Perdagangan DPA20193 BASIC COST ACCOUNTING AZNURULLAILI BINTI AHMAD SARKAWI
i Managing Editor Mohamad Hafizul Bin Mohd Zaid Editor Mohamad Hafizul Bin Mohd Zaid Faezah Binti Kamisan Writer Aznurullaili Binti Ahmad Sarkawi Designer Aznurullaili Binti Ahmad Sarkawi Faezah Binti Kamisan Application Publishers and Developers Aznurullaili Binti Ahmad Sarkawi Faezah Binti Kamisan All rights reserved. written permission of the publisher. Published by: Politeknik Muadzam Shah, Lebuhraya Tun Abdul Razak, 26700 Muadzam Shah, Pahang Darul Makmur 1 st Edition 2021 e ISBN 978 967 2498 24 7 No part of this work may be reproduced, stored in any form or by any means without the
ii ACKNOWLEDGEMENT We would like to record our warm appreciation and thanks to the many parties who have provided encouragement and helpful comments towards the arrangement of this Basic Cost Accounting eBook. It is our hope that this eBook would help students to gain better understanding of this course. AZNURULLAILI BINTI AHMAD SARKAWI FAEZAH BINTI KAMISAN Lecturer Department of Commerce Politeknik Muadzam Shah
iii PREFACE BASIC COST ACCOUNTING provide knowledge on basic elements, procedures and methods used in planning, controlling and preparing the product cost which is used in financial accounting. This knowledge will enhance students’ ability to prepare a costing report for either manufacturer or services sectors. The chapters covered in this eBook are in line with the latest syllabus prescribed by the Department of Polytechnic and Community College Education, Ministry of Higher Education Malaysia. Several important chapters include introduction to cost accounting and elements of cost, the cost classification, costing methods and budgeting for planning and controlling which aim to give a comprehensive view of the subject. In addition, the exercises are given at the end of each chapter to test students understanding in the particular chapter. We hope this eBook will be useful for all students of Polytechnics especially for Diploma Accountancy students to understand and grasp the basic cost accounting concepts well. Suggestions for improving the coverage and the content of this eBook are most welcome from the end-users. We honestly feel and hope that these suggestions will greatly help us further improve the quality of the eBook. AZNURULLAILI BINTI AHMAD SARKAWI FAEZAH BINTI KAMISAN Lecturer Department of Commerce Politeknik Muadzam Shah
iv 1.1 Concept, Principle, Methods And Techniques Of Cost 2 1.3 Statement Of Cost 17 Exercises 19 2.1 The Materials Control 32 2.2 Purchasing Department’s Functions, Purchasing Procedure, 34 Storing Control And Raw Material Issuing Procedure 2.3 Stores Control Procedures For Material Using Economics 36 Ordering Quantities (EOQ), Inventory Control Levels And Inventory Turnover Ratio 2.4 Record Inventory Using Perpetual And Periodic Inventory System 44 Exercises 51 3.1 Define The Direct Labour And Indirect Cost 55 3.2 Record And Control Labour Cost 56 3.3 Remuneration Methods 60 3.4 Calculation of Remuneration Methods 60 Exercises 74 Advantages And Disadvantages Of Remuneration Methods 60 3.5 Measuring Labour Productivity And The Effects Of Labour Turnover 70 1.2 Cost Accumulation And Cost Assignment 9 TABLE OF CONTENTS iii ii Table of Contents iv Preface Acknowledgements INTRODUCTION TO COST ACCOUNTING AND ELEMENT OF COST 1 THE COST CLASSIFICATION: COSTING FOR MATERIALS 32 THE COST CLASSIFICATION: COSTING FOR LABOURS 55
v 4.1 Concept And How Direct Expenses Trace To Products 78 4.2 Classification Of Overhead, Production And Service Departments 79 4.3 Allocation Overhead, Apportionment And Reapportionment Overhead 80 4.4 Overhead Absorption Rate And Methods 89 4.5 Overhead Or Predetermined Absorption Rates – One Rate For One 92 Department And One Rate For Several Departments 4.6 Over Or Under Absorption Of Overhead 94 Exercises 96 References 6 Exercises 118 5.2 Service Costing 126 Exercises 130 5.1 Job And Batch Costing 109 6.1 The Budgeting System 132 6.2 The Nature Of Static And Flexible Budget 136 Exercises 142 6.3 The Static And Flexible Budget 139 151 BUDGETS FOR PLANNING AND CONTROL 132 COSTING METHODS 109 THE COST CLASSIFICATION: COSTING FOR OVEHEADS 78
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 1 CHAPTER 1 INTRODUCTION TO COST ACCOUNTING AND ELEMENT OF COST Topic Overview 1.1 Concept, principle, methods and techniques of cost 1.1.1 Definition of cost accounting 1.1.2 Importance of cost accounting to management 1.1.3 Differences between cost accounting and financial accounting 1.1.4 Basic cost concepts of costing principles: a) Cost unit b) Cost centre c) Cost object d) Conversion costs e) Opportunity costs f) Incremental costs g) Replacement costs h) Sunk costs 1.2 Cost accumulation and cost assignment 1.2.1 Accumulation and assignment of costs for different functions 1.2.2 Cost accumulation for the purpose of stock valuation and profit reporting a) Product Cost b) Period Cost 1.2.3 Cost accumulation for the purpose of decision making by using high-low method a) Fixed costs b) Variable costs c) Semi-variable costs 1.2.4 Cost accumulation for the purpose of planning and control a) Controllable costs b) Non-controllable costs 1.3 Statement of cost EXERCISES
