Cost Accounting Techniques and Systems
Costing methods
Candidates must distinguish job, batch, contract and process costing, and know when each applies. Process costing handles continuous production and requires normal loss, abnormal loss or gain, scrap values, and equivalent units (EU) where work in progress exists. Joint products and by-products arise from a common process; joint costs are apportioned using physical measures or sales value at split-off, while by-products are usually credited to the process at net realisable value.
Systems and variances
Absorption costing versus activity-based costing (ABC) is a core comparison: ABC treats overheads as driven by activities such as setups and inspections, giving more accurate costs where overheads are diverse. Throughput accounting focuses on bottleneck resources. Standard costing produces material, labour, overhead and sales variances; candidates should know the difference between price and usage/quantity variances and between planning and operating variances.
Traps in questions
- Valuing abnormal gain at full cost including normal loss scrap proceeds.
- Forgetting that normal loss is valued at scrap value and is not carried by good output.
- Ignoring the degree of completion when calculating equivalent units.
- Using the wrong basis for joint cost apportionment.
- Mixing FIFO and weighted-average EU methods.
Worked example
A process has 400 completed units and 600 units in closing WIP that are 60% complete for conversion costs. Conversion EU = 400 + (600 × 60%) = 400 + 360 = 760 units. If conversion costs are £3,800, the cost per EU is £5.
Rule of thumb
In process costing, always state the cost per equivalent unit separately for each input (materials and conversion) because completion percentages usually differ.