CHAPTER 1

NATURE AND PURPOSES OF COST ACCOUNTING

INTRODUCTION
Business organizations exist to provide goods and services at a profit.
In order to earn profit, organizations must know the cost incurred in
producing the goods and services so that a desires profit margin will
be added to the cost to determine the selling price. This chapter
explains what constitutes cost. The ways of classifying cost and
different patterns of cost behaviour.

Again cost accounting could be defined as: "The part of

management accounting which establishes budgets and standard
cost and actual cost of operations, processing, departments or
products and the analysis of variances, profitability or social use of
funds". (CIMA Terminology)

THE OBJECTIVES OF COST ACCOUNTING

The objectives of cost accounting include the following:
a. To ascertain cost and facilitate pricing
b. To provide information to assist planning
c. To provide information to facilitate decision making
d. To provide information aid control
e. To provide motivation
f. To promote cost consciousness at all levels of the
management hierarchy

1
 g. To provide a formal means of gathering detailed information
on operations.
These objectives are achieved through the processes of cost-
ascertainment and cost control. These processes form the subject
matter of this study.

FUCNTIONS OF COST ACCOUNTING

The functions of cost accounting include the following;
a. The application of costing principles, methods and techniques
in ascertaining the cost of units (products or services). This
helps in pricing decisions.
b. The provision of information to management for the purpose
of planning. Planning is the process of establishing goals and
suitable courses of action to achieve the goals. The cost
system generates information such as:
➢ Resources available e.g. materials, labour, other
facilities
➢ Cash flow pattern within a given time horizon
➢ Expected returns from alternative project etc.
Information such as these will enable management make a
commitment about the way scarce resources may be utilized and set
good priorities.

The provision of information to management for decision making.

Decision making entails choosing from among a given set of
alternatives to achieve defined objectives. Cost accounting system
generates a pool of information that facilitates informed decisions.
Example of such costs include various costs, their behaviour,
2
composition and nature that is, whether the costs are fixed or
variable: a Sunk cost or opportunity cost, incremental-or
avoidable or unavoidable etc. with information such as these, prudent
choices may .be made regarding whether to make or buy a
component, sell or further process an item, continue or discontinue a
product line or division, accept or reject a special order 'etc.

SCOPE OF COST ACCOUNTING ELEMENTS OF COST

There are three elements of cost, namely: materials, labour and
expenses. These result in the following classes of cost:
a. Material cost
b. Labour cost
c. Expenses

a. Material Costs
These are the costs of materials or commodities other than fixed
assets introduced into a product or consumed in the operations of
an organization. In other words, they are the cost of materials input
into the production of goods and services. For example, the cost of:
i. Raw materials
ii. Component parts
iii. Work in progress
iv. Primary packing materials
v. Lubricating oil
vi. Consumable tools
vii. Stationary
viii. Cleaning materials

b. Labour Cost
This is the cost of employee remuneration. In other words, payments
made to and on behalf of employees. for offering labour services in

3
the production function.
c. Expenses
These are costs other than material costs and labour costs. For
example the cost of:
i. Hiring special equipment and maintaining such equipment
ii. Royalty payments
iii. Copyrights and pattern payments
iv. Utilities such as electricity and water
v. Rent etc.

Each of the elements of cost can either be direct or indirect

• Direct cost: These are costs that can be directly identified and
charged to a cost unit without apportionment. Direct costs
comprise of:
• Direct material cost
• Direct labour cost
• Direct expenses
a. Direct material cost:
These are the costs of material that can be physically identified with a
specific cost unit. They are the cost of materials entering into and
becoming constituent elements of a product or saleable service.
Direct materials Costs are allocated to cost units.

Note: Some materials which could qualify as direct materials may be

treated as indirect materials for ·purposes of materiality and
convenience.
The following groups of materials are example of direct materials
• Materials specially purchased for a particular job order or
process.
4
• Materials requisitioned from store for a particular production order
• Work in progress and component parts
• Primary packing materials e.g. cartons, wrapping materials etc.

b. Direct labour or wages cost

These are the cost of remuneration for employee's efforts and skill
applied directly to a product or saleable service. Such wages are
allocated directly to cost units. Examples of direct labour cost are;

i. Wages of production operatives who are involved in transforming

the raw materials into finished goods.
ii. Wages of waiters who serve meals at a hotel
iii. Wages of sales assistants involved in selling goods in a retailing
shop etc.

c. Direct Expenses:
These are costs other than material cost, labour cost which can be
identified with and charged or allocated to a cost unit. In other words,
they are costs other than material costs and labour cost which are
incurred for a specific product or saleable service.
Example of direct expenses are:
• The cost of hiring special equipment for a particular production
order.
• The maintenance cost of special equipment hired for particular
production orders
• Royalty payments
• Travelling expenses to site of contract etc.
• The sum of all direct costs is prime cost

d. Indirect cost
All costs that cannot be identified with. and allocated to a cost unit but
that has to be apportioned to a number of cost centers and further
5
absorbed by cost units are described as indirect cost.
Another term for all indirect costs is overhead costs. Indirect costs
comprise of:
* Indirect material cost
* Indirect labour cost
* Indirect expenses
i. Indirect Material Cost
These are the costs of materials item that cannot be identified with
anyone product because they are used for the benefit of all products
rather than for anyone specific product. In other words, these are
materials cost which cannot be allocated to cost units but are apportioned
and absorbed by cost units.
For example
• The cost of materials required for operating and maintaining plant
& equipment such as
* Lubricating oil
* Consumable tools
• Cost of stationary
• Cost of cleaning materials
* Soap and detergents
* Rugs and dusters
* Brooms and brushes etc.
ii. Indirect labour Cost
These are wages of employees who do not work on the product itself but
who assist in the manufacturing process. Such costs cannot be
allocated to cost units; rather they are apportioned to cost centers and
further related to cost units through absorption.
For example:

6
 • Salaries of factory supervisors
• Wages of the store dept employees
• Wages of cleaners etc.
iii. Indirect Expenses
These are expenses incurred in general, not for the production of a
specific cost unit. For example·
• Selling and distribution expenses
• Advertising
• Safes promotion etc .
Administrative expenses
• Stationary
• Auditing and Consultancy
• Secretarial charges
• Product expenses
• Rent
• Insurance
• Electricity

METHODS OF COSTING
The cost of products or services is determined using several methods.
The use of a given method is dictated by such factors as: the nature
of cost units, the production process, the mode of cost accumulation,
the duration of work etc. The following are the well established
methods of costing
• Job/batch costing
• Contract costing
• Process costing
• Service costing
All these methods will be discussed in details in subsequent
sections.

7
 CHAPTER 2
COST CLASSIFICATION

WHAT IS COST?
Cost is the amount of expenditure incurred on or attribute to a
specified thing or activity Mathematically, cost is the product of the
quantity of a given resources used and the price per unit of the
quantity of resources.
Costs are usually ascertained in respect of cost units or cost
objectives.

What is a Cost Unit?

A cost unit is a quantitative unit of a pro-duct or services in relation to
which costs are ascertained. For example, tones of cocoa, bags of
maize, bags of rice, barrels of beer or cartons of minerals, kilowatt
hours, passenger per mile etc

What is Cost Objective?

A cost objective is any activity for which a separate measurement of
cost is desired. A cost unit is a cost objective. However, there are
some cost objectives which are not cost units. Examples of cost
objectives include a product, a service, a department or segment of
the business, a function, a process or activity or indeed anything for
which one want to measure the cost of resources used. -

What is cost Centre?

A cost centre is a location, a person an item of equipment or a group
of these in relation to which cost are ascertained and further related

8
to cost units. For example, the factory, canteen, maintenance section,
the foreman, managing director, the plant, the pool of computers etc.
Cost centers are broadly classified into
1. Production cost centers
2. Service cost centers

What is a Profit Centre?

This is a center not only incurs cost but also generates revenue

Classification of Cost
Cost can be classified variously for different objectives
a. Classification According to Elements of Costs: Costs
can be classified by element. There are three basic elements of
cost. These are materials, labour and other facilities or
resources other than materials and labour. Thus when classified
according to elements, there are the following classes of costs.
• Materials cost
• Labour cost·
• Expenses.
Material Costs:
These are the costs of materials or commodity other than fixed
assets, introduced into product or consumed in the operations of an
organization. In other words, they are cost of materials input into the
production of goods and services. For example, the cost of
• Raw materials
• Component parts
• Work in progress.
• Primary packing materials
• Lubricating oil
• Consumable tools

9
 • Stationary etc.
• Cleaning materials

Labour cost:
These are the cost of employee's remuneration. In other words,
payments made to and on behalf of employees for offerings services
'in the production function.

Expenses:
These are costs other than materials costs and labour costs. For
example the cost of
• Hiring special equipment and maintaining such equipment
• Royalty payments
• Copyrights and patent payments
• Utilities such as electricity and water
• Rent etc.

b. Classification as Direct or Indirect

Cost can also be classified either as direct cost or as indirect cost.
i. Direct Cost: these are costs that can be directly identified and
charged to a cost unit without apportioning. Direct costs
comprise of
• Direct material cost
• Direct labour cost
• Direct expenses

Direct Material Cost:

These are the costs of materials that can be physically identified with a

10
specific cost unit. They are the cost of materials entering into and
becoming constituent elements of a product or saleable service. Direct
materials costs are allocated to cost units.

