DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 45 Bin Cards • A bin card is used to record the receipts, issues and closing balances of the materials kept in the stores. • A bin card shows the quantity of individual stock items in a particular store location. • A separate bin card is prepared for each item of stock kept in the stores. • The bin card record must tally with the physical quantity of goods available in the stores. • The bin cards are prepared manually by the storekeeper. • The storekeeper is responsible for any discrepancies in the physical quantity of stock items. • The bin card specifies the location and the materials specifications. • The details in a bin card include the maximum, minimum, re-order levels, materials receipt and issue dates, and the physical balance. Store Ledgers • The store ledger records stock items in quantity as well as value. • It shows the free stock balance, the stock control levels and the value of stock. • It is maintained by the cost accounting department and represents a stock control record. • As soon as the materials are received, the cost price of the materials must be recorded. • The financial balance in the store ledger records are used for the preparation of the financial statement. 1. It keeps the record of stocks up to date. 2. It acts as a control device, so the possibilities of loss or theft of materials are minimized. 3. The recording of stocks in bin cards as well as store ledger minimizes the error in recording the receipts and issues of stocks. 4. The discrepancies noted after physical counting are detected and corrective action is taken promptly to avoid future reoccurrence. 5. Enables the preparation of final accounts. 6. Slow-moving inventories, obsolete or dormant stocks are easily identified. Advantage of Perpetual Inventory System
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 46 There are several methods of pricing the issue of materials. Each method will give different results, hence affecting profit as well as the value of closing stocks in the balance sheet. a) FIRST IN FIRST OUT (FIFO) • The FIFO method follows the principle that materials received first are issued first. • After the first lot or batch of materials purchased is finished, the next lot is taken up for supply. The advantages of FIFO method are: a) The inventories consist of the latest batch (purchases) b) Management has little control over the selection over the selection of units in order to influence recorded profits c) Valuation of inventories and cost of goods manufactured are consistent and realistic d) Easy to understand and operate The disadvantages of this method are: a) The objective of matching current cost with current revenue is not achieved under this method: i) FIFO costing is improper if many lots are purchased during the period at different prices ii) This method overstates profits especially with high inflation What is Periodic Inventory System?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 47 The following is summary of the receipts and issue of materials in factory during October 2020. Date Receipt (kg) Price/kg (RM) Issuing (kg) Oct. 1 1000 1.00 Oct. 5 260 1.05 Oct. 6 700 Oct. 12 400 1.15 Oct. 20 300 1.25 Oct. 24 620 Oct. 25 240 Solution Example 2.5: FIFO method Date Receipts Issues Balance Q P A Q P A Q P A Oct.1 Oct. 5 Oct.6 Oct.12 Oct.20 Oct.24 Oct.25 EXAMPLE 2.5
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 48 b) LAST IN FIRST OUT (LIFO) • The materials purchased are issued in the reverse order to FIFO; that is the last receipt is the first issue. • The inventory is priced at the oldest costs. The advantages of the LIFO method are: a) It provides a better matching of current costs with current revenue. b) It resulted in a real income in times of rising prices, by maintaining net income at a lower level c) This method considered as a cheap form of tax avoidance by business firms. d) LIFO produces an income statement, which shows correct profit or losses and financial position. The disadvantage of LIFO costing method is: a) The valuation of inventory for balance sheet purposes is out of date, as it reflects prices of some past period The following is summary of the receipts and issue of materials in factory during October 2020. Date Receipt (kg) Price/kg (RM) Issuing (kg) Oct. 1 1000 1.00 Oct. 5 260 1.05 Oct. 6 700 Oct. 12 400 1.15 Oct. 20 300 1.25 Oct. 24 620 Oct. 25 240 EXAMPLE 2.6
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 49 Solution Example 2.6: LIFO method Date Receipts Issues Balance Q P A Q P A Q P A Oct.1 Oct. 5 Oct.6 Oct.12 Oct.20 Oct.24 Oct.25 c) WEIGHTED AVERAGE COST (WAC) • Issue of material is priced at the average cost price of the materials in hand a new average being computed whenever materials are received. • Total quantity and total costs are considered in computing the average price and not the total of rates divided by total number of rates as in calculated each time a purchase is made. The advantages of WAC: a) The method is logical and consistent as it absorbs while determining the average for pricing material issues. b) The changes in the prices of materials do not affect much the materials issues and stock c) The method follows the concept of total stock and total valuation. The disadvantages of WAC: a) Simplicity and convenience are lost when there is too much change in the prices of materials b) An average price is not based on actual price incurred; therefore is not realistic.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 50 The following is summary of the receipts and issue of materials in factory during October 2020. Date Receipt (kg) Price/kg (RM) Issuing (kg) Oct. 1 500 20 Oct. 10 300 24 Oct. 15 700 Oct. 20 400 28 Oct. 25 300 Oct. 27 500 22 Oct. 31 200 Solution Example 2.7: Date Receipts Issues Balance Q P A Q P A Q P A Oct.1 Oct.10 Oct.15 Oct.20 Oct. 25 Oct.27 Oct.31 EXAMPLE 2.7
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 51 QUESTION 1 The demand for material ABC is 12,000 units per annum. The cost of storage is 24% of price per annum. The cost of ordering is RM2.00 per order. The price of ABC is RM5 per unit. Calculate the economic order quantity (EOQ) for the company. QUESTION 2 In respect of material ABC, the following data is available: Lead-time from suppliers is estimated at a maximum of 4 months and minimum of 2 months. The average lead-time is 3 months. Budgeted consumption: Maximum 300 units/month Minimum 50 units/month Annual 1,800 units Cost of storage is 25% of price per annum. Ordering cost is RM2.00 per order. Price per unit or material is RM0.32. Calculate: (a) Economic order quantity (EOQ) (b) Stock level (i) Re-order level (ii) Maximum stock level (iii) Minimum stock level (iv) Average stock level QUESTION 3 Forecast sales : 4000 units per year Unit cost : RM50 per year Ordering cost : RM35 per order Carrying cost : 20% of unit’s value You are required to: (a) Calculate EOQ. (b) Find number of order per year. EXERCISES
