DPA30073 pg. 1 Edited :PKBI/JPPKS/DAT
DPA30073 pg. 2 Edited :PKBI/JPPKS/DAT CHAPTER 1 : INTRODUCTION TO COST ACCOUNTING 1.0 Introduction Cost and management accounting is largely concerned with ascertaining, analysing and reporting of cost and revenue information for planning, control and decision making. 1.1 Identify the concept, principle, methods and techniques of cost 1.1.1 Define the cost accounting 1.1.2 Explain the importance of cost accounting to management • Costing aims at providing management with cost information for the purposes of planning and control. • Costing also helps management make policy decisions • Cost information provided may help management decide whether to buy the component from outside or to make the component internally. • Costing principles are applied to all kinds of businesses whether big or small, commercial or non-commercial (such as government departments and social activities). • Costing facilitates estimates of price. Where a business is asked to submit quotations, it will be necessary to quote a price based on estimates. • The main purpose of a costing system is to provide cost information. The information must be available speedily and accurately. • An efficient costing system will enable the following to take place: a. Reveal unprofitable operations, profitable of activities, waste, loss and inefficiencies. b. Make cost comparison possible c. Facilitate planning and control decisions. d. Make cost control easier e. Identify weakness enabling remedial actionsto be taken, and f. Provide a basisfor price fixing Cost accounting is the process of measuring, analyzing and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization. Cost accounting is defined by the Chartered Institute of Management Accountants (CIMA) as “the application of accounting and costing principles, methods and techniques in the ascertainment of costs and the analysis of savings and/or excess as compared with previous experience or with standards”. Cost accounting is, therefore, a method of ascertaining costs with the ultimate aim to plan and control the operations of a business.
DPA30073 pg. 3 Edited :PKBI/JPPKS/DAT 1.1.3 Differences between cost accounting and financial accounting Standpoint Cost Accounting Financial Accounting Definition Define as the application accounting and costing principles, methods and techniques in the ascertainment of costs and the analysis of savings and/or excesses as compared with the previous experience or with standards. Define as the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. Nature Classifies, records, present and interprets in a significant manner the material, labour, overhead costs involved in manufacturing and selling each product, job and services. Classifies, records, presents and interprets in terms of financial character and provides the figures for the preparation of the financial statements. Primary users of information The users are internal users. They are members of the management. The users of Financial Accounting statements are mainly external to the business enterprise. External users include shareholder, creditors, financial analyst and government authorities. Regulatory requirements No mandatory rules or regulations needed for preparing reports Statutory requirements needed in reporting requirement such as Company Act, FRS and GAAP when preparing Financial Statement Reporting Involves continuous system of reportingmanagement reports are prepared weekly or on monthly basis The ‘generally accepted accounting principles’ are important and used extensively. 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 monetary unit. Report frequency Data and statements are prepared whenever needed. Reports may be prepared on a monthly, weekly or even daily basis. Data and statement are developed for a definite period, usually a year @ semi annually. Time dimension Concerned with future information as well as past information Reports what has happened in the past in an organization. Governance Management report presented to board members on a monthly basis. Audited accounts singed and filed annually Cost accounting is vitally important to an organization because cost information and planning and control decisions must keep pace with increasing changes in industry, trade and commerce.
DPA30073 pg. 4 Edited :PKBI/JPPKS/DAT 1.1.4 Discussthe basic cost concepts of costing principles: a. Cost unit • A business is set up to produce or to provide a service. • The quantitative unit of a product or service in relation to which costs can be ascertained / related. • Examples: jobs, contracts, kilograms of material, kilowatt hours passenger miles, cost per patient, and cost per book Cost Units Uses Kilowatt hours To ascertain cost of electricity Litres To ascertain cost of liquid Consulting hours To ascertain the cost of service rendered b. Cost Centre • Costs may relate to sections or parts of a business. • It is, therefore, necessary to provide the business into sections called cost centres. • The CIMA defines a cost centre as “a location, person, oritem of equipment (or group of these) in respect of which costs may be ascertained and related to cost units”. • Set up to help the cost accountant in ascertaining costs and to help him control costs. • Charged with its cost, for example, a salesman with the salesman’s commission. • A cost centre may be: i. A location, for example,sales area, ii. A person, for example,salesman, iii. An item of equipment, for example, delivery van. iv. Cost centres may be classified into: Production Cost Centre Where production takes place Example: Production cost centre of furniture manufacturing is: • Machining Department • Assembling Department • Finishing Department` Which provides services to other cost centres
DPA30073 pg. 5 Edited :PKBI/JPPKS/DAT c.Cost object • Anything for which a cost measurement is desired • Suppose you’re a manager at BMW’s automotive manufacturing plant in Spartanburg, South Carolina. Can you identify some of the plant’s cost objects? d.Conversion costs • All manufacturing costs other than direct material costs. • Represent all manufacturing costs incurred to convert direct materials into finished goods. e.Opportunity costs • The contribution to operating income that is forgone by not using a limited resource in its next-best alternative use. • For example, the (relevant) cost of going to school for a BISA (Business Informatics, Systems and Accounting) in accounting degree is not only the cost of tuition, books, lodging, and food, but also the income sacrificed (opportunity cost) by not working. However, the estimated Service Cost Centre Example: Stores Maintenance Production Planning and Personnel Canteen Process Cost Centre Where a specific process or a continuous sequence of operations take place Example: Refining Process Mixing Process Cooking Process Examples of Cost Objects at BMW Cost Object Illustration Product A BMW X6 sports activity vehicle Service Telephone hotline providing information and assistance to BMW dealers Project R&D project on enhancing the DVD system in BMW cars Customer Herb Chambers Motors, the BMWdealerthat purchases a broad range of BMW vehicles Activity Setting up machines for production or maintaining production equipment Department Environmental, health, and safety department
DPA30073 pg. 6 Edited :PKBI/JPPKS/DAT future benefits of obtaining a BISA in accounting (such as a higherpaying career) will exceed these out of pocket and opportunity costs. f.Incremental costs • The additional total cost incurred for an activity. • The amount by which cost differs under two alternatives of action. • Example: The incremental cost of making DVD players is the additional cost of RM15,000,000 that The Soho Company will incur if it decides to make DVD players. g.Replacement costs • The amount of money a business must currently spend to replace an essential asset like a real estate property, an investment security, a lien, or another item, with one of the same or higher value. • Sometimes referred to as a “replacement value”, a replacement cost may fluctuate, depending on factors such as the market value of the asset, and the expenses involved in preparing assets for use. • Insurance companies routinely use replacement costs to determine the value of an insured item. • Replacement costs arelikewiserituallyusedby accountants,whorely on depreciation to expense the cost of an asset over its useful life. • The practice of calculating a replacement cost is known as “replacement valuation”. h.Sunk costs • Past costs which are unavoidable and cannot be changed no matter what action is taken. • Costs of resources already acquired and are unaffected by t h e choice between the various alternatives. • Irrelevant for decision making as they do not affect future costs and cannot be changed by any current or future action. • Example: Depreciation 1.2 Identify the concept, principle, methods and techniques of cost 1.2.1 Describe the accumulation and assignment of costs for different function Cost accumulation involves identifying, measuring and recording cost information whereas cost assignment is about assigning costa to cost objects. The term ‘cost’ is simply the expenditure incurred in producing a product or providing a service. A cost object is any item, product or activity for which a company wants to ascertain the cost. The cost
DPA30073 pg. 7 Edited :PKBI/JPPKS/DAT and management accounting system is responsible for classifying and assigning costs to objects. Prepare statement of cost The cost statement is prepared usually to present the detailed costs of total output during a certain period. It is not based on a double – entry framework. It provides information relating to cost per units at different stages of the total cost of production or at a different stages of completion of the total cost of production or at a different stages of completion of the product. The format of statement of cost as follows: Name of Company The Statement of Cost for The Year Ended………… RM RM RM Raw Material : Opening Stock XXX + Purchase XXX + Carriage inward XXX (-) Return outward (XXX) XXX (-) Closing Stock (XXX) Cost of raw material consumed XXX Direct wages XXX Direct expenses : Rental of specific machine XXX Royalty XXX XXX PRIME COST XXX + Manufacturing Overhead: Depreciation of machinery / plant etc XXX Insurance of factory XXX Salary of factory engineer XXX Power supply XXX General expenses of factory XXX Indirect raw material / wages XXX Rent and rates of the factory XXX XXX + Opening stock of Work in Progress XXX (-) Closing stock of Work in Progress (XXX) PRODUCTION / MANUFACTURING COST XXX
DPA30073 pg. 8 Edited :PKBI/JPPKS/DAT + Administration Overhead: Depreciation of office equipment / furniture / fittings etc XXX Salary of office clerk / manager XXX Stationery XXX Office insurance XXX Office rent and rates XXX Bank charge XXX Interest on loan XXX Office general expenses XXX XXX + Selling and Distribution Overhead: Advertising XXX Promotion XXX Salesman commission XXX Salary of lorry / van driver XXX Depreciation for lorry / van XXX Other expenses for lorry / van XXX XXX + Opening stock of Finished Goods XXX (- ) Closing stock of Finished Goods (XXX) TOTAL COST XXX + Profit / (-) Loss XXX TOTAL SALES XXX Figure 1.2.1 : Format of statement of cost Example 1: Emir Enterprise submits the following information on 31st December 2023: RM Sales for the year 275,000 Inventories at the beginning of the year: Finished goods 7,000 Work in progress 4,000 Purchase of the materials 110,000 Materials inventory: Beginning 3,000 Closing 4,000 Direct labour 65,000 Factory overhead was 60% of the direct labour cost Inventories at the end of the year: Work in progress 6,000 Finished Goods 8,000 Other expenses for the years: Selling expenses 10% of sales