Note: Some materials which' could qualify as direct materials may be

treated as indirect materials for purposes of materiality and convenience.
The following groups of materials are examples of direct materials
• Materials specifically purchased for a particular job order or
process.
• Materials requisitioned from store for a particular production order

• Work in progress and component parts

• Primary packing materials e.g. cartons, wrapping materials etc.

ii. Direct labour or Wages Cost

These are the costs for employee's efforts and skills applied directly to a
product or saleable service. Such wages are allocated directly to costs
units. Examples of direct labour cost are
• Wages of production operatives who are involved in transforming
raw materials into finished goods.
• Wages of waiters who serve meals at a hotel.
• Wages of sales assistants involved in selling goods in a retailing
shop etc. .

iii. Direct Expenses

These are costs other than materials costs which can be identified with
and charged or allocated to a cost unit. In other words they are costs

11
other than materials cost and labour cost are incurred form a specific
product or saleable service. Examples of direct expenses are:
• The cost of hiring a special equipments for a particular order
• The maintenance cost of special equipment hired for particular'
production orders
• Royalty payments
• Traveling expenses to site of contracts etc.
The sum of all direct costs is prime cost.

2. Indirect Cost
All costs that cannot be identified with and allocated to a cost unit but that
has to be apportioned to a number of cost centers' and further absorbed
by cost units are described as indirect cost. Another term for all indirect
costs is overhead costs. Indirect costs comprise of
a. Indirect material cost
b. .Indirect labour cost
c. Indirect expenses

i. Indirect material cost

These are the cost of material items that cannot be Identified with anyone
product because they are used for the 'benefit of all products rather for
anyone specific product. In other words, these are materials costs which
cannot be allocated to cost units but are apportioned and absorbed by
costs units. For example;

• The cost of materials required for operating and maintaining plant

& equipments such as
* Lubricating oil
12
 * Consumable tools
• Cost of stationary
• Cost of e-learning materials
* Soap and detergent
* Rugs and dusters
* Brooms and brushes etc.
ii. Indirect Labour Cost
These are wages of employees who do not work on the product itself but
who assist in the manufacturing process. Such costs cannot be allocated
to cost units; rather they are apportioned centers and further related to
cost units through absorption. For example:
• Salaries of factory supervisors
• Wages of the store dept employees
• Wages of cleaners etc.

iii. Indirect Expenses

These are expenses incurred in general and not for the production of a
specific cost unit. For example
• Selling and distribution expenses
i. Advertising
ii. Sales promotion etc.
• Administrative expenses
i. Stationery
ii. Audit & consultancy fees
iii. Secretarial charges
• Production expenses
i. Rent
ii. Insurance

13
 iii. Electricity

c. Classification According to Function·

All the indirect costs, that is, overhead cost. Can also be classified
according to function. Thus, overhead can be classified as:
i. Production overheads
ii. Selling overheads
iii. . Marketing overheads
iv. Distribution overheads
v. Administrative overheads.
vi. Research and development overheads

Classification According to Behaviour

Costs may be classified according to the way the cost behaviors in
relation to activity level. In this regard, cost may be classified a-s:
i. Fixed costs
ii. Variable cost
iii. Semi-fixed, semi-variable or mixed costs
iv. Stepped fixed costs
Fixed cost: These are costs that do not vary with changes in activity
levels. They usually change with the passage of time. For example,
rent and rates, the managing directors salary etc.
Variable cost: These are costs which vary in direct proportion with
changes in activity levels. For example, the costs of raw materials,
direct wages and direct expenses such as royalties.
Semi-fixed semi-variable or mixed cost: These are costs which
contain fixed and variable elements, That is, for-a given range of
level. The cost may be constant and beyond the relevant ranges,
costs may then vary in direct proportion with changes in activity level.
For example, the- cost of utilities such as electricity, water and
telephone.
14
Stepped fixed cost: These are costs which are fixed for a given
range of activity level but which change discretely for ranges of
activity levels beyond the given ranges.

e. Classification as Product costs or period costs

Product costs:
These are the costs that are identified with goods produced or
purchased for resale. These usually are the production or
manufacturing costs. They. are the costs used for the valuation of
stocks and work in progress.
Examples of product costs are:
* Cost of raw materials
* Production wages
* Production overheads such as electricity, depreciation of plant,
and rent of factory premises etc.
Expired Product Cost
These are the portion of product cost which relate to products that
have already realized revenues and do not have future revenue
generating potential.

Unexpired Products Costs

These are the costs of resources acquired which are expected to
contribute to future revenue. They are recorded in the balance sheet,
e.g. stock of materials not yet sold. When the stocks are sold and
revenue realized the cost is then expired cost and recorded in the
profit and loss account.
Period Costs:
These are the costs incurred and charged against profit for a period,
15
and not included in cost for stock valuation purposes. These usually
are non-manufacturing costs. Examples are selling and distribution
overheads and administrative overheads.
Periods costs are charged in full to the profit and loss account for the
period. They are not included for stock valuation purposes. Products
costs can be analyzed as expired costs or unexpired costs.
Classification of Costs as Relevance and Irrelevant Costs
i. Relevant Costs/Revenue: These are' those future costs and
revenues that can be altered by a given· decision. .
ii. Irrelevant Costs/Revenues:
These are the costs/revenue that will not be affected by a given
decision. Irrespective of what decision is taken. The cost will
not alter. Examples of Relevant Costs include:
• Future costs
• Opportunity costs
• Avoidable costs
• Incremental costs etc.

Examples of irrelevant costs include:

• Past costs
• Sunk costs
• Unavoidable costs
• Fixed costs except for incremental fixed costs

CHAPTER 3

16
 COST ESTIMATION TECHNIQUES

Introduction:
The definition of how cost will behave with respect to changes in activity
or output level is very vital to decision making, planning and control. The
preparation of standard costs, budgets, performance reports and relevant
cost for pricing and other decisions will depend on reliable estimates of
fixed and viable costs at different levels of activity.

However, costs are not easy to predict since they behave differently
under different circumstances. Also whether a cost is fixed or viable with
respect to a particular measure of activity depends on the length of time
under consideration. Generally, the longer the time, the more likely costs
will be viable.

Due to the complex nature of costs especially over the long run when
they conation both fixed and viable elements, it becomes necessarily for
management to use increasingly sophisticated techniques to separate
and thus ascertain the fixed and viable elements to a whole cost.

Cost estimation is a term used to describe the measurement of historical

costs with a view of helping in the prediction of future costs for
management decision making. That is, historical cost information is
analyzed to provide estimation which to base future expectations cost
estimation techniques.

There are five main methods that can be used to estimate costs namely:

1. The engineering method;

2. the account analysis method;
17
3. Scatter diagrams;
4. High-low methods;
5. Regression Analysis.

Engineering method: This is also called work measurement method

and involves estimating cost functions by analyzing the relationship
between inputs and outputs in physical terms. Usually, engineers who
are familiar with the technical requirements estimate the quantities of
materials, labour and machine hours required for various operations;
prices and rates are then applied to the physical measures to obtain the
cost estimates.

One advantage of the engineering method is that it is suitable for

estimating costs of repetitive processes where input-output relationships
are clearly defined. The disadvantage of the method is that it can be time
consuming and difficult to apply in a multi-product situation, especially
where there are joint costs and output mix is not known.

The accounts Analysis Approach

This approach uses the information contained in the ledger accounts.
These are analyzed and categorized as either fixed or viable, semi-fixed
or semi-viable. Some of the disadvantages of this approach is that:

• Inspection does not always indicate the true nature of costs.

• Accounts are by their nature summarizes, and often contain
transactions of different categories.
• It is based on historical information.

18
Scatter diagrams: This involves plotting on a graph the total costs for
each level of activity. A line is then drawn through the middle of the
plotted points by visual approximation.

Illustration
A company is seeking to establish whether there is a linear relationship
between the level of advertising expenditure and subsequent sales
revenue generated.

Figures for the last eight months are as follows:

Months Advertising Expenditure

- Sales (N000) Revenue (N000)
1 2.65 30.0
2 4.25 45.0
3 1.00 17.5
4 5.25 46.0
5 4.75 44.5
6 1.95 25.0
7 3.50 43.0
8 3.00 38.5
26.35 289.50

Required:

19
You are required to plot on a suitable graph advertising expenditure sales
revenue or vice-versa as appropriate.

50

40

20

10

1 2 3 4 5 6

High-low Method: As the name suggests, this method uses two

extremes data points to determine the values of fixed and viable costs. It
involves the following steps:

i) Select the highest output level and the related costs

ii) Select the lowest output level and the related costs
iii) Compute the variable cost using the following formula:

Variable cost = Difference in cost

20
 Difference in activity

iv) Compute the fixed cost portion as

Fixed cost = Total cost – Variable cost

Illustration 2.3
HND II Company Ltd, manufactures a single product and has kept the
following records for the past 6 months:

Month Output Total cost (N)

1 7,000 250,000

2 8,000 230,000

3 6,200 194,000

4 7,700 222,000

5 8,200 229,000

6 7,800 212,000

Using the high-low method, determine the fixed and viable costs.

Solution:

High -Low = Difference

Output 8200 -6200 = 2,000

Cost 229,000 -194,000 = 35,000

Variable cost per unit = N35,000/2000 = N17.50

Substituting in either the high or low volume:

21
 High (8,200) or Low (6,200)
N N
Total costs 229,000 194,000
Variable costs (8,200Xn17.50) 143500 (6200XN17.50) 108,500
85,500 85,500
Therefore, the cost equation is: y = 85500 + 17.50x

The disadvantage of this method is that only two historic records from the
previous are used where the records are not a reliable indication of costs
throughout the relevant range of output, which is likely an unreliable
estimate of fixed and variable cost will be obtained. The advantage of the
method is its relative simplicity.

The effects of inflation:

Over time, inflation affects all costs and to arrive at the real costs which
reflects the characteristics of costs, the effects of inflation on costs must
be removed. This adjustment is necessary before any of the cost
estimation techniques is applied.