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 52 QUESTION 4 A company makes bicycle. It produces 450 bicycles a month. It buys the tires for bicycles from a supplier at a cost of RM20 per tires. The company’s inventory carrying costs is estimated to be 15% of cost and the ordering is RM50 per order. Calculate EOQ. QUESTION 5 Shriram Enterprise manufactures a special product ‘Zed’. The following particulars were collected for the current year. Reorder quantity (EOQ) : 187 units Normal usage : 50 units per week Maximum usage : 75 units per week Minimum usage : 25 units per week Reorder period : 4 to 6 weeks Cost of placing an order : RM100 Annual carrying cost per unit : RM15 Demand for unit per annum : 12,000 units You are required to calculate re-order level, minimum level, maximum level, average stock, storage cost, ordering cost and total cost. QUESTION 6 Trading Account for the year ended 31 December, 2018 RM RM Sales 18,000 Less: Opening stock 2,000 Add purchases 8,000 10,000 Less: Closing stock 4,000 Cost of goods sold/cost of material used 6,000 Gross Profit 12,000 Calculate the stock turnover.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 53 QUESTION 7 Compute the stock turnover average and average selling period from the following data of a trading company: RM Sales 75,000 Gross profit 35,000 Opening inventory 9,000 Closing inventory 7,000 QUESTION 8 The ITM trading company provides you the following data for the year 2016: Stock turnover : 12 times Opening inventory : RM36,000 Closing inventory : RM54,000 Calculate cost of materials used sold for the year 2016. QUESTION 9 Inventory balance on 1 December 2017 is 10 units @ RM3.50 Date Purchases Sales 2 12 units @ RM3.40 10 10 units @ RM6.00 15 10 units @ RM2.50 27 8 units @ RM4.45 30 19 units @ RM9.50 Show ending inventory for each methods under: (a) LIFO (b) FIFO (c) AVCO
DPA20193 BASIC COST ACCOUNTING, CHAPTER 2 54 QUESTION 10 The information below shows data of inventories bought and sold by Syarikat Maju in December 2018. Date Purchases Sales Dec 2 12 units @ RM3.40 each 6 10 units @ RM6.00 each 10 10 units @ RM2.50 each 11 8 units @ RM4.45 each 14 19 units @ RM9.50 each 19 18 units @ RM3.90 each 20 5 units @ RM 5.60 each 22 9 units @ RM8.00 each 23 11 units @ RM10.00 each 24 10 units @ RM3.48 each 25 4 units @ RM3.35 each 29 8 units @ RM9.90 each Show ending inventory for each methods under: (a) LIFO (b) FIFO (c) AVCO
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 55 CHAPTER 3 THE COST CLASSIFICATION: COSTING FOR LABOURS Topic Overview 3.1 Define the direct labour and indirect labour cost 3.2 Explain recording and control labour costs 3.3 Explain the different types of remuneration method a) Time-based Schemes b) Piecework Schemes c) Bonus/Incentives Schemes 3.4 Calculate the remuneration using the different methods 3.5 Explain advantages and disadvantages of various remuneration methods 3.6 Explain the labour productivity and the effects of labour turnover EXERCISES 3.1 DIRECT LABOUR AND INDIRECT LABOUR 1. Direct labour cost relates to remuneration of employees directly involved in the completion of a product or service. 2. Direct labour is the workers who actually make the product (or provide the service in the service organization) are said to be directly involved in production. 3. The direct labour cost can be easily traced to the products produced. 4. For example, carpenters in a furniture factory, production operators in a manufacturing organization, chefs that cooks in a restaurant, pilot, doctor, teacher. 5. For cost accounting purposes, direct labour cost is classified as prime cost. 6. The classification of labour costs is important for measuring labour efficiency, determining accurate product costs as well as for preparing labour cost control analysis. What is Direct Labour Cost?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 56 1. Indirect labour is workers who are involved indirectly in the production process. 2. They play a different role in ensuring products are made, accounted for and delivered to customers. 3. For example, factory supervisors, managers, cleaners, technician, foreman, and so on. 4. Indirect labour costs are included in the calculation of total overheads, which are subsequently absorbed into the products. 3.2 RECORD AND CONTROL LABOUR COST 1. The recording and control of labour costs involve several activities and departments. 2. The activities include recruitment, training, recording and costing of labour. 3. The departments involved in these activities include the following: a) Human resource department b) Timekeeping department c) Cost accounting department 4. The following table shows the functions of each department. Department Functions/Activities Human Resource Department • Organize recruitment of suitable candidates for the organization. They will advertise the vacancies in any social media, screen the applicants, conduct interviews and coordinate with respective section managers who will responsible for making the final selection of candidates. • Preparing the payroll for the employees. They prepare information relating to the employee’s attendance time, details of absenteeism, hourly wage rate and details of various deductions such as income tax, employee provident fund contribution and etc. • Designing a suitable remuneration package. The remuneration package consists of three elements which are basic wages, benefit and allowances, and rewards and incentives. Basic wages calculated either using time-based methods or output-based methods. Benefits and allowance relate to employee welfare schemes such as provident fund, pension fund, housing allowance, travelling allowance, and gratuity. Rewards and incentives are linked to efficiency bonus. What is Indirect Labour Cost?