Learning Unit 3

ACC 2642:
1
Introduction to
Managerial
Accounting
Unit 3
Course Code:ACC 2542

Semester: One
Presenter: Mrs C Shavhani
ACC 2542: Introduction to 2
Managerial Accounting
Learning Outcomes
3.1 Define the procedure for the control of materials which
demonstrates a thorough understanding of the manner in which
the various source documents and reports are used during the
control process.
3.2 Value inventory according to the FIFO and weighted average
methods.
3.3 Discuss the arguments for and against FIFO and weighted
average, replacement cost and standard cost methods of
inventory valuation.
3.4 Distinguish between periodical and continuous inventory systems
3.5 Define costs related to inventories and explain alternative ways
in which they can be dealt with in an accounting system.
Learning Outcomes
3.6 Account for material costs in the ledger

system.
3.7 Distinguish between labour and labour related
costs.
3.8 Distinguish between the calculation of labour
costs and the calculation of the payroll.
3.9 Explain the accounting handling of various
labour related costs.
Outcome 3.1
Define the procedure for the control of materials

 Raw material inventory.
 Items purchased by the company (not issued to the production
department yet)
 For use in the manufacture of a finished product
 Raw materials of one company can be the finished product of
another company
 E.g. steel plates (finished product) to use in the manufacturing
of motorcars
Outcome 3.1
Define the procedure for the control of materials
(continued):
 Work-in-progress inventory.
 Items currently in production
 Partially finished at some intermediate stage of completion
 Can be completely finished in respect of material or labour
 Finished goods inventory.
 Items that have been produced but not yet sold
 Cost of sales.
 Cost of goods that have been sold
Outcome 3.2
Cost formulas (IAS 2 par 25 & 27)
 Cost of inventories shall be assigned using the FIFO method or
weighted average cost formula. An entity shall use the same cost
formula for all inventories having a similar nature and use to the entity.
 FIFO formula assumes that the items of inventory that were purchased
or produced first are sold first, and consequently the items remaining
in inventory at the end of the period are those most recently purchased
or produced.
 Under the weighted average cost formula, the cost of each item is
determined from the weighted average of the cost of similar items at
the beginning of the period and the cost of similar items purchased or
produced during the period. The average may be calculated on a
periodic basis, or as each additional shipment is received.
Outcome 3.2
Value inventory according to the FIFO and weighted
average methods
Inventory ledger card using the FIFO method
 First-in-first-out (First item received was the first item to be
issued).
 Price materials using first the purchase price of the oldest
unit in inventory
 During periods of inflation, this assumption leads to a lower
cost of sales calculation and therefore a higher profit
 The closing inventory will be the latest and therefore the
higher prices
Outcome 3.2
Value inventory according to the weighted average

methods (continued):
Inventory ledger card using the weighted average
method
 Issuing the items at the average cost of the materials in
stock
 Total cost of an item of material in inventory divided by the
total quantity of inventory
Outcome 3.2 – Class example 1
The following transactions relating to a certain inventory item were concluded:

1 January: Inventory 50 units @ R5 per unit
3 January: Issued 20 units
4 January: Purchased 80 units @ R6 per unit
7 January: Returns to supplier 10 units (received on 4
January)
Create an inventory ledger card using the following methods:
(a) FIFO
(b) Weighted average.
Outcome 3.2 – Solution: FIFO
FIFO
Date Received Issued Balance
Qty. Price Amount Qty. Price Amount Qty. Price Amount
1 Jan 50 5,00 250,00

3 Jan 20 5,00 100,00 30 5,00 150,00
4 Jan 80 6,00 480 30 5,00 150,00
80 6,00 480,00
5 Jan 20 5,00 100,00 10 5,00 50,00
80 6,00 480,00
6 Jan 10 5,00 50,00
20 6,00 120,00 60 6,00 360,00
7 Jan (10) 6,00 (60,00) 50 6,00 300,00
Outcome 3.2 – Solution:
11
Weighted Average
Average ( # (R150 + R480) ÷ (30 + 80) = R5,73 per unit)
Date Received Issued Balance

