Accounting 2 Second Edition

ACCOUNTING 2
Second Edition
1 Managerial Accounting Basics
2 Cost: Concept, Classi cation and Component
3 Manufacturing Costs
4 Actual Costing and Normal Costing
6 Cost Volume Pro t

Table of Contents
7 Absorption Costing and Marginal Costing
8 Job Order Costing
9 Process Costing
10 Standard Costing and Variance Analysis
11 Decision Making
Reference
Editor’s
Updates &
Notes
copyright
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Editor’s Note
ACKNOWLEDGEMENT
Kolej Matrikulasi Perlis
Kolej Matrikulasi Kedah
Kolej Matrikulasi Perak
Kolej Matrikulasi Selangor
Kolej Matrikulasi Pulau Pinang
Kolej Matrikulasi Negeri Sembilan
Kolej Matrikulasi Melaka
Kolej Matrikulasi Johor
Kolej Matrikulasi Pahang
Kolej Matrikulasi Kelantan
Kolej Matrikulasi Labuan

Table of
contents
1 MANAGERIAL ACCOUNTING
BASICS
INTRODUCTION
This topic covers the comparison between managerial

accounting and nancial accounting, functions of
management and roles of accounting information in
management, characteristics of managerial accounting
information, roles of management accountant and code of
ethics in management accounting.
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1 LEARNING OBJECTIVES
Students should be able to:
1.1
• Explain managerial accounting.

• Explain the differences of managerial accounting and nancial accounting
based on these features: primary users of reports, types and frequency of
reports, purpose of reports, content of reports and veri cation of reports.
1.2
• Explain the functions of management: planning, directing and controlling.

• Explain roles of accounting information in management
1.3
• Explain the characteristics of managerial accounting information:

accuracy, timeliness, understandability, relevance, cost effective and
exibility.
1.4
• Describe the roles and functions of management accountant to assist in

executing the functions of management.
1.5
• Describe about ethics

• State importance of Ethics in Management Accounting
• State Issues in Management Accounting Ethics
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1.1 COMPARISON BETWEEN FINANCIAL ACCOUNTING AND MANAGERIAL

ACCOUNTING
• Managerial accounting or management accounting is the process of identifying,
analysing, recording and presenting nancial information that is used internally by the
management for planning, directing and controlling.
• The comparison between nancial accounting and managerial accounting is as follows :
Categories Financial Accounting Managerial Accounting
Primary • External users: stockholders, • Internal users: of cers and

Users of creditors, and regulators / managers of the business
Reports government, banks, suppliers
Types and • Financial statements - • Internal reports such as

Frequency of statement of pro t or loss, budgets, Cost-Volume-Pro t
Reports statement of changes in analysis
equity, statement of nancial • As frequently as needed by the
position, cash ow statement management
• Quarterly and annually
Purposes of • General-purpose • Special-purpose for speci c
Reports decisions.
Contents of • Pertains to business as a • Pertains to subunits of the

Reports whole business.
• Highly aggregated • Very detailed.
(condensed) • Extends beyond double entry
• Limited to double-entry accounting.
accounting and cost data • Not required to follow MFRS
• Required to follow MFRS
Veri cation • Required to be published • Neither published nor audited by
of Reports and audited by statutory statutory auditors.
auditors
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1.2 FUNCTIONS OF MANAGEMENT AND ROLES OF ACCOUNTING INFORMATION

IN MANAGEMENT
• The following are the management's functions.
Function Explanation
Planning • The process of setting objectives/goals to be achieved.

• Selection methods/strategies that will be implemented to achieve the
objectives.
• Example: Maximise short-term and market share, commit to

environment protection and social programs
Directing • Directing involves coordinating a company’s diverse activities and

human resources to produce a smooth-running operation.
• This function relates to implementing planned objectives and

providing necessary incentives to motivate employees.
• Example: manufacturers such as Campbell Soup Company, General

Motors, and Dell must coordinate purchasing, manufacturing,
warehousing, and selling.
Controlling • Process to ensure that the strategy is on the right track and the goal
is achieved or not based on performance evaluation.
• Follow-up is made if necessary

• Example: Determine whether goals are met.
i. Decide changes needed to get back on track.
• Decision making is not a separate management function. Rather, it is the outcome of

the exercise of good judgement in planning, directing and controlling.
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• The following are the roles of accounting information in management:
Roles Explanation
Decision • The thought process of selecting a logical choice from the
making available options.
Control and • A systematic exercise which is called as a process of checking

evaluate actual performance against the standards or plans with a view to
performance ensure adequate progress and also recording such experience as
is gained as a contribution to possible future needs
Planning • It is deciding what to do, and who, where, when, why and how to
do it.
• Here managers decide what goals to be accomplished, how they

will be accomplished.
• It gives the manager some warning of crises that might occur in

the future.
• The management accountant’s role in assisting in formulation of

future plans is by providing information to e.g. decide what to sell,
in what markets and at what prices
Budgeting • A budget forecasts the nancial results and nancial position of a

company for one or more future periods.
• A budget is used for planning and performance measurement

purposes, which can involve spending for xed assets, rolling out
new products, training employees, setting up bonus plans,
controlling operations, and so forth.
Stock • the process of calculating the value of goods or materials owned

evaluation by a company or available for sale in a store at a particular time.
Determination • a process of calculating cost of goods sold/ cost of services and

of cost and setting the price of the goods/service in order to get pro t.
prices of
products or
services
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1.3 CHARACTERISTICS OF MANAGERIAL ACCOUNTING INFORMATION
• The following are the characteristics of management accounting information:
Characteristic Explanation
Accuracy • Accounting information must be correct for its intended

purposes. Incorrect information could have serious and
damaging consequences.
• Example: Business owners need accounting information that

is applicable to the business decision at hand. They can
request nancial statements, accounting schedules,
reconciliations or cost-bene t analysis.
Timeliness • Timeliness means having information available to decision-

makers before it loses its capacity to in uence decisions.
• Example: Information is timely when it is available to users

early enough to allow its use in the decision process. The
need for timely information requires that companies provide
information to external users on a periodic basis.
Understandability • Using terms that are easily understood to ensure that the
information obtained is clear and can be used to make
informed decisions.
• Example: Presentation of information should not only

facilitate understanding but also avoid wrong interpretation of
nancial statements. Thus, understandable nancial
accounting information presents data that can be understood
by users of the information and is expressed in a form and
with terminology adopted to the user’s range of
understanding
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Characteristic Explanation
Relevance • Relevance is closely and directly related to the concept of useful

information.
• Relevance implies that all those items of information aid the

users in making decisions and/or predictions. To make a
difference in the decision process, information must possess
predictive value and/or feedback value
• Example: if net income and its components con rm investor

expectations about future cash-generating ability, then net
income has feedback value for investors.
Cost • Producing good results without costing a lot of money. Acquiring

Effectiveness information costs money. The bene t gained from that piece of
information must outweigh the cost of getting the information.
• Example: The company can get the information on customer

satisfaction through surveys done by interviewing the customers
in person or by doing the online survey.
• In deciding the mode of the survey, the company must compare

the costs of both methods with the bene t gained from the result
of the survey. It should choose the most cost effective method.
Flexibility • Information is not necessarily detailed for pointless accuracy, but

it is easily adaptable to the needs of decisions to be made.
• Example: It relates to accounting information systems. It

describes an accounting system that is able to adapt to changes
in the company, its operations, and needs of decision makers.
• Flexibility means that the system, which can deal with the
changes in technology, competitive pressure, consumer, tastes,
and regulations.
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1.4. ROLES OF MANAGEMENT ACCOUNTANT
• Responsible for carrying out the task of helping the management in planning.
i. Managers use the information to develop speci c goals and strategies for the
future.
ii. Planning requires that managers align the company’s objectives with its
available resources.
iii.A manager’s ability to forecast and plan depends on the budgets developed by
accountants
• Provide information and accounting reports.

i. Managerial accountants often perform cost analysis for certain products and
divisions, which include variable and xed costs.
ii. The production decisions made by managers are a direct result of information
received from managerial accountants
• Assist departments in achieving the organisation's objectives through preparing a

budget.
i. Preparing budgets is a basic activity for managerial accountants. Budgets
express the company’s plan of action using quantitative gures.
ii. The budgeting process allows managers to allocate resources to the most
nancially needy departments, and eliminate programs and departments that are
not effectively using the resources.
iii. The particular budgets produced by managerial accountants depend on the
needs of the organisation.
iv. Common budgets prepared include the master, sales, production, material,
labour and cash budgets.
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1.5 CODE OF ETHICS IN MANAGEMENT ACCOUNTING
Ethics
• Ethics is more than simply obeying laws; it involves doing the right thing as well as the
legal thing.
• Many companies have a code of conduct to help guide their employees.
• For example, Google has a code of ethics that they expect all of their employees and
board members to follow. Failing to do so can cause termination of employment. The
preface of the code includes “Don’t be evil.” They use that to show all employees and
other shareholders within Google that they are serious about ethics—that trust and
respect are essential in providing a great service to their customers.
Importance of Ethics in Management Accounting
• Ethics is an important part of managerial accounting, and companies follow a code of

ethics or conduct that addresses ethical issues/concerns for management
accountants.
• Managerial accountants should never commit acts that violate the standards of ethics,
and they should never ignore such deeds by others within their companies.
• The ethical dilemmas of managerial accountants are increasing in response to big
data, arti cial intelligence and other technologies, as reported in the September 2019
issue of the CPA Journal.
• Ethical codes of professional organisations provide helpful guidance.
Issues in Management Accounting Ethics
• Circumventing Unethical Behaviour

i.Companies may choose to act unethically in the business environment. Business
owners may determine that unethical behaviour is not necessarily illegal, a logic
that creates a grey-shaded area in business.
ii.Managerial accountants constantly may push ethical limits when recording and
reporting nancial information.
iii.Companies should provide detailed explanations to those conducting external
audits regarding questionable accounting procedures to ensure adherence to
Institute of Management Accountants (IMA) standards of practice.
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• Consequences of Unethical Actions

i. Accountants who fail to abide by the IMA's accounting ethical code face a
variety of punishments.
ii. Accountants may lose their professional certi cation, be removed from
accounting positions and face legal penalties depending on their inappropriate
actions.
iii. Managerial accountants who do not disclose inappropriate accounting
operations in their company also can be held liable.
iv. Maintaining the general public's trust in companies is a primary responsibility of
managerial accountants.
Institute of Management Accountants (IMA)
• The Institute of Management Accountants (IMA) is a

professional organisation responsible for creating
managerial accounting guidelines.
• The IMA provides managerial accounting ethics for
licensed accountants, and non-licensed
accountants also can use these ethical standards to
govern their accounting career.
• The IMA's ethical principles are based on honesty,
fairness, objectivity and responsibility.
• IMA members must use these ethical principles
when engaging in accounting services for their
company and the general public.
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2 COST: CONCEPT, CLASSIFICATION

AND COMPONENT
INTRODUCTION
This topic covers the importance of cost information,

difference between costs and expenses, cost classi cation,
manufacturing costs, non-manufacturing costs, direct costs,
indirect costs, product costs and period costs.
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2.1
• Explain the importance of cost information to management.
2.2
• Explain the differences between costs and expenses.
2.3
• Explain the classi cation of costs according to function, cost behaviour

and other classi cation such as direct cost and indirect cost.
2.4
• Calculate manufacturing costs, direct material, direct labour, and

overhead: prime and conversion costs.
2.5
• Calculate non-manufacturing costs: selling expenses and administration

expenses.
2.6
• Calculate cost of direct material and cost of direct labour.
2.7
• Calculate cost of indirect labour, indirect material and other

manufacturing cost.
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• Explain the differences between product costs and period costs, and
compute both costs
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2.1 THE IMPORTANCE OF COST INFORMATION
• To enable management to carry out management functions in an organization, for

example planning, directing and controlling.
• Managers need to have deep knowledge about costs and cost classi cation in order to
be able to control and manipulate costs so that the company can achieve maximum
performance.
2.2 DIFFERENCES BETWEEN COSTS AND EXPENSES
Costs Expenses
Costs are the sacri ce of resources to Expenses are the sacri ce of resources to
acquire products or services which will obtain bene t in the current period.
bene t in the future.
Example: Cost to acquire assets such as Example: Cost of operational or non-

cost in purchasing machinery. operational expenses such as the amount
of Utilities Expense.
2.3 COST CLASSIFICATION
Function
• Manufacturing Costs
Costs that are incurred in the process of producing products such as direct materials
cost, direct labour cost and manufacturing overhead costs.
Costs Explanation
Direct materials cost • Cost of main direct materials that is used in producing
products and can be traced to the nished product.
• Example: Cost of wood used in the making of wooden
tables.
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Costs Explanation
Direct labour cost • Salaries or wages paid to labour directly involved in

converting direct materials into nished product.
• Example: Wages paid to assembly-line worker.
Manufacturing • All manufacturing costs except direct materials cost and

overhead costs direct labour cost.
• Example: Cost of indirect materials such as screws, nails
used in the making of wooden tables.
Prime costs • Main costs involved in the process of producing products.

• Consist of direct materials cost and direct labour cost.
Conversion costs • Costs involved in the process of converting direct

materials into nished products ( nished goods).
• Consist direct labour cost and manufacturing overhead
costs.
• Selling Expenses and Administration Expenses

i. Also known as non-manufacturing costs.
ii. Costs incurred in the process of selling products and administrating the
business such as Advertising Expense, Salaries of Sales and Administrative
and Depreciation Expense of Of ce Equipment.
iii. Also known as operational expenses or period costs and will be reported in the
Statement of Pro t or Loss or Statement of Comprehensive Income.
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Behaviour
Costs Explanation
Variable Cost Costs that vary in total as the activity changes and variable cost per
unit is constant.
Fixed Cost Costs that do not change even though the activity changes and xed
cost per unit changes inversely to the change of the activity.
Mixed Costs Costs that contain both variable cost and xed cost elements.
Other Classi cation
Costs Explanation
Direct Cost • Costs involved directly in the production process and can be
traced to the product such as direct materials cost and direct
labour cost.
• Also known as prime costs.
Indirect Cost • Costs that cannot be traced to a cost object.