DPA30073 pg. 9 Edited :PKBI/JPPKS/DAT Administration expenses 5% of sales You are required to prepare a statement of cost. Solution to Example 1: Emir Enterprise Statement of Cost of for the year ended 31st December 2022 RM RM Raw materials : Opening stock 3,000 + Purchases 110,000 (-) Closing stock (4,000) 109,000 Direct labour cost 65,000 PRIME COST 174,000 Manufacturing Overhead (60% x RM65,000) 39,000 213,000 + Opening stock of Work in Progress 4,000 (-) Closing stock Work in Progress (6,000) MANUFACTURING COST 211,000 Administration expenses (5% x RM275,000) 13,750 Selling Expenses (10% x RM275,000) 27,500 252,250 Add: Finished Goods (beginning) 7,000 Less: Finished Goods (closing) (8,000) TOTAL COST 251,250 Profit 23,750 Sales 275,000 1.2.2 Explain cost accumulation for the purpose of stock valuation and profit reporting a. Product cost • Cost identified with goods purchased or produced for resale. • In manufacturing firm, this cost is attached to the product and is included in the stock valuation (inventory evaluation). • Example: Manufacturing cost b. Period cost • Cost that is not attached to the product and is identified with a specific time interval. • Not included in the inventory evaluation • Treated as an expenses in the period the cost is incurred • Example: Non-manufacturing cost 1.2.3 Discuss the cost accumulation for the purpose of decision making by using high-low method
DPA30073 pg. 10 Edited :PKBI/JPPKS/DAT a. Fixed costs • These are costs that will not change over a given range of activity (volume) and within a given period of time. Costs that remain constant in total amount regardless of changes in activity / production level. The total fixed costs do not increase as activity increases. • Examples: Insurance, depreciation , director’s salary, rental of premises and plant manager’s salary. • Since fixed cost relates to a time span, it is also referred to as period cost. • For example, annual depreciation on a vehicle depreciated on a straight line basis remains fixed regardless of the frequency of use during the year. • A director’s salary is fixed each month regardless of the number of hours he puts into his work. b. Variable costs • These are costs that vary / change in direct proportion to changes in the level of activity (volume of production). • If a factory shuts down and stops production completely, no variable costs will be incurred. • Example: o Direct materials (flour in bread), o Direct wages (payment to production employees for time spent working), o Direct expenses (maintenance costs of production machine and petrol consumption by vehicles). • The total variable costs increase as activity (number of units) increase.
DPA30073 pg. 11 Edited :PKBI/JPPKS/DAT c. Semi-variable costs • These are costs that contain both fixed and variable costs. • The costs are not perfectly fixed or perfectly variable. • Costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at critical activity levels. • Telephone costs, for instance, contain a fixed sum of rental for a period, say one month, and variable costs for metered calls. • Examples: Electricity and Telephone Bills. • The semi-variable cost is made up of a fixed and a variable cost element. 1.2.4 Explain cost accumulation for the purpose of planning and control a. Controllable costs • Managed costs • Costs that are influenced by the decisions or actions of a manager • For example, shut down cost such as retrenchment salaries • Another example is labour cost can be controlled by managers for its efficiency, overtime etc. b. Non-controllable costs • Uncontrollable costs
DPA30073 pg. 12 Edited :PKBI/JPPKS/DAT • Costs that are not influenced by the decisions or actions of a manager • For example, increased cost of raw material due to inflation.
DPA30073 pg. 13 Edited :PKBI/JPPKS/DAT TEACHING AND LEARNING ACTIVITY : PRACTICAL SESSION TOTAL : 3 QUESTIONS 1. The following are the information extracted from Cahaya Maju Company books for the year ended 31st December 2023. RM Opening stock: Raw materials 2,300 Finished goods 4,860 Works in progress 2,500 Purchased of raw materials 68,700 Direct wages 40,200 Indirect wages 8,900 Power and electric 4,600 Insurance : Factory 1,556 Office 1,244 Rent : Factory 6,667 Office 5,333 Machinery expenses 1,400 Manufacturing general expenses 980 Depreciation: Plant and machinery 3,600 Office equipment 1,200 Sales and distribution expenses 6,800 Import duty on raw materials 1,000 Royalties 3,000 Additional Information : a) Closing stock : Finished goods RM4,450 Raw materials RM2,880 Work in progress RM3,000 b) Power and electric expenses are to be portioned to office and factory at the ratio of 2:3. c) Accrual expenses: Sales and distribution expenses RM200 Direct wages RM150 You are required to prepare statement of cost for the Cahaya Maju Company for the year ended 31 December 2022.
DPA30073 pg. 14 Edited :PKBI/JPPKS/DAT 2. Ikhwan Rahman Co. is a company produced baby care products. The following extracted from the company’s book as at 31 December 2022. RM Purchase of raw materials 13,000 Direct wages 10,000 Factory’s salaries 6,000 Royalty 12,500 Carriage inward for raw materials 6,000 Factory rental 1,000 Electricity and power 2,500 Stock at 1/1/2022 : Raw materials 2,000 Finished goods (4,000 units) 1,100 Work in process 3,300 Stock at 31/12/2022 : Raw materials 2,300 Finished goods (6,250 units) 1,000 Work in process 7,250 Promotion expenses was RM0.30 each for unit sold which is 25,000 units had been produced during the year. Royalty was paid based on unit produced. You are required to : i) prepare Cost Statement for the year ended 31 December 2004 ii) calculate the profit if selling price was 500% on the purchase of raw materials. 3. From the information given below calculate the: a) prime costs b) production cost c) total production costs RM Production manager’s salary 30,000 Wages and salaries of employee (70% is direct labour) 100,000 Production royalties 30,000 Haulage costs on raw materials bought 1,000 Carriage inwards on raw materials 2,000 Hire of computers for production control 10,000 Depreciation : plant and machinery 15,000 Depreciation : factory building 20,000 Canteen costs (60% used by factory workers) 15,000 Interest on loan 1,000 Salesmen’s salaries and commission 10,000 Traveling expenses 2,000 Other factory indirect expenses 10,000 Salary of store clerks 5,000 Salary of costing clerks 8,000
DPA30073 pg. 15 Edited :PKBI/JPPKS/DAT CHAPTER 2: THE COST CLASSIFICATION 2.0 Introduction Cost accumulation involved identifying, measuring and recording cost information whereas cost assignment is about assigning costs to cost objects. The term cost is simply the expenditure incurred in producing a product or providing a service. 2.1 COSTING FOR MATERIALS AND STORE ORGANIZATIONS • Materials are supplies purchased from outside sources which are used to manufacture products for sale. • Materials are classified as direct materials or indirect materials. • Raw materials must be available and must be acquired before production can begin. • They have to be ordered, received, stored, issued and controlled continuously. 2.1.1 Describe the materials control • The current emphasis in material management is materials control. • This is because in many organizations, materials constitute a large part of the total cost of a product and large sums of money are invested in materials. • Management is aware that their businesses have a greater opportunity for increased profits by reducing material costs. • The important areas are discussed below: Material • Savings in material • Reduction in cost • Increase in profit • Efficient purchasing • Control of material quality • Effective stores control • Determining appropriate issue price • Timely report • Keeping records and systematic accounting • Reducing loss of material • Applying cost management techniques – JIT, etc. The figure above shows the elements in material management in order to achieve savings, reduce costs and increase profits. ⚫ Objectives of material control includes ensuring: ◼ Material of right quality is purchased in the right quantity, at the right place and time ◼ Funds allocated for materiall investment are porperly utilized ◼ Ever ready supply of material when required ◼ Proper utilization of material to avoid wastage ◼ Proper storage of material ⚫ The following should be carried out in ensuring there is proper material control taking place:
DPA30073 pg. 16 Edited :PKBI/JPPKS/DAT ◼ Materials of appropriate quality and specificatin are purchased only when required and with proper authorization ◼ Supplier is chosen based on ability to give an appropriate price, quality and prompt delivery ◼ Materials undergo proper inspection upon receipt ◼ Provide appropriate storage facilities and carry regular physical stocktaking on stock levels ◼ Direct material used in production is charged based on appropriate and consistent pricing basis ◼ Indirect material should be charged to the correct cost centre and treated as overheads ◼ Documentation, accounting system anda data controls’ systems at each stage should be well designed and effective ◼ Stocktaking must be well organised to ensure stocks’ qualities are available when required ⚫ Material control procedures involve: ◼ Procurement / Purchasing of materials ◼ Receipt of materials ◼ Storage / Stock-keeping of materials ◼ Stock control ◼ Issuance (consumption) of materials ◼ Stock valuation 2.1.2 Explain purchasing department’s functions, purchasing procedure, storing control and raw material issuing procedure Purchasing Department’s Functions • Large sums of money are invested in the purchase of materials. • It is therefore important that there should be an efficient purchasing procedure and a sound system of materials control. • An organization must ensure that materials of the right quality in the right quantity are purchased at the right time and at the right price. • The purchasing department is responsible for the purchasing activities. • Purchasing begins when the storekeeper requiring materials prepares a purchase requisition asking the purchasing department to purchase the materials. • Other than the storekeeper, other responsbile people, such as departmental heads, can ask the purchasing department to purchase materials for new products or materials that are not stocked. • The principle is that a purchase requisition should be drawn up by the person who is closely familiar with the current stock situation and future needs of the materials requested. • A well organised buying department is essential for the efficient fulfilment of the purchasing function. • The person at the head of this department should have an intimate knowledge and experience of the particular industry and the class of materials and stores dealt in, and must possess sound knowledge of finance and efficient business methods.
