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RGAB 2006

BASIC COST ACOUNTING

R G A B O L A N D A N D J A F E A T H E R S

A C C O U N T I N GS T E P B Y S T E P

Four-hour programmesof self-instruction in accounting

Accounting Step by Step1 Accounting Reports2 Debit and Credit3 Basic Cost Accounting4 Budgetary Control

Accounting Step by Step Volume 3

BASIC COST ACCOUNTING

R G A BOLANDFellow of the Institute of Chartered Accountants

J A FEATHERSFellow of the Association of Certified Accountants

Fellow of The Institute of Cost and Management Accountants

ISBN 0 340 04504 3

Copyright copy RGAB 2006All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means electronic or mechanical including photocopy recording or any information storage and retrieval system without permission in writing

The figures in this book are fictitious and do not relate to any particular company or business

HOW TO USE THIS PROGRAMME

INTRODUCTION

This is an experimental programme in applying a new technique to the problems of learning accounting The authors would appreciate comments from both teachers and others who use the programme to improve the design of later editions

PURPOSE OF THE PROGRAMME

The programme enables you to teach yourself very rapidly the language and basic concepts of cost accounting It is a programme of instruction which leads you to an understanding of what cost of instruction which leads you to an understanding of what cost accounting reports can and cannot tell you about a business It is not a textbook but an aid to the understanding of existing textbooks

The programme leads you from simple to complex ideas in a gradual fashion If you are unfamiliar with accounting you will not be able to understand the later parts of the book until you have understood what comes before The programme is like a ladder and the parts of the programme are like the rungs in a ladder You cannot reach the top rung of a ladder unless you have first used all the lower rungs If there are several rungs missing in the ladder it is not only very difficult to reach the top but the ladder also becomes unstable The same things apply to your knowledge of accounting

CONTENTS

This book is divided into five chapters Chapter I is a brief introduction Chapters II-V comprise the main programme which is a series of ldquosetsrdquo In each set there are ten to sixty ldquoframesrdquo which systematically present new knowledge and also demand from you written answers

The main programme is followed by a quiz designed to test the knowledge you have acquired There is also a brief glossary of cost accounting language

TECHNIQUE

The following technique is used in writing the programme1 The number of words needed for a correct response is indicated by the

number of dotted lines ()2 An acceptable answer to a frame is the correct answer shown or any

reasonable synonym You are the judge3 Answers that require an amount of money are indicated in the frame by

ldquopoundrdquo and not by the normal ldquordquo

ACCOUNTING STEP BY STEP ROUTINE

ROUTINEThe routine for the student to follow in using the programme is as follows

1 Read the summary of the set If you already understand all the words pass on to the next set If not do the set

2 Read each frame and refer to the appropriate exhibit each time3 Write your response in the book or on a separate sheet4 Check your response with the correct answer which is one frame down

Do not wait until the end check each answer separately5 If your answer is the same as the correct answer or is any reasonable

synonym mark it with a tick and go on to the next frame6 If the answer is not correct read the frame again write the answer to

the frame correctly and then go on to the next frame7 At the end of the set read the summary of the set again Count the

number of correct answers you have made If you have 80 correct move to the next set If you have less than 80 correct do the set again

WRITING THE ANSWERSWriting the answers is essential to the learning process The answer must be written before you look at the correct solution If you glance ahead you will lose half of the value of the programme (However a little intelligent cheating can be educational)

SEQUENCEEach frame must be answered in turn The sequence has been carefully designed to introduce new knowledge and to reinforce old knowledge Do not skip frames Any apparent repetitions are there for a good reason Avoid careless answers If you begin to make mistakes because you are tired and have not read the text carefully take a rest If you continually miss one particular point go back to the set in which it first appeared and do that set again

And now read quicklythrough Chapter I

ldquoIntroduction to Cost Accountingrdquo

CONTENTS

HOW TO USE THIS PROGRAMME vii

CHAPTER I Introduction to Cost Accounting 9

CHAPTER II Meaning of Cost 13SET 1 Calculating the cost 13SET 2 Organization objectives and methods 21SET 3 Direct and indirect costs 33SET 4 Cost estimates and selling prices 47

CHAPTER III Manufacturing Overhead 57SET 5 Cost centres 57SET 6 Cash and credit 73

CHAPTER IV Costing Methods 83SET 7 Contract job and batch costing 83SET 8 Output costing 93SET 9 Process costing 99

CHAPTER V Interpretation of Cost Data 107SET 10 Cost statements 107SET 11 Relevant costs 123

QUIZ A Test of Knowledge acquired fromthe Programme 136

FOR THE TEACHER 151

ANSWERS TO THE QUIZ 152

GLOSSARY OF COST ACCOUNTINGLANGUAGE 153

PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR

FRAME NOOF EACHERROR

CHAPTER I 20

CHAPTER IISet 1Set 2Set 3Set 4

20202020

CHAPTER IIISet 5Set 6

2515

CHAPTER IVSet 7Set 8Set 9

101010

CHAPTER VSet 10Set 11

2020

Quiz 30

Total time 240

NOTE The authors would be pleased to receive the information outlined above and other comments from any serious student who is interested in research into the effectiveness of programmed learning

One error in a frame is treated as a frame in error

IMPORTANT NOTEIn the front of each set is a summary of technical terms and ideas to be

learned from the set Read it quicklyIf you already understand all of the summary do not complete the set

pass on to the next oneIf you do not completely understand every technical term and idea in

the summary do the whole set Do not attempt to do only parts of a particular set

CHAPTER I

INTRODUCTION TO COST ACCOUNTING

Estimated time 10 minutes (twice) (Read at beginning and end of the programme)

Read quickly through the following paragraphs Do not study them in detail until you have completed the whole programme

Accounting Language

Accounting has been called the language of business and like any language it can never express our thoughts with absolute precision and clarity Our task of learning this language is complicated by the fact that many of the words used in accounting mean almost but not quite the same as they mean in every-day life You must learn not to think of the words in their popular meaning In this programme we have used a standard set of accounting terms although certain other terms are also commonly used in practice However frequent repetition and writing of the standard accounting terms reinforces your basic grasp of the accounting language

Rules and principles

In any language there are some rules of principles that are definite and some others that are not definite The latter are a matter of opinion or style Accountants have different opinions just as grammarians have different opinions As language changes to meet the needs of communication in a society so accounting changes to meet the needs of business

Uncertainty

Accounting encompasses the facts about a business that can be expressed in money However many important business facts ie the health of management the morale of the workers the state of the market etc cannot be expressed in money Accounting must necessarily therefore provide only a limited picture of a business


Consistency and ComparabilityAccounting figures became significant not in themselves but when they are compared with other figures for a similar previous period with a budget estimate or even with figures for another business

The accountant therefore despite the problems of uncertainty tries to be consistent in his judgment so that the figures he produces are comparable

Financial AccountingFinancial accounting generally relates to the records and to the concepts necessary to prepare balance sheets and income statements (profit and loss accounts) showing a true and fair overall position of a business

Cost AccountingCost accounting is concerned not with the overall results of the business but with the efficiency of the various sections of the business and with the cost of a unit of production The cost is not in not a scientific fact but depends upon the judgment of the cost accountant This book shows how the cost of a unit of production may be calculated and the key assumptions underlying this calculation You should therefore appreciate not only the advantages of cost accounting but also some of its limitations

Actual and Standard CostsThe programme deals with historical or actual cost accounting A separate programme will deal with the technique of standard cost accounting The latter involves the setting of standards as measures of performance against which to measure actual cost and efficiency of operations in terms of variances of price quantity and volume

LanguageIn the programme we have used a simple set of standard words in place of highly technical terms The glossary at the end of the book defines each word used in the book and other words used in practice

Now start the detailed programmeat chapter II Set 1

10

CHAPTER II

MEANING OF COST

SET 1 CALCULATING THE COST

Estimated time 20 minutes

SUMMARY

In financial accounting we compute for an accounting period the sales cost and profit for the whole business However in cost accounting we analyse costs and compute the cost of each unit of production

Cost depends upon the judgment of the cost accountant in each situationThe cost of a product purchased for resale is the price we pay But if we

buy material to make a product for resale then the cost of the product includes the material labour and overhead

The cost of those units of a product sold is not the same as the total cost of materials labour and overhead since some of those costs may relate to unsold units

If we buy goods for pound4 and sell half of them for pound6 our profit to date is pound4 (provided the goods left over are still worth pound2)

CHAPTER II

MEANING OF COST


Exhibit 1 Financial Accounting Report

INCOME STATEMENT

Year ended December 31 Year 1

poundSales 120Less Costs 100

Profit 20

Relates to four different products produced and sold during the year

FRAME DETAIL CORRECT ANSWERS

1 In financial accounting we compute the sales costs and profit for all products However in cost we compute the cost for each separately

Now check your answer with the correct answer in the frame below Tick it if correct

2 Now read Exhibit 1 which is an income statement or profit and loss account for an accounting period of year

accountingproduct

3 It shows total sales and costs during the year and a figure of total for the year of pound20

one

4 The statement that indicates the total sales costs and profit for an accounting period is called a and account or statement

profit

5 In Exhibit 1 the income statement shows the sales cost and profit for (how many) different products produced and sold during the period Does it show the cost of each product For this we need not financial accounting but accounting

profitlossincome

6 If we only make 4 identical units of the same product for pound100 the cost of one unit may easily be calculated by dividing the total cost by Thus the cost per unit is pound

fournocost

7 However if we make four different products we (can cannot) divide the total cost by the total quantity of the output to get the cost of one product What do we need

4pound25

8 If we purchase goods for resale the cost is the purchase that we pay for the goods

cannotcost accounting

15

CHAPTER II SET 1

CALCULATING THE COST

Exhibit 2 Cost of one product Product X

poundMaterial 3 tons pound5 per ton 15Labour 5 hours pound1 per hour 5

20Overhead 5 hours pound2 per hour 10

Total cost 30


9 However if we buy raw material and manufacture a product then to the cost of raw material we must add the cost of manufacture to get the total of the product

price

10 Read Exhibit 2 relating to (how many) product It shows the computation of the total cost of product X as pound

cost

11 To manufacture the product we used tons of raw material at pound5 per ton for a total material cost of pound similarly we used 5 hours of labour at pound per hour for a total labour cost of pound

onepound30

12 Is the cost of labour and material the total cost of product X

3 tonspound15pound1pound5

13 To arrive at total cost we must add pound10 for This overhead cost is an estimate based upon hours at pound2 per hour

no

14 The overhead cost appropriate to a particular product is always an estimate Therefore the total product cost must also always be an It must depend upon the judgment of the accountant

overhead5

17

CHAPTER II SET 1


Exhibit 3 Importance of the cost of Closing Stock (Inventory)

poundPurchases 5 pound5 eachSales 3 pound9 each

2527

Apparent profit to dateCost of goods left unsold (closing stock)

2 pound5 each

210

Actual profit to date 12

Note The actual profit may also be computedpound

Sales 27Less

Purchases 25Less goods left unsold 10

Cost of goods sold 15 15



15 In the cost of product X we show overhead of pound10 If we had decided not to produce this one unit of product would we have saved pound10 of overhead

estimatecost

16 Estimates of cost depend upon the of the cost accountant

probably not

17 Let us now take another example if we buy goods for pound4 and sell half for pound6 we make a profit to date of pound

judgment

18 To compute the pound4 profit we deduct from the pound6 selling price the pound2 of goods sold There are pound2 of goods left over for subsequent

pound4 not pound2 (Because we still have pound2 of goods left unsold)

19 If the pound2 of goods left over are subsequently sold for pound4 we make a further profit of pound The entire profit of both sales is now pound The calculation of profit (does does not depend upon the cost of any goods left) over

costsale

20 Now read Exhibit 3 where we purchase some goods at pound5 each to sell again at pound9 each The difference between total purchases and sales to date is only pound Is this the total profit on the transaction

pound2pound6does

19


21 If we take into account the cost of the goods left unsold pound the apparent profit of pound2 is increased to an actual profit of pound

pound2no

22 Read Exhibit 3 and the note thereto again Do you see how the profit of pound12 may be computed in two different ways Is pound12 the(a) profit to date or(b) profit on the total transaction or(c) both (a) and (b)

pound10pound12

23 If we buy a pig for pound1 can we compute scientifically the exact cost appropriate to the pigrsquos tail

(a)

24 In summary therefore the cost of a product includes labour cost cost and cost Cost incurred (is is not) the same as cost of goods sold Cost is not a scientific fact but depends upon the of the cost accountant

No Itrsquos a matter of judgment

25 Are you writing down the answer to each frame and checking it immediately

materialoverheadis notjudgment

26 Now read again the summary of the set Count up the number of your correct answers If you have more than 20 correct carry on to the next set

If not start writing now Reading is not enough We want you to learn and to remember

20

CHAPTER II

SET 2 ORGANIZATION OBJECTIVES AND METHODS


SUMMARY

The organization of a manufacturing business provides the basis for cost analysis into

1 Manufacturingmdashcost of direct labour direct material and manufacturing overhead Overhead expenses are indirect costs and include indirect labour indirect material occupancy repairs maintenance internal transport factory supervision etc

2 Sales and distributionmdashcost of salesmenrsquos salaries sales office expenses advertising promotion packaging dispatch and carriage outwards etc

3 Administrationmdashcost of accounting office services and general management

The objectives of cost accounting are to1 Estimate the cost of each product (as an aid to pricing)2 Compute the cost of work in process so that the profit may be properly

calculated3 Control costs by associating costs with centres of responsibility

comparing actual with planned cost and taking corrective action

The cost accounting method to achieve these objectives should be appropriate to the business organization and its products Alternative methods available include job contract batch output and process costing

CHAPTER II SET 2

ORGANIZATION OBJECTIVES AND METHODS

Exhibit 1 Organization Chart of a Manufacturing Business

MANAGING DIRECTOR

MANUFACTURINGDEPARTMENT

SALESDEPARTMENT

ADMINISTRATIVEDEPARTMENT

120EMPLOYEES

20EMPLOYEES

10EMPLOYEES

Direct labour Sales overhead Administrative overheadDirect material Salesmenrsquos salaries Directorsrsquo feesManufacturing overhead Advertising Office salaries

Indirect labour Travelling Auditorrsquos feesOccupancy Sales promotion StationeryRepairs AccountingMaintenance General administrationInternal transportSupervisionIndirect material

Exhibit 2 Objectives of cost accounting

1 Estimate cost and possible selling price of each product2 Compute the cost of work in process3 Control costs


1 Read Exhibit 1 which shows the organization of a typical manufacturing business into three main departments andhelliphellip

Check your answer with the correct answer in the frame below Tick it if correct

2 The majority of workers are employed in the department which covers direct labour and indirect labour The employees in the manufacturing department are out of a total of 150 in the business

manufacturingsalesadministrative

3 However in the sales department we have employees and in the administrative department employees

manufacturing120

4 Direct labour and direct material are all incurred in the helliphellip department However from the outline of the business the overheads may be divided intohellip or overhead

2010

5 Cost of salesmenrsquos salaries advertising travelling sales promotion etc are all overhead

manufacturingmanufacturingsalesadministrative

6 Cost of directorsrsquo fees office salaries auditorrsquos fees stationery etc are overhead

sales

23

FRAMRE DETAIL CORRECT ANSWERS

7 Factory costs for occupancy indirect labour repairs supervision indirect material etc are overhead

administrative

8 What is this ldquooccupancyrdquo overhead manufacturing

9 Read again the detail of the manufacturing department in Exhibit 1 Direct labour direct material (are are not) part of manufacturing but they are not manufacturing overheads Overheads are costs

Costs of ldquooccupyingrdquo a factory eg rent rates lighting power building maintenance insurance etc

10 Now in your own organization are you part of manufacturing selling or administration Does your superior really understand you Your real problems Your potential The real responsibilities you have carried for so long without a word of complaint

areIndirect

11 This completes our review of the organization and overhead costs Now read Exhibit 2 which lists the of cost accounting These objectives are to estimate cost and possible selling of each product to compute the cost of work in and to costs

(We all seem to have the same problem)

