Determining the Cost of Operations for Pricing and Controlling

In this section, you will explore various costing methods essential for determining the cost of operations. The section will cover job and batch costing, contract costing, service costing and process accounts. You will be taken through hands-on activities that will help you to solidify your understanding of these key concepts and costing methods. By understanding how to accurately calculate and control costs, you will be better equipped to use appropriate pricing strategies to set the prices of goods and services.

KEY IDEAS

• Cost Sheet/Statement: A detailed document that summarises the costs incurred for a particular product or period, which typically includes material, labour, expenses and overhead costs.

• Job Costing: A costing method used to determine the costs associated with a specific job or project, where each job is treated as a separate cost unit.

• Batch Costing: A method of costing applied when products are manufactured in batches and costs are calculated for each batch before the determination of the cost per unit.

• Contract Costing: A method used to ascertain costs for specific long-term projects or contracts, and is often used in construction or large-scale engineering works.

• Service Costing: A costing approach for service industries to calculate the cost of providing a service, such as transportation, healthcare or hospitality.

• Process Costing: A costing method used to determine the cost per unit of products produced by industries where production is continuous, with the products passing through multiple processes.

Job Costing

Job costing is a method used to calculate the cost of specific projects where each job is unique and designed based on the customer’s specific needs. Examples include building a house, crafting furniture or making a custom dress. Since each job is different, it is essential to keep track of expenses for each one. To do this, each job is given a job number and a job cost card, where all costs for that job are recorded. This helps to ensure that every amount spent on materials, labour and other costs is accurately recorded for each individual job.

Batch Costing

Batch costing is used when a company produces a large number of identical items as a group or "batch". For example, if a furniture company makes 1,000 identical chairs, they treat the entire production as a single batch. Batch costing is also common in industries like car manufacturing, clothing production, pharmaceuticals and footwear. Companies may fill individual orders by producing a special batch or selecting products from the general stock if they meet the customer’s needs.

Costing In terms of costing, both batches and jobs are treated in the same way using the procedure below.

1. Determine the cost of materials used for the job/batch.

2. Determine the cost of labour hours used by each department on the job/batch.

3. Determine any direct costs associated with the job/batch

4. Determine the overhead to be absorbed on the job/batch.

NOTE: For batch costing, the cost per unit is calculated by dividing the total cost by the number of units produced in that batch.

Elements of cost The cost price of a product or service is made up of direct materials, direct labour, direct expenses and overhead costs.

This can be represented on a cost sheet as below.

Direct Material GH¢ GH¢

Material A xxx Material B xxx xxx Direct Labour Dept. Y xxx Dept. Z xxx xxx Direct Expenses xxx Prime Cost xxx Variable Overheads Manufacturing xxx Selling & Distribution xxx Administrative xxx xxx Total Variable Cost xxx Fixed Overheads Manufacturing xxx Selling & Distribution xxx Administrative xxx xxx Production / Total Cost xxx Profit xxx Selling Price xxx

Activity 5.1 Exploring Costing Methods and Calculations

This activity will help you understand the difference between job and batch costing.

You will also learn the practical steps needed to calculate the cost of a product, using a real-world scenario.

1. Form a group with a few friends or classmates. Discuss the meaning of Job Costing and Batch Costing.

2. Present your definitions to the class for discussion and feedback.

3. Read the scenario about Madam Yaa Taa, a seamstress who needs to price a special dress for a customer.

Scenario Madam Yaa Taa is a seamstress. She has received an order to sew a special dress for one of her customers. She is not certain about the process she has to go through to determine the total cost to give her customer the appropriate price quotation for the dress

4. As a student of cost accounting, outline the four basic steps Madam Yaa Taa should follow to determine the total cost and give the correct price quotation for the dress.