DPA30073 pg. 17 Edited :PKBI/JPPKS/DAT Purchasing Procedure Figure:Material Control Cycle Storing Control • Stores control begins from the moment material are received by the storekeeper. • An efficient storekeeeping is essential to ensure: o That too much stock is not held as this would mean too much capital is tied up unnecessarily and increased costs of storage o That too little stock is not held as this will result in production hold-ups due to insufficient stock o That materials can be protected against pilferage = __________ or deterioration = __________ as this may result in losses o That materials can be received and issued speedily so that production is not held up o That the materials can be located speedily. This in turn requires the materials to be classified and cooled properly so that wrong materials are not sent to production. ⚫ Materials should be properly kept and organised by store department to prevent losses. ⚫ The responsibility lies on the storekeeper. ⚫ Storekeeping includes the following activities: Procument department - issues PO to selected supplier Supplier-sends goods and DO to the organization Good receipt and inspection department issues GRN and sends goods and GRN to stores Storage-storekeeper issues materials to production and raises MRN when ROL is reached Stores control department - raises and issues PRN Costing and finance Department Production Department
DPA30073 pg. 18 Edited :PKBI/JPPKS/DAT ◼ Efficient and speedy issue of materials. ◼ Receipt of parts and materials from supplier and from production. ◼ Organizing storage in logical sequence to ensure items can be speedily snd easily identified ensuring for efficient storage space utlization. ◼ Organizing stocks’ checkc to enable correct figures be provided when required. ◼ Protect items from damage or deterioration. ◼ Securing stock from pilferage = _______________, theft and fire. Raw Material Issuing Procedure ⚫ Issue of materials must be appropriately authorized, recorded and charged to appropriate cost centres. ⚫ Done by Material Requisition Form (MRN) that contains ◼ The quantity requested and issued. ◼ Part No ◼ Description ◼ Job or Centres to be charged. ◼ Authorization ⚫ MRN is prepared by the person or department which request for the material. ⚫ If the goods are returned back to the store, the Material Returned Note has to be prepared and kept by the store and hence, update the store records. 2.1.3 Determine stores control procedures for material using Economic Ordering Quantities (EOQ), inventory control levels and inventory turnover ratio o Economic Ordering Quantitities (EOQ) o Enables an organization to control investments in materials o To determine how much material should be ordered o The quantity which is the most economic to order o Enables us to arrive at the order size that will minimise the total cost of stock, that is carrying costs and holding costs. Formula: EOQ = √ CH D = total annual demand for material during a given period or the annual quantity used Co = costs of placing and receiving an order CH = the annual cost of holding/carrying one unit of material Other Terms: No of orders (D / Q) How many times orders are made in a year Average Stock (Q / 2) Quantity Ordered / 2 Average Stock Value (Q / 2 X CU) Average Stock X Cost per Unit Annual Ordering Cost (Co X D/Q) Cost per Order X No of Order Annual Storage Cost (Cs) Storage Cost (%) X Average Stock Value Or
DPA30073 pg. 19 Edited :PKBI/JPPKS/DAT Storage Cost Per Unit X Average Quantities o At reorder level, stock will be zero and when replenished the stock will be at the maximum level, Q. o At constant demand average sock is Q / 2. o The cost of carrying the average stock is Q/2 X C. o If the total annual demand is D and the order quantity is Q then the number of orders for stock in a year will be D/Q. o If the cost per order is 0 then the total ordering costs will be D/Q X 0. o The EOQ model assumes that the total costs of having stock equals the total carrying costs plus total ordering costs, that is: Total Cost = (Q/2)C + (D/Q)0 o EOQ model is based on the following assumptions: ▪ Demand is constant ▪ Carrying and ordering costs are constant ▪ Unit price is constant ▪ Quick delivery ▪ Replenishment is made instantenously o Example: Palmer Products Ltd. is involved in the manufacture of motor cycle parts. The follwing information are available: Material used is 8,000 units Carrying cost is RM1 per unit Ordering cost is RM10 What is the economic order quantity (EOQ), the total carrying costs, the total ordering costs and the total costs? Answers: EOQ = 400 units Total Carrying Costs = RM200 Total Ordering Costs = RM200 Total Costs = RM400 o EOQ is the optimal order size that minimises carrying costs and ordering costs, which mak up total costs of stock.
DPA30073 pg. 20 Edited :PKBI/JPPKS/DAT o Carrying costs are variable costs that include interest on money tied up in stocks, storage costs, insurance, handling costs, rates (tax on property), depreciation and obsolescence. o Ordering costs are fixed costs that include transportation costs, handling costs, receiving costs, production costs and set up costs. o Carrying costs increase as the size and frequency of the orders increase. o EOQ also attempts to eliminate stockout. o Stockout happens because of delays in receiving orders. o Cost of stockoug or running short of stock includes loss of sales and customer goodwill as well as discruption in production. o Thus, a firm may carry additional stock or safety stock. o Safety stok increases the average stock held and thus increases the carrying costs. o A firm may also increase its order to take advanatage of quantity discount. o Discount will reduce the purchase price but may increase the total inventory cost. o When the order quantity increaseds, the carrying costs will increase while ordering cost will decrease. o Therefore, managers must compare the savings due to decrease in purchase price with the increase in total inventory cost. o EOQ concerns itself with the size of the order and the total cost of stock. o Organizations have come to accept that these concerns are insufficient in effective stock management. o They have recognised that benefits can be derived from: ▪ Small but more frequent orders ▪ The quality of material ordered ▪ Timely delivery through good relationships with suppliers Whereby, these benefits can be derived from a policy of just-in-time purchasing. Inventory Control Levels • One of the purposes of stores control is to ensure that there is no risk overstocking or understocking. • Overstocking (excessive stock) leads to high storage cost and inefficient use of capital, which could be used more profitability in other projects.
