Businesses must establish predetermined costs to implement a standard costing system for materials, labor, and overhead. This system facilitates the tracking of actual costs, comparison with standard costs, variance analysis, and corrective action, ensuring continuous improvement. 1. Establishing Standard Costs To determine an achievable standard cost for each product, companies must consider the standard costs…
The profit-volume (P/V) ratio is a key metric for measuring a business’s profitability. It shows how a company’s profit changes in response to changes in sales volume. The P/V ratio is also known as the contribution ratio or marginal ratio. A company determines the selling price of its products after calculating of the fixed cost,…
Definition of Standard Costing Standard costing is an accounting methodology used to estimate the expenses associated with a production process, as manufacturers cannot predict actual costs in advance. This approach enables manufacturers to plan for future expenditures related to direct materials, direct labor, and overhead, facilitating effective cost management. The Chartered Institute of Management Accountants…
Identification of Cost Units The identification of cost units is essential for businesses to assess costs accurately. A cost unit represents a specific product, service, time, activity, or a combination thereof, for which costs are measured. Selecting an appropriate cost unit ensures precise cost allocation and analysis. Types of Cost Units: Industry-Specific Examples: The identification…
Unit Costing Unit cost refers to the total cost incurred in manufacturing, storing, selling, and shipping a single product. It is a fundamental concept in business and economics. Unit costing is particularly suitable for industries characterized by continuous and homogeneous production. In contrast, multiple costing, also known as composite costing, is applied to industries where…
Service costing, also referred to as operating costing, applies to services that lack a tangible form but fulfill consumer needs and preferences. It is a method used to ascertain the expenses incurred in the provision of services. The primary objective of service costing is to determine the cost per unit of service, enabling businesses to…
Joint Products Joint products refer to two or more products that are simultaneously produced through the same process and separated during processing, each possessing a sufficiently high saleable value to be recognized as a main product. By-Products A by-product is a secondary product or substance generated during the manufacturing or processing of another product. By-products…
In manufacturing, a finished product is created through a series of processes that transform raw materials into semi-finished goods before reaching the final, market-ready stage. This production cycle typically involves multiple stages, including processing, assembly, and quality control. A semi-finished product refers to raw materials that have undergone partial processing and are in a work-in-progress…
Equivalent units in accounting refer to the process of expressing partially completed units as a proportion of fully completed units. This is determined using the following formula: Equivalent Units of Production=Actual Number of Units in Process× Percentage of Work Completed Illustration: Consider a chocolate factory that is producing chocolate bars. At the end of the month, the factory has 1,000 bars that are only 50% complete.…
Direct costs are expenses that can be specifically attributed to a particular cost object, such as a product, service, or project. These costs are easily traceable to a specific activity or output. Examples of direct costs include raw materials used in manufacturing, wages of employees directly involved in production or service delivery, fuel and utilities…