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 57 • Identifying and meeting the training needs of existing staff. • Ensuring employee welfare and a safe working environment for employees. Timekeeping Department • Responsible to record employee work time through employee attendance or time spent by each employee in the factory or each job. • Employee’s attendance may be recorded in a daily register, clock card, and electronic swipe cards. A daily register – each day employees sign in when they arrive for work and sign out when they leave. Clock card – a popular method of recording attendance, the employees clock in and out each day to record their attendance. Electronic swipe cards – employees use an electronic swipe card to record their attendance. • The objectives of time-booking are as follows: a) To ascertain the employee’s productive hours and the idle time. b) To allocate the labour hours to individual jobs for the purpose of labour costing. c) To calculate the remuneration including bonus payable under available incentives schemes. d) To calculate the overtime applicable on each job/product for the purpose of overhead calculation. e) To calculate the overtime applicable on each job/product for the purpose of performance control. f) To determine labour efficiency. • The clock card and the time sheet provide the necessary employee information such as time of arrival, time of departure, time spent on jobs, idle time and break time. Cost Accounting Department • To ascertain cost includes the labour cost. • The details of the labour time spent in each job and the agreed wage rate provides the basis for the calculation of labour costs for each job.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 58 Employee Record Card Source from Business Form Template.com Wage Reports 1. Wage reports are prepared to indicate whether the workforce is efficient or not. 2. It is through the reports that management exercises control over its workforces and over the cost of labour. Some of the reports are: a) Overtime report: Showing overtime hours, premium paid and reasons for overtime. b) Idle time report: Shows idle time, production time and analysis of idle time. c) Labour turnover report: Shows the reason worker leaves the job and number of employees leave, stay, and new in the organization. d) Wage analysis report: Shows the breakdown of all wages by jobs, cost centres, process, and grades of employees. e) Control ratios: Used to compare results of departments to indicate how well the department is performing in relation to others. Report for Direct Labour
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 59 1. Idle time may be caused by: a) Machine breakdown b) Waiting for work c) Inefficiency d) Material shortages 2. Idle time is usually recorded on an idle time card that also indicates the reasons for idle time. 3. Wages paid for unproductive time is treated as production overhead. A machine operator’s machine breaks down for four hours. The total time is forty-four hours including four hours idle time. The rate is RM1 per hour. What will his gross wage be? Solution Example 3.1: If an employee is paid for 8 hours attendance time at a wage rate of RM4 per hour and his job ticket shows that he had worked a total of 7 ½ hour on Job No 123, the ½ hour which he is paid is termed idle time. Since this idle time is not productive, it is to be charged to production overhead. Solution Example 3.2: What is Idle Time? EXAMPLE 3.1 EXAMPLE 3.2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 60 3.3 REMUNERATION METHOD 1. The labour remuneration method has a direct impact on the cost of the finished product, the morale and productivity of workers. 2. An important aspect of labour cost control is a wage system designed primarily for exercising management control over employees. 3. Basically, there are two main schemes of payment for employees: a) Time-based schemes b) Piecework schemes c) Bonus/incentives schemes 3.4 THE CALCULATION FOR EACH METHOD AND ADVANTAGES AND DISADVANTAGES OF REMUNERATION METHODS a) Time Based Schemes (Straight Time) • The simplest form of a time-based remuneration scheme is a day rate system. • In a day rate system, workers would be paid for the number of hours worked at a basic rate per hour. • It is useful where the output level is beyond the control of the worker. Wages are calculated using the following formula: Mr. Krishna worked 40 hours in the first week of January. The rate per hour is RM2. What will his gross wage be? Solution Example 3.3: EXAMPLE 3.3 WAGES = HOUR ATTENDED X RATE OF PAY PER HOUR Gross wage = Hour attended x Rate of pay per hour = =
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 61 Advantages of time rate: a) Simple and easily method to reward the workers. b) The maintenance of work records is also very simple as only the hours worked needs to be recorded. The payment of wages is based on the number of hours worked. c) The estimated cost of labour is easily calculated for management purposes. d) With this system in place, the workforce is confident of receiving their wages as long as they present themselves for work. Disadvantages of time rate: a) Productivity of the company is not assured as the target production is not defined. b) Strict supervision is required as the workers are not bound by any production target. c) The quality of products may also suffer as the workers are not individually responsible for their production. Quality control needs to be put in place to check the finished product. d) Inequality of rewarding the workers occurs because they are all paid a flat rate irrespective of their efforts in doing the job. e) Dissatisfaction among hardworking workers may cause them to seek employment elsewhere. When an employee is required to work overtime, he is normally paid a premium rate. If he is paid time-and-a-half, they will receive one and half times his basic wage rate. Hassan works an 8-hour day at a basic wage rate of RM4.00. On a particular day, he worked 10 hours. If overtime is paid at time-and-a-half, calculate his basic wage and the overtime premium. Solution Example 3.4: EXAMPLE 3.4 Basic wage = = RM Overtime Pemium = = RM RM Or; Basic wage = = RM Overtime premium = = RM RM
