) CONTENTS YUNTING.. TOPIC 1 - INTRODUCTION TO MANAGEMENT AND COST ACCO! TOPIC 2 - COST CLASSIFICATION... TOPIC 3—INVENTORY PLANNING AND CONTROL... TOPIC 4~ ABSORPTION OF OVERHEADS. TOPIC 5 — OVERHEADS ALLOCATION AND APPORTIONMENT ~ PRIMARY APPORTIONMENT .. TOPIC 6 - oveRHEADS ALLOCATION AND APPORTIONMENT ~ SECONDARY APPORTIONMENT., TOPIC 7—- BUDGETING PROCESS... TOPIC 8 - COST-VOLUME-PROFIT ANALYSIS... TOPIC 9 - MARGINAL COSTING AND Al TOPIC 10- JOB AND BATCH COSTIN« TOPIC 11 ACTIVITY BASED COSTIN TOPIC 12 - PROCESS COSTING.. TOPIC 13 - JOINT PRODUCT AND BY TOPIC 14 - SERVICE COSTS. 'BSORPTION COSTING... G SYSTEM (SPECIFIC ORDER).. IG. PRODUCT. TOPIC 16-TIME VALUE OF MONEY TOPIC 17- CAPITAL INVESTMEN’ 'T APPRAISAL TOPIC 18 - LIMITING FACTORS +215TOPIC 1 - INTRODUCTION TO MANAGEMENT AND COST ACCOUNTING Cost © Cost is expenditure incurred on resources that are used to achi icular objecti + isthe amount of money required o produce a product or perform asenge Costing Means the technique and process of ascertaining costs, it consists of princi . aroused in determining: principles and rules which + The cost of producing a product e.g. bicycle or radio «The cost of providing services e.g. hotel or hospital Cost accounting Is concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement Cost accounting process Cost data collection Allocation and apportionment of costs to inventory, products and services Recording of income and expenses Ascertainment of profitability of activities carried out or planned Preparing statements (e.g. budgets, costing) Management accounting Relates to the provision of appropriate information for decision making, planning, control and performance evaluation Le. using financial data and communicating it as information to users. Cost accounting and management accounting are terms which are often used interchangeably. It is not correct to do so. Cost accounting is part of management accounting. Cost accounting © provides a bank of data for the management accountant to use. FUNCTION OF MANAGEMENT ACCOUNTING ‘A cost and management accounting system should generate information to meet the following requirements. a 1. Should allocate costs between cost of goods sold and inventories for internal and external profit reporting; | 2, Should provide relevant information to help managers make better decisions; 3. Should provide information for planning, control and performance measurement, o OBJECTIVES OF COST ACCOUNTING i) To ascertain cost . Cost ascertainment is the process of determining Gast after they have been incurred we ii) To control cost . Controlling costs by using various techniques such as budgetary control, standard costing, inventory control etc. Page 310P231, HENRY: TOUWA — 0745 340 591 ee eet aera © 7 eeei xisting machine, To provide information for des a Dee er to retain oF rR. Decision on whether to buy or make, tinue wit Sica process or not and whether to shut down or co! iv) To determine the selling price ing pri t or F Jling price of produc Cost accounting provide information on how to determine the selling p! services v) To ascertain profit ivi in objective basis Cost accounting aim at ascertaining the profit or loss of any activity on an obj by matching with revenue activity ACCOUNTING * The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information The objective of accounting is to provide sufficient information to meet the needs of the various users at the lowest possible cost. Financial account ig and Management accounting Its possible to distinguish between tw ‘0 branches of accounting, which reflect the internal and external users of accounting informatio: Management accountin; It is concemed with the Financial accounting (external accounting) It is concered with the provision of information 1 to extemal parti 5 These people are such as shareholders, eredit, Faries outside the organizati muse, ‘Peop + creditors ‘ganization. and regulatory a, ences outside the Bul Bencies outs; This course concentrates on manager nent accounting. SAENRVETATIUTADifference between management accountin ‘Financial Accounting ig and financial accounting ‘Management Accounting 1. Legal requirement Limited liability companies must, by law, prepare financial accounts 1. Legal requirement There is no legal requirement to prepare management accounts, 2, Focus on individual part of business Financial accounts concentrate on the business as a whole, aggregating revenues and costs from different operations, and are an end in the themselves. 2. Focus on individual part of business Management accounts can focus on specific areas of an organization's activities. Information may be required to aid decision rather than to be an end product of a decision. Example the cost and profitability of products, service, The format of published financial accounts is determined by local law, by international Accounting Standards and International Financial Reporting Standards. In principle the accounts of different organizations can therefore be easily compared, customers and activities. 3. Generally accepted accounting | 3. Generally accepted accounting principle principle Management accountants are not required to adhere to GAAP when providing managerial information for internal purposes. Instead the focus is on serving management's needs and __ providing information that is useful to managers relating to their decision-making, planning and control function. 4:Time dimension Financial accounting reports what has happened in the past in the organization, Le. present an historic picture of past ‘operation 4.Time dimension ‘Management accounting is concerned with future information as well as past information. 1.e. both historical records and a future planning tool. E.g. expected future costs and revenue 5. Report frequency A detailed set of financial accounts is published annually and less detailed accounts are published semi-annually. 5. Report frequency Management requires information quickly if it is to act on it, Consequently ‘management accounting reports on various activities may be prepared at daily, weekly ‘or monthly intervals. 6. Monetary nature Most of financial accounting information is of a monetary nature. 6. Monetary nature Management accounts incorporate non- monetary measures. Management may need to know, for example, tons of aluminium produced, monthly machine hours, or miles traveled by salesmen. HENRY.-TOUWA ~ 0745 340 591 Page 5their interest Different categories of users of financial statements and i ents. ‘ion’s financial stateme There are several stakeholders who study / use an See deastibed below: ‘The main groups of stakeholders and their information needs 1, Owners / Shareholders A i entity ‘These are providers of capital for running the operations of the * They use financial statements > as is improving / To determine whether the financial condition and performance is imp: deteriorating over time, oo. ions of the To determine the Managements’ efficiency in running the operatic entity, ei the To know the extent to which the available profits can be distributed to shareholders, . ‘To assess the safety and growth of their investment. To assess the stewardship function of the management ‘Management of the company * Management team is yirointed by the owners to supervise the day-to-day activities of the company Financial statements act as a report card which reflect: > the efficiency of the management in taking throughout the year Whether the business is profitable the effectiveness of manageimens control and 3. Employees {neerested with the profitability of the firm ie. the ability of employee's salaries and wages "Y of the firm t0 meet * AOIHY Of the frm to continue operating ie. i the firm is maki issue of liquidation, then they ean start’ looking for other pot ot and a lent vy v Vv timely decisions planning 4. Potential Customers PPlying goods and services S. Suppliers and other trade ereditors : * Suppliers want to know the financial stability of the entity, ie. the ana company to pay forthe goods and services supplicd “NS ability of the 6. Lenders To assess the entity’s ability to generate Sufficient cash flows. 4 debt repayments going forward, To determine the valu collateral, © Satisfy thei, © of the assets that the company has Pledged as seen: ‘Unity 7 7. Potential Investors * the potential owners of the organization they use financial statements HENRY-TOUWA — 0745 340 591 Be Page Ginga, j> To assess the organisation as a profitable investment destination. > To compare the financial statements of a number of companies from the same industry to make investment decision. 8 Financial analysts and advisers Le. Stock Brokers, Credit Agencies and Journalists The use financial statement > To make predictions on the future financial conditions of the entity on the basis of the current financial statements. > To advise their clients (potential investors) on whether to invest in a particular organisation or not. 9. Government and their agencies * To know the allocation of resources taking different policy decisions. * To collect the information of all entities and compile national economic statistics. e.g. GDP 10. Tax authorities * To know the business profits. * To determine the amount of tax payable by the company, e.g. income tax or VAT liability from revenue and purchase figures. 