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 2 1.1 CONCEPT, PRINCIPLES, METHODS AND TECHNIQUES OF COST 1. Cost Accounting can be defined as follows: 2. Cost accounting involves the techniques for: a) Determining the costs of products, processes, projects, in order to report the correct amounts on the financial statements. b) Assisting management in making decisions, and planning and control of an organization. 3. The Institute of Cost and Management Accountants (ICMA) London has defined costing as the ascertainment of costs. This includes the techniques and processes of ascertaining costs. 4. The Institute of Cost and Works Accountants of the U.K. has defined cost accountancy as the “application of costing and cost accounting principles, methods and technique to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of managerial decision-making.” (Jawahar Lal (1989). What is Cost Accounting ‘Cost accounting is the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds.’ (CIMA, London) ‘Cost accounting is a quantitative method that accumulates, classifies, summarizes, and interprets information for three major purposes consist of operational planning and controlling, special decision and product decision.’ (Charles T. Horngren) According to C.Drury, Cost Accounting is concerned with cost accumulation for stock valuation to meet the requirements of external reporting, whereas management accounting relates to the provision of appropriate information for people within the organisation to help them make better decisions.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 3 In short, Cost Accounting involves the following process: 1. To determine product cost. The cost of the product is very important in cost accounting. The total product cost and cost per unit of product are important in making stock valuation, deciding price of the product and managerial decision making. 2. To facilitate planning and control of regular business activities. The cost formulation in cost accounting system is oriented to help in planning, control and decision-making. The accumulation, classification and analysis of cost is done in such a way as to help management decision regarding business activities. 3. To supply information for short and long run decisions. Cost accounting system provides data for short and long run decisions of a non-recurring nature. These decision generally involve high cost commitment. ‘Cost Accounting is the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and analysis of variances, profitability, or the social use of funds.‘ (Lucey; 1996) What is the Importance of Cost Accounting to Management?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 4 4. In general cost accounting importance for the following purposes: a) Provide a structured approach to measurement of costs in manufacturing process or service industry. b) Integrate, harmonize, and standardize cost accounting principles and practices; c) Provide guidance to users to achieve uniformity and consistency in classification, measurement, assignment, and allocation of costs to products and services. d) Arrive at the basis of computing the cost of product, activity, or service where required by legal or regulatory bodies. e) Enable practicing members to make use of Cost Accounting Standards in the attestation of General Purpose Cost statements. f) Assist in clear and uniform understanding of all the related issues by various user organizations, government bodies, regulators, research agencies, and academic institutions. Source from: iEduNote
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 5 Source from: iEduNote Difference between Cost Accounting and Financial Accounting. Items Cost Accounting Financial Accounting 1. Audience/ Users Cost accounting involves the Financial accounting involves the preparation of a standard set of reports for an outside audience, which may include investors, creditors, credit rating agencies, and regulatory agencies. - External parties 2. Format Cost accounting involves creating reports that can be in any format specified by management, with the intention of including only that The reports prepared under financial accounting are highly specific in their format and content, as mandated by either What is the Difference between Cost Accounting and Financial Accounting? preparation of a broad range of reports that management needs to run a business. Example managers, employee, any department or unit in the organization. - Internal parties
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 6 information pertinent to a specific decision or situation. Generally Accepted Accounting Principles or International Financial Reporting Standards. 3. Level of detail Cost accounting usually results in reports at a much higher level of detail within the company, such as for individual products, product lines, geographical areas, customers, or subsidiaries. Financial accounting primarily focuses on reporting the results and financial position of an entire business entity. 4. Product costs Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory. Financial accounting incorporates this information into its financial reports (primarily into the balance sheet). 5. Regulatory framework There is no regulatory framework governing cost accounting reports. The structure of financial accounting reports are tightly governed by either Generally Accepted Accounting Principles or International Financial Reporting Standards. 6. Report content The information in a cost accounting report can contain both financial information and operational information. The operational information can come from a variety of sources that are not under the direct control of the accounting department. A financial report contains an aggregation of the financial information recorded through the accounting system. 7. Report timing Cost accounting staff may issue reports at any time and with any degree of frequency, depending upon management's need for the information. Financial accounting personnel issue reports only at the end of a reporting period. 8. Time horizon Cost accounting same goes to financial accounting too, but also can be Financial accounting is only concerned with reporting the