12 The first objective of cost accounting deals with estimating costs to set selling prices But are selling prices always based on cost They are often determined by the market and not merely by adding a percentage to the of a product

objectivespriceprocesscontrol

24

Remember that writing and checking the answers to each frame is absolutely vital if you are to get the full benefit from your work on this programme

CHAPTER II SET 2


Exhibit 3 Cost selling price and profit of products A B and C

Product

A B Cpound pound pound

CostSelling price

58

1010

1520

Profit 3 Nil 5


13 In Exhibit 3 we show for three products A B and C the appropriate cost price and

nocost

14 Product A costs pound and sells for pound making aof pound3 Whereas product B makes a profit of pound and product C a profit of pound

sellingprofit

15 Strictly on the cost accounting results it appears that we should drop product B Should other factors be considered before making this decision

pound5pound8profitpound0pound5

16 Thus cost accounting data may show whether a product makes a profit or loss but (does does not) indicate finally what management should do But should management be given cost and profit data by products

yesmdashit may be part of a line of products and to sell A and C we have also to sell B

17 The second objective of cost accounting in Exhibit 2 is to record the labour material and overhead incurred on a product in order that we may value in

does notyes

18 In Exhibit 4 we compute the value of work in process at (market price cost) The total cost incurred amounts to pound If we know that the material cost of each unit is pound1 then the pound250 of material (marked X) is for units

workprocess

27

CHAPTER II SET 2


Exhibit 4 Computing the cost of work in process

Totalcost

incurred

Cost ofgoods

finished

Costgoods stillin process

(unfinished)

pound pound poundCosts

LabourMaterialOverhead

200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits

UnitsCompletedIn process

100150

100mdash

mdash150

250 100 150


19 Of these 250 units (cost pound650) 100 units are complete for a total cost of pound400 and units are work in process at a cost to date of pound

costpound650250

20 For the work in process we (have have not) incurred the full material cost but we (have have not) yet incurred the full labour and overhead cost

150pound250(Have you got one of these answers wrong Can you see why)

21 The computation of the cost of work in process pound is made by the cost accounting section of the business It is not valued at market price but at the lower of or price

havehave not(because we must buy material before we start to make the product)

22 The third objective of cost accounting in Exhibit 2 is to costs by relating costs to the persons responsible for these costs

pound250costmarket

23 Responsibility cost accounting associates cost with the person

control incurring

24 Now read Exhibit 5 which shows the cost control report of the department for the month of August Who is probably responsible

responsible

29

CHAPTER II SET 2


Exhibit 5 Cost control report of the sales departmentmdashAugust

Responsible person Sales Manager

Actual BudgetDifference

over (under)pound pound pound

SalariesTravel expensesOffice expensesAdvertisingSales literature

23015102515

235201258

(5)(5)(2)207

295 280 15

Exhibit 6 Examples of different units of cost or production

Unit Cost Accounting Method (system)1 One job Job costing2 One contract Contract costing3 One process Process costing4 One unit of output Output costing5 One batch of units Batch costing


25 The actual costs for August were pound295 against a of pound280 The difference of pound15 arose because actual costs were (over under) budget

salessales manager

26 Exhibit 5 (is is not) a cost control report for the sales department It shows where the actual expenses for August exceeded the

budgetover

27 Which items were less than budget isbudget

28 Which items exceeded the budget Is this report useful to the sales manager

salariestravel expensesoffice expenses

29 By presenting timely cost reports to management cost accounting indicates the difference between planned and actual cost and thereby helps to costs

advertisingsales literatureyes

30 Now read Exhibit 6 which lists several different of cost Different methods of cost accounting determine the cost of one unit of production or one unit of

control

31


31 Cost accounting associates cost with a of production A job a contract a process or a unit of output are all of cost for cost accounting purposes

unitscost

32 For each unit of production there is usually a system of cost accounting One unit one cost and therefore one Name three possible units of cost

unitunits

33 To compute the cost and selling price of a product to value work in process and to control costs are all of cost accounting

systemJob batch contract orprocess

34 What do engineers usually say about cost accountants

objectives


32

CHAPTER II SET 3

DIRECT AND INDIRECT COSTS


SUMMARY

Direct costs are conveniently associated with a unit of productionThey are

1 Direct labour which is direct operating labour It normally excludes storemen foremen transport drivers office clerks salesmen inspectors managers and other indirect labour

or 2 Direct material which forms part of the product sold It normally excludes oil grease machine repairs rags and other indirect material

or 3 Direct services which are special costs for particular jobs only eg hire of machines

All other costs are indirect costs known as overheads which may be analysed in various ways

1 Manufacturing selling or administrative2 Fixed or variable (with the volume of production or sales)

The elements of cost may now be set out as follows

Direct labourDirect material

poundXXXX

PRIME COSTManufacturing overhead

XX XX

MANUFACTURING COSTSelling and administrative overhead

XXXXX

TOTAL COST XXX

Note Manufacturing costs incurred in one accounting period are for goods finished and partly finished In the cost of finished production we adjust costs incurred during the period for work in process brought forward from the previous period and work in process carried forward

CHAPTER II SET 3


Exhibit 1 List of expenditures analysed into direct costs indirect costs and special items

NormallyF or V

Description Direct costs

Indirect costs Special items (not

costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF

Direct labourDirect materialIndirect labour

XX

X

VVV

Indirect materialFactory rent and ratesLighting and heating

XXX

FFV

Foremenrsquos wagesStoremenrsquos wagesPower

XXX

FFF

Machine depreciation expenseOffice expensesOffice salaries

XXX

FFV

Sales salariesAdvertisingSales travelling expense

XXX

FF

mdashmdash

Auditorrsquos feesSolicitorrsquos feesIncome taxDividends

XX

XX

Note Normal effect of changes in the volume of production

Fmdashnot affected (fixed costs)Vmdashaffected (variable costs)


1 Read Exhibit 1 which is a list of expenditures analysed into costs costs and items


2 The first two items are direct labour and direct which are costs

directindirectspecial

3 Costs that can be conveniently associated with a unit of production are costs All other costs are indirect costs known as

materialdirect

4 Dividends and income tax are not costs but

directoverheads

5 The factory rent and rates are (direct indirect) costs or manufacturing overhead because they are part of the operating costs of running the

special items

6 However the rent and rates paid for sales or administrative offices (are are not) manufacturing overhead

indirectfactory

35

CHAPTER II SET 3


Exhibit 2 Elements of cost of Iob A and Iob B

ClassificationA Bpound pound


2010

1020

DD

Prime costManufacturing overhead

(100 of direct labour)

30

20

30

10 I

Manufacturing costSelling and administrative overhead

(20 of manufacturing cost)

50

10

40

8 ITotal cost 60 48

Note D Indicates Direct costI Indicates Indirect cost


7 Foremenrsquos wages wages and power are all overhead They (can cannot) conveniently be associated with one unit of production

are not

8 The total cost of a new machine (is is not) an overhead expense at the time of purchase However machine depreciation may be charged periodically as a overhead

storemenrsquosmanufacturingcannot

9 Machinery costs are charged to manufacturing overhead periodically in the form of

is notmanufacturing

10 Sales overhead includes such items as sales salaries and sales

depreciation

11 Auditorrsquos fees office salaries and office expenses are all overhead

advertisingtravelling expense

12 Indirect costs are overheads However income tax and dividends (are are not) costs or overheads They are special items treated as allocations of profit and not as

administrative

37


13 All costs may be divided into direct costs and indirect costs In Exhibit 2 what do the marks ldquoFrdquo and ldquoVrdquo mean Which item marked ldquoVrdquo should normally be marked ldquoFrdquo

are notcosts

14 Direct labour (does does not) usually include storemenrsquos wages inspectorsrsquo wages and managersrsquo salaries These items are manufacturing overhead unless they can be (what)

fixed or variable cost factory rent and rates (normally fixed cost)

15 Indirect material is a overhead It (does does not) usually include grease rags small tools etc

does notconveniently associatedwith a unit of production

16 Now read Exhibit 2 which shows the of cost of job A and job B

manufacturingdoes

17 For job A the direct labour cost was pound20 The direct material cost was pound10 and therefore the cost was pound30

elements

18 To the prime cost of pound30 we add manufacturing overhead at 100 of direct labour to get a cost

prime

38


19 Manufacturing cost equals manufacturing over head plus cost

manufacturing

20 Selling and administrative overhead of pound10 being of manufacturing cost (pound50) is added to manufacturing cost to give the cost of pound60

prime

21 In the total cost of job A (pound60) the easily identifiable direct costs amounted to pound and the overhead (indirect) costs amounted to pound

20total

22 Thus for job A only one half of the total cost was clearly defined as direct cost conveniently associated with the job and the other half was

pound30pound30

23 Similarly for job B prime cost amounts to pound Manufacturing overhead at the rate of of direct labour is added to form a manufacturing cost of pound

overhead

24 The total cost of job B is pound48 of which pound30 is cost and pound18 is cost or overhead

pound30100pound40

39

CHAPTER II SET 3


Exhibit 3 Cost of all finished production and cost of finished goods sold during one month

(In thousands of pounds)pound

Direct labourDirect materialManufacturing overhead

235

Manufacturing cost incurredWork in process opening plus

101

Work in process closing minus112

Cost of finished goods producedFinished goods opening inventory plus

95

Finished goods closing inventory minus143

Cost of finished goods sold 11

Note Alternatively you may thick of this calculation aspound000

Work in processOpening inventoryCost incurred

110

Closing inventory112

Goods finished (below) 9Finished goods

Opening inventoryGoods finished (above)

pound00059




25 The manufacturing overhead is charged as a percentage of Is this the only method for charging manufacturing overhead

directindirect

26 Direct labour plus direct material equals cost

direct labourno

27 Prime cost plus manufacturing overhead equals cost

prime

28 This seems to be a terribly long set Will it ever end

manufacturing

29 Manufacturing cost plus selling and administrative expenses equal cost This completes our review of the of cost

Yes Donrsquot despair 24frames to go

30 Now we come to the complication of stocks (inventories) which affect the figures we have accepted above Read Exhibit 3 which shows not the cost of one product but the cost of all production for a month and the cost of finished goods The figures are in thousands of pounds marked

totalelements

41


31 Costs incurred (spent) during the period are direct pound2000 direct pound3000 and manufacturing overhead pound

finishedsoldpound000

32 In Exhibit 3 pound10000 is the manufacturing cost (spent) for the month Is this the cost of goods finished during the month

labourmaterialpound5000

33 Work in process brought forward at the beginning of the period amounted to pound1000 The manufacturing cost incurred plus the work in process brought forward amounts to pound

incurredno (work in process has changed)

34 The work in process at the end of the period amounts to pound2000 Thus of the manufacturing cost incurred during the month (pound10000) and the work in process brought forward (pound1000) only pound related to work finished (completed) during the period

pound11000

35 To compute the cost of goods finished during the period we therefore take the costs incurred add work in process and deduct work in process

pound9000

36 Now we do the same computation for finished goods At the beginning of the period we had finished goods in stock (inventory) of pound and at the end of the period we had finished goods in stock (inventory) of only pound

openingclosing

42


37 To compute the cost of finished goods sold (cost of goods sold) during the period we take the cost of the finished goods add stock of finished goods and deduct stock of finished goods

pound5000pound3000

38 Thus the cost of finished goods produced during the month was pound to which we added the opening stock of finished goods pound and deducted the closing stock of finished goods pound to calculate the cost of the finished goods sold during the period pound

producedopeningclosing

39 Manufacturing costs incurred and cost of finished goods produced (are are not) the same We must adjust for changes in in

pound9000pound5000pound3000pound11000

40 Cost of finished goods produced (is is not) the same as cost of finished goods sold We must adjust for opening and closing of goods Now read again the note to Exhibit 3

are notworkprocess

41 For the last part of this set we return to our analysis of costs To summarize costs may be analysed into direct costs and indirect costs In direct costs may be manufacturing sales or administrative Alternatively they may be classified into fixed or

is notstocks (inventory)finished(Have you got the idea If not do frames 30ndash40again please)

42 Now read Exhibit 4 which shows the effect of variable and fixed costs at different of production and sales from one unit up to units

variable

43

CHAPTER II SET 3


Exhibit 4 Effect of variable costs and fixed costs at different volumes of production and sales

No of units of sales1pound

100pound

500pound

1000pound

Variable costsFixed costs

11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000

PROFIT (LOSS) (998)loss

(800)loss

nilbreak-even

1000profit

Total cost per unit pound1001 pound11 pound3 pound2

Note The basic data for this statement is

1 Variable cost per unit pound12 Selling price per unit pound33 Fixed overhead pound10004 No inventory changes


43 What is the variable cost per unit Is it the same cost per unit for all volumes

volumes1000

44 What is the total fixed cost What is the fixed cost per unit at the different volumes 1 unit 100 units 500 units 1000 units

pound1yes

45 Why is the total cost over pound1000 for one unit as against only pound2000 to make and sell a thousand units

pound1000pound1000 (pound100041)pound10 (pound1000100)pound2 (pound1000500)pound1 (pound10001000)(Do you see how it falls continually)

46 What is the break even volume (units) It occurs when total sales equal total Below this volume we make a loss and above it we make a

Because of heavy fixed costs

47 To determine the effects of different volumes of production and sales we must divide costs into and costs

500 unitscostprofit

48 In practice determination that a cost is fixed or variable is extremely difficult Direct costs tend to be (but are not always) (fixed variable)

fixedvariable

45


49 Overheads (are are not) always fixed irrespective of the volume of production

variable

50 The cost accountant must therefore investigate each direct and indirect cost very carefully before he can define it as fixed or variable It is not a matter of scientific analysis but practical

are not(some overheads do vary with the volume of production)

51 Would you say cost accounting is just clerical routine

judgment

52 Now read again the summary of the set Count up the number of your correct answers and if you have more than 40 correct take a short break and then continue on to the next set

We hope not the routine work is done after the cost accountant has used his judgment to make the necessary assumptions

46

CHAPTER II

SET 4 COST ESTIMATES AND SELLING PRICES


SUMMARY

In deciding the cost and possible selling price of a job the direct costs of labour and material are easy to identify The main problems arise in charging appropriate amounts for overhead and profit

To determine a fair manufacturing overhead for a job we find a relationship between the total manufacturing overhead cost and some known direct cost For example

Total Costs Possible Manufacturingof a Recent or Future Period Overhead Rates

poundDirect labour 600 200 of Direct LabourDirect material 1800Prime cost 2400 50 of Prime CostManufacturing overhead 1200

To the direct costs of the job we add first manufacturing overhead and then sales distribution and administrative overhead to arrive at total job cost

We may then add a profit percentage to total cost to compute an estimated selling price However the customer and the market for the product decide the actual selling price of the job

The excess of selling price over total cost is the profit from making and selling that particular job The contribution of a job is the excess of selling price over variable costs It contributes a margin for fixed costs and profit

CHAPTER II SET 4

COST ESTIMATES AND SELLING PRICES

Exhibit 1 Estimated cost and selling price of job no 1234pound

Direct labour 5 hours pound1 per hour 5Direct material 3 tons pound5 per ton 15

Prime cost 20Manufacturing overhead

Manufacturing cost Sales and administrative overhead

Total cost Profit

Estimated selling price of the job


1 For any job it is usually easy to determine the cost of labour and material which are (direct indirect) costs


2 The principal direct costs of a job are called direct and direct whereas the indirect costs of a job are called

direct

3 Overheads are paid to cover the whole volume of production They (are are not) paid for one specific job alone

labourmaterialsoverheads

4 Are you getting tired are not

5 Now read Exhibit 1 It shows how a computation of cost of job no 1234 was prepared to estimate the price

YesThen stop now and start again later

6 Which costs are definitely incurred for job no 1234 alone

selling

7 Now read Exhibit 2 to see how the overhead rates may be calculated It shows results of operations for a period

direct labourdirect material

49

CHAPTER II SET 4


Exhibit 2 Results of operations on all jobs for a recent period

poundDirect costsLabour 5000Material 15000Prime cost 20000Indirect costs Manufacturing overheadManufacturing overhead 10000 rates

