1.

Cost Concepts
The measurement of costs in accounting systems is used to find out and get information
about the generated profit, valuation of inventory, decision making and performance measurement.
The term cost can be defined as a monetary measure of the resources used to satisfy a specific
objective, like buying a good or service. Though we defined the cost term itself, but the term should
be determined in more deep concepts, because usually we dont use the cost word by itself,
instead we refer to cost by adding adjective to it in order to specify to the type of cost which we are
going to consider.
1.1 Classification of costs
In order to make our understandings more clearly, the costs are divided into some precise
types. o the classification of costs help us to make more accurate calculation by knowing the
definite types of costs and being able to assign them to different cost objects. !ost object is an
activity for which we have to make a separate calculation of costs. The cost objects may include the
cost of a particular product or provided service. "e#t we are going to discuss the different types of
costs.
1.2 Types of costs
Variable Costs $ it is the costs which vary in direct proportion to the activity volume. To be more
clear, as we double level, that will double the variable cost. That is, total variable cost usually is
linear and unit variable cost is constant.
Fixed Costs $ is the cost which remains constant despite the level of activities for some longer time
period. %i#ed costs include the depreciation of the factory building, the salaries of supervisors.
&owever, fi#ed costs may change over the time, it may increase or decrease in a longer time period.
In this situation this fi#ed costs can be described as semi-fixed or step-fixed costs, because in the
short time period the fi#ed cost is not willing to change whereas in longer time period because of
some changes leaded by the time going to reflect the fi#ed cost to increase or decrease in a step
manner. 'ecause of not remaining fi#ed in the long(term of fi#ed cost, usually it preferred by writers
to describe it as long(term variable costs.
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)e have also semi-variable cost also known as mixed cost which includes both a fi#ed and a
variable elements.
1.3 Elements of product costs
*roduct costs are generally defined as+
Product Cost, -irect.aterial / -irect0abor / %actory 1verhead
12 on a per unit basis+
Product Cost per unit , -irect .aterial per unit / -irect0abor per unit / %actory 1verhead per unit
3ctual costing system is a tool to calculate product cost, but first we need to understand some
fundamentals of any job costing system+
Cost object ( anything for which a separate measurement of cost is desired
Direct cost of a cost object$can be specifically and e#clusively traced to the cost object
Indirect cost of a cost object$cannot be specifically and e#clusively traced to the cost object,
for measure division into cost pools and allocation to the cost object is re4uired
Cost pool ( is a group of individual cost items 5e#. *lant service or production departments6
Cost-driver$is a base used for allocation of costs to the cost pools 57#. "umber of machine
hours, number of labor, area occupied, number of engineering hours etc. 6.
3ctual costing system measures the cost of product at their actual values+
Product Cost,3ctual -irect.aterial / 3ctual -irect0abor / 3ctual %actory 1verhead
0ets take a closer look to each of them+
1.3.1 irect!aterial Cost
3s were defined above direct cost of a cost object 5product6 can be specifically and
e#clusively traced to the cost object, these is the case for both direct labor and direct material. 'y
direct material we usually mean every type and 4uantity of material used for the production of
specific good. tale used in production of boilers, automobiles, aero plans8 wood in manufacture of
furniture, silk, ribbon and leather band used in making a hat, cloth in tailoring garments, !lay in the
manufacturing of bricks, leather in the manufacture of shoes, wheat used in milling flour are all
e#amples of direct material. 'usinessdictionary.com defines direct material as+ All items such
as raw materials, standard and specialized parts, and sub-assemblies required to assemble or
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manufacture a complete product. Direct material costs are assignable to a specific product, cost
center, or wor-order.
The term "ctual here stays for the point that we calculating the cost at the end of the
accounting period, when we already know the amount of cost occurred.
3n e#ample of the direct material calculation is provided below+
)ood is used in production of tables8 assume in order to produce one unit of fashion table
one cubic meter of wood is re4uired. The cost of one cubic meter of wood is 9::;. If during the
accounting period factory produced 9:: tables, what is the total and unit direct material cost.