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 7 involved in a variety of projections for future periods (e.g. budgeting). results of reporting periods that have already been completed. 9. Nature Classifies, records, present and interprets in a significant manner the material, labour, overhead costs involved in manufacturing and selling each product, job and service. Classifies, records, presents and interprets in terms of financial character and provides the figures for the preparation of the financial statements. 10. Accounting method Does not based on the double entry system. Follows the double entry system. 11. Unit of measurement Applies any measurement unit that is useful in a particular situation such as labour hours, and machine hours. All information is in term of monitory unit. What is the Basic Cost Concept of Costing Principles? Costs for Decision-making • Variable costs • Opportunity costs • Incremental costs • Replacement costs • Sunk costs • General fixed overheads • Fixed cost (not vary by a period) Relevant Costs Irrelevant Costs
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 8 Cost Concept Definition Example Cost Unit Quantitative unit of output or service to which costs can be related. It is the most relevant for the activities of the organization. There may be several different cost units in order to cost various products or activities. Per kilowatt hour, per kilogram of material, per passenger mile, per litre of paint, per ton of cement. Cost Centre Location, function, person or item of equipment for which cost may be ascertained and allocated. Cost are gathered together according to their incidence. Location (sales department, sewing department). Person (salesman). Equipment (delivery van). Cost Object Any item, product or activity for which a company wants to ascertain the cost. Cost of producing a product, cost of providing a service, cost of operating a department, or any activities for which costs are measured and assigned. Conversion Cost Costs other than material cost. Labour costs and manufacturing overheads are needed to convert raw materials into finished goods. Labour cost and manufacturing overhead. Opportunity Cost Cost that a person sacrifice when they choose one option over another. Graduation vs salary. Vacation vs training. Entrepreneurship vs steady job. Stock vs cash. Incremental Cost The additional costs resulting from an additional process or batch of units being produced. Also known as differential costs. If fixed cost increase due to certain situation, the difference in the increment considered as incremental cost. Processing of any products that involve additional process cost. Replacement Cost Cost incurred to replace any existing facilities or asset having similar characteristics for future use. Since the cost is in the future, it is relevant for decision making. Market price of replacing the stock item. Present value of machinery is RM1,000. Replacement cost for that
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 9 machinery based on market value is RM2,000. Sunk Cost Cost that have already been incurred by past actions. They cannot be recovered. They are not relevant to future decisions. When what is done cannot be undone RM200 spent last year to replace a sink. RM2 million spent five years ago on a new manufacturing plant. RM1 million spent on Research and Development two years ago. 1.2 COST ACCUMULATION AND COST ASSIGNMENT Source: SlideToDoc 1. Cost is simply the expenditure incurred for producing a product or providing a service. 2. Cost accumulation involves identifying, measuring and recording cost information. 3. Cost assignment is about assigning costs to cost objects. 4. Cost classification is the arrangement of costs items into logical groups. What is Cost Accumulation and Cost Assignment?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 10 1. Product Cost are costs identified with goods produced or purchased for resale. 2. Period Costs are those costs which are not included for stock valuation purposes. 3. Example of product cost and period cost: Product Cost Period Cost Manufacturing cost - Direct materials - Direct labour - Direct expenses Non-manufacturing cost (overheads) - Indirect materials - Indirect labour - Indirect expenses Direct material- Steel, wood, iron, rice, raw cotton, rubber, crude oil. Direct labour – Worker at assembly line, special designer, carpenters, pilots, lecturer, doctor, machine operators, chefs. Direct expenses – Cost of special layout, royalty for recipe or writing, hiring special machine or tools for manufacturing process. Indirect material – nails, glue, varnish, salt, sugar, gas. Indirect labour – foremen of machine, technician, supervisors, electricians, forklift truck operators. Indirect expenses – depreciation, insurance, rental, cashier’s salary, advertising, sales commission, office salary. 4. The different between product cost and period cost: Product Cost Period Cost Product cost become an expense when the goods are sold. Period costs which consist of anything other than manufacturing costs are treated as expenses and written off in the period they are incurred. Manufacturing cost considered as product cost. Non-manufacturing cost considered as period cost. Known as direct costs or inventoriable costs, are directly related to production output and are used to calculate the cost of goods sold. Considered indirect costs or overhead costs, not directly tied to production level. Always variable, depending on production Usually fixed, but can also be semi-variable. What is cost accumulation for the purpose of stock valuation and profit reporting?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 11 levels. Related to volume, such as units produced or labour hours. Related to overhead and indirect costs. Are recorded on a balance sheet. Are recorded on an income statement. Type Definition Example Fixed Costs Cost which remain unchanged regardless of the level of activity or the outcome of a decision under consideration. Supervisor salary, rental, depreciation, leasing charge. Variable Costs Cost that vary with production output. It change in direct proportion to the level of production output. Direct materials, direct wages, and direct expenses. Semi variable Costs Cost of variable and fixed elements attached together to the total cost. Step costs are semi-fixed costs that increase or decrease after a certain level of activity or time period. Telephone cost. What is cost accumulation for the purpose of decision making by using high-low method?