50 of prime cost or200 of direct labour cost

Manufacturing cost 30000Sales and administrative Sales and administrative

overheadoverhead 6000 rate

20 of manufacturing costTotal cost 36000Profit 9000 Profit 25 of total costSales 45000

FRAME DETAIL CORRECT ANSWERS8 During the recent period the total cost of direct

labour was pound and manufacturing overhead pound We may now calculate one possible manufacturing overhead rate as of direct labour

recent

9 A manufacturing overhead rate of 200 of direct labour means that for every pound1 of labour we have pound of overhead This is a method of charging manufacturing overhead to a particular job Are there any other methods

pound500degpound10000200

10 An alternative overhead rate would be to say that for every pound1 of prime cost (pound20000) we have pound of manufacturing overhead (pound10000) Now compute the manufacturing overhead for job no 1234 in Exhibit 1 using a rate based on prime cost

pound2Yes

11 To relate sales and administrative overhead to manufacturing cost we again examine the results of the recent period given in Exhibit 2 For the pound of sales and administrative overhead we have manufacturing costs of pound and we may compute an overhead rate of

poundfrac12pound10

12 A selling and administrative overhead rate of 20 means that for each pound100 of manufacturing cost we charge pound of selling and administrative overhead Now compute the charge in Exhibit 1

pound6000pound3000020

13 Finally we must decide how much profit shall we estimate for the job in Exhibit 2 we find the relationship between profit pound and total cost pound in the recent period was

pound20pound6

51

CHAPTER II SET 4


Exhibit 3 Revised cost and estimated selling price of job no 1234

poundDirect labourDirect material

515

Prime cost 20Manufacturing overhead (50 of prime cost) 10

Manufacturing costSelling and administrative overhead (20 of

manufacturing cost)

30

6Total cost

Profit (25 of total cost)369

Estimated selling price 45


14 Thus from Exhibit 2 using the recent period we have computed rates to cover manufacturing overhead selling and administrative overhead and also a rate to add finally for Could we charge more


15 Using these overhead and profit rates now complete Exhibit 1 Then read Exhibit 3 Did you get it right

profitYes if customer stillaccepts the price

16 Direct costs amount to pound The manufacturing overhead based on 50 of cost amounted to pound giving a total manufacturing cost of pound

Yes GoodNo Why start the setagain please

17 Are manufacturing overhead and selling and administrative overhead both charged on the basis of a percentage of labour costs

pound20primepound10pound30

18 Selling and administrative overhead is charged at the rate of 20 of

no

19 The estimated profit on the job no 1234 is pound based upon of the total cost

manufacturing cost

53

CHAPTER II SET 4


Exhibit 4 Computation of the contribution of job no 1234

poundESTIMATED SELLING PRICE 45

poundLess variable costs

Direct labour 5Direct material 15Variable manufacturing overhead 3Variable sales and administrative overhead 4 27

CONTRIBUTION 18Less fixed costs

Fixed manufacturing overhead 7Fixed sales and administrative overhead 2 9

ESTIMATED PROFIT (per Exhibit 3) 9

Note To compute the contribution we must first analyse the overhead as follows

Total Fixed Variablepound pound pound

Manufacturing 10 7 3Sales and administrative 6 2 4

16 9 7


20 Cost accounting techniques have helped us to estimate the and selling of job no 1234

pound925

21 Of the total cost of pound36 only the direct pound5 and direct pound15 are actual costs The balance of pound16 is not direct cost but charges for

costprice

22 Overhead charges are based upon rates computed from cost of total operations In this case we could have used a budget or a forecast of future costs but instead to compute the rates we used the results of the operations of a period

labourmaterialoverhead

23 Now study ldquocontributionrdquo in Exhibit 4 Try to understand the breakdown of fixed and variable costs The contribution is the difference between the selling price and the costs

recent

24 We compute the ldquocontributionrdquo of job no 1234 by deducting the variable costs of pound from the selling price of pound The contribution to fixed overhead and profit is pound whereas the profit on the job is only pound Does this all agree with Exhibit 3

variable

25 If the business is short of work a job may be worth doing so long as its variable costs are less than its The difference between these two things is called the of the job towards fixed costs and profit

pound27pound45pound18pound9Yes

55

FRAME DETAIL CORRECT ANSWERS26 in Exhibit 4 how much was the total overhead

How much fixed How much variable Before we could calculate the contribution we had to analyse the into and costs

selling pricecontribution

27 Now to summarize this set we have seen that the cost of the job may be estimated as the direct cost of and plus manufacturing overhead and selling and administrative

pound16pound9pound7OverheadFixedVariable

28 If the cost accounting is properly co-ordinated with the financial accounting the total costs on all jobs (can cannot) normally be reconciled with the total costs in the income statement


29 We have also learned how to estimate the selling price of a job given the costs and the results of a period Alternatively we could use a budget which is an estimate of results of a period

can

30 The contribution of a job is the excess of selling price over It (is is not) the same as the profit on the job

directrecentfuture

31 Now read again the summary of the set Count your correct answers and if you have more than 24 correct stop for ten minutes and then continue to the next set

sellingvariable costis not

56

CHAPTER III

MANUFACTURING OVERHEAD

SET 5 COST CENTRES


SUMMARY

Analysis of manufacturing overhead by cost centres enables us to replace one overall manufacturing overhead rate with specific overhead rates for each cost centre Thus one hour in cost centre I may be costed differently from one hour in cost centre II

Manufacturing overhead cost centres may be1 Productive cost centres directly engaged in manufacturing operations2 Service cost centres for factory services such as power house

maintenance internal transport general factory overhead etc

The routine for analysis of manufacturing overhead by cost centre is1 Charge specific costs (foremanrsquos salary indirect labour etc) to

productive or service cost centres2 Charge general costs (factory managerrsquos salary etc) to a special

service cost centre called general factory overhead3 Charge non-specific costs to productive or service cost centres on an

appropriate basis (floor space units used number of workers etc)4 Recharge all service cost centre costs on appropriate bases to

productive cost centres to arrive at a revised total overhead cost for each productive cost centre

CHAPTER III SET 5

COST CENTRES

Exhibit 1 General overhead rate

TotalOverhead

Total direct labour cost

Overhead as of direct labour

costManufacturing

Selling andAdministrative pound100000 pound40000 250

Exhibit 2 Overhead rates distinguishing between manufacturing selling and administrative overhead

Totaloverhead

Total directlabour cost


costpound pound

ManufacturingSelling and

Administrative

80000

20000

200

50

100000 40000

FRAME DETAIL CORRECT ANSWERS1 The costs of a business may be divided into direct

costs and indirect costs Overhead expenses are costs


2 if we grouped all overhead costs into one cost centre and compared this total with the direct labour we could compute the rate as a percentage of direct labour

indirect

3 However we usually do not put all overhead into only cost centre

overhead

4 To facilitate more accurate costing we develop separate overhead rates for a series of separate operating centres known as

one

5 Now read Exhibit 1 which shows the total overhead of a business as pound against total direct of pound40000

cost centres

6 For pound40000 of direct labour the overhead rate is or pound100000

pound100000labour

59

CHAPTER III SET 5

COST CENTRES

Exhibit 3 Manufacturing overhead rates distinguishing between cost centres

Productive cost centre

Manufacturing overhead

Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000

Note This analysis is explained in Exhibit 7


7 Now read Exhibit 2 in which we subdivide the overhead into pound80000 and selling and administrative pound

250

8 From Exhibit 2 we may now calculate another overhead rate based on direct labour by comparing the direct labour of pound40000 with a manufacturing overhead of pound80000 to give a rate of This rate (does does not) include selling and administrative overhead of 50

manufacturingpound20000

9 Now read Exhibit 3 in which we divide the manufacturing overhead into (number) cost centres Cost centre 1 has pound and cost centre 4 has pound

200does not

10 From Exhibit 3 we may calculate an overhead rate for cost centre 2 by comparing the direct labour of pound6000 with the overhead of pound15000 to give a rate of

4pound10000pound30000

11 Similarly the overhead rate for cost centre 4 would be Is cost centre 3 probably more highly mechanized (ie more machinery overhead costs) than cost centre 4

250

12 Cost centre 3 has direct labour of pound against manufacturing overhead of pound and therefore has an overhead rate of

333no (lower overhead rates are often due to low machine depreciation)

61


13 Is cost centre 3 probably a manual or machine department


14 In Exhibit 2 we have only one manufacturing overhead rate of and all direct labour bears this same rate of overhead However in Exhibit 3 we have four different rates by cost centres of 200 250 and 333

manual

15 These rates (do do not) include selling and administrative overhead

200125

16 If we have only one overhead rate for the whole factory a product which has one labour hour in cost centre 4 (a machine shop) will be charged with the (same different) amount of overhead as a product using one hour in cost centre 2

do not

17 By using different rates by cost centres for different activities we (do do not) tend to associate the overhead of a cost centre with the labour of that particular cost centre

same

18 Remember the overhead rates referred to up to this point (do do not) include selling and administrative overhead

do

62


19 By dividing the direct labour and the manufacturing overhead into cost centres the overhead rates may be (more less) precise

do not

20 We shall now deal with the detailed analysis of manufacturing overhead by cost centres Read Exhibit 4 which shows the for charging manufacturing overhead to

more

21 Depreciation of machinery and foremenrsquos salary indirect labour are examples of (specific non-specific) costs which may be easily charged to the correct cost centres However they are still in direct costs or

basescost centres

22 By contrast some costs such as rent general building repairs personnel dept etc may not be easily identified with particular cost centres They must therefore be charged to cost centres on an Such costs are (specific non-specific) costs but they are still

specificoverheads

23 The cost for rent may be analysed to each cost centre on the basis of the number of square feet of area occupied by each cost centre If the total floor space was 10000 sq ft and cost centre no 1 occupied 5000 sq ft would it be allocated half of the rental cost

estimated basisnon-specificoverheads

24 What other item could be analysed on the basis of floor space

floorYes

63

CHAPTER III SET 5

COST CENTRES

Exhibit 4 Bases for charging manufacturing overhead to cost centres

Possible Basis of AnalysisManufacturing

OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost

Specific costs XNon-specific costs

Rent XLighting and heating XCleanersrsquo wages XSupervision XRepairs and maintenance XPersonnel dept costs XTimekeeperrsquos wages X

CHAPTER III SET 5

COST CENTRES

Exhibit 5 Partial analysis of manufacturing overhead by cost centre

Basisfor

analysisTotalcost Productive cost centres Service cost centres

I II III IV A B Generalpound pound pound pound pound pound pound pound

Specific costs Actual 50000 3000 2000 10000 14000 2000 1000 18000Non-specific costs Various 30000 2000 6000 10000 10000 1000 1000 mdash

Sub-total 80000 5000 8000 20000 24000 3000 2000 18000Recharge of general manufacturing service cost centre

No of employees mdash 3000 5000 4000 3000 2000 1000 (18000)

Sub-total 80000 8000 13000 24000 27000 5000 3000 mdashRecharge of service cost

centresAB

TOTAL COSTS BY PRODUCTIVE COST CENTREDIRECT LABOUR COST OVERHEAD RATE


25 The second item listed in Exhibit 4 is and heating which is analysed on the basis of the number of used

cleanersrsquo wages

26 If there are no separate electricity meters some other basis of analysis must be found Some businesses analyse lighting and heating on the same basis as rent ie area occupied

lightingunits

27 Was it really such a good idea to learn cost accounting

floor

28 Some other items are analysed on the basis of the ldquonumber of workers in each cost centrerdquo These items are costs timekeepers wages and This basis (is is not) useful as a general basis of analysis The cost accountant must select the appropriate basis by using his

Definitely

29 Now read Exhibit 5 which shows (number) productive and (number) service cost centres

personnel deptsupervisionisjudgment

30 There are two types of cost centres A cost centre concerned directly with manufacturing the product is a cost centre By contrast cost centres for factory services such as maintenance stores production control internal transport etc are cost centres

43

65


31 Manufacturing costs of a very general nature which would be difficult to analyse on any reasonable basis to cost centres are normally accumulated in a special service cost centre called cost centre How much did these costs amount to

productiveservice

32 Now for the routine of overhead analysis in Exhibit 5 First the specific costs easily identified for specific cost centres were charged on the basis of Easily identifiable costs are costs

generalmanufacturingservicepound18000

33 Total specific costs were pound of which productive cost centre IV was charged with pound

actual costspecific

34 Then the non-specific costs of pound were charged to cost centres on appropriate bases such as no of workers area used etc The total of specific and non-specific costs amounts to pound


35 We then recharge service cost centres on appropriate bases First general manufacturing service cost centre was charged on the basis of

pound30000floorunitspound80000

36 Is general manufacturing service cost charged to both productive and service cost centres

no of employees

67

CHAPTER III SET 5

COST CENTRES

Exhibit 6 Recharge of service cost centre costs to productive cost centres

Servicecost

centre

Servicecost

centreA Bpound pound

Specific costs 2000 1000Non-specific costs 1000 1000

3000 2000General manufacturing service cost centre 2000 1000Total cost to be recharged to

productive cost centres (exhibit 5) 5000 3000

Basis of recharging UnitsUsed

FloorArea

pound poundProductive cost centre I 1500 500

rdquo rdquo rdquo II 1000 1000rdquo rdquo rdquo III 600 400rdquo rdquo rdquo IV 1900 1100

Total (Exhibit 7) 5000 3000


37 Now read Exhibit 6 which shows the transfer of the costs of cost centres to productive cost centres so as to incorporate these costs into the final overhead rates of the cost centres

Yes

38 First we accumulate the specific costs of the service cost centres A pound B pound

serviceproductive

39 To this we add the non-specific costs and the allocations of the general manufacturing service cost centre from Exhibit

pound2000pound1000

40 Now we charge service cost centre costs to productive cost centres The total cost for service cost centre A was pound which is apportioned to the productive cost centres on the basis of

5

41 Similarly service cost centre B is allocated to productive cost centres on the basis of

pound5000units used

42 Now trace the data in Exhibit 6 to Exhibit 7 which is the completed analysis We compute the total costs of productive cost centres To the specific and non-specific costs of the productive centres we recharge a proportion of manufacturing service overhead

floor area

69

CHAPTER III SET 5COST CENTRESExhibit 7 Completed analysis of manufacturing overhead by cost centre

Basisfor



Specific costs ActualVarious

50000 3000 2000 10000 14000 2000 1000 18000Non-specific costs 30000 2000 6000 10000 10000 1000 1000 mdash


No ofemployee

s mdash 3000 5000 4000 3000 2000 1000 (18000)Sub-total 80000 8000 13000 24000 27000 5000 3000 mdash

Recharge of service cost centresAB

units usedfloor area

mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash

TOTAL COSTS BY PRODUCTIVE COST CENTRE 80000 10000 15000 25000 30000 mdash mdash mdashDIRECT LABOUR COST OVERHEAD RATE

40000 5000

200

6000

250

20000

125

9000

333 mdash mdash mdash

Note Figures in brackets denote deductions

See Exhibit 3


43 Then the service cost centre A pound is transferred to production cost centres on the basis of

general

44 Similarly the cost of service cost centre B pound is transferred to the productive cost centres on a basis of area occupied

pound5000units used

45 Finally the revised manufacturing overhead of each of the productive cost centres is computed as follows

cost centre I pound10000cost centre II pound15000cost centre III poundcost centre IV pound

pound3000floor

46 Against this revised overhead by cost centre we can compare the direct labour costs For cost centre I against an overhead of pound10000 we have direct labour cost giving an overhead rate of


47 Similarly we have analysed overhead via service cost centres to arrive at an overhead rate for

cost centre II cost centre III cost centre IV

pound5000200

48 Do these overhead rates agree with Exhibit 3 250125333

71


49 The technique of using cost centres enables us to subdivide the overhead into a series of centres and to compute separate overhead

Yes (in frames 32ndash47 you have followed the routine to get this data)

50 Finally the analysis by cost centres enables us to relate the overhead costs of the business to persons responsible for each

manufacturingrates

51 Have we now completed (successfully) the longest set in the programme

cost centre

52 Some of the possible bases to be adopted for analysing overhead to cost centres include area occupied of workers of power used or if known the cost