Qty. PriceAmount Qty. PriceAmount Qty. Price Amount
1 50 5,00 250,00
3 20 5,00 100,00 30 5,00 150,00
4 80 6,00 480 110 5,73 630,00
#
5 20 5,73 114,54 90 5,73 515,46
6 30 5,73 171,81 60 5,73 343,65
7 (10 6,00 60) 50 5,67 283,65
12
calculations
When additional units were purchased :
 4 January : Average ( # (R150 + R480) ÷ (30 + 80) =

R5,73 per unit)
When 10 units were returned

 7 January : (R343,65 –R60) ÷(60 units – 10 returned units) =
R5,67 per unit
ACC 2542: Introduction to
13
Outcome 3.3
FIFO
 Arguments for:
 Assumes that the accounting flow of materials is the same
as the physical flow of material, i.e. goods received first is
issued first.
 Closinginventory is valued close to market value at
balance sheet date
 Acceptable in terms of IAS
 Arguments against:
 During periods of inflation it might understate the cost of
sales (and overstate profits)
Outcome 3.3
Weighted average
Arguments for:
 Acceptable in terms of IAS
 Subject to minimal manipulation by management action
 Less extreme results than FIFO
Outcome 3.3
Replacement cost
 Arguments for:
 Relevant for decision-making
 Arguments against:
 Not acceptable in terms of IAS, i.e. for external
reporting purposes because of the lower of NRV vs
cost basis .
Outcome 3.3
Standard cost
 Arguments for:
 Process of pricing materials is simplified &
 useful for control purposes
 Arguments against: :
 Not acceptable in terms of IAS, i.e. for external reporting purposes
Outcome 3.3
Techniques for the measurement of cost (IAS 2 par 21)

 Techniques for the measurement of the cost of inventories, such as
standard cost method or retail method, may be used for
convenience if the results approximate cost.
 Standard costs take into account normal levels of materials and
supplies, labour, efficiency and capacity utilisation. They are
regularly reviewed, and if necessary, revised in the light of current
conditions.
Outcome 3.4
Distinguish between periodical and continuous
inventory systems
 The periodical inventory system is a system that computes
cost of goods sold by deducting the closing inventory
(determined by a physical stock count) from the sum of the
opening inventory and purchases during the year.
 Opening inventory (stock count)
+ Purchases (stock ledgers)
- Closing inventory (stock count)
= Cost of goods sold
Outcome 3.4
Distinguish between periodical and continuous
inventory systems (continued):
 The continuous or perpetual inventory system is a system

that keeps a running, continuous record that tracks
inventories and cost of goods sold on a daily basis.
 With every movement in inventories (receipts, issues, etc) the
stock records are updated.
 In the operation of the system a few items are checked each
day so that all stock items are checked two or three times a
year.
20
Outcome 3.5
Define costs related to inventories and explain alternative
ways in which they can be dealt with in an accounting
system
 Costs of purchase (IAS 2 par 11)

The costs of purchase of inventories comprise the purchase
price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing
authorities), and transport, handling and other costs directly
attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items
are deducted in determining the costs of purchase.
Outcome 3.5
 Costs of conversion (IAS 12 par 12)
 The costs of conversion of inventories include costs directly related to
the units of production, such as direct labour. They also include a
systematic allocation of fixed and variable production overheads that
are incurred in converting materials into finished goods.
 Fixed production overheads are those indirect costs of production
that remain relatively constant regardless of the volume of production
such as depreciation and maintenance of factory buildings and
equipment and the cost of factory management and administration.
 Variable production overheads are those indirect costs of production
that vary directly, or nearly directly with the volume of production,
such as indirect materials and indirect labour .
Outcome 3.5
 Other costs (IAS 2 par 15 & 16)
Other costs are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their
present location and condition.
Examples of costs excluded from the cost of inventories and

recognised as expenses in the period in which they are incurred
are: abnormal amounts of wasted materials, labour, or other
production costs; storage costs, unless those costs are
necessary in the production process prior to a further production
stage; administrative overheads that do not contribute to bringing
inventories to their present location and condition; selling costs
On 1 January 19x5 LAZ Manufacturers Limited had opening inventory at
a cost price of R40 000, R20 000 and R60 000 in their material control
account, production account and finished product account respectively.
There were no debtors or creditors at that date.
Below is a summary of the transactions and activities of the firm during

January 19x5:
1. Direct material purchased on credit: R100 000
2. Direct material of R120 000 issued to production departments at cost
price.
3. Salaries and wages of factory workers amounted to R50 000 for the
month and consisted of the following:
Direct labour R30 000 Indirect labour R20 000