Illustration 2.4 (with effect of inflation)

2005 2006
Production (units) 50,000 54,000
Total cost (N) 8,500,000 9177,000
Between 2005 and 2006 there have been 5% cost inflation.

Required:

22
(a) Calculate the real fixed and variable cost using high-low method.

Solution:
It should be noted that the 2006 total cost carries the effect of inflation in
it. N9,177,000 X 100/105 = N8,740,000

High - Low = Difference

Output 54,000 - 50,000 = 4,000
Total cost (N) 8,740,000 8,500,000 = 249,000
Real variable cost per unit = N240,000 = N60
4000

Real fixed cost = N8740,000 –(54000 X N60)

= N8,740,000 – N3,240,000

= N5,500,000

Regression Analysis/Least squares Technique

This is a statistical method of estimating cost using historical data from

previous accounting periods. It involves regression y or x, where y is the
dependent variable and x, the independent variable. The advantage of
regression technique over all the other techniques is that, besides the
determination of fixed and variable costs elements, that is, the
relationship between the dependent and independent variable; it goes a
step further to tell us how reliable this relationship is.

The regression line: y = a + bx

23
Where b = n∑xy - ∑x∑y

n∑x2 – (∑x)2

a= ∑y – b∑x
n n
Illustration:

Consumer Ltd recorded the following costs for the past 5 months of
activity:

Month Activity level (units) Total cost (N)

5 220 4500
6 400 7000
7 360 5500
8 380 6000
9 290 5000

Required:

(a) Calculate the total cost equation for the above data using regression
analysis.
(b) Calculate the total cost for the following activity levels:
(i) 300 units
(ii) 450 units

Solution:
(a) X Y XY X2
24
 220 4.5 990 48,400
400 7.0 2,800 160,000
360 5.5 1,980 129,600
380 6.0 2,280 144,100
290 5.0 1,450 84,100
1,650 28.0 9,500 566,500

n=5
b = (5 x 9500) – (1650 x 28.0)
(5 x 566,500) – (1650)2
= 1300 = 0.0118
110,000

a = 28 - 0.0118 x 1650
5 5

= 1,706

Total cost = 1,706 + 0.0118 x activity (activity in 000s)

= 1,706 + 11.8 x activity (with total cost in N)

(b) (i) Total cost for 300 units

= 1706 + (11.8 x 300) = N5,246

(ii) Total cost for 450 units

= 1706 + (11.8 X 450) = N7,016
Test of reliability

25
Unlike the other cost estimation techniques, the regression analysis,
being a statistical tests of accuracy or reliability of the regression results.
We will focus on only two of these tests namely:

1. Co-efficient of correlation (r) and

2. Co-efficient of determination (r2).
Correlation coefficient (r) determines the extent of relationship between
the variable. It is calculated using the following formula:

r = n∑xy - ∑x∑y
√ [n∑x2 – (∑x) 2(n∑y2 – (∑y) 2]

Where r = +1, implies these is perfect positive relationship between the

variables.

Where r = 1, implies these is a perfect negative relationship between the

variables.

Where r = 0, implies these is no relationship between the variables.

Therefore, the closer r is to +1 or -1, the closer the relationship between

the variables and closer r is to 0 the less close the relationship.

Co-efficient of determination

This measures the goodness of fit in the regression. Therefore, the higher
the value of r2, the more confidence we have in our cost estimate formula.

CHAPTER 4

26
 ORIGINATING PURCHASE

Depending upon the nature of the system and the item needed, the
person or officer requiring the item writes out a purchase requisition
for it. The purchase requisition will have to be authorized by a
designated officer before it is acted on. The purchase requisition
authorizes the expenditure.

In respect of items which are purchased into stock, as the items· get
used up they may need to be replenished through the issue of
purchase requisitions. The process in selecting supplies is as
follows:
i, Make a short list of possible suppliers by gathering information
about suppliers of the particular item from sources such as:
* Trade magazines
* Calls by company reps;
i. catalogues;
ii. Membership of professional associations;
iii. A directory of suppliers;
iv. Print and electronic media adverts;
From a long list of suppliers, scale the list down by
requesting for information through;
v. Request for information;
vi. Prequalification questionnaire; and
vii. Tender forms
 prepare a short list of suppliers
 Make a request for quotations from the short list.

27
ii. Evaluate suppliers' quotations or tenders. Factors to consider in
the evaluation price analysis and cost analysis which include:
• Specification and design standard;
• Delivery terms reliability;
• Durability and maintenance cost i.e. quality of supplies;
• Improvement in productivity;
• Capability, i.e. ability to meet volume requirements;
• Set-up costs;
• Tooling charges;
• Transport cost;
• Payment arrangements/terms; and
• Discount offers etc.

iii. Select and negotiate terms with the supplier;

iv. Negotiations must be aimed at a mutually satisfactory
agreement. All aspects of the purchase contract which are not
standard should be negotiated. The negotiations should also
aim at a win-win relationship between the organization and the
suppliers.

v. Ordering:
The purchase order is often used for ordering. The use of a standard
purchase order is not only to meet a legal requirement but also to
satisfy organizational requirements. To ensure that all orders are
properly authorized and are made against authorized requisitions.

The order is an offer to buy on the terms stipulated by the

28
organization. When the supplier agrees to supply then there is a
contract.
Various methods of ordering exist among which are:
• Period contracts;
• Blanket orders;
• Schedule orders; and
• Standing orders.

vi. Completing the order

The purchasing is concluded when the items ordered are received
into store. There is a need to control delivery. This implies making
sure that, suppliers will meet delivery schedules.

RECEIPT AND STORAGE OF MATERIALS

Store operations include;

Receiving Goods

Receiving Goods

Issue Goods Check Stock

Record Stock

PRICING OF ISSUES AND VALUATION OF STOCK

29
Introduction
When materials are needed from stores, the prospective user
prepares a materials requisition to request for the materials, When
the materials are issued out they should be priced the problem
usually is the price to use. This is because materials in stock may
have been purchased at varying prices from time to time. There are
several methods that could be used to price issues.

The objectives of material pricing are:

a) To charge to production on a consistent and realistic basis the

cost of materials used, and

a) To provide a satisfactory basis of valuing stock at the end of

the period.

Methods of pricing Issues and Valuing Stocks

There are several methods. Examples are:
a. First in First Out (FIFO)
b. Last in First Out (LIFO)
c. Simple Average Method
d. Weighted Average method
e. Standard price
f. Replacement price
g. Specific identification; and
h. Retail method

FIFO
30
This method uses the price of the first batch of materials received
for all issues until all units in the first batch have been issued, after
which the price of the next batch received becomes the issue price.
Stocks are thus valued using the prices of the last batches of
materials received.

Merits
It reflects the normal movement of materials in store issuing
materials in order of receipt;
a. Stock is valued using recent prices;
b. The method is simple and easily understood; and
c. It uses actual prices.

Demerits
i. The comparison of the cost of one job with another is difficult
because different issue prices are often used. The cost of a
job depends on When materials are requisitioned from
stores;
ii. The Issue price may not reflect current economic value;
iii. Stocks with low turnover will tend to be priced at old prices
when they are eventually issued. These prices could well be
unrealistic; and
iv In times of inflation, product cost may below while
replacement cost is high. Thus profit may be overstated.

LIFO

31
This method uses the price of the last batch of materials received
for all issues all units from this batch have been issued and then'
the price of the previous batch is used. Note that if a new delivery
is received before the first batch is fully issued, the new issue at
once becomes the last in price and is used to price issues until
either the batch is exhausted or a new delivery is received. Stocks
are valued using the prices of materials delivered first.

Advantages
a. The issue price is near to current economic value;
b. It is fairly simple to operate when materials are slow moving;
c. It uses actual prices; and
d. During a period of rising prices, stock values are conservative.

Disadvantages
a. It is not realistic as it is contrary to normal issue procedures;
b. The frequency of calculations causes much clerical work;
c. Stock values may significantly be understand; and
d. It can become complicated with fast moving stock not all of one
receipt may be exhausted before a differently priced
replacement order arrives.

The Simple Average Method

Under this method issue price is the co-efficient of the different prices
of all the materials in store arid the number of material items in that
total.
Advantages
a. It is simple to operate

32
b. It even out effects of any price fluctuations.

Weighted Average Price Method

This method averages prices after weighting by their quantities. With
each receipt of materials, the weighted average prices is re-
calculated band subsequent issues are priced at the calculated
weighted average price until a further receipt of goods necessities
the average price to be re calculated.
Advantages
a. It smoothens out fluctuations in issue prices; and
b. The comparison of different jobs is easier because it assumes
that values of identical items are all equal.

Disadvantages
i. Calculations have to be made to approximately four decimal
places to achieve a fair degree of accuracy; and
ii. The issue price may not reflect current economic values.

STOCK CONTROL LEVELS

Introduction
The level of stock held will depend upon a number of variables which
will each have cost implications. Management must make decisions
about. the control of stock levels with a view to minimizing the cost to
the business whilst achieving maximum efficiency in the availability
of materials to fulfill planned usage requirements.

The following stock levels need to be considered;

a. Minimum stock level

33
b. Maximum stock level
c. Re-order stock level
d. Re-order stock quantity or Economic Order Quantity; and
e. Average stock level

Illustration 2.1
The following data related to good works company ltd with respect to
material AY4.
1. 12,000 units of the material will be used every day for a 360
days year.
2. It will cost 50,000 naira to place each other
3. The cost of one unit of AY4 is 12, 000 naira and will cost 10%
of this amount to hold each unit of AY4 in store.
4. Daily usage of material AY4 will not exceed 12,500 units and
will not be less than 11,500 units.
5. The most reliable supplier takes a maximum period of 4 days
to deliver but the shortest delivery period could be 2 days.