5. Share your response with a colleague to get their feedback.

Activity 5.2 Learning the preparation of job cost sheets

1. In groups, study the list of cost items below

a. Consumables like lubricants and adhesives

b. Cost of hiring specialised equipment for a specific project

c. Depreciation on factory equipment

d. Electricity used by production machines

e. Fabric for producing clothing

f. Fees for specialised moulds used in plastic injection moulding

g. Freight charges for transporting raw materials directly to the factory

h. Insurance premiums for the factory

i. Lumber for manufacturing furniture j. Maintenance costs for production equipment k. Packaging materials for finished goods l. Payment to carpenters in a furniture factory m. Plastic granules for making bottles n. Property taxes on the manufacturing facility o. Remuneration for sewing machine operators in a textile firm p. Rent for the factory premises q. Royalty payments for using patented manufacturing technology r. Salaries of administrative staff s. Steel sheets for making car bodies t. Testing costs for quality assurance of a specific batch u. Wages of assembly line workers

v. Wages of machine operators w. Wages of welders in a metal fabrication company

x. Water used for washing in manufacturing processes y. Wood pulp for producing a sheet of paper

2. Group the list under the following categories of cost: Direct material cost, Direct labour cost, Direct expenses, variable overhead or fixed overhead

3. Share and discuss your response with another group You can use the table below to support your response

Direct Material Cost Wood pulp for producing sheets of paper Direct Labour Cost Remuneration for sewing machine operators in a textile firm Direct Expenses Testing costs for quality assurance of a specific batch Variable Overhead Water used for washing in the manufacturing process Fixed Overhead Insurance premium for the factory

Activity 5.3 Preparation of Job Cost Sheet

1. In groups, read the information below outlining the details of a job, number 609.

Cost of materials used ¢165, 500 Labour Department X 12 hours at GH¢50per hour Department Y 10 hours at GH¢40per hour Department Z 3 hours at GH¢60per hour Machine hours Department X 10 hours Department Y 7 hours Overheads are absorbed in the following ways.

• on machine hour basis in departments X at GH¢30 per hour& Y at GH¢30 and GH¢40

• on a machine hour basis in department Y at GH¢40 per hour

• per hour respectively and on a labour hour basis in Dept. Z.

2. Prepare a job costing sheet for job 609.

3. Present your answers on a flip chart and present to the class for discussion and feedback.

Profit is the amount of money left over after a business subtracts all its expenses from its revenue (the money it earns from sales). In other words, it is the extra money a company makes after covering all the costs involved in making and selling its products or services.

The basic formula for calculating profit in simple terms is:

Profit = Selling Price – Cost Price How to calculate mark-up or profit on cost When profit is calculated on cost price or mark–up, the formula is:

How to calculate the margin or profit on the selling price When profit is calculated on margin or selling price, the formula becomes:

NOTE:It should be noted here that if you are given the margin but have to convert it to mark-up to be able to calculate the profit on the cost price, the formula becomes

Example

The cost price of a job is GH¢7,000. Calculate the profit if:

1. the amount of profit is 15% markup.

2. the amount of profit is 15% margin.

Solution

1. Profit on cost or mark up Profit = GH¢ 1,050

2. Profit on selling price or margin

Note that the selling price is GH¢8,050 (That is 7,000 + 1,050). This is because Cost Price + Profit = Selling Price Profit = GH¢ 1,050

Activity 5.4 Calculation of Profit on a Job or Batch Study the information below and complete the tasks that follow.

A company manufactures a product for sale and has the following budgeted overheads.

Department Overhead Cost Activity Level

Blanking GH¢180,000 1,500 labour hours Machining GH¢430,000 2.500 machine hours Welding GH¢200,000 1,800 labour hours Assembling GH¢150,000 1,000 labour hours Selling and administrative overheads are charged at 20% of factory cost.

An order was received to manufacture 250 units of the product as Batch T5931.

Costs incurred were as follows.

Materials GH¢31,700

Labour Blanking 128 hours @ GH¢50.25/hr.

Machining 452 hours @ GH¢50.50/hr.

Welding 90 hours @ GH¢50.00 /hr.

Assembling 175 hours @ GH¢48/hr.

GH¢5,250 was paid for the hiring of a special machine to test the product. The time booking in the machine shop was 643 machine hours. Profit is computed at a 15% markup.

1. In your groups, calculate the;

a. Total cost of batch T5931

b. Cost per unit

c. Selling price of the product

2. Record all of your work and share your work with other groups for comparison.

Activity 5.5 Calculation of Profit on a Job or Batch

1. In your groups from the previous activity, study the information below and complete the tasks that follow.

Roberta Shipping Plc has received an order to produce two fishing vessels for Sekondi Fisheries. Each job passes through three departments – Preparatory, Machining and Finishing.

Costs incurred in production are as follows.

Preparatory Dept.

