MGT402 Short Notes by Kamran

MGT402 Short notes by Kamran · Lec # 23 · PROCESS COSTING SYSTEM · (Opening balance of work in process) · Two methods of cost allocation

(1) The weighted average (or averaging) method (2) The FIFO method.

Weighted average method

In the weighted average method opening stock values are added to current costs

FIFO method

• It is more complicated to operate
• In process costing, it seems unrealistic to relate costs for the previous period to the current Period of activities

Choosing the valuation method in examinations

In order to use the weighted average or FIFO methods to account for opening work-in-process different information is needed, as follows: For weighted average An analysis of the opening work-in-process value Into cost elements (i.e. materials, labor) For FIFO The degree of completion of the opening work in process for each cost element.

Lec # 25 · COSTING/VALUATION OF JOINT AND BY PRODUCTS · Basis of Cost Allocation (For by products)

(1) Physical Quantity Ratio (2) Selling Price Ratio (3) Hypothetical Market Value Ratio Cost Elements

Direct Material, Direct Material Factory Overhead Cost (Variable Cost) (Variable & Fixed Cost)

Marginal Costing

The cost of a cost unit is presented as the total of direct materials, direct labor, direct expenses and variable overheads (but not fixed overheads)

Marginal cost is the cost the variable cost that changes with the production of each next unit.

(A key concept in marginal costing is that of contribution margin)

Absorption and marginal costing

In absorption costing, fixed manufacturing overheads are absorbed into cost units. Thus stock is valued at absorption cost and fixed manufacturing overheads are charged in the profit and loss account of the period in which the units are sold. In marginal costing, fixed manufacturing overheads are not absorbed into cost units, Stock is valued at marginal (or variable) cost and fixed manufacturing overheads are treated as period costs and are charged in the profit and loss account of the period in which the overheads are incurred.

(Under absorption costing stock will include variable and fixed overheads whereas under marginal costing stock will only include variable overheads.)

Contribution Margin

Contribution margin = Sales - variable costs of sales

Contribution margin is short for “contribution to fixed costs and profits

Marginal costing: Profit calculation

Sales Rs X