11. Public * Growth ie. technology and better services = Employment opportunities * Social responsibility of entityBefore classification o! Production direct costs ” ing business TOPIC 2 - COST CLASSIFICATI! : ZATIC d the co: ga product. the cost jal and hence Direct material costs ‘ct material have be Are those costs of materials that are knows, ae ‘Any material that can be visibly identifies can . jated with itis adirect cost. ee eens ear ‘will need flour, furniture maker will en used in makin product is @ direc maker will need steel and so on. rect Labor cost roducts or vide service Direct labor costs ts or to pro Is the cost of wages of people who are employed to make the produ 4 soon. Example wages paid to baker, carpenter, machine operator and ©) Direct expenses i it have been incurred ‘Are those expenses other than direct material costs and a labor costs tha in full as a direct consequence of making a product. Example i i, is id for © Royalty- fee paid to the person who originally invented the product i.e. royalty is paid ‘every product produced © Cost incurred to hire a special piece of equipment to complete the manufacturing process ii) Production indirect costs (production overheads) |. NON-MANUFACTURII a such ag HENRYTOUWA ~ 0745 340 591 MIO and price sty, a) Indirect materials ‘Materials which cannot be traced in the fi inished product or service E.g. cleaning materials, material used in negligible amount b) Indirect labor Meaning all wages not charged directly to a product or service ©-8. wages of non-productive personne in the production or any other employee in a factory departinect ‘kpartment such as foremen, watchmen, ©) Indirect expenses Other than material and labor Ee, Rent, rates, and insurance of a factory, and machinery and factory building ° Depreciation, fy, » fuel, power i and mainte; nance of plant ING/PRODUCTIO These ‘costs are incurred in non-factory Most Gepartment, All ofthese are indirect costs,” ““P&"™ENtS. such ag » ,ADMINISTRATION OVERHEADS Indirect cost incurred in the direction, control and aa: Examples of administration overheat are a Folland naisration of: + Depreciation of office building oes lows SN undertakin Office salaries including salaries ote ment, * Sere FHte8 and insurance, lighting Tes, sect ») SELLING OVERHEADS” 8, cleaning. telephone gi coun Indirect costs incurred in promoting sa harass and ge Examples of selling overhead are eu + Printing and stationery, = follows. "MNS customers+ Salaries and commission of salesmen, representatives and sales department staff. © Advertising and sales promotion, market research. + Rent, rates and insurance of sales office and showrooms and so on. ¢) DISTRIBUTION OVERHEADS Indirect costs incurred in making the packed product ready for dispatch and delivering it to customer. Examples of distribution overhead are as follows © Cost of packing cases. © Wages of parkers, drivers and dispatch clerk. * Insurance charges, rent, rates, depreciation of warehouse and vehicle which distribute goods. 4) FINANCE COSTS Costs incurred in relation to the provision of finance to the business Examples-Interest on bank Ioan and Bank charges ©) RESEARCH AND DEVELOPMENT COSTS Are reasonable costs incurred for activities intended to provide information to help eliminate ‘uncertainty about the development or improvement of a product QUESTION 1 The following information was provided by the Fariji Manufacturing company on 30"April 2011 Materials + Direct $300,000 + Indirect 30,000 Factory wages * Direct 190,000 + Indirect 70,000 Royalties 50,000 Factory insurance 35,000 Factory rent and rates 80,000 Factory general expenses 60,000 Administration Office rent 70,000 Rent of showroom and sales offi 24,000 Supervisor salary iy 80,000 Sales salaries 25,000 Sales commission 28,000 Secretaries and accountants salaries 15,000 Advertisement : 22,000 Electricity and water (of which 50% is for factory, 30% is for » administration and 20% is for selling and distribution) 100,000 Depreciation of plant and machinery 10,000 Depreciation of office equipment 15,000 Depreciation of vehicle which distribute goods to customers 21,000 Bank charges 5,000 Interest on loan i 40,000 REQUIRED HENRY TOUWA ~ 0745 340 591 eo Page ¥OP 230UNDER THE FOLLOWING ING PRICE PREPARE THE TOTAL COSTS AND THE SELL} HEADINGS © Prime costs Factory overheads ; Factory costs/Manufacturing costs/production costs Administration costs Selling and distribution costs Finance costs Total costs ST Selling price(assume the mark-up of 25% is added to the costs to arrive its selling p! i elling price If 1,000 units of output were produced determine the total cost per unit and a selling p: of one unit QUESTION 2 Find the production cost per unit from the following details, The total number of units manufactured is 5,000. All I units are sold during the year. Assume that there is no opening and closing inventory, ‘The cost per unit is as follows: Tshs. Materials 1,500 Direct wages 1,200 Indirect material _| 500 The total costs incurred are as follows: Indirect wages Administration overheads Selling and distribution overheads QUESTION 3 | ‘Tshs500,000 ‘Tshs345,000 ‘Tshs202,500 Sun Co produces a product, M, foreach unit of product M, requ 1 . ‘material B. the market prices of materials A and B for the current year material A ang 2kg of Per kg respectively. Next year, the price of material A wit increase by 195°500 and shoo 00 Price of B will remain as itis. If un Co. wants to predant 5,000 units of 9° While the y.22000 calculate the total price of direct materials. of © mark Product M next Year, CLASSIFICATION OF Costs Students should beable to clasiy costs according to diferent cost 1. Classification according to direct and indies ge Ssifeatons as folly, 2. Classification according to product and period ext 3. Classification according to cost function 4. Classification according to cost behavior HENRY/TOUWA = 0745 340 sor4, CLASSIFICATION ACCORDING TO DIRECT AND INDIRECT COST a) DIRECT COST It is a cost that is incurred in the course of making a product or providing a service which identified directly and in full to the product or service. ee eee «Under direct cost we have direct material, direct labor and direct expenses (e.g. royalty) © Summation of direct cost is called PRIME COST + Direct costs are incurred only in the factory/production/manufacturing department. b) INDIRECT COST (Overheads) «is a cost that is incurred in the course of making a product or providing a service but which cannot be identified directly and in full to the product or service. Under this we have production overheads such as indirect materials, indirect labor and other indirect expenses Jneurred in factory. And we also have non-production overheads such as selling & distribution costs, ‘udministration expenses, finance costs and research and development «All costs occurred in non-production department are indirect costs. i departments no direct cost in non-production 2, CLASSIFICATION OF COSTS ACCORDING TO PRODUCT COSTS AND PERIOD COSTS i) Product costs ts Are costs incurred in relation to the production process © Are those costs that are identified with goods produced for sale. ‘© This costs are incurred in the production department © Product costs can be further split into prime costs and production overhead costs prime costs — consisting of direct material, direct labor and direct expenses Production overheads — indirect materials, indirect labor, indirect expenses. « pettuct costs always form part of the costs of product even when the product is not sold in any particulat period. Product costs are attached to products for inventory valuation purpose. Product cost is also called inventoriable cost «Closing stock at the end of the year is valued at production costs, Period costs will be charged (o cost of sales of the product only when the product is sold ii) Period Costs (non-production costs) Oa sesether than those attributable to production activity, ae costs incurred to enable the product ro be sold, «These costs are incurred in other department and not inthe production department Free ee steauit of administration costs, selling costs, distribution costs, finance costs and research and development costs + Hlence period costs do not form a part of the cost of product and na attempt is made to attach period tons te products for iaventory valuation purposes. Rather they are taken (0 profit and loss account as expenses in the period in which they are incurred. 