45 beams of wood at GH¢30,000 per beam 16 kg of other materials @ GH¢60,500 per kg 20 labour hours @ GH¢60,000 per hr.

Machining Dept.

10 machine hours @ ¢120,000 per hr.

20 labour hours @ ¢80,000 per hr.

16 kg of materials @ ¢40,000 per kg Finishing Dept.

15 liters of paint @ ¢450,000 per liter 26 labour hours @ ¢120,000 per hr.

Overhead at each department is estimated at ¢60,000 per labour hour.

Profit margin is 20%.

You are required to calculate;

a. The cost of producing the two vessels

b. The selling price of one vessel.

2. Show all of your working and compare your answers with those of another group.

In contract costing, a contract is an agreement between two main parties: the contractor and the contractee. The contractor is the person or company doing the work, and the contractee is the person or company who hired the contractor to get the job done.

Key Terms in Contract Costing

Contract Price

This is the total amount of money the contractee agrees to pay the contractor once the entire job is completed. It is the final price both parties agreed on from the beginning.

Work Certified

This refers to the part of the work that has been completed, inspected and officially approved by a qualified person, such as an architect in the case of construction projects.

This approval means that the work has met specific standards. The certified work is given a certain value, which is documented in a certificate. This certificate assures the contractee that the work up to this point is done well and according to plan. Work certified can be calculated as:

Work certified = Cost of work to date - (Cost of work uncertified – materials – plant costs) Work uncertified This is the part of the work that has been completed but has not yet been inspected or certified by a technical professional. Both certified and uncertified work are considered part of work in progress – the job that is still underway and not fully completed.

Certificate for completed work A certificate for completed work is issued by the professional who inspected the job (like an architect) and confirms that the work was done correctly, following the approved plans and meeting all required standards and regulations.

Progress Payments

These are partial payments that the contractee makes to the contractor during different stages of the job. Instead of paying the full amount at once, payments are made as work progresses. This helps the contractor manage expenses throughout the project and allows the contractee to see ongoing results before paying the full amount.

Retention fee Retention money is a portion of the contract price that the contractee withholds (does not pay) for a certain period after the work is completed. This is to protect the contractee in case any problems or defects arise that need fixing. The time during which this money is held back is called the retention period.

Work-in-Progress Work-in-progress refers to the total cost of the job done at any given point, including both certified and uncertified work. It is an important value in contract accounts because it shows the contractor's costs and efforts at that stage of the project.

Notional Profit

Notional profit is the estimated or apparent profit on a contract that is not fully completed yet. It is calculated by comparing the value of work certified with the costs involved in that certified work. Notional profit helps the contractor understand how much profit is expected on the certified part of the work in progress.

Formula for Notional Profit

Notional Profit = Value of work certified – Cost of work certified Also note that the Cost of work certified = Cost of work done to date – Cost of work that is not certified Putting all together, the notional profit formula can be re-stated as Notional profit = Value of work certified – (Cost of work done to date – Cost of work that is not certified) Contract Account In contract costing, each contract has its own account in the contractor’s books to keep track of all expenses and payments. For a completed contract, the account will show all costs and the contract price as income, which gives the final profit. For an incomplete contract, the account shows the costs incurred to date and the value of work done in order to provide an estimated profit.

Format for Contract Account

Name of Contract:

Contract Price:

Site of Contract:

Date of Commencement:

Date of Completion:

Contract Account

GH¢ GH¢

Purchase of materials xxxx Materials at site b/f xxxx Materials issued from stores xxxx Materials transferred to other contracts xxxx Direct wages xxxx Value of plants & equipment c/d xxxx Direct expenses xxxx Prepared expenses c/d xxxx Overheads xxxx Cost of work done c/d xxxx Sub contracts costs xxxx xxxx Materials from other contracts xxxx xxxx Plants & Equipment used xxxx xxxx Accrued Expenses c/d xxxx xxxx xxxx xxxx Cost of work done b/f xxxx Value of work certified xxxx Profit made xxxx Value of work not certified xxxx Profit in suspense xxxx xxxx xxxx Balances c/d Balances c/d Plants & Equipment xxxx All accruals xxxx Materials at site xxxx Profit xxxx Prepayments xxxx

Activity 5.6 Key Terms in Contract Costing

1. Form a group with a few classmates.

2. Use the internet to find more information and definitions for the following terms related to contract costing:

a. Contract Price

b. Work Certified

c. Uncertified Work

d. Progress Payments

e. Retention Money

f. Work-in-Progress

g. Notional Profit

3. Discuss the information you found within your group. Write down the key points from your discussion on a flip chart.

4. Present your findings to the entire class for a discussion.

Activity 5.7 Calculation of Cost of Work Certified

In your groups from Activity 5.6, study each of the scenarios and answer the questions that follow.