<iving the information above+
irect unit material cost , = m
>
# 9:: ; , 9::;
Total direct material cost , 9:: tables # 9::; , ?::::;
o calculation of direct material cost is straightforward, however we should keep in mind
that sometimes even direct material cost are treated as an indirect costs because of the efficiency
reasons. This is usually the case when direct material costs are very small, for e#ample nails used in
the furniture production. 'ecause the cost of nails is too small, it is inefficient to calculate it for each
unit of production. If this is the case managers may calculate cost of nail as an overhead for the
factory, and then allocate it to the each product type.
1.3.2 irect #abor Cost
-irect labor cost also can be essentially traced to individual units of production. It includes
the cost of labor that actually working on the production, in other words labor that is touching the
producing good, and thats why it is often referred as a touc$ labor cost. The e#amples of the direct
labor cost may include, operators of the machine used for the production, painters in the building the
houses, furniture man making the furniture, mechanics repairing the car in auto service and etc.
!alculation of the direct labor cost is also straightforward, for e#ample+
3ssume operator of factory machine spends 9::: hours each year on the production. 3t the
end of the year factory have produced @::: units of product. The salary of the operator is 9@; per
hour. %ind total direct labor cost and unit direct labor cost.
Total direct labor cost , 9::: hours # 9@; , @::::;
irect unit labor cost , @:::: ;A@::: , =:;
&owever direct labor cost also may be treated as an indirect when the cost is minor, for the
efficacy reasons. 3s 3ccountingformanagement.com states+
!In some industries, major shifts are taing place in the structure of labor costs.
"ophisticated automated equipment, run and maintained b# silled worers, is increasingl#
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replacing direct labor. In a few companies, direct labor has become such a minor element of cost
that it has disappeared altogether as a separate cost categor#. $owever the vast majorit# of
manufacturing and service companies throughout the world continue to recognize direct labor as a
separate cost categor#.%
1.3.3 %ver$ead Cost
.anufacturing cost of overhead includes all costs of manufacture, e#cept costs from direct
materials, labor and other direct spending. ometimes the term overheads are used instead of
indirect costs.
!anufacturin& %ver$eads'all indirect labor ( indirect material ( )ndirect expenses
%or instance, we may count costs of the rent and depreciation of machinery as indirect
manufacturing e#penses where company produces diverse types of product.
In order to calculate the total manufacturing cost of the product we suppose to take into
account the amount of resources that have been used in the production process. ome of the
products which re4uire allocation of costs should be recorded on document based credentials. o, it
is advised that the amount of materials spent on the production of each product must be recorded
separately on the store re4uisitions and the labor hours spent must be recorded on job cards. 3fter
collecting the data on the 4uantity of resources and the hours of direct labor work it is re4uired to
find out the price paid for all of those resources. Thus, usually the total number of the resources is
multiplied by the price paid per unit of resources, so that we get the total of the direct costsAprime
costs of the product.
-irect costs in comparison to indirect costs may be traced to objects as they may be easily
traced to a particular cost object. )hen cost can be directly allocated to the cost object the term cost
tracing may be used. 3s indirect costs are common to several cost objects, they cant be traced
directly to a cost object. That is why indirect costs are assigned to cost objects by using cost
allocations.
Direct costs Indirect costs
Cost Tracing
Traditional
costing
system
ABC
systems
4
Cost object
Figure 1. Cost allocations and cost tracing
%igure = presents a summary of the allocation process. 3s it is seen, the direct costs are
assigned to cost object by using cost tracing and indirect costs are assigned by using cost allocation.
!ause(and(effect allocations should be used in order to have an accurate allocation of indirect costs
to cost objects.
There are two systems that can be used to allocate indirect costs to cost objects $ it is
traditional costing systems and activity(based(costing 53'!6 systems.