3. CLASSIFICATION OF COSTS BY FUNCTION . | | ‘Under this we have production costs, ‘administrative costs, selling and distribution costs, finance costs and research and development costs. ; o Production costs - These costs are incurred in a factory department where product is produced. ‘They include direct materials, direct labor and production overheads a + Adwrinigtration expenses - Indirect cost incurred in the direction, control and administration of an undertaking. ; . ‘* Selling and distribution costs - Indirect costs incurred in promoting sales retaining customers, raking the packed product ready for dispatch and delivering itto customer, co aie Costs incurred in relation to the provision of finance to the business age 1NO23 HENRY. TOUWA - 0745 340591 2 afivities intended to . for activities in sts incurred improvement of a ; « Are reasonable oo: ent or improve ee Provide informa Product T BEHAVIOUR 4. CLASSIFICATION OF COSTS ACCORDING TO cos ond to changes in the level of * Cost behavior- refers to how a cost will react or resp business activity, ‘ ‘ Costs are classified into fixed and variable costs based on their behavior, Fixed costs . . . * Itis costs which remain Constant over a wide range of activity for a specified time Period. * Le. cost that remains constant in ‘otal imespective of change in the level of business activity, Rent, insurance, depreciation, wulity bills, salary, legal and audit fees are examples of fixed costs There are three types of fix 4) Long-run capacity fixe ‘These are sunk used in a factory ed overheads d costs orig coos Of resources (non r -e ees 'urTent assets) alread, HENRY.TOUWA ~0745 340 5911), Operating fixed costs Operating Treads are incurred to msntan and operate m ' Teast costs relating to the factory, e.g ae ae ¢) Programmed fixed costs Tiase are the costs of special program approved by management, e.g, costs relating to research tnd development, market promotion expenses, staff training expenses 4. Allfixed costs are overheads but all overheads are not fixed cots * Overhead ~ is a cost that is incurred in the course of makin Adi i t 1g a product or providin; Ghich eannot be traced directly and in full to that product or aca servis but Variable overheads — ¢.g. overtime premium, power costs, fuel costs ‘and any other utility costs Fixed overheads — e.g. insurance costs, depreciation on assets ctc. Step cost Ste hich is fixed in nature but only within certain levels of sctivty Example . Exam the deprecation of a machine which may be fied if production remain below 1,000 units per month. 1f tr 000 units, a second machine may be required, and the cost of depreciation (on Wo machines) ‘would go up a step. . Graph of step cost ofl {_ Vatume ofouiout™ NOTE: ixed cots. Some of overheads .ds but not all overheads are fi «All fixed costs are overheat direct materials are variable. such as sales commission, int ii) Variable costs «Is the portion of total co: # Variable costs are exP' change in the volume of activity. sts that varies with the direct proportion to the activity of yenses that change in business ; Example — direct material, direst labor Power and fuel, lubricants, tools and spares, products purchased for resale + Page 1306230 HENRY,TOUWA — 0745 340 591| | or per chip at shs10,000 5 hours of lal amounting to shs5,000. Ton4 ing uni hip re Thacomputer chip manuficturing ui, ate chip direct material wor art Pee of the workshop is hs], 000,00% Pa Sore administrative staff salary amounts to shs2,500, salary of shs2,500,000 per month, spats tthe output Perea th t showing the fixed and the variable cost comp. Prepare a monthly statement level of 500 computer chips for the month. quires 2 rec er chip aneiis shs 1,000,000, cd direct expenses P' alary is shs 1,000,000, 00, ket md th floor manager is paid m iii) Semi-variable or semi-fixed . 7 » A cost that is composed a mixture of fixed and variable components. * Itis the costs which is partially fixed and partially variable. COST ESTIMATION WHEN COST IS SEMI-VARIABLE ‘When the cost item is a semi-variable (mixed) one, the estimation of the future cost becomes somehow difficult. In this case we will be Tequired to use some models to disintegrate the total ost into the fixed cost element and the variable cost element. COST ESTIMATION METHODS * High-low method; * Least-squares method (regression analysis) High/low analysis Consists of selecting the periods of highest and lowest activity level; in costs that result from the two levels Sand comparing the changes Variable cost per unit = total costs in high activity level — total costs High aetivity level -low activisy level tivity level [eked costs are computed by deducting the derived variable lowest or highest activity level, °OStS fom total costs at with, Fixed cost= total cost in high activity level- (variable cost Per unit x high a ti srt ctivi Or Fixed cost= total cost in low activity level- (variable C0st per unitx tow an ved a QUESTION 5 Sevity lever) A hospital’s records show that the cost of carrying out healt accounting periods have been as follows, NM checks in the last fiy, Period Number of patients seen ‘otal cost © 1 650 17125 2 940 17800 3 1260 18650 4 990 17980 5 1150 18360 Using the high-low method and ignoring inflati ion, HENRY TQUWA — 0745 340 5912) Compute the variable cost per unit b) Compute Fixed cost per period c) Estimate the cost function (regression equation) 4) Compute the estimated cost of carrying out health checks on 850 patients in period 6 QUESTION 6 An organization has the following total costs at two activity levels: Activity level (units) 16,000 22,000 Total costs ($) 135,000 170,000 Variable cost per unit is constant within this range of activit i is the fixed costs when the activity exceeds 17008 ae eee Using the high-low method and ignoring inflation, a) Compute the variable cost per unit b) Compute Fixed cost per period ©) Estimate the cost function (regression equation) 4) Compute the total costs at an activity of 20,000 units QUESTION 7 An organisation has the following total costs at three activity levels: Activity level (units) 4,000 6,000 7,500 Total cost $40,800 $50,000 $54,800 Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 5,500 units. What is the total cost at an activity level of 5,000 units? QUESTION 8 The following information relates to the manufacture of Product LL in 20X8: Output (units) Total cost ($) 200 7,000 300 8,000 400 8,600 Page (Sof 231 HENRY TOUWA 0745 340 591 ee YEHONT iunit falls by variable cost PP «above 350). 1e For output volumes above 350 units th not just the exce 10%. (Note: this fall applies to all units — Required: i in 20X9. Estimate the cost of producing 450 units of Product LL ION 9 i vartments in its main wel ks manufacturing company. In one of the production cepa thead, ‘This is factory a machine hour rate is used for absorbing produ tion ste that will be used established as a predetermined rate, based on normal activity. te our Overhead for the period which is just commencing is £15.00 per mac expenditure anticipated, at a range of activity levels, is as follows: (machine hours) (£) 1500 25650 1650 26325 2000 27900 Calculate: {i the variable overhead rate per machine hour; the total budgeted fixed overhead; (3) the normal activity fevel of the department; and () te extent of over-/under-absorption if actual machine hours are 1700 and expendi on ‘Penditure is a) Regression analysis/least square method Regression analysis is a statistical device used fo predicting these unknown Variable (dependent variable) from the known valu val s oF other (independent variabley °* N® Formula . Y=a+bx a=Dy- box Don bandxy-yy ax? ~ (Dx)? HENRY TOUWA - 0745 340 591 PiketgQUESTION 10 Pict observations of maintenance costs ‘Hours Maintenance costs 90. 1,500 150 1,950 00 900) 30 900) 180. 2,700 150. 2,250 120 1,950 180 2,100 90 1,350 30 1,050 120 0) 60 1,350 Using the Teast-square method and ignoring inflation, ©) Compute the variable cost per unit {) Compute Fixed cost per period g) Estimate the cost function (regression equation) hh) Compute the estimated maintenance cost of 200 hours QUESTION 11 Regression analysis is Ex =440, 2y=330, 2x7=17,986, Ly?= being used to find the line of best fit (y=atbx) from eleven pairs of data. ‘The calculations have produced the following information: ‘What is the value of “a” in the equation for the line of best fit 0,366, =xy=13,467 and b=0.69171 QUESTION 12 ‘You are provided with the following data Month Production Semi-variable overheads (units) (tshs uly 220 22 ‘August 220 23 September 240 23 October 240 25 ‘November, 260 25 December 260 27 Find the regression line by the Teast squares method. in January if production level increases to 2,700 units. HENRY, TOUWA — 0745 340 591 What would be the semi-variable overheads Page 17 of 231or QUESTION 13 | . ing company, i Albatross Ple, the Australian subsidiary of British ee dito estimate year to 30 June 2001. In respect of oil consumption, it al ais the fixed expense y= a+ bx, where y is the total expense at an activity level Te win th 30 June 2000: 00 The following data relates to the year endin; i 5 ‘Month Machine hours 000" Fuel expens: July 34 a August 30 620 September 34 October 39 590 ‘November a2 500 ‘December 32 $30 January 26 500 February 26 500) March 31 530 April 35 550) May 4B 580) June 48 680 “The annual total and monthly average figures for the year ending 30 June 2000 were as follows: Machine hours ‘000° Fuel oil expense *000” Annual total 420 6,840 Monthly average 35 570 ‘You are required to: i) Estimate fixed and variable elements of fuel oil expense from the above data by both the following methods: 1. High and low points 2. Least squares regression analysis OTHER COSTS CLASSIFCATION i) Classification of costs by nature Under this we have direct and indirect costs ii) Classification of costs by function Under this we have administrative, selling, distribution, fj development. 