1. The following data was extracted from the books of Swanzy Plc GH¢ Total cost incurred on contract 600,000 Materials on site 85,000 Cost of work done not certified 84,000 Expenses prepaid 15,000 Plant on site 120,000

a. Calculate the cost of work certified based on this information.

b. Record your work and answer on a flip chart and share with another group.

2. The following information has been extracted from the books of Lloyd and Kiki Contractors.

GH¢ Plant on site c/d 225,000 Cost of work done not certified 170,000 Materials on site c/d 120,000 Expenses prepaid 35,000 Total cost incurred on contract 900,000

a. Calculate the cost of work certified based on this information.

b. Compare your response with another group for feedback and discussion.

Activity 5.8 Analysing and Preparing a Contract Account

1. Form a group with a few friends or classmates.

2. Discuss the Contract Account: Discuss the format of a contract account. Think about the types of expenses and revenue that are recorded and how they are classified as debits or credits.

3. Create a Template: Based on your discussion, create a template for a contract account.

4. Record this template in your workbooks so you can use it for reference in the future.

Stage of Completion of Contracts

When contracts are started and finished in the same financial year, it is easy to handle them in accounting. But many contracts take longer than one year to complete, and this creates a challenge. For instance, the question is whether we should calculate profit only when the contract is fully finished, or calculate it every year based on the work completed so far.

If we only calculate profit at the end of the contract, all the profit will show up in the year the contract is completed, while the earlier years will show no profit.

This creates two problems, namely:

1. Uneven Profit Reporting: The profit trend will look strange where one year will show a high profit and the others will show none.

2. Tax Burden: A lot of profit in one year means a higher tax liability for that year.

To fix this, businesses calculate the profit or loss for the contract each year based on how much of the work is completed.

This is called the stage of completion or the percentage of completion. It follows the accrual concept in accounting, which means we match income with expenses during the time the work is done.

This ensures that revenue, costs and profit are recorded proportionately to the progress of the contract.

By using this method, businesses can show profits more consistently each year and avoid misleading or uneven financial reports. Here's how the stage of completion is usually calculated.

Stage of Completion = This percentage is used to recognise revenue, expenses and profits in the income statement.

Activity 5.9 Meaning of Stage of Completion

Form a group with a few friends or classmates.

1. Discuss the format of a contract account. Think about the types of expenses and revenue that are recorded and how they are classified as debits or credits.

2. Based on your discussion, create a template for a contract account. Record this template in your workbooks so you can use it for reference in the future.

Activity 5.10 Calculation of Stage of Completion

1. In groups, carefully analyse the scenario below.

B-Matdor Plc won a contract to build affordable houses for the government in a low-cost town.

The contract amount was GH¢4million in 20X2, but by the end of 20X3, the estimated cost had increased to GH¢4.2 million and to GH¢4.4 million in 20X4.

Cost incurred was as follows 20X2 – GH¢1.1million, 20X3 – GH¢3,15milion and 20X4 -GH¢4.2million.

You are required to prepare

a. a statement showing the stage of completion for each year of the contract.

b. a statement showing the following as they would be recognised in the income statement for each year.

i. revenue

ii. costs

iii. profit.

2. Record your answers on a flip chart and compare with another group for discussion.

Extension task KKBK Engineers won a contract to build a modern market for the government in Akim Oda.

The contract amount was GH¢6million in 20X0, but by the end of 20X1, the estimated cost had increased to GH¢6.3 million and to GH¢6.6 million in 20X2. Cost incurred was as follows 20X0 – GH¢1.65million 20X1 – GH¢4.75milion 20X2 – GH¢6.3million.

Use the information from the scenario to prepare a statement showing;

1. The stage of completion for each year of the contract.

2. How are the following to be recognised in the income statement for each year:

a. revenue

b. costs

3. Record your answer in your workbook and share it with your teacher for feedback.

Activity 5.11 Contract Account

Working in your groups from Activity 5.9, study the information below.

