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BBA 2003
COST ACCOUNTING

TAN WAH TIONG
940928-14-5531
201565

CHONG KAR YUN
AUGUST 2013
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NO DETAIL PAGE
1.0 Contents 1
2.0 Introduction 2
3.0 Task 1 3-13
4.0 Task 2 14-15
5.0 Task 3 16-17
6.0 References 18
7.0 Coursework 19-22
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2.0 Introductions
Cost accounting is a process of collecting, analyzing, summarizing and evaluating various
alternative courses of action. Its goal is to advise the management on the most appropriate
course of action based on the cost efficiency and capability. Cost accounting provides the
detailed cost information that management needs to control current operations and plan for
the future.

Since managers are making decisions only for their own organization, there is no need for
the information to be comparable to similar information from other organizations. Instead,
information must be relevant for a particular environment. Cost accounting information is
commonly used in financial accounting information, but first we are concentrating on its use
by managers to make decisions.
Unlike the accounting systems that help in the preparation of financial reports periodically,
the cost accounting systems and reports are not subject to rules and standards like the
Generally Accepted Accounting Principles. As a result, there is wide variety in the cost
accounting systems of the different companies and sometimes even in different parts of the
same company or organization.


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3.0 Task 1
1.1 Three Basic Cost Elements Involved in the Manufacture Of Product
(a) Material cost:
Direct cost: An expense that can be traced directly to (or identified with) a specific cost
center or cost object such as a department, process, or product. Direct costs include of labor,
material, fuel or power. It vary with the rate of output but are uniform for each unit of
production, and are usually under the control and responsibility of the department manager.
As a general rule, most costs are fixed in the short run and variable in the long run. Also
called direct expense, on cost, variable cost, or variable expense, they are grouped under
variable costs. Examples: Cost of gravel, sand, cement and wages incurred on production of
concrete.

Indirect cost: A costs that are not directly accountable to a cost object such as a particular
project, facility, function or product. Indirect costs may be either fixed or variable. Indirect
costs include administration, personnel and security costs. These are those costs which are
not directly related to production. Some indirect costs may be overhead. But some overhead
costs can be directly attributed to a project and are direct costs. There are two types of
indirect costs. One are the fixed indirect costs which contains activities or costs that are fixed
for a particular project or company like transportation of labor to the working site, building
temporary roads, etc. The other are recurring indirect costs which contains activities that
repeat for a particular company like maintenance of records or payment of salaries.
Examples: Cost of depreciation, insurance, power, salaries of supervisors incurred in a
concrete plant.
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(b) Labor:
Direct labor: Cost of personnel that can be identified in the product, such as the salary of the
person who works at the production machine, but not the administrators or janitors salaries.
Besides, Direct labor is also the portion of the total cost of production of a product or
fulfillment of a service that is associated with salaries, benefits, taxes, and other expenses
related to the personnel needed for the process.

Indirect labour: Employees or workers (such as accountants, supervisors, security guards)
who do not directly produce goods or services, but who make their production possible or
more efficient. Indirect labour costs are not readily identifiable with a specific task or work
order. They are termed indirect costs and are charged to overhead accounts. Besides, indirect
cost also considered as the amount allocated for labours hours or activities that are not
related to the manufacturing process, like the lighting surrounding a finishing machine.
Indirect labour costs such as accounting, human resources, or other administrative functions
that support the process or personnel.






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(c) Overhead costs:
In business, overhead or overhead expense refers to an ongoing expense of operating a
business; it is also known as an "operating expense". Examples include rent, gas, electricity,
and wages. The term overhead is usually used when grouping expenses that are necessary to
the continued functioning of the business but cannot be immediately associated with the
products or services being offered (i.e., do not directly generate profits). It is closely related
accounting concepts are fixed costs and variable costs as well as indirect costs and direct
costs. In addition, overhead expenses are all costs on the income statement except for direct
labour, direct materials, and direct expenses. Overhead expenses include accounting fees,
advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes,
telephone bills, travel expenditures, and utilities.