2 These costs are directly taken to income statement. mance and research and iii) Classification of costs by purpose Costs may be required for the purpose of extemal reporting ori s or For external reporting costs can be classified as manufacturing ent Management use, product and period Fon-manufacturing or For intemal reporting costs can be classified as fixed or variable for “ management use, HENRY, TOUWA - 0745 340 591 % Pete 1 op 234yor decision making purpose we have the following classifiention RELEVANT AND IRRELEVANT COSTS 1. relevant costs Future cost that will be changed by a specific managerial decision 2. irrelevant costs Cost that will not be affected by the decision AVOIDABLE AND UNAVOIDABLE COSTS Sometimes the terms avoidable and unavoidable costs are used instead of relevant and irrelevant costs a, Avoidable costs ‘Are specific costs of an activity or business which would be avoided if the activity or business did not exist pb. unavoidable costs (irrelevant costs) ‘Are costs which would be incurred whether or not an activity sector existed INCREMENTAL AND MARGINAL COSTS 1. Incremental costs als0 called differential costs ‘© Differences in total costs between altematives being considered to assist decision making 2. Marginal costs and marginal revenue © Marginal costs represents additional cost of one extra unit of output CONTROLLABLE AND UNCONTROLLABLE COSTS 1. controllable costs * Isacost which can be influenced by management decisions and actions 2. uncontrollable cost «© Isany cost that cannot be affected by management within a given time span. OPPORTUNITY COSTS Is 4 cost that measures the opportunity that is lost or sa requires that an alternative course of action be given up Itis important to note that opportunity cost only apply to the use of scarce resources ccrificed when the choice of one course of action SUNK Costs Thise are the costs of resources already acqui Vatious alternatives. ‘Thy are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made in the future. jred where the total will be unaffected by the choice between VANT RANGE .. ahi © Ts used to refer the output range at which the firm expects to be operating within a short-term la 4 : planning horizon scape HENRYyTOUWA ~ 0745:340 591TOPIC 4 - ABSORPTION OF OVERHEADS Cost object | «Is aproduet, service, item of equipment or geographical location determination is required for which a separate cost ee a Costs assigned to a cost object are either direct or indirect. | * Direct costs such as direct material and direct labor can be specifically and exclusively traced (identified) to a particular product or service ASSIGNMENT OF INDIRECT COSTS TO A PRODUCT © Indirect cost cannot be so easily traced to the products because they are usually common to several cost objects . «ae basi Indirect costs needs to be assigned to the products or cost objects using the following basis of allocation units of output produced direct labor hours direct machine hours direct labor costs percentage direct materials costs percentage prime costs percentage vvvvvy STEPS TO ASSIGN INDIRECT (OVERHEADS) COST TO A PRODUCT STEP 1 Compute absorption rate (OAR) © The OARs are then used to calculate the amount of overhead to be attributed to each cost centre (department) ‘© Overhead absorption rates are calculated for future periods because the cost of production must be known in advance to enable selling prices to be fixed. * Calculation of OARs are based on planned (budgeted) allocation base 4 and budgeted overheads expenditure FORMULA USED TO CALCULATE OVERHEAD ABSORPTION RATE ‘No | Allocation base | Formula to calculate overhead CAUSE AND EFFECT absorption rate (O.A.R) T | Units of output [ 0.A.R= Budgeted overhead Appropriate if all unit Budgeted units of output Eran identical and involve identical time in production process 2 | Direct labor hours | O.A.R= Budgeted overhead Most appropriate in labor Budgeted direct labor hours intensive department Appropriate in those centers where machine are 3 | Machinehours | O.A.R= Budgeted overhead Budget machine hours used to great 4 direct material | 0.A.R-= Budgeted overhead x 100 Suitable whose oo T al percentage Budgeted direct material cost | cost represent large Portion of total cost HENRY TOUWA — 0745 340 591 ed Tg Pike se: ee ‘age $8'0f 231-ireck wages O.A.R= Budgeted overhead x 100 | Most appropriate in labor eroentage: Budgeted direct labor cost | intensive department Prime cost ‘O.A.R-= Budgeted overhead_x 100 | Appropriate where each percentage Budgeted prime cost job's material and labor ‘costs proportions vary to great extent. P2 Soayute applied/allocated/absorbed overheads = allocated overheads = OAR x actual allocation base STEP3 . Compute over or under absorption + is the difference between actual overheads and absorbed overheads 1, UNDER-ABSORPTION * Under-absorption occur if the absorbed overheads are less than actual overheads 2. OVER-ABSORPTION * Over-absorption occur if the absorbed overheads are greater than actual overheads QUESTION 1 The following budgeted data is available form manufacturing company © Overhead shs 2,500,600 + Direct wages shs 2,000,000 * Direct material costs shs 1,250,000 * Direct labor hours 500,000 hours * Machine hours 250,000 hours * Units of output 100,000 units You are required 8) Calculate six overheads absorption rate b) The company employs direct labor hours as allocation base in department 1 and machine hours as allocation base in department 2. The achial information for the period was as follows; * Direct material costs shs 1,250,000 * Direct wages shs 2,000,000 * Direct labor hours 40,000 hours * Machine hours 30,000 hours * Units of output 120,000 units Actual overheads department 1 shs190,000 * Actual overheads department 2 shs320,000 REQUIRED “Pr ') You are required to calculate applied (absorbed) overhead in department | and 2 i) Calculate over or under absorption HENRY ToUWA 0745 340 591 _& il Page 5208231 ANE (ONTing overhead costs usin, QUESTION 2 allocates manufacturing Ba So ia ilable for 2011: i Dulgeed te pt machine-hour The elowing tata avis ude i 4,200, ; Budgeted manufacturing overhead costs} oo y Budgeted machine-hours 75,000 ‘ Actual manufacturing overhead costs sae sa 1 Actual machine-hours REQUIRED 1. Calculate the overhead Absorption rate. | 2. Calculate the manufacturing overhead allocated during 201 1. a 3. Calculate the amount of under- or overallocated manufacturing overhead. BLANKET OVERHEAD RATES AND DEPARTMENTAL OVERHEAD ABSORPTION RATES { 1. BLANKET (PLANT WIDE) OVERHEAD RATE j . proach establishes a single overhead rate for the organization as a whole This a * Flanket overhead can only be justified when all produts services consume * This approach establi: i\ Depa the books of DNX coy | [Manufacturing overheads 200,000 goog a agent 3 Total 1) Direct labor hours 20,000 20,000 ae 900,000 | Rea , 20,000 60,000 | 4) Compute the blanket overhead rate ° ©) Compute the department overhead rate foreach department QUESTION 4 Budgeted production 38,000 units Actual production 35.000 units Calculate: 8) Blanket overhead absorption rate 5) Department overhead absorption rate ©) Actual overhead absorption rate @ Pre-determined overhead absorption rate HENRY TOUWA — 0745 340 591 ee P88: 60 61955)‘nts of an organization are as under Departments 7 oZ ‘Tshs 48,950 Tshs 89,200 Tshs 64,500 year ended 31" March, 2010 the factory overhead costs of three production -the bass of apportionment of overheads is given below Departments XxX 7Y .Z tshs 5.00 per machine hour for 10,000 hours 75% of direct labor cost of tshs 120,000 tshs 4.00 per piece for 15,000 pieces. Calculate department-wise under or over-absorption of overheads and present the data in tabular form QUESTION 6 Roman Kavishe Ltd accepts a variety of jobs which require both manual and machine operations. ‘The budgeted profit and loss account for the current period is as follows: TSHS TSHS Sales 7,500,000 Costs «Direct materials 1,000,000, © Direct labor 500,000 © Prime cost 1,500,000 * Production overheads 3,000,000 + Production cost 4,300,000 | soo * Administrative, selling and distribution — overheads . 