Plant-*ide +blan,et- over$ead rates.
1ne of the simplest methods of traditional costing system is to allocate indirect costs to cost
objects by the use of overhead rate for the whole organiBation. 'lanked overhead rate or plant(
wide rate terms are assigned to define a total overhead rate that is established for the organiBation
as a whole. ome departments may be called more overhead(intensive than others, those products
that are taking more time in such departments should be assigned to more overhead costs than those
that are spending less time in such departments.
!alculated departmental rates cover all these possible effects, but plant(wide rates do not
cover,because of the averaging process. )e can conclude that a plant(wide rate will generally result
in the reporting of inaccurate products costs. *lant(wide rate may only be necessary when all other
products also consume departmental overheads appro#imately the same 4uantity.
1.. Period Cost
*eriod cost which is known as period e#pense also is the cost which is impossible to
distribute to products.
In actual costing system we have different types of costs. -irect ones, indirect ones. )hen
our aim is to calculate the price for a specific product type or for a specific product of one type we
simply take the costs which occured directly for the production of that product. %or e#ample the
plastic material cost which is used for the production of one unit of pen.
3fter calculating the cost which occured for the production of that product, we look at the
overheads and we try to distribute the overheads to the products. %or e#ample we can calculate the
cost of electricity which is used during the production of the pen in the production machines. )e
simply add this cost to the cost of pen as well.
'ut what about the costs which are necessary for the production, but we can not distributeC
.anager of the factory works for the production as well. The cost of the salary paid to the manager
is a part of the cost of the pen for sure. 'ut how we can distribute the managers salary to the
products. .aybe if we are in a factory which is producing only pen in our imaginary world it would
be possible. 'ut since factories work for a set of products and this means that the factory produces
different types of products in different amounts, it becomes impossible to distribute the managerial
cost to products. ince in our world the variation in production is increasing, these costs which we
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can not allocate to production is increasing their proportion in the all costs. o the importance of
these costs is increasing in the modern world.
)e call these kind of costs as period costs. Its name comes from that they can not be distributed
but those cost amounts are always known for a period.
3lso we can calculate the overhead which occurs because of the depreciation on the production
machines and allocate it to products simply by checking the servicing cost of the machine and the
products produced in that machine. 'ut how about the depreciation in the buildingC -o we have
chance to tell how much it cost the depreciation in building goes to the price of product. &ow much
of the salary paid to the secretary goes to one productC Its not possible to tell that since we do not
have any cost driving activities in this issue . imilarly the common period costs can be listed as+
ales commissions
1ffice rent
elling e#pense
3dministrative e#pense
3dvertising
-epreciation of delivery e4uipment
7#ecutive compensation
ecretarial salaries
-epreciation of office building D e4uippment
In the modern world, with the new trends in production the variation in product types is
increasing. .ore costs are falling into the part of the period costs. 3nd since the proportion of the
period costs in the whole cost increases we should pay more attention on period costs every day.
2. Costin& /ystems
!ost siBe is an important part of many business events. )hile measurement is solely the first
step in a process, which is re4uired to monitor, control, strategy and market services and products.
E3nalysis of the measured costs is necessary. Fust knowing something is not of much usage to us,
we can also use that info. This analysis part of costing is called cost management or costing
system.
2.1 Types of costin& systems
!osting ystem consists of+
=. Fob !osting ystem ( which is the cost object is an element or various components of an
individual product or service.
9. *rocess !osting ystem $ is where the cost object is a mass of similar elements of a product
or service.
In this section we are going to focus mainly on Fob !osting ystem which also consists of two sub
costing systems+

a6 3ctual !osting $ uses the actual direct cost rates times the actual 4uantities of the direct(cost
inputs in order to trace direct costs to a cost object.
b6 "ormal !osting $ uses the actual direct cost rates times the actual 4uantities of the direct
cost inputs and that allocates indirect cost based on the budgeted indirect(cost rates times the
actual 4uantities of the cost(allocation bases in order to trace direct costs to a cost object.