Not quite

53 What is the name generally given to the special cost centre in which miscellaneous general manufacturing overheads are grouped together before being charged on the most reasonable basis to the various service and productive cost centres cost centre

floornumberunitsactual

54 We accumulate costs by productive centres and service centres and subsequently re-charge the service centre costs to the productive cost centres to accumulate total overhead costs for each cost centre

generalmanufacturingservice (or works general overhead)

55 Now read again the summary of the set Count up the number of your correct answers If you have more than 44 correct stop for coffee and then start the next set

productive(You have now completed the most difficult part of the programme Now it is ldquodownhillrdquo all the way home)

72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY

To determine the manufacturing overhead rate for a cost centre

1 Compute total overhead cost for the cost centre (Set 5)2 Select a measure of activity3 Divide the overhead cost by the measure of activity to compute the

overhead rate

Measures of activity for overhead rates are1 Direct labour cost

or 2 Direct labour hoursor 3 Machine hoursor 4 Prime cost

Manufacturing overhead rates may be computed separately for individual cost centres or departments or for the whole business

The estimated level of activity selected to compute the overhead rate significantly affects the rate and the accuracy of the job costs If the actual activity is less than estimated there will be a balance of overhead not charged to jobs This is known as undercharged overhead Conversely if the actual activity exceeds estimate there will be overcharged overhead

CHAPTER III SET 6

OVERHEAD RATES

Exhibit 1 Computation of three possible overhead rates for a cost centre

Measure of ActivityBasis 1 Basis 2 Basis 3

Overhead Cost pound40000 pound40000 pound40000

Measure of activityDirect labourmdashcost pound10000Direct labourmdashhours 20000 hoursMachine hours 40000 hours

Overhead rates based onDirect labour cost 400Direct labour hours pound2 per hourMachine hours pound1 per hour


1 In this set we shall discuss the method of computing overhead charges to jobs in the form of manufacturing overhead


2 We associate the direct costs with an appropriate amount of the overhead cost by using an

rates

3 Now read Exhibit 1 which is a computation of overhead rates for a cost centre It shows (number) possible bases or measures of activity

overhead rate

4 To compute the rate we associate the overhead cost of pound with a of

three

5 In basis No 1 we associate the overhead cost with the cost of pound10000 Thus for pound10000 of direct labour we incur pound40000 of overhead or

pound40000measureactivity

6 However this is not the only way of charging overhead In basis No 2 we may associate the overhead cost of pound40000 with the 20000 direct labour and produce an overhead rate of pound per hour

direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES

Exhibit 2 Effect of changing levels of activity on overhead charged

Estimated overhead pound40000Estimated direct labour cost pound20000Overhead rate 200 of direct labour

Case 1 Case 2 Case 3

HighActivity

EstimatedNormalActivity

LowActivity

pound pound poundActual direct labour cost 30000 20000 10000

Overhead charged to job costs 60000 40000 20000Actual overhead cost 40000 40000 40000Overhead over- (under-) charged to job costs

20000 mdash (20000)over-

charged Nilunder-

charged

Note (1) In job costs overhead is charged at 200 of the direct labour for the job

(2) If there is a large amount of overhead over-charged or under-charged the job costs do not then reflect fair overhead charges

(3) The accuracy of the overhead charges in the job costs therefore depends upon the amount of overhead under- or over-charged


7 Thus for every hour of direct labour in the cost centre we shall charge pound for overhead Does this include sales and administrative overhead

hourspound2

8 Direct labour may be a suitable basis for charging overhead where there is (little much) mechanization However if there is much mechanization and the overhead rate would exceed 200 of direct labour cost it may be useful to consider an overhead rate related to basis No 3 hours

pound2No

9 For basis No 3 we associate the overhead of pound40000 with (number) machine hours to compute an overhead machine hour rate of pound per hour

littlemachine

10 Each basis assumes that the overhead of the cost centre (will will not) vary directly withrsquo the measure of activity chosen

40000pound1

11 However each basis assumes an estimated level of activity Now read Exhibit 2 which shows the effect on the cost accounting of changing levels of

will

12 We have assumed that the cost centre overhead of pound40000 will entail direct labour of pound20000 so that we get an overhead rate of The estimated activity was the amount of pound

activity

77


13 In Exhibit 2 case no 1 indicates actual activity which is (higher lower) than the estimate

200Direct labourpound20000

14 The direct labour cost was not pound20000 as estimated but amounted to pound With the estimated pound40000 of overhead the 200 rate would charge pound and leave pound20000 (over- under-) charged

higher

15 In case No 2 however our estimated activity was correct and the direct labour amounted to pound The amount of overhead over- or under- charged therefore was

pound30000pound60000over

16 In case No 3 the actual direct labour was only pound leading to an overhead charge of pound and a balance of pound20000 (over- under-) charged

pound20000nil

17When the overhead is charged to a job it becomes part of the cost of the job If the job cost includes direct labour pound20 the cost of the job will include pound40 for overhead because we have used an overhead rate of

pound10000pound20000under

78


18 Now to analyse the effect of these three situations on job costs In each case we charged out overhead at an estimated rate of 200 whereas the actual overhead rates should have been

pound actual overhead

rateBasis 1 Overhead 40000

Direct labour 30000Basis 2 Overhead 40000 200

Direct labour 20000Basis 3 Overhead 40000

Direct labour 10000

200

19 However we could not wait until the end of the year to compute the actual overhead rate so we used an estimated rate as in Exhibit 2 To compute this estimated rate we have estimated

(a) cost pound40000(b) cost pound20000

133400

20 If the actual direct labour cost is less than the estimate we will have overhead (over- under-) charged

overheaddirect labour

21 If the actual direct labour cost is more than the estimate we will have overhead (over- under-) charged

under

22 Since we could not wait until we knew the actual level of activity we made an estimate and had an amount of overhead under- or over- at the end of the period

over

79


23 After charging out overhead at the estimated rate during the year we could still re-compute the charges again at the end of the year However we normally decide to leave the amount of overhead under- or over- as a loss or profit in the income statement An undercharge is a (loss profit) whereas an overcharge is a (loss profit)

charged

24 Overhead absorbed overhead recovered overhead charged overhead allocated These terms (do do not) mean substantially the same

chargedlossprofit

25 Overhead rates relate overhead costs to a measure of activity and thereby ensure that overhead costs are to the

Do (see glossary for the finer points of the language)

26 Overhead under-charged indicates that the actual level of production was (above below) the expected level In such circumstances the job costs include too little overhead and the true job cost is (more less) than the cost prepared using the estimated overhead rate

chargedjobs

27 Conversely over-charged overhead indicates that the actual level of activity was (above below) the expected level Job costs therefore tend to include too much overhead cost and therefore be too (high low)

belowmore

80


28 We think that at this point you should be allowed to express your thoughts about the programme

abovehigh

29 Incidentally do you now understand that ldquounder-absorbed overheadrdquo is a helliphellip (profit loss) and ldquoover-absorbed overheadrdquo is a helliphellip (profit loss) in the income statement of the period

Thank you

30 List the different measures or activity which could be used for overhead rates

LossProfit(If not do frames 18-29 again please)

31 Now read again the summary of the set Count up the number of your correct answers If you have more than 24 correct continue on to the next set (But if you still feel a little unsure do the set again anyway)

direct labour costdirect labour hoursmachine hoursprime cost

81

CHAPTER IV

COSTING METHODS

SET 7 CONTRACT JOB AND BATCH COSTING


SUMMARY

In contract costing the unit of cost is one contract Labour and materials and some other costs are direct contract costs General overhead is charged to contracts on an appropriate basis

In job costing we associate cost with a job Labour and material are direct costs Manufacturing overhead is charged on an appropriate basis Sometimes selling and administrative overhead is charged to job costs as a percentage of manufacturing cost to compute total job cost

The actual cost of the contract or job may subsequently be compared with the original estimate as a control on the

1 Profitability of the job2 Efficiency of production operations

and 3 Accuracy of the estimating procedures

The conservative practice is to ignore profit to date on jobs or contracts not yet completed However for contracts lasting several years it is customary to take credit for part of the profit each year to avoid profit fluctuation

Batch costing is job costing for a group or batch of identical products

CHAPTER IV SET 7

CONTRACT JOB AND BATCH COSTING

Exhibit 1 Contract cost

Contract No 1pound

Estimated selling pricendash Estimated total cost

150000100000

= Estimated total profit 50000

Actual cost to dateLabour 20000Material 26000Direct services 14000

Total direct cost 60000

Overhead charged 20000Total cost to date 80000

Proportion of profit earned to date

pound40000

Note By taking a proportion of the profit of long term contracts each year we avoid wide fluctuation of profits

However there may be unexpected losses on the remainder of the contract and it is not conservative to take the whole of the calculated pound40000 profit to date as profit in the income statement this year


1 We can now discuss the various methods of cost accounting which differ according to the helliphellip of cost or unit of helliphellip selected


2 First read Exhibit 1 It shows an example of a cost The unit of production is one

unitproduction

3 The total estimated cost of the contract was pound100000 and the estimated selling price pound Therefore the estimated total amounted to pound50000 Have we earned all of this profit to date

contractcontract

4 Up to the present time the contract is still un completed and the direct costs on the contract to date are labour pound20000 material pound26000 and direct services pound This makes a total direct cost to date of pound

pound150000profitno

5 To this cost we have added a charge for over head pound at a rate of of direct cost giving a total cost to date of pound


6 It is more conservative not to take profits until the of a contract but as we have spent pound80000 cost out of a total estimated cost of pound100000 could we perhaps after making reason able allowance for possible future losses assume that the profit is earned in relation to the cost incurred Or even be conservative and take only three quarters of this amount


85

CHAPTER IV SET 7


Exhibit 2 Batch costingmdashestimated cost

Estimated

Costpound

Labour poundDept A 15Dept B 5 20

Material 10Manufacturing Overhead

Dept A 45 (300)Dept B 5 (100) 50

Manufacturing Cost 80Selling and administrative over-

head (10) 8Total Cost 88

Profit 12Selling price 100

Note A ldquobatchrdquo is a group of identical products


7 Adopting these assumptions the proportion of profit earned to date is

frac34

end (completion)yesyes

8 Thus in costing for long term contracts we accumulate direct and indirect costs in the usual way and we may take credit for a helliphellip of the profit in relation to the cost incurred after making reasonable allowance for possible future


9 Now read Exhibit 2 which shows an example of costing A batch is simply a of identical

proportionlosses

10 The direct costs of the batch amounted to pound

batchgroupproducts

11 The manufacturing overhead costs total pound50 of which pound45 relates to Department and pound5 to Department

pound30

12 Does the business use only one overhead rate for all departments

AB

87


13 The Department A overhead rate is of direct labour and the Department B rate is

No

14 Which department is probably the more mechanized Department A or Department B Why

300100

15 To the estimated cost of pound80 we add selling and administrative overhead at the rate of

Department Ahigher overhead rate

16 The estimated total cost of the batch was pound and the profit pound

manufacturing10

17 Of this total estimated batch cost of pound88 how much was clearly and directly associated with this one batch

pound88pound12

18 How much of this total estimated batch cost of pound88 is the result of assumptions and overhead allocations or apportionments

pound30

88


19 If pound38 of the pound58 of overheads were fixed costs unaffected by the volume of output then the estimated contribution of the batch to fixed costs and profit is calculated

pound58

pound poundSales price 100

Less Direct costs 30Variable overhead

Contribution

20 If we were working at full capacity and could only get a selling price of pound70 for the batch would it pay us to take it

pound20pound50pound50(If unsure about ldquocontributionrdquo do again Set 4 Frames 23ndash31)

21 Would pound70 be a worthwhile sales price if we were working at a low level of capacity

No we could do more profitable business

22 If pound70 would be worthwhile how much would the pound70 selling price contribute to the recovery of fixed overheads and profit What would be the profit or loss on the batch

Yes

23 Now read Exhibit 3 which shows the cost of the batch

pound70ndashpound30ndashpound20=pound20loss pound18

89

CHAPTER IV SET 7


Exhibit 3 Batch costingmdashactual cost

ActualCost

poundLabour

Dept A 10Dept B 5 15

MaterialManufacturing overhead

Dept A 30 (300)Dept B 5 (100)

20

35

Manufacturing CostSelling and administrative

overhead (10)

70

7

Total costProfit

7723

Selling price 100


24 The estimated profit of pound12 was actually (increased decreased) to pound Why

actual

25 To measure the efficiency of a contract or job we compare the cost with the actual cost Could this comparison be affected by the efficiency of

(a) productive operations(b) estimating procedures

increasedpound23the substantial savings on labour costs (and consequently on overhead) exceeded the extra material cost

26 Incidentally is there a contract with immeasurable costs and unlimited profits

estimatedyes

27 Now read again the summary of the set Count up the number of your correct answers If you have more than 20 correct continue to the next set

marriage contract(perhaps)

91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY

For a factory producing only one product detailed costs pf manufacturing slaes and administration may be summarized and directly compared with the output volume of the product for the period In This way a per unit cost may be calculated for each item of cost incured

To measure the efficiency of current operations the actual unit cost may be compared with previouscost or budget

Output costing or some modification of it is often used in

Industry Unit of CostMining per tonRailways per ton-mileBuses per passenger-mileBrick works per thousand bricksOil per barrel of oil

CHAPTER IV SET 8

OUTPUT COSTING

Exhibit 1 Output costingmdashmonth and year to date

Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear

to datepound pound pound pound pound

LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65

Output quantitymdashtons 100 140 800 1000

Total costmdashper ton 70 69 78 65


1 Where a business produces only one product then one unit of output automatically becomes for cost accounting purposes the of cost


2 In output costing we divide the total costs of the factory by the number of units of

unit

3 A coal mine producing one grade of coal would use costing A bus company transporting passengers could use a ldquoper passenger milerdquo unit of costing

output

4 Now read Exhibit 1 which is a statement of for a and for the to

outputoutput

5 The total output for the month was tons at a total cost of pound

output costingmonthyear to date

6 The total cost per ton was pound In output cost accounting we merely divide the total cost by the number of units produced which is the

100pound700

95


7 The total labour cost was pound which worked out at pound per ton

pound7output

8 Similarly the material cost per ton was pound and the overhead cost pound per ton

pound100pound1

9 To make this cost accounting data more useful we must it with other data

pound2pound4

10 What other data is available compare

11 Compared with last month this monthrsquos labour cost per ton (pound1) (rose fell) by pound per ton whereas the material cost remained

last monththis year to datelast year to date

12 Overhead costs this month were pound per ton (higher lower) than last month Do we know why

fellpoundmiddot5unchanged

96


13 What is the output cost per mile of operating your own motor car

pound6higherYes probably because output was lower this month

14 Now read again the summary of the set Count up the number of correct answers If you have more than 10 correct continue to the next set

Enormous(This cost is seldom calculated accurately It tends to spoil the pleasure of driving)

97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY

Process costing is used by companies having a continuous flow of similar products (eg chemical works paper mills etc) where the final products result from a sequence of operations or processes The output of one process is the input of the next

Costs are collected by period for each process The unit of cost of each process is computed by dividing total process cost by the output

This system is in effect output costing for each process in a series of processes which together form a production cycle

The measure of efficiency for process costing is the same as for output costing ie comparison of actual cost with previous cost standard or budget

CHAPTER IV SET 9PROCESS COSTINGExhibit 1 Process cost accountingmdashmonth of December

PROCESS PROCESS PROCESSA B C

ANALYSIS BY COST pound pound poundLabour 90 16 20Material 40 4 10Overhead 20 20 30

Process cost 150 40 60Input from previous process mdash 100(X) 120

Total cost 150 140 180Output to next process 100 120 160

Work in process at end of month pound50 pound20 pound20

ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Input 220 mdash 40 100(X) 100 100 60 60 120Output 100 100 50 60 60 120 40 40 160In process 100 50 50 20 10(Y) 20 10 5 20

200 150 150 80 70 140 50 45 180Waste 20 20 10

220 150 pound150 100 70 pound140 60 45 pound180Per unit

Cumulative cost pound1 pound2 pound4Cost by process pound1 pound1 pound2


1 Some manufacturing involves a series of processes each of which has an input and an It is often convenient to accumulate costs as if each was a cost centre