1.500.000 Profit Other budgeted data: 25,000 * Machine-hours for the period 15,000 * Number of jobs for the period300 + Labor-hours for the period ‘An enquiry has been received recently from a customer and the production department has prepared the following estimate of the prime cost required for the job. Shs Direct materials 2,500 Direct labor cost 2,000 Prime cost 4,500 Labor-hours required 80 Machine-hours required 50 You are required to: 4) Calculate by different methods, six overheads absorption rates for absorption of Production overhead and comment on the suitability of each ) Calculate the production overhead cost of the order based on cach of the above rates. HENRY ToUW,A— 0745 340591 aes ee” Page 61 of 231ee QUESTION 7 ish a predetermined rate for The cost accountant of a newly formed company was asked i Sten shop and to chest resalts applying overhead to the job moving through a single manufacturing i 013 Periodically. After consulting various departments estimated data for ie jear 2 Estimated ean Direct labor hours 144,000 TSHS a Factory supervision 50,000 31 Indirect labor 115,000 99,000 Inspection 70,000 73,000 Maintenance 35,000 39,000 Indirect materials 25,000 20,000 Meat, light and power 20,000 18,000 Depreciation 35,000 35,000 Miscellaneous factory 10,000 3,000 overheads At the end of 2013, the first year of operations, the aotual Tesult were recorded against each item above. You are required to 4) Compute the predetermined over! incurred overhead rate: }) Determine the under or over-applied overhead for the year MULTIPLE CHOICE QUESTIONS QUESTION 1 XYZ Company applies overhead on the basis of direct labor-hours. The following data are available: Estimated annual overhead cost $450,000 Actual annual overhead cost 580,000 Estimated direct labor-hours 25,000 Actual direct labor-hours 20,000 Compute the amount of overhead applied during the period and the amount of under or overapplied overhead (if any), a) $450,000 applied and $130,000 underapplied b) $360,000 applied and $220,000 underapplied ©) $580,000 applied and no under or overapplied overhead 4) $360,000 applied and $220,000 overapplied heads rate based on direct labor hours; also compute the QUESTION 2 Overapplied overhead means that: a) Actual overhead is more than overhead applied b) Actual overhead is equal to overhead applied ¢) Overhead applied is less than actual overhead 4) Actual overhead is less than overhead applied BNRY = 40 591 . HENRY ‘TOUWA - 0745 3: Page 62'6f25%)‘popic s- OVERHEADS ALLOCATION AND APPORTIONMENT ~ PRIMARY APPORTIONMENT. : such as direct materials, direct labor and direct expenses can be easily traced (identified Di din ‘all to the physical units produced. us (identified) Sir indiet (overheads) costs cannot be specifically traced to physical units produced. However the fag of products would be impossible without incurring such overhead costs Dwethead (ie. indirect) costs include depreciation, fuel, heating, lighting, material handling, apis, property taxes, cost of services facilitating the day to day operations et. that are erential for any production activity. Cost centres _. | ‘Acost centre is any location in a business to which costs may be attributed. A cost centre is ‘usually a department or process. Specific overheads ‘These are overheads which may be identified and allocated to specific cost centre General overheads These overheads which are incurred for the business generally and are apportioned to cost centres on suitable basis SUITABLE BASES FOR APPORTIONMENT OF INDIRECT COSTS OVERHEADS BASIS OF APPORTIONMENT All labour related expenses e.g, time keeping, expenses, ‘Number of employees or staff welfare expenses, canteen expenses and indirect | wages paid for each labour department. Direct labour hours are used as a basis, for indirect labour + General department expenses Direct expenses + Maintenance expenses Machine hours © Rent © Rates FLOOR SPACE AREA * Property tax ° OCCUPIED {Insurance of building Telephone charges (when the number of telephone point ., estimated usage are not given) Depreciation of factory building Heating and lighting (when not separately metered the | Number of light points, oo st centres) floor space area oc ied . S [floor space aren | Supervising costs Time Spent in each department, ae HI Pi of 231 ENRY-TOUWA.— 0745 340 591 c er abe SO e NEHOMTFuel and Power (if metered separately to cost cetres) ‘Actual consumption (this is allocation rather than apportionment) or horsepower Insurance of plant and machinery On cost or book value or replacement values of assets in each department Depreciation of plant and machinery On the cost or book value of assets in each department Building maintenance Machine maintenance Area occupied Machine hours Plant and machinery department Depreaxtrs Rete. Number of value of machines in each production cost cenire Supervisor salar Direct labor hours Employees salary ‘Number of employees QUESTION 1 The annual overhead cost for the Ente prise Com centers and one assemb| Hy centre) and two service centers (atore and Indirect wages and supervision ‘Machine centres: X 1,000,000 Y 1,000,000 Assembly 1,500,000 Store 1,100,000 Canteen 1,480,000 6,080,009 Indirect materials Machine centres: X $00,000 Y 805,000 Assembly 105,000 Stores 0 Canteen 10,000 1,420,000 Lighting and heating 500,000 Property taxes 1,000,000 Insurance of machinery 150,000 Depreciation of machinery 1,500,000 Insurance of buildings 250,000 Salaries of works management 800,000 4,200,000 tao HENRY TOUWA ~ 0745 340 591 ipany which has three productioy n centers (two machine Canteen) are as follows: Page 66spe following information is also available e Book ‘Area Number | Direct machine Value of | occupied of | labor hours Machinery | (sq. employees | hours meters) §,000,000 | 10,000 300 1,000,000 | 2,000,000 5,000,000 | 5,000 200) 1,000,000 | 1,000,000 1,000,000 _ | 15,000 300 2,000,000 500,000 | 15,000 100 500,000 | 5,000 100 ‘15,000,000 | 50,000 ‘1000 Machine shop X Machine shop ¥ Assembly Stores service Cateen's costs apportioned a eae “om i ‘Seve store's costs apportioned 40% 35% 25% : Required: '2) You are required to allocate the costs of service department to production department using the step down method ») Compute suitable absorption rate QUESTION? ‘Bovkdaa PoblcLinited Company manufactures three products nto production departments, a machine shop and a fitting section; it also has tho sevice dcpaiments,a canteen and a machine maintenance section. Shown below are next years budgeted production data and manofacturing cst forthe company Products product product x y Z Proton ‘200s 500 wits 1700 wits Prime cost Diet meals S11 perurit 514 perunit 517 perunit Diet Labor: Machine sop S6perunit $4per nit S2perunit Fig section Si2perunit $3 perunit $21 per wit Machine bur per ni Ghoursperunit 3 hoursper unit hours per unit Machine canteen Machine section ‘Total Shop ‘maintenance Budget overheads (S) Allocation overheads 27,660 16,600 26650 90,380 ‘Rents, rate, heat and light 17,000 Depression and Insurance of equipment 25,000 ‘Additonal dats: Gross book value of equipment (S) 150 000 75,000 30,000 45,000 Nanber of employees 18 “ 4 4 Space oezupied(squa 1400 1000 800 ter spce occupied (square meters) _ 3600 i nna pony 7 of he mah inet ein’ ethan eine mcs tt ‘emsinderincame servicing the fing setion. i viene 2 pe ane ie ech year ending 31* December 200 dealing oe for machine shop and ig seon ) Colustethe olowing budgeted overhead wbsonsion ates: + Amacin hor rate forthe machine shop © Ge dite etre ona peerings of ec wae fr he ing son ine eaten for the wo methods ued in (D) ©) Calehe he badgeed manufacturing overhead cost pr wit of rode X 4 Page 67982311 HENRY Touwa — 0745 340 591 aedQUESTION 3 . three production departments A furniture- making business manufactures quality future to customer's orders ut Peel and two services departments. Budgeted ovethead costs for the coming Yes Total 12,800 Rent and Rates 6,000 Machine Insurance 3,200 ‘Telephone charges feana Depreciation ‘ Production Supervisor's salaries any Heating Lighting 75.400 ; raat Production departnents-A,B and C, and the two services departments ~Xand Y, are inthe new ‘Premises, the details of which, together with other Statistics and information, are given below Deine y Fae Floor area occupied (6q, meter) 3000 1800 600 400 Machine value ($000), 24 10 8 2 Bite! Labor rs budgeted 3200 1800 1000 tee labor rates per hour 3. MA feat sper S380 $350 8340 $3.00 $3.00 pa ‘each department (8000) 28 7 12 08 0.6 Vee Department X's costs apportion. 2 % 25% Sere be 0515 apportioned 50% 25% 25% epartiment Y"s costs apportioned 20% 3 Required: naa —— es 2 secre Shapes Tn . Calculate the total of each costs ofeach job, "shows Dept C ees « “mttaer unseen avemnol ‘Show the apportionment Costs at the end of the year Of the following costs Tsks "000 Fixed costs Rent and rates 4,000 Insurance 20,000 Depreciation on plant and machinery 25,000 General and department expenses, 37,500 Variable costs Indirect wages 15,000 Fuel and power 20,000 Maintenance expenses 10,000 Additional cost related data (amounts in shy000) Dept A | Dept Floor area Gq. fl) 2,000 2,000. ‘Costs of plant and machinery | 100,000 [250,000 Horsepower 16 24 Labour hours [5.000 —io,o00" Machine hours 12,000 [9,000 Direct expenses 25,000 | 25.000 Direct wages 30,000 [30,000 Direct materials 27,000 [19,500 ling price foreach. OVERHEADS ALLOCATION AND APPORTIONMENT - SECt oe SERVICE DEPARTMENT REALLOCATIONS ae bes the overheads are allocated and apportioned to the production and service cost centres we eed to re-apportion the service cost centre overheads to the production cost centres, This tg Because these service cost centres provide services to the production cost centres. Although the product are not actually processed in these services cost centres, costs are still incurred production cost centres Are directly involved in producing goods, for example shaping raw materials, components etc assembling «Service cost centres Are not involved in the production of goods, but provide services for the production cost centres, for example store, building and plant and maintenance, canteen, ete Service departments provide services for other service department as well as for production departments. For example, a personnel department provides services for other service departments such as power generating plant, maintenance department and stores. The power generating department also