Chapter 2: Calculating unit costs: Chi phí đơn vị (Part 1)

Chi phí đơn vị là tổng chi phí phát sinh của một công ty để sản xuất, lưu trữ và bán một đơn vị sản phẩm hoặc một dịch vụ cụ thể. Chi
phí đơn vị chính là giá vốn hàng bán cộng với chi phí bán hàng.

2.1. Identifying direct and indirect costs for cost units

Direct costs are those that can be specifically identified with the cost unit being
costed.
Là chi phí được gắn trực tiếp với việc sản xuất một hàng hóa hoặc dịch vụ cụ thể
Direct costs = Direct material costs + Direct labour costs + Direct
expenses.
Indirect costs or overheads are those costs that cannot be identified directly with the
cost unit being costed.
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation
FIFO (first in, first out):
FIFO assumes that materials are issued out of inventory in the order in
which they were delivered into inventory: issues are priced at the cost of the
earliest delivery remaining in inventory.
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation
Advantages and disadvantages of the FIFO
method - It is a logical pricing method, which probably
represents what is physically happening.
Advantage - It is easy to understand.
s - The inventory valuation can be near to a valuation
based on replacement cost.
- FIFO can be cumbersome to operate.
- Managers may find it difficult to compare costs
and make decisions.
- Inventory issue prices will lag behind current
Disadvantage market value.
s
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation
Transactions during May 20X6
Worked
example:
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation Worked
Using FIFO, the cost of issues and the closing inventory example:
value of the
transactions in section 2.2.1 would be as follows.
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation
LIFO (first in, first out):
LIFO assumes that materials are issued out of inventory in the reverse order
from that in which they were delivered.

Advantages
and
disadvantag
es of the
LIFO
method
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation
Cumulative weighted average
pricing A new weighted average price is calculated whenever
a new delivery of materials is received into store.

Average cost:
The cumulative weighted average pricing method calculates a
weighted average price for all units in inventory. The average price
is determined by dividing the total cost by the total number of units.
Chapter 2: Calculating unit costs (Part 1)
2.2. Inventory valuation
2.2.1 Pricing methods in inventory
valuation

Advantages and disadvantages of cumulative weighted average pricing

Periodic weighted average pricing A single average is calculated at the

end of the period based on all
purchases for the period.
Chapter 2: Calculating unit costs (Part 1)
 Summary of Chapter 2
Calculating unit costs

Direct costs Indirect costs

Can be traced in full to cost unit being Cannot be traced in full to cost object
costed being costed

Direct material cost Direct labour cost Direct expenses

All material becoming part of the cost Wages that can be identified with a specific Non-material and labour cost that can be
unit cost unit identified with a specific cost unit

FIFO LIFO Weighted average

Issues priced at oldest prices in inventory Issues priced at latest prices in inventory Issues priced at a calculated weighted average

Cumulative weighted average Periodic weighted average

New average calculated whenever a delivery is Single average calculated at end of each period
received
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.1. Calculating the absorption cost of a cost unit
To calculate the full cost of an item

Total direct cost (prime cost) = Direct materials + Direct labour + Direct
expenses (if any)
Absorption (full) cost = Total direct cost (prime cost) + Share of indirect
cost/overhead
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
Determing share of indirect cost/overhead: There are three stages in
determining the share of overhead to be attributed to a cost unit:

Overhead Overhead Overhead

allocation apportionmen absorption
t
 Step1 : O/H allocated or
apportioned to cost
centres using suitable OVERHEAD
bases
Allocate
S Apportion

Step 2 : Service cost

centres reapportioned to Production Production Service Service
production cost centres
Departmen Departmen
Departmen Departmen t C t D
Step 3 : Overheads Production Production Re-
absorbed into units of apportion
t A
Department t B
Department
production A B

Absorption

Cost Unit
3/12/2024
x PhD. Nguyen Minh Thanh -
Academy of Finance
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
3.1.2.1. Overhead allocation