2 We use each process as an output cost centre but we call this method of cost accounting costing

outputprocess

3 Now read Exhibit 1 which is an example of accounting for processes

process

4 To be completely manufactured the unit of production must pass through (number) processes

process costthree

5 In process A the costs associated with the process are and The total cost amounts to pound

three

6 The number of units put into (input) process A during the month was of which 100 were completed (output) and passed to process B (number) were partly processed and (number) were wasted

labourmaterialoverheadpoundl50

101


7 For cost accounting purposes we convert ldquoin process unitsrdquo (100) into an equivalent number of ldquofinished output unitsrdquo In Exhibit 1 we assumed that all uncompleted units were half completed We therefore divided uncompleted units by to convert them to equivalent completed units This gives an output for the period of 100 complete units and 50 ldquoequivalentrdquo completed units which are in process making a total equivalent output of units

22010020

8 The average unit cost of the process is calculated by dividing the total cost pound150 by the out put of 150 units The unit cost for process A was pound per unit

2150

9 We can now price the (number) of finished units at pound1 per unit in order to calculate the (input output) for process B

equivalentpound1

10 The cost of the input of the 100 units of process B is calculated at pound1 per unit making a total of pound100 Can you trace this input to process B in Exhibit 1

100input

11 During the month the input to process B was 100 units At the end of the month (number) were finished (number) were in process and (number) were scrapped

Yes (marked X)

12 To convert the units in process at the end of the period (20) to equivalent finished production we divide by

602020

102


13 Is it an assumption that all units are half processed

2

14 The total equivalent finished production of process B for the units in process is therefore units Can you trace this in Exhibit 1

Yes

15 The total output of process B therefore consists of 60 complete units plus equivalent complete units making a total of units

10Yes (marked Y)

16 The cost of process B including labour material and overhead amounted to pound plus the cost of input from process A pound

1070

17 For process B we may now calculate the unit cost of finished production by dividing the pound140 by the (70 units)

pound40pound100

18 Process B unit cost is pound per unit This was calculated by dividing the total cost pound140 by the units of output (number)

total costoutput

103


19 The 60 units of finished goods passed to process C will therefore be priced at pound per unit a total of pound

pound270

20 Similarly with process C the input was 60 units of which 40 units were finished units in process and units were wasted

pound2pound120

21 Equivalent production of process C was units against a total cost of pound180 giving a unit cost of output of pound per unit

1010

22 Thus we may summarize the results of the three processes as follows

A B CCost per unit (cumulative) pound1 pound2 poundOutput 100 60 Waste 20 10

45pound4

23 Finished output (is is not) the same as equivalent finished output

pound44020

24 We convert units in process into ldquoequivalentrdquo finished output in order to compute the cost per unit for the

is not

104


25 The total cost for a finished unit of process C was pound

process

26 This pound4 cost is made up of process A pound process B pound and process C pound

pound4

27 Each of the processes has been used as an output centre

pound1pound1 not pound2pound2 not pound4

28 We have assumed in this example that there (were were not) any units in process at the beginning of the month However in either case the principles of cost accumulation would be the

cost

29 The process cost data for the month of December would be more useful if it could be with other data for a previous or with a

were notsame


comparedmonthbudget

105

CHAPTER V

INTERPRETATION OF COST DATASET 10 COST STATEMENTS


SUMMARY

Cost statements or reports for management should be prepared and submitted quickly Generally rough figures presented rapidly are more useful than accurate figures which are only available after serious delay

Cost statements may show the1 Cost of each job or unit of production or product group2 Overhead cost of one section or department3 Cost of the whole business4 Operating results of a division or the whole business

To use cost statements effectively we ask the following questions1 What are the significant (more important) figures2 How do the figures compare with a standard of performance (budget

or previous period)3 What are the causes of the significant differences4 Who is responsible5 What action should be taken

Note More than seven days after the month end may be generally considered as a serious delay

CHAPTER V SET 10

COST STATEMENTS

Exhibit 1 Estimated cost compared with actual cost for a job

Estimated Actual Differencespound pound pound


40002200

30003000

(1000)800

Manufacturing overhead mdash(150 of direct labour cost) 6000 4500 (1500)

Manufacturing cost 12200 10500 (1700)

Selling and administrativeoverhead mdash 10 1220 1050 ( 170)

Total cost 13420 11550 (1870)Selling price 14000 14000 mdash

Profit 580 2450 (1870)

Actual figures over (under) estimated figures


1 A statement reporting cost data to management is a cost report or statement

Now check your answers with the correct answer in the frame below Tick it if correct

2 Most cost statements try to associate costs with the person for those costs

cost

3 Up to date cost statements prepared very quickly are often (more less) accurate than those prepared more slowly However they are (more less) useful to management

responsible

4 Timely (quickly prepared) cost statements (are are not) more useful for decision making than very accurate reports prepared after a very long period of preparation time A reasonable target is (number) days after the month end

lessmore

5 There are various types of cost statements because each statement is usually related to a particular Now read Exhibit 1 which is a cost statement prepared for a job to compare the cost with the cost

are7

6 It shows that the estimated total cost of the job was pound13420 compared with an cost of pound11550 making a difference of pound

purpose (person)estimatedactual

109

CHAPTER V SET 10

COST STATEMENTS

Exhibit 2 Overhead costsmdashengineering section

This month Year to dateActual Budget Variance Actual Budget Varianc

epound pound pound pound pound pound

Controllable costsSalaries 500 200 300 2500 2000 500Travelling 120 100 20 850 800 50Indirect materials 40 50 (10) 430 600 (170)

660 350 310 3780 3400 380Non Controllable costs

Occupancy 20 20 mdash 400 200 200Depreciation 45 40 5 450 400 50TOTAL COSTS 725 410 315 4630 4000 630


7 Which actual costs were less than the estimate Should we investigate the reasons why

actualpound1870

8 Direct labour is the main cause of the lower actual cost Does this affect the lower manufacturing overhead Why

direct labouroverheadsYes

9 You will remember that the contribution of a job is the excess of its selling price over its variable costs If we assume that the manufacturing overhead and the selling and administrative overhead of the job are fixed what is the estimated contribution of the job What was the actual contribution

YesBecause it is based on 150 of direct labour

10 Now read Exhibit 2 which is a cost statement of the for the engineering section

pound7800 (14000ndash6200)pound8000 (14000ndash6000)

11 The statement is useful to the section head because it shows the expenses actually incurred for the month pound against a budget of pound For the year to date the figures were pound against pound

overhead costs

12 For this month the major controllable costs that exceeded the budget were and What is a controllable (as apart from non-controllable) cost


111

CHAPTER V SET 10

COST STATEMENTS

Exhibit 3 Statement of total cost for the year (pound000)

pound000 pound000Direct charges

Labour 246Materials 500

Prime cost 746Indirect charges Manufacturing overhead

Supervision 110Indirect wages 130Motive power 40Repairs and maintenance 50Plant depreciation 166 496

Manufacturing cost 1242Sales and distribution overhead

Salesmenrsquos salaries 100Salesmenrsquos commission 35Travelling expenses 100Advertising 50Finished warehousesmdashwages and upkeep 51 336

1578Administration overhead

General office salaries 151Directorsrsquo fees 10Professional charges 62 223

Total cost pound000 1801


13 The total actual costs for the year to date were pound against a budget of pound4000 Of these actual costs the head of the section was held responsible for only pound against a budget of pound

salariestravellingA cost which the section head controls and for which he may be held responsible

14 If you were head of this section which item would you especially investigate this month

pound4630pound3780pound3400

15 Now read Exhibit 3 which is a statement of cost for the year It is divided into direct charges and indirect charges ldquoChargesrdquo means

salaries

16 Indirect charges refer to manufacturing overhead sales and overhead and administration overhead These are all

totalcosts

17 Exhibit 3 is a statement for year Can we evaluate the significance of the data

distributionoverheads

18 The costs are in thousands of pounds (marked pound000) and they amount to a prime cost of pound and a total cost of pound To mean anything to us we must have

oneNot very well because we have no comparative data

113

CHAPTER V SET 10

COST STATEMENTS

Exhibit 4 Summary of operating results for the month

Grand Total

Product A Product BAmount per unit Amount per unit

pound pound pound pound poundDirect costs

Materials usedLabour (wages)

2060015300

17500 5500

3511

310010800

312

Prime costIndirect costs

Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15

11Manufacturing cost

Selling and distributionoverhead

53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2

Sales 64500 37500 75 27000 30Quantity of sales 1400

units500

units900

units


19 This statement (is is not) a well presented cost statement because we have no comparative data against which to measure the actual data What data would be comparable and therefore useful as a standard of performance

pound746000pound1801000comparative data

20 Now read Exhibit 4 which is a summary of for one

is notprevious year or budget

21 The company produces two products shown in this statement as A and B What is the total cost for the period Does the statement show the costs and profits on product A and product B separately

operating resultsmonth

22 What is the most significant item of per unit cost for product A For product B Assuming that indirect costs are fixed The total contribution of each product was A pound B pound

pound59700yes

23 The contributions are fairly equal but of the total of pound4800 the analysis in Exhibit 4 shows that a profit of pound attributable to product A and pound is attributable to product B Is this profit analysis based on a scientific fact or practical judgment

material pound35 per unitlabour pound12 per unitpound14500 (pound37500ndash

pound23000)pound13100 (pound27000ndash

pound13900)24 Is it useful to have a summary of operating results showing the details for each product or product group separately What other data do we need in order to evaluate the figures

pound3000pound1800judgment

115

CHAPTER V SET 10

COST ESTIMATES

Exhibit 5 Statement of monthly operating results compared with budget

Actualpound000

Budgetpound000

Variancepound000

Sales 600 875 (275)Variable costs

Direct labourDirect materialVariable overhead

270 35 65

470 65 90

(200) (30) (25)

Total variable costs 370 625 (255)

Contribution 230 250 (20)Fixed costs

Manufacturing fixed overheadSales fixed overheadAdministrative fixed overhead

75 50 25

75 55 30

mdash(5)(5)

Total fixed costs 150 160 (10)Net profit 80 90 (10)Investment (assets employed) 800 720 mdashReturns on investment 10 12frac12 2frac12


25 Cost statements are usually prepared for a particular To evaluate these statements we must pay special attention to the larger or more items compare actual costs with a standard of performance (or budget) and the differences

Yescomparative data

26 Do you ever use the cost reports you receive purposesignificantinvestigate

27 Now read Exhibit 5 which is a statement of monthly operating results compared with Why is this a particularly effective report

No why not Have you carefully explained to your cost accountant precisely what you need when you need it and why you need it

28 The difference between actual sales pound600 and variable cost pound370 is known as the (pound230)

budgetBecause it distinguishes between variable and fixed costs and it provides a standard of performance (ie a budget)

29 In this statement the fixed costs (are are not) shown separately Did they exceed budget

contribution

30 Why did we make less profit than the budget Is it useful to segregate variable and fixed costs

areno

117

CHAPTER V SET 10

COST STATEMENTS

Exhibit 6 Comparisons (by percentage of sales) of the Operating Results of a company with the National Average for the Industry

CompanyIndustry Average

Differences Favourable

(Unfavourable)Sales 100 100 mdashLabourMaterialManufacturing overhead

244020

144015

(10)mdash(5)

84 69 (15)Gross profit 16 31 (15) Sales overheadAdministrative overhead

48

126

8(2)

Net profit 4 13 (9)


31 We have figures for one month What additional data do we need to really use this report

because actual sales were below budgetYes (so contribution is revealed)

32 In cost accounting reports we compare actual figures with some data to determine the significant

Year to date figures percentage data

33 Now read Exhibit 6 which is a comparison of the operating results of a company by percentage of with those of the average for the Industry

comparativedifferences (variances)

34 Our company made a net profit of of sales Did it make more or less than it should have done

salesnational

35 What is the main cause of the lower level of profit

4less

36 Which costs are comparatively low labour and manufacturing overhead costs are higher than national average

119


37 Cost accounting reports help us to compare our operating results by percentage of and to determine areas for further

selling expenses only 4 of sales compared with a national average of 12

38 A significant difference is a relatively large amount of relative to the

salesinvestigation

39 Do the cost reports you receive normally get to you in time to be really useful Do they contain useful comparative data as a measure of

moneywhole

40 Cost data becomes more significant if it is with other data

No Have you precisely defined your needs performance

41 The cost reports of the actual cost of a job may be compared with the original of cost for the job

compared

42 The reports on output for the period of one month may be compared with that of the output of the month or the same month in the year

estimate

120


43 The cost to date this year may be compared with the cost to date year

previousprevious

44 A budget is a forecast of cost over a period Any cost report relating to a period of time may therefore include a for that period if available

last

45 We may compute the total cost for a period or the cost per We may compare the costs of one period with that of another

budget

46 We are comparing costs to determine the differences between the actual figures and a standard of performance so that such differences or variances may be

unitperiod

47 Costs are compared so that may be investigated

48 By investigation we shall determine how the differences of cost arose and what (if any) we should take

differences (variances)investigated

121


49 To what figures do you pay particular attention in a cost report

action (decision)

50 Now read again the summary of the set Count up the number of your correct answers and if you have more than 40 correct continue to the next (and FINAL) set

significant figuressignificant variances

122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY

Cost data usually relates to a specific purpose The cost accountant cannot supply appropriate cost data unless he knows how the data will be used

Although the total cost of one unit of production includes labour material manufacturing selling and administrative overhead the relevant cost of producing one more unit of production may be only labour and material if overheads remain unchanged Furthermore if the labour force costs become fixed only material may remain as the variable and relevant cost

The interpretation of cost data depends not upon total cost incurred but upon the cost relevant to each particular decision or situation

In using cost figures we should always ask1 What assumptions are made in the data2 Are those assumptions valid for our purpose3 What costs are relevant to our decision

Note This is an elementary analysis of relevant cost problems However in a more sophisticated analysis our general theme remains get the figures right and relevant before you consider non-quantative factors

CHAPTER V SET 11

RELEVANT COSTS

Exhibit 1 Relevant cost of replacing an old machine with a new machine

PROBLEM Does it pay to replace the old machine

Old Machine New MachineCost pa Costs pa

Cost of MachinesWorking lifemdashyears

Depreciation per annumOther operating costs per annum

Fixed overhead per annum

pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000

Total cost of operating the machines pound4000 pound3000

Annual saving ( )InvestmentReturn on investment


Note Assumes no salvage or resale value


1 Cost accounting is a technique for associating direct and indirect costs with a unit of production Cost data is generally prepared for a particular only It must not be used for all purposes In this set we discuss the use and misuse of cost data and how to determine for a particular decision or situation the costs that are


2 Cost accounting and the use of cost data depend largely upon the of the cost accountant

purposerelevant

3 Generally the cost computed for one purpose (is is not) the cost relevant for other purposes

judgment

4 Do you still think our questions are easy is not

5 Now read Exhibit 1 which shows the effect on costs of an old machine with a new machine

good

6 The problem is Does it pay to replace the old machine The old machine costs per annum pound including depreciation operating and overhead costs whereas the new machine would cost only pound Would there be a saving

replacing

125

CHAPTER V SET 11

RELEVANT COSTS

Exhibit 2 Relevant cost of operating a car for a year

PROBLEM Does it pay to use the car

pound1 Annual cost of operating a car

Depreciation 500Repairs tax and insurance 100

600Petrol and oil 125

Total cost 725

Annual usage 10000 milespound

2 Annual cost of hiring a carMileage 10000 miles at poundmiddot05 per mile 500

pound3 Relevant costs of travel by car for 10000

miles per annum depends upon thesituation

Situation 1 We have no car and we would have to buy one

725

Situation 2 We have a car but do not use it 225Situation 3 We have and use a car 125


7 The cost data provided shows a saving of pound1000 per annum for investment of pound This appears to be a return on investment of

pound4000pound3000Apparently yes (but)

