TOPIC 8: COST ACCOUNTING
COST ACCOUNTING
- concept
- Objectives and importance of cost accounting
- Differences btw cost accounting and financial accounting
- Cost classification
- Breakeven point (B.E.P)
- Cost for manufacturing enterprise
Simple cash budget
- Concept of cash budget
- Importance of preparing cash budget
- Compute and prepare a simple cash budget for a business
CONCEPT OF COST
This refers to the value of economic resources used as the result of production of any commodity
For example;
100’000/= spent for producing 100 units of mobile phones. That amount of money used is known as cost.
Cost accounting
- It is concerned with the ascertainment and allocation of cost
- In order to produce products or provide any services, some amount of money are spent by an organization. This amount is regarded as cost
- This cost must be recorded properly and charged to the relevant jobs/ activities
- This cost are presented to management for decision making and evaluating a performance of an organization
- The main objective of cost accounting are to establish budget and standard cost and to analyze the differences between budgeted and actual performance.
Objectives of cost accounting
i.) Cost ascertainment
-The cost of producing products/ providing services must be ascertain accurately. This cost consist of raw materials, labor
-The cost must be kept at minimum possible level
-The detailed information about cost help the management to make some decisions and to evaluate the performance of an organization.
ii.) Disclosure of wastes
–The cost incurred for the production of any commodity can be determined in advance in view of the past experience.
That is; cost accounting is an important aid to disclose waste
iii.) Decision making
–Cost accounting provides necessary information to the management for making decision
iv.) Cost control
-When we talk about cost control we mean material cost, labor cost and other must be obtained at desirable levels. Cost accounting principles are used to eliminate unnecessary cost.
v.)Planning
–The management prepare plans for the expansion of business activities.
–The installation of new machine and plant is needed to increase t he production capacity of manufacturing concern in view of greater demand of its products. Thus the past experience and cost data are used to prepare.
vi.)Measurement of efficiency
–Cost data are used to measure the efficiency of a company
–if there are various department/division of business enterprises then it is important to determine the relative performance of this department.
vii.)Setting selling price
–It is more advisable that a business concern should ascertain its cost and then add its profit into cost of sales to obtain selling price.
–The cost data are also helpful to set a selling price.
COST CLASSIFICATION
Cost may be classified under three categories;
i.) Fixed and variable cost
ii.) Direct and indirect cost
iii.) Cost classification by function
FIXED AND VARIABLE COST. (FIXED COST)
FIXED COST:
Is the cost which remains the same at various level of output. This cost does not change with the change in output i.e. Remain the same even at Zero level of output
-This cost incurred mostly in periodic basis
e.g.; – Rent of premises and salaries of permanent employees
VARIABLE COST
Is the cost which changes with the level of production or output.
When production increases, variable cost also increases
Example of variable cost is raw materials, direct wages and other related.
DIRECT AND INDIRECT COST.
DIRECT COST
Is that cost which can be identified on the production of some
‘specific’ products. Example of direct cost is raw material and labor
cost. Since they can be charged and identified to the production of some
specific outputs, this is why we say raw materials and labour cost are
good examples of direct cost.
Cost associated directly with the production of goods/outputs.
INDIRECT COST.
Is the cost which cannot be identified to the production of some specific products or outputs. Examples of this are; water charges, interest rate, indirect
Materials, communication charges etc.
Cost classification by function
Cost may be classified by its functions or activities such as that or consist of production cost, administration cost and selling and distribution cost
-Production cost consists of raw materials, labor, rent of factories etc.
-Administration cost involves office cost such as office rent, postage, telephone, electricity etc
-Selling and distribution cost; this consist of cost which are incurred to promote the selling of goods and delivery these goods to the customers E.g. Advertisement, salesmen commission, depreciation of delivery van, carriage outward, carriage inward.
ANALYSIS OF COST
The cost (total) incurred by the manufacturing firm may be analyzed by cost accountant as under such that;
-Direct raw materials (D.R.M) xx
-Direct labor/Direct wages xx
-Direct any other cost xx
Total direct cost = prime cost xx
Add;
Production overhead (manufacturing overhead)
- Indirect wages xx
- Indirect factory wages xx xx
Manufacturing/production cost xxx
In case of profit or loss
COST STATEMENT FOR THE YEAR ENDED
| Total Direct Cost | |
| Raw materials (R.M) | xx |
| Direct labor ( D.L) | xx |
| Prime cost of production | xxx |
| Add ; Manufacturing over head | |
| Factory rent xx | |
| Power xx | |
| Supervision expenses xx | xxx |
| Production cost of goods produced | xxx |
| Add ;Administration cost and distribution | |
| Office rent xx | |
| Depreciation office xx | |
| Promotion xx | |
| Advertisement xx | |
| Carriage outward xx | xxx |
| Cost of goods sold | xxx |
| Add ; Profit margin | xx |
| Total sales | xxx |
Selling price รข”€ total costs = profit/loss on production
-Direct raw materials involves cost of raw materials, opening stock of raw materials, closing stock of raw materials, carriage inwards of raw materials etc.
