BASIC COST ACCOUNTING

100 BASIC COST ACCOUNTING

c) Machine Hours Production Overhead
=

Machine Hours
RM 10 000

=
4 000 hours

= RM2.50 per machine hour

d) Direct Material Costs Production Overhead
= Direct Material Costs

RM 10 000
=

RM 5 000

= 200% direct material costs

e) Production Output Production Overhead
=

Production Output
RM 10 000

=
2 000 units

= RM 4 per unit

101 BASIC COST ACCOUNTING

4.5. Calculate overhead or predetermined absorption rates- one rate for one
department and on rate for several departments

A. PREDETERMINED OVERHEAD RATES
o Overhead absorption has been based on actual overheads for a
costing of products.
o This method is however not satisfactory for costing purposes because:
 The job cost calculation has to be deferred until all costs incurred
are obtained.
 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.
o Therefore, pre-determined overhead rates are used instead.
o The formula is as follow:

FORMULA

Pre-determined OAR = Budgeted Production Overhead for the year
Budgeted Production for the year

EXAMPLE 4.5

The following information related to the budgets of Syarikat Barakah:

Production overhead RM 45 000 Labour hours 30 000
Direct Materials RM 15 000 Machine hours 22 500
Direct Labour RM 45 000 Production (units) 3 000

For one unit of its product, the following cost applies:

Materials RM10

Labour RM25

Labour hour used 15 hour

102 BASIC COST ACCOUNTING

Machines hours 7.5 hour

Compute:
a) Pre-determined OAR under all 5 methods
b) Overhead absorbed by the product under all methods above.
c) Total cost for 1 unit of product under all methods.

Solution:

a) Pre-determined OAR

Bases for OAR

Direct Direct labour Machine Direct material Production
labour cost
hours hours costs output
RM 45 000
30 000 DLH RM 45 000 RM 45 000 RM 45 000 RM 45 000
22 500 MH 3000 unit
= RM1.50 RM 45 000 RM 15 000
per DLH = 100% of = RM2.00 = 300% of = RM 15
Direct Labour per MH Direct Material per unit
Cost Cost
X 100
X 100

b) Overhead absorbed

Bases for OAR

Direct labour Direct labour Machine Direct Production
output
hours cost hours material
OAR X
costs Actual
Output
OAR X Actual OAR X Actual OAR X OAR X RM15 X 1
unit
DLH DL cost Actual MH Actual DM

cost

= RM1.50 X 15 = 100% X = RM2.00 = 300% X

DLH RM25 X 7.5 MH RM10

= RM22.50 = RM25 = RM15 = RM30 = RM15

c) Cost per unit for product

Bases for OAR

Direct labour Direct Machine Direct Production
hours
labour cost hours material output
Per Unit
(RM) costs

DM 10.00 Per Unit Per Unit Per Unit Per Unit
DL 25.00 (RM) (RM)
(RM) (RM)
DM 10.00 DM 10.00
DL 25.00 DL 25.00 DM 10.00 DM 10.00

DL 25.00 DL 25.00

103 BASIC COST ACCOUNTING

O/h 22.50 O/h 25.00 O/h 15.00 O/h 30.00 O/h 15.00
RM57.50 RM60.00 RM50.00
cost/unit cost/unit RM50.00 RM65.00 cost/unit
cost/unit cost/unit

4.6. Calculate over or under absorption of overhead

B. UNDER OR OVER ABSORPTION OF OVERHEAD

ACTUAL COSTING NORMAL COSTING

Multiplying actual Multiplying actual
production with actual rates production with
predetermined rates.
Actual Production X Actual
Rates Actual Production X
Predetermined Rates
AMOUNT ABSORBED =
AMOUNT INCURRED AMOUNT ABSORBED ≠
AMOUNT INCURRED.

o The amount absorbed is likely to be different from that incurred.
o The difference between these two amounts is called under or over

absorbed overhead.
o Under or over absorption occurred when:

Amount of overhead Actual production volume
expenditure incurred differs from differs from the budgeted

the amount budgeted production

OVERHEAD ABSORBED VS ACTUAL OVERHEAD

OVER ABSORBED UNDER ABSORBED

Absorbed > Actual Absorbed < Actual
POSITIVE NEGATIVE

104 BASIC COST ACCOUNTING

EXAMPLE 4.6

Syarikat AZ has the following overhead data for the year 2020. It use

direct labour hour as the basis.

Budgeted data for 2020 Production Direct Labour
Actual data for 2020 Overhead Hours
RM 12 000
RM 10 000 8 000 hours
8 200 hours

Solution: Production Overhead
=
Overhead Absorption
Rate (OAR) Direct Labour Hours
RM 12 000

=
8 000 hours

= RM 1.50 per direct labour hours

Overhead = Actual Production X Predetermined Rates
Absorption
= 8 200 hours X RM1.50 per DLH
= RM12 300

Actual Overhead = RM10 000

Absorbed vs Actual
RM 2 300 (over absorbed)
--

105 BASIC COST ACCOUNTING

ENRICHMENT EXERCISE 4.3

Spec Decorating uses a job order costing system to gather the costs of its
interior decorating business. Each client’s consultation is treated as a
separate job.

Manufacturing overhead is applied to each job based on the number of

decorator hours incurred. The data for the current year is provided as

below:

Budgeted overhead RM 660 000 Budgeted decorator 33 000
Actual Overhead RM 782 000 hours

Actual decorator hours 35 000

Required:
a) Calculate the predetermined overhead rate (OAR)
b) Calculate Overhead Absorb
c) Determined whether the overhead was under or over applied and by
how much.

106 BASIC COST ACCOUNTING

PRACTICE QUESTIONS
QUESTION 1
Indicate the amount over-or under absorption of overhead based on:

Direct labour hour Budgeted Actual
Direct labour cost
Machine hour 5 600 h 5 925 h
Production unit RM19,040 RM20,450
Overhead
3 300 h 3 418h
81 000 unit 85 296 unit
RM57,500 RM61,257

You are required to calculate the amount over or under absorption based on:

a) Direct labour hour
b) Machine hour
c) Production unit.