DPA30073 pg. 21 Edited :PKBI/JPPKS/DAT • Understocking (too little stock) may interrupt the production process, affect sales of the finished goods and hence, loss of customer goodwill. • To avoid such situations, organizations employ a system of stock levels to determine the reorder level and the maximum or minimum quantity to store. Reorder Level (ROL) Maximum consumption X Maximum reorder period ⚫ The level between the maximum and minimum stock levels ⚫ A request for new supplies will be made ⚫ Fixed level after considerations made (the rate of consumption, the time required to obtain new supplies, and the minimum level) ⚫ Objective: To minimise the risk of a stock out Minimum Stock Level ( Buffer Stock / Safety Stock ) = Reorder Level - (Normal Consumption X Normal Reorder Period) ⚫ The lowest quantity to which teh stocks should fall ⚫ Is fixed after considering the rate of consumption, the time required to obtain supplies and normal or average consumption Maximum Stock Level (MaxL) Reorder Level - (Minimum Consumption X Minimum Reorder Period ) + EOQ EOQ will be the amount of inventory which will be ordered when the stock falls to the reorder level. ⚫ The maximum quantity of material that should ever be held ⚫ Is fixed after considering the rate of consumption, the time required to obtain supplies, the EOQ, the risks of loss, deterioration and obsolescence; and storage space. ⚫ It must never exceed without specific management permission. Average Stock Level (Min Stock Level + Max Stock Level) / 2 Or Min Stock Level + 1/2 ROQ ⚫ The number of stock units that the stores department should maintain at any point of time in a specified period of operations. ⚫ In setting stock levels, consideration is given to the two variables which affect: ◼ Usage of materials (issues to production) ◼ Lead Time (the period of time between ordering - internal orexternal, replenishment - when the goods are available for use) ⚫ Example: The following information is available on component X for the month of June: Maximum usage 200 kg
DPA30073 pg. 22 Edited :PKBI/JPPKS/DAT Minimum usage 100 kg Reorder period 2 to 4 months Reorder quantity 400 kg Calculate: (1) The reorder level (2) The maximum stock level (3) The minimum stock level (4) The average stock level Answer: (1) The reorder level = 800 kg (2) The maximum stock level = 1,000 kg (3) The minimum stock level = 350 kg (4) The average stock level = 675 kg Inventory Turnover Ratio ⚫ Turnover of different kinds of materials are compared to find out materials that move slowly. ⚫ There are materials that remain in store for a long time. ⚫ Such materials take up space, tie up capital and deteriorate over a period of time. ⚫ The turnover also indicated how efficiently the stocks are utilised or managed. ⚫ Measures the number of times the average stock is used up during a certain period. ⚫ The formula to compute inventory turnover is: Inventory Turnover Ratio = Cost of Goods Sold / Average Stock Or Cost of material consumed / (1/2 MaxL + MinL) Or Cost of material consumed / (1/2 EOQ + MinL) ⚫ Example: The Statement of Comprehensive Income of a company is as follows: Statement of Comprehensive Income for the year ended 30th June, 2020 (extract) Sales RM18,000 Less: Opening Stock RM2,000 (+) Purchases RM8,000 RM10,000 (-) Closing Stock (RM4,000) Cost of Goods Sold RM6,000 Gross Profit RM12,000
DPA30073 pg. 23 Edited :PKBI/JPPKS/DAT Calculate the stock turnover. Answer: Average Stock = RM3,000 Stock Turnover = 2 times per annum 2.1.4 Record inventory using perpetual and periodic inventory system The Perpetual Inventory System The Periodic Inventory System Quantity counted regularly, for instance, 2 to 3 timesper year and compared to the tok figure in the card. Stock is checked against records at one point in time, for example, semi annually or annually. Continuous stock taking is important. It is a stock recording system whre the stock balance is shown on the record after every stock movement, either receipt or issue takes place. Continuous stocktaking ensures that PIS funcion correctly an minor stock discrepancies are corrected imemdiaely. Advantages: Disdvantages: Reduce loss due to disruption Disruption production routine Determinetehft of high value item that are easily being stolen Need to use stff tht are not familiar with stock, may result error in counting Failure on the system can be detected earlier Discrepancies show up reslted from ongoingproblm, which should be noted earlier No special form on high value item
DPA30073 pg. 24 Edited :PKBI/JPPKS/DAT TEACHING AND LEARNING ACTIVITY: PRACTICAL SESSION TOTAL: 14 QUESTIONS 1. The data below is extracted from Speedy Manufacturing Com. at 30 June 2020. Price of materials RM1.50 per liter Cost of ordering RM250 per order Carrying cost 10% per annum Normal consumption 15,000 liter per week Minimum consumption 12,000 liter per week Maximum consumption 16,000 liter per week Lead time period 2 to 6 week Assume that the company works 50 weeks a year. You are required to calculate: a) Economic Order Quantity b) Re-order level c) Minimum Stock Level d) Maximum Stock Level e) Average Stock Level 2. Palmer Products Ltd. is involved in the manufacturing of motor cycle parts. The following information are available : Material used is 8,000 units Carrying cost is RM1 per unit Ordering cost is RM10 Calculate the economic order quantity (EOQ), the total carrying costs, the total ordering costs and the total costs. Answers: 400 units, RM200, RM200, RM400 3. The following information is available on component ‘X’ for the month of July 2020: Maximum usage 200 kg Minimum usage 100 kg Reorder period 2 to 4 months Reorder quantity 400 kg Calculate : i) the reorder level (Answer: 800 kg) ii) the maximum stock level (Answer: 1,000 kg) iii) the minimum stock level (Answer: 350 kg) iv) the average stock level (Answer: 550 kg)
DPA30073 pg. 25 Edited :PKBI/JPPKS/DAT 4. The following information is available in the books of Khomeini Manufacturing Co. Ltd. Opening stock RM2,000 Purchases RM8,000 Closing stock RM4,000 Calculate the stock turnover. (Answer: 2 times) 5. The following information is available on component ‘Z’ for the month of July 2020: Annual material used is 12,000 units Ordering cost is RM8 Annual carrying cost is RM12 per unit Calculate the economic order quantity (EOQ), the total carrying costs, the total ordering costs and the total costs. Answers: 126 units, RM756, RM761.90, RM1,517.90 6. The following information is available on component ‘Y’ for the month of July 2020 : Material used is 1,800 units Item cost RM10 per unit Ordering cost is RM30 Carrying cost is 15% Calculate the economic order quantity (EOQ), the total carrying costs, the total ordering costs and the total costs. Answers: 930 units, RM697.50, RM696.77, RM1,394.27 7. Premium Food Co. produced new flavour cookies. The following information is available on two main materials used for the product. Material X Material Y Material usage 200 – 800 kg per month 100 – 500 kg per month Annual material usage 2,400 kg 3,600 kg Reorder period 3 – 5 month 2 – 4 month Price RM1.20 per kg RM0.80 per kg Ordering cost RM2 per order RM2.50 per order Carrying cost 20% on material price 25% on material price
DPA30073 pg. 26 Edited :PKBI/JPPKS/DAT You are required to calculate the following below for material X and Y separately : a) Economic order quantity (EOQ) b) Reorder level c) Minimum stock level d) Maximum stock level e) Stock turnover Answers Material X Material Y (a) Economic order quantity (EOQ) 200 kg 300 kg (b) Reorder level 4,000 kg 2,000 kg (c) Minimum stock level 3,200 kg 1,100 kg (d) Maximum stock level 3,600 kg 2,100 kg (e) Stock turnover 0.7 ~ 1 time / year 2.88 ~ 3 times / year 8. Herbalife Sdn Bhd manufactures health products using various kinds of herbs. Betel leaves are among the raw materials used. The company uses 25 – 40 kilograms of betel leaves per week. The delivery period is between 1 – 3 weeks. A kilogram of the leaves costs RM15. The cost of placing an order is RM11, whereas the storage cost is 8% of the average stock. Annual material usage is 1,800 kg. You are required to calculate the followings for the followings for this material : a) Economic order quantity (Answer: 181.66 kg) b) Re-ordering level (Answer: 120 kg) c) Minimum stock level (Answer: 50.8 kg) d) Maximum stock level (Answer: 276.66 kg) e) Number of orders to be made in a year (Answer: 9.9 ~ 10 times / year) f) If the company decided to order 95 kg of material at a time, calculate the ordering cost and the storage cost that the company would have to bear. (Answer: RM208.42 and RM57) 9. Vroom Sdn. Bhd. Is steel processing company for a construction purposes. The main material added in the process is known as “V 007” which is imported from Taiwan. Below are the details of the material: Average usage 2000 tonnes Minimum usage 1000 tonnes Maximum usage 3000 tonnes Price per unit RM150