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 12 Source: wallstreetmojo.com • High-low method is a method of estimating cost behaviour by comparing the total cost associated with two different level of outputs. HIGH-LOW METHOD: 1) VARIABLE COST = HIGHEST ACTIVITY COST - LOWEST ACTIVITY COST HIGHEST ACTIVITY UNIT - LOWEST ACTIVITY UNIT 2) FIXED COST = HIGHEST/LOWEST ACTIVITY COST - (VARIABLE COST PER UNIT x HIGHEST/LOWEST ACTIVITY UNIT) 3) y = a + bx y = Total cost, a = Fixed cost, b = Variable cost, x = Quantity
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 13 Based on the above situation, calculate the fixed cost and variable cost using high-low method. Solution Example 1.1: EXAMPLE 1.1
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 14 Let say you are a manager of a hotel and you are really concerned about the cost of which hotel is incurring and you want to derive a model to predict future cost, based on historical cost. You have collected data for the last 10 months and wants to see the cost for the next 2 months. Solution Example 1.2: EXAMPLE 1.2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 15 Company α wants to determine the cost-volume relation between its factory overhead cost and number of units produced. Use high-low method to split its factory overhead (FOH) costs into fixed and variable components and create a cost volume relation. The volume and the corresponding total cost information of the factory for past eight months are given below: Month Units FOH (RM) 1 1,520 36,375 2 1,250 38,000 3 1,750 41,750 4 1,600 42,360 5 2,350 55,080 6 2,100 48,100 7 3,000 59,000 8 2,750 56,800 Solution Example 1.3: EXAMPLE 1.3
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 16 Type Definition Example Controllable cost Cost that are targeted for cost reduction by managers. With proper planning and controls, production managers are able to reduce controllable cost without compromising product quality. Production wastage, production efficiency and product reworks. Non-controllable cost Unavoidable costs are treated as fixed. Costs are not targets for cost reduction. Factory insurance premium, factory rental and any fixed costs. What is cost accumulation for the purpose of planning and control?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 17 1.3 STATEMENT OF COST Company ABC Statement of Cost for the year ended XXXX Items RM RM Direct Material Direct Opening Stock of raw material XXX Add: Purchase of raw material Carriage inwards XXX XXX XXX Less: Closing stock of raw material (XXX) Value of raw material consumed XXX Add: Direct Wages/Direct Labour XXX Add: Direct Expenses: Royalty XXX PRIME COST XXX Add: Factory Overhead: Indirect wages Rent and rates of the factory XXX XXX XXX GROSS FACTORY COST XXX Add: Work in Progress (opening) Less: Work in Progress (closing) XXX (XXX) FACTORY COST XXX
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 18 Add: Administration Overhead: Rent Depreciation on office equipment XXX XXX XXX PRODUCTION COST XXX Add: Finished Goods (opening) Less: Finished Goods (closing) XXX (XXX) Add: Selling and Distribution Overhead: Sales expenses Promotion XXX COST OF GOODS SOLD/TOTAL COST/ COST OF SALES XXX
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 19 QUESTION 1 Below is the information for Syarikat Pelangi Sdn Bhd: Additional information: i. Manager spent 60% of his time in the office and 40% in the factory. Based on the information given above, you are required to prepare cost statement for the year ended 31 December 2013. Items RM Direct materials – opening stock 15,000 Direct materials – closing stock 16,000 Direct materials purchased 12,000 Factory worker’s wages 20,000 Manager’s salary 10,000 Office staff’s salary 6,000 Salesman’s commission 5,000 Carriage inwards 2,000 Factory’s rental 4,000 Other office expenses 1,200 EXERCISES
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 20 QUESTION 2 The following data have been extracted from Ekio Wood Furniture as at 31 December 2013: Items RM Carpenter’s wages 21,000 Supervisor’s salary 13,500 Wood : Opening stock 9,800 Wood : Closing stock 6,850 Purchase (wood) 83,000 Factory overhead 14,000 Clerk’s salary 16,200 Lorry driver’s salary 6,700 Manager’s salary 20,000 Carriage inwards 2,500 Rental of special machine 1,800 Rental of machine 9,000 Depreciation: Machinery 2,800 Depreciation: Equipment at showroom 1,100 Depreciation: Lorry (use for delivering) 6,000 Carriage outwards 4,700 Electricity 8,700 Canteen maintenance 1,500 Additional information: i. Electricity cost is divided between factory, administration and showroom according to the floor area occupied (sq. metres): factory 2000 m2 , office 500 m2 and showroom 1000 m2 . ii. Canteen is used by 5 clerks, 10 carpenters and 5 sales officers. You are required to prepare statement of cost on 31 December 2013.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 21 QUESTION 3 The following information is taken from the books of Syarikat Mizi Jaya Sdn Bhd.: Items RM Direct material on 1/1/2008 15,000 Work in progress on 1/1/2008 2,500 Finish goods on 1/1/2008 22,500 Direct material purchased 65,000 Sales 500,000 Depreciation 25,000 Insurance premium 1,500 Office staff’s salary 22,000 Salesmen’s commissions 13,000 Miscellaneous administration cost 65,000 Electricity and water expenses 10,000 Royalty 5,000 Lorry driver’s wages 3,000 Additional information: i. Stocks as at 31/12/2008: RM Direct material 5,000 Work in progress 500 Finish goods 8,500 ii. Direct labour used was 35,000 hours at rate RM5.50 per hour. iii. Depreciation of factory’s equipment is RM20,000 and the rest is for office equipment. iv. Insurance premium for factory is RM1,000 and the rest is for office. v. Miscellaneous administration cost for factory is RM45,000 and the rest is for office. vi. Electricity and water expenses for factory is RM8,000 and the rest is for office. vii. Lorry was used to send goods to the customers. You are required to prepare cost statement to find prime cost, production/factory cost and total cost.