QUESTION 2

Miza Furnishing has 3 production departments and 2 service departments.
Overhead costs incurred for the month of April are as follows:

Machine insurance RM
Rent and rates 8,000
Indirect materials 21,000
Heating & lighting 5,000
Telephone expenses 10,000
Depreciation 2,000
Supervisors’ salaries 24,000
Total 6,000
76,000

The 3 production departments, A, B and C and the 2 service departments, X and Y
are housed in the same premises. The details of which, together with other statistics
and information, are given below:

107 BASIC COST ACCOUNTING

Floor area occupied A B C X Y
(sq metres) 3,000 1,500 1,500 600 400
Direct labor hours
Labor rates per hour 2,000 1,200 1,800 - -
Machine value (RM’000) RM4 RM3 RM2 - -
Value of materials issued 30 20 10 - -
(RM’000) 100 50 30 - -
ALLOCATED OVERHEADS :
A B C X Y
Specific to each RM2,900 RM3,000 RM4,000 RM1,500 RM1,00
department
SD X’s cost apportioned 50% 25% 25% - 0
SD Y’s cost apportioned 20% 30% 50% - -
-

You are required to:

a. Prepare a statement showing the overhead cost for each
department, showing the basis of apportionment used.

b. Calculate overhead absorption rates using Direct Labour Hours.

QUESTION 3

A furniture making business manufactures quality furniture to customers’ orders. It
has three production departments and one service centre. Budgeted overhead
costs for the coming year are as follows:

Rent and rates RM12,800
Machine insurance 6,000
Building insurance 22,000
Power 8,500
Depreciation (machine) 18,000
Heating and lighting 6,400
Production supervisor salaries 24,000

The three production departments – A, B and C and one service department are
housed in the new premises, he details on which, together with other statistics and
information, are given below:

108 BASIC COST ACCOUNTING

DEPARTMENTS

AB C X
600 600
Floor area (sq meter) 3,000 1,800 8,000 400
Machine value 5,000 200
Horse power 24,000 10,000 1,000
DL hours 3.4 -
Labour rates per hour 10,000 10,000 3.0
Machine hour -
No of employees 3,200 1,800 4 -
Allocated overhead: 2
Specific to each 3.8 3.5 1,200
department 800
Service department 1,200 2,200 25%
X cost apportioned
14 10

2,800 1,700

50% 25%

Required:

a. Prepare an Overhead Analysis Sheet
b. Calculate the overhead absorption rate (use the DL hours as basis for

Department A and C and MH for Department B. (round up the figure to two
decimal places)

QUESTION 4

Rose Mawar Sdn Bhd has 3 production departments A, B and C and 2 service
department P and Q. The following data are extracted from the records of the
company for a particular given period:

Rent and Rates RM
General Lighting 15 000
Indirect wages 8 000
Power 8 000
Depreciation of machinery 7 000
Sundries 60 000
45 000

Additional information:

Direct Wages (RM) Total A B C P Q
Horse power 70 000 20 000 15 000 20 000 10 000 5 000

150 60 30 50 10 -

109 BASIC COST ACCOUNTING

Cost of machinery 1 500 400 000 450 000 550 000 50 000 50 000
(RM) 000
Production hours 14 000 6 000 4 000 4 000 500
worked 5
Floor area (sq mtr) 11 000 2 500 2 000 3 500 2 500
Lighting points 80 20 20 25 10

Service Department Expenses Allocation:

Department A B C P Q

P 25% 30% 35% - 10%

Q 35% 20% 35% 10% -

You are required to:

a. Compute the overhead rate of production department using the repeated
distribution method

QUESTION 5

Akasia Sdn Bhd produces an organic-based fertilizer in its Merlimau factory which
consists of 2 production departments, Department P and Q. The data below relates
to both departments:

Salary Total Costs Department P Department
Rent RM 7 200 Q
Supervision -
Electricity 5 400 RM 4 800
Factory Insurance 4 800
Depreciation of machine 6 900 To be apportioned
Maintenance of machine 4 200 accordingly
10 000
6 400

Additional Information:

Factory area Department P Department Q
Machine working hours 2 000 1 000
Factory Value (RM) 25 000 15 000
No. of workers
Direct labor hours 300 000 100 000
Machine Costs (RM) 50 100
3 500
1 500
40 000 10 000

110 BASIC COST ACCOUNTING

You are required to:

a. Prepare the overhead Statement Analysis showing the allocation and
apportionment of overheads for each department.

b. Calculate the overhead absorption rates for each department using direct
labour hours as the basis of absorption

QUESTION 6

Sowang Nider Enterprise produces toys. It has two production departments and two
service departments. The budgeted overhead costs for the year 2018 with the
additional data are as follows:

Item Amount Production Service Department
Department
Allocated Indirect 50 000 Dept 1 Dept 2 Maintenance Store
Materials 25 000 20 000
Allocated indirect labour 60 000 5 000 -
Depreciation of 30 000
machinery 22 000 21 000 8 000 9 000
Power 35 000
Rental for factory 15 000
Production Supervisor 27 500
salaries
Canteen 12 500
Fire Insurance 20 000

Additional Information:

Machinery book value (RM) Dept 1 Dept 2 Maintenance Store
Kilowatts hours 37 000 18 000 15 000 5 000
Floor Area 15 000 20 000 2 000 3 000
Number of employees 2 800 3 000 1 400 800
Direct labour hours 25
Machine Hours 20 15 Nil 20
Re-apportionment of maintenance 3 500 1 500 Nil Nil
Re-apportionment of store 1 800 4 200 Nil
55% 45%
50% 50%

Required:

a. Based on the information above, you are required to:

111 BASIC COST ACCOUNTING

i. Determine the most suitable basis for the overhead apportionment
ii. Explain allocated and apportioned overhead and indicate ONE (1)

example for each explanation.
b. Prepare an overhead analysis sheet showing the allocation and

apportionment of overheads to all cost centres, clearly showing the basis of
apportionment used. (round up your answer to the nearest number)

QUESTION 7

Anova Sdn Bhd is a manufacturing company which uses three production
departments to make its product. It has the following factory which are expected
to be incurred in the year 2016.

Indirect wages and salaries: RM
Machining
Assembly 120 354
Finishing 238 970

Factory rent 89 700
Fire Insurance 12 685 500
Electricity
Machinery power 3 450 900
Plant depreciation 985 350
Canteen Subsidy
2 890 600
600 000
256 000

Other information is available as follows:

Number of employees Machining Assembly Finishing
Floor space occupied 50 60 18
Horse power of machinery 800
Value of plant (RM ‘000) 1 800 1 400
Number of labor hours 13 000 500 6 500
Number of machine hours 30 120
250 140 000 35 000
100 000 36 000 90 000
200 000

You are required to:

a. Prepare the company’s overhead analysis sheet for the year
b. Calculate appropriate overhead absorption rate (to two decimal places)

using machine hour in machining and finishing and labour hours is assembly.