provides heat and light for other service departments including the personnel department and so on. APPORTIONMENT OF SERVICE COST CENTRE OVERHEADS TO PRODUCTION COST CENTRE SERVICE COST CENTRE [APPORTIONMENT Stores Number or value of stores requisitions raised by production cost centre Canteen ‘Number of employees Most of the times services department costs are apportioned basing on the percentage given in question ‘When percentages are given the following methods are used DIFFERENT METHODS OF REAPPORTIONMENT SERVICES DEPARTMENT COSTS TO PRODUCTION CENTRE DIFFERENT METHODS OF ALLOCATING THE SERVICE DEPARTMENT COSTS, 1, DIRECT ALLOCATION METHOD Itignores inter-service department service reallocations. Therefore service department costs are allocated only to production departments 2. SPECIFIED ORDER OF CLOSING METHOD (STEP DOWN METHOD) Itthis method is used the service departments’ overheads are allocated to the production departments in a certain order. ; The service department that does the largest portion of work for other service department is closed first, the service department that does the second largest portion of work for other service department is closed second and so on. ; Return charges are not made to service departments whose cost have previously been allocated. HENRY TOUWA 0745 340 5913. RESPROCAL SERVI EI a) REP] D DISTRIBUTION METI Where this method is adopted the service dort Specified percentages until the figure is B D (starting distribyy. b) THE MODIFIED REPEATED DISTRIBUTION METHO Uti i ¢ i ¢ other servi among the service cost centre) centre is apportioned to the other service ceny Step 1: st of the second service centre according to the given percentages. Then, the cost a ‘given percentages. Thuy is GPrortioned to the fist and other service centres in the, Be distribution of overheads takes place among the scr ETHOD ament costs are repeatedly allocated jn y. depal II t0 be significant. FH a uted in step 10 i Step 2: the total overhead cost of each service centre (as comp: step 10 apportioned among the production cost centres. ©) SIMULTANEOUS EQUATION METHOD ; Whee this method is used simultaneous equations are initially established @ ALLOCATE BASING ON THE INSTRUCTION OF THE QUESTION qometimes allocation of service department costs to production department depend the instruction of the question QUESTIONI Sh Pr 48,000 42,000 30,000 14,040 18,000 152,040 Ls ate SPPOHioned as follows partment . x Zz Service dey artment Service department | 20% — ao% Z, 1 2 Service department 2 40% 20% 2% - 10% ‘You are required to allocate the Costs of seryi, ° 1 following methods Mice department to Production deo ve th a) Direct allocation method Partment using the b) Specified order of closing method ©) Repeated distribution method 4) Reciprocal method HENRY TOUWA —0745 340 591 Page 70°6f:oN 2 aquest has three production departments and two service departments, The expenses for these Ace Ut ents as pet primary distribution summary are as follows: _ departments $2) Tshs'000 | Tshs'000 departments Production depat 6,000 A 5,200 8 4,800 | 16,000 departments service depat 800 Time-keeping and 00 tna) accounts, ‘additional information: Dept | Dept | Dept A B c Number of workers 16 12 12 Value of stores requisition 5,000 [3,000 | 2,000 (tshs‘000) 8y using direct method apportion the costs of service departments over the production departments QUESTION 3 ‘The overheads relating to two production departments, P1 and P2, and three service departments, timekeeping (S1) and Stores (S2) and maintenance ($3) are given below: Production Departments | Service departments Production Departments Service departments PL P2 Si S2 33 ‘Overheads as per 16,000,000 | 20,000,000 | 8,400,000 | 18,000,000 | 8,000,000 primary distribution ‘The expenses of the services departments are apportioned as follows: Production department service department Pl P2 P3 SI S2 Service department S1 40% 30% 20% - 10% Service department $2 30% 30% 20% 20% . You are required to allocate the costs of service department to production department using the modified repeated distribution method HENRY: TOUWA — 0745 340 591 Ge” Rage 7ADE2I8 : on sRA company has three product rvit artments. The overhead k i \d two services department e | \duction departments an: a nalysis sheet provides the following total of the overheads analyzed to production and service an departments: Shs A 4,800,000 Production department a co. € 3,000,000 X 1,400,000 1,800,000 15,200,000 ents are apportioned as follows: Services department ‘The expenses of the services depart Production department service department A B c x a Service department X 20% 40% 30% = 10% Service department Y 40% — 20% 20% 20% - Ou are required to allocate the costs of Tepeated distribution method QUESTION 5 The overheads rela departments, times \d P2, and three service keeping (S1) and Stores ince (S3) are given below: Production Departments | Pl 33 Overheads as per | $00,000,000 300,000,000 primary distribution Further information is available and is used is for distribution: Production i departments Pi [po No of employees 40 [30 No of stores 24120 Tequisitions Machine hours 2,400 [7,600 By using step down/speci fic order of closing method @pportion the co: i sts of Over the production departments service departmente| #IN 6 . Questio" NS ree production departments and two services departments, The overhead Ge sheet provides the following total of the overheads analyzed to production and service departmen Sh department A 16,000,000 Production oP B _ 13,000,000 C 14,000,000 yartment : stores 4,680,000 Serves dep Tool room 6,000,000 53,680,000 Tuc expenses ofthe services departments are apportioned as follows: Production department service department A B Cc stores tool room Stores 20% 25% 35% 5 20% Service department Y 25% 25% 40% 10% = ‘You are required to allocate the costs of service department to production department ‘using the simultaneous equation method (MULTIPLE CHOICE QUESTIONS 1 The following extract of information is available concoming the four cost centres of EG Limited. Semvice cost Production cost centres centre Machinery Finishing Packing Canteen ‘Number of direct employees 7 6 a = Number of indirect employees 3 2 1 4 Ouehead allocated and apportioned $28,500 $18,300 $8,960 $8,400 The overhead cost ofthe canteen isto be re-apportioned tothe production cost centres on the basis of the number of employees in each production cost centre. After the reapportionment, what is the foal overhead cost of the packing department, to the nearest $? A $1,200 8 $9,968 © $10,080 D $10,160 (2 marks) ‘The following information relates to questions 2and3 ‘Budgeted information relating to two departments in a company for the next period is as follows. Production Direct Direct Direct Machine Department ‘Overhead material cost ‘labourcost labour hours hours s $ 5 ; 27,000 67,500 13,500 2,700 46,000 @ 18,000 36,000 100,000 26,000 '300 Individual dec labour employees within each department earn diferng rats of Pay, according to their skills, ‘ade and experience. HENRY TOUWA — 0745 340 591i lanned | ich may include p TOPIC 7 - BUDGETING PROCESS time, which m eriod of Budget is quantitative statement for a defined p \dget 7 flows. A bu fevenues, expenses, assets, iblties and cash Flows Oe, organization, aids the co-ordination of activities eee by means of a fixed master budget, wneress io i i ‘ible budget . comparison of actual costs with flexible ee A budget is different from a forecast. A forecast only aims to p Jan its objectives for future future. On the other hand, a budget helps an organization to pl and the methodology to achieve these objectives. t provides @ focus for an ntrol. Planning is achieved lly exercised through the what will happen in the PREPARATION OF BUDGETS ii, iii, HENRY TOUWA — 0745 340 591 INCTIONAL BUDGETS/OPERATION BUDGET Operational budget of an organization comprises the budgets for all the functional activities (known as functional budgets) The most common operational activities for which a functional budget is prepared are sales, production, material(usage and purchase), labor and overheads * Aims to address spending and revenue for a particular function within a busines: FU MASTER BUDGET + A master budget is Fre eet financial plan. It displays a consolidation of the budgets to present the overall impact of the Projected operational activit ProMiabilty of the organization as a whole. lise satege showing the sr ue; costs and profit (oss) for the organization during de budget period A master budget normally contains all functional budgets, capital expengs budgeted tatement of profit or loss and ¢ budgeted statement of fina ee penditure budget period. Mancial position Aim at predicting the profit functional ics on the timation of n of the CAPITAL BUDGET * The capital expenditure budget is an outline of funds amongst its various existing and upcoming p; Comprises of the components that helps a compan Aims at procurement of fun and position for the organization ¢ luring the bug Bet Period 20 organization's dens. rojects ms dee Y Create a by ids and disbursement of funds Ud8** f (OF acaquiri ‘Witing assets a”sTION 1 on ‘Stemrise company manufactures two products, known as Alpha and Sigma. Alpha is jrodved in department