MODUL AA025 (STUDENTS VERSION)

AA025: ACCOUNTING MODULE 2021/2022

b) Statement of Comprehensive Income ( normal costing)

( Company’s Name)
Statement of Comprehensive Income – Absorption Costing

for the year ended 31st December 2XXX

RM RM
XXX
Sales (selling price x units sold)
XXX
(-)Cost of goods sold XXX

Beginning inventory( products cost per unit x beginning inventory units) XXX XXX
XXX
(+) Cost of Goods Manufactured (product cost per unit x units XXX
produced)

Cost of goods available for sale XXX

(-)Ending inventory (Product cost per unit x ending inventory units) XXX

Cost of goods sold

(+) Underapplied overhead/ (-) overapplied overhead

Adjusted cost of goods sold

Gross Profit

(-)Operating Expenses:

Variable selling & administration expenses (VSAE x units sold) XXX

Fixed selling & administration expenses XXX

Operating expenses

Net profit

( Company’s Name) RM RM
Statement of Comprehensive Income – Marginal Costing XXX

for the year ended 31st December 2XXX XXX
XXX
Sales (selling price x units sold) XXX
(-)Variable cost: XXX
Variable Cost Of Goods Sold XXX
XXX
Beginning inventory( products cost per unit x beginning inventory units)
Cost of goods manufactured (product cost per unit x units produced) XXX
XXX
Cost of Goods Available for Sale
(-) Ending inventory (Product cost per unit x ending inventory units) XXX
XXX
Variable cost of goods sold
(+) Underapplied variable overhead/ (-) overapplied variable XXX
overhead XXX

Adjusted Variable Cost of Goods Sold XXX
(+)Variable selling & administration expenses (VSAE x units sold) XXX

Total variable cost

Contribution margin
(-) Fixed cost:

Fixed manufacturing overhead
Fixed selling & administration expenses

Total fixed cost

Net profit

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 101

AA025: ACCOUNTING MODULE 2021/2022

Reconcile over-applied and under-applied overhead in income statement using
normal costing system.

VARIABLE MANUFACTURING OVERHEAD XXX
Applied variable manufacturing overhead (Applied variable overhead per unit x Actual Units XXX
XXX
Produced)
XXX
- Actual variable manufacturing overhead XXX
Under / overapplied variable manufacturing overhead XXX

FIXED MANUFACTURING OVERHEAD XXX
Applied fixed manufacturing overhead (Applied fixed overhead per unit x Actual Units XXX
XXX
Produced)
XXX
- Actual fixed manufacturing overhead
Under / overapplied fixed manufacturing overhead

Absorption Costing
Over/ Underapplied variable manufacturing overhead
Over/ Underapplied fixed manufacturing overhead
Total over/underapplied manufacturing overhead

Marginal Costing
Over/ Underapplied variable manufacturing overhead

Explain and reconcile net profit difference under absorption costing and marginal
costing.

Reconciliation of net profit for Absorption costing and Marginal costing

Absorption Costing Net Profit XXX
(+)Fixed manufacturing overhead in beginning inventory
XXX
(Fixed manufacturing overhead per unit x Beginning Inventory units) XXX
XXX
(-)Fixed manufacturing overhead in ending inventory

(Fixed manufacturing overhead per unit x Ending Inventory units)

Marginal Costing net profit

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 102

AA025: ACCOUNTING MODULE 2021/2022

EXAMPLE 2:

Azmaliah Sdn. Bhd. uses normal costing system for overhead cost allocation. Company’s

normal production is 24,000 units annually.
Overhead cost estimation annually is as follows:

Variable Manufacturing Overhead RM 60,000
Fixed Manufacturing Overhead RM240,000

Operating informations for year 2011 is as follows: 2,000 unit
Beginning inventory 20,000 unit
Production units 17,000 unit
Sales Units RM20
Direct Material per unit RM10
Direct labour per unit RM 56,000
Variable Manufacturing overhead cost RM180,000
Fixed Manufacturing overhead cost RM100
Selling Price per unit RM10
Selling & administration expenses per unit RM170,000
Fixed selling & administration expenses

Using absorption costing and marginal costing, you are required to:
a) calculate product cost per unit
b) calculate over or under applied manufacturing overhead cost
c) Provide Khadeejah Co.’s Statement of Comprehensive Income for the year
ended 31st December 2011

Solutions:

a) Product Cost per Unit Calculation

Absorption Costing RM Marginal Costing RM
Direct Material 20.00 Direct Material 20.00
Direct Labour 10.00 Direct Labour 10.00
Applied variable manufacturing 2.50 Applied variable manufacturing
overhead (RM60,000) overhead (RM60,000) 2.50
10.00
24,000 24,000 32.50
42.50
Applied fixed manufacturing Product cost per unit
overhead (RM240,000)

24,000

Product cost per unit

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 103

AA025: ACCOUNTING MODULE 2021/2022

b) Over or Under Applied Manufacturing Overhead Calculation

VARIABLE MANUFACTURING OVERHEAD 50,000
Applied variable manufacturing overhead (RM2.50 x 20,000) (56,000)
- Actual variable manufacturing overhead
(6,000)
Under applied variable manufacturing overhead

FIXED MANUFACTURING OVERHEAD 200,000
Applied fixed manufacturing overhead (RM10.000 x 20,000) (180,000)
- Actual fixed manufacturing overhead
20,000
Over applied fixed manufacturing overhead

Absorption Costing (6,000)
Under applied variable manufacturing overhead 20,000
Over applied fixed manufacturing overhead
14,000
Total over applied manufacturing overhead

Marginal Costing (6,000)
Under applied variable manufacturing overhead

c) Absorption Costing and Marginal Costing Statement of Comprehensive Income

Azmaliah Sdn Bhd

Statement of Comprehensive Income – Absorption Costing

For the year ended 30th November 2011

RM RM

Sales (RM100 x 17,000) 1,700,000

(-) Cost of Goods Sold:

Beginning inventory (RM42.50 x 2,000) 85,000

(+) Cost of Goods Manufactured (RM42.50 x 20,000) 850,000

Cost of Goods Available for Sale 935,000

(-) Ending inventory (RM42.50 x 5,000) (212,500)

Cost of Goods Sold 722,500

(-)Over applied overhead (14,000)

Adjusted Cost Of Goods Sold (708,500)

Gross profit 991,500

(-)Operating expenses:

Variable selling & administration expenses (RM10 x 17,000) 170,000

Fixed selling & administration expenses 170,000 (340,000)

Net profit 651,500

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 104

AA025: ACCOUNTING MODULE 2021/2022

Azmaliah Sdn. Bhd

Statement of Comprehensive Income– Marginal Costing

For the year ended 30th November 2011

RM RM
1,700,000
Sales (RM100 x 17,000)
(728,500)
(-) Variable cost: 971,500

Cost of Goods Sold (350,000)
621,500
Beginning inventory (RM32.50 x 2,000) 65,000

(+) Cost of Goods Manufactured(RM32.50 x 20,000) 650,000

Cost of Goods Available for Sale 715,000

(-) Ending inventory (RM32.50 x 5,000) (162,500)

Variable Cost of Goods Sold 552,500

(+)Under applied variable manufacturing overhead 6,000

Adjusted variable Cost of Goods Sold 558,500

(+)Variable selling & administration expenses (RM10 x 17,000) 170,000

Total Variable cost

Contribution margin

(-)Fixed cost:

Fixed manufacturing overhead 180,000

Fixed selling & administration expenses 170,000

Net profit

d) Reconciliation of net profit for Absorption costing and Marginal costing 651,500
20,000
Absorption Costing Net Profit (50,000)
(+)Fixed manufacturing overhead in beginning inventory (RM10.00 x 2,000) 621,500
(-) Fixed manufacturing overhead in Ending inventory (RM10.00 x 5,000)
Marginal Costing net profit

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 105

AA025: ACCOUNTING MODULE 2021/2022

9.5 Advantages and disadvantages of absorption costing and marginal costing
a. Explain the advantages and disadvantages of absorption costing and
marginal costing from the aspects of decision making, performance
evaluation and reporting.