112 BASIC COST ACCOUNTING

QUESTION 8

Kicap Gembira Sdn Bhd is divided into four cost centres; Fermentation,
Bottling, Labelling as production cost centre, and Maintenance is a service
centre responsible for providing maintenance.

The budgested cost for the period are:

Repair and maintenance RM
Rent 650
Depreciation of plant 1 200
Light 540
Supervision 160
Insurance of stocks 1 980
Power 600
1 080

Additional information is available in respect of the four cost centres:

Area in sq. meter Fermentation Bottling Labelling Maintenance
Effective horse power 3 000 2 000 1 200 800
Number of employees 3 000 2 000 1 000 -
Value of plant 40 30 20 10
Value of stock/material
Direct labour hour RM30,000 RM28,000 RM20,000 RM2,000
Machine hour RM18,000 RM12,000 RM9,000 -
Indirect hour -
1 200 1 240 1 180 -
1 270 980 350 -
500 240 320

Budgeted data for year 2018:

Fermentation 16% of stock/material cost

Bottling RM1.95 per direct labour hour

Labelling RM2.80 per machine hour

You are required to:

a) Complete the overhead analysis sheet (reapportionment using
direct method)

b) Calculate over or under absorption of overhead.

113 BASIC COST ACCOUNTING

QUESTION 9

Melawa View Tech Sdn Bhd has three production department (A, B and C)
and two service department (R and S). Overhead incurred for the period
were as follows:

DEPARTMENTS

A BC R S
1,800 1,000 1,600
Indirect material (RM) 7,000 2,700 1,300 9,000 5,000
950 250 150
Indirect wages (RM) 12,000 3,200

Repairs & Maintenance 2,150 350
(RM)

Other expenses incurred are:

RM

Rent rates 9,500

Power 1,000

Heating and lighting 6,000

Plant insurance 2,500

Equipment insurance 1,000

Depreciation expenses were 6% of the

value of assets owned by the company

Additional information:

Value Plant (RM) A DEPARTMENTS R S
Equipment (RM) 12,500 BC 3,750 -
2,000 30,000 3,750 2,000 1,000
Production Direct labour hours 28,000 1,000 4,000 -
capacity Direct labour cost 41,000 41,000 40,000 - -
24,000 60,000 48,000 - -
Machine hour 3,000 43,000 5,000 - 1,000
7,000 3,000 1,000 -
Floor area occupied (sq. meter) 80 180 30 10

Effective horse power

Reapportionment: 30 50 20 --
Department R 30 60 10 --
Department S

Departmental overhead absorption rates are as follows:

114 BASIC COST ACCOUNTING

A – 55% of direct labour cost
B – RM1 per machine hour
C – RM0.20 per direct labour hour
You are required to:

a) Prepare overhead analysis sheet (reapportionment using direct
method)

b) Calculate over or under absorption of overhead.

QUESTION 10

BMY Sdn Bhd is mainly involved in the production of bicycle accessories. The
production of the accessories is carried out by two production departments;
Machining and Finishing and supported by two servicing departments; Canteen
and Maintenance. The machining department is machine oriented while finishing
department is labour oriented.

For the year ended 31 August 2015, the company incurred the following costs:

TOTAL Machining Finishing Canteen Maintenance
Department Department

RM RM RM RM RM

Indirect materials 136,000 36,000 36,000 16,000 48,000

Indirect labour 192,000 36,000 108,000 48,000

Power for machines 54,000 39,000 15,000

Factory depreciation 180,000

Rates & assessment 12,000

Factory utilities 60,000

Plant & machinery 120,000
depreciation

Factory property 6,000
insurance 760,000

Total

115 BASIC COST ACCOUNTING

Below are the production data gathered from the production and service
departments:

TOTAL Machining Finishing Canteen Maintenance
Department Department

RM RM RM RM RM

Floor space 5,650 2,500 2,500 150 500
occupied (m2)
150,000 100,000 35,000 5,000 10,000
Book value of
machinery 185 50 120 5 10
60,000 50,000 10,000
Number of 34,000 10,000 24,000
employees

Machine hours

Direct labour hours

Required:

a) Prepare an Overhead Analysis Sheet for the year ended 31 August 2015. Show
your calculation to the nearest RM.

b) Calculate overhead absorption rate (OAR) for each production department
using the appropriate basis.

COSTING METHODS116 BASIC COST ACCOUNTING

TOPIC 5

5.1. Job and Batch Costing
5.1.1. Define Job and Batch Costing
5.1.2. Explain the features and steps involved in
job and batch costing
5.1.3. Identify source documents used in the job
costing
5.1.4. Determine of unit cost and pricing under
both methods

5.2. Service Costing
5.2.1. Define Service Costing
5.2.2. Explain the features of service costing
5.2.3. Describe unit cost associated under the
service costing method

117 BASIC COST ACCOUNTING

TOPIC 5: COSTING METHODS
5.

5.1. Job and Batch Costing

 INTRODUCTION
o Costing techniques and processes of determining cost of product
manufactured or service rendered.
o Different methods are applied in business to ascertain cost depending
upon the nature of the product, production method and specific
business conditions.

5.1.1. Define Job and Batch Costing

A. METHODS OF COSTING
o Generally, costing methods can be divided into TWO major
categories:

SPECIFIC ORDER COSTING CONTINUOS/ OPERATING
Job Costing COSTING

Batch Costing Process Costing
Contract Costing
Service Costing

METHODS OF SPECIFIC ORDER Job Costing
COSTING COSTING Contract Costing

CONTINUOS/ Batch Costing
OPERATING Service Costing

COSTING

118 BASIC COST ACCOUNTING

1. SPECIFIC ORDER COSTING
 This is a method for a certain specific order.
 CIMA – the category of basic costing methods applicable where
work consists of separate contracts, jobs or batches, each of
which is authorised by a special order or contract.

JOB COSTING

Used when work is done according to customer’s order.

Example: house building, ships building, machinery production &
repair, custom made furniture.

Characteristics Is a costing method applied where work is
of JOB ORDER undertaken to customers' special requirements
COSTING
Each order is of comparatively short duration

Production is usually carried out in accordance with
the special requirements of each customer

It is usual for each job to differ in one or more
respects from another job

Direct material, direct labour and direct expenses
are charged to spesific jobs

Job cost sheet/card is used to record costs and
control efficiency and estimate future work.

BATCH COSTING

Used to determine the cost of a group of identical or similar
production.

Example: production of nuts & bolts, components & other items which
are manufactured in distinct batches

119 BASIC COST ACCOUNTING

Charateristics Bacth costing is similar to job costing in that each
of BATCH batch of similar articles is separately identifiable
COSTING
A batch is a group of similar articles which maintains
its identity during one or more stages of production
and is trated as a cost unit.

