cost accounting (15)

8/10/2019 Cost Accounting (15)

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Chapter 17Process costing


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Treatment in accounts Normal loss : The cost of normal loss is absorbed by units

produced.

When normal loss has a scrap value, the same is credited inthe process account.Abnormal gain

Abnormal gain does not affect cost of normal production.

The process account is debited with full cost of abnormal gain. The abnormal gain account is debited and normal process loss

account is credited.

The balance is transferred to costing Profit and Loss account as

abnormal gain.

Cost per unit

The total cost is deducted by normal loss scrap value and then it is

divided by the input units minus the normal loss units.


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From the following particulars of two processes Process X and Process Y prepareprocess accounts of X and Y

Process X Process Y

Input (units) 5000 4600

Normal Loss 10% ?

Cost incurred (Rs.) Materials 8000 1500

Direct Labours 3000 4000

Overheads 2750 3010

Scrap value 0.50 2

Output of Process Y was 4300 units and cost is Rs.5 and there is no WIP, closing oropening stocks.Dr--------------------------------------------------

Units Cost/unit AmountTo Mat 5000 8000To Lab 3000To OH 2750

----------- --------------

5000 13750ToAbnormalGain 100 3.00 300

---------- ------------5100 14050

Cost per unit = (Total process cost scrap value of normalloss)/ (Inputsnormal loss)

= 13750250 / 5000500

= 3.00

Process X AccountCr.

--------------------------------------------------------

Units Cost/unit Amount

By Normal loss 500 0.50 250

(scrap value)

By process

Y A/c 4600 3.00 13800

----------- --------------

5100 14050


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Abnormal loss Abnormal loss is charged to the respective cost of production.

The process account is credited by abnormal loss account with cost of

materials, labours and overheads equivalent to good units. Abnormal loss units rank equal with normal units.

Abnormal loss account is credited by realizable scrap value and thebalance is written off to costing Profit and Loss Account as abnormalloss.

Process Y AccountDr

--------------------------------------------------


To Process X

A/c. 4600 3.00 13800

To Mat 1500

To Lab 4000

To OH 3010

----------- --------------

4600 22310

Cost per unit = (Total process costscrap valueof normal loss)/ (Inputsnormal loss)

5 = 223102x / 4600xx = 230 units

Cr.

--------------------------------------------------------


By Normal loss 230 2.00 460

(scrap value)

By Abnormal

Loss 70 5.00 350

By Finished

goods A/c 4300 5.00 21500

----------- --------------

4600 22310


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Inter process profit ExampleFollowing details are available for two processes X and Y

in Rupees

Process X Process Y

Materials 15000 --Labour 10000 15000

Overheads 10000 15000

Closing stock (at cost) 5000 7500

The output from process X is transferred to process Y at cost plus 25% mark-upbasis and also the output from Y is also charged at 25% mark-up basis. Finished

stock sold at Rs.90000 and stocks worth of Rs.15000 remained unsold. Noopening, closing work-in-progress.

Show process Accounts and profits.


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Chapter 7 & 8Standard costing


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Managing Costs Standard

cost

Actual

cost

Comparison between

standard and actual

performancelevel

Cost

variance

10-7

A managerial accountants

budgetary-control system has three

parts.

First, a predetermined or standard cost is

set. In essence, a standard cost is a

budget for the production of one unit of

product or service. It serves as the

benchmark in the budgetary-control

system. When the firm produces morethan one unit, the managerial accountant

uses the standard unit cost to determine

the budgeted cost of production or the

total standard cost.

Second, the managerial accountant measures the actual cost incurred in the

production process.

Third, the managerial accountant compares the actual cost with the budgeted or

standard cost.

Any difference between the two is called a cost variance. Cost variances then are used

in controlling costs


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Management by Exception

DirectMaterial

Managers focus on quantities and costs

that exceed standards, a practice known as

management by exception.