Advantages Disadvantages

Absorption Reporting : Decision Making :
Costing
i) Comply with generally accepted i) Not suitable for the decision making

accounting principles ( GAAP) and because all manufacturing cost are

more suitable for external charged to the product.

reporting purposes.

Performance Evaluation :

Product cost will not be under stated i) Not suitable for performance

because all manufacturing cost are evaluation because it does not

charged to the product. separate fixed cost and variable cost.

Marginal Decision Making: Reporting:
Costing
i) Helps management for planning , i) Limited to internal users only and

controlling and decision making reporting does not comply to GAAP.

because it separates variable cost

and fixed cost Product cost will be under stated because

Performance evaluation: it does not include fixed manufacturing

i) Suitable for performance evaluation overhead thus resulting selling price

because it can measure the abilities of which excluded fixed cost in production.

controlling variable cost by the

manager.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 106

AA025: ACCOUNTING MODULE 2021/2022

TUTORIAL CHAPTER 9 : ABSORPTION COSTING AND
MARGINAL COSTING

QUESTION 1 (C4)
Seroja Sdn Bhd (SSB) manufactures handicrafts for overseas market using normal costing
system. Normal production is 14,000 units per year. The estimated annual overhead costs
are:

Variable overhead RM35,000
Fixed overhead RM100,800

The following are the costs involved throughout December 2016: Units
0
Beginning inventory
Units sold 10,000
Units produced 12,000
Ending inventory 2,000

Selling price per unit RM
Variable manufacturing cost per unit: 30.00

Direct materials 6.00
Direct labour 4.00
Overhead 2.00
Variable selling and administrative cost per unit 2.50
Fixed manufacturing cost per year 72,000
Fixed selling and administrative cost per year 36,000

Required:
i. By using absorption costing method:

a. Calculate product cost per unit
b. Prepare an income statement for the month ended 31 December 2016

ii. By using marginal costing method:
a. Calculate product cost per unit
b. Prepare an income statement for the month ended 31 December 2016

iii. Prepare a reconciliation of net profit for both absorption and marginal costing

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 107

AA025: ACCOUNTING MODULE 2021/2022

QUESTION 2 (C4)
Sepitang Sdn Bhd (SSB) manufactures laptops. SSB practices normal costing system. In

January 2018, SSB produced 400 units of laptop. Ending inventory on 31 January 2018 was
10 units. The unit price per laptop is RM4,000. SSB had 20 units as ending inventory in
December 2017. Fixed overhead cost was over-applied by RM16,000. Fixed overhead rate
was RM400. The budgeted variable overhead cost is equal to the actual variable overhead
cost.

The following are information about SSB for January 2018: RM
500,000
Items 360,000
138,000
Direct materials 144,000
Direct labour
200
Variable overhead
25,000
Fixed overhead 15,000
Variable selling expense: 32,500
18,000
Commissions per unit 9,500

Fixed selling and administrative expense:
Advertisement
Rental
Salaries
Depreciation
Insurance

Required:
i. Calculate:

a. Product cost per unit using absorption costing
b. Product cost per unit using marginal costing

ii. Prepare:
a. Income Statement using absorption costing
b. Income Statement using marginal costing

QUESTION 3 (C4)
Sekampadi Sdn Bhd (SSB) manufactures sport bags. BS007 model is sold at RM85 per unit.
Normal production is 45,000 units, estimated variable overhead is RM207,000 and fixed
overhead is RM639,000. The following is the production data for the first month of
operation:

Beginning inventory 0
Units produced 55,000 units
Units sold 40,000 units
Costs:
COMPILED BY : SYIRLEEN ADLYNA OTHMAN 108

AA025: ACCOUNTING MODULE 2021/2022

Selling and administrative: RM5 per unit
Variable RM480,000
Fixed
RM18 per unit
Manufacturing: RM9 per unit
Direct materials RM5 per unit
Direct labour RM770,000
Variable overhead
Fixed overhead

Required:
i. Assume SSB uses absorption costing method:

a. Calculate product cost per unit
b. Prepare income statement for the month

ii. Assume SSB uses marginal costing method:
a. Calculate product cost per unit
b. Prepare income statement for the month

iii. Reconcile both income statement and explain why there are differences in net income
between absorption costing and marginal costing

QUESTION 4 (C4)
Assume the following data concerning operation of the Ames Manufacturing Company for
the month of September:

Number of units sold 100 units
Selling price per unit RM20
Variable manufacturing cost/unit RM5
Fixed manufacturing costs RM300
Variable selling and administrative cost/unit RM4
Fixed selling and administrative costs RM110

Required:
Prepare an income statement for the month of September, using the absorption costing and
marginal costing formats.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 109

AA025: ACCOUNTING MODULE 2021/2022

QUESTION 5 (C3)
The following data relate to Flores Company for the year ended December 31, 2018:

Cost of production: RM168,000
Direct materials RM252,000
Direct labour
Factory overhead: RM90,000
Variable RM180,000
Fixed RM44,000
Sales commission (variable) RM46,000
Sales salaries (fixed) RM62,000
General and administrative expenses (fixed)

Units produced 75,000 units
Units sold (@ RM18) 60,000

Required:
i. Compute the amount of income before income taxes and ending inventory under

absorption costing and marginal costing
ii. Reconcile the difference in income before taxes between the two methods

QUESTION 6 (C2 ,C3)
Jinjangga Sdn Bhd (JSB) is a manufacturer of a product known as PROP which is sold at RM30
per unit. In 2009, JSB produced 67,500 units of PROPs and 49,500 units were sold. Normal
production is 60,000 units and the estimated variable overhead is RM189,000 and fixed
overhead is estimated at RM282,000.