DPA30073 pg. 27 Edited :PKBI/JPPKS/DAT Ordering cost RM500 Handling cost 30% Re-order period 1 – 3 months Determine the following: i. Economic Order Quantity (EOQ) (Answer: 730.29 tonnes) ii. How many times the company needs to make an order per year? (Answer: 32.86 ~ 33 times / year) iii. Re-order Level (Answer: 9,000 tonnes) iv. Minimum Stock Level (Answer: 5,000 tonnes) v. How many times the company needs to make an order per year if the price of the material is increased by 30%. (Answer: New EOQ = 640.51 tonnes; 37.47 ~ 37 times / year) 10. Impiana Sdn. Bhd. is a company that producesshampoo. A material which is AJ-2217 being used in the processing and is bought from supplier from outside country. Following information is related to purchase of those material. Reorder Period Maximum 5 months Average 4 months Minimum 3 months Material Usage Maximum 400 units per month Average 200 units per month Minimum 100 units per month Annual 2,400 units Material price per unit RM0.40 Cost in placing an order RM2.00 Storage cost of material 20% on material price Determine the following: (a) Economic order quantity (EOQ) (Answer: 346 units) (b) Reorder level (Answer: 2,000 units) (c) Minimum level (Answer: 1,200 units) (d) Maximum level (Answer: 2,046 units) 11.State FIVE(5) tasks for a store keeper. (5 marks) ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ______________________________________________________________________
DPA30073 pg. 28 Edited :PKBI/JPPKS/DAT 12.List FIVE (5) advantages of centralised store. (5 marks) ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ______________________________________________________________________ 13. List FIVE (5) objectives of good system of material control. (5 marks) ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ______________________________________________________________________ 14. The Big Cup Company has produced a new flavoured drink. The following information is the use of raw materials for this product. Normal Usage 100 lites per day Minimum Usage 60 litres per day Maximum Usage 130 litres per day Reorder period 20 - 30 days Reorder quantity (EOQ) 2,100 litres You are required to calculate: (i) Reorder level (Answer: 3,900 litres) (ii) Minimum stock level (Answer: 1,400 litres) (iii) Maximum stock level (Answer: 4,800 litres) (iv) Average stock level (Answer: 2,450 litres) (v) The monthly requirement for an item is 1,000 kg each consisting RM6.00 per kg. Every order costs RM200 per order and storage charges are 20% of the average inventory per annum. Based on the information given, you are required to calculate the Economic Order Quantity (EOQ). (Answer: 2,000 units)
DPA30073 pg. 29 Edited :PKBI/JPPKS/DAT 2.2 COSTING FOR LABOUR COSTS 2.2.1 Define the direct labour and indirect labour cost Labour ⚫ Is the human factor that converts raw materials into finished product ⚫ Two (2) Types of Labour Cost Direct Labour Cost Indirect Labour Cost ⚫ Wages and remuneration paid for all employees’ effort and skills who directly contribute to the conversion of direct material into saleable products or services ⚫ Wages which cannot be identified with a particular product or service ⚫ Does not directly affect the construction or composition of finished product ⚫ Salaries are treated as overheads Production Output Examples ⚫ Machine operator / Assembler ⚫ Welders ⚫ Assembly line workers ⚫ Paint sprayers ⚫ Carpenter ⚫ Baker ⚫ Tailor Service Product Examples ⚫ Cooks / Chef ⚫ Kitchen helpers ⚫ Food tester ⚫ Nutritionist Production Department ⚫ Foremen ⚫ Supervis ors ⚫ Inspector s ⚫ Forklift and Crane Drivers ⚫ General Worker Service Departments ⚫ Maintenance Workers ⚫ Purchasing Managers ⚫ Storekeeper ⚫ Factory Cleaners ⚫ Security Guards ⚫ Timekeepers ⚫ Machine Cleaners ⚫ Materials handlers ⚫ Shop Clerks ⚫ Service Workers LabourRelated Costs ⚫ Premium paid for shifts ⚫ Overtime ⚫ Holiday Pay ⚫ Group Insurance ⚫ Pension ⚫ Uniform ⚫ Hospital and dental expense 2.2.2 Explain recording and control labour costs ⚫ Time keeping / time recording is a detailed recording of attendance or the time recording of attendance or the time employed on a given job or amount of work done. ⚫ Example: Punch / Clock Card, Thumb Print Machine, Handwritten Time Sheet. ⚫ Objectives of time recording are: ◼ to assist in the preparation of payrolls, and ◼ distribution of labour costs and other cost records. ⚫ Purposes of time recording: ◼ A basis of wage calculation ◼ An analysis of time spent on job ◼ Information for control and planning
DPA30073 pg. 30 Edited :PKBI/JPPKS/DAT 2.2.3 Explain the different types of remuneration method 2.2.4 Calculate the remuneration using the different methods 2.2.5 Explain advantages and disadvantage of various remuneration methods a. Time-based Schemes ⚫ Wages / Salaries are paid based on period of attendance ⚫ Commonly used: ◼ Where the output is difficult to measure (Administrative Function, Repairing Machinery) ◼ When a job of high degree of skill and quality is extremely important (a) Flat Time Rate (Day Rate) ⚫ Workers are paid based on the number of hours they work (rate per hour) ⚫ Illustration Rate / Hour = RM2 / hour Hour Worked = 40 hours Wages = Hours worked X Rate per Hour = 40 hours X RM2 = RM80 Advantages ⚫ Easy to compute and understand ⚫ Facilitate planning for labour cost ⚫ Ensure quality work as no hurry to complete the job ⚫ Income security as regular and stable income since the reate does not fluctuate with changes in output ⚫ Suitable for direct and indirect labour Disadvantages ⚫ No incentives for employees to increase production ⚫ Supervision needed ⚫ Efficient and inefficient workers are paid the same ⚫ Dissatisfaction may arise among the efficient workers. It may result in high labour turnover of good workers. (b) High Day Rate ⚫ Designed to provide a strong incentive to efficient worker by paying higher than inefficient workers.
DPA30073 pg. 31 Edited :PKBI/JPPKS/DAT ⚫ Illustration Normal rate per hour = RM3 / hour Normal output = 10 units / hour High day rate = RM4 / hour Output = 10 units / hour A worked 40 hours completed 400 units (inefficient workers) B worked 40 hours compelted 500 units (efficient workers) Wages: A = 40 hours X RM 3 = RM120 B = 40 hours X RM4 = RM160 Note: B is paid RM4 / hour because B has produced more than the normal output. (500 / 40 hours = 12.5 units / hour) Advantages ⚫ Labour cost per unit decreases as the output increases ⚫ Easy to compute and understand ⚫ High quality output achieved ⚫ Give incentive to good or skilled workers ⚫ Reduce dissatisfaction among workers ⚫ Able to attract higher grade workers Disadvantages ⚫ Employees cannot earn more than the fixed hourly rate for their extra effort ⚫ No guarantee that the scheme will work consistently ⚫ Employee may prefer to work at normal rate of output (c) Measured Day Rate ⚫ Employees are paid based on agreed level of wages for a specified level of performance ⚫ Illustration Production (units) Rate / hour (RM) 101-200 3 201-300 4 301-400 5 ⚫ Calculation Workers (40 hour - week) Unit produce Hours worked Wages earned X 120 40 40 X RM3 = RM120 Y 260 40 40 X RM4 = RM160 Z 380 40 40 X RM5 = RM200
DPA30073 pg. 32 Edited :PKBI/JPPKS/DAT b. Piecework Schemes ⚫Relates to individual effort and payment based on the achievement / production ⚫Produce more and earn more (a) Straight Piecework ⚫ Based on the principles than an employee requires encouragement to work ⚫ Paid based on the number of units produced ⚫ Amount of attendance is less significant ⚫ Used when quantity output and quality control are important ⚫ Formula: ⚫ Wages = Units Produced X Rate per Unit ⚫ Illustration Abu is employed by a company. He is paid RM2 for each unit he produces. Abu produced 150 units. Wages = 150 units X RM2 = RM300 Advantages Disadvantages ⚫ Strong incentive to increase production ⚫ Quality affected ⚫ Less supervision ⚫ Working efficiency will reduce when employee is satisfied with their pay ⚫ Simple to calculate and easy to understand ⚫ No minimum wage. Fluctuation in wage earned by workers ⚫ Fixed overhead cost per unit decrease as output increase ⚫ Slow inexperience workers and trainees are being penalised (low income) ⚫ Improve morale because effort is rewarded ⚫ Establishing piece rate involve exoensive negotiation with employees ⚫ Attract more efficient workers since they have the opportunity to earn higher wage ⚫ Involve a much more complex recording system than time rate (b) Piecerate With Guaranteed Minimum ⚫ Apply guaranteed minimum wage ⚫ Protect employees by guaranteeing them minimum weekly wage based on hourly rate multiply by employee’s number of attendance hours ⚫ Applies when the level of piece work earnings is below the guarateed minimum level