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 22 QUESTION 4 The following information given by Syarikat MOZA Trading for the month of January 2008: Items RM Direct materials 105,000 Factory worker’s salary 55,250 Office worker’s salary 4,250 Lorry driver’s salary 1,250 Salesman’s salary 4,000 Canteen manage’s expenses (3/4 of canteen users are factory workers) (1/4 of canteen users are office workers) 4,000 Salesman’s commission 600 Depreciation of factory machine 3,000 Depreciation of office furniture 250 Depreciation of transport lorry 750 Depreciation of exhibition room’s furniture 50 Factory supervisor’s salary 6,000 Plant rent (special job) 1,000 You are required to prepare cost statement to find prime cost, production/factory cost and total cost. QUESTION 5 The following information is costs incurred for Bonnia Sdn Bhd, a factory manufacturing women clothes, for the year ended 30 April 2006. Items RM Building (at cost = RM250 000) 120,000 Machine (at cost = RM120 000) 80,000 Stock at 1/5/2005: Direct materials 8,000 WIP direct materials 5,000 WIP direct labour 3,000 Purchase of direct materials 25,000 Direct wages 6,000 Factory salary 24,000 Office salary 34,000 Electric 5,000 Insurance 8,600
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 23 Factory rent 10,400 Sales commission 1,800 Factory maintenance expenses 2,500 Carriage inwards of direct materials 1,400 Cash 134,500 Additional information: i. Stock at 30 April 2006: Direct materials 2,900 WIP direct materials 1,400 WIP direct labour 2,100 ii. Insurance and electric are divided to factory and office on ratio 3 : 2 iii. Depreciation calculated based on reducing balance method at rate 10% a year for all type of fix assets. Depreciation is fully calculated in the year the asset is purchased and no depreciation calculated for the year it is sold. You are required to prepare a cost statement. QUESTION 6 Calculate prime cost, factory cost, cost of production and cost of sales from the following particulars: Items RM RM Direct materials 40,000 Direct wages 10,000 Direct expenses 2,000 Wages of foreman 1,000 Storekeeper’s wages 500 Electric power 200 Lighting: Factory 500 Office 200 Rent: Factory 2,000 Office 1,000 Repairs and renewal: Factory plan 500 Machinery 1,000 Office premises 200
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 24 Depreciation: Office premises 500 Plant and machinery 200 Manager’s salary 2,000 Office printing and stationery 200 Telephone charge 50 Postage and telegram 100 Salesman’s commission and salary 500 Advertising 500 Carriage outward 150 QUESTION 7 (a) Based on the information given below, prepare cost statement for Syarikat Sri Pelangai Sdn. Bhd. for the year ended 31 December 2008: Items RM Direct materials – opening stock 15,000 Direct materials – closing stock 16,000 Direct materials purchased 12,000 Return outward 5,000 Factory worker’s wages 20,000 Manager’s salary 10,000 Direct factory costs 2,000 Office staff’s salary 6,000 Salesman’s commission 5,000 Carriage inwards 2,000 Factory’s rental 4,000 Other office expenses 1,200 Direct materials duty import 1,800 Opening work in progress 1,600 Closing work in progress 2,100 Additional information: i. Manager spent 60% of his time in the office and 40% in the factory.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 25 (b) Based on the cost statement which you have prepared at 7 (a), how many sales that they should make in order to earn RM50,000 in profit? QUESTION 8 Below is the balance of the accounts of Rangkaian Utuh Sdn. Bhd. for the year ended 31st December 2014. Items RM RM Sales 200,000 Direct labour 15,500 Carriage inward 1,000 Purchase of raw material 77,500 Opening stock: Raw material 7,500 Work-in-progress 2,800 Finished goods (1,500 units) 5,500 Closing stock: Raw material 6,000 Work-in-progress 1,500 Finished goods (2,100 units) 5,800 Rental 16,000 Utilities 5,000 Salesman commission 900 Depreciation of van (used for sales activities) 500 Office clerk salary 1,700 Royalty 12,000 Additional information: i. Rental is divided between factory and office (60 : 40). ii. Utilities is divided between factory and office (50 : 50). iii. Total production units are 25,000 units during the period. Advertising costs is calculated as RM0.60 per unit sold during the period. iv. Royalty is based on units sold. You are required to prepare a statement of cost based on the information given.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 26 QUESTION 9 (a) Briefly define the following items and give ONE (1) example for each item. (i) Fixed Costs (ii) Variables Costs (b) Syarikat Danisya produce an elegant furniture. The following is a list of some of the costs incurred by the company: Items Category Production manager’s salary Purchase of wood Salesman commissions Wages of factory machine operators Advertising Carriage inwards on raw materials Depreciation of office computer Rent and rates for factory Factory supervisor salary Royalties paid to designers (based on Production) Fire insurance for factory Office salaries You are required to classify of each item above as (a) Prime Cost (b) Production Overhead and (c) Selling and Administration Overhead.