I and Sigma is produced in department 2. The following information is je for 2000. axaied material and labor cost: $ © Material X 7.20 per unit + Material Y 16.00 per unit + Direct labor 12.00 per hour Overhead is recovered on a direct labor basis, ‘The standard material and labor usage for each product is as follows: Model Alpha Model Sigma Material X 10 units 8 units Material Y 5 units 9 units Direct labor 10 hours 15 hours Other relevant data is as follows for the year 2000 Finished product Model alpha Model sigma Forecast sales (units) 8,500 1,600 Selling price per unit $400 $560 Ending inventory required (units) 1,870 90 Beginning inventory required (units) 170 85 Direct materials Material X Material Y Beginning inventory (units) 8,500 8,000 Ending inventory required (units) 10,200 1,700 You are required to prepare the following functional budgets: Sales budget in units and in shillings Production budget in units Direct materials usage budget in units Direct materials purchase budget in units and in shillings Direct labor budget in units and in shillings QUESTION 2 M Lid is preparing its annual budgets for the year to 31 December 2006.It manufactures and sells one product which has a selling price of Shs 150/= per unit. The marketing director believes thatthe selling price can be increased to Shs 160/= per unit, With effect from 1* July, 2006 and that at this price the sales volume for each quarter of 2006 will be as follows: Sales volume in units eaese Quarter 1 40,000 Quarter 2 50,000 Quarter 3 30,000 Quarter 4 45,000 Sales for each quarter of 2007 are expected to be 40,000 units. Each units of the finished product Which is manufactured requires four units of materials, materials are purchased from an outside ‘poli. Currently prices is shs 8/= per unit ‘ HENRY. TOUWA — 0745 340 591 Page 8V'of 231; ice b} The materials are expected to increase in Ey the materials into the finished product req oe hour. 4% increases in wage costs are anticipate t ‘Stocks on 31" December, 2005 are as follows: Finished Units Materials Units 9,000 3,000 10% labor hot ake effect from 18 October 2006. lows: ing stocks atthe end of each quarter are to be as follows: oie ne ° 10% of the next quarter’s sales wremen 20% of the next quarter's production requir Finished units materials REQUIRED: Prepare the following bud; a) Sales budgets in Shs and Units 5) Production budget in Unit ©) Material usage budgets in 4) Materials purchased bu ©) Labor budget in hours a QUESTION 3 The following the year 2009 Budgeted production units X 10,300 units and Y 6,000 42-3004 Vai s. Units idget in units and value ind in value information is about produetion overhead costs Ps lget of Kizazi Kipya Ltd for the year ending 31* December, 2006 (for quarter one to quarter three only) nits io lable overhead rate per unit of production ‘roduct Prod Y Indirect material Indirect labor Power (to the extent variable) 'shs’000. [is ae 0. Ld Os 0.4 Maintenance (to. the extent] 1.9 05 variable) Semi —Variable and fixed overhead expensey Product X Product Y Tshs*000 Tshs*000 Power (to the extent fixed) 25,000 “| 20,000 Maintenance (to the extent fixed) | 5.000 8,000 Depreciation 50,000 [75,000 Rent 20,000 | ~30,000 Required Prepare factory overhead budget for the year ended 31* December 2009 HENRY TOUWA — 0745 340 591 i Assembly of . ym April 200 with es curently paid Shs 5 pq ‘0 be incurred by Nole Itd duringQUESTION 4 The following information is about selling and distribution overhead Jwwenalis Joseph Itd during the year 2009, The sales revenue tshs1,600,000,000 costs to be incurred by for the year ended is % of sales ‘Variable expenses Sales commission: 6% + Wages and salaries 25% + travelling expenses 3% «advertising and promotion expenditure _| 1% Fixed selling expenses + marketing staff's salary (tshs’000) 50,000 «advertising expenses (tshs’000) 30,000 * depreciation (tshs’000) 45,000 warehousing expenses (tshs'000) 75,000 Required Prepare a selling and distribution expenses budget QUESTION 5 The following are estimated non-manufacturing overheads: Stationery etc. (Administration) Salaries = Sales * Offices Commission Car expenses (sales) Advertising Miscellaneous (office) Required 2) Prepare a selling and distribution expenses budget ») Prepare administration overheads budget HENRY TOUWA ~ 0745 340 591 es? tien 4,000 74,000 28,000 60,000 22,000 80,000 8,000 Page 83 9f 231.d sold by MW Ltd. Sales uBes a C- made an 5, B Shs.250, C Shs, ; _p, Band C- MAGE M215, , C Shs. ETT demand foe thee proc seling prices “fixed the same components e 0 nto W its, C 00 units, B 1000 units, Each sub-assembly consists of aifering quantities as follows: _— Frame Products Fram Buying in costs, per | Shs.20 ‘At the end of the current year on ‘but because interest rates have increases ital purposes, it is planned to effect a material ming year ended 31sts dece2006. utilis and the cori the stock of all finished products during the comi mee am "300 [Copper frames _| 1,000 B 700 [Component D | 4,000 c 1,600 | Component E 10,000 Component | 4,000 _| REQUIRED: Prepare budgets in respect of Period I of the forthcoming year for: i, Sales, in quantities and values ii, Production, in quantities only iii, Material usage, in quantities iv, Material purchased, in quantities and value QuesTIon7 2°44 Sierra funiture is an elite desk manufacturer. * Executive desk 3x5 oakdak ea © Chairman desk 6x4 red oak desk es The budgeted dretcost inputs for each produet in 2009 Exceutive li as Oak top Tene i aa H 6 square feet Chairman Tine Oak Tegs 4 z Red oak legs 0 Unit data pertaining to the dire Actual beginning direct materi Oak top (quare feet Red oak top (square fest) }Oak legs | d oak legs I RY TOUWA ~0+ ending direct Materials inventory (3/31/2002) _Tearget ending © Executive line Chairman line ware feet) 192 ; [a op Gaus feet) [0 Red oak t a aw ‘Oak legs LO ates 0 44 sit cost data for direct cost inputs pertaining to February'2002 and March 2002 are: ak top (per square feet) $20 [Red oak top (per square feet) | $25 {$25 0d Oak legs (pet leg) $12 ‘Red oak legs (per ley S18 [sg Data relating to finished goods inventory for March 2002 are: Executive line Chairman line Beginning inventory in units _| 20 3 Beginning inventory in units | 30 15 Budgeted sales for March 2002 are 740 units of the executive line and 390 units of the chairman line. The budgeted selling prices per unit are $1,020 for the executive line desk and $1,600 for the chairman line desk. Required Prepare the following budgets for March 2002 a) Revenues budget in units and in value b) Production budget in units ©) Direct materials usage budget in units 4) Direct materials purchases budget QUESTION 8 ‘The following data are budgeted from the books of Mangi Deports Months Sales (Tshs) ‘November (actual) 200,000 December (actual) 400,000 January, 720,000 February 970,000 March. 860,000 April 886,000 [Ms 1,025,000 June 1,087,000 Additional information ; ') A company receives payment for 20% of its sales in the month of sale, 50% in the following month and 30% two months after the month of sale | . . A fixed asset was disposed for Tshs 300,000 in February, Cash will be received in April Dividend on investment will be received on may Tshs 500,000 ii) iii) HENRY TOUWA —0745 340 591 Page 85'0f 231200,000 each month, amount will be 'shs 200, iv) Rent for two months January and February T: ta loan of Tshs 300,000 and i received in May tof a ) The application has been made to the bank Leah of May is hoped that the loan amount will be receiv i Deports The following expenses are budgeted from the books of Mangi Oe and Months Material Salaries Production selling overhead | purchased overhead a December | 310,000 150,000 65,000 5 ‘000 | January {250,000 |-100'000 60,000 35, a | February [310,000 121,000 63,000 67,001 | March 255,000 "106.0001 60,000 75,000 | April 306,000 "250,000 | 65.000 89,000 | Ma‘ 370,000 220,000 80,000 110,000 = | June 388,000 230,000 [82,000 115,000 Additional information - 2 Creditors for material purchases grant one month's credit * Production overheads is Paid in the month of usage. depreciation is Tshs 10,001 Salaries is paid in the mor Office and selling overhe Assets are to be should be made fo: Tax for the previo Assume that the cash bal Required Prepare the ca ‘td are paid one month in arrear acquired in the month of Feby T payment of T us year will be paid in ance in hand on 1 January i sh budget for the month of HENRY TOUWA - 0745 340 591 0 each month 8 80,000 a: Out of production overhead ruary and April id Tshs 25,000 for the Pereh rc for the same Tuary Tshs 30,099 me s Tshs 750,009 “anusry through May ‘Oe provisionsoric 8- COST-VOLUME-PROFIT ANALYSIS isthe study of the interrelationships between costs, volume and The managemest of an organisation usually wishes to know the profit likely tobe made ifthe a ands forthe Yen ar achieved: Management may also be intrested to raw he Ripe (g) The breakeven point which is the activity level at which there is neither profit nor loss. (b) The amount by which actual sales can fall below snicipated sls, without alos bog incurred ANALYSIS ASSUMPTIONS (break-even assumption Cer NM eng prosiced ld ae felling price per unit remain unchanged ‘arable cost per unit remain unchanged total fixed cost