Cost Accounting Fundamentals: Stock, Overhead, and Profit Analysis
Closing Stock Valuation Methods
Understanding closing stock valuation is crucial for accurate financial reporting. This section details two common methods: FIFO and Weighted Average Cost.
First-In, First-Out (FIFO) Method
The FIFO method assumes that the first units purchased are the first ones sold. This typically results in higher closing stock values during periods of rising prices.
| Units | Unit Cost | Total Value |
|---|---|---|
| 800 | $12 | $9,600 |
Summary of FIFO Calculation:
- Total Receipts: $65,600
- Total Issues: $56,000
- Closing Stock: $9,600
Weighted Average Cost (WAC) Method
The Weighted Average Cost method calculates the average cost of all available units for sale. This average is then used to value both the cost of goods sold and the closing inventory.
| Units | Value | Price per Unit | Notes |
|---|---|---|---|
| 2,000 | $20,000 | $10.00 | (Initial units at their price) |
| -1,600 | -$16,000 | (Less units from orders at their price) | |
| 400 | $4,000 | ||
| 2,400 | $26,400 | $11.00 | (Add next orders at the next price) |
| 2,800 | $30,400 | $10.86 | (Divide total value by total units for new average price) |
| -2,600 | -$28,229 | ||
| 200 | $2,171 | $10.86 |
Gross Profit Calculation Formula
Gross Profit is a key indicator of a company’s financial health, representing the revenue remaining after deducting the direct costs associated with producing the goods sold.
Gross Profit = Sales – Cost of Goods Sold (COGS)
Where:
- Cost of Goods Sold (COGS) = Opening Stock + Purchases – Closing Stock
Overhead Absorption Schedule by Department
The overhead absorption schedule systematically allocates indirect costs (overheads) to specific departments, which is essential for accurate product costing and departmental performance evaluation.
| Department | Processing | Assembling | Finishing | Administration | Work Study |
|---|---|---|---|---|---|
| Direct Labour | – | – | – | $65,000 | $33,000 |
| Allocated Costs | $15,000 | $20,000 | $10,000 | $35,000 | $12,000 |
| Subtotal | $15,000 | $20,000 | $10,000 | $100,000 | $45,000 |
| Apportionment: | |||||
| Administration (50:30:15:5) | $50,000 | $30,000 | $15,000 | ($100,000) | $5,000 |
| Work Study (70:20:10) | $35,000 | $10,000 | $5,000 | – | ($50,000) |
| Total Overhead to be Absorbed | $100,000 | $60,000 | $30,000 | – | – |
Calculating Departmental Absorption Rates
Absorption rates are calculated to apply overhead costs to products or services based on a predetermined activity base, such as machine hours or direct labor hours.
Processing Department
Total Controllable Cost Overhead (TCCO) / Machine Hours = $100,000 / 25,000 = $4 per Machine Hour (MH)
Assembling Department
TCCO / Direct Labour Hours = $60,000 / 30,000 = $2 per Direct Labour Hour (DLH)
Finishing Department
(TCCO / Direct Labour Cost) x 100 = ($30,000 / $120,000) x 100 = 25% of Direct Labour Cost
Total Cost of Producing Unit XP6
Here is a breakdown of the total cost for producing one unit of XP6, including prime costs and absorbed overheads:
| Cost Component | Amount ($) |
|---|---|
| Prime Cost | 47 |
| Overhead: | |
| Processing (4 x 6 MH) | 24 |
| Assembling (2 x 1 DLH) | 2 |
| Finishing (25% x $12 Direct Labour Cost) | 3 |
| Total Overhead | 29 |
| Total Cost per Unit XP6 | 76 |
Product Costing & Performance Analysis
This section details the standard costing for a product, followed by actual sales and production figures, and finally a comprehensive standard cost operating statement with variance analysis.
Standard Costing for a Product
Standard costing provides a benchmark for evaluating efficiency and controlling costs by setting predetermined costs for materials, labor, and overhead.
| Cost Element | Amount ($) |
|---|---|
| Selling Price | 30 |
| Direct Material (2.5 kilos) | 5 |
| Direct Labour (2 hours) | 12 |
| Fixed Production Overhead | 8 |
| Total Standard Cost | 25 |
| Budgeted Profit per Unit | 5 |
Total Budgeted Sales: 400 units
Actual Sales and Production Details
Actual performance details for the period, showing the real-world outcomes compared to the established standards.
| Item | Amount ($) |
|---|---|
| Sales (420 units) | 13,440 |
| Direct Material (1,260 kilos) | 2,268 |
| Direct Labour (800 hours) | 5,200 |
| Fixed Production Overhead | 3,300 |
| Total Actual Cost | 10,768 |
| Actual Profit | 2,672 |
Standard Cost Operating Statement & Variance Analysis
The standard cost operating statement compares budgeted performance with actual results, highlighting variances that indicate deviations from planned efficiency and spending.
| Description | Amount ($) | Favorable (F) | Adverse (A) |
|---|---|---|---|
| Budgeted Sales (400 units x $30) | 12,000 | ||
| Budgeted Cost of Sales (400 units x $25) | 10,000 | ||
| Budgeted Profit | 2,000 | ||
| Sales Volume Profit Variance (420 – 400 units) x $5 | 100 | 100 | |
| Budgeted Profit from Actual Sales | 2,100 | ||
| Variances: | |||
| Sales Price Variance (($13,440 / 420 = $32); ($32 – $30) x 420 units) | 840 | 840 | |
| Direct Material Usage Variance [$2 x (1,260 – (2.5 x 420))] | (420) | 420 | |
| Direct Material Price Variance [$2,268 – (1,260 x $2)] | 252 | 252 | |
| Direct Labour Efficiency Variance [$6 x (800 – (420 x 2))] | 240 | 240 | |
| Direct Labour Rate Variance [$5,200 – (800 x $6)] | (400) | 400 | |
| Fixed Overhead Volume Variance [$3,200 – ($8 x 400 units)] | 160 | 160 | |
| Fixed Overhead Expenditure Variance [$3,300 – ($8 x 400 units)] | (100) | 100 | |
| Total Favorable Variances | 1,492 | ||
| Total Adverse Variances | 920 | ||
| Net Variance (Favorable) | 572 | ||
| Actual Profit | 2,672 | ||