NOTE: We shall use this activity for illustrative purposes.

Re-Order Level of Stock

This is the level at which an order will be placed for additional
supplies of material so that delivery will be made before the business
runs out of stock. The factors that influence the re-order stock level
are:

a. Rate of consumption
b. Delivery period -.reliability of supplier/mathematically, it is

34
 computed as
Re-order stock level == maximum consumption x maximum delivery
period
Using the data in the illustration example Re-order level (ROL) =
maximum usage * maximum delivery period
= 12,500 * 4 days
= 50,000 units

Minimum Stock Level

This is' the lowest level at which stock may be allowed to fail. It is not
prudent to allow stock to fall below the minimum stock level.
The following factors determine the minimum stock level:
a) The rate of consumption
b) The delivery period normally allowed; and
c) The re-order level of materials.

Mathematically, the minimum stock level may be calculated as

Minimum stock level = Re-order (average consumption * average
delivery period)

Using the illustration example: Minimum stock level

Re-order Level- (average usage * average lead time)
= 50,000 units (12,000 * 3)
= 50,000 - 36,000
= 14,000 units

Maximum stock level

This is the largest possible quantity of stock that may be in store at
35
any given time. It is not prudent to maintain a quantity of stock above
this level.
The following factors determine the maximum stock level:
a. The storage space available;
b. The nature of. stock such as its perishability and seasonality. In
other words, the risk of deterioration;
c. The cost of storing above normal stocks;
d. The rate of consumption:
e. The re-order quantity;
f. The delivery period; and
g. There-order level.
Mathematically, it is computed as Maximum stock level
= Re-order level + Re-order quantity
(Minimum consumption x minimum delivery period)
Using the data from illustrative example:
Maximum stock level
ROL + ROQ - (minimum usage * minimum lead time)
= 50,000 + 18,974 - (11,500 * 2)
= 68,974 - 23,000
= 45,974 units

NOTE: The Re-order quantity of 45,974 units is calculated in 4.4

below

Re-order Quantity
This is the optimum quantity that should be ordered each time an
36
order is being placed. It is often referred to as the economic order
quantity. It is set in such -a way as to optimize material costs.
The cost of material stock is made up as follows:
a. Costs of holding or carrying stocks:
i. Forgone interest on capital invested in stock;
ii. Storage charges e.g. rent, lighting and heating, refrigeration,
air conditioning etc.; and
iii. Stores administration cost
• Staff salaries
• Equipment maintenance and handling charges
iv. Handling costs e.g. cost of packing and unpacking stocks;
v. Stock taking costs or perpetual inventory costs;
vi. Insurance, security etc
vii. Deterioration and obsolescence; and
viii. Pilferage, damages etc.

b. Cost of obtaining stocks or ordering costs.

i. Administrative costs associated; with purchasing,
accounting and receiving goods;
ii. Transport cots e.g. carriage inwards;
iii. Set-up and tooling costs of production runs for
internally manufactured goods; and
iv. The purchased price of the stocks.

c. Stock out costs

i. Lost contribution due to lost sales arising from stock
37
 out;
ii. Loss of future sales because customers will go
elsewhere;
iii. Lost of customer goodwill;
iv. Cost of production stoppages e.g. idle time pay, not
using plant optimally;
v. Labour frustrations over stoppages; and
vi. Extra costs of urgent replenishment purchases
Economic Order Quantity (EOQ) =

Where:
D = Annual demand = 12,000 * 360 = 4, 320, 000
Co = Cost of order = 50,000
Cc = Carrying cost per unit = 1, 200

EOQ =

2(4,320,000)(50,000)
1,200

Average Stock Level

This is the midway between the minimum stock level and the
maximum stock level.
Mathematically, it is computed as;
Average stock level = minimum stock level + maximum stock level
2

= 45, 974 + 14, 000

2
38
= 29, 987 units

Illustration 2.2
Using the information provided below, calculate the maximum,
minimum, re-order and average stock levels for Boateng ltd. Boateng
ltd manufactures a special product for the domestic market, records
available at the stores department indicated.

The following;
Maximum usage - 1200 units per week
Minimum usage - 500 units per week
Re-order usage - 1500 units per week
Delivery period - between 2 to 4 weeks
Solution
ROL = max usage x max lead time
= 120 x 4
= 4, 800 units

Minimum stock level = Re-order level (average usage * average lead

time)
4800 ((1200 + 500) * (2+4))
2 2
= 4800 – (850 * 3)
= 4800 – 2550
= 2250 units

Maximum stock level = re-order level + reorder qty * min lead time
= (4800 + 1500) – (500 * 2)
39
= 6300 – 1000
= 5, 300 units
Average stock = max stock + min stock
2
= 5300 + 2250/2
= 3775 units

Illustration
Mr. Ayuba decided on July, to invest his insurance compensation of
4, 000, 000 naira in a retail business to buy and sell second hand
shovels. The following transactions took place from that month to
December.
Purchase price
Date Quantity Cost Date Quantity Value
July 5 200 720,000 Aug 2 500 2,500,000
Aug 1 400 1,520,000
Sept 3 600 2,400,000
Oct 4 400 1,400,000 Oct 12 600 2,700,000
Dec 7 500 1, 400,00 Dec 12 400 1,500,000

Required:
a. Calculate the cost of shovels issued during the period and the
cost of shovels on hand 31/12 using the following methods of
pricing:

i. FIFO
ii. LIFO

40
 iii. Weighted average (calculation to 2 decimal places)
b. Calculate and discuss the effect each of the pricing methods
will have on the reported profit of the business
c. Examine critically the performance of the business during the
period

INVENTORY TAKING
This is the physically counting of materials in the store. Stocks of raw
materials, work-in-progress and finished goods are usually subject to
a stock take.
a. Annual/Periodic stock taking methods; and
b. Continuous stock taking

PERIODIC STOCK TAKING

This is a method of counting stock where the items are counted at
the end of a given period usually, annually or semi-annually.
Merits
a. It is less expensive to conduct a stock count once in the whole
year; and
b. The inconvenience of regular of frequent stock count is
avoided.

Demerits
i. It may required a disruption of operational activities at the end
of the year when the stock take is to take place;

ii. The size of the work may justify the use of large team; some
members of the team may not be familiar with the particular
41
 stock items. This may lead to to inaccuracies in the stock
count;
iii. Discrepancies which are the result of an on-going problem
and which should have been noted at an earlier date may be
revealed; and
iv. The deferment of the stock taking to the end of the year may
increase theft and pilferage.

CONTINUOUS INVENTORY TAKING

This is method of inventory taking where stock items are counted at
frequent intervals on a random rotational basis and the results of the
counts reconciled with the perpetual inventory records.

Merits
a. It is deterrent to pilferage and theft;
b. The closure of stores for an annual stock count is avoided;
c. There is ready availability of reliable stock balances,
throughout the year;
d. Discrepancies are discovered and remedied more promptly;
e. The stores system is kept constantly under review; and
f. It enhances effective stock control

Demerits
i. It is expensive to operate a continuous stock talking system.

42
 CHAPTER 5
LABOUR RECRUITMENT PROCESS COST

Labour recruitment refers to the process of engaging employees in

the organization for their services. Depending on the policy of the
organization, the mode of recruitment is determined either internally
or externally. The following steps are usually undertaken;
• A job analysis is done to determine the role, responsibilities and
person specification required
• Internally ad advert is placed on company notice board and a
search conducted.
• Externally, consideration is given to various search options like
labour office, newspaper, outsourcing, job fairs, executives
searches on so on.
• Applicants respond to company’s invitation and the company
proceeds to shortlists potential applicants.
Selection process
• Interviews are conducted whether structured or instructed
• A structured interview should have an agreed format with
questions ordered to evaluate applicants
• The right candidate is selected using pre-determined criteria.
LABOUR COST COMPUTATION
There are two basic methods of remunerating labour; time based
remuneration and output based remuneration.
TIME RATE METHODS OF REMUNERATION
The amount earned by the employee is based on the number of
43
hours spent at his place of work and not on the quantity of work
produced. The gross wage is calculated as hours worked x Rate per
hour. However when overtime is worked, the payment to the
employee will also include premium on the overtime hours.
Example:
Hours works = 50 hours
Rate per hour = N2000
Gross wage = N2000 x 50 hours
= N100,000
Advantages of Time rate methods of remunerations are;
1. It is simple to operate and easy to understand
2. The quality of work produced tends to be higher since the
worker is not in rush to complete a job in order to maximize
his earnings.
Disadvantages of Time rate methods of remunerations are;
1. There is no financial incentive to produce more than a
minimum amount. In fact, there is often an incentive to
produce as little as possible so that the worker can increase
his wage.
2. To monitor and check idleness the employer will be obliged to
incur supervision cost.
3. The method is often unfair because lazy workers and hard
workers are paid same rates.
Piece Rate Methods of Remuneration
Under this method, the amount earned by the employees is based
on the number of units produced. Piece rates can be examined under

44
three headings, namely
* Straight piece
* Different piece rate
* Piece rate with guaranteed time rate
Straight Piece Rate: under straight piece rates the payments to the
employee is computed thus; no. of units produced x rate per unit
Example 1:
No. of units produced = 1, 000 units
Rate per unit = N16, 000
Gross wage = N1, 000 x 16, 000

Example 2
Normal rate/hour = N1, 600
Standard time allowed = 10 units per hour
During an 8 hour “B” completes 90 units and “S” 60 units.
Calculate the earnings of each employee
B S
Rate per hour = 1, 6000 units produced 90 60
Units per hour = 10 units rate per unit 160
Rate per units = 1600 Gross wage N14, 400 N9,600
= 160
The remuneration fluctuates in direct proportion to units produced be
each employee. If time rates were used, both employees would
received (8 hours x N1,600) = N12, 800

