Traditional costing system is the oldest system of calculating total production cost and cost per unit.
Under this concept overhead are allocated only production base.
This allocation is done on the basis of labour hour or machine hours only.
As well as demand of production increased, production capacity also increased.
Goods are produced in large quantity by manufacturing companies.
Direct materials and direct labour are easy to handle but indirect materials, indirect labour and indirect expenses becomes difficult to handle.
Nowadays many organizations have adopted advance manufacturing technology.
Direct costs are becoming smaller portion of total cost but indirect expenses are increasing enormously or extremely.
Tradition costing system charges indirect overhead or expenses on labour hour or machine hour basis that is not relevant in modern or advance manufacturing technology.
According to CIMA, “ABC contribution to cost unit on the basis of benefit received from indirect activities e. g. ordering, setting up, and assuring quality.”
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[Conventional costing system, absorption costing system, volume based costing system]
The tradition costing system was designed decades ago for costing.
There are two types of distribution under traditional costing system.
They are primary and secondary distribution of overhead.
Under primary costing, direct materials, direct labour and direct overhead are calculated.
Under secondary costing, labour hour based or machine hour based overhead are calculated.
Cost Statement under Traditional Costing
Particulars |
Products |
||
|
P |
Q |
R |
Direct materials [Output x Usage x RMPU] |
xxxx |
xxxx |
xxxx |
Direct labour [Output x LHPU x Rs] |
xxxx |
xxxx |
xxxx |
Prime cost |
xxxx |
xxxx |
xxxx |
Add: Overhead (based on machine or labour hours): |
|
|
|
Machine or Labour expenses (Hours x rate) |
xxxx |
xxxx |
xxxx |
Total cost |
$xxxx |
$xxxx |
$xxxx |
Output |
xxxx |
xxxx |
xxxx |
Cost per units = Total cost ÷ Output |
$xxxx |
$xxxx |
$xxxx |
Where:
RMPU = raw materials per unit
LHPU = labour hours per unit
Following are the main limitations of trading costing:
(a) This system follows only single cost driver as labour hour or machine hour.
(b) It focuses quantity not activity.
(c) It is suitable for only small industry that produces narrow range of products.
(d) It is based on only unit basis, there are other expenses that are not related to units like materials handling, set-up cost, production schedule, inspection etc.
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
The following information is provided to you (amount in $/₹/Rs):
Products |
Output in units |
DLH (per unit) |
Materials cost per unit (MCPU) |
A |
20,000 |
0.40 |
$5 |
B |
10,000 |
0.50 |
$4 |
Wage rate per hour $10
Additional information:
Repair cost |
$20,000 |
|
Set up cost |
$30,000 |
|
Required: (a) Value of materials; (b) Total DLH; (c) Labour hour rate; (d) Total labour cost; (e) Income statement
[Answer: (a) $100,000 and $40,000; (b) 13,000 hours; (c) $3.85;
(d) $30,800 and $19,250; (e) Total cost $210,800 and $109,250;
CPU $10.54 and $10.932]
SOLUTION:
Value of materials
Value of materials |
= Output x MCPU |
|
A |
= 20,000 units x $5 |
= $100,000 |
B |
= 10,000 units x $4 |
= $40,000 |
Total direct labour hours
Total DLH |
= Output x DLH |
|
A |
= 20,000 units x 0.40 |
= 8,000 hours |
B |
= 10,000 units x R0.50 |
= 5,000 hours |
|
|
= 13,000 DLH |
Labour hour rate (LHR)
= Total overhead ÷ Total DLH
= ($20,000 + $30,000) ÷ 13,000 DLH
= 50,000 ÷ 13,000
= $3.85
Total labour cost
Value of labour cost |
= DLH × LHR |
|
A |
= 8,000 DHL × $3.85 |
= $30,800 |
B |
= 5,000 DLH × $3.85 |
= $19,250 |
Particulars |
Products |
|
|
A = 20,000 |
B = 10,000 |
Direct materials [Output x MCPU] |
100,000 |
40,000 |
Direct labour [Output x DLH x $10] |
80,000 |
50,000 |
Prime cost |