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 27 (c) The following information is extracted from the book of Syarikat Danisya Sdn Bhd, a manufacturer of elegant furniture for the year ended 31 December 2015: Items RM Purchase of raw materials 15,000 Direct wages 12,000 Office salaries 8,000 Royalties 10,550 Carriage inwards of raw materials 6,000 Factory rental 2,000 Utilities 2,000 Opening stock at 01/01/2015: Raw materials 2,500 Work in progress 1,000 Finished goods (4,000) 6,000 Closing stock at 31/12/2015: Raw materials 2,450 Work in progress 1,100 Finished goods (6,000) 9,000 Additional information: i. Advertising expenses will be charged RM0.15 per unit sold. ii. 31,000 units have been produced for the period. iii. The royalties paid based on the unit produced. iv. Utilities should be divided among three departments which are 50% factory, 25% for the office and 25% for sales department. You are required to prepare the Statement of Cost for the Year Ended 31 December 2015.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 28 QUESTION 10 The following information was taken from Ikatan Manufacturing Company a manufacturer of wood based furniture: Items RM Stock of raw material on 1 January 2013 3,200 Stock of raw material on 31 December 2013 2,400 Direct wages 64,000 Carriage inward of raw material 800 Stationary 350 Depreciation 8,500 Advertising 1,200 Purchase of raw material 40,000 Office staff salary 20,500 Insurance of factory 2,400 Lubricant for machine 500 Electricity and water bill 1,000 Royalty (based on production units) 4,500 Sales 300,000 Additional information: i. 4/5 of the electricity and water bill is for factory use and 1/5 is for office use. ii. 60% of the depreciation is for production use and the balance is allocated for office use. iii. Commission for sales will be given at 5% from sales. You are required to: (a) Define direct material and direct labour. (b) Prepare the Statement of Cost for the company for the Year Ended 31 December 2013. (c) Calculate the targeted net profit for the year using the cost statement above.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 29 QUESTION 11 (a) Define the meaning of variable cost and fixed cost. The meaning of each cost must be enclosed with graph sketch and ONE (1) example of each cost. (b) The following information was available for Behrang Manufacturing Bhd for the year ended 30 June 2012: Items RM RM 1 July 2011 30 June 2012 Inventories: Materials 95,000 115,000 Work in progress 130,000 115,000 Finished goods 135,000 120,000 Items RM Advertising expenses 85,000 Direct labour 215,000 Depreciation of office equipment 35,000 Depreciation of factory equipment 26,000 Power and electricity – factory 7,500 Indirect labour 27,000 Materials purchased 145,000 Office salaries expenses 95,000 Property taxes – factory 5,500 Property taxes – office 16,000 Rent expenses – factory 8,500 Sales 960,000 Sales expenses 150,000 Insurance – factory 4,500 Miscellaneous cost – factory 5,500 You are required to calculate Total Production Cost for the Year Ended 30 June 2012.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 30 QUESTION 12 (a) Identify the following cost as either prime cost, production overhead, administration overhead, selling and distribution overhead. (i) Production manager’s salary (ii) Depreciation of machinery (iii) Assembler’s manager (iv) Office salary (v) Advertising (vi) Delivery expenses (vii) Raw material used (viii) Salesman salary and expenses (ix) Director’s salary (x) Factory rent and rates (b) The following information is taken from Melati Bhd. for the year ended 31 December 2016. Items RM Inventory: 1 January 2016 15,000 31 December 2016 18,000 Work in Progress: 1 January 2016 7,500 31 December 2016 6,800 Raw material purchases 62,000 Freight inward 500 Direct wages 12,000 Salesman commission 500 Office staff salary 5,500 Insurance 1,200 Repair of machinery expenses 600 Advertising 1,000 Office rental 2,400 Depreciation of machinery 2,500 You are required to determine prime cost, production cost and total cost.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 1 31 (c) Based on your answer in (b) calculate the profit (if the company produced and sold 3,500 units of goods at RM100 per unit. Assuming there is no opening and closing finished goods.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 32 CHAPTER 2 THE COST CLASSIFICATION: COSTING FOR MATERIALS Topic Overview 2.1 Materials control 2.2 Purchasing department’s functions, purchasing procedure, storing control and raw material issuing procedure 2.3 Stores control procedures for material using Economic Ordering Quantities (EOQ), inventory control levels and inventory turnover ratio 2.4 Inventory using perpetual and periodic inventory system EXERCISES 2.1 MATERIALS CONTROL 1. The term ‘materials’ is generally used in manufacturing and it refers to raw materials used for production. The terms ‘materials’ and ‘store’ are sometimes used inter changeably, while ‘store’ is wider in meaning than materials. 2. Materials costs constitute a prime part of the total cost of product in manufacturing firms. The control over materials purchases, consumptions and stocks are important for effective management of a business firm. 3. Materials control basically aims at the efficient purchasing of materials, the efficient storing and efficient consumption. 4. Direct materials costs consist of raw materials and/or component and parts that are used in the production of a product. 5. Indirect materials costs include consumable supplies, such as cleaning chemicals and tools that are not directly identifiable to specific product or job. What is Material?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 33 1. Material control is a system or procedure that ensures various functions or departments within an organization coordinate their activities to achieve efficient materials planning, purchasing and usage. 