Luther Constructions is contracted to build a sports facility at Nyame Bekyere for GH¢2.1 million.

The data below relates to the contract at the end of the first year.

GH¢ Materials purchased 321,000 Materials returned to stores 51,000 Direct wages paid 148,200 Direct wages accrued 33,000 Plant on site at cost 90,000 Direct expenses paid 27,900 Direct expenses accrued 13,500 Other expenses incurred at the site 20,700 Overhead cost 34,500 Cost of work not certified 15,300 Value of the plant on site 67,500 Cash received for work certified 675,000 Retention money was agreed at 15% of the work certified, and money in respect of work certified has been received.

Task

1. In your groups, prepare the contract account and contractee account.

2. Record your answers and share with another group for feedback.

Organisations That Use Service Costing and Units

Produced S/N TYPE OF SECTOR COST UNITS

1 Canteens / Restaurants Plates of meals served 2 Hospitals Patient days, number of operations done, outpatients treated 3 Schools Number of learners, school days, cost per learner per semester/year 4 Consultancy Client hours/ days 5 Maintenance Maintenance hours / days 6 Provision of electricity Kilowatt hours 7 Soliciting firms Courts days/ hours 8 Hotels Bed /room per night 9 Transport Passenger per km, tonnes of goods per km The cost per unit of service is computed as =

Activity 5.12 Identification of Service Organisation and its Cost Units

1. With a few of your classmates, identify ten service sector industries/organisations and provide their possible cost units

2. Present your response to your class for discussion and feedback You can use the table below to support your work S/N Type of sector Cost units 1 Tourism and Travel Agency Per traveller, package, or trip 2 3 4 5 6 7 8 9

Activity 5.13 Calculating service unit costs in transport services

1. In your groups, read the information provided for Zimbo Plc and complete the tasks that follow.

Zimbo Plc operates a stone quarry and delivers stones in cargo trucks to clients.

The distance covered and deliveries on 10th April 20x2 are as follows Delivery Tonnes carried Distance covered in kilometres 1 2.5 20 2 3.1 30 3 6.2 90 4 5.5 80 5 4.5 60 The cost of operation for the day was GH¢571,200.

2. Calculate

a. cost per tonne

b. cost per kilometer

c. cost per ton per kilometre.

3. Record your work and answers and share with another group to compare.

Activity 5.14 Calculating service unit costs in health services

1. Form a group with a few friends or classmates. Read the case below and respond to the questions that follow.

Holy Saviour Clinic incurred a total cost of Gh¢840,000 in June, 20X1. A total of 2,400 patients were treated during that period. The hospital bills patients by adding a markup of 6%.

Using the provided information for Holy Saviour Clinic, calculate the following:

a. The number of patients per day.

b. The cost per patient.

c. The total revenue for the month.

2. Be sure to show all of your calculations and the steps you took to arrive at your answers.

3. After you have completed your calculations, compare your answers with those of another group.

4. Discuss any differences and provide feedback to each other.

In the next lessons, we will be testing your understanding of the principles of service costing by applying these principles to practical scenarios

Activity 5.15 Finding the Cost Per Unit of a Service

1. Read the information in each scenario carefully and complete the tasks that follow with your group from Activity 5.14.

2. Share your answers and work with another group for discussion and feedback.

Manna Hotel is a 100–room facility which charges GH¢500 per room per night.

During September 20X2, 400 guests visited the hotel and spent an average of 3 days each. The total cost of running the hotel for the month was GH¢105,000.

You are required to calculate

a. number of room days available

b. number of room days occupied

c. room occupancy rate

d. average cost per guest

e. profit or loss for the month

3. Royal Feast restaurant incurred a total cost of GH¢120,000 on its operations in April, 20X3. During the period, a total of 1,000 customers visited the restaurant and bought an average of 3 plates of food each. A plate of food is sold for GH¢50.00.

You are required to calculate;

a. The number of plates of food sold during the month

b. The cost per plate of food

c. Total revenue for the period

d. Profit or loss for the period,

4. Bright Child School has an enrolment of 600 learners. The cost of running the school for the year 20X4 was GH¢4,800,000. The school runs two semesters in a year and adds a 20% margin to the fees paid by learners.