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 62 b) Piece Rate or Piecework Systems • The wages are paid on the basis of the output produced by each worker. • In a piecework scheme, wage is calculated using the formula: • The piecework system is mostly used for direct workers. A fixed rate is paid for each unit produced. • The worker’s wages depend upon his output and not upon the time he spends in the factory. Advantages: i) Managerial supervision is not much needed for production since each worker assumes responsibility for his own time and output. ii) Higher production reduces overhead costs per unit of output. Disadvantages: i) Quantity increase – lower quality. ii) Dispute about spoiled or sub-standard work. iii) The rate can be fixed too high or too low to start with and it is difficult to change. Zaiana Sdn Bhd pays a piece rate of RM2 for each output produced. Employee A completes 80 units per week, Employee B completes 85 units and Employee C completes 100 units per week. Calculate the weekly wages of each employee. Solution Example 3.5: EXAMPLE 3.5 WAGES = UNIT PRODUCED x RATE OF PAYMENT PER UNIT Employee A = RM x units = RM Employee B = RM x units = RM Employee C = RM x units = RM
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 63 • Piecework Scheme has two methods of calculation: a) Guaranteed minimum rate b) Differential piece rate Guaranteed minimum rate: - Workers are guaranteed a minimum pay rate when performance are lower than normal (under uncontrollable situations). A company set a guaranteed minimum rate of 140 units/week at RM1.00/unit. Productions of over than 140 units / week will be paid at RM1.20/unit. Calculate the total wage received by a worker if his production is: a) 120 units/week b) 150 units/week Solution Example 3.6: Differential piece rate - Wages are paid at different rates which increase according to productions. This scheme provides incentives for workers to improve their skills and increase productions. A company set the following rates for its production workers: First 50 units RM1.00 per unit 51-55 units RM1.20 per unit 56 units and above RM1.50 per unit Ali produces 57 units in a week. Calculate Ali’s wage. EXAMPLE 3.7 EXAMPLE 3.6 a) 120 units x RM = RM b) 150 units x RM = RM
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 64 Solution Example 3.7: c) Individual Bonus Scheme Advantages: a) Increase production. b) Workers become more efficient to get incentives. c) Workers efforts are appreciated and they are motivated to improve work quality. Disadvantages: a) Some schemes are too expensive to operate. b) Difficult to ascertain level of achievement. These schemes are: i) Halsey ii) Halsey Weir iii) Rowan Under this scheme an employee is paid a basic rate per hour. If he completes his work in less than the ‘standard or expected time’, he earns a bonus. Time Saved = Time Standard – Time Taken; or Time Saved = Time Allowed – Actual Time Halsey Bonus Scheme BONUS = ½ x TIME SAVED x BASIC DAY RATE
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 65 The following is the information related to three workers of Murni Limited for the month of June. Salwa Rossa Sally Units produced 180 240 360 Damaged units 8 5 0 Time taken/week 70 hours 65 hours 62 hours Time standard/week 15% more than time taken 20% more than time taken 6% more than time taken Rate per hour RM2.50 RM3.00 RM2.20 Rate per unit RM0.20 RM0.50 RM0.35 Additional information: i) Normal time starts from 8.00 am until 6.00 pm and the workers work 5 days a week. ii) The company decided to pay for the damaged units because the raw materials used were not of high quality. You are required to calculate the total wages received by the workers using the Halsey bonus scheme. Solution Example 3.8: EXAMPLE 3.8
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 66 The formula: Encik Kamil is paid RM1 per hour. Time allowed is 50 hours. The time taken by him is 40 hours. Calculate his basic pay, bonus and his gross wage. Solution Example 3.9: Under this scheme the bonus is calculated as follows: EXAMPLE 3.9 Halsey-Weir Bonus Scheme Rowan Bonus Scheme BONUS = 1/3 x TIME SAVED x BASIC DAY RATE BONUS = TIME TAKEN x TIME SAVED x BASIC DAY RATE TIME ALLOWED/ STANDARD
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 67 Mimi is paid RM2.40 per hour and is given a job which has a standard time allowed of 12 hours. What should be her bonus pay for the job, and total rate of pay per hour if the job takes 9 hours. Solution Example 3.10: Refer to Example 3.8, calculate total wages after bonus scheme of; a) Halsey-Weir Bonus Scheme b) Rowan Bonus Scheme Solution to Example 3.11: a) Halsey –Weir Bonus Scheme EXAMPLE 3.10 EXAMPLE 3.11
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 68 b) Rowan Bonus Scheme Group Bonus Scheme 1. There are many incentive plans in industry which are related to the output performance of an entire group of workers, a department, or even the whole factory. 2. This scheme usually would be used when individual effort cannot be measured and employees work as a team. The scheme is to encourage team spirit in their work. The advantages of group bonus scheme are: i) It increases co-operation among fellow workers. ii) It can reduce accidents, spoilage, waste and absenteeism. iii) It reduces the clerical effort required to measure output and calculate individual bonuses. The disadvantages are if: i) The employee groups demand low efficiency standards as a condition for accepting the scheme. This will lead to lower production. ii) The colleagues may not satisfy with the performance of their friends who not contribute positively to the company. A company has a production standard of 150 units per day. A bonus of RM100 will be paid for every 10% increase in production. A group of 5 workers managed to complete 170 units in a day. Calculate the bonus received by each worker in that group. Solution Example 3.12: EXAMPLE 3.12
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 69 The standard production for Unite Factory is 24 units a day. A group of 10 employees work on the assembly line. For every 20% increase in production a bonus of RM60 will be shared equally by the group. On day 20, 30 units were produced. How much will each member of the group receive? Solution Example 3.13: Profit Sharing Scheme In a profit-sharing scheme, employees receive a certain portion of their company’s year-end profit – the size of the bonus being determined by their position in the company and the duration of their employment. One advantage of the scheme for the company is that it needs to pay only what it can afford out of its actual profits. Some disadvantages of profit-sharing are: a) Employees must wait until the end of the year for a bonus. The company therefore expects a long-term commitment to greater efforts and productivity from its workers without the incentive of immediate reward. b) Factors affecting profit may be outside the control of employees, in spite of greater productivity on their part, and c) Too many employees are involved in a single scheme for it to have a sufficient motivating effect on individuals. EXAMPLE 3.13