2. A sound system of material control possesses the following features: a) Uses of proper forms and records b) Considers effective purchasing methods c) Provides adequate storage facilities d) Operates efficient stock control records e) Maintains proper planning and scheduling of materials requirement. f) Maintains material cost within budget. 3. The following are the objectives in a good system of materials control: a) Materials of the desired quality will be available when needed for efficient production. b) Material will be purchased only when a need exists and in economic quantities. c) The investment in materials will be maintained at the lowest level consistent with operating requirements. d) Purchase of materials will be made at the most favourable prices under the best possible terms. e) Materials are protected against loss or damage by fire, theft and handling with the help of proper physical controls. f) Materials should be stored in such a way that they can provide minimum of handling cost and time. 4. The scope of material control consists of: a) Procurement procedures and control b) Stock investment and control c) Stock issuing and pricing d) Stock valuation What is Material Control?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 34 2.2 PURCHASING DEPARTMENT’S FUNCTIONS, PURCHASING PROCEDURE, STORING CONTROL AND RAW MATERIAL ISSUING PROCEDURE There are several functions of purchasing department: 1. The department should attempt to reduce the investment in stock to the lowest level consistent with operating requirements. 2. This department determines what materials are required, how much is required and when they are required. 3. The quantities should be bought in economic size so that there may not be over stocking. 4. The responsibility of the purchasing function includes price, quality and delivery all of which are crucial factors. Late or non-delivery, poor and substandard materials, incorrect specifications; are all likely to have great impact on profitability as paying unnecessarily high price. Purchasing procedures vary with different business firms. The important steps are as follows: a) Purchase requisition A form known as a purchase requisition is commonly used as a formal request to the purchasing department to order goods or services. There are 3 general purposes of purchasing requisition: 1) It is the start of purchasing process and informs the purchasing department of the need for the purchase of material 2) It fixes the responsibility of the department making the purchase requisition. 3) It can be used for future reference. Purchasing and Receiving Procedure Function of Purchasing Department
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 35 The storekeeper prepares the purchase requisition. It contains details, such as number, date, department, quantity, description, specification, signature of the person initiating the requisition, and signature of one or more officers approving the purchase. b) Purchasing Order After the requisition is received and approved, the purchasing department places an order with a supplier. The order is placed through established suppliers. The purchasing department may ask for bids for quotation before placing the order. The objective is the secure the highest quality materials at the lowest price. The purchase order should clearly state the materials required and the price, the delivery period and the department for whom the materials are purchased. Copies of the purchase order are sent to the department concerned, the sender of the purchase requisition and the store department. Copies of the purchase requisition and the purchase order are sent to the accounting department for the purpose of payment and voucher. c) Receiving material The receiving department performs the function of unpacking materials which are received by an organization. The receiving department will count, check/ inspect the good received and compare the goods received with the description on the purchase order and make a record. The receiving report or material received report is prepared. d) Approval of invoice Invoice approval is an important step in a materials control programme. It indicates that goods according to the purchase order have been received and payment. e) Making Payment After the purchase invoice total is approved, the process of making payment begins. When it is found that items qualify for payment, a cheque is drawn for the amount and sent to the supplier.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 36 2.3 STORES CONTROL 1. There has been a growing emphasis on the importance of stores control. More than fifty percent of the total production costs of production is represented by direct materials. 2. Large amounts of capital invested are locked up in stocks of materials. 3. One of the major objectives of a stores control system is to ensure that “stock out” do not occur and that surplus stocks are not carried. 4. Stock-outs occur when there is insufficient stock to meet production demands and this can lead to loss of customer goodwill and reduced profit. 5. Overstocking can result in capital being tied down in unwanted stock, whilst understocking can result in the risk of suffering stock-out crisis. 6. Important consideration that management must give during stock investment are: a) Availability of storage space b) Availability of funds c) Storage and materials handling costs d) Risk of loss due to damage, obsolescence, pilferage, or deterioration and evaporation e) Delivery delays or lead time f) Economic order quantities 7. Inventory control system covers from the investment in stock to the maintenance of inventory records and the pricing of inventory issues. 8. It covers the functions of ordering, purchasing, receiving goods into stores, storing, issuing and maintaining appropriate stock levels. 9. An effective inventory control system includes the adoption of the following techniques: a) Setting inventory control levels b) Economic order quantity model c) Maintaining proper inventory records d) Stocktaking e) Classification of inventory f) Pricing issues 10. Lead time is the period between placing an order and actually receiving the goods into stock. Stores Control