.
4. Depreciation of machines and plant for January 19x5 amounted to
R20 000.
5. Other manufacturing costs amounted to R30 000 and were settled
in cash.
6. The total manufacturing overheads and direct labour incurred were
taken up in the production process.
7. Products, of which the manufacturing costs amounted to
R200 000, were transferred to finished products.
8. Products, of which the cost of sales amounted to R130 000, were
sold on credit to the amount of R280 000 during the month.
Journalize these transactions, using an integrated cost accounting

system.
Outcome 3.5 - Solution
1 Direct material control account 100 000
Creditors 100 000
2 Work in progress (“WIP”) 120 000

Direct material control account 120 000
3 Direct labour 30 000

Overheads control account (indirect labour) 20 000
Payroll 50 000
Payroll 50 000
Bank 50 000
4 Overhead control account (depreciation) 20 000

Accumulated depreciation 20 000
5 Overhead control account (indirect production costs) 30 000

Bank 30 000
6 WIP 100 000

Direct labour 30 000
Overhead control account 70 000
7 Finished goods account 200 000
WIP 200 000
8 Cost of sales 130 000

Finished goods account 130 000
9 Debtors 280 000

Sales 280 000
Outcome 3.6
Account for material costs in the ledger system
 Material is either bought for cash or on credit and entered into the
ledger control account (double entry system: Dr ledger control acc
and Cr Bank or Creditors control acc)
 Direct materials is then issued to the production department for
manufacturing goods. Raw material is converted into work in
progress. (Dr Work-in-progress acc; Cr ledger control acc)
 Indirect materials can also be issued to be used in the production
process. This is issued to a factory overhead control account. (Dr
Factory overhead control acc; Cr ledger control acc)
 Finished products will be transferred from WIP to finished goods
store. (Dr Finished goods stock acc; Cr WIP control acc)
Outcome 3.6 - Homework
Complete the following activity for

outcome 3.6.
 Use the data provided for activity 4 of outcome

3.5 and do the following:
 a) Prepare the ledger accounts
 b) Determine the balance of inventory in
the statement of financial position on 31
January 19X5.
Creditors Direct material
1. 100 000 Balance 40 0002. 120 000
1. 100 000
Bank Direct labour

3. 50 000 3. 30 0006. 30 000
5. 30 000
Accumulated depreciation Manufacturing overheads

4. 20 000 3. 20 000 6. 70 000
4. 20 000
5. 30 000
WIP
Balance 20 000 7 200 000
2 120 000
6 100 000
Finished Goods
Balance 60 000 8 130 000

7 200 000
Cost of Sales
6 130 000
Debtors
9 280 000
Sales
9 280
000
 The balances of inventory in the statement of financial position
are as follows:
> Direct material (40 000 + 100 000 – 120 000) = 20

000
> Work in progress
(20 000 + 120 000 + 30 000 + 70 000 – 200 000) = 40
000
> Finished goods (60 000 + 200 000 – 130 000) = 130
000
Outcome 3.7
Distinguish between labour and labour related costs
 Labour cost can be divided into the following two phases:
 Computations of gross pay and deductions for each employee
(payroll accounting/financial accounting)
 Allocation of labour cost to jobs, overhead account and capital
account (labour cost accounting/management accounting)
 Labour can be divided between direct labour cost (relating
directly to a specific product) and indirect labour cost (not directly
relating to a specific product)
 Labour performance reports can be drawn up for each job. This
may distinguish between direct labour hours and idle time.
Outcome 3.7
Financial Accounting Management Accounting
Total Hours Available Time spent on each task, product etc
Total earnings of each employee on a Labour costs in respect of each task,

daily, weekly or monthly basis. product etc
Book entries in the financial ledger: Book entries in the cost ledger:
Labour control account Production account (WIP)
(Provision for payroll) XXX (direct labour) XXX
Salaries Payable XXX Overheads control
PAYE XXX (indirect labour) XXX
Pension XXX Labour control account (Provision
for
payroll) XXX
Outcome 3.8
Distinguish between the calculation of labour costs
and the calculation of the payroll
 There may be different wage schemes, nearly all are variants of
three basic methods, namely:
 Guaranteed hourly rate;
 Piecework;
 Premium bonus
Outcome 3.8
and the calculation of the payroll (continued):
 Under the guaranteed hourly rate method the employee is paid
on the basis of actual time worked.
 Information on the time worked is collected (clock cards).
 The hours worked is multiplied by the hourly rate to calculate
the total wage amount per worker.
 The advantages - easy to compute, understand and avoid
negotiations that seem to be inherent of incentive schemes.
 The disadvantage - no incentive for the employee to work
harder than is absolutely necessary.
Outcome 3.8
and the calculation of the payroll (continued):
 Under the piecework method (incentive method) the employee