DPA30073 pg. 33 Edited :PKBI/JPPKS/DAT ⚫ Provides security for employees receivin low wages due to cikness, delays, machine breakdowns, tool breakage and shortages ⚫ Disadvantage: Flat rate per unit being charged ⚫ Formula: Wages = Hours worked X Guaranteed Time Rate + No of units X rate / unit ⚫ Illustration Rate / Unit = RM0.60 Guaranteed time rate = RM1.50 / hour Hour worked = 40 hr Below 100 units the guaranteed minimum weekly wage is paid. 40 hours X RM1.50 = RM60 Workers Units Produced Wages A 80 RM60 B 100 RM60 C 120 120 units X RM0.60 = RM72 D 140 140 units X RM0.60 = RM84 (c) Differential Piece Rate ⚫ Objective: It encourages employees to increase production by offering an increase rate per unit at different levels of production ⚫ The rate per piece or rate per standard hour of production is increased as the output level rises but only applies to the additional unots, not to all the units achieved. ⚫ Illustration Standard rate / unit = RM0.60 Standard output = 2 unit / hour Hours of production per week = 40 hours Level of Production Rate Less than standard 80% of standard rate Standard Standard rate More than standard 120% of standard rate Note: Standard hours is the amount of work that should be performed in one hour under standard condition A standard hour is a mesurement of standard output X hour c. Bonus/Incentives Schemes ⚫ Include all influences (negative and positive) that will motivate employees
DPA30073 pg. 34 Edited :PKBI/JPPKS/DAT ⚫ To give incentive to efficient workers ⚫ Classified as financial and non financial ⚫ Types: ◼ Individual Bonus Scheme ◼ Overtime ◼ Group Bonus Individual Bonus Scheme ⚫ Individual employees qualify for a bonus on top of their basic wage, each person bonus’ is calculated separately ⚫ Charged to production overhead ⚫ The individual can earn bonus by working at an above target standard or efficient ⚫ Based on the relation between the time allowed and the time taken, and is usually calculated on the operative’s basic pay Total Wages Basic Wage + Bonus Time Allowed (TA) Time allowed set for a particular job Time Taken (TT) Actual hours worked Time Saved (TS) When the worker takes less time than TA Bonus Based on a percentage of the time saved ⚫ Illustration Time allowed for production of doughnut is pieces per hour. The wage rate is RM per hour. Hours to produce Ben worked 7 hours to produce 1200 pieces of doughnuts. Calculate the time saved and bonus payment to Ben (assuming bonus is 40% of time saved). TA to produce 1200 pieces is: TA = 1200 / 100 = 12 hours TT = 7 hours TS = TA - TT = 12 hrs - 7 hrs = 5 hrs Bonus = 40% X 5 hrs X RM5.00 = RM10.00 Overtime ⚫ Extra hours worked over and above basic hours / normal working hours required by management ⚫ OT hours = Hours worked - Basic Hour ⚫ OT rate is higher than basic rate. Example: Basic rate is RM2/hr whereby OT rate is 1.5 times higher. Thus, OT rate = 1.5X2 = RM3/hr ⚫ Gross Wage = Basic Wage + Bonus + OT premium ⚫ Illustration The following relates to a company which practises payment by result scheme. Employees are paid bonus based on 30% of time saved. The basic working hour per week is 40 in production department of the company. Overtime premium is payable at one and half a
DPA30073 pg. 35 Edited :PKBI/JPPKS/DAT time for the first 4 hours and two times for the following overtime worked. Payment is made in full for all units produced including rejected units. Employee Unit Produced TA / unit (hr) TT (hr) Rate per hr (RM) Rejected unit A 500 0.10 40 4.50 25 B 880 0.05 42 5.00 30 C 280 0.15 48 4.00 10 Calculate for each employee the following: a. Bonus earned b. Overtime premium c. Gross wage earned d. Wage cost e. Effective wage rate per hour Answer: A B C A. Bonus earned RM13.50 RM3 - B. Overtime premium - RM15 RM56 C. Gross wage earned RM193.50 RM218 RM216 D. Wage cost RM0.41 / good unit RM0.26 / good unit RM0.80 / good unit E. Effective wage rate per hour RM4.83 RM5.19 RM4.50 Group Bonus ⚫ Applied collectively to two or more operatives working as a group ⚫ Their duties must be interdependent and have common incentives ⚫ Objectives: ⚫ To create team spirit ⚫ To encourage the eliminatio of wastes in term of materials and time ⚫ To ensure that both supervisors and operators take and interest in the performance of others ⚫ To obtain economical production at high level ⚫ Bonus is based on cost saving. Time saved (TS) is the total time saved by all individual in a group. ⚫ TS by all employees = TT by an emplyee / TT by al lemployees X % Basic Rate Or Any other formula depending on the organization’s policy Advantages and Disadvantages of Group Bonus Scheme Advantages Disadvantages ⚫ Encourage team spirit ⚫ Imbalanced satisfaction by the efficient worker and inefficient worker ⚫ Easier to administer ⚫ No individual incentive
DPA30073 pg. 36 Edited :PKBI/JPPKS/DAT ⚫ Assist in reduction of labour unover, spoilage, waste and absenteeism ⚫ Any discrepancy of members will affect the whole group performance (sickness, holidays) ⚫ Helps in performance appraisal ⚫ May result additional administrative costs ⚫ Increase productivity of inefficient worker ⚫ Quality may be deteriorated due to bulk output ⚫ Reduced the amount of supervision as each member in the group will inspect each other to ensure each member has performed his task satisfactory in order to qualify for bonus ⚫ Not easy to determine various classes of workers in the group to share bonus Illustration In the wood machining of a company, a group bonus scheme operates. Under the scheme, time save is shared among the members of the group pro-rate to the work and is paid at agreed percentages of the hourly base-rates. Overtime is paid at time plus one half for the eight hours in excess of 40 hours and double for hours in excess of 48. Bonus is calculated weekly nd for a given week, use the following information to calculate: A. Time allowed and time saved for each of the three work groups and B. For each employee: ⚫ Bonus hours and bonus earnings ⚫ Basic wage including overtime ⚫ Gross wage Group Cabinets Bunks Kitchen Actual hours worked 60 40 50 Out Completed (units) 20 26 25 Ime allowed per unit completed (hours) 5 3 4 Rejected work (not paid for) - - - The following workers were employed based on the above information: Abu Hasni Izan Actual hours worked (hrs) 56 54 40 Rate per hour (RM) 4 4.50 6 Bonus (% of base rate) 50% 40% 60%
DPA30073 pg. 37 Edited :PKBI/JPPKS/DAT Answers: Abu Hasni Izan Bonus Hours Answer:48 hours Answer:46 hours Answer:34 hours Bonus Rate Answer: RM2 Answer: RM1.80 Answer: RM3.60 Bonus Earned Answer: RM96 Answer: RM82.80 Answer: 122.40 Overtime Hours Answer:16 hours Answer:14 hours Answer:0 hour Overtime Premium Basic Wage Answer: RM160 Answer: RM180 Answer: 240 Gross Wage Answer:RM368 Answer:RM370.80 Answer:RM362.40 2.2.6 Explain the labour productivity and the effects of labour turnover ⚫ Labour turnover is the change in the labour force during a specified period of time. ⚫ It is impotant for the management to keep labour turnover as low as possible as excessive turnover can be very expensive and reduce morale of the employees. Labour Turnover Ratio = Average number of employees leaving requiring replacement / Average number of employees in the period X 100% Illustration: A company had its payroll for 120 employees at the beginning of the year. At the end of the year, the number of factory employees employed was 125. During the year it had to replace 16 employees who resign from the company. Determine the labour turnover ratio. Answer: 15.10% Solution: Causes of Labour Turnover Avoidable Unavoidable ⚫ Low wage rate compared to market ⚫ Death/Retirement ⚫ Unsafe working condi ⚫ Redundancy - Economic Factor ⚫ Long working hours ⚫ Dismissal for disciplinary reasons ⚫ Conflicts with management ⚫ Health reasons-Illness/Accident ⚫ Lack of opportunity for career enhancement ⚫ Marriage, pregnancy or childcare problem
DPA30073 pg. 38 Edited :PKBI/JPPKS/DAT Costs of Labour Turnover Preventive Costs Replacement Costs Costs incurred to keep the employees happy and discourage them from leaving Consist of recruitment and training costs, scrap and defective work during training, loss of production Medical Services Full time doctors and nurses reduce labour turnover and increases efficiency and productivity Administration Advertising, recruitment, interviewing selection, engamenet, medical examination Sports, recreation and other welfare activities Subsidised canteens and better meals, housing schemes, educational facilites, social clubs Training Employees have to be givem training, even if skilled workers are engaged Environment Improvement in working conditions (Air-conditioning, Flexible working hours, Increase in holiday entitlement) Scrap and defective work New employees may take time to attain the degree of efficiency of the employees they have replaced Pension Scheme Replavement of the present scheme by one giving improved benefits on retirement Cost of tools and machine breakages While on training and during the early periods after completion of training Transport Company providing transport facilities Accident due to inadequate experience Costs include underrecovery of overhead, idle time, compensation Personal Development Role of the department in helping to develop and maintain a contented workforce (Care about and respect the employees, consider and support the employees’ grievances)