0$at is an actual cost system1
3ctual costing is an instrument of measuring products A services by calculating their
accounting costs, which is usually the 4uantity of materials, number of labor hours spent and etc.
3ctual cost system occurs.
3ctual !osting is the calculation of product costs according to the following aspects+ actual
cost of materials8 actual cost of labor8 actual overhead costs incurred, allocated using the actual
4uantity of the allocation base e#perienced during the reporting period.
The most important aspect of the actual costing is the fact that it uses only the actual costs
that been held and allocation bases of each work.
ince 3ctual !osting system based on the short(term costs, that may suddenly change, it may
be e#pected that 3ctual !osting will have a great volatility. Thus, the company which has stable
fi#ed production volumes from month to month will definitely use actual costing as its primary
instrument.
The actual cost and the standard cost are different, while both approaches are fre4uently used
to certify the profitability of a given project. )ith actual costs, the aim is to break down the specifics
of the costs intricate with the project and identify if the production process connected with the
project is in fact working at optimiBation productivity.
)hile considering the e#penses associated with a given job, we should clearly understand
the difference between standard cost and actual cost. The standard cost adopts a standard value and
uses that figure to path the usage of resources. This tracking is usually made in the form of either
hours or the number of units consumed, and can identify difference between the production and
consumption. &owever, the actual cost is related only to the costs ac4uired during the progression of
the project, and not the units already produced.
The actual costing is very useful tool for determining and judging the profitability of
production processes. &aving information on how much it costs to undertake that production for a
precise period, such as a month, makes it easier to compare the revenue that is accumulated for the
same period. )e can count that the company is operating at profit if the actual cost e#ceeds by the
total amount of revenue received during the same period. If not, the calculation of the actual cost
should alert business owners to recheck or recalculate each e#pense involved with the
manufacturing process and identify ways to decrease costs and increase the chance of profitability.
If we comparing the actual cost of production from a previous periods to given period can
also help classify cost where the cost of production is increasing. If this increase evidence to be a
constant tendency, looking at each of the aspects involved may give some hints as to what is
happening. %or e#ample, a research may uncover the fact that a redundant 4uantity of overtime is
!
the cause for the higher production costs. If this is the case, the business can look closely for the
reasons why the overtime took place, and find out if there is any better way to dispose the use of
labor to balance this increase. %rom this view, calculating the actual cost is considered as an efficient
tool that helps to keep the production process resourceful, thus ma#imiBing the opportunity to gain
the highest amount of profits possible from the operation.
2.2 /teps of "ctual Costin& /ystem allocation process
First sta&e of t$e cost allocation process
First stageAllocations
"1 and 2 ste#s$
Figure 2.First-stage allocation of Traditional costing system (1 and 2 steps)
&Drur# C. !'anagement and Cost Accounting(, )
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edition*.
%
&'er(ead cost
accounts
")or eac( indi'idual
category o) e*#enses
e.g. #ro#erty ta*es+
de#reciation etc.$
Cost
Centre
1
"normally
de#artments$
Cost
Centre
2
"normally
De#artments$
Cost
Centre
,
"normally
De#artments$
/econd sta&e of t$e cost allocation process
-econd stage Allocations "3 and 4 ste#s$
"Direct labour or mac(ine (ours$
Direct Costs
Figure 3.Second- stage allocation of Traditional costing system (3 and 4 steps)
&Drur# C. !'anagement and Cost Accounting(, )
th
edition*.
"n illustration of t$e t*o-sta&e process for a traditional costin& system.
7#ample =.= can be useful to present a more specific and detailed image of the two(stage
allocation process of a traditional costing system. To make our e#ample more convenient we assume
that the company has only five cost pools (machine departments G and H, an assembly department,
and materials handling and general factory support cost centers. In order to apply the two(stage
allocation process we should go through four general steps of cost allocation+
=. 3ssigning all manufacturing overheads to production and service cost centers8
9. 2eallocating the costs assigned to service cost centers to production cost centers8
>. !omputing separate overhead rates for each production cost centre8
.
