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PRODUCT COSTING
Job and Batch Costing
▪ Specific order costing method is used when the work consists of separately identifiable jobs, batches or contracts. Work only commences after an order is received.
▪ Continuous operation costing method is used when there is a continuous flow of identical units. Process costing is a typical form of continuous production process.
✓ JOB COSTING
A job is a cost unit which consists of a single order or contract. It consists of a single order undertaken to customers’ special requirements and is usually for a short duration.
It relates to a costing system where each unit of batch of output is unique. This creates the need for the cost of each unit to be calculated separately.
JOB COSTING PROCEDURES
The normal procedure in jobbing organizations involves:
- An initial enquiry is received from a customer.
- Details are confirmed and agreed with the customer as to the precise dimensions, quality of materials, quality of finished goods, required delivery date, etc.
- A cost estimate is prepared based on the requirement of the customer.
- A profit markup or margin will be added to the total estimated cost in order to calculate a quotation (selling price) for the job.
- If the estimate is accepted the job can be scheduled. All the material, labour or equipment required will be arranged.
- After the completion of the job, actual cost of the job will compare with the estimated selling price for the calculation of actual profit.
Job Sheet/Job Card
Cost of each job is recorded on a job sheet or job card. It is separately prepared for each job because each job is different from another job.
A typical job cost card is as follows:
$
Direct material X
Direct labour X
Direct expense X
Prime cost X
Production overheads (absorbed) X
Production cost X
Non- manufacturing overheads X
Total cost X
mark up/margin X
Selling price X
COLLECTION OF JOB COST INFORMATION
Direct material Cost:
▪ Estimated material cost will be calculated by valuing the material included in the quotation and cost of material purchased specifically for the job shall also be estimated.
▪ Actual material cost is taken from the material requisitions and by applying values to issues or from the invoices of material specifically purchased.
Direct Labour Cost:
▪ Estimated labour time requirement will be determined from similar jobs from the past. Labour rate will need to be considered for any increase or overtime.
▪ Actual labour hours are recorded over time sheets or on job cards. Actual labour cost is calculated using information about the hours (from the job card) and labour rate (predefined rate)
Direct Expenses:
▪ Estimated expenses shall be determined from the suppliers.
▪ Details of actual expenses will be determined from the invoices.
Production Overheads:
▪ Estimated production overheads will be calculated from overhead absorption rate is operation based on an estimated activity level (like budgeted labour hours).
▪ Actual production overheads are charged to the job using absorption rate and actual results (like actual labour hours). This means absorbed overheads are charged to jobs.
Non-Manufacturing Overheads:
▪ Non-Manufacturing overheads are charged to a job as a percentage of some cost such as Prime Cost, Production Cost etc.
Profit:
▪ Usual method of setting a selling price is cost plus pricing method. This method adds a profit to total cost to arrive at a selling price. The final price to be charged will be affected by what competitors charge and by what a customer is willing to pay.
TREATMENT OF RECTIFICATION WORK
Rectification cost is the cost incurred in rectifying sub-standard outputs.
Rectification is necessary where defects are discovered during the job or after completion of the job which requires additional work to be done. Sub-standard output returned to that department where the fault arises.
Rectification cost can be treated in two ways:
- If rectification work is not a frequent occurrence and can be identified with a specific job, then rectification costs should be charged as a direct cost to the job concerned.
- If rectification work is regarded as a normal part of the work, then rectification cost should be treated as production overheads and absorbed into the cost of all jobs for the period using overhead absorption rate.
USES OF JOB COSTING INFORMATION
- In making a decision as to the lowest price at which a job should be undertaken.
- In the estimation of a price for quotation to the customer.
- In the valuation of the partly completed job for balance sheet purpose.
- In the comparison of actual with budgeted data to facilitate operational control and for future cost or price estimation.
Work In Progress:
At the period end, the value of work in progress is simply the sum of cost incurred on incomplete jobs (charged as closing work in progress).
✓ BATCH COSTING
Batch costing is very much similar to that of job costing. A batch of identical products is treated as an individual job. A batch is a cost unit where a quantity of identical items is manufactured. It consists of a separate, readily identifiable group of product units which maintains their separate identity throughout the production process.
Batch costing is essentially a variation of job costing. Instead of a single job, a number of product units are manufactured as a batch. Batches may be made specifically to customer requirements or produced for holding in stock prior to sale. The procedures for costing batches are very similar to job costing. Once the batch is completed, the cost per unit can be calculated.