180,000 |
90,000 |
Add: Overhead (based on labour hour): |
|
|
Labour expenses (DLH x LHR) |
30,800 |
19,250 |
Total cost |
$210,800 |
$109,250 |
Output |
20,000 |
10,000 |
Cost per unit = Total cost ÷ Output |
$10.54 |
$10.93 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
Square Engineering Workshop produces three products using same production methods. Following information is given to you (amount in $/₹/Rs):
Department ® |
P |
Q |
R |
Output (units) |
500 |
1,000 |
2,000 |
Raw materials usage (units) |
3 |
2 |
1 |
Raw materials cost per unit ($) |
5 |
4 |
10 |
Machine hour per unit (hour) |
0.5 |
1 |
0.5 |
Other information (amount in $/₹/Rs):
Set up cost |
Materials handling |
Production requisition |
Total overhead |
15,000 |
20,000 |
2,750 |
37,750 |
Required: (1) Total cost under traditional costing; (2) Cost per unit
[Answer: (1) $15,750; $43,000 and $45,000;
(2) $31.50; $43.00 and $22.50]
SOLUTION:
Given and working note:
Machine hours |
= Output x MHPU |
|
Machine hours rate (MHR) |
P1 |
= 500 x 0.5 |
= 250 |
= Total overhead ÷ Total Machine hours |
P2 |
= 1,000 x 1.0 |
= 1,000 |
= $37,750 ÷ 2,250 hours |
P3 |
= 2,000 x 0.5 |
= 1,000 |
= $15 |
|
|
= 2,250 |
|
Cost Statement under Traditional Costing
Particulars |
Products |
||
|
P = 500 |
Q = 1,000 |
R = 2,000 |
Direct materials [Output x Usage x RMPU] |
7,500 |
8,000 |
20,000 |
Direct labour [Output x LHPU x $10] |
5,000 |
20,000 |
10,000 |
Prime cost |
12,000 |
28,000 |
30,000 |
Add: Overhead (based on machine hours): |
|
|
|
Machine expenses (MH x MHR) |
3,750 |
15,000 |
15,000 |
Total cost |
$15,750 |
$43,000 |
$45,000 |
Output |
500 |
1,000 |
2,000 |
Cost per units = Total cost ÷ Output |
$31.50 |
$43.00 |
$22.50 |
Keep in Mind (KIM)
There are two methods for traditional costing system: |
· Overhead based on labour hour |
· Overhead based on machine hours |
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Problems and Answers of Traditional Costing under Activity Based Cost |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
SM Handicraft Center manufactures handcrafted goods. Following information is available for three different products:
Particulars $ |
Products ® |
O |
P |
Q |
Output |
in units |
1,000 |
2,000 |
7,000 |
Materials cost per unit (MCPU) |
in $ |
8 |
12 |
16 |
Labour cost per unit (LCPU) |
in $ |
12 |
15 |
18 |
Machine hour per unit (MHPU) |
in hour |
4 |
4 |
4 |
Other information:
Materials related cost $88,000
Production run cost $100,000
Customer’s order execution $112,000
Required: (for three products)
(a) Direct materials cost; (b) Direct labour cost; (c) Total machine hour; (d) Total machine hour cost;
(e) Income statement under traditional costing; (f) Cost per unit
[Answer: (a) $8,000; $24,000 and $112,000;
(b) $12,000; $30,000 and $126,000;
(c) 4,000 hours; 8,000 hours and 28,000 hours; (d) MHR = $7.5;
(e) Total cost $50,000; $114,000 and $448,000;
(f) CPU: O = $50; P = $57 and Q = $64]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
Hi-life Polymers (P) Ltd manufactures slippers Following data are related to three different brands slippers:
Brands |
Output units |
Materials usage per unit |
Materials cost per unit (MCPU) |
DLH per unit |
X |
25,000 |
1.5 |
$10.00 |
1.0 |
Y |
20,000 |
2.5 |
$8.00 |
2.0 |
Z |
30,000 |
2.0 |
$12.5 |
1.5 |
Direct wages rate per hour $15
Actual overhead incurred:
Materials handling cost |
$50,000 |
|
Indirect labour |
$160,000 |
|
Repairs and maintenance |
$100,000 |
|
|
$310,000 |
|
Required: (a) Value of materials; (b) Total DLH; (c) Total labour cost; (d) Income statement under traditional costing;
(e) Cost per unit
[Answer: (a) $375,000; $400,000 and $750,000;
(b) 25,000 hours; 40,000 hours and 45,000 hours; (c) LHR = $2.82
(d) Total cost $820,500; $11,12,800 and $15,51,900;
(e) CPU: X = $32.82; Y = $55.64 and Z = $51.73]
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