Type of Product Cost

Amount

DirectLabor

Standard

10-8


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Managers do not have time to investigate everyvariance between actual and standard costs.

They focus their attention on the causes of significantcost variances.

This is called management by exception.

When operations are going along as planned, actual

costs and profit will typically be close to the budgetedamounts.

However, if there are significant departures fromplanned operations, such effects will show up assignificant cost variances.

Managers investigate these variances to determinetheir causes, if possible, and take corrective actionwhen indicated.


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Management by Exception (MBE) is a practice where onlysignificant deviations from a budget or plan are brought to theattention of management.

The idea behind it is that management's attention will be focusedonly on those areas in need of action.

When they are notified of a variance, they can hone in on thatspecific issue and let staff handle everything else.

If nothing is brought up, then management can assume everythingis going according to plan.

This model is similar to the vital signs monitoring systems in

hospital critical care units.

When one of the patient's vital signs goes outside the rangeprogrammed into the machine, an alarm sounds and staff runs to the

rescue.

If the machine is quiet, it's assumed that the patient is stable, and

they will receive only regular staff attention.


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MBE can bring forward business errors and oversights,

ineffective strategies that need to be improved, changes in

competition and business opportunities.

MBE is intended to reduce the managerial load and enable

managers to spend their time more effectively in areas where

it will have the most impact.


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Setting Standards

Analysis of

Historical Data

Task

Analysis

Cost

Standards

10-12


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Two methods are typically used for setting coststandards: analysis of historical data and task analysis.

One indicator of future costs is historical cost data. In a

mature production process, where the firm has a lot ofproduction experience, historical costs can provide agood basis for predicting future costs.

In using task analysis, the emphasis shifts from what

the product did cost in the past to what it should costin the future.

The managerial accountant typically works withengineers to conduct studies in an effort to determine

exactly how much direct material should be required,how machinery should be used in the productionprocess, and many direct labor hours are required.


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Accountants, engineers, personnel administrators,and production managers combine efforts to set

standards based on experience and expectations.

Participation in Setting Standards

10-14

Standards should not be determined by the managerial accountant alone. People generally

will be more committed to meeting standards if they are allowed to participate in settingthem.

For example, production supervisors should have a role in setting production cost

standards, and sales managers should be involved in setting targets for sales prices and

volume.

In addition, knowledgeable staff personnel should participate in the standard-setting

process.


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Perfection versus Practical Standards: A

Behavioral Issue

Should we usepractical standards

or perfection

standards?

Practical standards

should be set at levels

that are currently

attainable with

reasonable and

efficient effort.

10-15


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Standards that are as tight as practical, butstill are expected to be attained, are calledpractical (or attainable) standards.

Such standards assume a production processthat is as efficient as practical under normaloperating conditions.

Practical standards allow for such occurrencesas occasional machine breakdowns andnormal amounts of raw-material waste.


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I agree. Perfection

standardsare

unattainable and therefore

discouraging to mostemployees.

Perfection versus Practical Standards: A

Behavioral Issue

10-17

Some managers believe that perfectionstandards motivate employees to achieve

the lowest cost possible.

They claim that since the standard is

theoretically attainable, employees will

have an incentive to come as close as

possible to achieving it.Other managers and many behavioral

scientists disagree.

They feel that perfection standards

discourage employees, since they are so

unlikely to be attained.

Moreover, setting unrealistically difficultstandards may encourage employees to

sacrifice product quality to achieve lower

costs.


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Use of Standards by Service Organizations

Standard cost analysismay be used in any

organization withrepetitive tasks.

A relationship betweentasks and output

measures must beestablished.

10-18

Many service industry firms, nonprofit

organizations, and governmental units

make use of standards.Fast food restaurants set a standard for the

amount of ingredients in a menu item.

Airlinesset standards for fuel and

maintenance costs.

Insurance companies set standards for the

amount of time to process an insuranceapplication.