Cost per unit = Total batch cost
In a batch Number of units
Uses of batch costing
Batch costing is appropriate in following circumstances:
- Where similar number of items are made for each order.
- Where a business produces a single item to meet customer’s specifications but where the product being made contains components that are also used in other products. Such components will be made in batches.
Service Costing
Service costing is a costing method concerned with establishing the cost, not for items of production, but the cost of services provided. It is also called operation or function costing.
Service organisations do not make or sell tangible goods. Profit seeking service organisations include accountancy firms, law firms, transport companies, hair salons, banks and hotels. Non-profit organisations include hospitals, schools and libraries.
THE USE OF SERVICE COSTING
Service costing is used in:
- External Services: provided by a company in a service industry, for example car hiring services, transport services, courier services, etc.
- Internal Services: carried out by internal departments of a company, for example the costs of the vans or lorries used in distribution departments, the costs in computer departments or costs for staff canteens.
FEATURES OF SERVICE COSTING
- Intangibility: Output is ‘intangible’ rather than a tangible product.
- Perishability: Services are not ‘storable’ and cannot be bought in bulk.
- Simultaneity: Service is performed and consumed simultaneously.
- Heterogeneity: Nature and output are never standardized as human input is a major element of a service
- Cost nature: In a service industry sector a higher proportion of costs incurred are indirect as compared to direct.
- Composite cost units: More than one cost units like cost per patient/night, cost per passenger/mile.
SERVICE COSTING COMPARED WITH PRODUCT COSTING
- Labour element in service costing is more prominent than material used.
- There is no standardized process for recording of material, labour and other expenses. These all vary subject to nature of service.
- Not all services are revenue generating; customer service centres, distribution facility, libraries etc. are main examples. So, purpose of service costing may not, necessarily, be establishing a profit or loss attributable to that service but rather to provide the management with costs associated and efficiency and effectiveness of service being provided.
THE UNIT COST MEASUREMENT
One particular problem with service costing is the difficulty in defining a realistic cost unit that represents a suitable measure of the service provided. Frequently, a composite cost unit may be deemed more appropriate. Hotels, for example, may use the ‘occupied bed-night’ as an appropriate unit for cost ascertainment and control.
Other typical cost units that can be used include:
| service | cost unit |
| road, rail and air transport services | passenger/mile or kilometre, ton/mile, tonne/kilometre |
| hotels | occupied bed-night, guest days. |
| hospitals | patient-days |
| catering establishment | meals served |
In service costing, labour may be the only direct cost involved in providing a service.
Overheads will make up the remaining total costs.
The cost per service unit is calculated by establishing the total costs involved in providing the service and dividing this by the number of service units in providing the service.
Cost per service unit = Total service costs for the period . Number of services provided in the period
Occupancy of service = Number of services provided in the period x 100
Number of services available in the period
Service Cost Analysis:
▪ Planned cost should be compared with actual costs.
▪ A cost per unit of service should be calculated and it should be used as part of control function.
▪ Prices should be calculated for services being sold to third parties, similar procedure to job costing.
▪ Cost should be analysed into fixed, variable and semi-variable to assist in planning, control and decision making.
PROCESS COSTING
Process costing is a costing method which is applicable in industries producing homogeneous products in large quantities. The purpose of process costing is a typical one for example stock valuation. It is also called continuous order costing.
Process costing is defined by Kohler as: “A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries and chemical plants; distinguished from job costing, where costs are assigned to specific orders, lots or units.
FEATURES OF PROCESS COSTING
- Where the product of one process becomes the material of another process or operation
- Where there is simultaneous production at one or more process of different products, with or without by product,
- Where, during one or more processes or operations of a series, the products or materials are not distinguishable from one another, as for instance when finished products differ finally only in shape or form.
- Homogeneous production (Large Quantities) identical products.
- Production is continuous (2 or 3 or more processes) like oil refining, paper making and chemical manufacturing.
Characteristics
- Process Costing Method is applicable where the output results from a continuous or repetitive operations or processes.
- Products are identical and cannot be segregated.
- It enables the ascertainment of cost of the product at each process or stage of manufacture.
- The output consists of products, which are homogenous.
- Production is carried on in different stages (each of which is called a process) having a continuous flow.
- The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.
- The output of a process except the last may also be saleable in which case the process may generate some profit.