The cost per unit manufactured in a batch is the total
batch cost divided by the number of units in the
batch.

The selling prices of batches are calculated by
adding a profit to the cost of the batch. i.e very
similar to job costing.

FORMULA

Cost per Unit in Batch = Total Production Cost
No. of Production

CONTRACT COSTING

Similar to job costing, except that the cost unit is large and work is of a
longer duration.

Example: constructional nature.

2. CONTINUOUS/ OPERATING COSTING
 Applies to repetitive or continuous operation.
 CIMA – the category of basic costing methods applicable where
standardize goods or services result from a sequence of repetitive
and more or less continuous operations or processes to which
cost are charged before being average over the units produced
during the period.

120 BASIC COST ACCOUNTING SERVICE COSTING

PROCESS COSTING Used when standardized
services are provided.
Used in industries where
manufacturing is done Example: transportation
business.
continuously.

Example: food processing, oil
refining, chemical
manufacture.

5.1.2. Explain the features and steps involved in job and batch costing

The potential customer makes a request for a job to be done
indicating clearlly all the requirement

The specific order of the job order, such as quantity, quality, size,
colour, date of delivery, and any other special requirements are

discussed with the customer and agreed upon.

The production planning department then decides on the series of
operations to carry out the job and assigns the job to the relevant

machines or departments.

The estimated job cost is calculated based on the expected usage
of materials, labour, overhead costs and any specific cost for the job

The job starts once the customer agrees to the quoted selling price

121 BASIC COST ACCOUNTING

A. COMPARISON BETWEEN JOB COSTING AND BATCH COSTING

Basis for Job Costing Batch Costing
Comparison

Definition Job costing refers to a Refer to a costing technique
costing technique used to involving identical units that
determine the cost of a job are produces in batches
which can be a contract, whereby each batch is
specific work or assignment assigned a batch number,
that should be performed in number of units and the unit
accordance with customers’ costs.
set specifications and
requirement

Ideal Industries Is best suited for industries Is best suited for industries
which manufacture products which manufacture
as per customers’ demand products in batches such as
and needs such as clothing manufacturers,
shipbuilding, decoration, engineering manufacturers
interior design, furniture and as well as fast moving
press printing. consumer goods industries.

Production As per customer specification Mass Production of goods

Cost Unit The cost unit is the Executed The cost unit is a particular
Job batch

Cost The cost of each job unit is The cost per unit is derived
by dividing the total cost of
Ascertainment derived after the completion the batch buy the number
of items in the batch.
of each job

5.1.3. Identify source documents used in the job costing

A. JOB COST CARD
o During a production order, a cost sheet identified by a job number
is set up in the accounting department.
o Cost is grouped under three major headings:
o A job cost account is prepared by the cost office.
o The job cost account will record the materials and wages incurred.
o It will determine the selling price to be charged.

122 BASIC COST ACCOUNTING

o Basic information that can be found in this document are as
follows:

Name of Date Reference Material
Customer
number Cost

Labour Overhead Sign
Cost Cost

Name of Company
Job Cost Card for Job XYZ

Direct Material Cost XX RM
Direct Wages XX XX
Direct Expenses XX
PRIME COST XX
(+) Production Overhead XXX
TOTAL PRODUCTION COST XX
(+) Selling and Distribution Overhead XXX

Administration Overhead XX
TOTAL COST XXX
(+) Profit XX
SELLING PRICE XXX

 DETERMINATION OF PROFIT

PROFIT MARK-UP PROFIT MARGIN

Percentage of cost Percentage of sales or
selling price

Cost 100% Cost (100 – x) %

+ Mark-up x% + Mark-up x%

Selling Price (100 + x) % Selling Price 100 %

123 BASIC COST ACCOUNTING

EXAMPLE 5.1

PROFIT MARK-UP

Total cost of a job = RM1,000.
Mark up is set at 20%.

Calculate the profit and sales value of the job.

Solution: 100% RM1,000
20% ?
Cost 120% ?
+ Mark-up
Selling Price

Profit = 20% x cost
Selling Price = 20% x RM1,000
PROFIT MARGIN = RM200

= Cost + Profit
= RM1,000 + RM200
= RM1,200

Total cost of a job = RM1,000.
Margin is set at 20%.

Calculate the profit and sales value of the job.

Solution: 80% RM1,000
20% ?
Cost 100% ?
+ Margin
Selling Price

Profit = (20/80) x cost
Selling Price = (20/80) x RM1,000
= RM250

= Cost + Profit
= RM1,000 + RM250
= RM1,250

124 BASIC COST ACCOUNTING

5.1.4. Determine of unit cost and pricing under both methods
A. ACCOUNTING FOR JOB ORDER PRODUCTION

EXAMPLE 5.2

Name of Company
Job Order Costing

Direct Material Cost XX RM
Direct Wages XX XX
Direct Expenses XX
Prime Cost XX
(+) Overhead XXX
Production Cost 1 200
(+) Selling and Distribution Overhead XXX

Administration Overhead XX
Total Cost XXX
(+) Profit XX
Selling Price XXX

Company Alpha is using a predetermined overheads absorption rate based
on machine hours. The total budgeted overhead is RM 420 000 and the
budgeted machine hours are 70 000. The company is involved with the
production of Job A and Job A requires 200 machine hours.

Solution:

Step 1: Calculate OAR

Overhead Absorption Rate Budgeted Production Overhead
=
(OAR) Budgeted Machine Hours

RM 420 000
=

70 000 hours

= RM 6.00 per machine hours

Step 2: Calculate Overhead Absorb

Overhead Absorb = OAR X Actual Machine Hours

= RM 6 X 200 machine hours

= RM 1 200 per machine hours

125 BASIC COST ACCOUNTING

EXAMPLE 5.3

Job 666 required 20 kg of a material in stores which cost RM 15 per kg, and
also special component had to be bought at a cost of RM 150.

30 hours’ labour were spent on the job where employees were paid at RM 9
per hour. In addition, 3 hours was spent by a supervisor who is paid at RM 15
per hour. Overhead absorbed at the rate of RM 4 per labour hour.