• Can be categorised into indirect manufacturing costs and indirect
non-manufacturing costs.
• Indirect manufacturing costs are costs involved indirectly in the
production process and cannot be traced to the product, also
known as manufacturing overhead costs, consisting of indirect
materials cost, indirect labour cost and manufacturing overhead
costs.
• Indirect non-manufacturing costs are referred to as selling and
administrative costs and also known as period costs.
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2.4 MANUFACTURING COSTS
Example 1:
Costs And Expenses RM
Factory Equipment Rent 1,500
Factory Building Insurance 500
Direct Materials 200,000
Factory Utilities 800
Of ce Supplies 400
Assembly Line Wages 70,000
Depreciation on Of ce Equipment 400
Indirect Materials 10,000
Factory Property Taxes 125
Factory Supervisory Salaries 1,700
Advertising 1,250
Sales Commission 80,000
Depreciation on Factory Building 900
Required:
Calculate:
a.Prime costs
b.Manufacturing overhead
c.Conversion costs
d.Manufacturing costs
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Solution:
a. Prime costs
Prime costs RM
Direct Materials:
Raw Materials 200,000
Direct Labour:
Total 270,000
b. Manufacturing overhead
Manufacturing overhead RM
Depreciation On Factory Building 900
Total 15,525
c. Conversion costs
Conversion costs RM
Direct Labour:
Manufacturing Overhead 15,525
Total 85,525
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d. Manufacturing costs
Manufacturing costs RM
Total 285,525
2.5 NON-MANUFACTURING COSTS
Example 2:
Refer to cost information in Example 1
Required:
Calculate non-manufacturing costs:
Solution:
Non-manufacturing costs RM
Of ce Supplies 400
Advertising 1,250
Total 82,050
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2.6 DIRECT COSTS
Example 3:
Required:
Calculate direct costs:
Solution:
Direct costs RM
Direct Materials:
Direct Labour:
Total 270,000
2.7 INDIRECT COSTS
Example 4:
Required:
Calculate indirect manufacturing costs and indirect non-manufacturing costs:

Solution:
Indirect manufacturing costs RM
Manufacturing Overhead:
Depreciation On Factory Building 900
Total 15,525
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Indirect non-manufacturing costs RM
Of ce Supplies 400
Depreciation On Of ce Equipment 400
Advertising 1,250
Total 82,050
2.8 PRODUCT COSTS AND PERIOD COSTS
Product Costs Period Costs
Costs involved in the process of Costs involved in the process of selling

making products. products and administrating the whole
company.
Also known as manufacturing costs. Also known as non-manufacturing

cost.
Reported in the Statement of Cost of Presented in the Statement of Pro t or

Goods Manufactured. Loss or Statement of Comprehensive
Income as operational expenses.
Example: Example:
Direct materials Cost, Direct Labour Advertising Expense, Sales
Cost and Manufacturing Overhead Commission Expense, Freight Out and
Cost. Director’s Salaries Expense.
Example 5:
Required:
Calculate product costs and period costs:
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Solution:
Product costs RM RM
Direct Materials:
Direct Labour:
Depreciation on Factory Building 900
Total Manufacturing Overhead 15,525
Total Product Costs 285,525
Period costs RM
Of ce Supplies 400
Advertising 1,250
Total Period Costs 82,050
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3 MANUFACTURING COSTS
INTRODUCTION
This topic covers material cost, labour cost, manufacturing

overhead cost and Statement of Costs of Goods
Manufactured.
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3.1
• Explain and state examples of direct material and indirect material

involved in related production.
• Explain elements related to material cost such as purchase price,
purchase discount, delivery cost and warehouse insurance.
• Explain Inventory Method, Just-in-Time (JIT) and Economic Order
Quantity (E0Q).
• Calculate direct and indirect material cost used in the production.
3.2
• Explain and state examples of direct labour and indirect labour involved in
related production.
• Explain elements related to labour cost such as wages and salaries,
overtime, PERKESO, KWSP.
• Calculate direct and indirect labour cost in the production.
3.3
• Explain manufacturing overhead and state examples of manufacturing

overhead involved in related production.
• Calculate manufacturing overhead cost.
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3.4
• Prepare Statement of Costs of Goods Manufactured and explain its

relationship with Income Statement/Statement of Pro t or Loss.
• Calculate production cost per unit
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3.1 MATERIAL COST
Direct materials and Indirect materials
• Direct materials Cost

i. Direct materials refer to primary raw materials used in the production of nished
goods that can easily be traced physically and directly to the nished product.
ii. Direct materials cost are the costs of the primary raw materials used.
iii. Examples; cost of our used in the production of bread, cost of cotton fabric
used in the production of school shirts, cost of wood used in making wooden
furniture.
• Indirect materials Cost

i. Indirect materials cost refers to the cost of other raw materials than the primary
raw materials used in the production of nished goods.
ii. Indirect materials are not physically visible or traceable to the nished product.
iii. They are impractical to trace because their physical association with the nished
products are too small in terms of cost.
iv. Indirect materials cost is considered as a part of manufacturing overhead.
v. Examples; cost of yeast and salt used in the production of bread, cost of thread
and button used in the production of school shirts and cost of nails and glue
used in making wooden furniture.
Elements related to material cost
• Purchase price
i. Is the agreed prices, in the respective currency exclusive of value-added tax,
which shall be added at the statutory rate valid on the day of delivery.
ii. Packaging, transportation, insurance and other incidental expenses shall not be
included in the price, and shall be billed separately.
iii. Any charges, taxes, customs duties or other levies in connection with delivery
shall be borne by the customer.
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• Purchase discount
i. A purchase discount is a deduction that a payer can take from an invoice

amount if payment is made by a certain date normally before a discounted
period ends.
ii. This discount is used when a seller needs to accelerate the in ow of cash.
iii. A purchase discount will reduce the cost of purchasing raw materials.
• Delivery cost
i. Refer to the costs incurred in connection with the execution and delivery of the
agreement, including counsel fees, fees and expenses of the Acquisition Fund
Custodian and similar costs, fees and expenses.
ii. Delivery cost will increase the cost of purchasing raw materials. The reason is
that cost of raw materials purchased should include any delivery cost to bring
the raw materials to the purchaser and make it ready to use in production.
• Warehouse insurance
i. It is a policy that protects the Legal Liability, cost and expenses when the buyer/
seller transport and store the goods and merchandise in the care, or custody or
control of the warehouse.
ii. Warehouse insurance will increase the cost of purchasing raw materials
Inventory Method, Just-in-Time (JIT) and Economic Order Quantity (EOQ).
• Inventory is the number of stocks held by a business or a company and considered as

an asset.
• Good inventory management is a key to a company in achieving its goal of meeting
customers’ demand and having high pro tability.
• There are two ways of managing inventory:
i. Just-in-Time (JIT)
1. Under JIT inventory method, goods manufactured or purchased
just in time for sale
2. It focuses on providing customers with stocks at the right time and
with the right stock quality and quantity.
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3. It aims at reducing in-process inventory and carrying costs and

maximising pro ts at the same time.
4. It was developed as a way for the company to meet its customers’
demands on time and with minimum time, resource, and material
wastes.
ii. Economic Order Quantity (EOQ)
1. It is the amount or size of inventory that is ordered at

one time which minimises the ordering and annual inventory costs.
2. It aims at maintaining the amount of materials at a desired level at
a minimum cost.
3. The inventory level is closely monitored, and a xed number of
units are set so that each time that it reaches its reorder level, the
exact quantity is ordered.
4. It is applied especially if there is a continuous demand for the
product, and the new order is delivered in full.
Calculation of direct and indirect materials cost used in the production.
Example 1: (Calculating direct materials cost)
The information below is related to ABC Company.
RM
Direct Materials Inventory on 1 January 2022 35,000
Direct Materials Purchases 356,300
Direct Materials Inventory, 31 December 2022 43,800
Required:
Calculate the direct materials used in the year 2022.
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Solution:
RM
Direct Materials Inventory on 1 January 2022 35,000
(+)Direct Materials Purchases 356,300
Direct Materials available for use 391,300
(-) Direct Materials Inventory, 31 December 2022 43,800
Direct Materials used 347,500
Example 2: (Calculating indirect materials cost)
Below are the raw materials used in the production of 1 pack of “keropok ikan”
crackers.
Items Requirement for 1 pack RM
Fish 0.3kg x RM18 5.40
Starch our 0.5kg x RM0.30 0.15
Wheat our 0.4kg x RM0.50 0.20
Egg 2 eggs x RM0.30 0.60
Oil 0.06L x RM0.50 0.03
Packaging 0.20
Required:
Calculate the indirect materials used in the production for 1 pack of “keropok” crackers.
Solution:
Items RM
Starch our 0.15
Wheat our 0.20
Egg 0.60
Oil 0.03
Packaging 0.20
Total Indirect Materials Cost per pack RM 1.18
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3.2 LABOUR COST

Direct labour and indirect labour
i. Direct labour
1. Direct labour cost refers to the amount of wages or salaries paid to
direct labours that involved in the production of nished goods.
2. Direct labours are factory employees that can be physically and
directly associated with converting raw materials into nished goods
during the production process. Some of them directly handle
machines on the production line.
3. The amount of wages or salaries can be conveniently identi ed with
a particular line, product, job or process.
4. Examples: assembly line wages, tailor in a clothing factory wages,
graphic designer’s salaries in a printing factory.
ii. Indirect labour
1. Indirect labour cost refers to the amount of wages or salaries paid

to factory employees that has no physical association with nished
product or which is impractical to trace costs to goods produced.
2. Indirect labour costs are considered part of manufacturing
overhead.
3. Examples; indirect labour constitutes those factory employees that
are not directly engaged in the core manufacturing process such
as factory manager salaries, factory supervisors’ salaries, factory
security personnel salaries, janitor’s salaries etc.
Elements related to labour cost
i. Wages and Salaries
1. Wages means basic wages and all other payments in cash payable
to an employee for work done in respect of his/her contract of
service. Wages is calculated based on actual hours worked and is
paid at a predetermined hourly rate.
2. Salary is a xed amount that is paid to employees, normally on a
monthly basis.
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ii. Overtime
1. Overtime is hours worked in excess of normal working hours.
2. It is a remuneration paid to employees for work done during hours
in excess of normal working hours.
3. For example, if the painter in the previous example worked until
6pm then he would be remunerated for 2 hours’ overtime.
iii. PERKESO
1. SOCSO (Social Security Organization), also known as PERKESO

(Pertubuhan Keselamatan Sosial), was established in 1971 under
the Ministry of Human Resources (formerly known as Ministry of
Labour) to provide social security protections to all employees/
workers in Malaysia.
2. Not all wages payments to staff/workers are subject to SOCSO
contribution and there are certain wages excluded from SOCSO
contribution
3. Wages subject to SOCSO contribution:
a.Salary / Wages (full/part time, monthly/hourly)

b.Overtime payments
c.Commission
d.Paid leave (annual, sick and maternity leave, rest day,
public holidays)
e.Allowances
f. Service Charge
iv. KWSP
1. EPF stands for Employees Provident Fund and is commonly

known as KWSP or Kumpulan Wang Simpanan Pekerja in
Malaysia.
2. Every company is required to contribute EPF for its staff/workers
and to remit the contribution sum to KWSP before the 15th day of
the following month.
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Calculation of direct and indirect labour cost in the production.
Example 3: (Calculating direct labour cost and indirect labour cost)
Given below is the cost incurred for the labour in Syarikat XYZ Manufacturing Sdn. Bhd
for the month of January 2022.
Item Particular Rate/ Hour Amount/Cost

(RM) (RM)
Assembly Line Wages 7 Hours Daily 12 -
( 30 workers) (28 working days)
Supervisors Salaries Monthly - 3,200
Factory Manager Salaries Monthly - 5,400
Required:
Calculate the direct labour and indirect labour cost for the month of January 2022.
Solution:
Direct labour cost Particular Total Cost

(RM)
Assembly Line Wages RM12 x 7 hours x 30 x 28 days 70,560
Indirect labour cost Particular Total Cost

(RM)
Supervisors Salaries RM 3,200 8,600
Factory Manager Salaries RM 5,400
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3.3 MANUFACTURING OVERHEAD COST
Manufacturing overhead
• Manufacturing overhead cost refers to the cost of indirect materials, indirect labour and
other expenses in the factory.
• It is the cost incurred in the factory other than the cost of direct materials and direct
labours.
• Manufacturing overheads are considered product costs and are allocated to products
using different overhead allocation methods. These may include traditional absorption
costing or Activity Based Costing (ABC).
• Examples; factory supervisor’s salaries, indirect materials cost, factory rental,
depreciation expense on production machinery, prepaid insurance on factory buildings
etc.
Calculation of manufacturing overhead cost
Example 4: (Calculating manufacturing overhead cost)
Naura Sdn Bhd produced 1,000 refrigerators a month. The cost and expenses incurred
are as below:
Items RM
Insurance Expense - Factory building 500
Factory utilities Expense 800
Of ce Supplies 400
Depreciation Expense- Of ce Equipment 400
Advertising Expense 1,250
Depreciation Expense- Factory Building 900
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Required:
Calculate the manufacturing overhead cost incurred.
Solution:
Items RM
Insurance Expense- Factory Building 500
Factory Utilities Expense 800
Factory supervisory Salaries 1,700
Depreciation Expense- Factory Building 900
Total Manufacturing Overhead Cost 15,525
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3.4 STATEMENT OF COSTS OF GOODS MANUFACTURED
Format for Statement of Costs of Goods Manufactured and its relationship with
Income Statement/Statement of Pro t or Loss.
(Company name)
Statement of Costs of Goods Manufactured
For the year ended 31 December 20XX
RM RM
Direct Materials:
Beginning inventory of Direct Materials XXX
(+)Direct Materials purchases XXX
Direct Materials available for use XXX
(-) Ending inventory of Direct Materials (XXX)
Direct Materials Used XXX
Direct Labour:
Assembly Line Wages XXX
Indirect Materials XXX
Supervisors’ Salaries XXX
Factory Rental XXX
Depreciation Expense - Factory Machines XXX
Factory Insurance XXX
Factory Manager’s Salaries XXX
Total manufacturing overhead XXX
Total current manufacturing costs XXX
(+) Beginning inventory of Work In Process XXX
Total cost of Work In Process XXX
(-) Ending inventory of Work In Process (XXX)
Costs of Goods Manfucatured XXX
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(Company name)
Statement of Pro t or Loss
For the year ended 31 December 20XX
RM RM
Net Sales XXX
(-) Costs of Goods Sold
Beginning inventory of nished goods XXX

inventory
(+) Costs of goods Manufactured XXX
Costs of goods available for sale XXX

(-) Ending inventory of nished goods (XXX) XXX
inventory
Gross pro t XXX
(-) Operating expenses:
Selling Expenses XXX
Administrative Expenses XXX XXX
Net Income XXX
Calculation of production cost per unit
Sales unit - beginning units of nished goods

Production Units =
+ ending units of nished goods.
Costs of Goods manufactured

Production cost per unit =
Production Units
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Example 5: (Preparing Statement of Costs of Goods Manufactured and calculating

production cost per unit)
Below are the cost incurred in for Perusahaan Diamond Bay for the period ended 31
December 2022:
Item RM
Sales (14,000 units) 99,000
Purchases of Direct Materials 27,000
Beginning inventory:
Work In Process 7,000
Factory’s Manager Salaries 29,000
Indirect materials 10,500
Depreciation Expense – Factory Machine 5,800
Supervisor’s Salaries 8,000
Factory Utilities Expense 16,000
Factory Rental Expense 9,000
Sales Expense 68,000
Administrative Expense 15,000
Ending inventory:
Work In Process 4,650
The nished goods inventory (units) is as follows:
Beginning inventory 4,800 units

Production Units
Ending inventory 1,000 units
Required:
a.Prepare Statement of Costs of Goods Manufactured for the year ended 31 December
2022.
b.Calculate the production cost per unit.
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Solution:
a. Perusahaan Diamond Bay

Statement of Costs of Goods Manufactured
For the year ended 31 December 2022
RM RM
Direct Materials used:
Beginning inventory of Direct Materials 13,000
(+) Direct Materials purchases 27,000
Direct Materials Available for use 40,000
(-) Ending inventory of Direct Materials (5,500)
Direct Materials Used 34,500
Direct labour:
Manufacturing overhead:
Factory’s Manager Salaries 29,000
Depreciation Expense – Factory Machine 5,800
Factory Utilities Expense 16,000
Supervisor’s Salaries 8,000
Factory Rental Expense 9,000
Total manufacturing overhead 78,300
Current manufacturing cost 178,800
(+)Beginning inventory of Work In Process 7,000
Total cost of Work In Process 185,800
(-) Ending inventory of Work In Process (4,650)
Costs of goods manufactured 181,150
Production Units
b. Total units manufactured = 14,000 – 4,800 + 1,000
= 10,200 units
Production cost per unit = RM181,150 / 10,200 units
= RM17.76
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4 ACTUAL COSTING AND NORMAL

COSTING
INTRODUCTION
This topic covers the de nition of Actual Costing and Normal

Costing, differences between Actual Costing and Normal
Costing, Actual Overhead, Applied Overhead and Budgeted
Overhead, calculate Predetermined Overhead Rate (POR)
in Activity-Based Costing (ABC) and calculate applied
manufacturing overhead cost for every basis of
predetermined overhead rate.
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4.1
• Explain actual costing and normal costing.