- The input of a process except the first may be capable of being acquired from the outside sources.
- The output of a process is transferred to the next process generally at cost to the process. It may also be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.
- Normal and abnormal losses may arise in the processes.
Advantages
- It is possible to determine process costs periodically at short intervals. Average unit cost can be computed weekly or even daily.
- It is simple and less expensive to find out the process costs. iii. It is possible to have managerial control by evaluating the performance of each process. iv. It is easy to allocate the expenses to processes in order to have accurate costs.
- It is easy to quote the prices with standardization of process. Standard costing can be established easily in process type of manufacture.
Disadvantages of Process Costing
- Cost obtained at the end of the accounting period are only of historical value and are not very useful for effective control. ii. Valuation of work-in-progress is generally done of estimated basis which introduces further inaccuracies in total cost. iii. Where different products arise in the same process, it is not possible to exactly ascertain the total cost of the products.
- If any error occurs while calculating average costs, it will be carried through all the processes to the valuation of work in process and finished goods.
- The computation of average cost is more difficult in those cases where more than one type of product is manufactured and a division of the cost element is necessary.
Some important terms and concepts related to process costing are as follows: ▪ If finished products are produced by more than one process, then output of first process becomes the input of the next process.
▪ There might be some incomplete products at the end of the period; they are called work in progress units.
▪ Work in progress might not be complete with respect to all the cost so equivalent units should be calculated.
▪ Conversion cost = Direct labour cost + Direct expenses + Production overheads.
▪ During production process, some units might get lost, and if the loss is not more than the expected loss then it is called as NORMAL Loss (ignored in the calculation). ▪ If the loss is more than the expected loss, then it is called as ABNORMAL Loss of the process. It should be treated in the calculation.
▪ If the output units are greater than the expected output, then the extra units produced are called as ABNORMAL GAIN. Abnormal Gain must be treated in calculation. ▪ In some industries, there might be a chance of joint and By-products. By-products should be treated as NORMAL LOSS.
▪ Loses might have a certain resale value, that value is called the “Scrap
Value”.
▪ Losses might have to dispose of at some cost to company, that cost is called “Disposal value”.
STEPS TO SOLVE QUESTION
- Prepare a process account. 2. Calculate equivalent units.
- Calculate the cost of an equivalent unit.
- Find the cost of finished goods.
- If there is work in progress at the end, calculate the cost of work in progress / abnormal loss / abnormal gain.
Concept of Equivalent Units: Equivalent unit refers to a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress.
A process is continuous in nature and at the end of a period there may be some units, which have been started but have not been completed. These partially completed units are known as work-in progress. The existence of work-in-progress gives a problem in computing the average cost per unit as production units will be at different degree of completions, therefore we cannot simply take total cost divided by total output.
It becomes more complicated if the degree of completions varies for various cost elements. For example, materials may be added at the start of the process, and are thus fully complete, whereas labour and manufacturing overheads (conversion cost) may be added uniformly throughout the process. Hence, the ending work in progress may consist of materials that are 100% complete and conversion cost that is only partially complete.
For this problem, we need to calculate equivalent units.
Please note:
- The equivalent unit for one normal loss output is 0 as the company can predict for the normal loss when determining the cost per normal output unit.
- The equivalent unit for one abnormal gain or loss output is 1 since the company cannot predict it when calculating the cost per normal output unit.
LOSSES DURING THE PROCESS
- Normal Loss: Normal Loss is an expected loss of the process and its units are ignored while calculating equivalent units. If normal loss has a scrap value, the value of this loss is set off against the cost of production usually material.
- Abnormal Loss: Abnormal Loss arises when actual loss is more than expected loss. Abnormal Loss is the amount by which actual output from a process less than the expected output. Cost of one unit of abnormal loss is same as one unit of output. The cost of abnormal loss is charged to profit and loss account in the period in which it occurs. If abnormal loss has a scrap value, the amount of scrap value will be set off against the amount to be written off to profit and loss account and not in the process account. In process account abnormal loss units are valued at average cost per unit.
- Abnormal Gain: Abnormal Gain is the amount by which actual output from a process exceeds the expected output. It is the amount by which actual loss is less than the expected loss. So, Abnormal Gain is exactly opposite to Abnormal Loss. Cost of one unit of abnormal gain is same as one unit of output. Abnormal Gain is recorded in Process account and in Abnormal Gain account. The Abnormal Gain is then taken to profit and loss account as an item of income.