Information on production operations is as follows:

Item RM

Opening inventories 0

Direct materials 472,500

Direct labour 405,000

Variable overhead cost 202,500

Fixed overhead cost 270,000

Fixed sales expenses 69,600

Fixed administrative expenses 104,400

Sales commission per unit 3

Required:

i. Calculate the product cost per unit for PROP based on absorption costing method and
marginal costing method

ii. Prepare the income statement for JSB based on absorption costing and marginal

costing for the year ended 2009
iii. Give reasons why there is a difference in profit or loss earned in calculation (ii) above

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 110

AA025: ACCOUNTING MODULE 2021/2022

QUESTION 7 (C4)
Mawar Sdn Bhd (MSB) manufactures a product using normal costing system. Normal
production is 4,500 units and the estimated variable overhead is RM20,250 with fixed
overhead RM90,000.
Information on operation productions for September 2010 is as follows:

Selling price RM158
Units
Opening inventory 500
Production units 4,100
Sales unit 4,300
Ending inventory 300
Variable cost per unit: RM

Direct materials 33
Direct labour 60
Manufacturing overhead 5
Sales and administration 9
Fixed costs: RM
Manufacturing overhead 94,300
Sales and administration 48,300

Required:
i. Calculate product cost per unit for September 2010 using marginal costing and

absorption costing
ii. Prepare income statement for the month ending September 30, 2010 using marginal

costing and absorption costing
iii. Prepare a reconciliation of net profit statement for both absorption costing and

marginal costing for September 2010

QUESTION 8 (C4)
Lumuteks Sdn Bhd (LSB) produces and sells exclusive wooden doors. In October 2011, LSB
had produced 100 units with ending inventory for the month of 25 units. Selling price per
unit is RM16,000. LSB had 50 units inventoried at October 1, 2011. Actual overhead cost and
estimated overhead cost is equal.

Information for October 2011 is as follows:

Items RM
Direct materials 218,000
Direct labour 134,400
Variable manufacturing overhead 50,800
Fixed manufacturing overhead 51,200

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 111

AA025: ACCOUNTING MODULE 2021/2022

Variable selling expenses: 200
Commission (per unit)
16,000
Fixed selling and administrative expenses: 24,000
Advertising 40,000
4,800
Delivery 8,800

Salaries
Depreciation

Insurance

Required:
Prepare an Income Statement for LSB for the month ended 31 October 2011 using:

a. Absorption costing
b. Marginal costing

QUESTION 9 (C4)
Bluestone Bhd has the following data relating to its business operation for the years 2015,
2016 and 2017:

Variable cost per unit RM8.00
Direct materials 3.00
Direct labour 1.00
Variable manufacturing overhead (estimated and actual)
Variable selling and administrative expenses 0.50

Estimated and actual fixed overhead cost is the same, which is RM300,000 each year.
Normal production volume was 300,000 units per year. The selling price was RM20 per
unit. Fixed selling and administrative expenses were RM100,000 per year. Other
operating data were as follows:

Opening inventory (unit) 2015 2016 2017
Production (unit) - - 100,000
Sales (unit)
Closing inventory (unit) 300,000 300,000 300,000

300,000 200,000 400,000
- 100,000 -

Required:
i. Prepare the income statements for Bluestone Bhd for the year ended 2017 using the

following costing techniques:
a. Marginal costing
b. Absorption costing

ii. Prepare the reconciliation of net profit for the year ended 2017

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 112

AA025: ACCOUNTING MODULE 2021/2022

KOLEJ MATRIKULASI LABUAN
ACCOUNTING 2: AA025

Chapter 10 - Standard Costing And Variance Analysis

10.1 Definition of standard costing
(a) Explain the definition of standard costing.

10.2 Uses of standard costing
(a) Explain the uses of standard costing for the purpose of controlling and performance
evaluation.

10.3 Calculation of standard costing
(a) Compute standard costing per unit.

10.4 Types of standard
(a) Explain ideal standard and normal standard.

10.5 Variance analysis
(a) Explain variance analysis for direct materials, direct labour and manufacturing

overhead.
(b) Direct material variances
(i) Calculate price variance and quantity variance for direct material.
(c) Direct labour variance
(i) Calculate the price variance and quantity variance for direct labour.
(d) Overhead variances
(i) Compute expenditure and efficiency variance for variable overhead.
(ii) Compute budget and volume variances for fixed overhead.

10.6 Implications of variance analysis
(a) Interpret the result of variance analysis.
(b) Identify parties responsible for each variance.

10.1 Definition of standard costing
➢ A standard costs are predetermined unit costs which are used as measures of
performance.
➢ Standard costing values its manufactured products with a predetermined
materials cost, a predetermined direct labour cost and a predetermined
manufacturing overhead cost.

10.2 Uses of standard costing

1. Standards are important for decision making
➢ How we produce our product.
➢ How we price our product.

2. Monitor manufacturing
➢ Large variances may indicative of problems in production.

3. Performance measurement
➢ Differences between actual and standards are often used as measures of a
manager’s performance

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 113

AA025: ACCOUNTING MODULE Direct L
SR x S
10.3 Calculation of standard costing
Direct Materials (DM)
SP x SQ per unit

SP = Estimated direct material cost SR = Estimated dir
Estimated direct material quantity Estimated di

SQ per unit = Estimated totaldirect material SH per unit = Estim
Estimated unit produced Estim

SQ = SQ per unit x actual unit produced SH = SH per unit x

2021/2022

Labour (DL) Manufacturing Overhead (MOH)

SH per unit Variable MOH
SR x SH per unit

rect labour cost Fixed MOH
irect labour hours SR x SH per unit

mated Labour Hours SR (variable) = Estimated Variable MOH cost
mated unit produced Estimated Labour Hours

x actual unit produced SR (fixed) = Estimated Fixed MOH cost
Estimated Labour Hours

SH per unit = Estimated Labour Hours
Estimated unit produced

SH = SH per unit x actual unit produced

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 114

AA025: ACCOUNTING MODULE 2021/2022

10.4 Types of standard Normal/ Basic Standards
Ideal Standards Attainable Standard

➢ Represent optimum ➢ Represents efficient ➢ is established for use
levels of performance levels of performance ➢ unaltered for an
under perfect operating that are attainable
conditions. under expected indefinite period which
operating conditions. may be a long period of
➢ developed under the time.
assumption that no ➢ developed under the ➢ Basic standards are
obstacles to the assumption that there seldom revised or
production process will will be occasional updated to reflect
be encountered. problems in the current operating costs
production process such and price level changes
➢ The level of performance as equipment failure, ➢ Basic standards
under ideal standards labor turnover and representing a fixed
would be achieved materials defects. base are used primarily
through the best possible to measure trends in
combination of factors — operating performance
the most favourable
prices for materials and
labour, highest output
with best equipment and
layout, and maximum
efficiency in the
utilisation of the
production resources

➢ Not widely used

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 115

AA025: ACCOUNTING MODULE 2021/2022

10.5 Variance analysis
(a) Explain variance analysis for direct materials, direct labour and manufacturing
overhead.

Meaning:
An analysis of the difference between total standard cost and total actual cost is called
variance analysis.
Variance analysis attempts to identify and explain the reasons for the difference between a
standard amount and an actual amount.

1. DM Variance = Price Variance + Quantity Variance

Price Variance = AQ ( AP - SP)
Quantity Variance (AP x AQ purchased) – (SP x AQ purchased)

= SP ( AQ - SQ)
(SP x AQ used) – [SP x (SQ per unit x AU)]

2. DL Variance = Price Variance + Quantity Variance

Price Variance = AH ( AR - SR)
Quantity Variance (AR x total AH) – (SR x total AH)

= SR ( AH - SH)
(SR x total AH) – [SR x (SH per unit x AU)]

3. Variable MOH Variance = Expenditure Variance + Efficiency Variance

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

Efficiency Variance = SR ( AH - SH)
(SR x total AH) – [SR x (SH per unit x AU)]

4. Fixed MOH Variance = Budget Variance + Volume Variance

Budget Variance = ARAH - SRBH

(AR x total AH) – (SR x total BH)

Volume Variance = SR ( SH - BH)

(SR x total BH) – [SR x (SH per unit x AU)]

Notes: AU = actual unit produced
BU = budgeted/estimated unit or normal production
BH = SH per unit x BU

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 116

AA025: ACCOUNTING MODULE 2021/2022

(b) Direct material variances
(i) Calculate price variance and quantity variance for direct material.