Solution:

Name of Company
Job Order Costing

Direct Material Cost 300 RM
Store [20 kg x RM 15 per kg] 150
Special 450
270
Direct Wages 45 315
Basic [30 hours x RM 9 per hour] 765
Supervisor [3 hours x RM 15 per hour] 132
897
Prime Cost
(+) Overhead (OAR X Actual labour hours)

RM 4 x 33 hours
Production Cost / Total Cost

-

126 BASIC COST ACCOUNTING

EXAMPLE 5.4

ABC Manufacturing Co. produces special purpose grinding machine. A
customer has asked ABC Manufacturing Co. to quota a price for making the
machine. The following estimates were available:

Direct Material cost RM 500

Direct Labour

Machining 300 hours @ RM 0.50

Assembling 200 hours @ RM 0.25

Overhead is absorbed at RM 0.20 per direct labour hour

Selling & Distribution overhead is 25% of production cost

Profit is 25% of total cost

Prepare the job cost card indicating the price to be quoted.

Solution:

ABC Manufacturing Co
Job Order Costing

Direct Material Cost 150 RM
Direct Wages: 50 500

Machining (300 x RM 0.50) 60 200
Assembling (200 x RM 0.25) 40 700
Prime Cost
(+) Overhead 100
Machining (300 x RM 0.20) 800
Assembling (200 x RM 0.20) 200
Production Cost 1 000
(+) Selling and Distribution
Overhead 250
(25% x RM 800) 1 250
Total Cost
(+) Profit
25% of total cost
25% x RM 1000
Selling Price

-

127 BASIC COST ACCOUNTING

EXAMPLE 5.5

Batch 7777 used 2 000 kg of a material in stores which cost RM 10 per kg, and
also 500 kg of special material that was bought in at RM 4 per kg.

90 hours labour were spent in Department A where the employees were paid
at RM 12 per hour and 40 hours were spent in Department B where
employees are paid at RM 10 per hour. Overheads are absorbed at the rate
of RM 3 per labour hour. 900 units were produced.

Calculate the total absorption cost of the batch and each unit produces.

Solution:

Name of Company
Batch Costing

Direct Material Cost 20 000 RM
Store [2 000 kg x RM 10 per kg] 2 000
Special [500 kg x RM 4 per kg] 22 000
1 080
Direct Wages 400 1 480
Department A [90 hours x RM 12 per hour] 23 480
Department B [40 hours x RM 10 per hour]
Prime Cost 390
(+) Overhead 23 870

OAR x Actual labour hours
RM 3 x 130 hours
Production Cost / Total Cost for the batch

Cost per unit Total Cost
=

No of Production
RM 23 870

=
900 units

= RM 26.52

-

128 BASIC COST ACCOUNTING

EXAMPLE 5.6

BatchPro Company manufactures special components to order. It has the
following budgeted overheads for the year based on normal activity levels.

Department Budgeted Overheads Budgeted Activity driver
Machining RM 30 000 5 000 machine hours
Assembly RM 20 000 4 000 assembly hours

The selling and administration are computed as 10% of the production cost.
A total of 600 special components were made in batch number 601. The
following costs were incurred for batch number 601.

Direct Materials RM 6 000
Labour 500 hours in the machining department at RM 2
per machine hour
600 hours in the assembly department at RM 1.50
per assembly hour

A special equipment for testing the quality of the components was hired at a
cost of RM 700.

You are required to calculate:
a) The total cost and the unit cost of batch number 601
b) The profit per component if the selling price is RM 40 per component

Solution:

a) The total cost and the unit cost of batch number 601

Step 1: Calculate OAR

Overhead Absorption Rate Budgeted Production Overhead
=
(OAR) Budgeted Machine Hours

Machining Department = RM 30 000
5 000 machine hours

= RM6 per machine hour

129 BASIC COST ACCOUNTING

Assembly Department RM 20 000
=

4 000 assembly hours
= RM5 per assembly hour

Step 2: Calculate Overhead Absorb

Overhead Absorb = OAR X Actual Activity Level

Machining Department = OAR X Actual Machine Hours
= RM 6 X 500 machine hours
= RM3 000

Assembly Department = OAR X Actual Assembly Hours
= RM5 x 600 assembly hours
= RM3 000

BatchPro Company RM
Batch Costing 6 000

Direct Material Cost 1 000
Direct Labour: 900 1 900

Machining Department [500 h x RM 2] 700
Assembly Department [600 h x RM 1.50] 8 600
Direct Expenses:
Hire of special department 3 000 6 000
Prime Cost 3 000 14 600
(+) Overhead
1 460
Machining Department [500h x RM 6] 16 060
Assembly Department [600h x RM 5]
Production Cost
(+) Selling and Distribution Overhead
[10% x 14 600]
Total Cost

130 BASIC COST ACCOUNTING

Cost per unit Total Cost
=

No of Production
RM 16 060

=
600 units

= RM 26.77

b) The profit per component if the selling price is RM 40 per component

Profit = Selling Price per Unit - Cost per Unit

= RM40 - RM26.77

= RM13.23

-

ENRICHMENT EXERCISE 5.1

Sari Kara Sdn Bhd manufactures kitchen equipment for the local market.

During the month the company received one order Job no 725. The

following data related to the job:

Direct material: JOB NO 725
Received from store
Transfer from other job to job no 725 RM 50 000
RM 20 000
Direct labour:
Machining Department RM15 000
Packaging Department RM10 000
RM 3 000
Rental of Special Machine 10% of Production Cost
Administrative Cost
Overhead Absorption Rate: RM 2.00 per machine hour
RM 1.00 per machine hour
Machining Department
Packaging Department 2 000 hours
Machine Hours: 1 500 hours
Machining Department 25% on selling price
Packaging Department
Profit

Required:
Prepare job cost card for Job no 725.-

131 BASIC COST ACCOUNTING

5.2. Service Costing
5.2.1. Define Service Costing
A. INTRODUCTION
o CIMA(UK) – cost accounting for specific services of functions, eg;
canteen, maintenance, personnel. They may be referred to as
services centres, departments or functions.
o Services business mostly involves in distribution operation or
delivery function.
o Examples of services business:

Transportation • airlines, freight and cruises
Education • colleges and universities
• hospitals and clinics
Healthcare • radio and television
Media • amusement parks and cinema
• gymnasiums and swimming pools
Entertainment
Sports

o Differences between Service and Manufacturing Business

MANUFACTURING SERVICE

• Production and Sales of • Provision of intangible
tangible. service.

• Products can be stored. • Services cannot be stored
• Easy to control the quality since it is delivered and
consumed simultaneously
of products.
• Output is easy to measure. • Difficult to control the
quality of services

• Output is difficult to
measure

OBJECTIVES Determine what cost is most appropriate for each organization

Accumulate costs under suitable headings and to express
them in terms of the unit of service rendered

Calculate the cost that will be charged to each department
which is using the service rendered

Compare the cost incurred between similar organizations, for
example between various hospitals, between power stations
and other similar organizations if a common cost unit is agreed.