Losses with disposal cost
Sometimes loss units have a disposal cost rather than some scrap value; for example, additional cost is incurred in disposing them off. To deal with such a situation remember the following points (opposite to scrap value):
- Debit the disposal cost of normal loss units to process costs. The resulting amount would be used to value good output and abnormal loss/gain
- Normal loss appears in process cost with nil value
- Disposal cost of abnormal loss units is included in abnormal loss account and therefore is transferred to income statement
Example 1: During a 2-week period, period 1, costs of input to a process were $30,000. Input was 2,000 units, output was 1,700 units and a normal loss is 10%, with a scrap value of $1.5 per unit. During the next period, period 2, costs of input were again $30,000. Input was again 2,000 units, normal loss is 10%, with scrap value of $1.5 per unit but output was 1,900 units. There were no units of opening or closing inventory.
Required: Prepare process account.
Solution:
Period 1:
Process Account
| units | $ | units | $ | ||
| Input | 2,000 | 30,000 | Finished goods | 1,700 | 28,050 |
| Normal
loss |
200 | 300 | |||
| Abnormal
loss |
100 | 1,650 | |||
| Total |
2,000 |
30,000
|
Total | 2,000 |
30,000 |
Equivalent units: 1,700 + 100 = 1,800 units
Cost per unit: 30,000 – 300 = $16.5 per unit
1,800
Cost of output: 1,700 x 16.5 = $28,050
Cost of abnormal loss: 100 x 16.5 = $1,650
Period 2:
Process Account
| units | $ | units | $ | ||
| Input | 2,000 | 30,000 | Finished goods | 1,900 | 31,350 |
| Normal
loss |
200 | 300 | |||
| Abnormal
gain |
100 | 1,650 | |||
| Total |
2,100 |
31,650
|
Total | 2,100 |
31,650 |
Equivalent units: 1,900 – 100 = 1,800 units Cost per unit: 30,000 – 300 = $16.5 per unit
1,800
Cost of output: 1,900 x 16.5 = $31,350
Cost of abnormal gain: 100 x 16.5 = $1,650
VALUING WORK IN PROGRESS
- Closing work in progress: Where there are units partially completed at the end of the period, it has to be recorded in the books. To deal with this situation equivalent units are calculated. A value is then placed to closing work in progress.
Following assumptions are made when calculating equivalent units:
- Material is completely added at the start of the process and therefore a unit is assumed to be 100% complete with respect to material unless stated otherwise. Labour and overheads are assumed to be incurred evenly over the production process. So when a unit is referred to be 50% complete with respect to labour and overhead that means that unit is half complete with respect to labour and overheads although it might be 100% complete for material.
- Opening work in progress: Units left partially completed at the end of the period are treated as Opening WIP for the next period. International Accounting Standard (IAS) 2 Inventories allows two methods for inventory valuation: First in first out (FIFO)
- Weighted average method
Which method to use for valuation of opening inventory?
FIFO inventory valuation technique is normally used and should be used in examination unless specifically stated otherwise.
Remember the following rule:
- If degree of completion of each cost element is not provided in the question but just the value of each cost element, use weighted average method.
- If, on the other hand, degree of completion is provided for each cost element but not the value of each cost element, use FIFO method.
Example 2: BR Ltd makes a product requiring several successive processes. Details of the first process are as follows:
Opening WIP 400 units
Degree of completion:
| Material (valued at $19,880) | 100% |
| Conversion (valued at $3,775) | 25% |
| Units transferred to process 2 | 1700
units |
| Closing WIP | 300 units |
| Degree of completion: | |
| Materials | 100% |
| Conversion | 50% |
| Costs incurred in the period : | |
| Material | $100,000 |
| Conversion | $86,000 |
There were no process losses.
Required: Prepare the process account for august using:
- Weighted average method.