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 70 Dania Ltd. operates a profit sharing scheme under a trade union agreement. The agreement stipulates that 20% of the remaining profit after tax and dividends payments will be available for the scheme. The company’s issued share capital at 31st December 2011 is 50,000 ordinary shares of RM1 each. The profit after tax for the year ended 31st December 2011 is RM50,000. The tax rate is 50%. How much profits will be available for the scheme? The dividend per share is 10 cents. Solution Example 3.14: RM RM Profit after tax (-) Dividends Ordinary dividends Profit after tax and dividend Profit sharing scheme = = 3.5 MEASURING LABOUR PRODUCTIVITY AND THE EFFECTS OF LABOUR TURNOVER a) Labour productivity is a measure of efficiency and indicates an organizations effectiveness of utilizing its labour force. b) Cost reduction can be achieved through improved productivity. c) Total unit cost can be reduced with improved productivity. EXAMPLE 3.14 Measuring Labour Productivity
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 71 Kaisara Sdn. Bhd. is a small manufacturing organization with 6 factory workers. Each of the workers is paid RM150 per week. Each worker works a 40-hour week. The supervisor has been given the task to increase production. With so few workers, he is forced to put pressure on his existing workers to increase their productivity. Solution Example 3.15: 1. Labour turnover is the rate at which employees leave a company and are being replaced during a period. 2. Any changing of employees occasions loss to a manufacturer. 3. Labour turnover can be calculated as below as: 4. Labour turnover can be reduced through the following actions: a) Paying attractive remuneration. b) Offering reasonable hours, and good and safe working conditions. c) Creating a healthy relationship between members of the workforce. d) Providing training and employment development opportunities. EXAMPLE 3.15 Labour Turnover (EMPLOYEES LEAVING +EMPLOYEES REPLACE)/2 x 100 (EMPLOYEES AT THE BEGINNING + EMPLOYEES AT THE END)/2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 72 This information is extracted from Evon Company relating its employees for the year ended 2002: The number of employee employed on 1.1. 2002 is 120. During the year, 24 new employees were employed and 18 left. You are required to calculate: a) The number of employees on 31.12.2002 b) Labour turnover rate Solution Example 3.16: Causes of Labour Turnover Avoidable Causes Below are some of the examples of avoidable causes: o Low wages and earning o Unsatisfactory or unsafe working conditions o Bad relations among workers and supervisors o Unsuitable of job o Long working hours o Lack of opportunity for career enhancement Unavoidable Causes o Termination of service due to misbehavior or indiscipline o Retrenchment or lay off due to shortage of resources. o Personal causes o Illness, accident, retirement, or death EXAMPLE 3.16
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 73 o Family relocating to another city o Marriage, pregnancy or childcare problems Cost of Labour Turnover The cost of labour turnover consists of two elements: a) Preventive costs b) Replacement costs Preventive Costs Preventive costs include all those costs which are incurred to prevent workers from leaving the organisation and keeping them satisfied. These are the examples of preventive costs: a) Cost of medical benefits. b) Providing security for employees such as pension schemes. c) Social welfare benefits such as canteen, transport, housing and sports facilities. d) Personnel administration costs incurred for maintaining a cordial relationship with employees. Replacement Costs Replacement costs involve in replacing the employees who have just left the organization. It include the costs which are incurred for the recruitment and training of new workers. Also, they cover costs which arise as a result of wastage, losses, lower production because of less competent and inexperienced new employees. Replacement costs consider the following factors: a) The increase in costs of the personnel department due to the recruitment of new workers. b) The loss of production time as the new workers needs to be given training. c) The inefficiency of new workers and will affect production. d) Costs of breakages of tools and equipment due to inexperienced workers.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 74 QUESTION 1 Below is the information obtained from Melaka Best Sdn. Bhd.’s record for June 2013: Employees Mamat Minah Joyah Number of completed product (unit) 710 660 650 Standard time to complete 1 unit of product (mnt======== (minute) (min(minute(minute) 3.9 mnt 4.8 4.1 Actual time taken (hour) 43 49 47 Wage rate per hour (RM) 8.20 9.10 8.60 You are required to calculate total wages to be received by each employee under the following methods: (a) Halsey scheme (b) Rowan scheme QUESTION 2 The information below extracted from Multicip Factory about 3 workers at production department: Worker Nas Liya Zol Work hour 60 56 65 Wages rate per hour RM 10.00 RM 6.50 10.50 Unit produced : Product X 140 150 95 Product Y 230 156 200 Time allowed (per unit) : Product X 15 minutes Product Y 10 minutes EXERCISES
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 75 From the information above, you are required to calculate the total of wages received by the workers, using the following methods: (a) Halsey – Weir scheme (b) Rowan scheme QUESTION 3 The information below are related to 3 workers at production department in Syarikat Matang Kenanga for the month of July 2012: Worker Kasim Karim Karam Production unit 1850 2900 1800 Actual production hour 70 hours 65 hours 60 hours Time allowed per unit 2.5 minutes 1.5 minutes 2.0 minutes Rate per hour RM 3.10 RM 3.30 RM 2.80 Material cost per unit RM 0.50 RM 0.75 RM 0.59 From the information above, you are required to calculate the total wages earned by each worker, based on the schemes below (use 2 decimal point): (a) Halsey scheme (Kasim & Karim) (b) Halsey-Weir scheme (Kasim & Karam) (c) Rowan scheme (Karim & Karam) QUESTION 4 (a) Define labour turnover? How will you measure it? (b) Explain briefly TWO (2) types of cost associated with labour turnover and give an example for each type. (c) Calculate the number of employee at the end of the period. Department Q Department S Number of employee at the beginning of the period 72 34 The addition of employee during the period 14 9 Number of employees leaving during the period 11 7