• Identify components of actual costing and normal costing.
• Explain the difference between actual costing and normal costing.
• Explain the advantages and disadvantages of using normal costing to
management.
4.2
• Explain actual overhead, applied overhead and budgeted overhead.

• Identify and explain over-applied and under-applied manufacturing
overhead cost.
• Explain pre-determined overhead rate used in Activity-Based Costing
(ABC):
i. Explain basis /cost driver in predetermined overhead rate such as
units of production, direct labour hours, machine hours, direct material
cost and direct labour cost .
ii. Calculate predetermined overhead rate based on units of production,
direct labour hours, machine hours, direct material cost and direct
labour cost.
• Calculate applied manufacturing overhead cost for every basis of
predetermined overhead rate
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4.1 ACTUAL COSTING AND NORMAL COSTING
De nition
Actual Costing System Normal Costing System
Actual Costing System are Normal Costing System uses actual

considered the actual cost of direct costs of direct materials and direct labour
materials and direct labour involved and applied manufacturing overheads to
and actual manufacturing overhead numerous jobs supported at a
cost applied or allocated to several predetermined overhead rate to avoid
types of jobs. uctuation problems of cost per unit
output in every period that's caused by
multiple volumes of production units in a
certain period.
Component of Actual Costing and Normal Costing
Actual Costing RM Normal Costing RM
Actual Direct materials XXX Actual Direct materials XXX
Actual Direct Labour XXX Actual Direct Labour XXX
Actual Manufacturing XXX Applied Manufacturing XXX

Overhead Overhead
Product cost XXX Product cost XXX
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Difference between Actual Costing and Normal Costing
Actual Costing Normal Costing
Manufacturing cost are based on the Manufacturing cost are based on actual
actual cost of direct materials, actual cost of direct materials, actual cost of
cost of direct labour, and actual direct labour, and applied manufacturing
manufacturing overhead cost overhead cost.
Advantages and disadvantages of using Normal Costing to management
Advantages Disadvantages
i. The company can set the product i. Budgets are often unrealistic if the
pricing earlier or in advance. actual overhead amounts differ
greatly from what was budgeted.
ii. The cost of the product will remain
consistent at a certain period for
ii. Cost information is less accurate
using the same overhead rate.
since the information is based on
estimation. This can result in
incorrect information being given to
management.
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4.2 ACTUAL OVERHEAD, APPLIED OVERHEAD AND BUDGETED OVERHEAD.
Actual overhead Applied overhead Budgeted overhead

Refers to planned or
Refers to the actual Is calculated of
scheduled manufacturing
amount of indirect overhead cost allocated
overhead costs, actual
manufacturing costs to a speci c job
manufacturing overhead cost
incurred in a certain estimation based on
is still unknown.
period. actual activity base.
Example: Syarikat Awal Sdn

Example: telephone, Formula:
Bhd makes an estimation of
electricity, and water
Applied overhead = overhead such as:
bill; the bill amount will
only be known when Predetermined Supervisor salary RM100,000
we received the bills. overhead rate X Actual
Plant depreciation RM 7,500
activity based used
Machine repair RM 25,000
Difference between the actual overhead costs incurred and the cost of applied
overhead : under-applied overhead and over-applied overhead
Applied Overhead > Actual Overhead Over-applied Overhead
Applied Overhead < Actual Overhead Under-applied Overhead
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Predetermined Overhead Rate (POR) used in Activity-Based Costing (ABC)
• Manufacturing overhead costs were absorbed/applied into products using

Predetermined Overhead Rate (POR).
• POR is obtained from the estimated manufacturing overhead costs for a period by
choosing an activity base that will be used to apply the overhead costs for example
direct labour hours, machine hours, and units of production.
• POR used in Activity-Based Costing (ABC) is an approach in which cost is allocated to

the cost product based on resources used in the production activity.
POR formula
Budgeted annual overhead cost

POR =
Budgeted annual operating activity
The choices of budgeted annual operating activities are:
1. Direct labour hours

2. Direct labour costs
3. Machine hours
4. Direct materials cost
5. Production unit
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Example 1:
Syarikat Seri Bayu manufactures two types of products named Din and Don at the
beginning of 2022. Factory managers provide estimated information such as the
following:
Manufacturing overhead RM500,000

Machine hours 200,000 hours
Direct labour hours 100,000 hours
Direct labour cost RM650,000
Direct materials cost RM400,000
Production unit 75,000 units
Required:
Calculate the predetermined overhead rate (POR) basis on the of the following activities:
a.Machine hours
b.Direct labour hours
c.Direct labour cost
d.Direct materials cost
e.Production unit
Solution:
a. RM 500 000
200 000 MH d. RM 500 000 x 100%
RM 400 000
= RM 2.50 / MH
= 125% of DMC
b. RM 500 000
100 000 DLH e. RM 500 000
75 000 unit
= RM 5.00 / DLH
= RM 6.67 / unit
c. RM 500 000 x 100%

RM 650 000
= 76.92% of DLC
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Example 2:
On September 2022 these are the data found regarding manufacturing cost:
Activity basis Department X Department Y Department Z
Direct Materials RM 140,000 RM 126,000 RM 78,000
Direct Labour Cost RM 120,000 RM 110,000 RM 37,500
Manufacturing Overhead RM 98,000 RM 129,000 RM 80,000
Direct Labour Hours 8,000 hours 11,000 hours 3,500 hours
Machine Hours 34,000 hours 45,000 hours 10,400 hours
Each department uses a different basis to determine applied overhead. Department X is

based on 125% of direct materials cost, department Y is based on 76.92% of direct
labour cost while department Z is based on RM2.50 per machine hour.
Required:
Calculate the applied overhead for each department
Solution:
Applied overhead = Predetermined overhead rate X Actual activity base used
Activity Department X Department Y Department Z

basis
Direct 125% x RM 140,000

Materials
= RM 175,000
Direct 76.92% x RM
Labour 110,000
Cost
= RM 84,612
Machine RM 2.50 x 10,400
Hours hrs.
= RM 26,000
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Example 3:
For 2022, Malim Enterprise estimates manufacturing overhead cost RM 1,200,000.

While actual overhead costs for the year 2022 are RM1,180,000. Basis activities used
are stated as below:
Basis Activities Estimation Actual
Direct Labour Cost RM 2,000,000 RM 2,100,000
Direct Labour Hours 180,000 hours 190,000 hours
Machine Hours 200,000 hours 192,000 hours
Required:
a.Calculate predetermined overhead rate (POR) based on direct labour costs, direct labour
hours and machine hours.
b.Calculate applied manufacturing overhead
Solution:
a.
Direct Labour Costs = RM1,200,000 x 100%

RM 2,000,000
= 60%
Direct Labour Hours = RM1,200,000

180,000 Hours
= RM 6.67/ Hours
Machine Hours = RM1,200,000

200,000 Hours
= RM 6.00/Hours
= RM1,152,000
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b.
Direct Labour Cost = 60% x RM2,100,000
= RM1,260,000
Direct Labour Hours = RM6.67 X 190,000 hours
= RM1,267,300
Machine Hours = RM6.00 X 192,000 hours
= RM1,152,000
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6 COST VOLUME PROFIT
INTRODUCTION
This topic covers the Cost Volume Pro t (CVP) analysis,

assumption in CVP analysis, cost behaviour, CVP analysis
method, margin of safety, sensitivity analysis, the
importance of CVP analysis to management and the
ethical issues involved in CVP analysis
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6.1
• Explain CVP analysis.
6.2
• Explain the assumptions used in CVP analysis
6.3
• Explain total variable costs and variable cost per unit of production using
calculation and graph.
• Explain total xed costs and xed cost per unit of production using
calculation and graph.
• Explain mixed cost
• State three methods used to segregate mixed costs: high-low method,
graph method and simple regression method.
• Segregate mixed costs using high-low method. F
• Form a cost function equation: Y= a + bx
6.4
• Calculate break-even point (BEP), forecasted sales and targeted pro t

using mathematical equation method
• Calculate break-even point (BEP), forecasted sales and targeted pro t
using contribution margin method
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6.5
• Explain and calculate margin of safety in ringgit, unit and percentage.
6.6
• Explain the effects of changes in selling price, xed costs and or variable
costs on CVP based on calculation.
6.7
• Discuss the importance of Cost Volume Pro t Analysis to management.
6.8
• Identify ethical issues involved in Cost Volume Pro t Analysis.

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6.1 CVP ANALYSIS

• Cost-volume-pro t analysis is the study of the effects of changes in costs and volume
on a company’s pro ts.
• It is a planning process that management uses to predict the future volume of activity,
the costs incurred, the sales made, and the pro t received.
• Cost-volume-pro t analysis examines the behaviour of total revenues, total costs &
operating income as changes occur in the output level, the selling price, the variable
cost per unit or the xed cost of a product.
6.2 ASSUMPTIONS IN CVP ANALYSIS

• Units sold equal to units produced
• Cost behaviour can be classi ed accurately as either variable or xed.
• Costs and revenues are linear.
• Selling price per unit is constant.
• Variable cost per unit is constant.
• Total xed cost is constant.
• Changes in activity (known as ‘x’) are the only factors that affect costs.
6.3 COST BEHAVIOUR

•Variable Costs
Aspect Total Cost Cost Per Unit
De nition Varies in total in direct proportion to Remains constant at any level of

changes in the level of activity. activity.
Graph Cost (RM) Cost/unit (RM)
Units Units
Cost Y= bx
Function
Y = Total cost, b = Variable cost per unit, x = Level of activity
Example Direct materials, direct labour, indirect materials, and sales

commission.
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Example 1
Mummy Cake House sells a variety of cakes. The information below is related to its
business operation:
The cost of our is RM0.80 per cake. Level of production for 3 months are 2,000 units,
3,000 units and 4,000 units respectively.
Required:
Calculate the total variable cost and variable cost per unit of our for each month.
Solution:
Production Unit Variable cost per unit (RM) Total Variable Cost (RM)
(a) (b) (a x b)
2,000 0.80 1,600
3,000 0.80 2,400
4,000 0.80 3,200
The graph plotted for the above cost is as follows:
Cost (RM)
Total Variable Cost

3,200
2,400
1,600
Units
2,000 3,000 4,000
Graph 1: Relationship Between Total Variable Cost and Level of Activity
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Cost/unit (RM)
0.8 Variable cost/unit
Units
2,000 3,000 4,000
Graph 2: Relationship Between Variable Cost Per Unit and Level of Activity
• Fixed Cost
Aspect Total Cost Cost Per Unit
De nition Remains constant in total Varies inversely with changes in

regardless of the level of activity. activity.
Graph Cost (RM) Cost/unit (RM)
Units Units
Cost Y= a
Function
Y = Total cost , a = Total xed cost
Example Factory rental, of ce rental, factory depreciation, of ce depreciation,

supervisor’s salary, secretary’s salary, etc.
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Example 2
The cost information shows Rent Expense of Irfan Creative Enterprise is RM15,000.
Production for 3 months are 2,000 units, 3,000 units and 4,000 units respectively.
Required:
Calculate the total xed cost and xed cost per unit for each month
Solution:
Production Unit Total xed cost (RM) Fixed cost/unit (RM)

(a) (b) (b ÷ a)
2,000 15,000 7.50
3,000 15,000 5.00
4,000 15,000 3.75
The graph plotted for the above cost is as follows:
Cost (RM)
15,000 Total Fixed Cost
Units
2,000 3,000 4,000
Graph 3: Relationship Between Total Fixed Cost and Level of Activity
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Cost/unit (RM)
8.00
7.00
6.00
5.00
4.00 Fixed cost/unit
3.00
2.00
1.00
Units
2,000 3,000 4,000
Graph 4: Relationship Between Fixed Cost Per Unit and Level of Activity
• Mixed Cost
i. Explanation
Aspect Total Cost
De nition Mixed cost has both behavioral xed cost and variable cost.
Cost that varies in total but the changes is not in direct proportion to
the changes in the level of activity
Graph Cost (RM)
} Variable Cost
Fixed Cost
Units
Cost Y= a + bx
Function
Y = Total cost, a = Total xed cost, bx = Total variable cost
Example Factory Utilities
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i. Three methods used to segregate mixed cost

1.High-low method
2.Graph method
3.Simple regression method
ii. Segregate mixed cost using high-low method.

1.Data on the highest activity and the lowest activity are used to
estimate the variable cost per unit.
2.Activity: Production unit, hours, kilometre
3.Step:
a.Identify the highest activity and the lowest activity level.
b.Calculate variable cost per unit
Cost of highest activity (RM) - Cost of lowest activity (RM)

Highest activity (unit) - Lowest activity (unit)
c.Calculate total xed cost

d.Generate cost function
Example 3 (Single cost situation)

The followings are information about quarterly maintenance cost to produce tablet for
the current year.
Number of tablets Total maintenance

produced cost (RM)
1st quarter 360 1,720
2nd quarter 415 1,830
3rd quarter 480 1,960
4th quarter 240 1,480
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Required:
a.Calculate variable cost per unit and quarterly total xed cost.
b.Generate the cost function for maintenance cost.
c.Estimate total maintenance cost at 400 units of tablet.
Solution:
a.Variable cost per unit and quarterly total xed cost
Cost of highest activity (RM) - Cost of lowest activity (RM)

Variable cost per unit (b) =
Highest activity (unit) - Lowest activity (unit)
(RM1,960 − RM1,480)
(480 tablets − 240 tablets)
= RM480 / 240 tablets
= RM2 per tablet
Total xed cost (a) = Total mixed cost – Total variable cost
= Total mixed cost – (Variable cost per unit × Number of units)
= RM1,960 – (RM2 per tablet × 480 tablets)
= RM1,960 – RM960
= RM1,000
b.Cost function
Y = RM1,000 + RM2x
c.Total maintenance cost at 400 units of tablet
Y = RM1,000 + (RM2 x 400 units)
= RM1,800
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Example 4 (Multiple cost situation)

Khaleesah Manufacturing is a banana chips manufacturer around the city of Jasin,
Melaka. Here are some cost information taken from its nancial records for January and
February 2022;
January February
Units of production 21,000 27,000
RM RM
Bananas 15,750 20,250
Wages and salaries 15,250 16,750
Rental on factory building 1,500 1,500
Depreciation on factory machine 200 200
Factory utilities 1,420 1,540
34,120 40,240
Required:
a.Calculate the variable cost per unit and the xed cost for each cost item using the
high-low method.
b.Identify the cost behaviour of each item whether it is a variable cost, xed cost, or
mixed cost.
c.Estimate the total cost of factory utilities if the company produces 35,000 banana
chips.
d.Create an equation of total cost to show the behaviour of mixed cost. (y=a+bx).
e.Estimate the total cost if the company produces 35,000 units of banana chips.
Solution:
a.
Cost Variable Cost Fixed Cost

(RM) (RM)
Bananas (20,250 - 15,750) 20,250 =0.75(27,000) + a
(27,000 - 21,000) a=0
b = 0.75/unit
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Cost Variable Cost Fixed Cost

(RM) (RM)
Wages and (16,750 - 15,250) 16,750 =0.25(27,000) + a
salaries (27,000 - 21,000) a = 10,000
b = 0.25/unit
Rental on factory (1,500 - 1,500) 1,500 =0(27,000) + a

building (27,000 - 21,000) a = 1,500
b=0
Depreciation on (200 - 200) 200 =0(27,000) + a

factory machine (27,000 - 21,000) a = 200
b=0
Factory utilities (1,540 - 1,420) 1,540 =0.02(27,000) + a

(27,000 - 21,000) a = 1,000
b = 0.02/unit
b.
Costs Variable Cost Fixed Cost Types of cost

(RM) (RM)
Bananas Variable cost

0.75/unit 0
Wages and salaries Mixed cost

0.25/unit 10,000
Rental on factory building Fixed cost

0 1,500
Depreciation on factory Fixed cost
machine 0 200
Factory utilities Mixed cost

0.02/unit 1,000
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c.Estimate the total cost of factory utilities if the company produces 35,000 banana
chips
Total cost of factory utilities
Y = RM1,000 + RM0.02x
= RM1,000 + RM0.02(35,000)
= RM1,700
d.Create an equation of total cost to show the behaviour of mixed cost. (y=a+bx)
Costs Total xed costs Variable costs per unit

(a) (b)
RM RM
Bananas - 0.75
Wages and salaries 10,000 0.25
Rent on factory building 1,500 -
Depreciation on factory machine 200 -
Factory utilities 1,000 0.02
12,700 1.02
Y = RM12,700 + RM1.02x
e.Estimate the total cost if the company produces 35,000 units banana chips
Y = RM12,700+ RM1.02x
= RM12,700 + RM1.02(35,000)
= RM48,400
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6.4 CVP ANALYSIS METHOD

• At break-even point (BEP), total revenue equals to total cost (no pro t nor loss
situation)
• BEP shows the minimum level of sales that businesses need to achieve to avoid loss.
• Method of CVP analysis:
i. Mathematical Equation Method
ii. Contribution Margin Method
Example 5 (Mathematical Equation Method)
Chee Holdings produces product XYZ. Each unit is sold at RM4.00. The xed cost is
RM600 per month and the variable cost is estimated at RM2.50 per unit.
Required:
a.Calculate Break-Even Point (in RM and units) using mathematical equation method
b.Calculate net pro t if 500 units are produced.
c.Calculate sales unit if desired net pro t is RM300.
Solution:
a.Calculate Break-Even Point (in RM and units).