The first step in absorption costing is

allocation. Allocation is the process by
which whole cost items are charged
direct to a cost centre.
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
3.1.2.2 Overhead
apportionment: Phân bổ trên
a) First stage (apportionment): apportioning general overheads
không
The first stage of overhead apportionment is to identify all overhead costs as production
department, production service department, administration or selling and distribution overhead.
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
3.1.2.2 Overhead apportionment

b) Second stage (re-apportionment): service cost centre cost

apportionment
The next stage in absorption costing is to apportion the costs of
service cost centres to the production cost centres.
B) Giai đoạn thứ hai (phân bổ lại): phân bổ chi phí trung tâm dịch vụ
Giai đoạn tiếp theo trong chi phí hấp thụ là phân bổ chi phí của các
trung tâm chi phí dịch vụ cho các trung tâm chi phí sản xuất
 Re-apportionment
Re-apportionment. Service department costs need to be reapportioned to the production
departments, using a suitable basis linked to usage of the service.
Only production departments produce goods that will ultimately be sold. In order to calculate a correct price for these goods, we must
determine the total cost of producing each unit – that is, not just the cost of the labour and materials that are directly used in
production, but also the indirect costs of services provided by such departments as maintenance, stores and canteen.

Re-apportion methods

Direct method Indirect method

Step-down Reciprocal
method method
Used when service centers do not provide services to Used when one service Used when service
each other center provide services centers provide services
to others; but the others to each other
do not

Solution: service center which serves other centers Solution: service Solution: solved by
will be re-apportioned first center which serves using:
other centers will be Repeated distribution
re-apportioned first Simultaneous
equations
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
3.1.2.3 Overhead absorption The next stage in absorption costing is to
add them to, or absorb them into, the cost
of production or sales.

Production Production overheads are added to the prime cost. The total of the two being
overheads the factory cost, or full cost of production. Production overheads are therefore
included in the value of inventories of finished goods.

Administration,
selling and The aggregate of the factory cost and these non-
distribution production overheads is the total cost of sales:
overheads not included in the value of closing inventory.
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.2. Determing share of indirect
cost/overhead:
3.1.2.3 Overhead absorption

Stages 1: Predetermined Stage 3: Selecting the

absorption rates appropriate absorption
Stage 2: Calculating
In absorption costing, base
predetermined overhead Management should try to
it is usual to add establish an absorption rate
absorption rates
overheads into that provides a reasonably
product costs by The absorption rate is 'accurate' estimate of
applying a calculated by dividing the overhead costs for jobs,
predetermined products or services.
overhead absorption budgeted overhead by the
rate. budgeted level of activity.
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.3. Blanket absorption rates and departmental absorption rates

A blanket or single
Steps to Calculate the overhead to be
factory overhead
absorbed:
absorption rate is an 1. Choose fair methods of apportionment
absorption rate used 2. Apportion fixed costs over cost centres
Summar 3. Reapportion service cost centre costs
throughout a factory and y
4. Establish the overhead absorption rate
for all jobs and units of
5. Apply the overhead absorption rate to
output irrespective of the
products
department in which they
were produced.
Chapter 3: Calculating unit costs (Part 2)
3.1. Absorption costing
3.1.4. Over and under absorption of overheads
The overhead absorption rate is based on estimates (of both numerator and
denominator)

(a) Over absorption means that the overheads

charged to the cost of production are greater than
the overheads actually incurred.

(b) Under absorption means that insufficient

overheads have been included in the cost
of production.
Chapter 3: Calculating unit costs (Part 2)
3. 2 Activity based costing
3.1.4. Over and under absorption of overheads Figure 3.1: Activity based
costing
Traditional absorption costing assigns a large This is because overheads are usually absorbed using an
share of overhead to large volume items and a hourly rate.
small share to small volume items.

In high-technology production and in service Activities include setting up machines and order
operations there are many 'support' activities processing.
that are not related to output.
Products create a demand for the activities, but not
Activities cause costs. necessarily in relation to the volume manufactured.
The cost of the ordering activity might be driven by the
The costs of an activity are caused or driven
number of orders placed, the cost of the despatching activity
by factors known as cost drivers. by the number of despatches made.
If product A requires five orders to be placed, and product B
The costs of an activity are assigned to 15 orders, 1⁄4 (ie, 5/(5 + 15)) of the orde ring cost will be
products on the basis of the number of cost assigned to product A and 3⁄4 (ie, 15/(5 + 15)) to product B.
Chapter 3: Calculating unit costs (Part 2)
3.2 Activity based costing
3.2.2.1 Cost drivers
For those costs that vary with
production levels in the short
term, ABC uses volume-related
cost drivers such as labour hours
or machine hours.