Cost objects
"/roducts+ ser'ices
and customers$
?. 3ssigning cost centre overheads to products or other chosen cost objects.
&Drur# C. !'anagement and Cost Accounting(, )
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edition*.
teps = and 9 involve stage one and steps > and ? relate to the second stage of the two(stage
allocation process. 'elow each step is considered in detail.
2.3 Example of Cost "llocation
Cru2 ##P !anufacturers ,Inc. Is divided into service departments and producing departments.
The !utting, ewing, and %inishing are producing departments. 1n the other hand *ower upply
and .aintenance are service departments.
Indirect 0ages1 "2$ "2$
Cutting 1 333 333
-e0ing 1 333 333
Finis(ing 1 533 333
/o0er -u##ly 1 133 333
4aintenance 1 4%3 333 3%3 333
Indirect materials1
Cutting 533 333
-e0ing %35 333
Finis(ing 135 333
/o0er -u##ly 3
4aintenance 13 333 1 423 333
5ent 533 33
6ig(ting and (eating 1 333 333
Insurance o) e7ui#ment 153 333
De#reciation8#lant and e7ui#ment 1 533 333
Insurance o) buildings 253 333
Factory administration %33 333 4 233 333
11 700 000
The common cost is as follows+
Cutting -e0ing Finis(ing /o0er
-u##ly
4aintenan
ce
Total1
Boo9
'alue o)
mac(iner
y "2$
% 333 333 5 333 333 1 333 333 533 333 533 333 15 000
000
Area
occu#ied
"s7.
metres$
13 333 5 333 15 333 15 333 5 333 50 000
,umber
o)
333 233 333 133 133 1 000
13
em#loyee
s
Direct
labour
(ours
1 333 333 1 333 333 2 333 333
4ac(ine
(ours
2 333 333 1 333 333
-etails of total materials issues 5i.e. direct and indirect material6 to the production centers are as
follows+
/tep 1- "ssi&nin& all manufacturin& over$eads to production and service cost centers.
In this step our main objective is to allocate all manufacturing overheads to production and
service cost pools. )e should prepare an overhead analysis sheet to allocate manufacturing overhead
costs. The overhead analysis sheet is shown in Table =.=. In many organiBations this document is
available only in computer form. 'y looking at 7#ample =.= we can notice that indirect labor and
indirect material costs have been traced directly to cost centers. 7ven though these items can be
directly assigned to the cost centers, but they cannot be directly traced to products. That is why the
indirect material and labor costs are assigned directly to cost centers. The other costs which shown
in 7#ample =.= cannot be directly traced to cost centers instead we must allocate them by using
appropriate allocation bases for each cost centers.
Table 1.1 "1 ste# o) allocation #rocess$
/roduction centers -er'ice
centers
Item o) Allocation Total Cutting -e0ing Finis(ing /o0er
-u##ly 4aintenance
e*#enditure Base "2$ "2$ "2$ "2$
"2$ "2$
Indirect 0age Direct 3%3 333 1 333 333 1 333 333 1 533 333
1 133 333 1 4%3 333
11
Cutting 2 4 333 333
-e0ing 2 3 333 333
Finis(ing 2 1 333 333
2 % 333 333
Indirect
4aterials Direct 1 423 333 533 333 %35 333 135 333
13 333
5ent Area 1 333 333 233 333 133 333 333 333
333 333 133 333
6ig(ting and
:eating Area 533 333 133 333 53 333 153 333
153 333 53 333
Insurance o) Boo9 'alue
;7ui#ment o) mac(inery 153 333 %3 333 53 333 13 333
5 333 5 333
De#ciation Boo9 'alue
/lant and o)
;7ui#ment mac(inery 1 533 333 %33 333 533 333 133 333
53 333 53 333
Insurance o)
Buildings Area 253 333 53 333 25 333 !5 333
!5 333 25 333
Factory ,umber o)
Administation em#loyees %33 333 243 333 13 333 243 333
%3 333 %3 333
"1$ 11 !33 333 2 .!3 333 2 .3 333 2 4%3 333
1 !3 333 1 %33 333
&Drur# C. !'anagement and Cost Accounting(, )
th
edition*.
o at this point the first stage allocation bases are used to e#plain the allocations of overhead costs.