45
Advantages
• Effort is rewarded and in consequence, the employee is given the
incentive to produce more
• Because employee are self-motivated, less supervision required
• The employer benefits from a reduction in the overhead cost per
unit of production
Disadvantages
• There is a danger that quality will be scarified and in order to avoid
such a situation the employer would spend more on inspection
and quality control
• Piece workers, after earning certain remuneration during a week,
might be satisfied and slacken their pace, arrive late or absent
themselves. Plant is therefore left idle and capacity is under-
utilized.
• A considerable degree of time is involved in setting standard
times and as these are subject to the agreement of trade union
representatives, further time is often spent in detailed negotiation
before piece rates are established.
• If an error is made and piece rates are set too high, it is difficult
subsequently to reduce them.
This could prove to be extremely costly.

b. Piece Rate with Guaranteed Day Rate: it is a system

adopted to compensate employees on account of low production,
leading to earnings under piece rate being below the normal day rate
remuneration. If any employees earnings according to the piece work
are less than the normal day rate, he is paid the day rate instead of
46
the piece rate.
Example:
Rate per hour N15, 000
Cost per hour N16, 000
Units produced 8,000 units

Calculate the piece rate with Guaranteed day rate of remuneration

assuming that 8,800 hours were used to produce all the units.
Piece rate earnings = units produced x rate per unit
8, 000 units x 15, 000
= N120, 000.00
Time rate earnings = hours worked x rate per hour
8, 800 hours x 15, 000
= 132, 000,000
Since the guaranteed hourly rate is higher than the piece rate, the
employee is paid the hourly wages of N132, 000, 000

Differential piece rate: under this scheme the piece work rate
changes at different levels if efficiency or production;
Example:
N10, 000 per unit when production is below 7 units per hour
N15, 000 per unit, when it is 7 – 10 units per hours
N20, 000 per unit when production is above 10 units hour etc.

The object of this is to provide a strong incentive to each the

maximum rate of production.

47
Premium Bonus Schemes
Bonus schemes are intended to reward employees for their efficiency
in saving cost for the organization through the savings of time. These
are therefore schemes for sharing extra profits with employees.
Consequently bonus can only be awarded where there has been cost
savings or improved performance that leads the organization to
exceed its profit target. To be able to compute bonuses, we must first
appreciate the following concepts.

Time allowed: this refers to the expected time to be spent in doing

some piece of work e.g. if time set for one unit is 5 hours; then 100
units shall be 500 hours. Time allowed may therefore not be the same
as the hours worked.

Time taken: this is the number of hours actually used in performing

a piece of work.

Time saved: It is the difference between time allowed and hours

worked, when time allowed is greater than hours worked.

Premium bonus: this is paid when time has been saved; the
magnitude of the bonus therefore depends upon the time saved.

Types of Premium Bonus Schemes

These include the following;
i. Halsey Bonus Scheme
ii. Halsey-Weir Bonus Scheme
iii. Rowan Bonus Scheme

48
Halsey Scheme
According to this scheme, the time saved should be apportioned
equally between the employee.
Bonus = ½ x time saved x day = rate
Note: time allowed time taken = time saved

Halsey-weir scheme
Under this scheme the proportion is 2:1 in favour of the employer.
Thus the employees gets only a third of time saved at the rate per
hour.
Bonus = ? x time saved

Rowan Scheme; under this system, the bonus award to the

employee is the proportion between time taken and time allowed of
the time saved.
Bonus = Time saved x time taken x day rate
= time allowed
It therefore follows that if the employees save more time, he gets a
greater bonus.
Example
Time allowed = 12 hrs
Day rate = N18, 000
Time taken by A = 6 hrs
Time taken by B = 9hrs

Required: calculate the bonus to be awarded to both employees

using the Rowan Bonus Scheme

49
Solution
Rowan Bonus Scheme
Employee A
Time allowed = 12 hrs Bonus = Time saved x time taken x Day rate
Time allowed
Employee A
Time taken = 6hrs
Time saved 6hr
6hrs x 6 x 18, 000
12hrs
N54, 000
Employee B
Time allowed = 12hrs Bonus = Time saved x time taken x
Day rate Time allowed
Time taken = 9hrs
Time saved 3hrs
9hrs x 3 x 18, 000
12hrs
N40, 000
Many business organizations determine their bonuses through
negotiation with employee groups. The factors that influences the
size of the bonus include the following
• Time saved by employees
• Cost saved by employees
• Improved productivity
• The amount of super profits made by the business
organizations
• The achievements of other budgetary targets etc.
50
Illustration
Jobs are issued to operative X to make 189 units and to operative Y
to make 204 units for which a time allowance of 20 standard minutes
and 15 standard minutes per unit respectively is credited. For every
hour saved, bonus is paid at 50% of the basic rate which is N200 per
hour for both employees.

The basic working week is 42 hours. Hours is excess rare paid at

time and half? X completes his units in 45 hours and Y in 39 hours
(but works a full week). Because of defective materials, 6 of X’s units
and 4 of Y’s units are subsequent scrapped although all units
produced are paid for;
Your are required to calculate for each of X and Y
a. The amount of bonus payable
b. The total gross wage payable
c. The wages cost per good unit made.

a. Solution
X Y
i. Time allowed 20m x 189 15 x 240
60 60
=63 hours = 51 hours
ii. Time taken 45 hours 39 hours
Time save (i) (ii) 18 hours 12 hours
a. Bonus (1/2 x time saved x day rate) ½ x 18 x 200
½ x 12 x 200
N1800 N1200

51
 X Y
b. Basic wages (42hrs x 200) 8,400 8,400
overtime (3 hrs x 1.5 x 200) 900 Nil
Bonus 1,800 1200
11,100 9,600
Good units made (189-6) 183 units (204-4) 200 units
Gross wage 11,100 9,600
Less non-productive pay - (3x200) 600
11,100 9,000
Wages cost/good unit 11,100 9,000
200
= N60.66 N48
Overtime Remuneration Schemes
Overtime is the time spent beyond the normal working hours or days.
Overtime wage rates are expressed as time plus a fraction or in
multiples of time e.g.
i. Time and one half
ii. Time and one third
iii. Double time
iv. Time and one fifth etc.

a. Meaning of Time: time refers to the basic rate e.g. if the

normal rate of pay is N5000 an hour, then the time is N500.
Meaning of Additional Rate: the additional rate is called the
overtime premium and whatever it is the amount involved is
arrived at by multiplying the description by the basic rate e.g.
the overtime rate is time and one half, the basic rate is N500.

52
 The premium shall be N250 = 1/5 x N500.
b. Overtime Premium: it is the portion of the overtime pay over
and above the basic rate of pay. Basically, overtime premium
is treated as indirect wages. The only time is worked
according to the customers request to complete his order
within a specified period.

Illustration
Using the information given below, you are required to;
a. Calculate the amount earned by each employee under each
of the following remunerations methods
i. Piece work (with guaranteed hourly rate)
ii. Hourly rates
b. Calculate the gross wages paid to each employee under each
of the above methods;
Employee A Employee B Employee C
Time allowed
Hours per 100 units 23 32 38
Rate per unit No. 12 ½ No. 5 N0.07 ½
Guaranteed hourly rate N0.06 N0.75 N0.50
Time taken: Hours 40 42 39
Actual units produced 200 125 150

53
Solution
1. Piece work (with guaranteed hourly rate)
Employee A Employee B Employee C
Guaranteed pay
Actually hours worked 40hrs 42hrs 39hrs
Guaranteed hourly rate N0.06/her N0.75/hr N0.50/hr
=24 N31.5 N31.5
Piece rate N0.121/2/unit N0.05/unit N0.07/unit
Units produced 200 units 125units 150units
Piece work earning N25 N6.25 N11.25
ii. Hourly rate earnings =24 N31.5 N19.5

54
 CHAPTER 6
COST BOOK-KEEPING

Book keeping is the process of identifying, recording and

summarizing transactions in the appropriate books of accounts. The
balances in the accounts, to be obtained at the end of an accounting
period, are to be extracted to the trial balance, which is just list of
balances of both debit and credit. The system of book keeping is not
restricted to financial account; it is applicable to cost accounting too.
Book financial and cost accounting data are to be properly kept and
processed to develop and produce the required information for
decision making future.
Illustration 4.1
Magana manufacturing ltd. Operates an integrated accounting
system and it is required to record the following balances and
transactions in the ledger accounts prepare final accounts at the
month’s end.