Assume - p = price per unit
b = variable cost per unit
a = total xed cost
x = unit
Total revenue = Total costs

or Total revenue = Variable costs + Fixed costs
or px = bx + a
px – bx = a
x (RM4 – RM2.50) = RM 600
therefore:
BEP in unit or x = RM 600
(RM4 – RM2.50)
= 400 units
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BEP in RM
= Price or p x BEP in unit or x
= RM4.00 x 400
= RM1,600
b.Net pro t if 500 units are produced.
= px – bx – a
= RM4(500) – RM2.50(500) – RM600
= RM2,000 – RM1,250 – RM600
= RM150
c.Sales unit if desired net pro t is RM300.
Net pro t = px -bx - a

RM300 = x (RM4.00 -RM2.50) - RM600
x (RM4.00 - RM2.50) = RM300 + RM600
x = RM300 + RM600
(RM4.00 - RM2.50)
x = 600
Example 6 (Contribution Margin Method)
Chee Holdings produces product XYZ. Each unit is sold at RM4.00. The xed cost is
RM600 per month and the variable cost is estimated at RM2.50 per unit.
Required:
a.Calculate Break-Even Point (BEP) in RM and units using contribution margin (CM)
method
b.Calculate net pro t if 500 units are produced.
c.Calculate sales unit if desired net pro t is RM300.
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Solution:
a.Break-Even Point (in RM and units).
CM per unit = (RM4.00 -RM2.50)

= RM1.50
BEP in unit or x = a
CM per unit
BEP in unit or x = RM 600

RM 1.50
= 400 units
BEP in RM
= Price or p x BEP in unit or x
= RM4.00 x 400
= RM1,600
b.Net pro t if 500 units are produced.
Net pro t = x (CM/ unit)– a

= 500 (1.50) – RM600
= RM750 – RM600
= RM150
c.Sales unit if desired net pro t is RM300.
x = a + desired net pro t

CM per unit
= RM600 + RM300
RM 1.50
= 600 units
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6.5 MARGIN OF SAFETY
• Margin of safety or safety margin is the difference between actual or expected sales
and sales at the break-even point.
• It measures the “cushion” that a particular level of sales provides.
• It tells us how far sales could fall before the company begins operating at a loss or it
indicates the possible decrease in sales that may occur before loss.
• The higher of margin of safety, the better it is or the lower the risk of not breaking even
and incurring a loss.
• The margin of safety can be stated in unit, RM or as a ratio (percentage).
• Formulas
Margin of Safety in unit
Margin of safety (unit) = Actual sales unit (expected sales unit) – BEP unit
Margin of Safety in RM
Margin of safety (RM) = Actual sales RM (expected sales RM) – BEP RM
Margin of Safety in ratio (%)
Margin of safety (%) = Margin of safety (unit) x 100%

Actual sales (Unit)
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Example 7
Given:
Sales at break-even point = RM15,500 @ 5,000 units
Actual Sales = RM22,320 @ 7,200 units
Required:
a.Calculate margin of safety in RM.
b.Calculate margin of safety in unit.
c.Calculate margin of safety in ratio (%).
Solution:
a.Margin of safety in RM
= RM22,320 – RM15,500
= RM6,820
b.Margin of safety in unit
= 7,200 – 5,000
= 2,200 units
c.Margin of safety in ratio
= RM6,820 x 100%
RM22,320
= 31%
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6.6 SENSITIVITY ANALYSIS
• Analysis the effects of changes in selling prices, xed costs and variable costs over
cost volume pro t through calculations
• It is a “what if“ technique that managers use to examine how an outcome will change if
all elements in CVP analysis changed from the original data by predictions and
assumptions.
• Examples of outcome that normally tested are: -
- Units sold to achieve break-even point or
- Units sold to achieve certain targeted pro t.
Example 8
The following is information for ZAM products issued by Zamrud Sdn. Bhd. (ZSB):
RM
Sales (400 units) 165,000
Variable cost 66,000
Contribution margin 99,000
Fixed cost 79,200
Net income 19,800
Required:
a.Calculate the sales volume in units and Ringgit at the break-even point.
Contribution margin per unit @ Contribution margin per unit
= Selling price –Variable cost per unit = Contribution margin
= RM165,000 – RM66,000 Sales unit
400 400 = RM99,000
= RM412.50 – RM165 400
= RM247.50 = RM247.50
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Break even point (unit) = Fixed cost

Contribution margin per unit
= RM79,200
RM247.50
= 320 units
Break even point (RM) = Break even point (unit) x Selling price
= 320 x RM412.50
= RM132,000
b.Calculate the number of units to be sold if ZSB targets a pro t of RM50,490
Sales unit = Fixed cost + Pro t

= RM79,200 + RM50,490
RM247.50
= 524 units
c.Change in xed cost and variable cost
To increase the production capacity of ZSB, production managers are planning to buy a
machine priced at RM142,000. The estimated depreciation of the machine is
RM42,350. The direct Labour costs of operating the machine will increase by RM10 per
unit. With this change, sales units are expected to increase to 550 units. Calculate the
selling price per unit of ZAM product if ZSB wants to maintain existing pro t

550 = (RM79,200 + RM42,350) + 19,800
Sales price – (165 + 10)
Sales price = RM432
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d.Change in sales price and xed cost.
ZSB's current sales level is 400 units. ZSB wants to increase sales and the sales
manager recommended a discount of RM37.50 per unit. At the same time, promotion
and advertising expenses are increased by RM30,000. The sales manager believes that
the sales units will increase by 60%. Is this proposal worth accepting? (Show all
calculations)

400 x 160% = (RM79,200 + RM30,000) + pro t
RM247.50 – RM37.50
= RM25,200
This proposal should be accepted as pro t increased by RM5,400

from RM19,800 to RM25,200
6.7 THE IMPORTANCE OF CVP ANALYSIS
• Determine the level of sales at break-even point.

• Determine the level of sales to achieve targeted pro t.
• Setting the selling price of the product to achieve targeted pro t (pricing policy).
• Making decisions regarding xed costs and marketing strategies.
• Making a forecast of the pro t that could be achieved when there is a change in the
CVP analysis element such as changes in:
i. Fixed Cost
ii. Variable Cost
iii. Price
iv. Sales Units
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6.8 ETHICAL ISSUES INVOLVED IN COST VOLUME PROFIT ANALYSIS
• Improper way of signing cost.

• Charging costs to the wrong jobs.
• Showing sales before revenue earned.
• Overstating cost of contracts.
• Arbitrary allocation of costs.
• Setting sales targets that are too low to maintain the desired reputation.
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7 ABSORPTION COSTING AND

MARGINAL COSTING
INTRODUCTION
This topic covers de nition of absorption costing and

marginal costing, product cost determination,
Statement of Comprehensive Income/Statement of
Pro t or Loss and Strengths and weakness of
absorption costing and marginal costing.
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7.1
• Explain absorption costing and marginal costing.

• Compare between Absorption Costing and Marginal Costing in terms of
product costing, inventory valuation and income statement/ Statement of
pro t or loss format
7.2
• Calculate product cost per unit under absorption costing and marginal
costing.
7.3
• Calculate the adjustment of over-applied and under-applied overhead.

• Journalise the over-applied and under-applied overhead.
• Prepare the Statement of Comprehensive Income/Statement of Pro t or
Loss under Absorption Costing and Marginal Costing based on actual
costing and normal costing.
• Explain and reconcile net pro t difference under Absorption Costing and
Marginal Costing.
7.4
• Discuss the strengths and weaknesses of Absorption Costing and

Marginal Costing for management review from the aspects of decision
making and performance evaluation.
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7.1 ABSORPTION COSTING AND MARGINAL COSTING
• Absorption Costing
i. Also known as full costing.
ii. Determine product cost by considering all manufacturing/production costs i.e.
direct materials cost, direct labour cost, variable manufacturing overhead cost
and xed manufacturing overhead cost.
iii.Meanings all manufacturing costs are absorbed by the units produced.
iv.Also means the xed manufacturing overhead cost is part of the product cost.
v. Comply with General Accepted Accounting Principle (GAAP)
vi.Also referred as full costing
• Marginal Costing
i. Also known as variable costing or direct costing
ii. Only direct materials, direct labour and variable manufacturing overhead costs
are considered product costs.
iii.Fixed manufacturing overhead costs are recognised as period costs (expenses).
iv.Determine product cost by taking into account variable manufacturing/
production costs only i.e. direct materials cost, direct labour cost and variable
manufacturing overhead cost.
v. Only for internal user.
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• Comparison between Absorption Costing and Marginal Costing in terms of product

costing, inventory valuation and income statement/Statement of pro t or loss format.
Absorption Costing Marginal Costing
RM RM
Direct materials XX
Direct materials XX
Direct labour XX
Direct labour XX
Variable manufacturing XX
Product costing
overhead Variable manufacturing XX
Fixed manufacturing XX overhead
overhead
Total XXX Total XXX
•Considering xed overhead •Not considering xed overhead

costs in product cost per unit. costs in product cost per unit.
•Unsold goods will have xed •Product cost per unit valuation
overhead cost elements. is lower than Absorption
•These costs remain in Costing.
Inventory inventories until the product •The value of unsold goods
valuation is sold. (ending inventory) will be
lowered.
•Fixed manufacturing overhead
costs is treated as operational
expense in the Statement of
Comprehensive Income
RM RM
Sales XX
Sales XX
(-) Cost of goods sold XX
(-) Variable costs XX
Gross pro t XX
1. Cost of goods sold XX
(-) Selling and XX
2. Selling and
administrative expenses administrative expense
Statement of
Contribution margin XX
Comprehensive Net pro t XX
Income (-) Fixed costs XX
1. Fixed manufacturing
overhead
XX
2. Selling and administrative
expenses
Net pro t XX
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7.2 PRODUCT COST DETERMINATION
Example 1
Mersing Sdn Bhd (MSB) is involved in strawberry jam production. Below is information
regarding operation of the company for the year 2022:
Direct materials RM 4.50/unit
Direct labour RM 2.90/unit
Variable manufacturing overhead RM 1.20/unit
Fixed manufacturing overhead is absorb based on rate of RM 0.60/unit
Required:
a. Calculate product cost per unit based on Absorption Costing and Marginal Costing
Solution

Costs
(RM) (RM)
Direct Materials 4.50 4.50
Direct labour 2.90 2.90
Variable manufacturing overhead 1.20 1.20
Fixed manufacturing overhead 0.60 -
Total 9.20 8.6
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7.3 STATEMENT OF COMPREHENSIVE INCOME / STATEMENT OF PROFIT OR LOSS
• Format of Statement of Comprehensive Income / Statement of Pro t or Loss

(Absorption costing)
Syarikat ABC
Statement of Comprehensive Income (Absorption costing)
For the year ended 31/12/xx
RM RM
Sales xx
(-) Cost Of Goods Sold:
Beginning inventory xx
(+) Cost of goods manufactured xx
Cost of goods available for sale xx
(-) Ending inventory (xx)
xx
(-) Over-applied overhead / (+) Under-applied overhead (xx)/xx
Adjusted Cost Of Goods Sold (xx)
Gross pro t xx
(-) Operating expenses
Variable Selling and Administrative Expense xx
Fixed Selling and Administrative Expense xx (xx)
Net pro t/ Net Loss xx/ (xx)
• Format of Statement of Comprehensive Income / Statement of Pro t or Loss (Marginal

costing)
Syarikat ABC
Statement of Comprehensive Income (Marginal costing)
For the year ended 31/12/xx
RM RM
Sales xx
(-) Variable costs:
Variable Cost Of Goods Sold:
Beginning inventory xx
(+ ) Cost of goods manufactured xx
Cost of goods available for sale xx
(-) Ending inventory (xx)
xx
(-) Over-applied overhead / (+) Under-applied xx/ (xx)
Adjusted variable Cost Of Goods Sold xx
(+) Variable Selling and Administrative xx
Total variable cost (xx)
Contribution Margin xx
(-) Fixed costs
Fixed Manufacturing Overhead xx
Fixed Selling and Administrative xx (xx)
Net pro t/ Net Loss xx/ (xx)
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• The difference in net pro t = Absorption costing net pro t - Marginal costing net pro t
• Reconciliation of net pro t:
RM
Absorption costing net pro t XX
(+) Fixed manufacturing overhead in beginning inventory XX
(Fixed manufacturing overhead per unit x beginning unit)
(-) Fixed manufacturing overhead in ending inventory (XX)
(Fixed manufacturing overhead per unit x ending unit)

Marginal costing net pro t XX
Example 2 (Actual Costing)

MJ Co. uses actual cost system in allocating overhead cost. Below is the information
from MJ Co. for year 2022.
Variable cost per unit RM

Direct materials 3
Direct labour 6
Variable manufacturing overhead 1
Selling & Administration 2
Fixed annual cost

Overhead 60,000
Selling & Administration 10,000
Production and sales in unit:
Beginning Inventory 0 Sales 4,000

Production 5,000 Ending Inventory 1,000
Selling price per unit is RM30.00
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Required:
a.Calculate product cost per unit for both absorption costing and marginal costing
system.
b.Prepare Statement of Comprehensive Income for the year ended 31 December 2022
for both absorption costing and marginal costing system.
c.Prepare the reconciliation net pro t for absorption costing and marginal costing.
d.Explain the reason for the difference in pro ts under absorption costing and marginal
costing.
Solution
a.Product cost per unit

Manufacturing costs per unit
(RM) (RM)
Direct direct materials 3 3
Direct labour 6 6
Variable manufacturing overhead 1 1
Fixed manufacturing overhead 12* -
Product cost per unit 22 10
RM 60,000
* Fixed manufacturing Overhead per unit =
5,000units
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b.Statement of Comprehensive Income for Absorption costing and marginal costing