For costs that vary with some other

activity and not volume of
production, ABC uses transaction-
related cost drivers
Chapter 3: Calculating unit costs (Part 2)
3.2 Activity based costing
3.2.2.2. Calculating product costs using ABC

Step 1 Identify an organization’s major

activities.

Identify the factors (cost drivers) which

Step 2 cause the costs of the activities.

Collect the costs associated Cost pools are equivalent to cost

Step 3 centres used with traditional
with each activity into cost
pools. absorption costing.

Step 4 Charge the costs of activities to products on the basis of their usage of
the activities. A product's usage of an activity is measured by the
quantity of the activity's cost driver it generates.
Chapter 3: Calculating unit costs (Part 2)
3.3 Costing methods
Section overview
Depend on the nature of its operations.
Appropriate when each cost unit is separately
identifiable.
Types of specific order costing method are job, batch and contract costing.
Job and batch costing are appropriate when jobs are of relatively short
duration.
Contract costing is appropriate when cost units are of relatively
long duration.
The process costing method is appropriate when output
consists of a continuous flow of identical units.
In a process costing environment unit costs are
determined on an averaging basis.
Chapter 3: Calculating unit costs (Part 2)
3.3 Costing methods
3.3.1 Specific order costing

Some organisations produce “one off” products or

services to a customer's specific requirements,
where each cost unit is separately identifiable
from all others.
3.3.1.1 Job costing
Job costing is appropriate where each separately identifiable cost unit or job
is of relatively short duration

Each job would be allocated a separate job number and costs would be
accumulated against this number in order to determine the total cost of the job.
Chapter 3: Calculating unit costs (Part 2)
3.3 Costing methods
3.3.1 Specific order costing
Figure 3.2: Job 3.3.1.1 Job costing
costing

Direct material issues Direct labour costs

FIFO, LIFO etc Based on time records

Job Number
XXXX

Production overhead costs

Absorbed from cost centre A, cost
centre B, etc
Chapter 3: Calculating unit costs (Part 2)
3.3 Costing methods
3.3.1 Specific order costing
3.3.1.2 Contract costing 3.3.1.3 Batch costing

Contract costing is Batch costing is similar to job costing

appropriate where each except that each separately identifiable cost
separately identifiable unit would be a batch of identical items.
cost unit is of relatively Each batch would be allocated a number to
long duration identify it and costs would be accumulated for
the batch in the same way as for a job in job
costing.
Chapter 3: Calculating unit costs (Part 2)
3.3 Costing methods
3.3.2 Process (continuous operation) costing

Some organisations have a continuous flow of operations and

produce a large number of identical products.

The cost per unit of output from each process is determined

by dividing the total process cost by the number of units
produced each period.
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management

Life cycle costs include those incurred in

developing the product and bringing it to
Section overview
market, as well as the costs incurred after sales
of the product have ceased.
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management
3.4.1 Life cycle costing

Component elements:
Research and development costs: design, testing and so on
Training costs: including initial operator training
Production costs: materials, labour and so on
Distribution costs: transportation, handling, inventory cost
Marketing costs: advertising, customer service.
Retirement and disposal costs: dismantling specialised equipment
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management
3.4.1 Life cycle costing

Costs Costs incurred during production

incurred and sales stage, eg, direct materials,
marketing costs
Costs incurred before
production and sales
begin, eg, R&D Costs incurred once
production has ceased,
eg, disposal costs

Tim
Figure 3.3: Costs incurred during the life cycle of a product or service e
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management

3.4.2 Target costing

Target costing t begins with a concept for a new

product and, after considering the situation in the
potential market for the product, a required selling
price is determined.
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management
3.4.3 Just-in-time Just-in-time (JIT) is an approach to operations planning and
control based on the idea that goods and services should be
produced only when they are needed.

A number of operational requirements

3.4.3.1 Operational requirements for JIT
are vital to the success of a JIT system.
High quality.
Speed.
Reliability.
Flexibility.
Efficient production planning.
Reliable sales forecasting.
Chapter 3: Calculating unit costs (Part 2)
3.4 Other approaches to cost management
3.4.3 Just-in-time

3.4.3.2 JIT and cost management

An efficient JIT system enables managers to control and reduce costs in a
number of areas, including the following.

Warehousing costs.
Improved capacity utilisation.
Reduction in waste.
Reduction in write-offs due to obsolescence.
Summary of Chapter 3