is paid on the basis of production (number of units produced).
 Under the premium bonus method (incentive method) a time
allowance is given for a job. If the actual time taken to complete
the job is less than the allotted time, a bonus is paid based on
the time saved.
 Under this method, the worker is still paid his normal wage
(based on guaranteed hourly rate), but a bonus is also paid
for his efficiency.
Outcome 3.8
Advantages and disadvantages of incentive schemes.
 ADVANTAGES
- Higher productivity and output:
- decrease in fixed overheads / unit
- decrease in labour costs / unit
- increase in sales volume
- Higher wages attract better labourers
- Morale improves
 DISADVANTAGES
- Admin - difficult / complicated schemes
- Disputes - creation of performance levels
- Drop in quality of products
Benefits Ltd cannot decide which type of scheme to implement.
The following information is available:
EMPLOYEE
A B C D
Actual hours worked 38 36 40 34
Hourly payment rate R3 R2 R2.50 R3.60
Output (units)
X 42 120 - 120
Y 72 76 - 270
Z 92 - 50 -
 .
 The standard time allowed per unit:
X - 6 minutes; Y - 9 minutes; Z - 15 minutes; Each minute earned is
valued at 5c for piecework calculations
Required:
Calculate each employee's earnings if wages are payable as follows:
1. Guaranteed hourly rate (basic wage);
2. Piecework: guaranteed at 75% of the basic wage, if the employee was
unable to earn the amount;
3. Premium bonus: the employee receives two thirds of time saved in
addition to the hourly wage.
Outcome 3.8 - Solution 1
Guaranteed hourly rate:
75%
A: 38 x 3 = R114 85,5
B: 36 x 2 = R72 54
C: 40 x 2,50 = R100 75*
D: 34 x 3,60 = R122,4 91,8
43
Piecework: Tariff/unit
X: 6 minutes x 5c = 30c / unit

Y: 9 minutes x 5c = 45c / unit
Z: 15 minutes x 5c = 75c / unit
X 30c Y 45c Z 75c R
A 42 x 30 + 72 x 45 + 92 x 75 = 114
B 120 x 30 + 76 x 45 = 70,20
C 50 x 75 = 37,50*
D 120 x 30 + 270 x 45 - = 157,50
 *37,50 < 75
 C will therefore receive R75.
 Earnings per employee:

R
A = 114
B = 70,20
C = 75
D = 157,50
 Premium bonus "Time saved"
Hours allowed Hours Saved
 A X 42 x 6/60 4,2
Y 72 x 9/60 10,8
Z 92 x 15/60 23,0
Total 38,0
Time saved= Hours allowed – Actual hours = 38 – 38 = 0; no bonus
 B X 120 x 6/60 12,0
Y 76 x 9/60 11,4
Total 23,4
Time saved= Hours allowed – Actual hours = 23,4 - 36 = - 12.6; no bonus
 Premium bonus "Time saved"
Hours allowed Hours Saved
C Z 50 x 15/60 12,5
Time saved =Hours allowed – Actual hours = 12,5 - 40 =-27.50; no
bonus
D X 120 x 6/60 12,0
Y 270 x 9/60 40,5
Total 52.5
Hours allowed – Actual hours = 52.5 – 34 = 18.5; 18.5 X 2/3
X R3.60
R44.40
 Earnings:
A = R114 (as calculated in i)
B = R72 (as calculated in i)
C = R100 (as calculated in i)
D = R122,40 + R44,40 = R166,80
48
Outcome 3.9 Question 3.3 -
HOMEWORK
The employees of Turkey Ltd are paid at the end of each month.
November 19x4 was an exceptionally busy month and direct
labourers therefore worked a considerable amount of overtime.
This overtime cannot be attributed to any specific task.
Accounting records reflect the following information:
Gross Overtime Total

