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Full Costing 1 (1) - 1

The document discusses full costing, which includes all costs associated with producing a product or service. It provides examples of calculating full costs for single and multi-product businesses, including specific scenarios for a fruit juice company and a computer repair service. The text emphasizes the importance of understanding direct and indirect costs in management accounting.

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Mujahid
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5 views19 pages

Full Costing 1 (1) - 1

The document discusses full costing, which includes all costs associated with producing a product or service. It provides examples of calculating full costs for single and multi-product businesses, including specific scenarios for a fruit juice company and a computer repair service. The text emphasizes the importance of understanding direct and indirect costs in management accounting.

Uploaded by

Mujahid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Accounting and Finance

For Non-specialists
Twelfth Edition

Part Two
Management accounting

Chapter 8
Full costing
Full Costing
Full (absorption) costing takes into
account all the costs of producing a
particular product or Service.

2
The average cost of educating a UK undergraduate student for the academic
year 2016/17 was £10,372.

The figure represents the full cost of carrying out this activity.

What does this cost include?

3
Single product Business

Fruit Juice Ltd began operations at the beginning of May. It has one product
which is the Sparkling Orange drink. During May the business produced 7,300
litres of the drink. The manufacturing cost incurred was made up as follows:

Ingredients (Orange, sugar, water, … £390


Fuel £ 85
Rent of Factory £350
Depreciation of equipment £75
Labour £852

What is the full cost per litre of producing “Sparkling Orange” in May?
4
5
Multi-product Business (job
costing)

Cost of car repair by a garage


1) Direct Costs
DM Spare parts Job sheet
DL Mechanics time
OH (indirect costs) Rent

6
7
Example 8.1

Johnson provides a personal computer maintenance and repair service. It has


overheads of £10,000 each month. Each month 1,000 direct labour hours are
worked and charged to cost units (jobs carried out by the business). A
particular laptop repair undertaken by the business used direct materials
costing £15. Direct labour worked on the repair was 3 hours and the wage rate
is £16 an hour. JohnsonLtd charges overheads to jobs on a direct labour hour
basis. What is the full ( absorption ) cost of the repair?

8
9
Activity 8.8

Marine Suppliers Ltd undertakes a range of work, including making sails for
small sailing boats on a made-to-measure basis.
The business expects the following to arise during the next month:
Direct labour cost £120,000

Direct labour time 6,000 hours

Indirect labour cost £19,000

Depreciation of machinery £8,000

Rent £10,000

Heat, lightening and power £2,000

Machine time 2,000 hours

Indirect materials £1,500

Other indirect production OH cost elements £1,200

Direct Material cost £36,000

10
The business has received an enquiry about a sail. It is estimated that this
particular sail will take 6 direct labour hours to make and will require 20 square
meters of sailcloth, which costs £25 per square meter.

The business normally uses a direct labour hour basis of charging indirect cost
(overheads) to individual jobs.

What is the full ( absorption) cost of making the sail?

11
12
Figure 8.6
How the full cost is derived for the sail by
Marine Suppliers Ltd
Activity 8.9

Suppose that Marine Suppliers Ltd used a machine hour basis of charging
overheads to jobs
What would be the cost of the previous job if this job is expected to take five
machine hours?

14
Example 8.2
A business that provides a service, expects to incur overheads totalling
£20,000 next month. The total direct labour time worked is expected to be
1,600 hours and machines are expected to operate for a total of 1,000 hours.
During the next month, the business expects to do just two large jobs.
Information concerning each job is as follows:
How much
Job 1 Job 2

Direct labout hours 800 800

Machine hours 700 300

15
How much total OH will be charged to each job if overheads are to be charged
on a) direct labour hour basis
And b) Machine hour basis?

Overhead recovery rate:

16
Figure 8.7
The effect of different bases of charging
overheads to jobs in Example 8.2
If a customer has agreed to pay a price for job 1 based on full costs plus an
agreed fixed percentage of profit

Here it would be beneficial to the producer for the total cost of the job to be as
high as possible.

18
Segmenting the overhead

Assume that in the last example, the total oh for next month is £20,000.
£8,000 relates to machine ( depreciation, maintenance, rent of the space
occupied by the machines and so on) and the remaining £12,000 is more
general expenses

19

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