MJ Co.
RM RM
Sales (RM30 x 4,000) 120,000
Beginning inventory 0
(+) Cost of goods manufactured (RM22 x 5,000) 110,000
Cost of goods available for sale 110000
(-) Ending inventory (RM22 x 1,000) (22,000) 88,000
Gross pro t 32,000
Variable Selling and Administrative Expense 8,000
(RM2 x 4,000)
Fixed Selling and Administrative Expense 10,000 (18,000)
Net pro t 14,000
MJ Co.
RM RM
Sales 120,000
(-) Variable costs:
(+ ) Cost of goods manufactured (RM10 x 5,000) 50,000
Cost of goods available for sale 50,000
(-) Ending inventory (RM10 x 1,000) (10,000)
Variable Cost Of Goods Sold 40,000
(+) Variable Selling and Administrative (RM10 x 1,000 ) 8,000
Total variable cost (48,000)
Contribution Margin 72,000
(-) Fixed costs
Fixed Manufacturing Overhead 60,000
Fixed Selling and Administrative 10,000 (70,000)
Net pro t 2,000
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c.Reconciliation of net pro t for absorption costing and marginal costing
RM
Absorption costing net pro t 14,000
(+) Fixed manufacturing overhead in beginning inventory 0
(RM12 x 0)
(-) Fixed manufacturing overhead in ending inventory (12,000)
(RM12 x 1,000)
Marginal costing net pro t 2,000
d.Reason for the difference in pro ts under absorption costing and marginal costing.
The difference in pro ts under absorption costing and marginal costing is due to
xed overhead costs which is included as product cost in the absorption costing.
Fixed overhead costs considered as inventoriable; i.e. absorbed in ending inventory
in absorption costing. While in the marginal costing, xed overhead costs charged as
period costs for the current year or is treated as an expense for the period.
• The adjustment of over-applied and under-applied overhead
RM
}
Applied manufacturing overhead xx
Compare
Actual manufacturing overhead xx
Over-applied / (Under-applied) xx /
overhead)
• Journal for the over-applied and under-applied overhead
i. If the overhead is under-applied:
Accounts and Explanation Debit (RM) Credit (RM)

Cost of Goods Sold xx
Manufacturing Overhead xx
(To record under-applied overhead)
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ii. If the overhead is over-applied:

Manufacturing Overhead xx
Cost of Goods Sold xx
(To record over-applied overhead)
Example 3 (Normal costing)
Here are the actual data in relation to the operation of Syarikat Kayaries using the
normal costing system for 2022:
Beginning inventory 0 unit

Production 36,000 unit
Sales 30,000 unit
Ending inventory 6,000 unit
Actual cost:
RM
Direct materials 1.80 per unit
Direct labour 1.50 per unit
Variable overhead 0.60 per unit
Fixed manufacturing overhead 12,000
Variable selling and administrative expenses 8,200
Fixed selling and administrative expenses 3,600
Selling price 6.00 per unit
Manufacturing overhead costs are absorbed by production units. Here are the
company's annual budgets:
Budgeted xed overhead RM 14,000

Budgeted production volume 35,000 units
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Required:
a.Calculate the product cost per unit for marginal costing and absorption costing.
b.Prepare a Statement of Comprehensive Income based on marginal costing and

absorption costing method for the year ended 31 December 2022.
c.Reconcile the net pro t difference under absorption costing and marginal costing
d.Prepare journal entry to record the adjustment of over-applied or under-applied

overhead.
Solution
a.Product cost per unit
Absorption costing Marginal costing
(RM) (RM)
Direct materials 1.80 1.80
Direct Labour 1.50 1.50
Variable manufacturing overhead 0.60 0.60
Fixed manufacturing overhead (POR) *0.40 -
Total 4.30 3.90
* 14,000
= 0.4
35,000
Under-applied / over-applied overhead calculation

for absorption costing
RM
Applied xed overhead RM0.40 x 36,000 14,400
Actual xed overhead units 12,000
Over-applied overhead 2,400
No under-applied / over-applied overhead calculation

for marginal costing since no di erence between actual
variable overhead per unit and estimated variable
overhead per unit
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b.Statement of Comprehensive Income based on marginal costing and absorption

costing method for the year ended 31 December 2022.
Syarikat Kayaries
RM RM
Sales (RM6.00 x 30,000) 180,000
(+) Cost of goods manufactured (RM4.30 x 36,000) 154,800
Cost of goods available for sale 154,800
(-) Ending inventory (RM4.30 x 6,000) (25,800)
Cost Of Goods Sold 129,000
(-) Over-applied overhead (2,400)
Adjusted Cost Of Goods Sold (126,600)
Gross pro t 53,400
Variable Selling and Administrative Expense 8,200
Fixed Selling and Administrative Expense 3,600 (11,800)
Net pro t/ Net Loss 41,600
Syarikat Kayaries
RM RM
Sales (RM6.00 x 30,000 ) 180,000
(-) Variable costs:
(+)Cost of goods manufactured (RM3.90 x 30,000) 140,400
Cost of goods available for sale 140400
(-) Ending inventory (RM3.90 x 6,000) (23,400)
Variable Cost Of Goods Sold 117000
(+) Variable selling and administrative 8,200
Total variable cost (125,200)
Contribution Margin 54,800
(-) Fixed costs
Fixed Manufacturing Overhead 12,000
Fixed Selling and Administrative 3,600 (15,600)
Net pro t/ Net Loss 39,200
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c.Net pro t reconciliation
RM
Absorption costing net pro t 41,600
(+) Fixed manufacturing overhead in beginning inventory 0
(RM0.40 x 0)
(-) Fixed manufacturing overhead in ending inventory (2,400)
(RM0.40 x 6,000)
Marginal costing net pro t 39,200
Reasons for difference in net pro t
•Due to xed manufacturing overhead

•In absorption costing, xed manufacturing overhead per unit is considered
as product cost.
•In marginal costing, xed manufacturing overhead per unit is considered
as period cost.
d.Journal entry to record the adjustment of over-applied or under-applied overhead.

Cost of Goods Sold 2,400
(To record over-applied overhead)
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7.4 STRENGTHS AND WEAKNESSES IN ABSORPTION COSTING AND MARGINAL

COSTING
Performance Not suitable for management Suitable for performance

Evaluation performance evaluation evaluation because it can
because it’s doesn’t segregate measure the manager's abilities
xed cost and variable cost to control variable costs
Decision Making Not suitable for the decision- Helps management for
making because all planning, controlling and
manufacturing costs are decision making because it
charged to the product. separates variable cost and
xed cost
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8 JOB ORDER COSTING
INTRODUCTION
This topic covers Job Order Costing, the characteristics

of Job Order Costing (in terms of product types, cost
accumulation, cost ows and documentation) and the
determination of cost per job.
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8.1
• Explain Job Order Costing

• Explain the characteristics of Job Order Costing in terms of product types,
cost accumulation, cost ows and documentation.
8.2
• Explain and calculate the cost per job.

• Explain source documents such as material requisition form and time
ticket.
• Calculate total manufacturing cost and the cost per job.
• Prepare job cost sheet.
• Provide suggestion to management on pricing policy based on Job Cost
Sheet
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8.1 JOB ORDER COSTING
•Job Order Costing
i. Costs are assigned to each job or to each batch of product to ful l customer’s
speci cations.
ii. Each job/batch has its own distinguishing characteristics.
iii.Examples: wedding invitation cards, custom furniture, custom t-shirt and birthday
cake.
iv.The objective is to compute the cost per job once the job completed.
• Characteristics of Job Order Costing in terms of product types, cost accumulation, cost
ows and documentation
Terms Details
Product Types Heterogeneous.
Cost Accumulation Cost
Each accumulated
job (batch) based
has itsondistinguishing
job. characteristics
Cost Flows Costs are charged to individual job. Total cost are
determined when the job completed.
Documentation Job Cost Sheet.
• Illustration shows the recording of costs in a job order cost system for Disney as it
produced two different lms.
Illustration 8.1: Costs in a job cost system
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• Example: basic overview of the ow of costs in a manufacturing setting for production of

a re truck.
Illustration 8.2: Costs ow
8.2 DETERMINATION OF COST PER JOB
• Calculate the cost per job
i. Cost per job consists of 3 components as follows:
Cost RM
Direct materials XXX
Direct labour XXX
Applied manufacturing overhead XXX
ii. The direct materials and direct labour costs can be traced to the job speci cally.
These costs involved directly in the making of the product.
iii.The manufacturing overhead is applied to the job based on a predetermined

overhead rate.
iv.Normal costing is used instead of the actual costing so that the cost of the job
can be determined without having to wait until the end of accounting period.
v. The cost of the job is determined when the job is completed, not at the end of the
accounting period.
vi.Based on the cost information, the management can decide on the pricing of the
product to be charged to the customer.
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Example 1 (Single department)
Kilang Perabot Kayu received an order from a customer to build 10 units of kitchen
cabinet. The costs involved in making the cabinets are RM15,600 and RM10,000 for
direct materials and direct labour accordingly. Manufacturing overhead was applied
based on the direct labour cost at the rate of 150%.
Required:
Calculate the cost of the job.
Solution
Cost RM
Direct materials 15,600
Direct labour 10,000
Applied manufacturing overhead (150% x 10,000) 15,000
Total Cost 40,600
Example 2 (multiple departments)
Syaz Sdn. Bhd. uses machine hour base to compute predetermined overhead for
Cutting Department and direct labour hour base for Assembling Department. In the
early of 2022, the management has predicted data as below:
Cutting Department Assembling Department
Direct labour hours 125,000 250,000
Machine hours 375,000 51,250
Direct labour costs (RM) 2,750,000 5,000,000
Manufacturing overhead (RM) 3,000,000 2,500,000
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Below is the order from Mr. Marc for July 2022:
Cutting Department Assembling Department
Direct labour costs (RM) 19,250 8,750
Direct materials costs (RM) 27,500 50,000
Machine hours 2,875 75
Direct labour hours 875 425
Required:
a.Calculate the predetermined overhead rate for Cutting Department and Assembling
Department
b.Calculate the total overhead costs for Mr. Marc’s order.
c.If the order contains 1,000 units of output, what is the cost per unit?
Solution
a. POR Cutting Department = RM3,000,000

375,000 hours
= RM8.00/ machine hour
POR Assembling Department = RM2,500,000

250,000 hours
= RM10.00/ direct labour hour
b. Total overhead costs for Mr. Marc’s order:
Cutting Department = RM8.00 x 2,875 hours = RM23,000
Assembling Department = RM10.00 x 425 hours = RM4,250
Total RM27,250
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c.Cost per unit If the order contains 1,000 units of output
Cost items Cutting Assembling Total

Department (RM) Department (RM) (RM)
Direct materials 27,500 50,000 77,500
Direct labour 19,250 8,750 28,000
Applied 23,000 4,250 27,250

manufacturing
overhead
Total 69,750 63,000 132,750
Therefore:
Cost per unit: RM132,750 = RM132.75/unit
1,000 units
• Source documents
i. Materials requisition form/slip
1.The information on the cost of direct materials used in the process
of completing the order/job can be traced to the material requisition
form.
2.Every material taken from the store must get the authorisation from
the storekeeper.
3. A material requisition form must be lled to request the materials
from store.
4.This form will be used to trace the cost of materials for each job
done in the factory.
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5.Example of materials requisition form:
ii. Time ticket

1.The information on the cost of direct labour involved in the job can
be traced to the time ticket.
2.Time ticket is the documents used to record the hours the worker
has worked.
3.In the case of a particular job, the worker may be required to clock
in the time he starts doing the job and the clock out the time he
nishes, every day he is doing the job. up from all workers’ time
tickets.
4.Example of time ticket
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• Calculate total manufacturing cost and the cost per job

i. Manufacturing costs consist of three components; i.e direct materials, direct
labour and manufacturing overhead.
ii. In job order costing, the costs of direct materials and direct labour on particular
job will be traced through material requisition forms and time tickets.
iii.The cost of manufacturing overhead is applied using a predetermined overhead
rate set by the business. Usually, normal costing is used in calculating the cost of
the job.
Example 3
Kilang Perabot Kayu had the following costs for January 2022:
RM
Beginning inventory:
Work in process inventory Job 01 3,000
Job 02 3,250
Information from direct materials requisition forms were as follows:
RM
Job 01 1,550
Job 02 1,340
Job 03 2,400
Job 04 2,365
Information from workers’ time tickets were as follows:
RM
Job 01 2,435
Job 02 4,125
Job 03 1,465
Job 04 3,215
Additional information:
1.Manufacturing overhead is applied at a rate of 140% of direct labour cost
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2. Jobs completed during the month were:

Job 01 – 50 units
Job 02 – 40 units
Job 03 – 20 units
3.Sales:
Job 01 – RM15,591
Job 02 – RM21,735
Required:
a.Calculate cost and cost per unit for each job.
b.Calculate ending work in process and nished goods
c.Calculate the total cost of goods sold and total sales
Solution
a. Cost and cost per unit for each job.
Job Cost Table
Job 01 Job 02 Job 03 Job 04 Total

(RM) (RM) (RM) (RM)
Beginning Work-In- 3,000 3,250 - - 6,250
Process
Direct materials 1,550 1,340 2,400 2,365 7,655
Direct Labour 2,435 4,125 1,465 3,215 11,240
Applied Manufacturing 3,409 5,775 2,051 4,501 15,736

Overhead
Cost per job 10,394 14,490 5,916 10,081 40,881
Units completed (unit) 50 40 20 -
Unit Cost (per unit) 207.88 362.25 295.8 -
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b.Ending work in process and nished goods
Total ending work in process:
Job 04
(RM)
Direct Labour 3,215
Applied Manufacturing Overhead 4,501
Cost per job 10,081
Total of nished goods:
Job 01 Job 02 Job 03 Total

(RM) (RM) (RM) (RM)
Beginning Work-In-Process 3,000 3,250 - 6250
Direct materials 1,550 1,340 2,400 5,290
Direct Labour 2,435 4,125 1,465 8,025
Applied Manufacturing Overhead 3,409 5,775 2,051 11,235
Cost per job 10,394 14,490 5,916 30,800
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c.Total cost of goods sold and total sales
Total cost of goods sold:
RM
Job 01 10,394
Job 02 14,490
Total 24,884
Total sales:
RM
Job 01 15,591
Job 02 21,735
Total 37,326
•Job Cost Sheet

i. A job cost sheet is a report/form used to record the summary of direct materials
costs, direct labour costs and manufacturing overhead costs charged to the job.
ii. It is also used to determine the total and unit costs of the completed job.
iii.Job cost sheet is reported once the production process has been completed.
iv.Companies keep a separate job cost sheet for each job.
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Illustration 3: Flow of Documents
Material
Requisition Form
Time Ticket Job Cost Sheet
Predetermined
Overhead Rate
Example 4:
Creative Women Manufacturing Co. (CWMC) employs a job order costing system in
their manufacturing operations. They commenced the production of a speci c order,
which involves the creation of 100 silver bracelets for Efayel Company, under the
reference name "Job 101" on January 5, 2023. Manufacturing overhead costs are
applied based on direct labour cost basis (80%). The job completed on 31 January
2023. The following details are extracted from a relevant source document.
Materials Requisition Form Time Ticket
Date Number Cost (RM) Date Number Cost (RM)
6/1/23 1,000 10/1/23 9,000

342 236
12/1/23 7,000 31/1/23 6,000
345 237
26/1/23 4,000
352
Required:
Prepare Job Cost Sheet for Job 101.
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Solution:
•Suggestion to management on pricing policy based on Job Cost Sheet
i. From the Job Cost Sheet in Example 4 (CWMC), RM390 is the cost per unit for
Job 101. Thus, if the price is set at RM390, it's only covers the manufacturing
costs. There are other costs such as selling and administrative expenses should
be considered.
ii. If the management intends to achieve a certain percentage of pro t, then the
desired percentage of pro t (mark-up) must be added to the cost per unit.
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Example 5:
CWMC sets its pricing policy to be 100% mark-up on its manufacturing cost. To
determine the price per unit for Job 101.
Required:
Calculate the desired selling price per unit of Job 101
Solution
Price = Cost per unit + (100% mark-up on cost per unit)

= RM390 + (100% x RM390)
= RM390 + RM390
= RM780
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9 PROCESS COSTING
INTRODUCTION
This topic covers process costing, equivalent units,

determination of product cost per equivalent unit, cost
of completed units and cost of ending work-in process
inventory, transferred-in cost and production cost
report.
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9.1
• Explain process costing.