8 However have we included only the relevant costs in our calculation

pound400025

9 The old machine will depreciate whether or not we buy the new machine The old depreciation of pound1500 should be (included excluded) when making this comparison Consequently the saving for buying the new machine which appeared to be pound1000 per annum (has has not) now disappeared

no

10 The effect on costs of machine replacement depends upon correct computation of the costs

excluded (or put on both sides)has

11 Now read Exhibit 2 which is an example of the indirect costs of operating a car The total cost of running a car for 10000 miles per annum including depreciation repairs petrol and oil amount to pound However to hire a car to do a similar mileage would cost pound500 Can we therefore conclude it would be cheaper for us to hire a car

relevant

12 If we have no car at all the relevant cost is the total cost of running the car pound It pays to (hire buy)

pound725No

127

CHAPTER V SET 11

RELEVANT COSTS

Exhibit 3 Relevant cost of doing a job or subcontracting

PROBLEM Does it pay to make or buy

pound1 Cost of own manufacture (100 units)

Direct material 4000Direct labour 1000

Prime cost 5000Variable manufacturing overhead 2000

Variable cost 7000Fixed manufacturing overhead 1000

Manufacturing cost 8000Fixed administrative cost 2000

Total cost 10000Total

pound2 Alternative cost of subcontracting 7600

pound3 Relevant costs

If we are operating at full capacity 7000If we are operating at partial capacity 7000If we are operating at very low capacity

but decide not to dismiss directlabour 6000


13 If we already have a car but do not use it it will still depreciate The relevant costs to the decision are not pound725 They are pound It pays to (hire use)

pound725hire

14 If we have and use a car then the pound100 is already spent for tax insurance and repairs And the relevant cost for operating the car for 10000 miles is not pound225 but the lower figure for petrol and oil only of pound It pays to (hire use)

pound225use

15 To decide whether it costs less to use our car or to hire a car depends upon the costs of the situation

pound125use

16 Now read Exhibit 3 very carefully It gives an example of the relevant costs of doing a job or sub contracting This is known as a or decision

relevant costs

17 The total cost of manufacturing 100 units is pound10000 We could subcontract this work to another firm for pound7600 Should we subcontract

makebuy

18 Of the total cost of pound10000 the direct costs of labour and material and variable overhead amount to only pound and fixed overheads pound

It all depends

129


19 Exhibit 3 the relevant costs to make or buy depend upon whether or not we are operating at full or capacity

pound7000pound3000

20 If we subcontract the job will we actually save pound2000 of fixed administrative overhead and pound1000 of fixed manufacturing overhead in cash At full or partial capacity the relevant cost to make is not pound but pound

partiallow

21 Does the relevant cost exceed the subcontract price It pays to (make buy) because we ldquosaverdquo pound

Nopound10000pound7000

22 Therefore at full or partial capacity the total relevant cost is the (fixed variable) cost of pound However at a very low level of capacity we may decide to keep our labour force intact working or not Labour therefore becomes a cost

Nomakepound600 (contribution to fixed cost and profit)

23 To decide when it pays to make or buy we must compare the subcontractor price with the cost which is normally the cost However the classification (may may not) change At lowest capacity in Exhibit 3 relevant cost is pound

variablepound7000fixed

24 The excess of the purchase price over the relevent cost is known as the contribution from making At Lowest capacity operation in Exhibit 3 it still pays to (make buy) and thus provide a of pound1600 to the fixed costs

relevantvariablemaypound6000

130


25 In make or buy decisions if relevant cost is more than purchase price it pays to (make buy) because there is no to fixed costs If there is contribution it may pay to (make buy)

Makecontribution(pound7600ndashpound6000 = pound1600)

26 However we cannot make everything In make or buy decisions therefore we must choose from a range of items to make those that provide the (greatest least) contribution

Buycontributionmake

27 Fixed overhead is not usually relevant to make or buy decisions When the business is operating at low capacity some of the normally variable costs (eg labour) may have to be treated as costs in make or buy decisions Relevant cost (does does not) change

Greatest

28 Now read Exhibit 4 to see the relevant cost of hand or operation

Fixeddoes

29 If the work is done by hand it costs pound However if done by machine it would cost pound Should we therefore buy the machine to do the work

machine

30 We know that the work appears to cost less by machine to the extent of pound Do we know the cost of the machine

pound16500pound9900it all depends

131

CHAPTER V SET 11

RELEVANT COSTS

Exhibit 4 Relevant cost of hand or machine operation

PROBLEM Does it pay to buy a machine to do a manual job

Manual cost

Machine cost Different

pound pound pound

Direct labour 2000 1000 (1000)Direct material 3000 3000 mdashManufacturing overhead (500

of direct labour) 10000 5000 (5000)

Manufacturing cost 15000 9000 (6000)Selling and administrative overhead

(10 of manufacturing cost) 1500 900 (600)Total cost 16500 9900 (6600)

Note Assuming we would have to buy the machine


31 In Exhibit 4 manufacturing overhead is calculated at of direct labour

pound6600no

32 The effect of purchasing a new machine will mean that machine depreciation will increase Therefore both the total manufacturing overhead and the manufacturing overhead rate will (rise fall)

500

33 Purchase of a machine for pound20000 would lead to a (higher lower) manufacturing overhead than would purchase of a machine for pound200000

rise

34 The saving of pound6600 therefore through buying a machine can only be evaluated when we know the of the machine

lower

35 If the purchase of a machine increased substantially the manufacturing overhead of a company the existing overhead rate of 500 on direct labour (will will not) be relevant

cost

36 Therefore in Exhibit 4 we (can cannot) determine whether the machine or hand method is more economic until we know the cost of the machine and the effect upon manufacturing over head We (can cannot) use existing overhead rates for this purpose

will not

133


37 Again if we have an overhead rate of 500 on direct labour can we say that for every pound1000 of direct labour saved we also save pound5000 of overhead

cannotcannot

38 An overhead rate of 500 (can cannot) be used for every purpose

no

39 Overhead should therefore be carefully investigated before we decide it is a cost

cannot

40In any cost problem involving rates we should ask ldquowill overhead lsquosavedrsquo actually be realized in rdquo

relevant

41 If we introduce a machine which reduces the total cost of direct labour but increases the manufacturing overhead then the manufacturing overhead rate as a percentage of direct labour will(1) be unchanged(2) rise(3) fall

cash

42 In choosing between alternatives it is important to decide whether overhead costs are

rise

134


43 Again when cost data indicates a particular course of action as more profitable cost-wise this action may be affected by other factors such as the volume of sales orders on hand the stock position or the market Thus already in hand stock position and the state of the are relevant factors in cost decisions

relevant

44 In the interpretation of cost data we must actual data with other available data and consider the costs that are and the costs that are

ordersmarket

45 Cost data is not generally based upon scientific principles but upon the practical of the cost accountant

comparesignificantrelevant

46 Now read again the summary of the set and the summary of Chapter I again Take a short break and then test your knowledge of cost accounting by completing the quiz that follows

judgment(You have finished a very long and difficult programme This is an achievement Well done)

135

QUIZmdashA TEST OFKNOWLEDGE ACQUIRED FROM THE

PROGRAMME


Note Mark only the ldquomost correctrdquo answer to each question

1 If we buy a whole live pig for pound1 the cost of one of the pigrsquos earsa may be computed scientificallyb is related to the selling price of the pigc depends upon why we buy the pigd is nil

2 Cost Accounting is a technique for calculating thea overall profit or loss of a businessb price at which a business could be boughtc selling price of a productd cost of a unit of production

3 If we buy goods for pound4 and sell half of them immediately for pound6 retaining the remainder for sale later our profit to date is

a pound2b pound4c pound8d impossible to compute

4 If we manufacture 5frac12 units (one only half completed) for pound55 and sell five units for pound100 our profit to date is

a pound45b pound50c pound55d pound100

5 In computing the profit of a manufacturing business the stocks (inventory) of raw material work in process and finished goods left at the end of the period should be

a valued at selling price less profit marginb valued at selling pricec ignoredd valued at cost or lower

136

6 Cost accounting divides costs intoa direct material selling and manufacturing overheadb direct material and labour selling and administrative overheadc direct labour and direct material manufacturing selling and

administrative overheadd direct labour and overhead

7 The system of cost accounting chosen for a particular business shoulda be the same as that for other firms in the same industryb relate to the productc relate to the organization of the businessd relate to the product and the organization of the business

8 One objective of cost accounting is to computea the true selling price of the productb the scientific cost of the productc the fair cost of the productd the companyrsquos total costs

9 A cost centre isa the middle of the cost accountantb a section of the business which can be used conveniently for

accumulating costs so that all work done in that cost centre may be charged for on a uniform basis

c an intermediatemdashas opposed to a high or a lowmdashcostd something else

10 The purpose of valuing work in process isa to assist in the calculation of profitb to provide a basis for fixing selling pricesc to find out how much work has still to be doned something else

11 Cost reports may be more useful in controlling costs if such reports are submitted

a annually with absolute accuracyb semi-annuallyc monthly with absolute accuracyd rapidly with reasonable accuracy

137

12 Job costing is similar toa standard costingb marginal costingc batch costingd process costing

13 For cost accounting purposes the overhead costs of a business organization are normally divided into

a management and workersb manufacturing selling distribution and administrative costsc buying and sellingd direct and indirect costs

14 The direct labour and material cost of a job may bea computed scientificallyb more easily computed than the overhead for that jobc allocated on a time basisd the basis for computing administrative overhead for that job

15 When valuing work in process distribution costs should bea includedb excludedc partially includedd deducted from the selling price

16 The charging of assembly shop overhead to a product may be based on the

a amount of selling and administrative overheadb quantity of direct materialc amount of direct labour costd number of machine hours

17 To charge manufacturing overhead to jobs the overhead rate is best computed

a monthly based on actual data for a past monthb annually based on data for a future periodc annually based on data for a past yeard on some other basis

138

18 The total profit computed in cost accounting for all the jobs completed during the period will be

a absolutely accurateb equal in total to the amount on the balance sheetc equal to the total profit of the income statementd reconcilable with the profit of the income statement

19 To determine what is ldquodirect labourrdquo as opposed to ldquoindirect labourrdquo we must ask the question

a does the labour work regularlyb is the labour employed in the machine shopc can the labour be conveniently associated with a unit of

productiond is the labour done by a worker or by an engineer

20 If there is uncharged manufacturing overhead at the end of the yeara job costs will show too little charge for overheadb job costs will show too much charge for overheadc overhead was definitely abnormally highd actual activity was definitely greater than the estimated activity

21 In computing the cost of a unit of production normallya direct costs are fairly definite and overhead costs depend upon

allocations and assumptionsb all costs depend upon broad assumptionsc the indirect costs are more definite than the direct costsd once the overhead rate is fixed the direct costs may be calculated

22 In computing the profit of a manufacturing businessa closing work in process and finished goods may be ignoredb closing work in process must be valued at cost and finished goods

must be valued at selling pricec closing work in process and finished goods are not relevant to cost

and profit calculationsd closing work in process and finished goods must both be valued at

cost or less

23 The cost of the foremanrsquos salary is normallya direct labourb manufacturing overheadc administrative overheadd indirect material

139

24 The cost of factory heat and power is normallya direct labourb manufacturing overheadc selling and administrative overheadd indirect material

25 The cost of sales literature is normallya direct labourb manufacturing overheadc selling and administrative overheadd indirect material

26 The total cost of a new machine purchased during the year is normallya direct materialb manufacturing overheadc selling and administrative overheadd something else

27 The depreciation of the managing directorrsquos motor car is normallya direct materialb manufacturing overheadc selling and administrative overheadd indirect material

28 The directorsrsquo fees are normallya non-productive labourb manufacturing overheadc selling and administrative overheadd indirect labour

29 Dividends and income tax payable by a company are normallya direct labourb manufacturing overheadc selling and administrative overheadd something else

30 If a cost centre has direct labour of pound2000 against specific overhead of pound4000 and a share of general manufacturing overhead of pound1000 the overhead rate for the cost centre is

a 100 of direct labour costb 200 of direct labour costc 250 of direct labour costd 40 of direct labour cost

140

31 In computing the total cost of each productive cost centre we must take the cost of each service cost centre and allocate it to all

a productive cost centres equallyb all productive cost centres on a fair basisc cost centres equallyd appropriate cost centres on a fair basis

32 The objectives of cost accounting area simply to compute a fair costb to set selling pricesc to do both of these thingsd something more

33 The wages of an inspector of production in a factory should be treated asa direct labourb part of material costc indirect labour unless conveniently associated with a unit of

productiond manufacturing overhead even if it can be conveniently associated

with a unit of production

34 Selling prices depend on thea cost of the productb efficiency of the sales forcec amount that potential customers are prepared to payd efficiency of the cost accounting system

35 Output cost accounting is similar toa process costingb batch costingc contract costingd marginal costing

36 The elements of cost of a company making only one product are direct labour pound10000 direct material pound60000 variable manufacturing overhead pound12000 fixed manufacturing overhead pound15000 variable selling and administrative overhead pound13000 and fixed selling and administrative overhead pound14000 If the company produced and sold 10 more items what would be the total cost

a pound124000b pound126700c pound133500d something else

141

37 Salaries and indirect wages area direct labourb recorded on job cardsc manufacturing overheadd manufacturing sales or administrative overhead

38 Direct labour on specific jobs or on overhead accounts is re corded ona attendance cardsb wages sheetsc job time cardsd something else

39 Direct workersrsquo time not spent directly on manufacturing the product is normally charged to

a direct labourb selling overheadc manufacturing overheadd administrative overhead

40 Product A sells for pound20 involves pound12 of variable cost Product B sells for pound25 involves pound15 of variable cost What will be the companyrsquos profit if it sells 100 items of product A and 200 items of product B when its fixed cost is pound2500


41 The most useful analysis of costs for decision making purposes is intoa manufacturing and sellingb direct and indirectc present and pastd relevant and not relevant

42 Overtime premium isa the amount paid for time worked in excess of normal hoursb always charged to direct labourc extra payment to workers in addition to their normal rates when

working overtimed illegal

142

43 Responsibility accounting is particularly concerned witha historical accountingb controllable costsc storekeepingd indirect wages

44 The system of costing most likely to be found in a bus company isa job costingb batch costingc contract costingd output costing

45 In the case of long-term contracts credit may be taken for profit to the extent of

a payments received to dateb costs incurred to datec expected final profitd profit earned to date less provisions for possible future losses

46 The most suitable cost centre overhead rate for an assembly shop is based on

a machine hoursb labour costsc labour hoursd prime costs

47 We often convert ldquoin process unitsrdquo into equivalent finished units bya waiting until they are completedb ignoring overheadsc applying ratios based upon the amount of work doned applying standard prices

48 The ldquocontributionrdquo of a job is thea gross profitb net profitc excess of sales revenue over variable costsd difference between fixed and variable costs

49 The costs of internal transport repairs maintenance power sections in a factory are normally charged

a to specific productive cost centresb initially to one service cost centre and subsequently to productive

cost centres only

143

c initially to one service centre and subsequently to selling and administrative overhead

d initially to various service cost centres and subsequently to other cost centres on a reasonable basis

50 Manufacturing overhead should be recovered (charged to jobs)a at one rate for the whole factoryb at different rates for each cost centrec on the basis of selling and administrative overheadd in some other way

51 If we compute manufacturing overhead rates for individual cost centresa there is not likely to be much difference between the various cost

centre ratesb the manufacturing overhead rates are more complicated and less

accuratec there is more clerical work but little benefitd the overhead rates for the various cost centres will be related to the

actual cost incurred by these cost centres

52 A factory had a total manufacturing overhead of pound20000 against a direct labour cost of pound10000 and used an overhead rate of 200 A new cost accountant set up two separate cost centres in Cost Centre ldquoArdquo direct labour was pound8000 and overhead pound8000 and in Cost Centre ldquoBrdquo direct labour was pound2000 and overhead pound12000 When we compare the new cost system with the old system

a the old overhead rate of 200 will be replaced by two new rates of 100 and 200 respectively

b it will make no difference to the total cost of the product where the direct labour cost is the same in Cost Centre A as it is in Cost Centre B

c it will make no difference to the total cost of the product where the direct labour cost in Cost Centre A is six times as much as the direct labour cost in Cost Centre B but it will make a difference to the cost of other products

d it will make no difference to the total cost of the product where the direct labour cost in Cost Centre A is four times as much as the direct labour cost in Cost Centre B but it will make a difference to the cost of other products