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 76 (d) Below are the details of the production from 2 workers of MMM brand of Kilang Pakaian Sukan in a week 3 of March 2010. Saniy Salman Production units 320 360 total working hours (hour) 32 42 Time allowed (hour) 38 48 Rate per hour (RM) 3.00 2.90 Calculate the total wages for each of the worker based on: i. Halsey scheme ii. Rowan scheme iii. Halsey-Weir scheme QUESTION 5 (a) (i) List THREE (3) types of Individual Bonus Scheme. (i) State TWO (2) causes of labour turnover. (b) The following table contains related information of 3 Waterlily Industries workers for the month of December: Ali Auni Anis Unit produce 300 215 210 Damage unit 0 6 8 Time taken/week 50 hours 55 hours 60 hours Time standard/week 4% more than time taken 15% more than time taken 20% more than time taken Rate per hour RM30 RM20 RM25 Rate per unit RM21.50 RM20 RM23 Additional information: i. Normal time start from 9.00am to 7.00pm and the workers works 5 days a week. ii. The factory decided to pay the damage units because the raw materials used were not high quality. iii. No overtime paid for extra time taken.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 3 77 Based on the information above, you are required to calculate bonus pay for each worker using Halsey Bonus Scheme. (c) Based on information in question (b) calculate basic and total pay for each worker. (d) Calculate labour cost per unit for each worker.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 78 CHAPTER 4 THE COST CLASSIFICATION: COSTING FOR OVERHEADS Topic Overview 4.1 Concept and how direct expenses trace to products 4.2 Classification of overhead, production and service departments 4.3 Allocation overhead, apportionment and reapportionment overhead 4.4 Overhead absorption rate and methods 4.5 Overhead or predetermined absorption rates – one rate for one department and one rate for several departments 4.6 Over or under absorption of overhead EXERCISES 4.1 CONCEPT AND HOW DIRECT EXPENSES TRACE TO PRODUCTS 1. Overhead are indirect costs consists of indirect materials, indirect labour and indirect expenses. 2. They cannot be directly charged to units of production. 3. Overhead is divided into production overhead and non-production overheads. Production Overhead Non-Production Overhead Meaning: Indirect cost related to the production or the products of the business. Meaning: Expenses not directly related to the production of cost units or products. Example: Rental of a factory, power of the machinery, building insurance and etc. Example: Selling and distribution overheads, administration overheads and finance overheads.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 79 4. Overhead groups: Overhead Explanation Indirect material Cost of materials which are not traceable to the product being made. Examples include oil and grease used in operating and maintaining machines, soap, automobile supplies and brooms. Materials of small value like glue in shoe-making and nails in furniture trade. Indirect wages Wages paid to factory employees who are not directly involved in production. Examples include supervisors, sweepers, storekeepers, foremen and maintenance inspectors. Indirect expenses Expenses are incurred for the business as a whole. Examples include heat, light, depreciation, rent, rates and insurance. 5. Direct expenses treated as indirect are as follows: a) Small items: For example, glue and nails used in shoe making, oil used in roti canai, thread in garment making, sugar and salt in food ingredients. b) Convenience: Some direct expenses for the sake of convenience are treated as indirect. For example are power, water and electricity. To determine the amount to be charged would require the fixing of a meter in every cost centre so that the reading for power consumption can be taken. 4.2 CLASSIFICATION OF OVERHEAD, PRODUCTION AND SERVICE DEPARTMENTS 1. Overhead costs can be classified into: a) Factory/Production overhead includes all indirect costs incurred by the manufacturing department from the receipt of raw materials until the product is finished and placed in a saleable state until they are sold and delivered. E.g: Indirect factory materials, indirect factory wages, insurance of plant, factory rent etc. b) Administration overhead includes all indirect costs incurred in directing and controlling general company policies and programmes for the operation of the manufacturing and selling department of the enterprise. E.g: Office salaries, audit fees, stationary expenses etc.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 80 c) Selling overhead is costs incurred in securing orders. E.g: Advertising costs, salaries and commission to sales representatives etc. d) Distribution overhead is costs incurred from the time the product is completed in the factory until it reaches the customers. E.g: Transport charges and packing costs. 2. Overheads are collected from the main sources such as: a) Material requisition: Indirect materials b) Wage analysis sheet/time sheet: indirect wages c) Plant register: Depreciations d) Invoices: Stationary e) Meter records: Electricity and water 3. Departmentalization of factory overhead means dividing the company into segments called cost centers to which expenses are incurred. 4. A cost center is divisions of the company where cost generating activities are considered to take place. 5. Mainly, there are two types of cost centers: a) Productions department represents a subunit of the company where manufacturing activity takes place. b) Service departments represent cost centers which provide support for the production department. 6. Service department overhead is reapportioned to the production departments. Then the production department overhead is absorbed by the products produced by the departments. 4.3 ALLOCATION OVERHEAD, APPORTIONMENT AND REAPPORTIONMENT OVERHEAD 1. Overheads cannot be charged directly to cost units. They must be shared equally between the cost units. Cost allotment is the distribution of overheads to cost centres or cost units. What is Cost Allotment?