Opening balance at 1st June, 20xx

N N
Issued share capital 250,000
Reserves 65,000
Depreciation provision (plant) 38,000
Creditors control 42,750
Buildings 80,000
Plant and mach 146,500
55
Bank 23,291
Debtors 49,856
Stocks: Raw materials 41,200
W-1-P 24,260
Finished Goods 30,643
395,750 395,750
The following information is supplied regarding the months
transactions.
N
Purchases of raw material 122,600
Gross wages and salaries:
Production direct wages (including N6,800 accrued) 24910
Production indirect wages 6,253
Administration salaries 11,058
Selling and distribution salaries 6,219
Expenses:
Product control 4,286
Administration 7,017
Selling and distribution 4,935
Overheads recovered:
Production 28,750
Administration 18,500
Selling and distribution:
Cash payments:
Creditors 155,296
Salaries and wages 41,025
Cash receipts- debtors 185,473
Discount allowed 2,100
Discount received 3,926
Provision:
Depreciation on plant 9,520
Bad debts 4,100
Factory cost of completed prediction 155,000
Factory cost of goods sold 173,000
Sales 220,800
56
Material issues:
Production 83,621
Works maintenance 6,509
Solution
Story control A/C Cost of index A/C
N N N N
Bal. b/d 41,200 W.I.P 83,621 Finished goods 173000 P&C 202,300
Purchases 122,600 Production/H 6509 Admin O/H 18,500
163,800 Bal c/d 73,670 S & D O/H 10,800
Bal b/d 73,670 163,800 202,300 202,300

W.I.P Control A/C Debtors Control A/C

Bal b/d 24,260 Finished Goods Bal b/d 49,833 Cash 185,473
Wages 24,910 155,000 Sales 220,800 Discount 2,100
Materials 83,621 Bal. c/d 6541 270,656 Bal c/d 83,083
Prod. O/H 28,750 161,541 Bal b/d 83,083 270,656
161,541
Bal b/d 6,541
Finished Goods Control A/C Creditors Control A/C
N N N N
Bal b/d 30,643 Goods sold 155,000 Cash 155,206 Bal b/d 42,750
Prod. 155,000 Bal. c/d 12,643 Discount Rec. 3,926 Purchases 122600
165,043 185,588 Bal. c/d 22,366 Expenses 16,238
Bal b/d 12,643 181,588 181,508
Wages/Salary Control A/C Overhead Adjustment A/C
Cash 41,025 WIP Prod. O/H 803 Admin O/H 425
Deduction 3,600 Reduction O/H 6,253 S & D O/H 356 P&L 732
Accrued c/d 6,800 Reduction O/H 985 1,157 1,157
51,425 Admin O/H 11,058
S & D O/H 6,219
51,425
Accrued c/d 6,800

Production O/H Control A/C Profit & Loss A/C

Wages 6,253 W.I.P 28750 Cost of sales 202,300 Sales 220,800

57
 Salaries 2,985 Under rec. 803 Overhead adj. 732 Dis. Rec. 3,296
Expenses 4,286 Discount Allow 2,100
Depreciation 9,520 Bad dept. prov 4,100
Materials 6,509 Transfer to res 15,494
29,553 29,553 224,726 224,726
Administration O/H Control A/C S&D O/HA/C
Salaries 11,058 Cost of sales 18500 Salaries 6,219 Cost of sales 10800
Expenses 7,017 Expenses 4,935 Under rec. 354
Over rec. 475
18,500 18500 11,154 11,154
Depreciation Provision (plant)
Bal. c/d 47,520 Bal. b/d 38,000
47,520 Prod. o/h 9,520
47,520
Bal. b/d 47,520
Balance sheet
Share capital 250,000 Buildings 80,000
Receives 80,4947 Plant 148,500
Current liability Less dep. 47,820 98,980
Creditors 22,366 17,980
Accrued wages 6,800 Current Assets
Deduction 3,600 Cash 12,443
32,766 Debtors 83,083
Less BDP 4,100 78,893
Stock R.M 73,670
W.I.P 6,541
Finished goods 12,643
363,260 363,260

Interlocking Financial and Cost Accounts

This system opens separate cost accounting and financial systems
in which the basic accounting data are used in the normal manner in
the financial accounts and then the data and documents passed to

58
the cost department. There the source data on costs will be
reclassified into the functional analysis necessary for costing
purposes using such supplementary information as labour and
machine times, production statistic, material requisitions and scrap
reports.

The financial accounting system has the normal debit and credit
entries within itself and in addition has a memorandum account that
will have posted to it all items which are to be transferred to the cost
accounting system.

In the cost ledger there will be the necessary accounts for costing
purposes, e.g. store ledger control A/C, WIP Control A/C etc. and in
addition, an account which is equal and opposite to the memorandum
financial account. The cost ledger account is sometime called cost
ledger contra account, but to avoid confusion with the memorandum
cost ledger control account in the financial accounts, it is frequently
called Financial (or General) Ledger Control Account.

The financial ledger control account is an essential element of the

cost ledger because it forms" part of double entry system within the
ledger. It also enables the financial and cost ledger to be interlocked
because it must agree with memorandum cost ledger control account
in the financial ledger.

Illustration 4.2
Assembly Company Ltd operates interlocking financial and cost
accounting systems. The' following balances and data relate to their
59
cost ledger and it is required to record the entries, obtain the costing
profit and preparation closing trial balance.
Cost Ledger
Opening trial balance
N N
Financial ledger control A/C 49,521
Store ledger control A/C 8,951
W.I.P Control A/C 26,367
Finished Goods Control A/C 14,203
49,521 49,521
The following information is available regarding the periods
operations
N
Raw material purchases 62,280
Direct wages 40,191
Indirect wages 6,280
Administration salaries 11,207
Selling and distribution salaries
Production expenses 9,380
Administration expenses 6,529
Selling and distribution expenses 4,043
Store issues - production 43,010
- Factory maintenance 2,005
- Admin maintenance 659
Production overhead absorbed 16,670
Admin overhead absorbed 18,493
S & D overhead absorbed 10,621
Factory cost finished goods 111,032
Cost of finished goods sold 118,815
Sales 160,921

Reconciliation of cost and financial accounts

60
Differences can arise between the projects shown by the cost
account and the financial accounts. Periodically these differences
must be reconciled to ensure that there are no errors in either set of
accounts.

Differentials arise due to several factors

a. Items appearing in the financials and non-cost accounts.
Typically example are; dividends received, profit and losses
on sale of assets, interest paid and received, share issue and
preliminary expenses and fines paid by the company.
b. Items appearing only in the cost accounts. These are
infrequent and usually relate to imputed charges for such
matters as rent and interest.
c. Differences in the treatment of depreciation and different stock
valuations.
The reconciliation is carried out using memorandum reconciliation
account as shown in the following example.

Illustration 4.3
The profit shown in the financial accounts N18,592 and for the same
period the cost account showed a profit of N20,496. Comparing of
the two set of accounts revealed the following:
Stock valuations Cost Accounts Financial Account
Raw materials N N
Opening stock 6,821 7,259
Closing stock 5,483 5,128
Finished Goods:

61
Opening stock 13,291 12,905
Closing stock 11,430 11,131
Dividends and interest received of N552 and a loss of N1, 750 on the
sale of milling machine were not entered in the cost accounts.
Reconcile the profit figures

CHAPTER 7
62
 OVERHEADS ABSORPTION METHODS

THE CONCEPTS OF OVERHEAD ABSORPTION

This is the process of assigning overhead costs to products or
services produced. Overheads are absorbed into products by
following the process below;
i. Calculate the overhead absorption rates;
ii. Apply the calculated overhead absorption rate to determine
the overhead absorbed.
METHODS OF OVERHEAD ABSORPTION
Generally, overhead absorption rate (OAR) is computed as
OAR = Budgeted overheads
Budgeted activity level
There are different factors that could possibly be used as activity
level. These include the following;
i. Direct labour hours
ii. Machine hours
iii. Units of production
iv. Direct material cost
v. Direct labour cost
vi. Prime cost etc.

i. Direct Labour Hours

This method assumes that direct labour hours are the most
significant factor that influences the amount of overhead incurred in
the production of products and services. Direct labour hours are
therefore used as basis for the absorption.
63
OAR = Budgeted overhead
Budgeted direct labour hours
= OAR per direct labour hour

This method is suitable where the production technology is labour

intensive and wage rates are stable. From our illustrative example, we
were told that overheads from the Blending and Polishing departments
are absorbed using Direct Labour Hours.
Overheads for these two departments are:
Blending Department = N6,165,000
Polishing Department = N5,217,000 and the budgeted
direct labour hours for these two departments are 1050 hours and 450
hours respectively.

The Overhead Absorption Rates will computed as follows

Blending Polishing
Budgeted overheads N6,165,000 N5,217,000
Budgeted Direct Labour Hours 1,050hours 450hours
Therefore O.A. R 1,050hours 4hours
Where DLH is Direct Labour Hour
ii. Machine Hours
Where the production process is highly mechanized and is not
labour intensive, the use of labour hours may be inappropriate.
Under such circumstances, machine hours may be preferred as
activity base for overhead absorption.
OAR = Budgeted Overheads
Budgeted machine hours

64
 = OAR per machine hour

From our illustrative example, we were told that overheads from the
Grinding and Firing departments are absorbed using Machine Hours.
Overheads for these departments are;
Grinding Departments = N6,738,000
Firing Department = N10,380,000 and the budgeted
machine hours for these two departments are 620 hours and 520 hours
respectively.

The Overhead Absorption Rates will thus be computed as follows;

Grinding Firing
Budgeted Overheads 6,738,000 N10,380,000
Budgeted Machine Hours 620 hours 520 hours
Therefore O.A.R 10.87 per MH N19.96 per MH

iii. Units of Production

Where the production process turns out uniform products on mass
quantities, units of production could be used as basis for overheads
absorption. Where the units are not

Overheads Basis Production cost centers Services centers

Grinding Blending Firing Polishing Personnel Administration maintenance

iv. Direct Material Cost Percentage

Overheads are absorbed as a percentage of direct material cost. This
method is used when there are stable and uniform materials price. Where
material price are not uniform, this method will not yield good result.
OAR = Budgeted overheads x 100
Budgeted direct material cost
= OAR as a percentage of direct material cost

65
v. Direct Labour Cost Percentage
Overheads are absorbed as a percentage of direct labour cost. Where
intensive labour technology is used and wage rates stable and uniform,
this method may be used.
OAR = Budgeted overheads x 100
Budgeted direct labour cost
= OAR as a percentage of direct labour cost

vi. Prime Cost Percentage:

Prime cost as we have already explained is the aggregate of direct
materials cost, direct labour cost and direct expenses. Overheads can
therefore be absorbed as a percentage of prime cost. Where there is
relative stability of rates and prices, this methods could be used
OAR = Budgeted overheads x 100
Budgeted direct labour cost
= OAR as a percentage of direct prime cost

WHY PREDETERMINED RATES ARE USED

a. Actual overheads are not known until after the end of a given
period. If budgets are not used product cost cannot be quickly
determined. The alternative will be to calculate the overhead recovery
rate as frequently as possible. This could however be cumbersome and
inconvenient.

b. Actual overheads are substantially influenced by the general price

level and actual activity levels are subjects to wide fluctuations. The
combined effect of these two is large fluctuations in the absorptions rates
if based on actual overhead cost and actual activity level. To reduce the
effects of such fluctuations on overhead recovery, it is considered better
to use budgeted overheads and budgeted activity for overhead
66
absorption since these reflect standards.