- FIFO method. Solution:
- a) Weighted Average Method Process Account
| unit
s |
$ | unit
s |
$ | ||
| Opening WIP | 400 | 23,65
5 |
Finish ed goods | 1,7 00 | 184,3
94 |
| Material | 1,6 00 | 100,0
00 |
Closin g WIP | 300
|
25,26
1 |
| Conversi on | 86,00
0 |
||||
| Total | 2,0 00 | 209,6
55 |
Total | 2,0 00 | 209,6
55 |
Equivalent units:
Material: 1,700 + (300 x 100%) = 2,000 units
Conversion: 1,700 + (300 x 50%) = 1,850 units Cost per unit:
Materials: ($19,880 + $100,000) / 2,000 units = $59.94 per unit
Conversion: ($3,775 + $86,000) / 1,850 units = $48.527 per unit
Total cost per unit: $59.94 + $48.527 = $108.467 per unit
Cost of Finished Goods: 1,700 x $108.467 = $184,394 Cost of Closing WIP:
Materials: (300 x 100%) x $59.94 = $17,982
Conversion: (300 x 50%) x $48.527 = $7,279
$25,261
- b) FIFO (First in first out)
Process Account
| unit
s |
$ | unit
s |
$ | ||
| Opening WIP | 400 | 23,65
5 |
Finish ed goods | 1,7 00 | 183,5
34 |
| Material | 1,6 00 | 100,0
00 |
Closin g WIP | 300
|
26121 |
| Conversi on | 86,00
0 |
||||
| Total | 2,0 00 | 209,6
55 |
Total | 2,0 00 | 209,6
55 |
Equivalent units: (Opening WIP x remaining percentage of completion) + Units input n transferred to output in the period + (closing WIP x percentage of completion).
Material: (400 x 0%) + 1,300 + (300 x 100%) = 1,600 units
Conversion: (400 x 75%) + 1,300 + (300 x 50%) = 1,750 units
Cost per unit:
Materials: $100,000 / 1,600 units = $62.50 per unit
Conversion: $86,000 / 1,750 units = $49.143 per unit
Total cost per unit: $62.50 + $49.143 = $111.643 per unit
Cost of Finished Goods:
1,300 units x $111.643 = $145,137
1,700 units
$23,655 (incurred in the previous period)
Material: (400 x 0%) x $62.50 = $0
Conversion: (400 x 75%) x $49.143 = $14,742
$14,742 Total cost of finished goods: $145,137 + $23,655 + $14,742 = $183,534 Cost of Closing WIP:
Materials: (300 x 100%) x $62.50 = $18,750
Conversion: (300 x 50%) x $49.143 = $7,371
26,121
Weighted average costing of production
In the weighted average method, opening inventory values are added to current costs to provide an overall average cost per unit.
The cost of opening inventory is added to the costs incurred during the period, and completed units of opening inventory are each given a value of one full equivalent unit of
production.
Therefore, no distinction is made between units in process at the start of a period and those added during the period.
Illustration – Weighted Average Method
Op WIP 700 units (50% complete) $3,000
Total process costs $21,000
Units finished in process 2,100
Closing WIP 500 units (20% complete)
What is the cost of an E.U.?
Step 1: Calculate the Total Cost
Total cost = Opening WIP cost + Process cost
Total Cost = $21,000 + $3,000 = $24,000
Step 2: Calculate Closing WIP E.U.
Closing WIP E.U. = Closing WIP units * % Completion
Closing WIP E.U. = 500 * 20% = 100 units
Step 3: Calculate the Equivalent Unit (EU)
EU = Total cost / (Finished Goods + Closing WIP)
EU = $24,000 / (2,100 + 100) = $10.91
FIFO costing of production
The FIFO method of valuation deals with production on a first in, first out basis.
The assumption is that the first units completed in any period are the units of opening inventory that were held at the beginning of the period.
This means that the process costs must be allocated between
Opening WIP units
Units started and completed in the period
Closing WIP units
Illustration
Op WIP 100 units (60% complete) valued at $3,000
350 units were produced and transported to the warehouse
Equivalent Units $10
What is the total cost of the goods transferred to the warehouse?
Step 1: Get the cost of WIP of completed units (given in the exam)
60% was competed at value of $3,000
Step 2: Calculate the remaining value of the Opening WIP
100% – 60% = 40% is the remaining that needs to be finished
40% of 100 units x $10 = $400
Step 3: Find the value of production in this period
350 units need to be made
We have 100 units already
Therefore, we need 350 – 100 = 250 units to make in the period
Therefore, the value is 250 units x $10 = $2,500
Step 4: Calculate the Total cost
$3,000 + $400 + $2,500 = $5,900
JOINT AND BY PRODUCTS
Joint Products: Joint Products are produced from the same process but which have significant sales value at point of separation.
By Products: By Products on the other hand are the output of the same process but they have a very small sales value as compared with the value of main products.