144

53 Using the data in No 52 the labour and overhead cost of a job which used 8 hours labour in Cost Centre A and none in Cost Centre B would be

a unchanged by the new systemb increased by the new systemc reduced by the new systemd impossible to determine unless additional information were known

54 In a manufacturing company where the policy is to make a profit on each job equal to 10 of the total cost of that job the total costs for a year are

poundMaterial 100000Direct LabourmdashDept X 10000Direct LabourmdashDept Y 20000Manufacturing OverheadmdashDept X 20000Manufacturing OverheadmdashDept Y 60000Selling and Administrative Overhead 42000

If manufacturing overhead is charged on the basis of direct labour cost and the selling and administrative overhead is charged on the basis of the total manufacturing cost what would be the selling price of the following job

poundMaterial 25000Direct LabourmdashDept X 5000Direct LabourmdashDept Y 6000


55 The manufacturing overhead rate for the current year is best computed from

a this yearrsquos estimated manufacturing overhead divided by the actual direct labour hours last year

b last yearrsquos manufacturing overhead divided by the actual direct labour hours last year

c last yearrsquos manufacturing overhead divided by the estimated direct labour hours this year

d this yearrsquos estimated manufacturing overhead divided by the estimated direct labour hours this year

145

56 If a company bases its overhead rate on direct labour hours and the actual labour hours turn out to be less than estimated labour hours there will be

a under charged overheadb over charged overheadc neither under charged nor over charged overheadd revised manufacturing overhead rates

57 Uncharged manufacturing overhead is most likely to arise because thea direct costs were not charged to jobsb manufacturing overhead was not charged to jobs because the rate

was computed inaccuratelyc manufacturing overhead was less than forecastd the estimated volume of production was not achieved

58 The method of charging manufacturing overhead to products should always be a

a percentage of direct labour cost if all jobs involve different amounts of direct labour and the wage rates payable vary

b machine hour rate if some parts of the factory are mechanizedc machine hour rate for departments using extensive machines and

labour hour rates for departments where most of the work is done manually

d percentage of prime costs because no method of allocating overhead is accurate

59 Selling and administrative expense may be charged to the products as aa percentage of direct labour costb percentage of the selling pricec percentage of prime costd percentage of the manufacturing cost

60 Which costs may be charged to cost centres on the basis of space occupied

a managersrsquo salariesb powerc machine depreciationd rent

146

61 Which of the following should not be included in selling and distribution overhead

a salesmenrsquos salaries commission and expensesb showroom and finished goods warehouse costsc the small cartons in which all the companyrsquos products are packed

and which the ultimate consumer receives when buying a productd the packing cases into which the small cartons are some times

packed

62 The first consideration when deciding how much detailed work should be involved when analysing costs by products should be the

a cost of getting the datab skill of the cost accountantc legal requirementsd reliability and usefulness of the analysis when completed

63 The objective of allocating all costs to products is toa produce a scientifically accurate costb avoid unallocated overhead and compute total product costc co-ordinate the cost and financial accountsd compute the ldquocontributionrdquo of the product to the final profit

64 In contract costing the unit of cost isa labour and materialb the contractc that part of the contract that has been completedd something else

65 To evaluate the efficiency of operations the actual contract cost data may be compared with the

a profit and loss accountb original estimatec last contract for the same customerd contract completed most recently for any customer

66 If we own and operate a car at an overall cost of 1s per mile Would it pay to hire a car for 4d a mile for one journey of 10 miles

a No providing petrol and oil costs less than 4d a mileb Yes providing petrol and oil costs less than 4d a milec Nod Yes

147

67 Which of the following costing systems would you expect to find in a chemical works

a contract costingb batch costingc process costingd job costing

68 Where a product passes through a series of operations in sequence cost accounting is normally done by

a process costing designed to produce the cost of a productb process costing designed to produce the cost of each processc job costing designed to produce the cost of each jobd some other way

69 Costs that are the same per unit of production but increase in total when the volume of production increases are

a fixed costsb semi-variable costsc variable costsd standard costs

70 Cost reports for management should showa as much detail as possible to all levels of managementb only summary figuresc details of non-controllable expenses appropriate to the level of

management for which the report is preparedd cost data and comparable data useful to management for decision

making pyramided for higher levels of management

71 If a job has direct labour costs of pound10 direct material costs of pound20 a manufacturing overhead rate of 200 of direct labour cost and a selling and administrative overhead rate of 10 of manufacturing cost should we subcontract it for pound45

a Yesb Noc No if overhead is fixedd Yes if overhead is fixed

148

72 A contract has direct labour cost of pound20 direct material cost of pound20 and four hours of machine time The normal machine hour overhead rate is pound10 per hour The variable cost of the contract is probably


73 In the case of a particular job the direct labour cost in Department A (where 20 hours work is involved) is pound30 and the direct labour cost in Department B (where 8 hours work is involved) is pound5 The direct material cost is pound20 and production department overheads are recovered at the rate of pound1 per hour in Department A and at the rate of pound2 per hour in Department B The manufacturing cost of this job is therefore


74 A job has direct labour costs of pound10 direct material costs of pound20 fixed manufacturing overhead of pound15 variable manufacturing overhead of pound10 and fixed selling and administrative over head of pound12 Its selling price is pound75 What is the profit of the job and what is the ldquocontributionrdquo of the job

a pound8 and pound30b pound8 and pound35c pound8 and pound20d something else

75 Cost accounting dataa if accurately prepared is always suited to many different purposesb is usually difficult to prepare and is seldom of great valuec must be specially prepared in relation to each particular decisiond is a scientific fact and cannot be disputed

76 If a company has been operating at a high level of capacity and on this basis has computed its overhead rate for cost estimating purposes will its cost estimates tend to be relatively

a highb low

149

c averaged unpredictable so far as accuracy is concerned

77 If the same company experiences a recession and it recomputes its manufacturing overhead rate on the assumption that only a small proportion of its capacity will be utilized will its cost estimates tend to be relatively

a highb lowc averaged unpredictable so far as accuracy is concerned

78 The purchase of a machine costing pound1500 and having a working life of 3 years is expected to lead to a reduction of pound1000 per year in the labour costs The manufacturing overhead recovery rate is 500 of direct labour cost The total savings over a period of three years resulting from the purchase of this machine will probably be

a pound1500b pound16500c more than pound1500 but less than pound16500d something else

79 In the case of a company manufacturing only one type of product the direct material costs per unit are pound40 and 10 hours work is involved per unit produced The direct labour cost is pound1 per hour and variable manufacturing overheads amount to 200 of the direct labour cost If the fixed manufacturing overheads amount to pound1000 per year what is the manufacturing cost per unit if the annual output is (a) 1000 units and if it is (b) 100 units

a (a) pound151 (b) pound160b (a) pound71 (b) pound80c (a) pound131 (b) pound140d something else

80 ldquoThe actual cost of a product may vary according to the time it is produced the assumptions adopted by the cost accountant and the volumes of production and other things in the factoryrdquo This statement is

a always trueb partly true partly falsec sometimes trued false

150

FOR THE TEACHER

Programmed learning is designed to simulate an individual tutor In designing this programme we have analysed in detail what knowledge and skills we are trying to teach and what behaviour we expect of the student when he has completed the programme

The advantages of the programme aremdash

1 Each student can learn at the pace most suitable for him

2 The student studies advanced material only when he has mastered the elementary material

3 The programme is designed to prompt a correct answer from the student The aim is to reward the student as much as possible If he is rewarded he will be motivated to continue paying attention

4 The student cannot daydream He is continuously active and receives immediate and continuous confirmation of his success in learning the material

5 Frames are designed to bring the critical point to the attention of the student and to establish his understanding of each critical point

The record of responses made by the student highlights areas where the programme might well be reconsidered No programme is perfect and consistent errors in any one frame by many students may indicate that the frame should be redesigned

151

ANSWERS TO THE QUIZ

1 c 21 a 41 d 61 c 2 d 22 d 42 c 62 d 3 b 23 b 43 b 63 b 4 b 24 b 44 d 64 b 5 d 25 c 45 d 65 b 6 c 26 d 46 c 66 a 7 d 27 c 47 c 67 c 8 c 28 c 48 c 68 b 9 b 29 d 49 d 69 c10 a 30 c 50 b 70 d11 d 31 d 51 d 71 c12 c 32 d 52 d 72 d13 b 33 c 53 c 73 c14 b 34 c 54 a 74 b15 b 35 a 55 d 75 c16 c 36 c 56 a 76 b17 b 37 d 57 d 77 a18 d 38 c 58 c 78 c19 c 39 c 59 d 79 b20 a 40 c 60 d 80 a

GRADING 70ndash80 Excellent60ndash70 GoodUnder 60 Fair repeat the programme

at a later date

FINAL NOTE

We hope that you have enjoyed this programme and that you have finally solved to your satisfaction the many puzzles that we have presented to you We believe that learning of accounting can be both intriguing and entertaining

You will retain and expand the knowledge you have acquired from this programme if you seek out every opportunity to use it in your day-to-day work Have we stimulated you to be a little curious about accounting in the future

GLOSSARY OF COST ACCOUNTING LANGUAGE

Absorbed overhead See overhead chargedAccounting Art of preparing accounting reports from books and other records

Based on concepts and principles true and fair money cost conservatism consistency comparability entity going concern recognition of profit etc

Accounting period Period of time between one balance sheet and the next Period of the income statement Usually a month or one year

Administrative overhead Cost of directing and controlling a business Indirect cost Administrative expense Includes director fees office salaries office rent legal fees auditors fees accounting services etc Not research manufacturing sales or distribution overhead

Allocated overhead See overhead chargedBalance Sheet Statement of assets and how they are financed from liabilities

and owners equity Not an income statementBatch Group of identical products or jobsBatch costing Cost system where the unit of cost is a batch Similar to job

costingContract costing Cost system where the unit of cost is one contract For long

term contracts a proportion of the profit to date may be taken each yearContribution Excess of selling price over variable cost Contributes to fixed

overhead and profit Also used in make or buy decisions as the excess of purchase price over relevant cost of making

Controllable cost Cost for which some person may prepare a budget and be held responsible for the variance between actual cost and budget

Cost Several meaningsa Expenditure on a given thingb To compute the cost of somethingc Direct cost or indirect cost (indirect cost is overhead expense)

Cost accounting Recording of cost data and preparation of cost statements Objectives

a To compute cost of a product as an aid to pricingb To value work in processc To control costs

Costing Two meaningsa To estimate costsb Cost accounting

153

Cost allocated Cost charged Cost analysed (Some cost accountants use the word allocation to mean charge of whole items of cost as distinct from apportionment which covers analysis of proportions of an item of cost)

Cost apportioned Cost charged Cost analysed (Some cost accountants use the word ldquoapportionmentrdquo to mean analysis of proportions of items of cost See also cost allocated)

Cost centre Centre for analysis of overhead into smaller cost sections Used to compute more precise overhead rates Better cost control Productive and service cost centres

Cost charged See cost allocatedCost classification Grouping of costs by common characteristicsCost code Series of alphabetical or numerical symbols to represent descriptive

titles in cost classificationCost control Objective of cost accounting Achieved by

1 Setting of budget or standard cost2 Recording of actual cost3 Comparison of standard and actual cost to compute variances (differences)4 Investigation of cause of variances5 Action by responsible management

Cost manual Manual of responsibilities routines forms and reports in a cost systemCost of capital Not all real cost It is the reward to each type of capital used by

a business ie creditors (nil) loans (interest) preference shares (dividends) ordinary shares (dividends)

Cost of sales Cost of goods actually sold Labour material and manufacturing overhead adjusted for changes in inventory of raw material work in process and finished goods

Cost report Cost statementCost statement Statement of cost andor operating results of all or part of a

business Prepared promptly with reasonable accuracy Contains comparative data Cost report

Cost unit Unit of cost Unit of product chosen as focus of cost accounting Contract job batch product or process

Current cost Actual cost Not estimated cost Not standard costDepreciation Allocation of the cost of a fixed asset (building equipment

vehicles etc) over its working life Measure of the cost of using the fixed asset (Land does not normally depreciate) Methods straight line diminishing balance sum of the digits

Direct costing Cost system for variable costs only All fixed costs charged to income statement and not to product or job cost accounts

Direct costs Costs conveniently associated with a unit of product Normally direct labour direct material direct services (eg

154

hire of equipment for one specific job) All other costs are indirect costs known as overhead expenses (Some cost accountants also use the term ldquodirectrdquo for specific costs ie overhead expenses which are clearly identifiable with an overhead cost centre but not with a unit of product)

Direct expenses Direct costs which may be conveniently associated with unit of product Direct services See direct costs

Direct labour Labour conveniently associated with a unit of product Direct wages Direct payroll Covers all operating labour Does not normally include inspectors wages foremanrsquos salary indirect labour wages paid to persons normally employed on production for time spent on other work etc See direct costs

Direct material Direct cost Conveniently associated with a unit of product Material that forms part of the product sold Not indirect material Not manufacturing overhead

Direct services Direct expenses Direct costsDirect wages Direct labourDistribution overhead Cost of packing and distributing the product Indirect

cost Overhead Often grouped with sales overhead and charged to jobs as a percentage of manufacturing cost

Elements of cost Basic analysis of cost to compute overhead rates direct labour plus direct material plus direct services equals PRIME COSTprime cost plus manufacturing overhead equals MANUFACTURING COSTmanufacturing cost plus sales distributive and administrative overhead

equals TOTAL COSTExpenditure Money paid for cost expense asset or other purposesExpense Indirect cost Overhead Manufacturing selling or administrative

overhead Not a direct cost Not conveniently associated with a unit product Fixed or variable

Expense analysis sheet Record of expenses for analysisFinished goods stock Inventory or stock of finished goods Valued at lower of

cost (of labour material and manufacturing overhead) or market value Sometimes valued at direct cost only

First in first out price (FIFO) Method of costing material issues assuming that first goods received are the first issued

Fixed assets Assets such as land buildings plant and equipment acquired for long term use in the business and not for resale Valued at cost less accumulated depreciation not at market value Depreciation charged to overhead expense periodically (Exception land is not normally depreciated) Where the cost less accumulated depreciation of a fixed asset is completely unrelated to its current value then as an exceptional operation all assets may sometimes be restated for all accounting purposes at current values

155

Fixed cost Cost not affected by variations in the volume of production Not a variable cost Overhead may be fixed or variable cost

General manufacturing overhead service cost centre Cost centre used to accumulate general manufacturing overhead items Subsequently recharged on an arbitrary basis to all cost centres Covers such items as the factory managerrsquos salary and office costs

Historical costing Accumulation of past costs Actual not standard costsIncome statement Statement of sales costs expenses and profit for an

accounting period Profit and loss account Not a balance sheetIndirect cost Cost which cannot conveniently be associated with a unit of

product Overhead expense Indirect expense Not direct costIndirect expense See indirect costIndirect labour Labour that cannot be conveniently associated with a unit of

production Indirect cost Overhead Not direct labour but does include the non-productive time and activity of normally direct workers

Indirect material Material used which does not form a measurable part of the product sold Not conveniently associated with unit of product Includes oil rags factory supplies etc Indirect cost Usually manufacturing overhead Sometimes direct material of very low value is treated as indirect material to save clerical costs

Indirect wages Indirect labourInventory Stock of goods Raw material work in process finished goods

Valued at the lower of manufacturing cost or market value Sometimes valued at direct cost only

Iob card Record of work done by direct labourIob Unit of cost Single job order or contractIob costing Cost system based on one job as the unit of costLabour hour rate Worker rate of pay per hourLabour time record Time card Clock cardLast in first out price (LIFO) Method of costing material issues assuming that

the last item received is the first item issued Conservative in time of rising prices Little used except to avoid taxation

Limitations of cost data Data for one purpose may not be relevant for other purposes Costs often meaningless unless prepared quickly and presented with comparative data against which to measure performance Cost depends upon the judgment of the cost accountant

Machine hour rate Two meaningsa Overhead rate for manufacturing overhead based on machine