BLANKET OVERHEAD ABSORPTION RATES VERSUS COST

CENTRE OVERHEAD ABSORPTION RATES

Overhead recovery rates are usually calculated for each production cost
centre. Where an overhead recovery rate is in production cost centre.
Where an overhead recovery rate is in respect of the whole factory it is
factory it is termed a blanket overhead recovery rate or factory wide
overhead recovery rate.

Blanket overhead recovery rates are not very appropriate because of the
following reasons:
a. The factory consists of different production cost centres and
products may consume cost centre overheads in different
proportions
b. Different activity bases drive cost for different proportions.
DETERMINATION AND TREATMENT OF OVERHEADS
Overhead Absorbed or Overhead Under Absorbed
Having regard to the way overheads is absorbed, it is unlikely for the
actual overhead incurred to be the same overheads absorbed. This thus
creates a situation if over absorbed overheads or under absorbed
overheads.
Treatment of under or over absorption of overheads
a. Adjust the under or recovery to cost units produced during the
period,
- This may not be worthwhile and such historical information is of
no use to management
b. Carry the under or recovery to future accounting periods
67
 - This results in a distortion of performance figures

c. Treat the under or over recovery as a period cost by writing it off in

the profit and loss account.
- The treatment of overheads could be done using
a. Absorption costing system where both fixed and variable
overheads are considered and charged to products.
b. Marginal costing system where only variable overheads is
considered and absorbed into products and fixed overheads
treated as a period cost and charged to profit and loss
account.

CHAPTER 8
BUDGETING

INTRODUCTION
68
At the beginning of the financial period of every organization, whether the
organization is publicly or privately owned, it needs to develop its budget
to guide its operation for the year ahead. Budget is therefore an important
process of every organization
How effectively the budget process is handed in an organization
could define success or failure for the organization.
DEFINITION:
A budget may be defined as: "a plan quantified in monetary terms
prepared and approved prior to a defined period of time usually
sharing planned income to be generated and/or expenditure to be
incurred during that period of time showing planned income to be
generated and/or expenditure to be incurred during that period and
the capital to be employed to attain a given objective.

BENEFITS OF BUDGETING
1. Planning and coordination
Planning is the key to success in business and budgeting forces
planning to take place. The budgeting process provides for the
coordination of activities and department of the organization' so
that each facet of the operation contributes towards the overall
plan.

2. Definition of authority and responsibility

The approval of a budget authorities the plans contained within
it so that management by exception can be practiced i.e, a
subordinate is given a clearly defined role with authority to. plan,

69
 the variations are opened to a higher level.

3. Communication
The budget process includes all levels of management.
Accordingly it is an important avenue of communication between
'top and middle management regarding the firm's objectives and
the practical problems of implementing these objectives, and
when the budget is finalized, it communicates the agreed plans
to all the staff involved.
4. Control
This is the process of comparing actual result with planned
result and reporting on the variations, which is the principle of
budgetary control, sets a control framework which help
expenditures to kept within agreed limits. Deviations are noted
and corrective action can be taken to forestall a reoccurrence.
5. Motivation
The involvement of the lower and middle management is the
preparation of budgets and the establishment of clear targets
against which performance can be judged have been found to
be motivating factor.

Limiting factor or key factor or principle budget factor

Limiting factor is that factor which, at any given time effectively limits
the activities of an organization. It may be customer, demand and
production capacity, shortage of labour, materials space or finance.
Because such a factor will have a pervasive effect on all plans and
70
budgets, the limiting factor must be identified and its effect on each
budgets carefully considered during the budget preparation process.

Mostly, the principal budget factor is customer demand i.e. the

company is unable to sell all the output it can produce. The limiting
factor can and does change when one constraint is removed some
other limiting will occur – otherwise, of courses, the organization
could expand to infinity.

Illustration
ND II Company manufactures two products, known as alpha and
sigma. Alpha is produced in department 1 and sigma in department
2. The following information is available for 200x. Standard material
and labour costs;
N
Material X 7.20 per unit
Material Y 16.00 per unit
Direct labour 12.00per unit
Overhead is recovered on a direct labour hour basis.
The standard material and labour usage for each product is as
follows;
Alpha Sigma
Material X 10 units 8 units
Material Y 5 units 9 units
Direct labour 10 hours 15 hours

Other relevant data is as follows for the year 200x:

71
 Finished product
Alpha Sigma
Forecast sales (units) 8500 1,600
Selling price per unit 400 560
Ending inventory required (units) 1870 90
Beginning inventory (units) 170 85
Direct materials
Material X Material Y
Beginning inventory (units) 8500 8000
Ending inventory (units) 10200 1700
You are required to prepare:
1. Sales budget;
2. Production budget;
3. Direct material usage budget;
4. Direct material purchase budget; and
5. Direct labour budget

CASH BUDGETS
The objective of the cash budget is to ensure that sufficient cash is
available at all times to meet the level of operations that are cut-lined
in the various budgets. Because cash budgeting is subject to
uncertainty, it is necessary to provide for more than the minimum
amount required, to allow for some margin of error in planning. Cash
budgets can help a firm to avoid cash balances that are surplus to its
requirements by enabling management to take steps in advance to
invest the surplus cash in short term investments. Alternatively, cash
deficiencies can be identified in advance, and steps can be taken to

72
ensure that bank loans will be available to meet any temporary
deficiencies. The overall aim should be to manage the cash of the
firm to attain maximum cash availability and - maximum interest
incomes on any idle funds.

Illustration
The opening cash balance on 1st January was expected to be N30,
000.
The sales budgeted were as follows:
N
November 80,000
December 90,000
January 75,000
February 75,000
March 80,000

Analysis of records shows that debtors settle according to the following patterns;
60% within the month of sale, 25% the month following, 15% the month following:

Extracts from the purchases budget were as follows;

December 60,000
January 55,000
February 45,000
March 55,000

All purchases are on credit and past experience shows that 90% are settled in
the month of purchase and balance settled the month after.
Wages 15000 per month and overhead 20,000 per month (including 5,000
73
depreciation) are settled monthly. Taxation of N8,000 has to be settled in
February and the company will receive settlement of an insurance claim of
N25,000 in March.
Solution:
Working:
The receipts from sales are as follows;
January cash
November (15% x N80,000) 12000
December (25% x N90,000) 22,500
January (60% x N75,000) 45,000
79,500
February cash
December (15% x N90,000) 13500
January (25% x N75,000) 18,500
February (60% x N75,000) 18500
March (60% x N80,000) 48000
78,000

January cash
Payment for purchases:
December (10% x N60,000) 6000
January (90% x N55,000) 49,500
55,500
February cash
N
January (10% x N55,000) 5,500

74
February (90% x 45,000) 40,500
46,000
March cash
February (10% x N45,000) 4500
March (90% x N55,000) 49,500
54,000
Cash Budget
January February March
Opening balance 30,000 24,000 17,250
Receipt from sales 79,500 77,250 78,000
109,500 101,250 120,250
Payments:
Purchases 55,500 46,000 54,000
Wages 15,000 15,000 15,000
Overheads (less depr.) 15,000 15,000 15,000
85,000 84,000 84,000
24,000 17,250 36,250

Fixed and Flexible Budgets:

A fixed budget is a budget which is designed to remain unchanged
irrespective of the volume of output or turnover attained i.e. it is
single budget with no analysis of cost.

On the other hand, a flexible budget which is designed to adjust the

permitted cost levels to suit the levels of activity attained. The
process by which this is done is by analyzing cost into its fixed and
variable elements so that the budget may be flexed according to the
75
actual activity.

For control purposes it is vital that flexible budgeting is used only by

comparing what the costs should have been with the expenditure
incurred at the actual activity level can any control be exercised. The
major purpose of a fixed budget is at the planning stage when it serves
to define the board objectives of the organization. It is unlikely to be of
any exactly as planned. The formal definition of a flexible budget is as
follows:
A budget which, by recognizing different cost behavior patterns is
designed-to change as volume of output changes.

Illustration
Jalla Company makes a single product and has an average production
of 5000 units a month although this varies widely. The following extracts
from the overhead statement for the extension department shows; the
makes up of the budget and a 'month's actual results.

Budget for average actual results for

Production of 5000 Jan. Production
Units 4650 units
N N N
Indirect labour
Fixed 3,000
Variable E1/unit 5,000 8,000 7,900
Consumables (all variable) 15,000 14,250
Variable overhead 20,000 18,200

76
Fixed overhead 12,500 12,500
55,500 52,850

Show two budgetary control statement for January, one based on the
fixed budget for 5000 units and one based on a flexible budget for the
actual level of production.
Solution
Budgetary Control Statement
Fixed Budget Actual Budget
Expense type Fixed Budget Actual Result Budget Variance
N N Favourable/Adverse
Indirect labour 8,000 7,900 100
Consumables 15,000 14,250 750
Variable overheads 20,000 18,200 1,800
Fixed overheads 12,500 12,500 -
55,500 52,850 2650

NB:
a. The various are the differences between budget and actual. They
are favourable when actual costs are below budget and adverse
when above.
b. When, as in this case, the activity level is different to that planned,
the comparison of actual result with a fixed budget shows little or
no useful information. We will see that total costs are lower than
budget, but so is so is the activity level. What is required is to
appreciate budgeted expenditure for the actual production level.