EXAMPLE 1: Direct Material Variances ( material used= material purchased)

Syarikat KKHH produces H & M for the southern market. The costs information for the
production were as follows:

Direct material standard price RM2.00 per kg
Standard quantity 5 kg per unit
Direct material actual cost RM2.20 per kg
Actual quantity 4 kg per unit
Actual unit produced 100 units

Required:
Determine direct material variances.

Price variance = AQ ( AP-SP) Quantity Variance = SP ( AQ-SQ)
= 400 ( 2.20-2.00) = 2.00 ( 400 -500)
= RM 80 UF = 200 F

Direct Material Variance = RM 80 UF + RM200F
= RM120

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 117

AA025: ACCOUNTING MODULE 2021/2022

EXAMPLE 2 : Direct Material Variance ( material used ≠ material purchased)

Syarikat HUSFI DINI produces HD for the northern market. The costs information for the
production were as follows:

Actual production 4000 units
Direct materials purchased 10,000 kg @ RM8.30

Direct materials used 8,200 kg @ RM8.30

The standard cost information as follows:
Direct materials 2 kg x RM8.00 = RM16

Required:
Determine direct material variances.

Price variance = AQ ( AP-SP) Quantity Variance = SP ( AQ-SQ)
= 10,000 ( 8.30 – 8.00 ) = 8.00 ( 8,200 – 8,000)
=RM 3,000 UF = RM 1,600 UF

Direct Material Variance = RM 3,000 UF + RM 1,600 UF
= RM 4,600 UF

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 118

AA025: ACCOUNTING MODULE 2021/2022

(c) Direct labour variance
(i) Calculate the price variance and quantity variance for direct labour.

EXAMPLE 3: Direct Labour Variance

Syarikat DTPH produces H-Mas for Masjid Tanah market. The costs information for the
production were as follows:

Standard rate RM0.50 per hour
Standard hour 2 hours per unit

Actual units produced were 100 units, which:

Actual rate RM0.60 per hour
Actual working hours 220 hours

Required:
Determine direct labour variances.

Price variance = AH ( AR – SR ) Quantity Variance = SR ( AH – SH )
= 220 ( 0.60- 0.50 ) = 0.50 ( 220 – 200)
= 22 UF = RM 10 UF

Direct Labour Variance = 22 UF + 10 UF
= RM 32 UF

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 119

AA025: ACCOUNTING MODULE 2021/2022

(d) Overhead variances
(i) Compute expenditure and efficiency variance for variable overhead.

EXAMPLE 4 : Variances for Variable Overhead
Syarikat DDLJ produced H-Tech. The budgeted costs for the company were as follows:

Production 20,000 units
Direct Labour hours 30,000 hours
Variable Overhead RM24,000
Standard variable overhead rate per unit [email protected] hours

The actual units produced were 18,000 units The actual variable overhead cost was RM25,200.
Actual direct labour hours were 40,000 hours.

Required:
Determine variable overhead variances.

Expenditure variance= AH ( AR – SR ) Efficiency Variance = SR ( AH – SH)

= ARAH-SRAH = SRAH- SRSH

=40,000 ( 0.63- 0.80 ) = 0.80 ( 40,000 – 27,000)
= RM 6,800 F = RM 10,400 UF

Variable MOH Variance = RM 6,800 F + RM 10,400 UF

= RM 3,600 UF

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 120

AA025: ACCOUNTING MODULE 2021/2022

(ii) Compute budget and volume variances for fixed overhead.

EXAMPLE 5: Variances for fixed overhead

Syarikat DIL budgeted cost for 2015 as below:

Production unit 25,000 units
Direct Labour Hour 40,000 hours

Fixed Overhead RM25,000

Standard fixed overhead rate per unit RM0.625 @ 1.6 jam

The actual units produced were 30,000 units The actual fixed overhead was RM22,400.
Actual direct labour hours were 35,000 hours.

Required:
Determine fixed overhead variances.

Budget Variance = ARAH – SRBH Volume Variance = SR ( SH – BH )
= 22,400 – 25,000 = 0.625 ( 48, 000 – 40, 000)
= RM 2,600 F = 5,000 F

Fixed MOH Variance = RM 2,600 F + RM 5,000 F
= RM 7600 F

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 121

AA025: ACCOUNTING MODULE 2021/2022

10.6 Implications of variance analysis
(a) Interpret the result of variance analysis.
Actual Costs < Standard Costs = Favorable (F)
Actual Costs > Standard Costs = Unfavorable (UF)
Actual Costs > Budgeted Costs = Favorable (UF)
Actual Costs < Budgeted Costs = Favorable (F)
Actual unit produced < Budgeted unit = Unfavorable (UF)
Actual unit produced > Budgeted unit = Favorable (F)

(b) Identify parties responsible for each variance.

DM Price Variance Purchasing Manager Or Storekeeper And BOD
DM Quantity Variance Factory Supervisor And Production Manager
DL Price/ Rate Variance HR Manager And BOD
DL Quantity/Efficiency Factory Supervisor And Production Manager
Variance
V. MOH Expenditure Variance Factory Supervisor And Production Manager
V. MOH Efficiency Variance Factory Supervisor And Production Manager
F. MOH Budget Variance Factory Supervisor And Production Manager
F. MOH Volume Variance Factory Supervisor And Production Manager

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 122

AA025: ACCOUNTING MODULE 2021/2022

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 123

AA025: ACCOUNTING MODULE 2021/2022

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 124

AA025: ACCOUNTING MODULE

CHAPTER 10 : VARIANCE FORMULA

1. DIRECT Actual Cost
MATERIAL

COST Price Variance Quantity V

(APAQ) (SPAQ)

=AQ ( AP-SP) =SP ( AQ

or If quantities purchased ≠ quanti

Actual Cost

Price Variance Quantity

(APAQ) (SPAQ purchased) (SPAQ u

=AQ (AP-SP) =SP (AQ

DM Variance = Price Variance + Quantity
(SPSQ) + (APAQ)

2021/2022

Standard Cost NOTES
Variance
P = DM Price
(SPSQ) Q = DM Quantities
Q-SQ)
SQ per unit = Estimated Total DM
ities used Estimated unit produced

Standard Cost SQ = SQ per unit x actual unit produced
y Variance AP = Actual DM cost
used) (SPSQ)
Actual DM quantities
Q-SQ)
SP = Estimated DM cost
y Variance Estimated DM quantities

SQ & AQ = Total cost
SP & AP = Price or quantity per unit

Actual < Standard = Favorable (F)
Actual > Standard = Unfavorable (UF)

Price Variance = AQ purchased
Quantities Variance = AQ used

AQ used = DM beginning inventories + DM
purchased – DM ending
inventories.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 125