The provided list provides fre4uently used allocation bases done at first stage+
Cost Allocation base
5ent+lig(ting and (eating
Area
Factory administration ,umber
o) em#loyees
De#reciation and insurance o) #lant and e7ui#ment <alue o) items o)
#lant and e7ui#ment
&Drur# C. !'anagement and Cost Accounting(, )
th
edition*.
12
'y looking at the overhead analysis sheet shown in Table =.= we can see that all the
manufacturing overheads of the company are assigned to the three production and two service cost
pools in the labeled 5=6 row.
/tep 2- 3eallocatin& t$e costs assi&ned to service cost centers to production cost centers.
Table 1.2
/roduction centers -er'ice
centers
Item o) Allocation Total Cutting -e0ing Finis(ing /o0er
-u##ly 4aintenance
e*#enditure Base "2$ "2$ "2$ "2$
"2$ "2$
5eallocation o)
-er'ice center
Costs
/o0er -u##ly <alue o)
4aterials
Issued 88888 %%3 333 3 333 223 333
"1 !3 333$
4aintenance Direct labour
:ours 88888 453 333 453 333 .33 333
"1 %33 333$
"2 $ 11 !33 333 4 333 333 3 %33 333 3 33 333
8 8
3fter allocation of costs to production and service cost centers, in this step we have to
reallocate assigned costs from service cost pools to production cost pools. The service departments
5service cost poolsAcenters6 are the departments which are e#ist within the organiBation to offer
services of different kind for the company. The service departments also sometimes can be referred
as support departments. 3ssume that we have two service centers. 1ne is materials procurement and
the other one is general factory support which consists of activities such as production scheduling
and machine maintenance. Traditional costing system for assigning costs to products reallocates
service center costs to production centers that have a direct relation of working on the product. In
the process of allocation service centre costs to production centre, the benefit that the production
centers receive should be carefully considered.
)e should presume that the value of materials issued 5shown in 7#ample =.=6 gives an
appropriate estimation of the benefit that the production centers derive from materials procurement.
In row labeled 596 in Table =.9 we can see that all manufacturing costs are allocated to production
cost pools. This concludes the first stage of the two(stage allocation process.
/tep 3-Computin& separate over$ead rates for eac$ production cost centre.
The second stage of the two(stage process is to allocate overheads from each production
centre to overheads going through that centre. Traditional !osting ystems often use the allocation
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bases considering the amount of time products spend in each production centre, such as direct labor
hours, machine hours and direct wages.
&ere we can think that the company uses machine hour rate for the machine production centers and
a direct labor hour for the assembly centre. The following formula shows how to calculate the
overhead rates.
Cost centre o'er(eads
Cost centre direct labor (ours or mac(ine (ours
Table 1.3
/roduction centers -er'ice
centers
Item o) Allocation Total Cutting -e0ing Finis(ing /o0er
-u##ly 4aintenance
e*#enditure Base "2$ "2$ "2$ "2$
"2$ "2$
4ac(ine (ours and direct
6abour (ours 2 333 333 1 333 333 2 333 333
4ac(ine (our o'er(ead rate 2.15 3.%3
Direct labour (our o'er(ead rate 1.%3
&Drur# C. !'anagement and Cost Accounting(, )
th
edition*.
/tep . 4 "ssi&nin& cost centre over$eads to products or ot$er c$osen cost ob5ects.
In the final step we have to allocate the overheads that pass through the production centers.