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1.2 The difference between the following terms
(i) Product cost and period cost
Product costs include all the costs that are involved in acquiring or making product but
period costs are all the costs that are not included in product costs. A manufacturers product
costs are the direct materials, direct labor, and manufacturing overhead used in making its
products. (Manufacturing overhead is also referred to as factory overhead, indirect
manufacturing costs, and burden.) The product costs of direct materials, direct labor, and
manufacturing overhead are also inventoriable costs, since these are the necessary costs of
manufacturing the products.
In the other sides, Period costs are not a necessary part of the manufacturing process. As a
result, period costs cannot be assigned to the products or to the cost of inventory. The period
costs are usually associated with the selling function of the business or its general
administration. The period costs are reported as expenses in the accounting period in which
they are best match with revenues, when they expire, or in the current accounting period. In
addition to the selling and general administrative expenses, most interest expense is a period
expense.





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(ii) Sunk cost and relevant cost
The sunk cost is one for which the expenditure has taken place in the past. This cost is not
affected by a particular decision under the consideration. Sunk costs are always results of
decision taken in past. Investment in plant and machinery as soon as installed, its cost is
sunk cost and is not relevant for decision making. The relevant cost is a cost appropriate in
adding to make specific management decisions.
Besides, a relevant cost is a future cost which differ with alternatives and one which is
expected to be incurred and not a sunk cost which has already been incurred. If the cost
remain constant between different alternatives, treated as irrelevant cost however that is not a
sunk cost. Sunk costs are based on past, always irrelevant for decision making.
In addition, relevant cost must be an incremental or avoidable cost. For example fixed over
heads which are allocated by head office are not relevant, but incremental or avoidable fixed
overheads are relevant.








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(iii) Fixed and variable cost
The difference between fixed cost and variable cost is that, fixed costs refer expenses whose
total does not change in proportion to the activity of a business, within a relevant period of
time and they include rent and utility bills. On the other hand variable costs change in
relation to the activity of a business for instance sales and production volume.
It also can be describe as in short period, total cost is divided into fixed cost and variable
cost. In short period, some factors are fixed such as factory building, machines etc. and some
factors variable such as fuel, raw materials etc. Fixed factors do not change when volume of
production change and variable factors directly vary with the volume of production. Cost
incurred on fixed factors is known as fixed cost.
The amount of fixed cost does not change and remains fixed whether volume of production
is more or less or zero. Its examples are rent of the building, interest of the money invested
in machines and so on. Cost incurred on variable factors is known as variable cost. This cost
directly varies with the volume of production. If volume of production is zero, this cost will
be zero. Its examples are fuel cost, cost or raw materials etc.

(iv) Avoidable and unvoidable costs
Avoidable cost is an expense that will not be incurred if a particular activity is not performed.
Avoidable cost refers to variable costs that can be avoided, unlike most fixed costs, which
are typically unavoidable. While avoidable costs are often viewed as negative costs, they
may be necessary to achieve certain goals or thresholds.

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In the other sides, unvoidable costs alter the course of a project or business. For example, a
manufacturer with many product lines can drop one of the lines, thereby eliminating
associated expenses such as labor and materials. Corporations looking for methods to reduce
or eliminate expenses often analyze avoidable costs associated with underperforming or non-
profitable product lines.

(v) Controllable and uncontrollable costs
Controllable costs are the costs which can be influenced by the action of a
specified member of an undertaking. A business organisation is usually divided into a
number of responsibility centres and an executive heads each such centre. Controllable
costs incurred in a particular responsibility centre can be influenced by the action of the
executive heading that responsibility centre. For example, Direct costs comprising direct
labour, direct material, direct expenses and some of the overheads are generally controllable
by the shop level management.
In the other sides, uncontrollable costs are the costs which cannot be influenced by the action
of a specified member of an undertaking are known as uncontrollable costs. For example,
expenditure incurred by, say, the Tool Room is controllable by the foreman
incharge of that section but the share of the tool-room expenditure which is apportioned
to a machine shop is not to be controlled by the machine shop foreman



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(vi) Direct and indirect costs
Direct costs are those that are directly attributable to a project of the manufacture of a
product or a project. For instance if you are in the highway construction business and you
got a bid to build a new highway, direct costs would be the materials like asphalt and the
cost of labor. That actually a variable cost and it is easier to track. On the other sides, an
indirect cost would be administrative expenses, and the depreciation and maintenance costs
for equipment like trucks and road graders and scrapers. Those are actually more fixed costs
and more difficult to track and assign to a particular project.