AA025: ACCOUNTING MODULE

2. DIRECT Actual Cost

LABOUR COST

Price/ Rate Variance Quantity/ Effic

(ARAH) (SRAH)

=AH (AR-SR) =SR (AH

DL Variance = Price Variance + Quantity
or

(SRSH) + (ARAH)

3. VARIABLE

MOH Actual Cost

Expenditure Variance Efficiency

(ARAH) (SRAH)

=AH(AR-SR) =SR(AH-S

Variable MOH Variance = Expenditure Varia

= (SRSH) + (ARAH)

2021/2022

Standard Cost R = Direct Labour Cost
ciency Variance H = Direct Labour Hours

(SRSH) SH per unit = Estimated DL Hours
-SH) Estimated Unit Produced

y Variance SH = SH per unit x actual unit porduced

Standard Cost AR = Actual DL Cost
Variance Actual DL hours

(SRSH) SR = Estimated DL cost
SH) Estimated DL hours
ance + Efficiency
SH & AH = Total hours
Variance SR & AR = rate per hour
) Actual < Standard = Favorable (F)
Actual > Standard = Unfavorable (UF)
R = Variable MOH rate
H = DL hours

SH per unit = Estimated DL Hours
Estimated unit produced

SH = SH per unit x actual unit produced

AR = Actual Variable MOH cost
Actual DL hours

SR = Estimated Variable MOH cost
Estimated DL hours

SH & AH = Total Hours
SR & AR = rate per hour
Actual < Standard = Favorable (F)
Actual > Standard = Unfavorable (UF)
Basis : DL hours

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AA025: ACCOUNTING MODULE

4. FIXED MOH Actual Cost Budgeted Cost
Cost

Budget Variance Volume Va

(ARAH) (SRBH)

=(ARAH)- (SRBH) SR(SH

Fixed MOH Variance = Budget Variance +
= (ARAH) - (SRSH)

2021/2022

Standard R = Fixed MOH Rate
H = DL Hours

arians SH per unit = Estimated DL Hours BH
(SRSH) Estimated unit produced BU

SH = SH per unit x actual unit produced

H-BH) AR = Actual Fixed MOH cost
Actual DL hours

Volume Variance SR = Estimated Fixed MOH cost
Estimated DL Hours

SH , BH dan AH = Total DL hours
SR & AR = rate per hour

Actual < Budgeted = Favorable (F)
Actual > Budgeted = Unfavorable (F)

Budgeted < Standard = Favorable (F)
Budgeted > Standard = Unfavorable (UF)
Basis : DL hours

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 127

AA025: ACCOUNTING MODULE 2021/2022

TUTORIAL CHAPTER 10:STANDARD COSTING AND
VARIANCE ANALYSIS

QUESTION 1 (C2, C3)
Syarikat Sejahtera uses standard costing system and the following standards are used for
product processing:

Direct materials (RM1.80 per kilogram) Cost to product one unit of finished
Direct labour (RM5.00 per hour) goods
Variable overhead
Fixed overhead (based on 10,000 units a year) RM3.60 per unit

RM20.00 per unit

RM1.20 per unit
RM0.80 per unit

Production units are used as a basis for variance analysis. In 2012, 8,000 units were
produced and the following are the actual costs incurred:

1. Material 20,000 kilogram at RM40,000.
2. Labour 33,600 hours at RM178,080.
3. Variable overhead RM10,000
4. Fixed overhead RM7,200

Required:
Calculate:
i. Standard quantity for materials and standard hour per unit for labour
ii. Direct material price and usage variances
iii. Direct labour rate and efficiency variances
iv. Variable overhead expenditure variance
v. Fixed overhead budget variance
vi. In your opinion, it is necessary for direct material variance to be separated into price

variance and quantity variance?

QUESTION 2 (C4)
The following data are related with the given budget for Perniagaan Tawakkal for 2012 and
the actual result obtained for that year:

Production volume Budget Actual
Material used 25,000 units 20,000 units
Material cost
Labour used 50,000 kg 45,000 kg
Labour cost RM70,000 RM67,500
Variable overhead 100,000 hours 120,000 hours
Fixed overhead RM200,000 RM300,000
RM45,000 RM60,000
RM40,000 RM60,000

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 128

AA025: ACCOUNTING MODULE 2021/2022

Required:
Calculate:
i. Direct material price variance, Direct material usage variance and Direct material

variance
ii. Direct labour rate variance, Direct labour efficiency variance and Direct labour

variance
iii. Variable overhead expenditure variance, Variable overhead efficiency variance and

Variable overhead variance
iv. Fixed overhead budget variance, Fixed overhead volume variance and Fixed

overhead variance

QUESTION 3 (C4)

Mardhiah Sdn Bhd (MSB) produces a product and uses standard costing system. The

following is the standard cost for each product: RM

Raw materials (3 kg x RM4.00) 12.00
Direct labour (0.8 hours x RM12.50) 10.00

Variable overhead (0.8 hours x RM6.00) 4.80

Fixed overhead (0.8 hours x RM3.00) 2.40
Standard cost per unit 29.20

The following information is the activities and actual cost involved for the whole year.
a. Fixed overhead cost is RM95,000 meanwhile variable overhead cost is RM250,000.
b. Production is 50,000 units.
c. MSB has used 41,000 direct labour hours amounted to RM533,000.
d. A total of 130,000 kilogram of raw materials was bought at RM3.70 per kilogram.
e. Raw materials beginning inventory are 25,000 kilograms at RM4.00 per kilogram. No
raw materials ending inventory.

Normal production is 45,000 units annually. Standard overhead rate is calculated based on
normal activity using direct labour hours.

Required:
Calculate the variances for:
i. Direct material price and quantity
ii. Direct labour rate and efficiency
iii. Variable overhead expenditure and efficiency
iv. Fixed overhead budget and volume

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 129

AA025: ACCOUNTING MODULE 2021/2022

QUESTION 4 (C4)
Syarikat Sarikaynan Sdn Bhd (SSSB) produces rattan chairs. A total of 5,000 units were
produced in November 2007 and the actual costs are as follows:

Items RM
Direct materials 104,125
Direct labour
Variable manufacturing overhead 82,400
Fixed manufacturing overhead 31,000
42,000
Total
259,525

Actual direct materials bought and used are 21,250 kg at RM4.90 per kilogram. Actual direct
labour cost is calculated based on 7,000 direct labour hours. Applied variable overhead cost
is based on direct labour hours.

Standard cost for a unit of rattan chair is as follows:

Items Description RM
20.00
Direct materials 4kg @ RM5.00 15.00
6.00
Direct labour 1.25 hours @ RM12.00
41.00
Variable manufacturing overhead 1.25 hours @ RM4.80

Variable cost per unit

Required:
Calculate:
i. Direct materials price and quantity variances
ii. Direct labour rate and efficiency variances
iii. Variable overhead expenditure and efficiency variances

QUESTION 5 (C4)
Pengkalanrama Sdn Bhd (PSB) provided the standard cost data for one of their product:

Direct materials (4 meters @ RM5) RM
Direct labour (0.5 hours @ RM10) 20
Variable overhead (0.5 hours @ RM6) 5
Fixed overhead (0.5 hours @ RM2) 3
1
Standard cost per unit
29

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 130

AA025: ACCOUNTING MODULE 2021/2022

The following are actual data for the year 2008:

Production 6,000 units
Costs: RM
Direct materials purchased (24,000 meters)
Direct materials used (23,500 meters) 124,800
Direct labour (2,900 hours) 122,200
Variable overhead 29,580
Fixed overhead 10,500
6,000

Estimated activity is 25,000 hours.