Even a district motor vehicle office may

have a standard for the number of days

required to process and return an

application for vehicle registration.

These and similar organizations usestandards in budgeting and cost control in

much the same way that manufacturers

use standards.


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Standard CostVariances

Cost Variance Analysis

QuantityVariancePrice Variance

The difference between

the actual price and the

standard price

The difference between

the actual quantity and

the standard quantity

10-19


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There are two types of standard costvariances: price variance and quantityvariance.

A price variance arises when there is adifference between the actual price and thestandard price.

A quantity variance occurs when there is adifference between the actual quantity usedand the standard quantity to be used.


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A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should havebeen paid for the resources acquired.

10-23

In this model, the standard price is the amount that should have been paid for the

resources acquired.


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A General Model for Variance Analysis



Price Variance Quantity Variance

Standard quantity is the quantity that should havebeen used.

10-24

The standard quantity is the quantity of that resource that should have been used.


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Standard Costs

Lets use the concepts of

the general model to

calculate standard cost

variances, starting with

direct material.

10-25

Lets use the concepts of the general model to calculate standard cost variances for

Hanson, Inc. We will start with direct materials.


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Hanson Inc. has the following direct material

standard to manufacture one Zippy:1.5 pounds per Zippy at $4.00 per pound

Last week 1,700 pounds of material were

purchased and used to make 1,000 Zippies.The material cost a total of $6,630.

Material VariancesZippy

10-26

Hanson Inc. manufactures a product called a zippy. The direct material standard for one

zippy is 1.5 pounds of material at a cost of $4.00 per pound. Last week, 1,700 pounds of

materials were purchased and used to make 1,000 Zippies. The actual cost of the

materials was $6,630


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What is the actualprice per pound

paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.d. $6.63 per pound.

Material Variances Zippy

10-27To calculate the direct-material price variance, we must first determine the actual priceper pound of material

M t i l V i


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What is the actualprice per pound

paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.d. $6.63 per pound.

AP = $6,630 1,700 lbs.AP = $3.90 per lb.

Material Variances

Zippy

10-28

The actual price per pound can be calculated by taking the total actual cost

of $6,630 and dividing it by the actual number of pounds which was 1,700.

Therefore, the actual cost per pound was $3.90.


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Hansons direct-material price variance (MPV)

for the week was:

a. $170 unfavorable.

b. $170 favorable.

c. $800 unfavorable.

d. $800 favorable.

Material Variances Zippy

10-29

Now that we know the actual price per pound, the standard price per pound and the actual

number of pounds used, we can calculate the material price variance

Material Variances


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Hansons direct-material price variance (MPV)

for the week was:


b. $170 favorable.

c. $800 unfavorable.d. $800 favorable.

MPV = AQ(AP - SP)MPV = 1,700 lbs. ($3.90 - 4.00)

MPV = $170 Favorable

Material Variances

Zippy

10-30

The standard price of $4.00 is subtracted from the actual price of $3.90.

This difference is multiplied by the actual quantity of 1,700 pounds.

The resulting variance is a negative $170.

The variance is favorable because the actual price per pound was less than the standard

price per pound.

Material Variances


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The standard quantity of material that

should have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.c. 2,550 pounds.

d. 2,000 pounds.

Material Variances

Zippy

10-31

To calculate the direct-material quantity variance, we must first determine the standard

quantity of materials that should have been used to produce 1,000 Zippies.

Material Variances


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The standard quantity of material that

should have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.c. 2,550 pounds.

d. 2,000 pounds.

SQ = 1,000 units 1.5 lbs per unit

SQ = 1,500 lbs

Material Variances

Zippy

10-32

The standard quantity of material for one Zippy is 1.5 pounds.

Since 1,000 Zippies were produced, we must multiply 1.5 pounds times 1,000 units to get

1,500 pounds of material for the standard quantity

Material Variances


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Hansons direct-material quantity variance (MQV) for

the week was:


b. $170 favorable.