You are required to calculate;

a. cost per learner per semester

b. fees payable per learner per semester

c. profit or loss for the school for the year

Terms in Process Costing

Normal Loss

This is the expected loss of materials that naturally happens during production. It is the type of loss that cannot be avoided because it occurs due to normal factors like evaporation, shrinkage or chemical reactions. For example, if you are making juice and some liquid evaporates during boiling, that is normal loss. Businesses treat this type of loss as a regular cost of production because it cannot be avoided.

Abnormal Loss

This is the extra loss that happens unexpectedly during production. It is the loss beyond what was expected (normal loss). Abnormal loss might occur due to problems like poor- quality materials, broken machinery, accidents or mistakes. For instance, if 2,000 units are processed and you expect to lose 5% of them (which is 100 units), it means you should end up with 1,900 units. If at the end of the production process you actually get an output of 1,850 units, it means you have lost an extra 50 units. This extra 50 units are considered as abnormal loss. This extra unit loss is not considered as a regular part of the production cost like normal loss but rather charged against or debited to the profit and loss account.

Abnormal Gain

This is the opposite of abnormal loss. It happens when there is less loss than you expected.

For example, if you process 2,000 units and expect a 5% normal loss, it means you are expected to get an output of 1,900 units). However, if the actual output becomes 1,930 units, the extra 30 units that have been saved from being lost under normal circumstances is considered as abnormal gain. This gain reduces the cost of production for that process.

Waste Wastage refers to the portion of materials lost during production that has no value at all. It is completely unusable and cannot be sold or recycled. For example, when peeling vegetables, some peels may be thrown away with no use.

Scrap Scrap is leftover material from production that still has some value. It can be sold as it is or used to make something else. For example, leftover pieces of fabric from a garment factory can be sold or reused for smaller items. The value of scrap is subtracted from the production cost to reduce expenses.

Spoilage Spoilage refers to products that are damaged during production and cannot be repaired or used. These goods are thrown away or sold at a lower price. Spoilage might happen due to bad materials, operator mistakes, or faulty machines. For example, cookies that get burnt in a bakery and cannot be sold are considered spoilage.

Defective Products

Defective products are items that do not meet quality standards but can be fixed. These goods can be reworked by using extra materials, time and labour to bring them up to standard. For example, if a table is made with a scratched surface, it might be sanded and polished to make it acceptable for sale.

Conversion Cost: this comprises both labour and overhead costs.

Work in Progress (WIP)

Work in progress refers to products that are not yet finished at the end of the production process. These are the incomplete goods still being worked on.

• Opening WIP: The unfinished goods that were carried over from the previous process.

• Closing WIP: The unfinished goods at the end of the current process.

For instance, if you are baking a batch of bread, the dough that has not gone into the oven yet is considered a work in progress.

Activity 5.16 Terminologies in Process Costing

1. Copy the table below into your book

2. Study the list of terminologies provided below

a. Normal Loss

b. Abnormal Loss

c. Abnormal Gain

d. Waste

e. Scrap

f. Spoilage

g. Defective Products

h. Work in Progress

3. Complete the table by selecting the appropriate term from the list and record it in the terminology column against the riddle that best describes the meaning of the term.

I am not done, I am in between and partially complete. I am on the line, in the making stage.

What is my name on this unfinished page?

I am the product that did not survive. Defects made me unfit to thrive. Faulty and flawed, I am set apart. What am I? Gosh! I miss the mark.

I am the leftover and the cast aside. There is no use for me because I cannot be applied. I am thrown away without any haste. What is my name?

I am unexpected and out of line, more than what is normal. An extra loss that is a surprise and goes beyond the standard.

I am small, useless, but I hold some value. I am sometimes sold for a penny or two.

Anyway, I am not a waste because I have some worth to share. What is my name? Take a guess, if you dare.

I am expected and part of the game, a portion of the input that is usually lost. I cannot be blamed because in every process, I must have my place I am created, but not up to standard. Errors in me take me quite far and make me unfit.

However, I am mostly fixed and sold like the standard ones, though my fate is not certain.

What is my name?

I am the odd one in the crowd. An extra unit that makes you proud. Unexpected but not a pain. What am I because I am a surprise gain!