DPA30073 pg. 39 Edited :PKBI/JPPKS/DAT TEACHING AND LEARNING ACTIVITY: PRACTICAL SESSION TOTAL: 11 QUESTIONS 1. The following information is available on Department 3 of Ershad Manufacturing Ltd. for a period of six month. Number of people employed at the beginning of the period 36 Additions to the workforce during the period 7 Number of employees who left during the period 5 Calculate the labour turnover rate. 2. S & S Company produced the detail about labour turnover for its employees. Department X Department Y No. of employee at the beginning of the period 72 34 The addition of employee during the period 14 9 No. of employees leaving during the period 11 7 You are required to calculate : a) the number of employee at the end of the period b) labour turnover rate for each department 3. The following information relates to two workers for a particular week in July 2020. Armin Badul Production units 320 360 Time taken 32 hours 42 hours Time allowed 38 hours 48 hours Rate of pay per hour RM3.00 RM2.90 Rate per unit RM0.40 RM0.30 You are required to calculate the workers’ remuneration based on Piecework Scheme. 4. Lee is a sole proprietor, involves in junk foods packaging and have two workers, Dee and Vee. The following are the detail about the workers’ activities for one week. Working hour for one week is 40 hours. Dee Vee Rate per hour RM3.20 RM2.75 Units completed 180 150
DPA30073 pg. 40 Edited :PKBI/JPPKS/DAT You are required to calculate the wages paid to each worker using the following remuneration methods : (a) Time-based Scheme (b) Piecework Scheme at RM0.75 per unit (c) Bonus scheme which bonus will be paid at a rate RM2.40 per hour for time saved. Time allowed is 15 minutes per unit. (d) Differential Piece Rate based on : First 100 units RM0.60 per unit 101 – 150 unit RM0.90 per unit Next 151 unit RM1.20 per unit 5. Surip worked at Production Department for Syarikat Perkilangan Maju Jaya Sdn. Bhd which produced crystal vases at Balok. At the last week of July 2020, he completed 36 units of crystal vases and the detail about the production as follows : i. Working hour : 8.00 am to 5.30 pm ii. Working day : Sunday to Thursday iii. Rate per hour : RM2.50 iv. Rate per unit : RM1.80 v. Standard time to complete 3 unit crystal vases was 5 hours You are required to: a) Calculate the basic pay for Surip during the period b) Calculate differential piece rate based on: First 10 units - use above rate 11 – 20 units - RM2.00 21 – 30 units - RM2.30 next 31 units - RM2.60 c) If Surip worked from 8.00 am to 6.00 pm from Sunday to Thursday, calculate the overtime premium and his gross pay if he is paid at time and half for overtime.
DPA30073 pg. 41 Edited :PKBI/JPPKS/DAT 6. Lumut Blue Limited makes three products : Shampoo, Body Shampoo and Soap. Data for the four weeks ended 31st July, 2020 relating to the products and four employees are shown in the table below. Each worker is paid daily at the rate of RM6.40 per hour. Employees Actual Hours Worked Production in Units Shampoo Body Shampoo Soap Fatihah 170 97 80 - Fatin 146 38 12 120 Farhan 162 - 54 156 Faizal 164 188 10 - Total 825 325 290 320 Due to high demand last year, the company is considering changing the basis of the remuneration scheme. The management accountant has come up with a suggestion of a new scheme as follows: Workers are paid based on the piece rates (given below) plus a bonus at a rate of RM6.00 perhour on time saved by them. Product Piecework rate per unit (RM) Standard hours allowed per unit Shampoo 4.40 1 Body Shampoo 6.40 1.5 Soap 3.00 0.75 Calculate for the four weeks the gross wages earned by each employee using : a) the present system (Answers: RM1088, RM934.40, RM1036.80, RM1049.60) b) the proposed piecework system 7. The Assembly Department of Decor Bhd employs three workers working 40 hours per week. Abu and Mat are semi-skilled workers, whereas Pin is a skilled worker. The factory operates five days per week and the workers are paid based on the hourly rate. Overtime premium paid is 40% of basic rate and workers are also entitled for individual bonus of 50% on time saved.
DPA30073 pg. 42 Edited :PKBI/JPPKS/DAT Below is the information for the four weeks of July 2020 : Employee Abu Mat Pin Hours worked (hour) 165 163 160 Rate per hour (RM) 10 10 12 Output (unit) 6,720 6,600 8,500 Mat is required to work overtime in order to complete an urgent order from a regular customer. Semi-skilled workers are required to complete one unit of product within 1.5 minutes, whilst 1.2 minutes is allowed for skilled workers. You are required to calculate the basic pay, overtime pay (if any), bonus pay (if any) and gross pay for each worker for the month of July 2020. 8. Aries Corporation produces a product called Venus. The normal working hours for the company is 40 hours a week. Bakar, who is a skilled worker, worked 46 hours in the second week of July, while Chong, who is a semi-skilled worker, worked 51 hours for the same period. Skilled workers are paid RM6.00 per hour and semi-skilled workers are paid RM4.50 per hour. Overtime is paid at a premium of 60% of the normal hourly rate and bonus will be paid based on 40% of the time saved at the normal hourly rate. Total output produced by Bakar is 312 units while Chong produced 210 units. The standard time to produce a unit of Venus is 10 minutes and 15 minutes for skilled workers and semiskilled workers respectively. You are required calculate the gross wages for each employee for the second week of July. 9. The following data relates to 3 workers of AF Industrial for first week of July 2020. Employees Dafi Ismail Sabri Units completed 180 170 180 Time allowed per unit (minute) 15 12 16 Time taken (hour) 38 32 43 Rate per hour (RM) 1.50 1.30 1.40 Rate per unit (RM) 0.30 0.25 0.20
DPA30073 pg. 43 Edited :PKBI/JPPKS/DAT Required: (a) Calculate the workers’ remuneration based on Piecework scheme. (b) In the second week of July 2020, Dafi, Ismail and Sabri need to complete 340 units, 280 units and 360 units respectively in order to complete an order from customer. Their hours worked for the order as follows : Dafi - 90 hours Ismail - 59 hours Sabri - 100 hours Calculate the overtime premium and gross pay for each worker if they were paid 1¾ for overtime premium. 10. a) Syarikat Perniagaan Orang Bandar involved in manufacturing Mini Car Toys. Wan and Rafi are their workers at Engine Department and they have different skills. Information below shows their production in the month of July 2020. Workers Production Time Allowed Time Taken Wan 260 units 60 hours 100 hours Rafi 160 units 90 Hours 80 hours Each of the worker are paid RM5 per hour. You are required to calculate the basic pay for each of them. b) Star Marketing makes three products: J, A and Y. Data for the year ended 30th June 2020 related to the products and employees were as follows: Employee Hours worked Product J Product A Product Y Kay 2,040 1,164 960 - May 1,750 456 144 1,440 The employees were paid on time based at RM4.40 per hour. In an attempt to increase production, Star Marketing proposed changing the basis on which employees are paid based on output with rates given as follows: Product Piece rate per unit (RM) J 4.40 A 6.40 Y 3.00
DPA30073 pg. 44 Edited :PKBI/JPPKS/DAT Using the information given, you are required to calculate the earnings for each employee on the straight piecework scheme. c) The following table contains related information of 3 Waterlily Industries workers for the month of July 2020: Ali Auni Anis Units produced 300 215 210 Damaged units 0 6 8 Time taken / week (in hours) 50 55 60 Standard time / week 4% more than time taken 15% more than time taken 20% more than time taken Rate per hour (in RM) 30 20 25 Rate per unit (in RM) 21.50 20 23 Additional Information: (i) Normal time starts from 9am to 7pm and the workers work 5 days a week. (ii) The factory decides to pay for damaged units because the raw materials used are not of high quality. (iii) No overtime paid for extra time taken. Based on the information above, you are required to calculate the basic pay for each worker.