In case where service cost centers supply each other, the allocation of overheads might be more
comple#.
3. "dvanta&es and disadvanta&es of t$e "ctual Costin&
/ystem
3.1 "dvanta&es of t$e actual costin&
-ue to the fact that Fob !osting system considers different methods of overheads calculation,
there are lot of researches and arguments regarding which method is better and why. Those
specialists that stopped their choice on the 3ctual cost application to a cost objects have a proven
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reasons for that. !onse4uently, a big number of specialists made researches and investigations on
that issue, as a result they could corroborate 3ctual costing by its irrefutable advantages.
=. %irstly, 3ctual !osting gives financial and accounting managers the possibility to have an
access to the all costs for each separate job that been done during the period. 3ccounting
team may easily analyBe each of those costs, scrutiniBe why those costs been incurred, how
to avoid some of those undesirable costs in the future and may easily control the situation8
make sure that costs taking place in accordance with the plans. 3lso, managers easily make
conclusions in order to correctly plan costs for the future projects. 3s a result, better level of
profitability can be achieved.
+or e,ample, during some job performance, there ma# be costs held which are should not be held
b# the compan# and have to be refunded to the other parties.
Another e,ample, while anal#zing actual costing data it ma# be revealed that there were e,cess
costs of machine woring hours, caused b# the unnecessar# long use of equipment or the defects
problems with the machine, so that in future those costs ma# be avoided. It is a matter of utmost
importance for the accounting and financial management, to see whether the incurred costs are
much different from the e,pected ones.
9. econdly, as it is shown, an actual costing is an instrument that traces direct costs to a cost
object by using the actual rates times the actual 4uantities of the direct(cost inputs. 'ecause
of the fact that we are using actual costs computed at the end of the accounting period $ we
are sure in those results, therefore our data is accurate.
)hile considering the benefits of the actual costing we should always remember that those
benefits are important not only for those decision(makers that are pursuing an aim to ac4uire an
accurate and clear data for making further doubtless judgments, but who are able to wait until the
end of the period.
>. Thirdly, one more advantage is that additional corrections in the costs may influence on the
correctly planned contracts with the customers in the situations when customers are
refunding all the costs held by the supplier as they can accurately introduce all the cost
overruns in advance.
The business of any firm consists of the attitudes to arrange their procedures and work in the
way that assists them to correctly plan their future business strategy and work.
3ctual costing mainly provides accounting managers detailed, clear and, what is most important,
reliable information about the situation with costs in the company.
The calculated actual costs that is also called the periodic unit price, it can be used to do a
revaluation of the inventory for the closing period. .oreover, accounting and finance management
can use this actual price as the standard price for the ne#t periods.
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3.2 isadvanta&es of actual costin& system
Hou are not able to calculate costs before the end of the period. 'ecause actual costs should be
accumulated and then calculated and allocated to each cost pools. 3ccumulation of costs usually
made at the end of the year, which e#plains the reason why we cannot calculate costs at any time
whenever we need them.
=.Hou suppose to wait until the end of the fiscal year. There are two reasons why we have to wait
until the end of the period+
a6 The numerator reason 5indirect(cost pool6.
In the shorter period, the influence of seasonal pattern is greater on the amount of costs.
%or e#ample, the cost of indirect cost like heating would be calculated during the winter
months, but annual calculation of costs integrates all seasons into annual indirect cost
rate. 3lso, indirect costs are affected by inconstant non seasonal costs like repair and
maintenance of e4uipment costs which incurred in one month that benefits the operations
of future months. o by pooling all costs to annual consideration we smooth some of
inconstant hits in costs resulted in shorter periods instead of calculating these costs in a
month with highly non seasonal erratic costs.
b6 The denominator reason 54uantity of the cost(allocation base6.
-ispersion of monthly fi#ed indirect costs over fluctuating levels of monthly output and
thus variable 4uantities of the cost allocation base.