earnings earnings earnings
Direct labour R21 000 R2 500 R23 500
Indirect labour 8 000 - 8 000
Marketing costs control 5 000 - 5 000
Administrative costs control 3 000 - 3 000
R37 000 R2 500 R39 500
49
Outcome 3.9 Question 3.3
(HOMEWORK)
 Deductions:
SITE R4 735
Pension fund contributions (on total earnings)
Employee 7,65%
Employer 7,65%
Contributions to trade unions (employee only) R500
Unemployment insurance (employer and employee) 0,90%
Workmen's compensation assurance (employer only) 0,62%
Provision for leave payment (employer only) - calculated on all labour
costs excluding overtime services 3,00%
 YOU ARE REQUIRED TO:

 a) prepare the journal entry for the distribution of November's labour costs;
 b) prepare the journal entries for the recording of the provision for the payroll and
payment of the payroll.
ACC 2542: Introduction to Managerial 50
Accounting
Outcome 3.9 Question 3.3 (Ques Bank)
So where to start???... The basics
A/ “Prepare the journal entry for the distribution of November's labour
costs” = Management Accounting:
WIP (Direct Labour) DR
Overheads (Indirect Labour) DR
Wages/Salaries control CR ***
B/ “prepare the journal entries for the recording of the provision for the
payroll and payment of the payroll = Financial Accounting
Wages/Salaries (Net) DR ***
Net Wages CR
UIF etc CR
ACC 2542: Introduction to Managerial 51
Accounting
Outcome 3.9 Question 3.3 (Ques Bank)
So where to start???... The basics
A/ “Prepare the journal entry for the distribution of November's
labour costs” = Management Accounting:
What is the employer paying = Gross wages (Net wages +

Employee deductions) + Employer Deductions
Outcome 3.9 Question 3.3 (Solution)
 CALCULATIONS
 1. Distribution
Employer's contributions
7,65% 0,62%
Total Pension 0,9% Compen- 3% Total
earnings fund UIF sation Leave
Direct labour 21 000 1 607 130,2 630 23 556,2
189,0
Overtime 2 500 191 22,5 15,5 -* 2 729,0
premium
Indirect labour 8 000 612 72,0 49,6 240 8 973,6
Marketing 5 000 383 45,0 31,0 150 5 609,0
Administrative 3 000 230 27,0 18,6 90 3 365,6
39 500 3 023 355,5 244,9 1 110 44 233,4
 *No leave provision in respect of overtime, since leave cannot be affected by overtime.
 (a) Distribution
 WIP/Direct labour 23 556.20

 Manufacturing overheads
 - Overtime premium 2 729.00
 - Indirect labour 8 973.60
 Marketing costs control 5 609.00
 Administration costs control 3 365.60
 Provision for payroll 44 233.40 (C1)
 (b) Provision and payment
Provision for payroll 44 233,4
Pension fund (C2) 6 046
Unemployment Insurance Fund (C3) 711
Workmen's compensation assurance 244,9
Provision for leave payments 1 110
SITE 4 735
Contributions to union 500
Wages payable (C4) 30 886,5
Wages payable 30 886,5
Bank 30 886,5
 The R 44 233.40 = is the total amount paid by the employer (employee
deductions will be subtracted from the employees gross earnings).
 But R 44 233.40 = provision for payroll/wages control account.
Management Accounting Provision for payroll =
Financial Accounting Provision for payroll.
 The provision for payroll is a sort of collecting place for net wages paid
and deductions made from gross wages.
 Direct Wages = Ordinary time & basic Overtime (Productive Time),

whereas Indirect Wages = Overtime Premium
 CALCULATIONS
 C2 Pension fund
Employer 3 023
Employee 3 023
6 046
 C3 Unemployment insurance
Employer 355,5
Employee 355,5
711,0
 C4 Net wage
Total earnings 39 500,0

Less: Employer's deductions
SITE 4 735,0
Pension (0,765 x 39 500) 3 023,0
UIF (0,9% x 39 500) 355,5
Union 500,0
30 886,5
Outcome 3.9 - Class Example 5
 The information below applies to a worker who is paid on a
weekly basis.
 You are required to do the following:
a) Calculate the employee's net salary for the week. You can
assume that there are no perks involved.
b) Record the above salary calculation.
.
Basics???
 a) Calculate the employee's net salary for the week. = Financial