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 81 2. Cost allotment involves: 3. The definition of distribution under cost allotment. COST ALLOCATION Once overheads have been collected the costs can be allocated to cost centres. The overhead can be allocated if caused solely by a particular cost centre and if the exact amount of overhead is known. Cost allocation is the allotment of whole items of cost to cost centres or cost units. (CIMA) COST APPORTIONMENT Cost cannot be allocated directly to a particular cost centre, must be apportioned to the cost centres on a fair basis. Cost apportionment is the allotment to two or more cost centres of proportions of common items of cost on the estimated basis of benefit received. (CIMA) RE-APPORTIONMENT Once the costs have been apportioned to the cost centres (production and service), it is necessary to reapportion the service cost centre costs to production cost centres. Only production departments or cost centres are directly involved in manufacture of cost units. Allocation Absorption Re-apportionment Apportionment Primary Distribution Secondary Distribution
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 82 4. The choice of an appropriate basis is to ensure that cost apportioned to the cost centers reflects the benefit received. However, it must be pointed out that no matter how “appropriate’ a basis is chosen, there always remain another acceptable basis. Hence the choice of the most appropriate is subjective. BASIS OVERHEAD COSTS TO WHICH THE BASIS APPLIES Area (taken up by each cost centre) Rent, rates, heating, light, depreciation of buildings, building service and fire insurance. Book value or capital value Depreciation of machinery, equipment, buildings and vehicles, and insurance Number of employees Supervision, canteen expenses, welfare, wages, cost office expenses, administration, payments under profit sharing schemes and employer’s liability. Technical estimates Power consumption. Volume space Heating, lighting and building depreciation. Number of material requisitions Materials handling and material storage. Weight of materials Materials handling. Direct allocation Power (where meters are used). Value of machine serviced or horse power of machine Maintenance workers. Value of stock Fire insurance.
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 83 Cost Allocation and Apportionment (Primary Distribution) The Elegant Company has four departments. A, B and C are the production departments and D is a servicing department. The actual costs for a period are as follows: RM Indirect materials: Production department A B C 950 1,200 200 Servicing department D 1,500 Indirect wages: Production department A B C 900 1,100 300 Servicing department D 1,000 Rent 2,000 Repair 1,200 Depreciation 900 Light 200 Supervision 3,000 Insurance 1,000 Employee’s insurance 300 Power 1,800 The following data are also available in respect of the four departments: Dept. A Dept. B Dept. C Dept. D Area( sq. feet) 150 110 90 50 No. of workers 24 16 12 8 Total wage RM8,000 RM6,000 RM4,000 RM2,000 Value of plant RM24,000 RM18,000 RM12,000 RM6,000 Value of stock RM15,000 RM9,000 RM6,000 - EXAMPLE 4.1
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 84 You are required to apportion the above costs to the various departments on the most equitable method. Solution Example 4.1: Departments Items Basis Total A B C D Allocation: Indirect materials Indirect wages Total Allocation Apportionment: Rent Repairs Depreciation Light Supervision Insurance Employees Power TOTAL OVERHEAD
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 85 The Klagan Hotel is developing a cost accounting system. Initially it has been decided to create three (3) cost centres: Residential and Catering deal directly with customers whilst Maintenance is an internal service cost centre. The following overhead details have been estimated for the next period: Residential Catering Maintenance Total Overhead costs (RM): Indirect expenses 30,500 36,000 14,500 81,000 Insurance on equipment 14,000 Air-conditioning and lighting 18,500 Depreciation on equipment 37,500 Total 151,000 Other data: Floor area (m2 ) 2,750 1,350 300 4,400 Value of equipment (RM) 350,000 250,000 75,000 675,000 Prepare an overhead analysis sheet for Klagan Hotel showing clearly allocations and apportionments to each cost centre. (round up your figures to zero decimal point) Solution Example 4.2: Production Department Service Department Items Basis Total Residential Catering Maintenance Indirect expenses Total Allocation Insurance on equipment Air-conditioning and lighting Depreciation on equipment Total EXAMPLE 4.2
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 86 Re-apportionment (Secondary Distribution) 1. The overhead costs of service departments should be further assigned to production departments. This is due to the reason that service departments do not themselves manufacture anything. 2. The reassignment or reapportionment of service departments overhead to production departments is termed as secondary distribution. 3. There are mainly two methods to deal with secondary distribution, i.e Continuous/Reciprocal Method and Direct Method. a) Continuous/Reciprocal Method In this method, the process of apportioning service departments overhead is continued until the figure becomes immaterial. Assume the following data for A. Azim Industries: The departmental distribution (primary distribution) summary has the following totals: Production Department Service department A B C X Y 800 700 500 234 300 The expense of the service departments is charged out on a percentage basis as follows: A B C X Y X 20% 40% 30% - 10% Y 40% 20% 20% 20% - You are required to show the reapportionment of overhead using continuous method. EXAMPLE 4.3
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 87 Solution Example 4.3: Continuous Method A B C X Y Overhead Costs (Primary Distribution) 800 700 500 234 300 b) Direct Method This is the most common method of allocating service department costs to production departments because of its mathematical simplicity and ease of application. It involves allocation of service department costs directly to producing department and ignores any services provided by one service department to another. Assume the following data for A. Azim Industries: The departmental distribution (primary distribution) summary has the following totals: Production Department Service department A B C X Y 800 700 500 234 300 EXAMPLE 4.4