156

hours worked on each job Suitable for machine sections Not suitable for assembly work

b Rate for operating a machine for one hourMaintenance cost Maintenance and repair of machines and buildings

Overhead Indirect cost May be manufacturing sales or administrativeManufacturing overhead Indirect cost of running the factory Includes rent

rates lighting power foreman maintenance repairs insurance etc Does not include the full cost of machines only machine depreciation

Marginal cost Relevant cost of producing one more unitMarginal costing See marginal cost Sometimes variable cost only

Sometimes used to mean direct costingMaterial cost Cost of material used See direct material and indirect materialMaterial issue analysis sheet Record summarizing and analysing material

issues by jobs contracts products or overhead accountsMaterial requisition Stores or stock requisition Issue ticketObjectives of cost accounting See cost accountingOccupancy Cost of occupying a building Includes rent rates lighting

heating cleaning maintenance etc Sometimes accumulated as a service cost centre and recharged to other cost centres on the basis of floor space occupied Avoids apportionment of each individual cost to each cost centre separately

Operating cost Cost of providing a serviceOpportunity cost Not a cost at all The value of a particular alternative course

of actionOrganization (for cost accounting) Definition of authority and responsibility

in a business in order to design the appropriate cost accounting system Cost analysis follows the organization plan Manufacturing sales and administrative costs may be analysed for the business as a whole or for each division or product group

Output costing Cost system for a business or department with only one output of identical products

Overhead absorbed See overhead chargedOverhead allocated See overhead chargedOverhead expense Indirect cost Overhead Fixed or variable with the volume

of production See manufacturing sales distributive and administrative overhead Not direct cost

Overhead Indirect cost cannot be conveniently associated with a unit of product Expense Manufacturing sales or administrative Not direct cost

Overhead charged Overhead allocated or absorbed or recovered

157

Overhead charged to a contract job or product using an overhead rateOverhead rate Rate for charging out overhead to jobs contracts or products Routine

1 compute amount of overhead2 estimate measure of activity3 compute overhead rateMeasures of activity may be direct labour cost direct labour hours prime cost or machine hours Overhead rates may be for the whole factory or for each cost centre

Overhead recovered See overhead chargedOverhead under or over charged Overhead under or over absorbed allocated

recovered Difference between overhead incurred and overhead charged to contracts or jobs using an overhead rate Overcharge indicates that actual activity exceeded estimated activity Credit or profit in the income statement because job costs charged with too much overheadUndercharge indicates that actual activity was less than estimated activity Loss in the income statement because job costs charged with too little overheadNormally applied to manufacturing overhead Not sales or administrative overhead

Payroll Wages sheet Wages LabourPayroll allocation Wages analysisPayroll analysis Wages analysisPre-determined cost Cost estimate Standard costPrimary costs Analysis of costs into labour material and overhead See elements of costPrime cost Direct labour plus direct material plus direct services Direct cost

Does not include overhead Basis for overhead rateProcess costing Cost system for a sequence of operations where the unit of

cost is one processProductive cost centre Cost centre engaged in direct manufacturing or

productive operations machine shops assembly shops etc Not a service cost centre

Product group Group of products classified for cost analysisProfit and loss account Income statement Not a balance sheetRelevant cost That part of total cost that is relevant to a particular decision or

course of action Refers more to variable rather than fixed costs May change over time

Research cost Cost of research Separate overhead or part of manufacturing overhead Indirect cost Not normally direct cost

Salary cost Not normally conveniently associated with a unit of product Usually manufacturing sales or administrative overhead

158

Sales overhead Cost of promoting sales and retaining custom Indirect cost Overhead expense Not manufacturing or administrative overhead Includes advertising sales literature sales salaries travelling expenses depreciation of sales cars etc

Service cost centre Cost centre for activities not engaged in direct productive operations Includes power-house maintenance internal transport production control Not a productive cost centre Manufacturing overhead Recharged to appropriate cost centres

Specific cost Indirect cost clearly associated with a specific cost centre Not direct cost Overhead

Standard cost Predetermined standard of performance against which to measure actual cost Standard costing as opposed to actual or historical costing

Standard rate Rate which is set at the beginning of an accounting period Not the actual rate Simplifies clerical work in cost accounting

Stock Inventory of goods on hand Stores Raw material work in process or finished goods Valued at the lower of manufacturing cost or market value

Stock requisition Material requisitionStores requisition Material requisitionStores Location for keeping stock or inventory Stock InventoryStraight Line depreciation Depreciation method charging off the cost of a

fixed asset equally over the years of its working lifeUnabsorbed overhead See overhead underchargedUnallocated overhead See overhead underchargedUncontrollable cost See controllable costUnit of cost Unit of product chosen for cost accounting Contract job batch

processUnit of product Unit of cost for cost accountingUnit of output Unit of productVariable cost Cost which varies with the volume of production or salesVariable expense Variable cost Variable overheadVariance Difference between actual cost and the standard of performance ie

budget standard cost or previous cost Sometimes analysed into price efficiency seasonal and volume variances

Wages Payroll Pay of workers Labour costWages analysis Payroll analysis Record analysing labour cost by contract

job batch process or overhead accountWages sheet Payroll Record to compute gross and net payWork in process See stock Work partially completed Valued at lower of

manufacturing cost or market value

The four self-instruction programmes comprising the popular series ACCOUNTING STEP BY STEP are designed to enable students managers engineers and scientists to teach themselves the language and basic concepts of accounting

A C C O U N T I N GS T E P B Y S T E P

Four-hour programmesof self-instruction in accounting







ISBN 0 340 04504 3




INTRODUCTION





CONTENTS



TECHNIQUE

















CONTENTS








FOR THE TEACHER 151



PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR


CHAPTER I 20


20202020


2515


101010


2020

Quiz 30

Total time 240







CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158





















ISBN 0 340 04504 3




INTRODUCTION





CONTENTS



TECHNIQUE

















CONTENTS








FOR THE TEACHER 151



PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR


CHAPTER I 20


20202020


2515


101010


2020

Quiz 30

Total time 240







CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158
















INTRODUCTION





CONTENTS



TECHNIQUE

















CONTENTS








FOR THE TEACHER 151



PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR


CHAPTER I 20


20202020


2515


101010


2020

Quiz 30

Total time 240







CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158



























CONTENTS








FOR THE TEACHER 151



PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR


CHAPTER I 20


20202020


2515


101010


2020

Quiz 30

Total time 240







CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158















PROGRESS WORK SHEET

CHAPTERSETESTIMATED

TIME(MINUTES)

ACTUALTIME

(MINUTES)

TOTAL OFFRAMES

IN ERROR


CHAPTER I 20


20202020


2515


101010


2020

Quiz 30

Total time 240







CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158



















CHAPTER I




Accounting Language




Uncertainty










10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158























10

CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158















CHAPTER II

MEANING OF COST



SUMMARY






CHAPTER II

MEANING OF COST



INCOME STATEMENT



Profit 20






accountingproduct


one


profit


profitlossincome


fournocost


4pound25



15

CHAPTER II SET 1





Total cost 30



price


cost


onepound30




no


overhead5

17

CHAPTER II SET 1




2527


2 pound5 each

210



Sales 27Less






estimatecost


probably not


judgment




costsale


pound2pound6does

19



pound2no


pound10pound12


(a)







20

CHAPTER II



SUMMARY









CHAPTER II SET 2



MANAGING DIRECTOR


SALESDEPARTMENT


120EMPLOYEES

20EMPLOYEES

10EMPLOYEES











manufacturing120


2010




sales

23



administrative





areIndirect





24


CHAPTER II SET 2



Product


CostSelling price

58

1010

1520

Profit 3 Nil 5



nocost


sellingprofit






does notyes


workprocess

27

CHAPTER II SET 2



Totalcost

incurred

Cost ofgoods

finished


(unfinished)



200(X)250

200

150100150

50150 50

650 40 250

TotalUnits

Completed

Units

Work inProcessUnits


100150

100mdash

mdash150

250 100 150



costpound650250






pound250costmarket


control incurring


responsible

29

CHAPTER II SET 2







23015102515

235201258

(5)(5)(2)207

295 280 15





salessales manager


budgetover







control

31



unitscost


unitunits




objectives


32

CHAPTER II SET 3



SUMMARY









poundXXXX


XX XX


XXXXX

TOTAL COST XXX


CHAPTER II SET 3



NormallyF or V



costs)

Manufac- turing

overhead

Sales overhead

Admini-strative

overhead

VVF


XX

X

VVV


XXX

FFV


XXX

FFF


XXX

FFV


XXX

FF

mdashmdash


XX

XX









materialdirect


directoverheads


special items


indirectfactory

35

CHAPTER II SET 3





2010

1020

DD



30

20

30

10 I



50

10

40

8 ITotal cost 60 48




are not




is notmanufacturing


depreciation




administrative

37



are notcosts






manufacturingdoes


elements


prime

38



manufacturing


prime


20total


pound30pound30


overhead


pound30100pound40

39

CHAPTER II SET 3





235


101



95





110




pound00059





directindirect


direct labourno


prime


manufacturing




totalelements

41









pound11000


pound9000


openingclosing

42



pound5000pound3000






are notworkprocess




variable

43

CHAPTER II SET 3




100pound

500pound

1000pound


11000

1001000

5001000

10001000

TOTAL COSTSSales

10013

1100300

15001500

20003000


(800)loss

nilbreak-even

1000profit






volumes1000


pound1yes






500 unitscostprofit


fixedvariable

45



variable




judgment



46

CHAPTER II



SUMMARY








CHAPTER II SET 4






Total cost Profit






direct







selling



49

CHAPTER II SET 4










recent




pound2Yes


poundfrac12pound10




pound20pound6

51

CHAPTER II SET 4




515



manufacturing cost)

30

6Total cost













no


manufacturing cost

53

CHAPTER II SET 4












16 9 7



pound925


costprice




recent


variable



55









can


directrecentfuture



56

CHAPTER III


SET 5 COST CENTRES


SUMMARY









CHAPTER III SET 5

COST CENTRES


TotalOverhead



costManufacturing



Totaloverhead



costpound pound


Administrative

80000

20000

200

50

100000 40000





indirect


overhead


one


cost centres


pound100000labour

59

CHAPTER III SET 5

COST CENTRES




Direct labourcost


costpound pound

No 1 10000 5000 200No 2 15000 6000 250No 3 25000 20000 125No 4 30000 9000 333Total 80000 40000




250




200does not




250



61





manual


200125


do not


same


do

62



do not


more


basescost centres


specificoverheads




floorYes

63

CHAPTER III SET 5

COST CENTRES



OverheadNo of

workersFloorarea

Unitsused

Technical estimate

Actual cost



CHAPTER III SET 5

COST CENTRES


Basisfor







centresAB




cleanersrsquo wages


lightingunits


floor


Definitely




43

65



productiveservice




actual costspecific






no of employees

67

CHAPTER III SET 5

COST CENTRES


Servicecost

centre

Servicecost






FloorArea






Yes


serviceproductive


pound2000pound1000


5


pound5000units used


floor area

69


Basisfor






No ofemployee




mdashmdash

1500 500

10001000

600400

19001100

(5000)

mdashmdash

(3000)mdashmdash


40000 5000

200

6000

250

20000

125

9000



See Exhibit 3



general


pound5000units used



pound3000floor





pound5000200


71





manufacturingrates


cost centre


Not quite







72

CHAPTER III SET 6

OVERHEAD RATES


SUMMARY



overhead rate





CHAPTER III SET 6

OVERHEAD RATES










rates


overhead rate


three




direct labour400

75

CHAPTER III SET 6

OVERHEAD RATES




HighActivity


LowActivity



20000 mdash (20000)over-

charged Nilunder-

charged






hourspound2


pound2No


littlemachine


40000pound1


will


activity

77





higher




pound20000nil



78







Direct labour 10000

200



133400




under


over

79



charged


chargedlossprofit




chargedjobs


belowmore

80



abovehigh


Thank you





81

CHAPTER IV

COSTING METHODS



SUMMARY








CHAPTER IV SET 7



Contract No 1pound


150000100000






pound40000







unitproduction


contractcontract


pound150000profitno





85

CHAPTER IV SET 7



Estimated

Costpound



Dept A 45 (300)Dept B 5 (100) 50







frac34





proportionlosses


batchgroupproducts


pound30


AB

87



No


300100




manufacturing10


pound88pound12


pound30

88



pound58



Contribution






Yes



89

CHAPTER IV SET 7



ActualCost

poundLabour



Dept A 30 (300)Dept B 5 (100)

20

35


overhead (10)

70

7

Total costProfit

7723

Selling price 100



actual





estimatedyes



91

CHAPTER IV SET 8

OUTPUT COSTING


SUMMARY





CHAPTER IV SET 8

OUTPUT COSTING


Unit cost per ton

Total costthis

monthThis

monthLast

month

Thisyear

to date

Lastyear


LabourMaterial

100200

10 20

15 20

20 20

1020

Overhead 400 40 34 38 35

Total cost 700 70 69 78 65







unit


output


outputoutput




100pound700

95



pound7output


pound100pound1


pound2pound4






96






97

CHAPTER IV SET 9

PROCESS COSTING


SUMMARY











ANALYSIS BYQUANTITY

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound

Actual units

Equiv units

Unit Pricepound


200 150 150 80 70 140 50 45 180Waste 20 20 10







outputprocess


process


process costthree


three



101



22010020


2150


equivalentpound1


100input


Yes (marked X)


602020

102



2


Yes


10Yes (marked Y)


1070


pound40pound100


total costoutput

103



pound270


pound2pound120


1010



45pound4


pound44020


is not

104



process


pound4




cost


were notsame


comparedmonthbudget

105

CHAPTER V



SUMMARY






CHAPTER V SET 10

COST STATEMENTS




40002200

30003000

(1000)800





Profit 580 2450 (1870)






cost


responsible


lessmore


are7



109

CHAPTER V SET 10

COST STATEMENTS









actualpound1870








overhead costs



111

CHAPTER V SET 10

COST STATEMENTS

















salaries


totalcosts





113

CHAPTER V SET 10

COST STATEMENTS


Grand Total




2060015300

17500 5500

3511

310010800

312


Factory overhead

35900

18000

23000

7500

46

15

13900

9500

15



53900

5800

30500

4000

61

8

23400

1800

26

2Total cost

Profit59700 4800

34500 3000

69 6

252001800

28 2


units500

units900

units









pound59700yes






115

CHAPTER V SET 10

COST ESTIMATES


Actualpound000

Budgetpound000

Variancepound000



270 35 65

470 65 90

(200) (30) (25)




75 50 25

75 55 30

mdash(5)(5)




Yescomparative data







contribution


areno

117

CHAPTER V SET 10

COST STATEMENTS





244020

144015

(10)mdash(5)


48

126

8(2)

Net profit 4 13 (9)









salesnational


4less


119





salesinvestigation


moneywhole




compared


estimate

120



previousprevious


last


budget


unitperiod




121



action (decision)



122

CHAPTER V SET 11

RELEVANT COSTS


SUMMARY






CHAPTER V SET 11

RELEVANT COSTS







pound60004

pound40004

pound1500pound1500

pound1000pound1000

pound3000pound1000

pound2000pound1000









purposerelevant


judgment



good


replacing

125

CHAPTER V SET 11

RELEVANT COSTS






Total cost 725






725






pound400025


no




relevant


pound725No

127

CHAPTER V SET 11

RELEVANT COSTS















pound725hire


pound225use


pound125use


relevant costs


makebuy


It all depends

129



pound7000pound3000


partiallow









130





Buycontributionmake


Greatest


Fixeddoes


machine



131

CHAPTER V SET 11

RELEVANT COSTS



Manual cost


pound pound pound








pound6600no


500


rise


lower


cost


will not

133



cannotcannot


no


cannot


relevant


cash


rise

134



relevant


ordersmarket





135


PROGRAMME











136











137










138












cost or less


139









140











141










142











cost centres only

143













144













145













146




packed









147












148









a highb low

149










150

FOR THE TEACHER









151

ANSWERS TO THE QUIZ



at a later date

FINAL NOTE


















153

















154














155














156

















157













158















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