Required:
Calculate:
i. Direct materials price and quantity variances
ii. Direct labour rate and efficiency variances
iii. Variable overhead expenditure and efficiency variances

QUESTION 6 (C4)
Zackry Inc., manufactures a product called Fruta. The company uses a standard cost system
and has established the following standards for one unit of Fruta:

Direct materials Standard Standard price Standard cost
Direct labour Quantity or rate
Variable manufacturing overhead RM45.00
Fixed manufacturing overhead 5 meters RM9 RM18.00
1.5 hours RM12 RM10.50
RM7.50
1.5 hours RM7

1.5 hours RM5

Fixed manufacturing overhead is calculated based on normal production of 2,000 units.

During June, the company recorded the following activities related to the production of
Fruta:

a. The company produced 1,900 units during June.
b. A total of 9,000 meters of materials were purchased at a cost of RM79,650.
c. There was no beginning inventory of materials on hand at the start of the month; at

the end of the month, 1,300 meters of materials remained in the warehouse unused.
d. Worked 3,600 direct labour hours at a cost of RM12.40 per hour.

e. Manufacturing overhead is assigned based on direct labour hours. Variable
manufacturing overhead costs during June totalled RM26,500.

f. Fixed manufacturing overhead costs during June totalled RM 13,800.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 131

AA025: ACCOUNTING MODULE 2021/2022

Required:
Calculate:
i. Direct materials price and quantity variances
ii. Direct labour rate and efficiency variances
iii. Variable overhead expenditure and efficiency variances
iv. Fixed overhead budget and volume variances

QUESTION 7 (C4)
Hardwood Furniture, Incorporated manufactures all types of office furniture. The company
has one giant plant and office complex in Sarawak, and employs a full-time cost accounting
department to control and analyze production costs. At the end of the year, the cost
accounting department showed the following data:

The standard cost card showed: RM5.00 per unit
Direct materials RM4.00 per hour
Direct labour

Actual Data

Materials: Purchased 10,000 units @ RM4.94
Requisitioned 7,100 units
Standard quantity allowed 7,000 units

Direct labour:Actual hours worked 3,760 hours
Standard hours allowed 3,180 hours
Actual rate paid RM4.20 per hour

Required:
Compute:
i. Direct materials price and quantity variances
ii. Direct labour rate and efficiency variances

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 132

AA025: ACCOUNTING MODULE 2021/2022

QUESTION 8 (C4)
The following data are given:

Direct labour hours Budgeted Actual
Factory overhead: (normal capacity) 25,600

Variable 20,000 RM19,000
Fixed RM17,000
RM16,000
RM14,000

Standard allowed for actual production: 24,000 hours

Required:
Compute,
i. Variable overhead expenditure and efficiency variances
ii. Fixed overhead budget and volume variances

QUESTION 9 (C1, C3)
Direct labour and variable overhead standards per finished unit for Century-Fox Metals
Company are as follows: variable overhead, 10 hours at RM2.00 per hour. During October,
5,000 units were produced. Direct labour hours used were 52,000 hours. Actual variable
overhead costs were RM109,200.

Required:
i. Determine the expenditure variance and efficiency variance for variable overhead
ii. Give possible explanation for each variable overhead variances

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 133

AA025: ACCOUNTING MODULE 2021/2022

KOLEJ MATRIKULASI LABUAN
ACCOUNTING 2: AA025

Chapter 11 : Relevant Costs For Decision Making

Learning Outcome: -

11.1 Relevant cost.
a) Concept and characteristics of relevant cost.

11.2 Types of relevant costs and irrelevant cost.
a) Opportunity cost, sunk cost, incremental cost, differential cost, avoidable
cost and unavoidable cost.

11.3 Applications in decision making.
a) Make-or-buy decision.
b) Accept-or-reject a special price order.

11.4 Qualitative factors in decision making.
a) Related factors such as environment, technology and laws.

11.1 Relevant cost.
a) Concept and characteristics of relevant cost.

Relevant costs are those costs and revenues that differ across alternatives. They
are future cost and have the avoidable characteristic. The concept of relevant
cost is used to eliminate unnecessary data that could complicate the decision-
making process.

Costs and revenues that do not differ across alternatives, not in the future and
can’t be avoided are known as irrelevant costs and can be ignored when trying
to choose between alternatives.

Characteristics of relevant costs:
i. Future cost.

ii. Differs among alternatives.

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AA025: ACCOUNTING MODULE 2021/2022

11.2 Types of relevant costs and irrelevant cost.
a) Opportunity cost, sunk cost, incremental cost, differential cost,
avoidable cost and unavoidable cost.

Relevant Costs: -

a) Opportunity Opportunity cost refer to the benefit given up by not choosing an
cost alternative course of action. For example, if a machine is used to
make one type of product, the benefit of making another type of
product with that machine is lost.

a) Incremental Incremental cost refer to the additional costs involved to carry
cost out an activity. For example, when buying a new machine, it is
necessary to send the employee for training to use the machine
at a cost of RM4,000. The RM4,000 is known as the incremental
cost.

b) Differential cost Differential cost refer to the difference in a cost item under two
c) Avoidable cost decision alternatives. For example, if the cost of alternative A is
RM10,000 per year and the cost of alternative B is RM8,000 per
year. The difference of RM2,000 would be the differential cost

Avoidable cost refer to the cost that is not incurred if the activity
is not performed. For example, supply expenses. If there is no
production, there is no supply expense to be incurred. These
costs are often identified as variable costs, which vary based on
production.

Irrelevant Costs: - Sunk cost refer to the cost that has incurred in the past and
a) Sunk cost cannot be changed regardless of which future action is taken. For
example, the amount you spent in the past to purchase or repair
b) Unavoidable a laptop should have no bearing on your decision whether to buy
cost a new laptop or not.

Unavoidable cost refer to the cost that is still incurred even if the
activity is not performed. For example, if a manufacturing plant
shuts down, it still needs to pay for property taxes. These costs
are often considered fixed costs. Fixed costs are expenses that do
not depend on production.

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AA025: ACCOUNTING MODULE 2021/2022

11.3 Applications in decision making.
a) Make-or-buy decision.
b) Accept-or-reject a special price order.

a) Make-or-buy decision

i. When a manufacturer assembles component parts in producing a finished
product, management must decide whether to make or to buy the components.

ii. The decision to buy parts or services is often referred to as outsourcing.

iii. In a make-or-buy decision, the relevant costs are:
➢ The variable manufacturing costs that will be saved.
➢ The changes to fixed manufacturing costs.
➢ The purchase price.
➢ The opportunity cost.

iv. In relevant costing it is preferred that students use incremental analysis to
make decision. Incremental analysis is also known as differential analysis.