• Explain characteristics of process costing in terms of product types, cost
accumulation, cost ows and documentation.
• Compare between process costing and job order costing.
9.2
• Calculate equivalent units using weighted average method.
9.3
• Calculate product cost per equivalent unit using the weighted average
method based on following assumptions: direct material is added at the
beginning, ending or uniformly in the process and conversion costs
incurred uniformly
9.4
• Calculate cost of completed units (transferred-out cost) and cost of

ending work-in-process.
9.5
• Explain transferred-in cost.

• Calculate cost of equivalent units for transferred-in cost in the second
department.
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9.6
• Prepare production Cost Report for each department.

• Discuss the importance of Production Cost Report to the management.
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9.1 PROCESS COSTING
• A system for assigning costs to goods that are mass-produced in a continuous

sequence of steps, called processes.
• Process industries produce large numbers of identical units, such as tomato ketchup,
boxes of cereal, shampoos, and sardines.
• Many companies in the petroleum, food and beverage, pharmaceutical and chemical
industries use process costing.
Characteristics of process costing in terms of product types, cost accumulation,

cost flow and documentation
Types of products Homogenous products (similar products that are mass-

produced such as boxes of cereal, food and beverage.)
Cost Accumulation A process costing system accumulates the cost of each
process needed to complete the product. For example,
cost accumulated by:
1. Processing Department
2. Packaging Department
Documentation Cost summarized in a Production Cost Reports.
Cost Flow Cost charged to every process. Total costs are determined
at the end of a period.
Comparison Between Process Costing and Job Order Costing
Job Order Costing Process Costing
Type Of Heterogenous (Assigned to a Homogenous(Similar product

Product specific/customize/different job ) that are mass-produced)
Cost Cost for each job Cost of each process

Accumulation
Cost Flow Cost charged to each job.Total Cost charged to every
costs are determined when the process.Total costs are
job is completed. determined at the end of a
period.
Documentation Job cost sheets Production cost reports
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9.2 EQUIVALENT UNITS
Calculation for equivalent units using weighted average method.

• In the production, not all the processing units will be fully completed.
• Equivalent units represent units that are supposed to be completed over a period of
time using the production costs incurred.
• Formula:
Equivalent units =
Completed unit + [ Ending work in process unit x % of completion ]
Example 1:
In a factory, an initial inventory of 28,000 units was on hand. Over the course of the
period, 25,000 units were completed and advanced to the next stage, while another
3,000 units were still in progress as the period came to a close. These incomplete units
had achieved an 80% level of completion in terms of both direct Labour and
manufacturing costs, with no additional materials consumed in this phase. Calculate the
equivalent units in terms of direct Labour and manufacturing overhead costs.
Solution:
Direct Labour cost + Manufacturing Overhead = Conversion cost
Physical Unit Equivalent unit
Conversion cost
Completed Unit 2000 2000
(+) Ending Work in

Process 3000 2400
(80% x 3,000)
Equivalent unit 4400
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9.3 DETERMINATION OF PRODUCT COST PER EQUIVALENT UNIT
Product cost per equivalent unit
• The completed percentage for direct materials depends on when the material is added
during the production process.
Beginning of the process 100%

Ending of the process 0%
Continuously Uniformly with the level of production process / with
the percentage of completion.
• The completed percentage for transferred-in units is 100%.

• The completed percentage for conversion cost is uniformly with the level of production
process.
Cost per [Beginning WIP costs + Costs added during period*]

equivalent units =
Equivalent Units
*costs added during period = current cost added.
Calculation for product cost per equivalent unit using the weighted average
method based on following assumptions:
• Direct materials is added at the beginning, ending or uniformly in the process

• Conversion costs is incurred uniformly
Illustration 9.1: Percentage of Direct materials Added in Partially

Complete Unit ( example: 75% completed) - beginning
If direct materials added at

the beginning process
Direct materials 100% in process completed
Starting Completed
Conversion Cost (75% completed)
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Illustration 9.2: Percentage of Direct materials Added in Partially

Complete Unit ( example: 75% completed) - ending
If direct materials added at

the ending process
Direct materials 0% in process completed
Starting Completed
Conversion Cost (75% completed)

Example 2:
Completed unit: 64,000 units, ending work in process (20% completed), 26,000 unit
Cost of Direct Material RM198,000 and Conversion Cost RM110,720.
Required:
a.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion if direct material added at the beginning of process.
b.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion if direct material added at the ending of process.
c.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion if direct direct material added uniformly in process.
Solution:
a.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion cost if direct material added at the beginning of process.
Equivalent unit: Direct Material Conversion Cost
Completed unit 64,000 64,000

Ending WIP 26,000 5,200
(20% completed) (20%x26,000)

Equivalent unit: 90,000 units 69,200 units
RM198,000 RM110,720
90,000 units 69,200 units
Cost per equivalent units RM2.20 per unit RM1.60 per unit
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b.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion cost if direct material added at the ending of process.
Equivalent unit Direct Material Conversion Cost

Ending WIP (20% completed) 0 5,200
(20% x 26,000)
RM198,000 RM110,720
Cos per equivalent units RM3.09 per unit RM1.60 per unit
c.Calculate equivalent unit and equivalent cost per unit for direct material and
conversion cost if direct material added uniformly in process.
Equivalent unit Direct Material Conversion Cost

Ending WIP 5,200 5,200
(26,000 units, 20% completed) (20% x 26,000) (20% x 26,000)

RM198,000 RM110,720
Cost per equivalent units RM2.86 per unit RM1.60 per unit
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9.4 COST OF COMPLETED UNITS AND COST OF ENDING WORK IN PROCESS

INVENTORY.
Calculation for cost of completed units (transferred-out cost) and cost of

ending work in process.
Completed Units And Transferred - Out Cost :
Completed units &

Units completed & transferred-out x cost per unit
transferred-out cost =
Ending Work In Process Cost– calculated separately for each cost element
Ending WIP cost = (Units ending WIP x % completed) x cost per unit
Example 3:
Mekar Sejati Enterprise is using process costing system to trace production costs.
Information of the Department One is as follows:
Beginning work in process 10,000 units @ RM54,300

Unit started 17,800 units
Cost added during period incurred RM116,514
Unit completed and transferred - out 20,200 units
Ending work-in-process 7,600 units (40% complete)
Given the cost per equivalent units is RM7.35.
Required:
a. Calculate the Cost of Completed Units.
b. Calculate the Cost of Ending Work in Process.
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Solution:
a. Cost of completed unit
Units completed and transferred - out 20,200
x Cost per Equivalent unit RM7.35

RM148,470
b. Cost of Ending Work in Process
Units of Ending Work-in-Process x % completed (7,600 x 40%) 3,040
x Cost per Equivalent unit RM7.35
RM22,344
9.5 TRANSFERRED - IN COST
Transferred - in cost
• The cost that has been incurred in a previous department (Department 1) and that will
be transferred into next department (Department 2) for the purpose of continuing the
next process.
Department 1 Department 2
Units Completed
Units Ending Units Beginning
& Transferred Units started
work in process work in process
Out
Calculation for cost of equivalent units for transferred-in cost in the second
department.
Refer to example 3 (a). The cost of equivalent units for transferred-in cost in the second
department are equivalent to completed and transferred-out cost in the first department.
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9.6 PRODUCTION COST REPORT

Production Cost Report for each department
• An internal document for management that shows production quantity and cost data
for production department.
• There are 4 steps in preparing a production cost report:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
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Format for Production Cost Report ;
Department A:
(Company’s Name)
Production Cost Report –Department A
For the month ended XXX
Quantity Physical Units
Beginning work in process xxx
Units started xxx Equivalent Units
Unit to be accounted for xxx Direct materials Conversion
Costs
Must
be Unit Completed & transferred- xxx xxx xxx
the
same out
Ending work in process xxx xxx xxx
Units accounted for xxx xxx xxx
Costs Direct Conversion Total

materials Costs
Beginning work in process xxx xxx xxx
Current cost incurred xxx xxx xxx
Costs to be accounted for xxx xxx xxx
÷ Equivalent unit xxx xxx xxx

Cost per Equivalent Unit xxx xxx xxx Suppose
to be the
same
however
Completed & transferred-out xx x xx = xxx xxx different
due to
cost rounding
error
Ending work in process:

Direct materials xx x xx = xxx
Conversion costs xx x xx = xxx xxx
Costs accounted for xxx
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Department B:
(Company’s Name)
Production Cost Report –Department B
For the month ended XXX
Quantity Physical
Units
Beginning work in process xxx
Units started xxx Equivalent Units
Units to be accounted for * xxx Transferred Direct Conversion
in materials Costs
Must
be Units Completed & xxx xxx xxx xxx
the
same transferred out
Ending work in process xxx xxx xxx xxx
Units accounted for * xxx xxx xxx xxx
Costs Transferred Direct Conversion Total

in materials Costs
Beginning work in process xxx xxx xxx xxx
Current cost incurred xxx xxx xxx xxx
Costs to be accounted for xxx xxx xxx xxx
÷ Equivalent unit xxx xxx xxx xxx
Cost per Equivalent Unit xxx xxx xxx xxx
Suppose
to be the
Completed & transferred- xx x xx = xxx xxx same
however
out cost different
due to
rounding
error
Transferred-in xx x xx = xxx
Direct materials xx x xx = xxx
Conversion costs xx x xx = xxx xxx
Costs accounted for xxx
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Example 4:
Processing Department and Packaging Department of Perniagaan Indah has following
production and manufacturing cost data for February 2022. All materials are added at the
beginning of the process.
Manufacturing Cost of Processing Department:
Beginning work in process:
Direct Materials RM18,000
Conversion costs RM14,175
Current cost incurred:
Direct Materials RM180,000
Labour RM35,100
Manufacturing Overhead RM61,445
Production Data of Processing Department:
Beginning work in process 15,000units
Units transferred-out 64,000units
Units started 75,000units
Ending work in process 26,000units (20% completed)
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Manufacturing Cost of Packaging Department:
Beginning work in process:
Materials RM27,600
Conversion costs RM15,150
Transferred-In RM19,200
Current cost incurred:
Transferred-in Z (used transferred - in costs)
Material RM120,000
Labour RM36,100
Manufacturing Overhead RM38,750
Production Data of Packaging Department:
Beginning work in process 18,000 units
Completed Y
Units started X (used transferred- in units)
Ending work in process 14,000 units (50% completed)
Required:
Prepare a production cost report for Processing Department and Packaging Department
for the month of February.
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Solution:
Perniagaan Indah
Report of Production cost (Processing Department)
For the month ended 28 February 2022
Quantity Physical Units
Beginning work in process 15,000
Units started 75,000 Equivalent Units
Unit to be accounted for 90,000 Direct materials Conversion
Costs
Unit Completed & transferred 64,000 64,000 64,000
out
Ending work in process 26,000 26,000 5,200
Units accounted for 90,000 90,000 69,200
Costs Direct materials Conversion Total

Costs
Beginning work in process 18,000 14,175 32,175
Current cost incurred 180,000 96,545 276,545
Costs to be accounted for 198,000 110,720 308,720
÷ Equivalent unit 90,000 69,200 -
Cost per Equivalent Unit 2.20 1.60 3.80
Completed & transferred out 64,000 x RM3.80 243,200

cost

Direct materials 26,000 xRM2.20 = RM57,200
Conversion costs 5,200 x RM1.60 = RM8,320 65,520
Costs accounted for 308,720
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Perniagaan Indah
Report of Production cost (Packaging Department)
For the month ended 28 February 2022
Quantity Physical
Units
Beginning work in process 18,000
Units started 64,000 Equivalent Units
Units to be accounted for * 82,000 Transferred Direct Conversion
in materials Costs
Units Completed & 68,000 68,000 68,000 68,000
transferred out
Ending work in process 14,000 14,000 14,000 7,000
Units accounted for * 82,000 82,000 82,000 75,000
Costs Transferred Direct Conversion Total

in materials Costs
Beginning work in process 19,200 27,600 15,150 61,950
Current cost incurred 243,200 120,000 74,850 438,050
Costs to be accounted for 262,400 147,600 90,000 500,000
÷ Equivalent unit 82,000 82,000 75,000 -
Cost per Equivalent Unit 3.20 1.80 1.20 6.20
Completed & transferred out 68,000 x RM6.20 421,600

cost

Transferred-in cost 14,000 x RM3.20 = RM44,800
Direct materials 14,000 x RM1.80= RM25,200
Conversion costs 7,000 x RM1.20=RM8,400 78,400
Costs accounted for 500,000
*Completed & transferred-out units as started into production units in

second department
*Completed &transferred-out costs as transferred-in started into
production costs in second department
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Importance of Production Cost Report to the management.
• Internal document for management that shows production quantity and cost data for a
production department.
• Provides a basis for evaluating productivity of a department.

• Managers can use cost data to assess, whether unit costs and total costs are
reasonable.
• Top management can also judge whether current performance meets or matches
meeting planned objectives.
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10 STANDARD COSTING AND

VARIANCE ANALYSIS
INTRODUCTION
This topic covers standard costing, determination of

standard cost, variance analysis and extract of
variance report based on analysis.
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10.1
• Explain standard costing.

• Explain the uses of standard costing for the purpose of controlling and
performance evaluation.
• Explain ideal standard and normal standard.
10.2
• Calculate standard cost per unit.
10.3
• Explain Direct Material Variance. Direct Labour Variance and

Manufacturing Overhead Variance.
• Identify parties responsible for each variance such as production
manager.
• Calculate Price variance and quantity variance for direct material, Price/
rate variance and quantity/ ef ciency variance for direct labour,
Expenditure and ef ciency variance for variable overhead and Budget and
volume variance for xed overhead
• Interpret the result of variance analysis as favourable (F) or unfavourable
(UF).
10.4
• Prepare an extract of variance report based on the analysis.