9.Its not providing timely information for management decisions. If theres a need to react
for changes in the market driven by competitors, we have to wait till the end of the fiscal
year in order to calculate overall costs and take decisions whether to eliminate too costly
products or to add up a new line of production. %urthermore, if our sales and revenue are
proportionally decreased, we cannot calculate the costs right away to find out the reasons
behind our problem to take corrective actions, whereas we have to wait until the year ends
which can be too late to respond to changes.
>. The large amount of overheads e#pected to be spent on production are fi#ed in the short term.
That is why, even if we want to calculate overheads more regularly, we will have inaccurate results,
because activities differ from month to month. The only thing we can do here is a normal product
cost based on average long(term production rather than an actual product cost, which is affected by
changes in activities in different months of the year.
1
C%6C#7/)%6
In the present group report the main aspects of 3ctual !osting system been considered. 7ven
though, there are a big number of discussions and arguments regarding the choice of the system that
should be applied as the main instrument of the companys accountingAfinance systems, an 3ctual
costing is one of the most popular. *roject considers all the benefits and drawbacks of the 3ctual
!osting system, but nevertheless there are still very successful companies that are mainly applying
this accounting instrument for ac4uiring reliable data for further analyBes and decision(making
processes. Thus, this topic deserves precise attention and has to be compared with others tools.
The concept of the product cost and basis of the job costing are scrutiniBed and analyBed,
what provides the reader with a simple understanding of the mentioned terminologies. 3s the
calculation of the product cost re4uires the use of direct labor costs, direct material costs and factory
overheads, the project considers and e#plains each one separately in more details.
The special attention is devoted to the factor of direct costs and particular e#amples of direct
materials and direct labor are provided in terms of the actual costing system.
1!
1verheads cost is the part of the 3ctual !osting system that should be clearly understood,
the present project covers all the significant aspects of the overhead rates. .anufacturing overheads
which are generally the summary of indirect labor, indirect material and other indirect e#penses are
the part of calculation of product cost.
In a consecutive order are e#plained stages of the process for allocation costs to the products
( the process which reflects the main activities of the 3ctual !osting system.
3 clarification of the periodic costs, its definition and e#amples are provided as one more
possible type of the costs.
The present project describes 3ctual costing from the various perspectives, such as
measurement, theoretical and also general instructions for the further analysis of the results. The part
of analysis may also be defined as the cost management.
3s the 3ctual !osting system is one of the possible methods to calculate overheads, the
special part of the project covers all possible advantages and disadvantages of the 3ctual !osting
system.
The main purpose of using actual costing procedure is to find out product cost and to make
further analysis of the result. In order to calculate product cost it is re4uired to calculate direct
material costs, labor cost and other overheads. This simple method is used for the investigation of
the current costing system in the company and identifying costs of each job in each department.
Isefulness of this method only depends on the possibility of managers to wait until the end
of the period, otherwise alternative methods can assist in making decisions, but that data is less
reliable and accurate.
3EFE3E6CE/
-rury !. .anagement and !ost 3ccounting 5J
th
edition6. 0ondon+ outh()estern
-on 2. &ansen, .aryanne .. .owen, 0iming <uan !ost management+ 3ccounting D control
5K
th
edition6
!harles T.&orngren, rikant..-atar, <eorge %oster !ost 3ccounting. 3 .anagerial emphasis.
5==
th
edition6
2onald ). &ilton, !ornell Iniversity .anagerial 3ccounting 5?
th
edition6
)nternet sources8
www.acsis.com.auA*ublicationsA2isk.angeA!haptersA...ATopicLK.pdf
www.accountingtools.comA4uestions(and(answersAwhat(is(actual(costing.html
1%
www.accountingformanagement.comAjobLorderLcostingLadvantagesLdisadvantages.htm
www.wisegeek.comAwhat(is(an(actual(cost.htm
www.businessdictionary.comAdefinitionAdirect(material.html
www.accountingformanagement.comA.anufacturingLandLnonmanufacturingLcost.htm
1.