132 BASIC COST ACCOUNTING

5.2.2. Explain the features of service costing

Characteristics The features are more or less similar with job
of SERVICE order costing, except that it only concerned
COSTING with services, not goods.

For example: architect firm, law firm, dental
clinic, accounting firm, workshop

Services rended according to the
customer'sneeds

Operating and service costs usually collected
under Variable or running costs and fixed or
standing costs

The costs may be collected for different costs
units so that the relevance and utility of cost
could be understood.

5.2.3. Describe unit cost associated under the service costing method

A. ASCERTAINMENT OF COSTS
o Typical cost units used in service costing are shown below:

Service Possible Cost Units
Transport Tonne - mile
Passenger - mile
Hospital Miles travelled
Patient - days
Electricity No of operations
Hotel Kilowatt - hours
Restaurant Occupied – bed days
Colleges Meals served
Full time equivalent student

o Accumulation of costs
 Each organization will have to determine what cost is the most
appropriate for its own purposes.
 Whatever cost unit is decided upon, the calculation of cost per
unit is done in a similar fashion to output costing.

133 BASIC COST ACCOUNTING

 The average costs of the units of service provided are calculated
by dividing the total costs by the total amount of service provided.
FORMULA

Total Cost per Period
Cost per Service Unit =

No. of Service Units Supplied in the Period

 Operating and service total cost are usually collected under the
following headings:

FIXED / STANDING COSTS VARIABLE / RUNNING COSTS

Charges which are Costs that vary from day to
incurred whether or not the day operation

service is in operation or
not

Name of Company

Statement of Operating Cost for the month ______

Cost per month Total Costs

(RM) (RM)

Running Costs: XX

(+) Standing Costs XX

TOTAL COSTS XXX

134 BASIC COST ACCOUNTING

EXAMPLE 5.7
TRANSPORTATION

Mr X runs a bus service company and he has five buses. In one-year period
there are 20 000 passengers and its runs in all 50 000 kilometres. The total cost
of operation in a year is RM25,000,000.

You are required to compute the cost per passenger per running mile.

Solution:

Cost per passenger per Total costs of operation
Total passenger X Total running mile
running mile unit =

RM 25 000 000
=

(20 000 passengers X 50 000 km)

= RM 0.025

EXAMPLE 5.8
FOOD SERVICES

Mat Burger Enterprise makes and sells various types of burgers in Merlimau.

The following costs were incurred during October.

Buns RM
Tomatoes 400
Lettuce 350
Cucumber 400
Meat 100
Other ingredients 600
Cooks' wages 180
Servers ' wages
Supervisor's salary 2,650
Utilities for kitchen 1,800
Depreciation of cooking equipment 2,000
Rent (included in rent is rental for kitchen RM 500)
Business license 450
Depreciation for table and chairs 200
Average number of customer in October are 2,000 900
customers. 280
250

135 BASIC COST ACCOUNTING

Required:
Determine the average cost per burger for the month.

Solution:

Cost per burger = Total costs of operation
Total number of customers

RM 10,560
=

2,000 customers
= RM5.28

EXAMPLE 5.9
HAIRDRESSING SERVICE

Twins Sisters Enterprise is a family own business that provides saloon services in
Muar. The business rents a shop lot whereby a quarter of the area is
considered as general and administration office.

The following information relates to operation of the business in January:

Rental cost RM
Depreciation of furniture 2,500
Workers' salaries 3,000
Electricity and water expenses 8,000
Consumable supplies such as shampoo, conditioner, 1,500
hair color etc. 2,000
General expenses
Average number of customer per annum is 4,500 800

Required:
Determine the cost per customer in January.

Solution: Total number of customers
Average customer per =
month
Month
Cost per customer
4,500
=

12

= 375 customers

Total costs of operation
= Average customer per month

136 BASIC COST ACCOUNTING

RM 17,800
=

375 customers
= RM47.47

ENRICHMENT EXERCISE 5.2
Rebung Sdn Bhd is a haulage contractor and operator three (3) tow trucks.
The following information is available:

Loading Cost RM 9.00 per tonne
Fuel Cost RM 0.75 per km
Repair cost RM0.45 per km
Depreciation RM 1.50 per km plus RM 150 per month per
vehicle
Drivers’ wages RM 900 per month per vehicle
Supervision expenses RM 1 000 per month
General expenses RM 650 per month

During the month of June, it is expected that all the three tow trucks will be

fully utilized. A total of nine trips will be made and the return journey will be

empty. The following information is given:

No of trip Tones Kilometers
Carried travelled
1
2 68 720
3 56 1 060
4 80 1 560
5 64 460
6 52 880
7 80 1 920
8 58 360
9 52 400
50 540

Calculate:
a) Total running costs
b) Total standing costs
c) Total costs
d) The average cost per tonne per km for the month of June-

137 BASIC COST ACCOUNTING

PRACTICE QUESTIONS
QUESTION 1
Distinguish between job costing and batch costing.

QUESTION 2
State any FIVE information in job cost card.

QUESTION 3

Lazaza Sdn Bhd manufactures IT equipment for the local market. The data for the
period ended 31 December is as follows:

Basis of overhead absorption Machining Assembly
department department
Budgeted overhead % of direct
Budgeted direct labour hour Machine labour cost
Budgeted direct labour cost hours RM 200 000
per hour 25 000 hours
Budgeted machine hours RM 260 000
Actual direct labour hours 15 000 hours RM 5 per
Actual machine hours hour
RM 2 per
hour 18 000 hours
30 000 hours
26 000 hours 15 000 hours
20 000 hours
30 000 hours

During the month the company received orders for Job no 711. The following data
relates to the job:

Direct material: Job no 711
PQS 120
PVQ 134 RM 6 000
RM 10 000
Material return to supplier
Direct Labour: RM 500

Machining department (RM 4 per hour) 1 000
Assembly department (RM 6.50 per hour) 1 500
Hire special machine RM 4 200
10% of
Administrative cost production cost

138 BASIC COST ACCOUNTING

Machine hours: 1 240 hours
Machining department 825 hours
Assembly department

Profit is 25% on selling price

Required:

Prepare a job cost sheet showing the Prime cost, Production cost, Total cost and
Selling price for Job no 711.

QUESTION 4

Prepare a job cost sheet for Job No. KTNX50 which was completed in October
using the following data:

Department Department

AB

Direct labour hours 10 20

Machine hours 50 15

Direct Material cost (RM) 600 450

Direct Labour cost per hour (RM) 50 20

Additional information:

a. Production overhead costs for Department A and B are absorbed using
RM10.50 per machine hour and 115% of the direct labour cost respectively.

b. Advertising cost incurred RM550.
c. Shipping expenses incurred RM200
d. Selling and administrative salaries RM950
e. Profit for Job No. KTNX50 is 20% on cost.