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10.1 STANDARD COSTING
Standard costing
• Standard costing is a system accounting that uses predetermined standard costs for
direct materials, direct Labour, and factory overheads. Standard costing is used by
some manufacturers to identify the differences or variances between:
i. The actual cost of the goods that were produced, and

ii. The costs that should have occurred for the actual goods produced
• In managerial accounting, standard costs are predetermined unit costs which

companies use as a measure of performance. It is used to set budgets and plan for
future expenses.
Uses of standard costing
• Standard costing system helps to control and evaluate performance by comparing the
actual costs incurred with the standard costs.
i. Control
1. Managers control the costs by developing standard cost, that is the

costs that should be attained.
2. They control each activity that affects product cost such as price and
quality of the material used in the production, the time involved in
making the product and the rate of wages and manufacturing
overheads.
ii. Performance Evaluation
1. Standard costs may be used by management as a mean to

measure the performance of a company as a whole or any particular
department or manager. For example, the Production Manager will
be held liable if the cost of production is higher than expected.
2. Human Resource Managers can also be blamed if inefficient labour
is used. Each department in a manufacturing firm can also be
evaluated based on the efficiency of utilising the cost of production
involved. Further evaluation on the company in general is also
possible.
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Ideal Standard And Normal Standard
i. Ideal standards
1.Represent optimum levels of performance under perfect operating

conditions.
2.Developed under the assumption that no obstacles to the production
process will be encountered.
3.The level of performance under ideal standards would be achieved
through the best possible combination of factors — the most
favourable prices for materials and labour, highest output with best
equipment and layout, and maximum efficiency in the utilisation of the
production resources
4.Not widely used.
ii. Normal standards
1.Represents efficient levels of performance that are attainable under

expected operating conditions.
2.Developed under the assumption that there will be occasional
problems in the production process such as equipment failure, labour
turnover and materials defects.
10.2 DETERMINATION OF STANDARD COST
• Calculation of standard cost per unit
Direct Standard price of direct Standard quantity of direct

= x
materials materials per unit materials per unit
Standard rate of direct Standard hour of direct labour
Direct Labour = x
labour per hour per unit
Manufacturing Predetermined overhead Standard hour of direct labour
= x
Overhead rate per hour (variable/fixed) per unit
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Example 1:
RM
Direct materials RM2.50 x 3.00kg 7.50
Direct Labour RM5.00 x 2.0 hours 10.00
Variable Manufacturing Overhead RM3.00 x 2.0 hours 6.00
Fixed Manufacturing Overhead RM2.00 x 2.0 hours 4.00

Total 27.50
10. 3 VARIANCE ANALYSIS
Direct materials Variances, Direct Labours Variance and Manufacturing Overhead

Variances
• An analysis of the difference between total actual cost and total standard cost is called
variance analysis.
• The variance is expressed in total RM not on per unit basis. When actual costs exceed
standard costs, the variance is unfavourable.
• If the actual costs are less than standard costs, the variance is favourable.
i. Direct materials Variances
The direct materials variance is the difference between the actual direct materials
costs incurred and the standard cost of materials resulting from production
activities of the period. Total direct materials variance could be caused by
differences in the price paid for the materials or differences in the quantity of
materials used.
1. Materials Price Variance
The material price variance results from a difference between the

actual price and the standard price at the actual quantity of
materials.
2. Materials Quantity Variance
The Material Quantity Variance results from differences between

the quantity of material actually used and the quantity that should
have been used at the standard price of material.
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ii. Direct Labours Variances
The direct labour variance is the difference between the amount actually paid for
labour and the amount that should have been paid. Total direct labour variances
could be caused by differences in the labour rate paid for the materials or
differences in labour hours.
1. Labour Price/ Rate Variance
The labour rate variance results from the difference between the
rate actually paid to workers and rate that supposed to be paid at
the actual hours worked.
2. Labour Quantity/Efficiency Variance
The labour efficiency variance results from the difference between

the actual number of hours worked and the number of hours that
should have been worked for the output produced at the standard
labour rate.
iii. Manufacturing Overhead Variances
Manufacturing overhead variance is the difference between the actual overhead

costs and the overhead costs applied based on standard hours allowed for the
amount of goods produced. The computation of manufacturing overhead
variance is divided into variable and fixed overhead variances.
1. Variable Overhead Variance
It is the difference between the standard variable overhead cost

allowed for the actual output achieved and the actual variable
overhead cost.
a. Variable Overhead Expenditure Variance
Variable overhead expenditure variance is the difference

between actual variable overhead rate and the
predetermined variable overhead rate at the actual direct
labour hours.
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b. Variable Overhead Efficiency Variance
Variable overhead efficiency variance is the difference actual

direct labour hours and standard hours worked at a
predetermined overhead rate.
2. Fixed Overhead Variance.
Fixed overhead variance is the difference between the actual fixed

overhead cost incurred and the standard fixed overhead cost allowed
for the actual output produced.
a.Fixed Overhead Budget Variance
Fixed overhead budget variance (also known as expenditure

variance) is the difference between the actual fixed
manufacturing overhead costs and budget fixed
manufacturing overhead cost.
b. Fixed Overhead Volume Variance
Fixed overhead volume variance is the difference between

budget at normal production and the applied fixed
manufacturing overhead based on actual production.
Parties Responsible For Each Variance
VARIANCE PARTIES RESPONSIBLE

Direct Materials Price Purchasing Department Manager
Variance
Direct Materials Quantity Factory Supervisor,
Variance Production Department Manager
Direct Labour Price/Rate Personnel Department Manager,
Variance Factory Supervisor,
Production Department Manager
Direct Labour Quantity/ Factory Supervisor,
Ef ciency Variance Production Department Manager
All Overhead Variances Factory Supervisor,
Production Department Manager,
Sales Department Manager (Volume Variance)*
*Due to lack of customer’s order or overly optimistic sales forecasts.
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Calculation Of Variance
• An analysis of the difference between total standard cost and total actual cost is
called variance analysis.
• Variance analysis attempts to identify and explain the reasons for the difference
between a standard amount and an actual amount.
i. Direct materials Variances = Price Variance + Quantity Variance
Price Variance = (AP x AQ purchased) - (SP x AQ purchased)

= AQ (AP - SP)
Quantity Variance = (SP x AQ used) - [SP x (SQ per unit x AU)]

= SP (AQ - SQ)
AP < SP AQ < SQ
or or
AP x AQ < SP x AQ = FAVOURABLE SP x AQ < SP x SQ= FAVOURABLE
SQ = Standard Quantity
SP = Standard Price per unit
SQ = SQ/u x AU
AP = Actual Price per unit
SP = Standard Price per unit
AQ = Actual Quantity purchased/
used AU = Actual unit produced
Example 2: (Quantity material used equals to quantity material purchased)

Syarikat QiqiLala produces baby clothes for the local market. The costs information for the
production are as follows:
Standard Direct materials Price RM2.00 per kg

Standard Quantity 5 kg per unit
Actual Direct materials Cost RM2.20 per kg
Actual Quantity 4 kg per unit
Actual Unit Produced 100 units
Required:
Calculate the direct materials variance.
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Solution:
Price variance = AQ ( AP-SP) Quantity Variance = SP ( AQ-SQ)

= 400 ( 2.20-2.00) = 2.00 ( 400 -500)
= RM 80 UF = 200 F
SP< AP = Unfavourable (UF) SQ > AQ = Favourable (F)
Direct materials Variance = RM 80 UF + RM200F
= RM120 F
Example 3 : Direct materials Variances (Quantity material used different from quantity
material purchased)
Syarikat HUSFI DINI produces HD for the northern market. The costs information for the
production were as follows:
Standard Direct materials Price RM8.00 per kg

Standard Quantity 2 kg per unit
Direct materials Purchased 10,000 kg @ RM8.30
Direct materials Used 8,200 kg @ RM8.30
Actual Unit Produced 4000 units
Required:
Calculate the direct materials variance
Solution:
Price variance = AQ ( AP-SP) Quantity Variance = SP ( AQ-SQ)
= 10,000 ( 8.30 – 8.00 ) = 8.00 ( 8,200 – 8,000)
= RM 3,000 UF = RM 1,600 UF
SP < AP = Unfavourable (UF) AQ > SQ = Unfavourable (UF)

Direct materials Variance = RM 3,000 UF + RM 1,600 UF
= RM 4,600 UF
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ii. Direct Labours Variances = Price/Rate Variance + Quantity/Efficiency Variance
Price/Rate Variance = (AR x total AH) - (SR x total AH)

= AH (AR - SR)
Quantity/Efficiency Variance = (SR x total AH) - [SR x (SH per unit x AU)]
= SR (AH - SH)
SR > AR = FAVOURABLE SH > AH = FAVOURABLE
AR = Actual Rate per hour SH = Standard Hours

AH = Actual Hours SH = SH/u x AU
AU = Actual unit produced SR = Standard Rate per hour
Example 4:
Syarikat OCOC produces chocolate drink for the Kelantan market. The costs information for
the production are as follows:
Standard Rate Per Hour RM0.50 per hour

Standard Hour 2 hours per unit
Actual Units Produced 100 units
Actual Rate Per Hour RM0.60 per hour
Actual Working Hours 220 hours
Required:
Calculate the direct labour variance.

Solution:
Price/Rate Variance Quantity/Efficiency Variance
= AH ( AR – SR ) = 220 ( 0.60- 0.50) = SR ( AH – SH ) = 0.50 ( 220 – 200)

= RM 22 UF = RM 10 UF
SR < AR = Unfavourable (UF) SH < AH = Unfavourable (UF)

Direct Labour Variance = RM22 UF + RM10 UF = RM 32 UF
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iii. Variable Manufacturing Overhead Variances = Expenditure Variance +

Efficiency Variance
Expenditure Variance = (AR x total AH) - (SR x total AH)

= AH (AR - SR)
Efficiency Variance = (SR x total AH) - [SR x (SH per unit x AU)]
= SR (AH - SH)
SR > AR = FAVOURABLE SH > AH = FAVOURABLE
AR = Actual Rate per hour SH = Standard Hours

AH = Actual Hours SH = SH/u x AU
AU = Actual unit produced SR = Standard Rate per hour
*Standard rate = predetermined variable overhead

= budgeted overhead/budgeted hours
= SR x BH/BH
Example 5:
Syarikat DHL produces high technology product. Below is the production information for
the period:
Standard Variable Overhead RM0.80 @ 1.5 hours

Actual Direct Labour Hours 40,000 hours
Actual Variable Overhead Cost RM25,200
Actual Unit Produced 18,000 units
Required:
Calculate the variable overhead variance.
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Solution:
Expenditure = AH ( AR – SR ) Efficiency = SR ( AH – SH)

= ARAH-SRAH Variance = SRAH- SRSH
variance
= RM25,200 - (RM0.80x = [40,000 - (1.5x18,000)]RM0.80
40,000) = (40000 – 27,000) RM0.80
= RM25,200 – RM32,000 = RM 10,400 UF
= RM 6,800 F
SRAH > ARAH = Favourable (F) SH < AH = Unfavourable (UF)

Variable MOH Variance = RM 6,800 F + RM 10,400 UF
= RM 3,600 UF
iv. Fixed Manufacturing Overhead Variances = Budget Variance + Volume Variance
Budget Variance = (AR x total AH) - (SR x total BH)

= AR x AH - SR x BH
Volume Variance = (SR x total BH) - [SR x (SH per unit x AU)]
= SR (SH - BH)
SR x BH > AR x AH = SH > AH = FAVOURABLE

FAVOURABLE BU < AU = FAVOURABLE
SH = Standard Hours = SH/u x AU

AR = Actual Rate per hour
BH = Budgeted Hours = SH/u x BU
AH = Actual Hours
SR = Standard Rate per hour
BU = Budgeted unit produced
SR x BH = Budgeted overhead
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Example 6:
Below is the information about production activity of Syarikat DuDo for 2022:
Budgeted production unit 25,000 units

Budgeted direct Labour hours 40,000 hours
Budgeted fixed overhead RM25,000
Actual production units 30,000 units
Actual direct labour hours 35,000 hours
Actual fixed overhead RM22,400
Required:
Calculate the fixed overhead variance
Solution:
SR =SRBH/SH = 25000/40000 = RM0.625 per hour
SH/u = Budgeted hour/budgeted output =40000/25000 = 1.6 hours/unit
SH = SH/U x AU = 1.6 X 30000 =48,000
Budget Variance = ARAH – SRBH Volume Variance = SR ( SH – BH )

= 22,400 – 25,000 = 0.625 ( 48, 000 – 40, 000)
= RM 2,600 F = 5,000 F
Budgeted OH > Actual OH = Favourable(F) BU < AU = Favourable (F)
SRSH > SRBH = Favourable (F)
Fixed MOH Variance = RM 2,600 F + RM 5,000 F
= RM 7600 F
Interpretation for the result of variance analysis as favourable (F) or

unfavourable (UF).
• If the actual costs are less than standard costs, the variance is favourable.
Favourable variance has a positive connotation. It suggests efficiencies in incurring
and using manufacturing cost.
• When actual costs exceed standard costs, the variance is unfavourable.

Unfavourable variance has a negative connotation. It suggests that the company paid
too much for one or more of the manufacturing cost elements or that it used the
elements inefficiently.
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Actual Costs < Standard Costs = Favourable (F)

Actual Costs > Standard Costs = Unfavourable (UF)
Actual Costs > Budgeted Costs = Unfavourable (UF)
Actual Costs < Budgeted Costs = Favourable (F)
Actual unit produced < Budgeted unit = Unfavourable (UF)
Actual unit produced > Budgeted unit = Favourable (F)
Actual Costs > Standard Costs Favourable variance (F)
Actual Costs < Standard Costs Unfavourable variance (UF)
10.4 EXTRACT VARIANCE REPORT BASED ON THE ANALYSIS
• A variance report is a document that compares planned financial outcomes with the
actual financial outcome.
• All variances should be reported to appropriate levels of management as soon as

possible. The form, content, and frequency of variance reports vary considerably
among companies.
• Variance analysis reports may be expressed not only in Ringgit Malaysia (RM), but
also in percentages, ratios, graphs, and narrative.
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Example 7 :
Refer to Example 2, Example 4, Example 5 and Example 6
Perniagaan xxx
Variance Report
For the Week Ended xx / xx / xxx
No. Variance Actual Standard Variance Explanation

(RM) (RM) (RM)
1 Material Price 880 800 80 UF Rush order

Variance
2 Material Quantity 800 1,000 200 F Experienced labour

Variance
3 Labour Rate Variance 132 110 22 UF High demand from

labour union
4 Labour Efficiency 110 100 10 UF Poor trained labour

Variance
5 Variable Overhead 25,200 32,000 6,800 F Reduced utilities

Expenditure Variance expenses rate
6 Variable Overhead 32,000 21,600 10,400 UF Unskilled indirect

Efficiency Variance labour
7 Fixed Overhead 22,400 25,000 2,600 F Reduced monthly

Budget Variance manufacturing rental
8 Fixed Overhead 25,000 30,000 5,000 F Over utilised

Volume Variance production fasilities
10-13
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Example explanation for variance report
VARIANCE FAVOURABLE UNFAVOURABLE

Material Price • A decrease in material • Change in market price
Variance quality will result in a • Rush order
reduction in price
• Unforeseen discounts
received
Material Quantity • Experienced labour • Use of poor quality material
Variance • More effective use made • Poor maintenance and
of material defects in machinery
Labour Rate • Pay lower than standard • Wages rate increase
Variance • Appointing unskilled
workers
Labour Efficiency • Work motivation • Lack of training errors in
Variance • Better quality of allocating time to jobs
equipment or materials • Incorrect Instructions
Variable Overhead • Savings in costs incurred • Increase in cost of

Expenditure more economical overheads used
• Properly set standards • Change in production
Variance methods
Variable Overhead • Labour working more • Lack of supervision

Efficiency ef ciently • Unskilled indirect labour
• Staff training
Variance
Fixed Overhead • Savings in costs incurred • Increase in cost of services

Budget Variance • Changes in prices relating used
to xed overhead • Seasonal conditions
expenditure
Fixed Overhead • Labour working more • Lost production through
Volume Variance ef ciently strike
• Labour working overtime • Labour shortage
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fi
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11 DECISION MAKING
INTRODUCTION
This topic covers relevant cost, type of relevant costs

and irrelevant costs, applications in decision making
and qualitative factors in decision making.
11 Table of
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11.1
• Explain the characteristics of relevant cost.
11.2
• Explain the opportunity cost, sunk cost, incremental cost, differential cost,
avoidable cost and unavoidable cost.
11.3
• Calculate and explain the decision using incremental analysis for: Make-
or buy decision, Accept-or-reject a special price order and Limiting
factors analysis- maximum to three (3) products with one limiting factor.
11.4
• Explain the related factors such as; environment, technology and laws.
11 Table of
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11.1 CHARACTERISTICS OF RELEVANT COST
• Making decisions requires that only those costs and revenues that are relevant to the
alternatives are considered.
• The inclusion of irrelevant cost and revenue data may result in making wrong
decisions.
• Therefore, it is essential to identify the relevant costs and revenues that are applicable
to the alternatives being considered.
• The relevant costs and revenues required for decision making are only those that will
be affected by the decision.
• Characteristics of relevant costs are associated with:

i. future cash flows.
ii. difference costs between various alternatives.(differential costs)
iii. additional costs incurred if a particular alternative is chosen. (additional costs,
incremental costs)
• Relevant costs are future costs that differ between alternatives.