Material Variances

Zippy

10-33

Now that we know the actual quantity used, the standard quantity that should have been

used and the standard price per pound, we can calculate the material quantity variance.

Material Variances


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Hansons direct-material quantity variance (MQV) for

the week was:


b. $170 favorable.


MQV = SP(AQ - SQ)

MQV = $4.00(1,700 lbs - 1,500 lbs)

MQV = $800 unfavorable

Material Variances

Zippy

10-34

The standard quantity of 1,500 pounds is subtracted from the actual quantity of 1,700

pounds.

This difference is multiplied by the standard price of $4.00 per pound.

The resulting variance is a positive $800.

The variance is unfavorable because the actual quantity used was greater than the

standard quantity that should have been used to make the 1,000 Zippies.


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1,700 lbs. 1,700 lbs. 1,500 lbs.

$3.90 per lb. $4.00 per lb. $4.00 per lb.

$6,630 $ 6,800 $6,000

Price variance

$170 favorable

Quantity variance

$800 unfavorable

Material Variances Summary

10-35


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To summarize, the direct-material price varianceis the difference between the actual quantity atthe actual price and the actual quantity at thestandard price.

The result is a $170 favorable price variance. The direct-material quantity variance is the

difference between the actual quantity at thestandard price and the standard quantity at the

standard price. The result is a $800 unfavorable quantity

variance.

Material Variances


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The price variance is computed on

the entire quantity purchased.

The quantity variance is computedonly on the quantity used.

Hanson purchased and used1,700 pounds. How are thevariances computed if the

amount purchased differsfromthe amount used?

Zippy

10-37

When the amount of direct-materials purchased is different from the amount

used, the direct-material price variance is based on the quantity purchased.

The difference between the purchase price and the standard price are

highlighted by the price variance, which relates to thepurchasing function.

In contrast, the direct-material quantity variance is based on the amount ofmaterial used in production.

The quantity variance highlights differences between the quantity of material

actually used and the standard quantity allowed.

Material Variances


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Hanson Inc. has the following materialstandard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week 2,800 pounds of material werepurchased at a total cost of $10,920, and

1,700 pounds were used to make 1,000Zippies.

Material VariancesZippy

10-38

Lets try an example where the amount of materials purchased is different than the amount

of materials used in production.The direct material standard for one zippy is still 1.5 pounds of material at a cost of $4.00 per

pound.

Last week, 2,800 pounds of materials were purchased at a total cost of $10,920.

1,700 pounds of material were used to make 1,000 Zippies.


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The standard price of $4.00 is subtracted fromthe actual price of $3.90.

This difference is multiplied by the amount ofmaterials purchases, which is 2,800 pounds.

The resulting direct-material price variance is anegative $280.

The variance is favorable because the actual priceper pound was less than the standard price perpound.

But the variance is larger when a greater quantityof materials were purchased.

MQV = SP(AQ - SQ)


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Actual QuantityUsed Standard Quantity

Standard Price Standard Price

1,700 lbs. 1,500 lbs.

$4.00 per lb. $4.00 per lb.

$6,800 $6,000

Quantity variance

$800 unfavorable

Quantity variance isunchanged because actual

and standard quantities are

unchanged.

Material Variances

Zippy

MQV = SP(AQ SQ)

MQV = $4.00(1,700 lbs

- 1,500 lbs)

MQV = $800unfavor.

10-41


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To calculate the material quantity variance, thestandard quantity of 1,500 pounds is subtracted fromthe actual quantity of 1,700 pounds.

This difference is multiplied by the standard price of

$4.00 per pound. The resulting direct-material quantity variance is a

positive $800.

The variance is unfavorable because the actual quantityused was greater than the standard quantity thatshould have been used to make the 1,000 Zippies.

Notice that the amount of material purchased did noteffect this variance.


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cost accounting (15)

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