Example 1:

Ismad Company makes motorcycles and scooters. It incurs the following annual costs
in producing 25,000 ignition switches Y15 motorcycles.

RM
Direct materials 50,000

Direct labour 75,000

Variable overhead 40,000
Fixed overhead 60,000

Total manufacturing costs 225,000

Total cost per unit (RM225,000 ÷ 25,000) 9.00

Instead of making its own switches, Ismad Company might purchase the ignition
switches from Zulman Inc. at a price of RM8 per unit. If the ignition switches is
purchased, RM10,000 of the fixed costs will be eliminate.

Required:
Perform relevant costing to help Ismad Company making decision.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 136

AA025: ACCOUNTING MODULE 2021/2022

Solution
Alternative 1: Differential/Incremental analysis approach (relevant costing)

Cost Item Make Buy Net Income (RM)
(RM) (RM) Increase/(Decrease)
Relevant costs to make:
Direct materials (25,000 x RM2) 50,000 50,000
75,000 75,000
Direct labour (25,000 x RM3) 40,000 40,000
10,000
Variable manufacturing overhead 10,000
(25,000 x RM1.6) (200,000)
Avoidable fixed manufacturing 10,000 200,000 (25,000)
overhead 175,000 200,000
Relevant costs to buy:
Purchase Price (25,000 x RM8)

Total relevant cost

Conclusion:

Ismad Company should continue making the ignition switches instead of buying
them because the decision to buy the ignition switches will result in the decrease
of net income by RM25,000.

OR

Alternative 2: Differential/Incremental analysis approach (full costing)
- Take into account all costs whether relevant or not.

Cost Item Make Buy Net Income (RM)
(RM) (RM) Increase/(Decrease)
Costs to make:
Direct materials (25,000 x RM2) 50,000 50,000
75,000 75,000
Direct labour (25,000 x RM3) 40,000
Variable manufacturing overhead 40,000
(25,000 x RM1.6) 60,000
Fixed manufacturing overhead 60,000
Costs to buy: 10,000 (200,000)
Purchase Price (25,000 x RM8)
200,000

Fixed manufacturing overhead 225,000 50,000 (50,000)
Total cost 250,000 (25,000)

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AA025: ACCOUNTING MODULE 2021/2022

Conclusion:

Ismad Company should continue making the ignition switches instead of buying them
because the decision to buy the ignition switches will result in the decrease of net
income by RM25,000.

Notes:
Alternative 2 does not comply to the relevant cost concept because it uses full costing
method, therefore alternative 1 is more recommended.

Example 1: (Opportunity costs):
Assume that through buying the switches, Ismad Company can use the released productive
capacity to generate additional income of RM38,000 from producing a different product.
Required:
Perform relevant costing to help Ismad Company making decision.

Solution

Alternative 1: Differential/Incremental analysis approach (relevant costing)

Make Buy Net Income (RM)
(RM) (RM) Increase/(Decrease)

Total costs 175,000 200,000 (25,000)
Opportunity cost 38,000 - 38,000
Total relevant cost 13,000
213,000 200,000

Conclusion:

Baron Company should buy the ignition switches instead of making them
because the decision to buy the ignition switches will result in the increase of net
income by RM13,000.

Notes:
Additional income of RM38,000 through buying the switches is an additional cost of
continuing to make the switches in the make-or-buy decision. This is an opportunity cost and
therefore added to the “Make” column for comparison.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 138

AA025: ACCOUNTING MODULE 2021/2022

OR

Alternative 2: Differential/Incremental analysis approach (relevant costing)

Cost Item Make Buy Net Income (RM)
(RM) (RM) Increase/(Decrease)
Relevant costs to make:
Direct materials (25,000 x RM2) 50,000 50,000
Direct labour(25,000 x RM3) 75,000 75,000
Variable manufacturing overhead 40,000 40,000
(25,000 x RM1.6)
Avoidable fixed manufacturing 10,000 10,000
overhead

Opportunity cost 38,000 38,000
Relevant costs to buy: 200,000 (200,000)
Purchase Price (25,000 x RM8 )

Total relevant cost 213,000 200,000 13,000

Conclusion:

Baron Company should buy the ignition switches instead of making them
because the decision to buy the ignition switches will result in the increase of net
income by RM13,000.

Notes:
Alternative 1 is used if it is an extension of the previous question and depends on the total
marks given in the question; while alternative 2 is used if it is a new question that stand
on its own.

b) Accept-or-reject a special price order

i. Accept-or-reject a special price order refer to the opportunity to obtain additional
business by making a major price concession to a specific customer.

ii. Assumes that sales of products in other markets are not affected by special order.
iii. Assumes that company is not operating at full capacity.
iv. In the accept-or-reject decision, the relevant costs are:

➢ The variable manufacturing costs to produce the special order.
➢ The expected revenues.
v. In relevant costing it is preferred that students use incremental analysis to make
decision. Incremental analysis is also known as differential analysis.
vi. Any changes in fixed costs, opportunity cost, or other incremental costs or savings
(such as additional shipping) should be considered.

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Example 3

AA Adrien Company produces 100,000 ice cream maker per month, which is 80% of its plant
capacity. Variable manufacturing costs are RM8 per unit. Fixed manufacturing costs are
RM400,000 or RM4 per unit. The ice cream maker are normally sold directly to retailers at
RM20 each.

AA Adrien Company has an offer from Watermark Supplier (a foreign wholesaler) to
purchase an additional 2,000 ice cream maker at RM11 per unit. Acceptance of the offer
would not affect normal sales of the product, and the additional units can be manufactured
without increasing plant capacity.

Required:
What should management do? Help AA Adrien Company make the decision.

Notes:
Before proceeding, consider whether the company is operating at full capacity or not. If the
production capacity has been met, this special order needs to be rejected. Next step will be
done if the production capacity has not been met.

Calculation to check production capacity: -

Full capacity = Current production ÷ % of current
capacity

= 100,000 units
80%

= 125,000 units

Remaining capacity = Full capacity – current production
= 125,000 units – 100,000 units
= 25,000 units

Conclusion:

AA Adrien Company can proceed with the analysis to accept-or-reject the
special order of 2,000 units because it still can be manufactured without
increasing the production capacity.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 140

AA025: ACCOUNTING MODULE 2021/2022

Solution

Alternative 1: Differential/Incremental analysis approach (relevant costing)

Cost Item Accept (RM) Reject (RM) Net Income
102,000 units 100,000 units (RM)

Sales revenue (100,000 x RM20) + (2,000 x RM11) (100,000 x RM20) Increase/
(Decrease)
(-) Variable cost = 2,022,000 = 2,000,000
22,000
Contribution (100,000 x RM8) + (2,000 x RM8) (100,000 x RM8)
Margin 16,000
Conclusion: = 816,000 = 800,000 6,000

1,206,000 1,200,000

AA Adrien Company should accept this special order because it will increase
the net income by RM6,000.

Alternative 2: Differential/Incremental analysis approach (full costing)

Cost Item Accept (RM) Reject (RM) Net Income
102,000 units 100,000 units (RM)

Sales revenue (100,000 x RM20) + (2,000 x RM11) (100,000 x RM20) Increase/
(Decrease)
(-) Variable cost = 2,022,000 = 2,000,000
22,000
Contribution (100,000 x RM8) + (2,000 x RM8) (100,000 x RM8)
Margin (16,000)
(-) Fixed cost = (816,000) = (800,000) 6,000
Net
Income/(Loss) 1,206,000 1,200,000 -
Conclusion: 6,000
(40,000) (40,000)
806,000 800,000

AA Adrien Company should accept this special order because it will increase
the net income by RM6,000.