QUESTION 5

Mr Aliman operates a coffee shop at Banda Baru Uda. During peak periods, his
shop operates 24 hours a day. Half of his business activities is takeaway. The
following are the expenses incurred in December:

Cost of material used in doughnuts RM
Salary of the supervisor of the overnight shift when needed 3 000
Straight line method depreciation on cooking equipment 1 200
400

139 BASIC COST ACCOUNTING

Power costs to operate the ovens. 300
Monthly rental 500
Cost of drinks served 1 000
Insurance premium covering his equipment 300
Equipment maintenance costs 150
Cost of supplies (ie napkins, plastic bags and boxes) 200

Calculate the following costs:

a. Total variable costs
b. Total fixed costs

QUESTION 6

Faizal provides transportation services using Uber system in Bandar Melaka.
Calculate the following costs:

a. Variable cost per km
b. Total fixed cost for the first six month

The following is his expenses for the first six months: RM
2 500
Fuel expenses 150
Toll charges 400
Maintenance cost 550
Monthly car instalment 30 000 km
Travelling activity

QUESTION 7

Mania Ltd undertook three jobs in January 2020. All jobs were started in January
2020. The costs associated with the job, for the month of January were as follows:

Materials issued from stores Job X1 RM Job X3
Materials returned to stores 3,00 Job X2 5,000
Special materials purchased 30 7,000
Direct wages 100 -
200 70 300
- 400
2,000

140 BASIC COST ACCOUNTING

It is estimated that the overhead for 2011 as RM50,000 and the direct labour hours
as 25,000. Overhead is to be absorbed on a direct labour hour basis. Overhead
incurred in January was RM4,000.

Direct workers are to be paid RM1 per hour.

Job no. X1 was the only job completed and dispatched in January. The selling
price is RM7,000.

Prepare from the above data the tabulated cost cards for jobs Xl, X2, and X3.

QUESTION 8

Amani Manufacturing Co. Ltd. produces special purpose grinding machines. A
customer has asked Amani Manufacturing. Co. Ltd. to quote a price for making
the machine. The following estimates were available.

Direct material cost RM500

Direct wages: Machining 300 hours at 50 cents.
Assembling 200 hours at 25 cents.

Overhead is absorbed at 20 cents per direct labour hour. Selling and distribution
overhead is 25% of production cost. Profit is 25% of total cost.

Prepare the job cost card indicating the price to be quoted.

QUESTION 9

Mayview Glory Sdn. Bhd. has three departments that produce items ordered by
customer. The company applies predetermined overhead rates of absorption to
absorb the department overheads for all complete work orders.

The following basis are used to absorb overhead costs for each job:

Department P - Machine Hours
Department Q - Direct Labour Hours
Department R - Direct Material Costs

The company estimates the costs below for the year ended December 2019:

141 BASIC COST ACCOUNTING

Production overhead (RM) Department P Department Q Department R
Direct labour (RM) 22,000 43,940 16,000
Direct material (RM) 8,350 10,600 5,800
Direct labour hours 8,600 12,200 5,080
Machine hours 10,000 13,000 6,000
5,500 7,350 1,150

Information for Job No. 1305 is as follows:

Direct labour (RM) Department P Department Q Department R
Direct material (RM) 5.25 8.80 2.50
Direct labour hours 8.00 12.50 5.75
Machine hours 6 8 4
4 3 1.5

Required:

a) Compute the overhead absorption rate for each department.
b) Show the total overhead absorbed from each department.
c) Analyze the total costs and what is the selling price if profit is 15% on total

cost?

QUESTION 10

The Mawarni Company has two producing departments: assembly and finishing.
The company has been using a plant wide predetermined overhead rate based
on direct labour hours. The following estimates were made for the current year:

Manufacturing Overhead Assembly Finishing Total
Direct labour hours RM200,000 RM100,000 RM300,000
Machine hours
40,000 35,000 75,000
5,000 16,000 21,000

Mawarni started and completed Job 1512 during the year. The job-order cost
sheet indicated the following:

Materials Requisitioned RM18,000
Direct labour cost RM16,000
Direct labour hours:
1,700 hours
Assembly 1,300 hours
Finishing

142 BASIC COST ACCOUNTING

Machine Hours: 1,000 hours
Assembly 700 hours
Finishing

A total of 2,000 units were produced on Job 1512.

Required:

a. Assume that Mawami uses a plantwide predetermined overhead based on
direct labor hours. Calculate the total cost and the unit cost for each of the -
2,000 units produced by Job 1512.

b. Assume that Mawami uses separate departmental overhead rates based
upon direct labor hours for assembly and machine hours for finishing.
Calculate the total cost and the unit cost for each of the 2,000 units
produced by Job 1512.

QUESTION 11

Ulwan Ltd. Provides services to factory workers in Dongongon. The following
information is for January 2021.

No. of workers 40 people
No. of meal served 80 meals per day
Operating days 20 days per month
Fresh cooking materials RM8 per meal per day
Worker's salary RM4,000 per month
Water & electricity RM2,400 per month
Dry cooking materials RM200 per day
Cleaning aids RM300 per month

Show:
a. Statement of operating cost for January 2015
b. Cost per meal
c. Operating cost per day

143 BASIC COST ACCOUNTING

QUESTION 12

Tan School provides typing and shorthand lessons at certificate level. It operates 5
days a week, 4 weeks a month. The following info is for December 2016.

Lecturer's salary RM60/hour
Total teaching hours 5 hours /day
No. of lecturer 15
Administration salary RM8,000p.a
Printing expense RM5/week/student
Water and electricity RM100/week
Office rent RM300/week
Depreciation of office equipment RM700/month
No. of students 250
No. of classes 6

Calculate:

a. Operating cost per month
b. Operating cost per student per month

BUDGETS FOR PLANNING AND CONTROL144 BASIC COST ACCOUNTING

TOPIC 6

6.
6.1. Apply the budgeting system
6.1.1. Define the meaning of budgeting
6.1.2. Discuss the advantages/purpose of
budgeting
a. Planning tool
b. Communication tool for the whole
organization
c. Resources allocation tool
d. Performance measurement tools
6.1.3. Explain different types of budget:
a. Static budget
b. Flexible budget

6.2. Discover the nature of static and flexible budget
6.2.1. Define the static and flexible budget
6.2.2. Differentiate between static budget and
flexible budget
6.2.3. Identify the limitation in static and flexible
budget

6.3. Construct the static and flexible budget
6.3.1. Prepare static budget and flexible budget

145 BASIC COST ACCOUNTING

TOPIC 6: BUDGETS FOR PLANNING AND CONTROL

6.
6.1. Apply the budgeting system
6.1.1. Define the meaning of budgeting

What is a budget?
A budget is a financial plan for future activities.