77
 Budgetary Control Statement
Fixed Budget Actual Result
Expense type Fixed Budget Actual Result Favourable various
N N Favourable/Average
Indirect labour
Fixed 3,000
Variable N1/unit, 4,650 7,650 7,900 (250)
Consumables at N/unit 13,950 14,250 (300)
Variables overheads at N4/unit 18,600 18,200 400
Fixed overheads 12,500 12,500 -
52,700 52,850 (150)

Budgeting in non-profit making organizations

The budgeting process in non-profit making organizations normally
begins with the managers of the various activities calculating the
expected cost of maintaining current ongoing activities and then
adding to those cost any further development of the services that are
considered desirable. For example, the education, health, housing
and social services work department of state or local' government will
proposes specific activities and related costs for the coming year.
The budgets are co-coordinated by the accounting department into
an overall budget proposal.

The available resources for financing the proposed level of public

service should be sufficient to cover the total cost of such services.
In the case of a state or local government, the resources will be
raised by local taxes and government grants.
78
Similar procedures are followed by mosques, churches,
charities and other non-profit making organizations in that they
produce estimates for undertaking their activities and then find the
means to finance them or reduce the activities to realistic levels so
that they can be financed from available financial resources.

One difficulty encountered in non-profit making organizations is the

precise objectives are difficult to define in quantifiable way and the
actual accomplishments are even more difficult to measure.

1. Line item budgets

The traditional format for budgets in non-profit organizations is
referred to as line item budgets. A line item budget is one in which
the expenditures are expressed in considerable detail, but the
activities undertaken are given a little attention. In other words, line
item budgeting shows the nature of the spending but not the
purpose. The amounts in this type of budget are frequently
established on the basis of historical costs that have been adjusted
for anticipated changes in costs and activity levels. When they are
compared with the actual expenditures, line item budgets provide a
basis for comparing whether the actual expenditures has been
exceeded or whether under spending has occurred.

2. Planning, programming budgeting system

The aim of PPBS is to enable the management of a non-profit
organization to make more informed decisions about the allocation
resources to meet the overall objectives of the organization. First,

79
overall objectives are established. Secondly, the programmes that
might achieve objectives are identified. Programmes relate to
major activities undertaken by programme are determined so that
bud get allocations can be made on the basis of cost and benefits
of the different programmes.

ZERO BASED BUDGETING

Zero-based budgeting (also known as priority based) emerged in
the late 1960's as an attempt to overcome the- limitations of
increment-al budgets. This approach requires that all activities are
justified and prioritized before decisions are taken relating to the
amount of resources allocated to each activity.

CHAPTER 9
BREAK-EVEN ANALYSIS

Break-even Analysis is a technique that assist in decision making

by using the marginal costing concept and is used to measure the
effect on profit as a result of changes in volume of activities, cost
and prices. It is also called cost volume profit (CVP) analysis. It
assists in predicting future cost levels and sales in relation to a given
level of activity, thereby assisting in planning.

Assumption of the CVP analysis

80
1. All cost could be categorized as either variable, fixed costs.
2. Selling price and variable cost per unit are constant
3. Total fixed cost remains unchanged regardless of output
4. Level of technology and efficiency remains the same
5. Volume is the only independent variable that affects cost.
6. There is a relevant range.

Limitations of the Basic Assumptions

In a true life situations, the basic assumption of C.V.P analysis
discussed above tend only to be valid over a limited range of activity.
As a result of this reason, care must be exercised when using break-
even analysis for decision making on the presentation of information.
The basic assumptions of CVP have the following deficiencies:
(a) It might be difficult to separate some costs into their fixed and
variable portions.
(b) The selling price per unit is assumed to be constant. This is
not realistic because of possibility of discounts.
(c) The variable cost per unit is assumed to be constant. This is
not realistic because quantity discount could result in
decrease in material cost and labour cost per unit could fall
whenever learning curve becomes applicable.
(d) Fixed cost is assumed to remain unchanged. This is not true
because in reality, fixed costs move in a step-like manner.
Also in the long-run all costs are variable.
(e) It is assumed that production is equal to sales, hence no
closing stock. This assumption is unrealistic because a
business is a going concern and invariably stocks are carried
81
 from one period to the other.
(f) The assumption of one product or constant mix of product is
not realistic because most organizations produce variety of
products and invariably actual mix turnout to be radically
different from the expected level of activity. This may be due
to host of factors such as taste of the customers and the
economic realities of the day.
(g) The assumption that there is no change in level of
technology and efficiency is untenable since innovations are
taking place every day in all spheres of business
endeavours.

Uses of the CVP analysis model

(a) To determine the Break-eve-n point in units Total fixed cost
Contribution per unit or contribution margin
(b) Break-even point in sales value (N)
Total fixed cost
Contribution margin ratio
(c) Number of units to sell to make a targeted profit (N)
= Total fixed cost + targeted
profit Contribution margin
(d) The sales value in N required to achieve a target profit
= Total fixed cost (TFC)
Contribution margin Ratio (CMR)

Illustration 1
(a) The following data is given:
Fixed overhead N100,000
Variable expenses N10 per unit
82
 Selling price N15 per unit
Indicate the number of units to be manufactured and sold:
(i) Break-even
(ii) To earn a profit of N 10,000
(iii) What additional units would be necessary to increase the
profit by N5,000

(b) From the following information, calculate the break-even

point and turn-over to earn a profit of N30,000 Fixed
overheads N21,000
Variable expenses N2 per unit
Selling price N5 per unit

If the company is earning a profit of N30,000, express the margin of

safety available to it.

CHAPTER 10
MARGINA COSTING AND ABSORPTION COSTING

TECHNIQUES

CIMA defines marginal costing “as a decision making technique used to

determine the effect of cost on changes in the volume of time and output
in a multi-product firm especially in the short run”. Therefore, it is a
technique which emphasizes the variable cost of a product.

Marginal costing statement format

N N
Sales (a) x x
Direct material x x
83
Direct labour x x
Direct expenses
Prime cost x
Production variable costs x
Production marginal cost (b) x
Contribution (a-b) x
Fixed costs are excluded from the cost structure.
Absorption costing statement
N N
Sales x x
Direct material x x
Direct labour x x
Direct expenses x x
Prime cost x x
Production variable overhead x x
Marginal cost x x
Fixed Production overhead cost x x

Total production cost of sales x x

Gross profit x
Illustration 1
ABC limited had the following data in relation to its product. You are
required to use absorption costing and marginal costing to determine the
profit.

Cost per unit

Direct materials 3.00

Direct labour 4.00

Variable overhead 1.00

84
 8.00

Fixed cost 4.00

Total cost 12.00

Budgeted level of activity 200,000 units

Selling price N16.00

Selling & administrative cost N100.000

Data relating to production & sales = year 1 Year 2

Production 200,000 240,000

Sales 200,000 180,000

Illustration: 2

A company makes and sells a single product. At the beginning of period

1, there are no opening stocks of the product for which the variable
production cost is N4 and the sales price is N6 per unit Fixed costs are
N2000 per period of which N1500 are fixed production costs. Normal
output is 1500 units per period.

Period 1 Period 2
Units Units
Sales 1,200 1,700
Production 1,500 1,400
85
Required
Prepare profit statements for each period and for the two periods in total
using absorption costing and marginal costing.

Absorption costing statement

Year 1 year 2
N’000 N’000
Sales (N16 per unit) 3200 2,880
Cost of goods manufactured:
(N12 per unit) 2400 2,880
Add opening stock at N12 - -
Cost of goods sold 2400 2,880
Less closing stock at N12 - 720
2,400 2,160
Gross profit 800 720
Selling & admin costs (100) 100
Net profit 700 620
Over (under) absorption - 240
Marginal costing statement:
Year 1 Year 2
N’000 N’000
Sales (N16 per unit) (a) 3200 2,880
Cost of goods manufactured:
(N8 per unit) 1600 1920
Add opening stock at N12 - -
1,600 1,920

86
Less closing stock at N8 - 480
Cost of goods sold (b) 1 600 1,440
Contribution (a-b) 1,600 1,440
Fixed manufacturing cost 800 800
Selling & admin cost 100 100
Total fixed cost (c) 900 900
Gross profit [(a-b)-c] 700 540

REFERENCES

Adeniji A.A. (2010) Cost Accounting; A Managerial Approach.

Adeniji A.A. (2008) An insight into Management and Cost Accounting, 4th
Edition, EL-TODA Ventures Ltd.
Bhattacharyya, A.K. (2010) Principles and Practice of Cost Accounting
New Delhi: PHI Learning Private Ltd.
Drury, C. (2011) Management and Cost Accounting, London:
International Thonson Business Press.
Horngren, C.T. (2013) Cost and Management Accounting; A. Managerial
Emphasis. New Dehi: Pearson Education, Asia.

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Institute of Chartered Accountants of Nigeria (2009) Cost Accounting.
Study pack for Accounting Technician of west Africa (ATSWA),
Lagos.
Khan, M.Y. and Jain, P.K. (2013) Theory and problems of Management
and Cost Accounting. Noida: McGraw-Hill Education (India) Ltd.
Lall Nigan, B.M. and Jain, I.C. (2009) Costing Principles and Practice
New Delhi Prentice Hal of India.
Lucey, T. (2005) Costing; An Instructional Manual, London: DP
Publications Limited.
McMenamin, J. (2000) Financial Management: An Introduction. Oxford;
Oxford University press.
Pandey, I.M. (2008) Financial Management. New Delhi; Vikas Publishing
House pvt ltd.

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