Accounting, therefore
= Gross pay less employee deductions
NB/ Learn which deductions are taxable and which are not i.e.:
Pension = YES
Medical Aid = YES
UIF = NO
Garnishee Orders = NO
 1 Normal work week (6 days) (i.e. Sat. 5 hours): 45 hours
 2 Number of hours worked: Monday, Tuesday, Thursday and Friday – 8h per
day; Wednesday 10 h, Saturday 5 h; Sunday 3 h: Total 50 hours
 3 Normal wage: R5.00 per hour.
 4 Pension fund (based on normal remuneration): Employer's contributions 5%
Employee's contribution 7,5%
 5 Medical aid fund: Employer's contributions R13.00 Employee's contribution
R13.00
 6 SITE/PAYE deduction: 13% on taxable income
 7 Workers' unemployment insurance fund: R 1,00 paid by employer and the
employee
 8 Overtime remuneration:150% of normal remuneration during the week. 200%
of normal remuneration on Sundays.
61

Normal Remuneration (45 hours @ R5 per hour) 225.00
Overtime Remuneration
2 hours X 1.5 X R5 15.00
3 hours X 2 X R5 30.00
Total Gross Remuneration 270.00
(Less): Pension (7.5% X 225) 16.88
(Less): Medical Aid 13.00
Taxable Income 240.12
(Less other deductions): UIF 1.00
SITE (240.12 X 13%) 31.22
Net Salary payable in cash 207.90
62
Outcome 3.9 – Solution
 DR Payroll Expense 295.25

 CR Net Salary 207.90
 CR Pension (16.88 + 11.25) 28.13
 CR Medical Aid (13 + 13) 26
 CR UIF (1 + 1) 2
 CR SITE 31.22
 DR Net Salary 207.90

DR Pension (16.88 + 11.25) 28.13
DR Medical Aid (13 + 13) 26
DR UIF (1 + 1) 2
DR SITE 31.22
 CR Bank 295.25
63

(Homework)
 The timesheet of employee Stevens shows that he worked 44 hours during a
40 hour work week. On the Monday and Saturday he worked 2 hours overtime
respectively. The normal overtime remuneration (1½ x normal wage) is paid.
 His normal wage is R6 per hour.
 Medical and pension fund contributions (6% and 10% of normal wages
respectively) are paid on a 50:50 basis by employer and employee. SITE (12%
of taxable income) is the only other deduction being made
 YOU ARE REQUIRED TO:
 calculate the net earnings of employee Stevens for the week; and
 calculate the labour tariff per hour for employee Stevens if you assume that
a year consists of 52 work weeks, that Stevens gets 3 weeks holiday leave per
year and that the enterprise is closed for 8 public holidays during the year.
Normal idle time is budgeted as 7½% and a holiday bonus equal to 3 weeks
wages is paid.
64

(Solution)
Net earnings
Normal wages (40hours X R6) 240.00
Overtime (4 hours X R6 X 1.5) 36.00
Gross wages
276.00
Less:
Deductions
Pension fund (5% X 240)
12.00
Medical fund (3% X 240)
7.20
SITE (12% X (276 – 12 – 7.20)) 30.82
 b) Labour tariff
R
Normal wages (52 weeks x R240) 12 480.00
Leave bonus (3 weeks x R240) 720.00
Employer contributions (52 weeks x R19.20) 998.40
Total labour cost 14 198.40
Total hours (49 weeks x 40 hours) 1 960.00

Less: Public holidays (8 days x 8 hours) (64.00)
Available labour hours 1 896.00
Less: Idle time (7,5% x 1 896 hours) 142.2
Productive labour 1 753.80
hours
Labour tariff per hour 14 198.40  1 753 = 8,10