The budgets used in business often include a sales or revenues
budget detailed by products or services, production budgets,
budgets for each department in the company, cash budget,

capital expenditures budget, and others.

 The combination of all the budgets is referred to as the company's
master budget or profit plan.

 Budgets help management decide which activities it will
undertake and how the company's resources will be used.

 If the budgeted income statement and balance sheet coming
out of the master budget are not acceptable, management can
make the needed changes before the year actually begins.

Budgetary Control

Budgetary control is the process of preparing budgets for the
future period, comparing the standards set by budget with the
actual performance, finding out the reasons for the differences

in performance and taking corrective actions.

TYPES OF CONTROL

Operational Budget Cash Flow Budget Capital Expenditure
Budget

3 STEPS PROCESS

PREPARE BUDGETS COMPARE WITH CORRECTIVE
ACTUALS ACTIONS

146 BASIC COST ACCOUNTING

OBJECTIVES OF BUDGETARY CONTROL

To PLAN the activities To COORDINATE the To CONTROL each
of a business so that activities of the function, which will
the objective of the business so that: involve determining
responsibilities for any
business can be • They work towards deviations from the
achieved the common
objectives plan and taking
corrective actions.
• Profit can be
achieved with the

minimum
investments

ADVANTAGES DISADVANTAGES

• Effective tool for measuring • Future uncertainty reduces

the performance the value of budget

• Identify weak areas control

• Improvement measures • It makes talented
• Brings efficiency employees complacent
• Brings discipline and overburdens the less
• Improve coordination talented ones
• Simple tool
• Performance on track • Conflicting departmental
goals.

BUDGET A quantitative statement (expressed in financial terms)
that explains the action plan to be taken by an
organization's management to fulfill the objective
specified in the plan.

The plan of action is for the forthcoming period.

Also reffered to as forecasted financial statement or
pro-forma financial statement.

A good planning and controlling tool
- If at the end of the period, deviation occurs from the
planning or budget made, the management will
attempt to identify the weaknesses or the irregularities
that exist and take the necessary corrective actions.

Prepared for responsibility centres - department or
activity.

147 BASIC COST ACCOUNTING

BUDGETING A formal process of financial planning using estimated
financial data.

The estimates could be on a fixed basis or on a flexible
basis.

Budgeting is not merely forecasting nor it is an estimate
or prediction.

It is a plan and an attempt at the beginning of the
period to expect the revenue and the cost during the
period, and to control the activity to achieve the same.

Important requirement of budgeting:
 Effective organization

- This requires work activities being grouped
according to their inter-relationship, defining authority &
responsibility, delegating authority & responsibility,
developing relationships to achieve better coordination
& communication
 Human involment

- Surveillance device, pressure device & reflection of
management attitudes.

6.1.2. Discuss the advantages/purpose of budgeting

PLANNING TOOL

• The formal process of budgeting works within the
framework of long term, overall objectives to produce
detailed operational plans for different sectors and facets
of the organization.

• Planning is the key to success in business and budgeting
forces planning to take place.

• Budgeting process provides for the coordination of the
activities and departments of the organization so that
each facet of the operation contributes towards the
overall plan.

COMMUNICATION TOOL

• The budgetary process includes all levels of management
as it's an important avenue of comunication between top
and middle management regarding the firm's objectives
and the practical problems of implementing these
objectives.

• When the budget is finalized, it communicates the agreed
plans to all the staff involved.

• Vertical communication - requires communication
between functions to ensure that coordination is achieved.

148 BASIC COST ACCOUNTING

RESOURCES ALLOCATION TOOL

• In general, organization's resources (money, materials,
facilities and employees) are limited.

• Proper planning and effective budgeting are essential for
judicious utilization of resources

• A good and comprehensive budget allocated the
resources accordung to their applicability.

PERFORMANCE MEASUREMENT TOOLS

• A budget defines the goals and objectives that can be
used as a benchmark to evaluate the performace of a
department or employees in an organization.

• Process of comparing actual results with planned results
and reporting on the variations.

• When results do not agree with plan, managers attempt to
determine the causes of divergence.

MOTIVATION TOOL

• Benchmark set by the management is based on the
budget that can motivate employees of an organization to
work hard in order to achieve the budget and organization
goals.

• Sometimes they try to achieve more than the budgeted
target to gain extra in incentives.

6.1.3. Explain different types of budget

Static Flexible Operational Financial
Budget Budget Budget Budget

►Fixed budget which is ►Budget which is
designed to remain designed to adjust the
unchanged irrespective permitted cost levels to
of the volume of output suit the level of activity
or turnover attained. actually attained.
STATIC BUDGET
FLEXIBLE BUDGET ►Also known as variable
budget to control the
manufacturing overhead
costs.

149 BASIC COST ACCOUNTING ►Part of Master Budget
that comprises the
►Individual budget that capital budget, cash
results in the preparation budget, budgeted
of budgeted income balance sheet and
statement. budgeted statement of
►The budgets establish cash flows.
goals for the company's
sales and production ►It focuses on the
personnel. impact of operations
OPERATIONAL BUDGET and planned capital
FINANCIAL BUDGET outlays on cash.

6.2. Discover the nature of static and flexible budget
6.2.1. Define the static and flexible budget

What is a static budget?

A static budget is a budget in which the amounts will not change
even with significant changes in volume.

I. EXAMPLE OF A STATIC BUDGET
o Assume that a company's annual budget is a static budget. In
this static budget is a line "sales commissions expense budget
RM 200 000."
o This means that the budget for sales commissions expense will
be RM 200 000 whether the actual sales for the year are RM 2
million, RM 4 million or RM 8 million.

What is a flexible budget?

A flexible budget is a budget that adjusts or flexes with changes in
volume or activity. The flexible budget is more sophisticated and

useful than a static budget.

(The static budget amounts do not change. They remain
unchanged from the amounts established at the time that the

static budget was prepared and approved.)

For costs that vary with volume or activity, the flexible budget will
flex because the budget will include a variable rate per unit of
activity instead of one fixed total amount. In short, the flexible
budget is a more useful tool when measuring a manager's
efficiency.