• Irrelevant costs consist of sunk costs, allocated common fixed costs and future costs
that do not differ between alternatives.
11.2 TYPES OF RELEVANT AND IRRELEVANT COSTS
• Relevant Costs:
i. Opportunity cost Opportunity cost is the benefit given up by not choosing an

alternative course of action. For example, if a machine is
used to make one type of product, the benefit of making
another type of product with that machine is lost.
ii. Incremental cost Incremental cost is the additional costs involved to carry out
an activity. For example, when buying a new machine, it is
necessary to send the employee for training to use the
machine at a cost of RM4,000. The RM4,000 is known as
the incremental cost.
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iii.Differential cost Differential cost is the difference in a cost item under two decision
alternatives. For example, if the cost of alternative A is RM10,000
per year and the cost of alternative B is RM8,000 per year. The
difference of RM2,000 would be the differential cost
iv.Avoidable cost Avoidable cost is the cost that is not incurred if the activity is not
performed. For example, supply expenses. If there is no
production, there is no supply expense to be incurred. These
costs are often identified as variable costs, which vary based on
production.
• Irrelevant Costs:
i. Sunk cost Sunk cost is the cost that has incurred in the past and cannot be
changed regardless of which future action is taken. For
example, the amount you spent in the past to purchase or repair
a laptop should have no bearing on your decision whether to
buy a new laptop or not.
ii. Unavoidable cost Unavoidable cost is the cost that is still incurred even if the activity
is not performed. For example, if a manufacturing plant shuts
down, it still needs to pay for property taxes. These costs are
often considered fixed costs. Fixed costs are expenses that do
not depend on production.
11.3 APPLICATIONS IN DECISION MAKING
• Business decisions involve a choice among alternative courses of action.

• In making such decisions management ordinarily considers both financial and non-
financial information.
• The process used to identify the financial data that change under alternative courses of
action is called incremental analysis.
• Incremental analysis involves not only identifying relevant revenues and costs but also
determining the probable effects of the decision on future income.
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• Data for incremental analysis involves estimates and uncertainty.

• In incremental analysis, both costs and revenues may change.
• However, in some cases, variable costs may not change under the alternative courses
of action and fixed costs may change
• The applications used in decision making are as follows:

i. Make-Or-Buy Decision
ii. Accept-Or-Reject A Special Price Order And
iii. Limiting Factors Analysis-Maximum To Three (3) Products With One Limiting
Factor.
Make-Or-Buy Decision
• When a manufacturer assembles component parts in producing a finished product,

management must decide whether to make or to buy the components.
• The decision to buy parts or services is often referred to as outsourcing.

• In a make-or-buy decision, the relevant costs are:
i. The variable manufacturing costs that will be saved.
ii. The changes to fixed manufacturing costs.
iii. The purchase price.
iv. The opportunity cost.
• Action plan:
i. Look for the costs that change.
ii. Ignore the costs that do not change.
iii. Use 4 columns analysis; items, make, buy and net income
( increase/decrease)
iv. Recognise the opportunity cost
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Example 1 :
For many years Fatzura Company produced the starters that are installed in its standard
line of farm tractors. Due to some reasons, the company planned to purchase the
starters from an outside supplier who offered to sell the starters for RM9.00 per unit.The
cost to produce the starters are as follows:
Price per unit Total

RM RM
Direct materials 3.10
Direct labour 2.70
Supervisor Salaries 1.50 60,000
Depreciation Expense -Equipment 1.00 40,000
Variable Manufacturing Overhead 0.60
Rent 0.30 12,000
Total Production Cost 9.20
A supervisor was paid to monitor production of starters. The company decided to sell
production equipment for RM40,000 if the starters are purchased from outside. The rent
charged for the production of starters is avoidable.
Required:
Prepare computations showing whether Fatzura Company would continue making or

purchase the starters.
Solution:
unit produced = 60000/1.50 or 40000/1.00 or 12000/0.30= 40000 units
11-4
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Make Buy Net income

Increase/(decrease)
Item RM RM RM
Direct materials 124,000 - 124,000
(RM3.10 x 40,000 Units)
Direct labour 108,000 - 108,000
(RM2.70 x 40,000 Units)
Supervisor Salaries 60,000 - 60,000
Variable manufacturing overhead 24,000 - 24,000
(RM0.60 x 40,000 Units)
Avoidable fixed cost - Rent 12,000 - 12,000
Opportunity cost 40,000 - 40,000
Purchase Price - 360,000 (360,000)
(RM9.00 x 40000)
Total costs 368,000 360,000 8,000
Conclusion : Fatzura company should buy the starters because the net income will
increase by RM8,000.
Accept Or Reject A Special Price Order
• Accept-or-reject a special price order refer to the opportunity to obtain additional business
by making a major price concession to a specific customer.
• Assumes that sales of products in other markets are not affected by special order.
• Assumes that company is not operating at full capacity.
• In the accept-or-reject decision, the relevant costs are:
i. The variable manufacturing costs to produce the special order.
ii. The expected revenues.
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• Any changes in fixed costs, opportunity cost, or other incremental costs or savings
(such as additional shipping) should be considered.
• Action plan:
i. identify all revenues that change as a result of accepting the order
ii. identify all costs that change as a result of accepting the order, and net this
amount against the change in revenues.
Example 2:
Giraldi Company manufactures toasters. For the first 8 months of 2022, the company
reported the following operating results while operating at 75% of plant capacity:
RM
Sales (400,000 units) 4,000,000
Cost of goods sold 2,400,000
Gross profit 1,600,000
Operating expenses 900,000
Net income 700,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 60%
variable and 40% fixed.
In September, Giraldi Company received a special order for 15,000 toasters at RM6.00
each from Alazar Company of Mexico City. Acceptance of the order will result in
RM3,000 of shipping costs but no increase in fixed operating expenses.
Required:
Prepare an analysis showing whether Geraldi Company would accept the special
order. Why?
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Solution:
Calculation to check production capacity:
Full capacity = Current production ÷ % of current capacity

= 400,000 units X 100%
75%
= 533,333 units
Remaining capacity = Full capacity – current production
= 533,333 units – 400,000 units
= 133,333 units
Geraldi Company can proceed with the analysis to accept-or-reject the special order of
15,000 units because it still can be manufactured without increasing the production
capacity
Cost Item Reject (RM) Accept (RM) Net Income (RM)

400,000 units 415,000 units Increase/
(Decrease)
Sales revenue - (15,000 units x RM6) 90,000
= 90,000
(-) Variable cost -
Cost of Goods Sold [( RM6x 70%) x15,000 63,000
units]
= 63,000
Operating - (RM1.35 x 15,000 units) 20,250
Expenses = 20,250
Shipping cost - 3,000 3,000
Contribution Margin - 3,750 3,750
Conclusion: Giraldi Company should accept the special order because it will increase
net profit by RM3,750.
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Limiting Factors Analysis (Maximum To Three (3) Products With One Limiting Factor)
• This involves a form of decision-making where the situation pertains to a constrained

supply of resources for manufacturing a product line.
• Once this limited resource is clearly identified, it must be utilised to its fullest capacity,
and the product produced using this limited resource should ideally yield the highest
possible profit.
• An organization may encounter a single limiting factor, aside from maximum sales
demand, or it may face multiple scarce resources, each of which imposes a practical
restriction on the achievable level of activity.
• Examples of such limiting factors encompass:
i. Labour. The limit may be either in terms of total quantity or of particular skills.
ii. Materials. There may be insufficient available materials to produce enough units
to satisfy sales demand.
iii. Manufacturing capacity. There may not be sufficient machine capacity for the
production required to meet sales demand.
• In the context of limiting factor analysis, it is assumed that management will make
product mix or service mix decisions based on options that maximise profit.
• Profit is considered maximised when contribution is maximised, assuming that fixed

costs remain unchanged. In these decisions, it is generally assumed that fixed costs
remain constant regardless of the selected product or service mix, making only
variable costs relevant.
• There are three primary steps to consider when making decisions related to limiting
factors:
i. Identify the limiting factor
ii. Determine the priority of product production based on its contribution margin
per limiting factor.
iii. Assign the limited resources to the products based on their priority.
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Example 3:
Company AXE manufactures three distinct products: A, B, and C, all of which are
produced using the same machine. This machine's maximum monthly capacity is 6,000
machine hours.
Product A, B, and C require 0.5, 1, and 1.5 machine hours, respectively, for each unit
produced. The production quantities for product A, B, and C are 3,000, 2,000, and 1,000
units, respectively. These products have contribution margins of RM7, RM10, and RM5,
respectively. The fixed cost amounts to RM8,000.
However, the production machine is scheduled for a significant overhaul, which will
reduce its production capacity to only 3,000 machine hours.
Required:
a.Identify the limiting factor

b.Calculate the contribution margin per machine hour for each product.
c.Advise which product should be given production priority based on above (b). Explain
your answer
d.Calculate the units of the products to be produced based on the limiting factor.
e.Calculate the net profit
Solution:
a.
Product A Product B Product C
Machine hour required per unit 0.5 1 1.5
Number of production 3,000 2,000 1,000
Total machine hours 1,500 2,000 1,500
Total machine hours required 5,000
Total machine hours available 3,000
Shortfall in machine hours 2,000
The limiting factor is machine hour
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b.
Product A Product B Product C
Contribution/ unit RM 7 RM 10 RM 5
Machine hour/ unit 0.5 1 1.5
Contribution/ machine hour RM 14 RM 10 RM3.33
Ranking/ Priority 1 2 3
c. Product A is given the highest priority, followed by Product B, and Product C

receives the lowest priority. This ranking is based on their respective contribution
margins per machine hour, with Product A having the highest margin (RM14),
followed by Product B (RM10), and Product C (RM3.33).
d. Product Production unit Required machine Available

hours machine hours
3,000
Product A 3,000 3000 x 0.5 = 1,500 1,500
Product B 1,500 1,500 x 1 = 1,500 -

1,500 available machine hour
1 hour per unit
Product C - - -
e. RM
Contribution margin:
Product A 3,000 units x RM7/unit 21,000
Product B 1,500 units x RM10/unit 15,000
36,000
(-) Fixed cost 8,000
Net Profit 28,000
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11.4 QUALITATIVE FACTORS IN DECISION MAKING
• Qualitative factors are those factors that cannot be expressed in monetary terms.
i. Environment
Environment factors that need to be considered by the management while
making decision are:
1. Effect on employee morale, schedules and other internal

elements (companies image)
2. Relationships and commitments to suppliers
3. Effect on present and future customers
4. Long-term future effect on profitability.
ii. Technology
Technology factors that need to be considered by the management while

making decision are:
1. Quality of product
2. High-end machinery
3. With technologies; processes has become more efficient and

effective.
iii. Law
Law factors that need to be considered by the management while making

decision are:
1. Minimum wages policy
2. Labour working time policy
3. Government’s requirement
4. Company rules
11-11
Table of
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Reference
Don R. Hansen and Maryanne M. Mowen. (2017). "Management

Accounting." 7th edition. Thomson South Western.
Romney, Marshall B., & Steinbart, Paul J. (2021). "Accounting

Information Systems." Pearson Education. Bangkok.
Tracie Nobles, Brenda Mattison, and Ella Mae Matsumura.

(2018). "Horngren's Accounting." 10th edition. Pearson
Education.
Wan Madznah, W. I., & Mohd Rizal, P. (2023). "Fundamentals of

Business Accounting." Second Edition. Shah Alam, Selangor:
Oxford Fajar S.B.
Weygandt, Jerry J., Donald E. Kieso, and Paul D. Kimmel. (2020).

"Financial Accounting." 11th edition. New York: Wiley.
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ACCOUNTING 2

2 Cost: Concept, Classi cation and Component

4 Actual Costing and Normal Costing

6 Cost Volume Pro t

7 Absorption Costing and Marginal Costing

8 Job Order Costing

10 Standard Costing and Variance Analysis

Kolej Matrikulasi Perlis

Kolej Matrikulasi Kedah

Kolej Matrikulasi Perak

Kolej Matrikulasi Selangor

Kolej Matrikulasi Pulau Pinang

Kolej Matrikulasi Negeri Sembilan

Kolej Matrikulasi Melaka

Kolej Matrikulasi Johor

Kolej Matrikulasi Pahang

Kolej Matrikulasi Kelantan

Kolej Matrikulasi Labuan

This topic covers the comparison between managerial

• Explain managerial accounting.

• Explain the functions of management: planning, directing and controlling.

• Explain the characteristics of managerial accounting information:

• Describe the roles and functions of management accountant to assist in

• Describe about ethics

1.1 COMPARISON BETWEEN FINANCIAL ACCOUNTING AND MANAGERIAL

Categories Financial Accounting Managerial Accounting

Primary • External users: stockholders, • Internal users: of cers and

Types and • Financial statements - • Internal reports such as

Contents of • Pertains to business as a • Pertains to subunits of the

1.2 FUNCTIONS OF MANAGEMENT AND ROLES OF ACCOUNTING INFORMATION

• The following are the management's functions.

Planning • The process of setting objectives/goals to be achieved.

• Example: Maximise short-term and market share, commit to

Directing • Directing involves coordinating a company’s diverse activities and

• This function relates to implementing planned objectives and

• Example: manufacturers such as Campbell Soup Company, General

• Follow-up is made if necessary

• Decision making is not a separate management function. Rather, it is the outcome of

• The following are the roles of accounting information in management:

Control and • A systematic exercise which is called as a process of checking

• Here managers decide what goals to be accomplished, how they

• It gives the manager some warning of crises that might occur in

• The management accountant’s role in assisting in formulation of

Budgeting • A budget forecasts the nancial results and nancial position of a

• A budget is used for planning and performance measurement

Stock • the process of calculating the value of goods or materials owned

Determination • a process of calculating cost of goods sold/ cost of services and

1.3 CHARACTERISTICS OF MANAGERIAL ACCOUNTING INFORMATION

• The following are the characteristics of management accounting information:

Accuracy • Accounting information must be correct for its intended

• Example: Business owners need accounting information that

Timeliness • Timeliness means having information available to decision-

• Example: Information is timely when it is available to users

• Example: Presentation of information should not only

Relevance • Relevance is closely and directly related to the concept of useful

• Relevance implies that all those items of information aid the

• Example: if net income and its components con rm investor

Cost • Producing good results without costing a lot of money. Acquiring

• Example: The company can get the information on customer

• In deciding the mode of the survey, the company must compare

Flexibility • Information is not necessarily detailed for pointless accuracy, but

• Example: It relates to accounting information systems. It

1.4. ROLES OF MANAGEMENT ACCOUNTANT