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AA025: ACCOUNTING MODULE 2021/2022

OR
(if requested by the question to make decision just by analyzing the difference in contribution
margin) – Perform alternative 3

Alternative 3: RM
22,000
Expected increase in revenue (2,000 x RM11)
(-) Expected increase in variable manufacturing costs (2,000 x RM8) (16,000)
Expected increase (decrease) in net income 6,000

Conclusion:

AA Adrien Company should accept this special order because it will increase the
contribution margin by RM6,000.

OR
(if requested by the question to make decision just by analyzing the difference in contribution
margin per unit) – Perform alternative 4

Alternative 4: RM

Special order sales price per unit 11
Variable manufacturing cost per unit 8
Positive (negative) contribution margin per unit 3

Conclusion:

AA Adrien Company should accept this special order because it will provide a
positive contribution margin of RM3 per unit. The total contribution margin
will increase by RM6,000 (2,000 x RM 3 per unit).

Notes: Alternative 3 and 4 is only applicable if information is insufficient to perform
full differential/ incremental analysis or if requested by the question.

11.4 Qualitative factors in decision making.
Related factors such as environment, technology and laws.

Qualitative factors are factors that cannot be measured but still need to be considered
by the management while making decision.

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a) Environment

Environment factors that need to be considered by the management while
making decision are: -
➢ Effect on employee morale, schedules and other internal elements

(companies image)
➢ Relationships and commitments to suppliers
➢ Effect on present and future customers
➢ Long-term future effect on profitability.

b) Technology

Technology factors that need to be considered by the management while making
decision are: -
➢ Quality of product
➢ High-end machinery
➢ With technologies; processes has become more efficient and effective

c) Law

Law factors that need to be considered by the management while making
decision are: -
➢ Minimum wages policy
➢ Labour working time policy
➢ Government’s requirement
➢ Company rules

d) Example of qualitative factors that need to be considered by the management
while making decision based on applications; are as follows

Make or buy decision. Special price order decision

i. The suppliers' trustworthiness. i. Impact on sales to regular customers.
ii. The quality of the products.
iii. Humanity factor in terminating ii. Potential that can lead the company
into new sales areas.
existing employees.
iii. The customer's ability to maintain an
on-going relationship that includes
good ordering and paying practices.

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 143

AA025: ACCOUNTING MODULE 2021/2022

TUTORIAL CHAPTER 11: RELEVANT COSTS FOR
DECISION MAKING

QUESTION 1 (C4)
The Spartan Company has an annual plant capacity of 25,000 units. Predicted data on sales
and costs are given below:

Sales (20,000 units @ RM50) RM1,000,000
Manufacturing costs:
Variable (materials, labour and overhead) RM40 per unit
Fixed overhead RM30,000
Selling and administrative expenses:
RM2 per unit
Variable (Sales commission – RM1 per unit) RM7,000
Fixed

A special order has been received from outside for 4,000 units at a selling price of RM45 each.
This order will have no effect on regular sales. The usual sales commission on this order will
be reduced by one-half.

Required:
Should the company accept the order? Show supporting computations.

QUESTION 2 (C3, C4)
Cobb Company incurs costs of RM28 per unit to make a product that normally sells for RM42.
A foreign wholesaler offers to buy 5,000 units at RM25 each. The special order results in
additional shipping costs of RM1 per unit.

Required:
i. Compute the increase or decrease in net income Cobb realises by accepting the special

order, assuming Cobb has excess operating capacity.
ii. Should Cobb Company accept the special order?

QUESTION 3 (C4)
Keita Berhad produces a variety of fish food. A total of 60,000 units are produced annually
and sold at RM15 per unit.
Information on cost per unit are as follows:

Direct materials RM
Wages 3.50
Variable overhead 4.80
Fixed overhead 1.60
1.20

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 144

AA025: ACCOUNTING MODULE 2021/2022

A special order was received from a customer to purchase 15,000 units at the price of
RM10.50. Keita Berhad has the capacity to process 25,000 additional units and the fixed
overhead is unlikely to increase despite special orders being received.

Required:
i. As a management accountant of the company, you are required to determine whether

the order should be accepted or not?
ii. If production capacity is 65,000 units, should the order be accepted?

QUESTION 4 (C3)
Hayati Malik Security Berhad (HMSB) is a company that produces a security alarm device.
The cost per unit to produce 10,000 units of the alarm device is as follows:

Direct materials RM
Direct labour 4.00
Variable overhead 10.00
Fixed overhead 8.00
9.00
Total
31.00

Seladang Enterprise has bid to supply 10,000 units of alarm device to HMSB at RM30 per
unit. If HMSB accepts this offer, the facility in the factory can be used to manufacture other
components. This will result in a cost saving of RM45,000. In addition, fixed manufacturing
overhead cost of RM5 per unit can be avoided.

Required:
State the best option for HMSB whether it is desirable or not to accept Seladang Enterprise
offer.

QUESTION 5 (C2, C3)

Bawang Berhad produces computer. It uses a component called Alpha in the production
process. A total of 50,000 Alpha components are required to produce 10,000 computers. The

costs of producing Alpha components are as follows:

RM RM

Direct materials 50,000

Direct labour 70,000

Variable overhead 25,000

Fixed overhead

Factory insurance 6,000

Factory supervisor salary 5,000

Other overhead 3,000 14,000

Total 159,000

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AA025: ACCOUNTING MODULE 2021/2022

The company can also purchase Alpha from a supplier at a price of RM2.90 per unit. In this
case, all insurance and factory supervisor salaries can be avoided. The factory space can also
be rented to another party at RM4,800 per year.

Required:
i. Should the company make its own or purchase Alpha from its suppliers?
ii. What are the other qualitative factors to be considered?

QUESTION 6 (C3)
Yatrib Sdn Bhd (YSB) produces KLN components. The annual production of KLN is 40,000
units. The cost per unit of KLN is as follows:

Direct materials RM
Direct labour 23.40
Variable overhead 22.30
Fixed overhead 1.40
24.60
Total
71.70

A supplier offers to supply KLN components for RM59.20 per unit. If YSB accepts this offer,
it can produce a new component, NSP. NSP component will contribute an additional
contribution margin of RM352,000 per year. Part of fixed manufacturing overhead costs of
RM21.90 per unit will still be incurred even if KLN component is purchased from the
supplier.

Required:
Determine whether YSB should make or buy the KLN component.

QUESTION 7 (C4)
There is a new asparagus plant being commercialized in Malaysia. Bedah Sdn Bhd (BSB) is
considering whether to buy the asparagus seedling or to plant its own seeds. BSB can get
1,000 asparagus plants per harvest.

The cost of planting the asparagus seeds are as follows:

Direct materials (seeds) RM
Direct labour 3,500
Variable overhead 3,000
Fixed overhead 1,200
6,000

COMPILED BY : SYIRLEEN ADLYNA OTHMAN 146