DPA30073 pg. 45 Edited :PKBI/JPPKS/DAT 2.3 Costing for overheads 2.3.1 Identify the concept of overhead Overhead costs are operating costs of a business enterprise, which cannot be traced directly to a particular unit of output. Production overhead consists of indirect materials, indirect labour and indirect expenses, which are incurred, in a manufacturing process. The examples of overhead are depreciation on machinery, insurance of factory building, electric and heating, rent and rate of the factory. Overhead also becomes an increasing large part of total manufacturing costs. It is used for expansion of business and make or buy decision. 2.3.2 Explain classification of overhead, production and service departments. Overheads are analysed by their function that is production overhead and nonproduction overheads. The classification of overhead is shown below: Overheads Production Overheads -Indirect Costs that related to the production of the products of the business. Production Overheads/Manufacturing Overheads / Factory Overheads Example:Indirect factory materials, Cost of factory power, water and electricity, Factory rents and rates,Insurance of plant, Depreciation and maintenance of plant,tools and machinery,Indirect factory wages Non-Production Overheads -Expenses not directly related to the production of cost unit or product Administration Overheads Examples: Office salaries,Salaries of administrative directors,Depreciation of office building,Audit fees,Rent, rates and insurance of general office,Lighting, heating and cleaning of office Selling & Distribution Overheads Examples:Commission and travelling expenses for salesmen, Advertising,Showroom expenses,Bad debts and collection charges,Legal cost related to salesmen, Packing costs, Carriage and freight outwards
DPA30073 pg. 46 Edited :PKBI/JPPKS/DAT Figure 2.3.2.1: Overhead Classification Usually, in an organizations, there are two types of cost centres – Production Department and Services Department. a) Production Department The production Department is involved directly in the manufacturing process. In other words, the production Department manufactures the goods and services to be sold. The examples of production departments are machining, finishing, sewing, cutting and assembly departments. b) Service Department A sub-unit an organization that is not involved directly in the manufacturing of products or services. The service department exist to support production departments. The examples of service departments are equipment maintenance departments, stores department, canteen departments and so on. 2.3.3 Distinguish between allocation overhead, apportionment and reapportionment overhead FIGURE 2.3.3.1: STEPS IN ALLOCATION AND APPORTION OF OVERHEAD Cost Allocation STEP 1:OVERHEAD CLASSIFICATION STEP 2 :COLLECTION OVERHEADS STEP 3:DISTRIBUTION OF OVERHEADS TO PRODUCTION AND SERVICE COST CENTRE STEP 4:REDISTRIBUTION OF OVERHEADS FROM SERVICE CENTRE TO PRODUCTION COST CENTRE STEP 5 : ABSORPTION OF OVERHEADS BY PRODUCTION UNIT
DPA30073 pg. 47 Edited :PKBI/JPPKS/DAT Cost allocation / departmentalization of factory overhead means dividing the company into segments called cost centers to which expenses are incurred. A cost center is divisions of the company where cost center : productions department represents a subunit of the company where manufacturing activity takes place. Whereas, service departments represent cost centers which provide support for the production department. Cost Apportionment (Primary Distribution) Some overhead costs can be directly identified with a particular department or cost center and can be allocated specifically to the department. However, there are some overhead costs that cannot be identified and charged directly to a department. The costs must be apportioned to any department using such items. Cost apportionment is the process of charging expenses in an equitable proportion to the various cost center or department. In cost accounting this is known as primary distribution of overhead. The following are the bases of apportionment, which are common in use: Overheads Basis of apportionment Electricity of building, rent and rates, depreciation on building and building repairs floor area occupied Tool room, labour costs, storekeeping Labour hours maintenance/repair of plant and machinery, machine department cost Machine hours Depreciation an plant and machinery Capital Value of assets Power for machinery Kilowatt hours Canteen, accident insurance, medical, personnel department expenses, supervision and wage department. Number of employees Figure 2.3.3.2 : Suggested basis of apportionment of overheads 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. Reapportionment overhead (Secondary Distribution) The overhead costs of service department should be further assigned to production departments. This is due to the reason that service departments do not themselves manufacture anything. The reassignment or re-apportioned of service departments overhead to production departments. Service Department Overhead Costs Basis of apportionment Accounts Number of employees or value of purchases Canteen Number of employees or hours worked Repair and maintenance Labour hours Stores Number of requisitions, cost of materials Building services Floor areas Figure 2.3.3.2 : Suggested basis of apportioning the service department cost
DPA30073 pg. 48 Edited :PKBI/JPPKS/DAT Each service department may provide services to each other. This means that part of the providers costs must be apportioned to the receiving service department. Reciprocal costs between Service Departments occurs when the service departments render service to one another in mutual or complementary relationship, or when service cost centre provides reciprocal services to each other. The methods available to deal with reciprocal services are i) Simultaneous equation method and ii) Repeated distribution method. 2.3.4 Explain the overhead absorption rate and methods ✓ After all service departments overhead costs have been apportioned to production departments, the total cost of production department is to be apportioned to each individual product or cost unit. This is called overheads absorption. ✓ Defined by CIMA Absorption of production overheads is “the allotment of overheads to cost units” by means of rates separately calculated for each cost centre. ✓ Required the calculation of an overhead absorption rate (OAR) in order to charge overhead costs to the products. ✓ Basis of absorption of overheads may be done as follows: i) Data from previous or historical ii) Anticipated volume or unit produced, and iii) Normal volume of output or capacity. 2.3.5 Calculate overhead or predetermined absorption rates – one rate for one department and one rate for several departments • The base rate at which the overhead cost is allocated to the product is known as the overheads rate. • The rate may be historical or predetermined. Methods of Absorption Some method of overhead absorption has to be applied to absorb factory overhead to individual product or jobs on some equitable basis. The rate, which is used to charge overhead costs to the products job, is known as absorption rate. The following are the generally recognized methods of absorption rates: The activity level that should be used are bases on items such as direct labour hours, direct labour costs machine hours, direct material costs and unit of output. Selection of the base should be one which corresponds most closely with the total overhead costs of each department. 2.3.6 Calculate over or under absorption of overhead Overhead absorption has been based on actual overheads for a costing period for costing of products. This method is, however, not satisfactory for costing purposes because: Overhead Absorption Rate (OAR) = Production overhead ----------------------------- Activity Level
DPA30073 pg. 49 Edited :PKBI/JPPKS/DAT a) The job cost calculations have to deferred until all costs incurred are obtained. b) Such problem of delay may be overcome by use of shorter period. However, when production fluctuates due to seasonal or some other factors, the overhead rate would vary significantly from month to month. Production overhead costs may remain quite constant if comprised mainly of fixed elements. The use of actual overhead rate in charging overhead to similar products may result in varying unit costs. When predetermined overhead rates are applied, the overheads absorbed will be greater or lesser than the actual expenditure incurred on the account of overheads. Under normal costing, total overhead costs are absorbed by multiplying actual production with predetermined rates, the amount absorbed is likely to be different from that incurred. The difference between these two amounts is called under or over absorbed overhead. Under and over absorption occurred when: a) the absorbed amount is greater than actual overheads, it is called ‘’Over absorbed”. b) when the absorbed amount is lesser than actual overheads incurred is “Under absorbed” Overhead absorbed = Absorption Rate (OAR) x Actual Activity Level Overhead absorbed > Actual overhead = Over absorbed or Overhead absorbed < Actual overhead = Under absorbed Summary 1. Overhead refer to costs that cannot be traced directly to product. It embraces indirect material, indirect labour and indirect expenses. Overhead is usually categorized into production, administration, selling and distribution. Such categorization facilitates correct apportionment and absorption of overheads. 2. All production cost that cannot be directly allocated must be apportioned to the costs centres, that is production and service, on an equitable basis. The costs of the service cost centre will then have to be reapportioned to the production cost centres. 3. Once reapportioned the overheads are charged to or absorbed by the cost units passing through the production cost centres. Overheads are usually absorbed before the end of the costing period.