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 37 Economic Order Quantity (EOQ)/Re-Order Quantity 1. Economic Order Quantity (EOQ) is the most economical way to place an order; in other words it equates the cost of ordering with the cost of storage of materials. 2. EOQ is the optimal order quantity that minimizes the total inventory cost. Formula 1: D = Annual usage/demand for units of materials per annum O = Ordering cost I = Cost of storage of materials or carrying cost (in %) C = Cost per unit Therefore: The total cost related to stock consists of: a) Storage/carrying cost – cost related to space for storage (eg: rent, warehouse etc.), workers, (eg: guard, storekeeper), equipment (eg: rent of forklift etc.) b) Ordering cost – Cost related to ordering process. Eg: telephone bill, fax, courier, carriage, loading etc. EOQ = 2DO IC NO. OF ORDER PER YEAR = ANNUAL USAGE EOQ
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 38 Formula 2: Inventory Control Levels a) Re-Order Level • The level at which the stock is allowed to fall before an order for stock replenishment is placed. • The purpose is to minimize or eliminate the risk of stock-out arising. • Level which it is essential to initiate purchase requisition for fresh supplies of materials. It is determined by: i) The rate of consumption of materials ii) The time required to obtain new supplies (Re-order period) Formula 3: TOTAL COST = (STORAGE COST) + (ORDERING COST) STORAGE COST = AVERAGE STOCK * % OF CARRYING * COST PER UNIT ORDERING COST = NO. OF ORDER PER YEAR * COST PER ORDER RE-ORDER LEVEL = MAXIMUM CONSUMPTION X MAXIMUM RE-ORDER PERIOD @ RE-ORDER LEVEL = MAXIMUM USAGE X MAXIMUM LEAD TIME
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 39 b) Minimum Stock Level • The minimum stock level is lower than the ROL but above the absolute zero level. • The minimum stock level acts as a buffer stock. • When it reaches a minimum stock level, the order which has already been placed should be received or should be chased up. • The minimum stock level is the level below which stocks should not normally be allowed to fall. It is determined by: a) The rate of consumption of materials b) Re-order period Formula 4: c) Maximum Stock Level • The largest quantity of materials which should ever be held. • It is a level above the ROL. • Maximum stock level is the level which stocks should normally be allowed to rise. It is determined by: a) The rate of consumption of materials b) The re-order period c) Amount of capital available d) Cost of storage e) Price fluctuation MINIMUM STOCK LEVEL = ROL – (AVERAGE USAGE x AVERAGE LEAD TIME/AVERAGE RE-ORDER PERIOD)
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 40 Formula 5: d) Average Stock Level • The amount of stock the store management should maintain at any time of operation. • This can be determined by one of the two formula: Formula 6: MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + EOQ – (MINIMUM USAGE x MINIMUM LEAD TIME/MINIMUM REORDER PERIOD) AVERAGE STOCK LEVEL = OPENING STOCK + CLOSING STOCK 2 OR AVERAGE STOCK LEVEL = MINIMUM LEVEL + MAXIMUM LEVEL 2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 41 Calculation Of Stock Levels Re-order quantity 2,000 units Re-order period 3 to 5 weeks Maximum consumption of materials 500 units per week Minimum consumption of materials 300 units per week Normal consumption of materials 400 units per week Solution Example 2.1: The demand for materials MXZ is 12,000 units per annum. The cost of storage is 24 % per annum. The cost of ordering is RM2.00 per order. The price of MXZ is RM5 per unit. Calculate EOQ. Solution Example 2.2: EXAMPLE 2.1 EXAMPLE 2.2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 42 In respect of materials MXZ, the following data are available: Lead-time from suppliers is estimated a maximum 4 months and minimum 2 months. The average lead-time is 3 months. Budgeted consumption: Maximum 300 unit /month Minimum 50 unit /month Annually 1,800 units Cost of storage is 25% per annum. Ordering cost is RM2.00 per order Price per unit of materials is RM0.32. Calculate EOQ, all the stock level and stock turnover. Solution Example 2.3: EXAMPLE 2.3
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 43 Rate Of Stock Turnover/Inventory Turnover Ratio 1. The stock turnover rates measures the number of times the average stock is used up during a certain period. 2. Inventory turnover is a measure of the number of times inventory is sold or used in a time period, such as a year. 3. It is calculated to indicate any trends in material usage. 4. It is a good technique to be used in the control of materials costs. Formula 7: OR RATE OF STOCK TURNOVER = COST OF MATERIALS USED DURING A PERIOD **AVERAGE STOCK OF MATERIAL USED DURING THE PERIOD ** (OPENING STOCK + CLOSING STOCK)/2 STOCK TURNOVER RATIO = COST OF MATERIALS USED DURING A PERIOD ½ (MAXIMUM STOCK LEVEL + MINIMUM STOCK LEVEL)
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 44 Cost of materials XYZ used in the year = RM200,000. Opening stock of materials XYZ = RM50,000. Closing stock of materials = RM30,000. Solution Example 2.4: 2.4 INVENTORY SYSTEM 1. A perpetual inventory system is a system of records whereby the receipts and issues of stores are continuously updated after each transaction, and the balance shows the up-todate position. 2. Proper records, forms and documents must be maintained for the receipt, issue and transfer of materials. 3. The types of records are: a) Bin cards b) Store Ledgers What is Perpetual Inventory System EXAMPLE 2.4