(vii) Prime cost and Conversion cost
The difference between prime and conversion costs refers to the difference in the types of
costs and what they are applied to. Prime costs are basically the cost of direct labor and
direct materials. Conversion cost is the cost of direct labor cost and manufacturing overhead
cost. The term conversion is used because direct labor and manufacturing overhead costs are
incurred to convert materials into finished products.
Besides, Prime Cost is a business's expenses for the materials and labor it uses in production.
Prime cost is a way of measuring the total cost of the production inputs needed to create a
given output. Conversion costs are those costs required to convert raw materials into finished
goods that are ready for sale. In addition, the concept is used in cost accounting to derive the
value of ending inventory. It can also be used to determine the incremental cost of creating a
product, which could be useful for price setting purposes.


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1.3 discuss the behavioral classification of costs, explaining all the term used therein
1. Variable costs
Variable costs are expenses that change in proportion to the activity of a business. Variable
cost is the sum of marginal costs over all units produced. It can also be considered normal
costs. Fixed costs And variable costs make up the two components oftotal cost. Direct Costs,
however, are costs that can easily be associated with a particularcost object. However, not all
variable costs are direct costs. For example, variable manufacturing overhead costs are
variable costs that areindirect costs, not direct costs. Variable costs are sometimes called
unit-level costs as they vary with the number of units produced.



2. Semi variable costs
A cost composed of a mixture of fixed and variable components. Costs are fixed for a set
level of production or consumption, becoming variable after the level is exceeded.

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3. Fixed costs
A cost that does not change with an increase or decrease in the amount of goods or services
produced. Fixed costs are expenses that have to be paid by a company, independent of any
business activity. It is one of the two components of the total cost of a good or service, along
with variable cost.

4. Semi fixed costs or stepped costs
Costs that are constant over a range of production. If one employee can make 5000 units,
then the employees wage is constant over a production range of one to 5000 units. If you
produce 5001 units, you will need another employee. So your cost doubles. If you make
14,000 units your cost triples because you need three employees.




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5. Concave cost function
concave function is the negative of aconvex function. A concave function is
also synonymously called concave downwards, concave down, convex upwards, convex
cap or upper convex.




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4.0 Task 2
Assume the following purchases were made in ABC
Data of purchase Unit Purchased Price per Unit
1
st
January 500 100
2
nd
January 600 200
3
rd
January 800 400

Units used on 4
th
January are 900

FIFO Method
Purchased Issued Balance
Data Units Price Amount Units Price Amount Unit Price Amount
1
st
Jan 500 100 50000 500 100 50000
2
nd
Jan 600 200 120000 1100 170000
3
rd
Jan 800 400 320000 1900 490000
4
th
Jan 900 *** 130000 1000 360000



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LIFO Method
Purchased Issued Balance
Data Units Price Amount Units Price Amount Unit Price Amount
1
st
Jan 500 100 50000 500 100 50000
2
nd
Jan 600 200 120000 1100 170000
3
rd
Jan 800 400 320000 1900 490000
4
th
Jan 900 *** 340000 1000 150000

Weighted Average Methods
Purchased Issued Balance
Data Units Price Amount Units Price Amount Unit Price Amount
1
st
Jan 500 100 50000 500 100 50000
2
nd
Jan 600 200 120000 1100 170000
3
rd
Jan 800 400 320000 1900 490000
4
th
Jan 1900 490000 900 257.895 232105 1000 257.895 257895


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5.0 Task 3
Calculate:
(i) Hourly rate
(ii) Basic piece rate
(iii) Individual bonus scheme where the employee receives the bonus in proportion of the
time saved to time allowed
Name of employee SS RR PP
Unit produced 270 200 220
Time allowed in minutes per unit 10 15 12
Time taken (hours) 40 38 36
Rate per hour ($) 125 105 120
Rate per unit ($) 20 25 24