remain unchanged 2 fim produce only a single product ro sem variable cost + nocxteral fctors imed-for production ‘The formula for CVP analysis can be given as follows, SPQ-VCQ+FC+ TL Where + Q-Volume(units/quantity) ‘SPs Selling price per unit VC= Variable cost per unit FC= Total Fixed costs per time T= Profit SPQ@Total revenue VCQ=Total variable costs QUESTION 1 A company plans to sell 1000 units of product at a price of shs 150/= each over ‘manufacturer will be SO per unit and fr the coming month. The variable costs of ixed cost forthe period willl be 80,000/= Required 4. What wl be the profit forthe month ‘. What will profit be ifthe company charges a price she 140/= but sales 1020 units asa result © Mhat vill profit be ifthe company charges a price of shs 1650/ but sales 9600 units as a result and variable cost increases by 10% Contribution Margin 1s the excess of sales over variable costs M= sp-ve Where M = Conbuton margin per unit SP= Sling price pe unit cont tn Vaitle con pr un sage ote tribution margin ratio (contribution as percentage of sale) ; oatbtn margcan'e egrets pret of hs whch cl contibuon magn ato (CMR) Coin a 00 SP Whe the dat given ae sls fortwo years and profit fortwo years then Page 103 of 231at which the is the level of activity te} enve and total cost are equal ( My tecned tol wheres) [benceven point ofits ql 16 280 Gea Fonanans Sieur Saat in dollar) ) Break even in sales value (in dol J Sales van streak even poi ants Sales valet breakeven point EC break even point x SP or ©) Unie rondo ative tig rot > ‘Unie poduced cama Ee si reves shee reed pot © Sah tane ot Sete peeed wm ptt SP Or Sales value fo eam a profit = EC# IT CMR MARGIN OF SAFETY is the difference between the sales Sales beyond the break-even volume bring in profits. The margin of safety is and the beahceven Point. Margin of safety indicates by how much sales may decrease before a loss occurs ‘ish margin of safety signifies that the break-even point is far below the sales level under consideration so atic there is fallin sales, there wil still be a profit. On the other hand, @ small margin suggests . Total fied costs per month, & | The contribution margin per unit 4. Contribution margin Sie fg beak ven point in nits and in sales value (in $s.) per month free wakeandshilings wo achieve «potter ae et month E The matin. shilingstoachiveater potion Assume tax rate was 40% per month E [Remain of safeyinunitsandin alee eh month of May ‘Margin ofsafery sto in the month sf as QUESTION 3 ‘Th following information is available for Janet Mlay international Selling price per unit she 20 Variable cost per unit shs 12 Tota fixed costs Shs 560,000 | 8) W hatis break-even output? What sth profit eared when the output is she 100,000 units? | What should be the ouput to achieve ‘2rBet profit of shs 400,099 | 4) What are break-even sales in shillings " QUESTION 4 Nall Intemational manufactures a certain product. Ns curent financial and produ, Unit selling price she as PMCtOn Figures are Biven be, Unit variable overhead shs 20 ca Fixed costs shs 400, Output shs 24, it 2) What is Neali current level of profit 00 ait ©) What will be the percentage change in poi fr the following changes: 10% increase in output A 12% increase i AS% decrease in in unit selling price n Unit variable cost HENRY TOUWA — 0745 340 501UESTION greak-oven point in unit and shi ate the break-even point in unit and shilling from the following data: Calla ting price per unit nas following data: Variable cost per unit the? ‘otal fixed costs ne vane) {what sales (in units) required to earn a pretax income of shs 60,000 4) What sales (in units) required to earn a aftertax income of shs 60,000 if the tax rate is 4096? TION 6 , QUEST? ge break-even point in units and rupees from the following data: a Contribution margin ratio 3036 Contribution margin per unit shs 6 Fixed costs per month shs 20,000 rfibe net profits shs 60,000 what is the amount of sales in shillings? Assume O tax rate, QUESTION 7 ‘The Samson Company produces a special kind of cement which is packed and sold in bags of 20 kg, During the past ‘Ronth its revenue and costs patterns were as follows: Selling price per bag shs 30 Variable cost per bag shs 16 Fixed costs shs 10,000 Quantity 3,000 bags Consider each of the following separate: 1) What is the break-even quantity? b) Assume a 10% increase in production volume. What is the percentage change in profit c) Assume a 10% increase in selling price. What is the new break-even point? 4) Assume 50% increase in fixed assets. What is the new break-even point? «) Assume the variable costs increases to shs 20 per bag. What is the new break-even point? MULTIPLE CHOICES QUESTIONS 11 The following information relates to a business for a period. How many units were sold in the period? A. 1800 B 1750 c 2250 28 The information relates to a product. $ selling price per unit 100 variable costs per unit 60 total fixed costs 90 000 net profit 15.000 D 2625 $ break even sales revenue 15.000 unit sales price 10 fixed costs 6.000 ‘What are the variable unit costs? A $2.00 B $2.60 RY TOUWA — 0745 340 591 Page 107-0F232,G cosTING ; STING AND apsoRPTION © ‘of recording product/service 0 je-me ing ae Mel costing are te two BAS Absorption costit st cama jn a management ‘accounting 1, MARGINAL COSTING «Isa costing system of ‘* Fixed production over costs and research an ‘© Marginal cost is the cos! ‘Le. ig a variable cost of one unit 's Its special value is in recognizing cost TOPIC 9 - MARG! ; .ds manufactureg Fs in cost of g00 nut jable production costs are included 7 gistribution, administration ty variable Pi hich they are incurred pate (selling ; =) ar tenon ie re in je if that unit were produced i vice, {of unit of product or service ‘of a product or service. st behavior, and hence assis! whereby onl ting in decision-making. ABSORPTION COSTING ; 2 Isacosting system of whereby all variable production costs and fi of goods manufactured aoe .d research and development . ony, hnon-manufacturing costs (selling & distribution, administration costs ant costs) are written off in the period in which they are incurred .ey are incurred. ‘* It follows the historical accounting approach where costs are recorded only once they ‘Therefore Absorption costing approach is preferred for extemal reporting. ed production costs are included in cost ABSORPTION COSTING VS MARGINAL COSTING. Marginal Costing Absorption Costing Fixed manufacturing costs are treated as__| Fixed manufacturing costs are treated as period costs. product costs. No problem of over absorption or under | Normal absor, i mn costing: Th is absorption of fixed manufacturing problem of over absor] tion ae overheads. tion or under absorption of fixed mai i overheads. ane ‘Operating statement shows contribution margin (sales revenue less variable costs), Operating state ‘ment sh. (als revenue ess cost or govde se ‘Net profit is the excess of contribution margin over fixed costs. Distinction between variable costs and fixed costs is relatively important. een ‘anufacty; ctu; ring costs ring costs is relatively ees Particularly useful for short-term decision making. aan TOUWA —0745 340 591QUESTION considering its plans fort a a Limited i cone eae ing price eae ending 31 December 2001. It makes and sells a single product, which has bode Per unit, suing 8 Diret materials Direct labour a Production overhead: Yate 4 ined Fetg ovehead/ Varible s Fixed 2 ‘Administration overhead: En :thead costs per unit ebased M 1 Fine vee oss Pet unit ae based ona normal annual activity level of 96 000 unis These costs r expected to be incurred at a constant rate throughout the year, ¥ “ ‘Activity levels during January and February 2001 are expected to be: January February Units units: Sales 7000 8750 Production 8500 7150 Assume that there will be no stocks held on 1 January 2001. Regie 9 ys in olan fomat ro satcmens echo the te months of nur and Fehr 2001 using ') "Absorption costing: ii) Marginal costing, 4 Reconcile and explain the teasons for any liferencs between the marginal nd absorption profits for each month, which you have caleulated in your answer to (a) above. Based upon marginal costing, caleulate i) ‘The annual breakeven sales value; and i) The activity level, in units, which will yield an annual profit of £122 800, iit) Explain 3 fundamental assumptions underpinning single product breakeven QuEsTION 2 Freier bas been exacted fom the financial records of Japhet Bisheko Lid forthe year ended 308 June 2017, tion during the year 35,000units Fished goods atthe begining ofthe year 3,0000mite ied goods tthe beginning ofthe year —100uate Selig pie per unit 1 thsz,000 Fired production overhead cost forthe year | tshs10,000,000 ‘ericson and selling expense forthe year tshs2,000,000 budgsed capacity ofthe plant, 40,004n ‘Teal cox per unit incued during the year was a follows: "Tes + Marit oo + Latour oo * Variable overheads 300 mene tmethod for valuation of inventory. The cost of opening fished gods inventory determined unde the ‘enticing tem var een sedate acd oveatr ones erie ae ee Requinen, °) Pept profit statement forte year ended 30" Jane 2017 under Marginal esting ‘Absorption costing *) Pepe econilton beeen he profits determined under the two system HENRY Towa = 0745 340.591 =e vy