Page 23 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes Cost System Options

Cost system design options are given below:

Table 1.2: Cost System Design Options

Type of system Actual Costing Standard Costing Activity-based
used for existing Systems Systems Costing Systems
products/services Nature
of process Whereby goods/
Service are produced
*Unique product or *Unique product or *Unique product or
services services services
*Actual direct labour *Standard direct *Actual or standard
and material charges labour and material direct labour and
*Standard overhead charges material charges
Job order production
rates *Standard overhead * Actual or Standard
*Relatively few fi rst rates overhead rates
and second stage *Relatively few fi rst *Mutiple fi rst and
drivers for overhead and second stage second stage drivers
drivers for overhead for overhead
*Homogeneous *Homogeneous *Homogeneous
products or services. products or services. products or services.
*Actual direct labour *Standard direct *Actual or standard
and material charges. labour and material direct labour and
*Actual overhead charges. material charges.
charges *Standard overhead *Actual or standard
Process Production
* Relatively few fi rst charges overhead charges
and second stage * Relatively few fi rst * Multiple fi rst and
drivers for overhead and second stage second stage drivers
drivers for overhead. for overhead
*Variances computed
for processes
Mixed Job order/ Process Combines elements of job order and process production and uses all
Production three costing system

Job-order Production Process: These are suitable for firms that produce many unique products
or batches of products, requiring different amounts of labour, material and overhead. Each job
is costed separately and work is scheduled as orders are received. Job order production is used
in industries as diverse as printing, construction, consulting, auto repair and heavy machinery.
Costs of each job are computed by tracing direct labour and direct material to the job and by
allocating overhead to the job. In actual costing, we trace actual material and labour costs and
allocate overhead. In a standard costing system, we establish standard rates for labour, material
and overhead. In an activity based system, we trace labour and material directly to products and
overheads is allocated to the products by the use of multi-drivers in the first and second stage of

the production process.
Process Production: Process costing is most appropriate in circumstances where multi-phase
mass production is the underlying process of production. Process costing production is used to

industries as diverse as oil refining, glass, steel, banking, fast-food restaurants and cement. Under
process production, products often go through multiple phases of production. The production
process is continuous and resources are brought in an ongoing basis, keeping pace with the
production process. At the end of the accounting period, there will be incomplete products at
varying stages of production, and moving into later phases of the production in the next period.

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