APPORTIONMENT OF JOINT COST INTO JOINT PRODUCTS
Process account will be as normal. The joint cost of the joint products is distributed according to these methods:
- Physical measurement/volume at point of separation
- Sales value at point of separation
- Net realizable value at point of separation
ACCOUNTING TREATMENT FOR BY-PRODUCTS
In process costing, By Products are treated as normal losses and the sales value of By Product is treated as scrap value of normal loss.
- Income from by product added to sales of main product
- Income from by product treated as a separate source of income
- Sales income of by product deducted from the cost of production
- Net realisable value of by product deducted from the cost of production
| Joint product | By product | |||
| Nature | It’s a main product | Supplementary product | ||
| Realizable value | High sales value | Low sales value | ||
| Accounting | All the
joi nt pro ducts accounted for |
are | separately | A by-product is not separately costed. |
By-products and joint products
Joint Products
Joint products are two or more products which are:
- output from the same processing operation
- indistinguishable from each other up to their point of separation
- Joint products have a substantial sales value
- Often they require further processing before they are ready for sale
- Joint products arise, for example, in the oil refining industry where diesel fuel, petrol, paraffin and lubricants are all produced from the same process
By-Products
A by-product is a supplementary or secondary product (arising as the result of a process) whose value is small relative to that of the principal product.
The distinguishing feature of a by-product is its relatively low sales value in comparison to the main product.
In the timber industry, for example, by-products include sawdust, small offcuts and bark.
Value by-products and joint products
A joint product is an important saleable item, and so it should be separately costed The profitability of each joint product should be assessed in the cost accounts.
Joint process costs (pre-separation costs) occur before the split-off point.
These costs have to be apportioned between the joint products at the split-off point to obtain the costs of each of the products in order to value closing inventory and cost of sales.
The main methods of apportioning joint costs, each of which can produce significantly different results are
- Sales value of production (market value)
- Production units (Physical unit basis)
- Net realisable value = Sales value – further cost to process after product leaves joint process.
A by-product
- is not important as a saleable item, and whatever revenue is earned from the by product sale, is deducted from the joint process cost before the cost is shared between the joint products.
Illustration – Physical Unit Basis
Joint process costs $800,000
Production
- 120,000 units
- 100,000 units
By product C 20,000 units sold for $1.5/unit
What is the cost per unit of Product A, if the physical method of apportionment is used? Solution
- Step 1 – Total cost to be apportioned
Joint costs – (By product (Production) x Selling Price)
$800,000 – (20,000 x $1.5) = $770,000
- Step 2 – Cost per unit of A
Costs apportioned to all products / Number of Joint Product Units
= $770,000/220,000
= $3.5/unit
Illustration – Sales Value Method
Joint process costs $50,000
Production and Sales value/unit
- 3,000 units sold for $8.4/unit
- 6,000 units sold for $4.5/unit
What is the cost of one unit of Product A, if the sales value method of apportionment is used? Solution
- Step 1 – Joint costs – (By product (Production) x Selling Price) Total cost to apportion are $50,000
- Step 2 – Production (units) x sales value per unit
Total sales value is: (3,000 x $8.4)+(6,000 x $4.5) = $52,500
- Step 3 – Total cost to apportion to product = Joint Costs / All products sales value x Sales value (product)
Product A sales value is: (3,000 x $8.4) = $25,200
Cost to apportion to A = 50,000 x ($25,200/$52,500) = $24,000
- Step 4 – Cost Per unit of Product = Total cost to apportion to product / Number of units
(Product)
Cost per unit of A = $24,000/3,000 units = $8/unit
Illustration – Net realisable value method
Total cost to apportion are $100,000
Production and Net realisable value/unit
- 7,000 units sold for $3.6/unit
- 14,000 units sold for $2.3/unit
What is the cost of one unit of Product A, if the net realisable value method of apportionment is used? Solution
- Step 1 – Costs apportioned to product = Joint costs – (By product (Production) x Selling
Price)
Total cost to apportion are $100,000
- Step 2 – Total cost to apportion to product = Joint costs / All products NRV x Total NRV of product
Product A NRV is: (7,000 x $3.6) = $25,200
Total NRV is: (7,000 x $3.6)+(14,000 x $2.3) = $57,400
Cost to apportion to A = 100,000 x ($25,200/$57,400) = $43,902
- Step 3 – Cost per unit = Total cost apportioned to product / Total number of units produced of product
43,902/7,000 units = $6.27