Activity 5.17 Preparation of Process Accounts

1. Working in groups with three or more classmates, read the scenario below and perform the tasks that follow.

Adoma produces a product that passes through two processes. Data for the month of July is as follows Process 1 Process 2 Material introduced 4,000 units GH¢5,000 - Direct Wages (GH¢) 6,000 6,000 Production Overheads (GH¢) 2,800 3,800 Packaging (GH¢) - 10,000

a. You are required to prepare the accounts for process 1 and process 2.

b. Show the cost per unit at the end of each process.

2. Record your answers and work on a flip chart, and share with another group for comparison and feedback.

Terms in Process Costing

Joint Products

Joint products are two or more products that are made at the same time from a single raw material and have almost the same value. These products cannot be separated or identified individually while they are being produced. They share the same costs (called joint costs) until they are separated at a point in the process called the split-off point.

For example:

a. From crude oil, we get products like kerosene, petrol, diesel and jet fuel.

b. From milk, we can make butter, cheese and cream.

Joint Costs are the total costs spent on raw materials, labour and overheads up to the split- off point. After this point, the products are treated separately. Joint costs can be divided among the products based on:

1. Sales Value: Where the share of costs is based on how much each product will sell for.

2. Production Units: Where costs are shared based on how many units of each product are produced.

3. Weight of Products: Where costs are allocated based on how heavy each product is.

By-Products By-products are secondary products of little value that are made accidentally while producing the main product. They are not the focus of production but can still be sold for some income. Examples include:

1. Rice husk: A by-product of milling rice. It can be used as a fuel, in making insulation materials or as a soil conditioner.

2. Feathers: A by-product of poultry processing. They are used in making pillows, clothing or insulation materials

3. Bone meal: A by-product of meat processing, made from crushed animal bones. It is often used as a fertiliser or a nutritional supplement for animals.

4. Sawdust: Produced as a by-product when cutting or shaping wood in carpentry and sawmills. It can be used to make particleboard or as fuel.

Accounting treatment for by-products By-products are usually worth much less than the main product, so they are treated differently in financial records. Here are three common ways to account for them:

a. Other income method: The money earned from selling the by-product is recorded as extra income in the income statement.

b. Reduction of cost method: The sales money from the by-product is used to lower the cost of making the main product.

c. Profit method: If the by-product is worth a lot, the profit from selling it is recorded directly as income in the income statement.

Activity 5.18 Meaning of Joint and By-Products

1. Form a group with a few friends or classmates.

2. Discuss the meaning of joint products and by-products. Analyse how each is treated in accounting.

3. Summarise the key points from your discussion on a manila card.

4. Make a poster presentation for the whole class to explain what you've learned.

Activity 5.19 Joint Cost Allocation and Decision-Making

1. With a few classmates, study the scenario below and perform the tasks that follow.

Ron Chemicals produces three products from a joint process costing of GH¢150,000 per month. After leaving the joint process, the products must be further refined before they are saleable. You have been provided with the following information.

Product Quantity Further

processing cost Unit selling price GH¢ GH¢ A 15,000 350,000 80 B 25,000 100,000 25 C 10,000 250,000 15 Now, do the following after reading the scenario above.

a. Allocate the joint cost using the physical quantity method.

b. Allocate the joint cost using the sales value method.

c. Compute the cost per unit of each product after further processing using the physical quantity method of allocating joint cost.

2. Share your work with another group for discussion and feedback.

Extension task ABC Co. Ltd. produces three products (Beer, Grain, and Yeast) through a joint process that costs GH¢250,000. The products can either be sold as they leave the joint process or processed further for sale. The cost accountant has provided additional details regarding the costs and revenues for these products as follows Product Quantity Sales price at split off Further processing cost Unit selling price after further processing GH¢ GH¢ GH¢ Beer 7,500 25 150,000 63 Grain 10,000 35 175,000 75 Yeast 25,000 50 225,000 88 Your tasks

1. Among the three products, allocate joint costs by using the;

a. Physical method

b. Sales value after production method

2. Analyse the results you had from task 1 together with other data provided to determine which products the company should sell at the split-off point and which should be processed further for sale. (Make sure to justify your decision)

3. Prepare a simple report to the cost accountant of ABC Ltd. on the decision you have taken, together with the justification for the decision taken. Share this with your teacher for feedback.