Revision
Questions
1. Briefly describe the flow of material in terms of the physical flow
and the corresponding flow in the accounting system.
 Raw material purchased is transferred to the production process on an as-
needed basis. The result of the production process is a completed product
which is ready to be sold to a customer.
 In the accounting system, the un-issued raw material is reflected in the
balance sheet as raw material inventory. The products in the production
process, but not yet completed, are reflected in the balance sheet as work-in-
progress inventory. The goods that have been finished but not yet sold to
customers are reflected in the balance sheet as finished goods inventory.
Once the finished goods have been sold the cost of those goods are
transferred to the income statement to the cost of sales line.
Revision
2. Identify one benefit for each of the inventory systems. Motivate
your answer.
 With the periodical inventory system stock counts are only
performed periodically. Stock counts require no movement in
stock items (i.e. no receipts or issues) and can delay the
production process. Therefore, with a periodical inventory
system those “down” times will be limited.
 With a continuous or perpetual inventory system daily stock
counts will need to be performed, during which no movement of
the stock counted is allowed. The advantage of a perpetual
inventory system is that stock losses are picked up at an early
stage, as opposed to the periodical system where stock losses
will only be identified when the stock count is performed.
Revision
3. Identify and discuss three inventory accounts of a

manufacturing firm.
 There are normally three inventory accounts:
 Raw Materials – the costs of the materials used in
the production process, but not yet issued to the
production process;
 Work in Process – includes all the costs of goods
that are only partially completed; and
 Finished Goods – the costs of the goods that have
been completed and which is ready to sell to
customers.
Revision
4. Describe how you think direct material, direct labour

and manufacturing overhead would be assigned to
jobs.
 Direct material is traced to a job based on stock
requisitions. The job number is noted on the stock
requisition form.
 Direct labour is traced to a job based on time sheets
indicating how much time was spent on a specific job.
 Manufacturing overheads are allocated to jobs based
on a calculated overhead rate.
Revision
Example
A Business Ltd buys 50 units for resale at a
particular date at R3 per unit; a week later it
buys a further 25 units at R3.10 per unit; and a
week after this transaction it buys a further 30
units at R3.25 per unit. A customer buys 80
units and pay R400 in total.
Revision
FIFO
50 units bought for R3.00 150.00
Total cost of sales 243.75
Closing inventory: 25 units at R3.25 per unit = R81.25 Θ
Average cost method:

80 units bought at R3.09524 247.62
(Total items 105; total cost R325)
Closing inventory: 25 units at R3.09524 = R77.38

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ACC 2642:

Course Code:ACC 2542

3.6 Account for material costs in the ledger

Define the procedure for the control of materials

Value inventory according to the weighted average

The following transactions relating to a certain inventory item were concluded:

1 Jan 50 5,00 250,00

Average ( # (R150 + R480) ÷ (30 + 80) = R5,73 per unit)

Date Received Issued Balance

When additional units were purchased :

 4 January : Average ( # (R150 + R480) ÷ (30 + 80) =

When 10 units were returned

Techniques for the measurement of cost (IAS 2 par 21)

 The continuous or perpetual inventory system is a system

 Costs of purchase (IAS 2 par 11)

Examples of costs excluded from the cost of inventories and

Below is a summary of the transactions and activities of the firm during

Direct labour R30 000 Indirect labour R20 000

Journalize these transactions, using an integrated cost accounting

2 Work in progress (“WIP”) 120 000

3 Direct labour 30 000

4 Overhead control account (depreciation) 20 000

5 Overhead control account (indirect production costs) 30 000

6 WIP 100 000

8 Cost of sales 130 000

9 Debtors 280 000

Complete the following activity for

 Use the data provided for activity 4 of outcome

Bank Direct labour

Accumulated depreciation Manufacturing overheads

Balance 60 000 8 130 000

> Direct material (40 000 + 100 000 – 120 000) = 20

Total Hours Available Time spent on each task, product etc

Total earnings of each employee on a Labour costs in respect of each task,

 Under the piecework method (incentive method) the employee

X: 6 minutes x 5c = 30c / unit

 Earnings per employee:

Gross Overtime Total

 YOU ARE REQUIRED TO:

What is the employer paying = Gross wages (Net wages +

 WIP/Direct labour 23 556.20

 Direct Wages = Ordinary time & basic Overtime (Productive Time),

Total earnings 39 500,0

 a) Calculate the employee's net salary for the week. = Financial

Outcome 3.9 - Solution

 DR Payroll Expense 295.25

 DR Net Salary 207.90

Outcome 3.9 Question 3.4

Outcome 3.9 Question 3.4

Total hours (49 weeks x 40 hours) 1 960.00

Labour tariff per hour 14 198.40  1 753 = 8,10

3. Identify and discuss three inventory accounts of a

4. Describe how you think direct material, direct labour

Average cost method:

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