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(i) Hourly rate
Name of employee SS RR PP
Time taken (hours) 40 38 36
Rate per hour (Shs) 125 105 120
Total amount (Time x Rate) 5000 3990 4320
(ii) Piece rate
Name of employee SS RR PP
Unit produced 270 200 220
Rate per unit (Shs) 20 25 24
Gross wage (Unit x Rate) 5400 5000 5280
(iii) Bonus Scheme
Name of employee SS RR PP
Unit produced
Time allowed in minutes per unit
270
10
200
15
220
12
Total time allowed (hours) (unit x time per unit/60)
Time taken (hours)
45
40
50
38
44
36
Time saved
Proportion (time saved/time allowed)
Bonus time [(Time saved / time allowed) x time taken]
125
1/9
4.44
105
6/25
9.12
120
2/11
6.55
Total time to be paid (time taken + bonus)
Rate per hours (Shs)
44.44
125
47.12
105
42.55
120
Total pay 5555 4947.6 5106
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6.0 references
- http://www.businessdictionary.com/definition/direct-cost.html
- http://www.investopedia.com/terms/d/directcost.asp
- http://en.wikipedia.org/wiki/Indirect_costs
- http://accountingexplained.com/managerial/costs/direct-and-indirect-costs
- http://www.businessdictionary.com/definition/direct-labor-cost.html
- http://www.investorwords.com/16347/direct_labor_cost.html
- http://www.answers.com/topic/direct-labor
- http://malaysia.answers.yahoo.com/question/index?qid=20090210064741AA5jfMr
- http://www.caclubindia.com/forum/sunk-costs-are-irrelevant-but-irrelevant-costs-are-not-
sunk-79001.asp#.UiqDNn_M-jg
- www.google.com





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7.0 coursework













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7.1
Ryan Limited makes 2 products, Exe and Wye, using 2 materials P48 and P34. On 1 April
tear 6, the company has the following stocks:
Materials: Kg
P48 5485
P34 2690

Finished Products: Units
Exe 650
Wye 200
To make a unit of Exe needs 5 kg of P48 and 2 kg of P34. To make a unit of Wye needs 8 kg
of P48 and 3 kg of P34.
During the year ending 31 March years 7, Ryan Limited expects to sell 5000 units of Exe
and 7500 units of Wye.
It is the intention to increase finished stock by 10% by 31 march year 7, but to reduce
material stocks to nil and from that date to implement a just-in-time purchasing arrangement.





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Required:
For the year ended 31 March year 7:
a) Prepare a production budget for Exe and Wye.
b) Prepare a purchasing budget for P48 and P34.
Solution:
a)

b)



Production budget Exe Wye
Units Units
Needed to meet sales requirements 5000 7500
Increase in finished stock 10% 65 20
Total to be produced 5065 7520
Materials budget P48 P34
Kg Kg
Product Exe 25325 10130
Product Wye 60160 22560
Total needed for production 85485 32690
Less stock in hand 1 April Year 6 5485 2690
To be purchased in year to 31/3.year 7 80000 30000
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7.2
A company uses 8 kg of material to make a product. The material costs 20 per kg. the
finished product weights 6 kg. The other 2 kg are trimmings and off cuts normally arising in
the course of manufacture. They can be sold for 5 per kg.
Required:
Calculate the direct material cost of a good unit of product if:
a) all product made are of a saleable quality
b) 10% of all products made are rejected because of poor quality. Rejected products cannot
be rectified but can be sold as scrap for 5 per kg.
Solution:
a)







Material 8 kg @ 20 per kg 160
Offcuts etc 2 kg @ 5 per kg (10)
Direct material cost per good unit 150
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b) To make 10 units of product:


Direct material
cost per good unit
1470/9

Material 80 kg @ 20 per kg 1600
Offcuts etc 20 kg @ 5 per kg (100)
Material cost of 10 units 1500
One rejected 6 kg @ 5 per kg (30)
Direct material cost of 9 good saleable units 1470