1. Outline the unique and common characteristics of the following costing methods:

a. job costing

b. batch costing

2. Explain the meaning and significance of the following terms in contract accounting:

a. Apparent/Notional Profit

b. Cost of Work Certified

c. Certificate for Completed Work

d. Retention Money

e. Contract Price

3. Discuss the treatment of normal loss, abnormal loss, abnormal gain, waste and scrap in process costing.

4. Analyse how joint and by-products are accounted for in financial records, and explain the impact of different methods of allocation on financial reporting and decision-making.

5. Abima Koka & Co Ltd. had a fixed price contract to build quarters for a mining company at Bogoso.

The initial amount of revenue agreed was GH¢440,000. The contract began on 1ˢᵗJanuary 20X2, and the initial estimate of the contract cost was GH¢400,000. By the end of 20X2, the estimate of the total cost had risen to GH¢404,000.

In 2003, the customer agreed to a variation that increased the expected revenue from the contract by GH¢10,000, which resulted in an additional cost of GH¢6,000.

On 31ˢᵗDecember 20X3, there were materials at the site of GH¢5,000 for use in the year 20X4.

The contract costs incurred at the end of the years 20X2, 20X3, and 20X4 were GH¢105,040, GH¢308,400 (including material at the site), and GH¢410,000, respectively.

You are required to do the following.

a. Prepare a statement showing the calculations for the stage of completion

b. A statement showing how revenue, cost and profit would be recognised in each of the years 20X2, 20X3 and 20X4

6. Glover Contractors was awarded a contract valued at GH¢3,750,000 by FranMart Plc to construct affordable houses for its staff on 01/01/20X1. The contract is supposed to be completed in 20X3. Based on the architect’s certificate, a retention of 10% has been agreed and is to be released a year after completion. The data below relates to the contract.

GH¢ Materials purchases 387,500 Materials issued from stores 122,500 Direct wages 260,000 Overheads absorbed 62,000 Hiring cost of equipment 213,000 Contract expenses 30,000 Material on site 31/12/20X1 85,000 Value of work certified 950,000 Cheque received as payment 855,000 Work certified 31/12/20X1 142,000 Lighting and heating owing 33,500 Prepayment carried down 21,000 You are required to prepare the following for the year ended 31/12/20X.

a. Contract account

b. Contrctee’s Account

7. Ziggy Blaze Plc. produces three products (i.e. Joint Product A, Joint Product B and a By-Product Z) Cost of production before the point of separation is as follows GH¢ Material 390,000 Labour 510,000 Expenses 300,000 After the point of separation, the following further costs are incurred before the goods are sold:

Material Labour Expenses

GH¢ GH¢ GH¢

Joint product A 67,500 15,000 22,500 Joint product B 30,000 90,000 7,500 By-product Z – – – Sales of the product are as follows GH¢ Joint product A 1,800,000 Joint product B 1,425,000 By-product Z 75,000 166166 Joint costs are apportioned between the joint products based on the saleable price at the point of separation, which is GH¢ Joint product A 1,350,000 Joint product B 1,050,000 The revenue from Byproduct Z is treated as sundry income You are required to calculate these.

a. Cost of production of each product

b. Profit on the sale of each product

c. Total profit for the company

8. Alata Samina, a product manufactured by Simple Debee Cosmetics passes through three processes to complete. The cost of production for the period was as follows:

Element of cost Process 1 Process 2 Process 3 Total GH¢ GH¢ GH¢ GH¢ Direct Material 2,000 3,020 3,462 8,482 Direct labour 3,000 4,000 5,000 12,000 Direct expense 500 226 – 726 1000 units @ GH¢5 were issued to process 1 Production overheads GH¢6,000 Output of each process Process 1 920 units Process 2 870 units Process 3 800 units Normal loss per process was estimated as Process 1 10% Process 2 5% Process 10% The loss in each process represented scrap which could be sold to a merchant at a value as follows:

Process 1 GH¢3 per unit Process 2 GH¢5 per unit Process 3 GH¢6 per unit There was no stock of materials or work in progress in any department at the beginning or end of the period. The output of each process passes directly to the next process and finally to the finished stock. Production overheads are absorbed by each process on a basis of 50% of the cost of direct labour You are required to prepare the following accounts

a. Process 1, 2 and 3 accounts

b. Normal Loss (scrap sale) account

c. Abnormal loss account

d. Abnormal gain account

e. Costing profit and loss account