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 88 The expense of the service departments is charged out on a percentage basis as follows: You are required to show the reapportionment of overhead using direct method. Solution Example 4.4: Direct method A B C X Y Overhead Costs (Primary Distribution) Airis Sdn. Bhd. has two production departments, A1 and B2, and two service departments, store and canteen. The maintenance department and canteen give service to the production departments. The overhead costs for Airis Sdn. Bhd. in total are as follows: Overhead Cost RM Rent and rates 80,000 Power 15,000 Insurance of the building 22,000 Insurance for machinery 12,000 A B C X Y X 20% 40% 30% - 10% Y 40% 20% 20% 20% - EXAMPLE 4.5
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 89 There are also costs that have been allocated directly to the departments: Departments RM Department A1 12,000 Department B2 10,000 Maintenance 5,000 Canteen 3,000 The following related information is also available: Total Department A1 Department B2 Maintenance Canteen Value of machinery RM400,000 RM200,000 RM150,000 RM50,000 - Floor area (sq. metres) 40,000 15,000 12,000 8,000 5,000 Number of employees 100 40 35 15 10 Machine hours 100,000 60,000 40,000 - - Power usage 100% 50% 35% 10% 5% You are required to allocate and apportion the overhead costs. 4.4 OVERHEAD ABSORPTION RATE AND METHODS After all service departments’ overhead costs have been apportioned to production departments, the next step is to spread factory overhead to different products or job produced. This is termed as ‘overhead absorption’. Methods of Absorption 1. Some method of overhead absorption has to be applied to absorb factory overhead to individual products or jobs on some equitable basis. 2. The rate, which is used to charge overhead costs to the products or jobs, is known as absorption rate. The following are the generally recognized methods of absorption rates:
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 90 3. The activity level that should be used are based on items such as direct labour hours, direct labour costs, machine hours, direct material costs and units of output. 4. Selection of the base should be one which corresponds most closely with the total overhead costs of each department. The following data was collected for MM factory: Production overheads RM10,000 Direct labour hours 2000 hours Direct labour costs RM8,000 Machine hours 4000 hours Direct materials costs RM5,000 Production 2500 units Calculate OAR using the following bases: a) Direct labour hours; b) Direct labour costs; c) Machine hours; d) Direct material costs; and e) Production output. OVERHEAD ABSORPTION RATE (OAR) = PRODUCTION OVERHEAD ACTIVITY LEVEL EXAMPLE 4.6
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 91 Solution Example 4.6: a) OAR,DLH = Overhead Direct labour hours b) OAR = Overhead Direct labour costs c) OAR = Overhead Machine hours d) OAR = Overhead Direct material costs Production output e) OAR = Overhead
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 92 4.5 OVERHEAD OR PREDETERMINED ABSORPTION RATES – ONE RATE FOR ONE DEPARTMENT AND ONE RATE FOR SEVERAL DEPARTMENTS 1. Predetermined absorption rate (POR) is an estimate used to absorb overhead before actual overhead is incurred. 2. Predetermined absorption rates often to be used for following reasons: a) Actual costs are not known until the end of a costing period. To wait until the end of that period and then to absorb overheads on the basis of the actual cost will not only be inconvenient but will also be too late to determine the selling price or too late for planning and control. b) If activity is seasonal, using actual costs will produce fluctuating unit costs. c) The use of POR enables product costs to be calculated as soon as production is completed. 3. POR is produced by: a) Estimating the total overhead for the forthcoming period. b) Estimating the level of activity for the same period. c) Dividing the estimated total overhead by the estimated level of activity. 4. The formula: The following information is available on Bolkiah Engineering Ltd. Budgeted production overhead RM45,000 Budgeted direct material cost RM15,000 Budgeted direct labour cost RM45,000 EXAMPLE 4.7 PREDETERMINED OVERHEAD ABSORPTION RATE (POR) = BUDEGETED PRODUCTION OVERHEAD FOR THE YEAR BUDGETED PRODUCTION/ACTIVITY LEVEL
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 93 Budgeted labour hours 30,000 Budgeted machine hours 22,500 Budgeted output (units) 3,000 During a particular period, a job was produced and details are as follows: Material cost RM10 Labour cost RM25 Labour hours 15 Machine hours 7.5 Calculate the: a) Various methods of overhead absorption, and b) Overhead absorbed by the job under each of the overhead absorption methods calculated in part (1). Solution Example 4.7:
DPA20193 BASIC COST ACCOUNTING, CHAPTER 4 94 4.6 OVER OR UNDER ABSORPTION OF OVERHEAD 1. Over or under absorption of overheads is the difference between overhead absorbed and actual overhead incurred. 2. There will be over or under absorption if there are differences between: a) Total overhead incurred and the estimate. b) Output and the estimate. c) Hours worked, material cost or labour cost and the estimates. Situation of under or over absorb 3. Under absorbed means that product cost has been understated and profit will be overstated. In contrast, when the overhead is over absorbed, it means that product cost has been overstated and profit will be understated. Although it is impossible to avoid under or over absorption of overheads, the company can minimize the amount of adjustment necessary at the end of the period. 4. Under or over absorbed overheads is a balancing figure and is transferred to the under or over absorption overhead account. At the end of the accounting period, under absorbed overheads will be written off in the income statement and over absorbed overheads will increase the profit in the income statement. 5. Step to calculate the over or under absorption of overheads. Over absorption of overheads Absorbed overheads > Actual overheads Under absorption of overheads Absorbed overheads < Actual overheads