ILLUSTRATION 1
Prepare a cost statement from the following information;
Raw material 300,000
Direct labor 80,000
Factory rent 15,000
Supervision salary 20,000
Administration expenses 40,000
Selling and distribution expenses 15,000
NOTE; Profit margin is 50% on cost, calculate selling price.
COST STATEMENT FOR THE YEAR ENDED
| Total Direct Cost | |
| Raw material | 300,000 |
| Direct labor | 80,000 |
| PRIME COST | 380,000 |
| Total M.O.H (Total Manufacturing overhead) | |
| Factory rent 15,000 | |
| Supervision salary 20,000 | 35,000 |
| Production cost of goods produced | 415,000 |
| Administration expenses 40,000 | |
| Selling and distribution 15,000 | 55,000 |
| Cost of goods sold | 470,000 |
| Add 50% margin | 235,000 |
| Selling price | 705,000 |
Since profit = cost x 50%
= 470,000 x 50%
= 235,000
Cost of goods sold = 470,000
Add; profit margin = 235,000
Selling price 705,000
ILLUSTRATION 2
From the following information prepare a cost statement
R.M 80,000
D.L 35,000
Factory rent 5,000
Power 3,000
Indirect wages 2,000
Administration expenses 4,000
Selling and distribution expenses 3,000
Profit is 25% on sales
COST STATEMENT FOR THE YEAR ENDED
| materials | 80,000 | |
| Direct labor | 35,000 | |
| PRIME COST | 115,000 | |
| MOH / FOH | ||
| Factory rent | 5,000 | |
| Power | 3,000 | |
| Indirect wages | 2,000 | 10,000 |
| Production cost of goods produced | 125,000 | |
| Distribution expenses | 4,000 | |
| Selling &distribution expenses | 3,000 | 7,000 |
| Cost of goods sold | 132,000 | |
| Add; profit margin | 33,000 | |
| Total sales | 165,000 |
NOTE; 1.WIP- Is the cost of those items which remain incomplete at the end of the specific period
- These are semi-finished goods
- WIP may be valued at prime cost or factory cost
ILLUSTRATION 3
From the following information prepare a cost statement
Stock on 1st. 1 2006 R.M 45,000
W.I.P 22,000
Stock on 31st.12.2006 R.M 65,000
W.I.P 19,000
Purchases of R.M 670,000
Carriage inward 25,000
Returns of R.M 15,000
Direct wages 280,000
Factory rent 60,000
Factory power 48,000
Depreciation of plant 15,000
Supervision salary (factory) 55,000
Office salaries 70,000
Office expenses 12,000
Depreciation of office equipment 5,000
Salesman salaries 68,000
Delivery van expenses 27,000
Depreciation of delivery van 18,000
Advertisement 12,000
NOTE
i.) If there is office salary and supervisor’s salary here normally supervisor’s salary is for factory
ii.) If the question is silent then the amount of W.I.P is very little compare to R.M
or purchase of R.M then it means it is in the final stage so should be finalized in the factory overhead level
iii.) But another time you may be informed if W.I.P is in prime level (early stage) or factory overhead level (final stage)
SOLUTION FOR ILLUSTRATION 3
COST STATEMENT FOR THE YEAR ENDED 31.12.2006
| Opening stock of (R.M) | 45,000 | |
| Add : Purchases of (R.M) | 670,000 | |
| Add: Carriage inwards | 25,000 | |
| 695,000 | ||
| Less: Returns outward (R.M) | 15,000 | 680,000 |
| Cost of R.M available for use | 725,000 | |
| Less : Closing stock of (R.M) | 65,000 | |
| Cost of R.M used/consumed | 660,000 | |
| Add : Direct wages | 280,000 | |
| Prime cost | 940,000 | |
| Add :Manufacturing over head (M.O.H) | ||
| Factory Rent | 60,000 | |
| Factory power | 48,000 | |
| Supervision salary | 55,000 | |
| Depreciation of plant | 15,000 | 178,000 |
| 1,118,000 | ||
| Add : W.I.P (opening) | 22,000 | |
| 1,140,000 | ||
| Less : W.I.P (closing) | 19,000 | |
| PRODUCTION COST | 1,121,000 | |
ILLUSTRATION 4.
ABC manufacturing co provides the following information for the month of October 2011
1st October 2011.
Raw materials 40,000
W.I.P 12,000
Finished goods 20,000
Stock on 31st October 2012
Raw materials 35,000
Work in progress 17,000
Finished goods 23,000
Purchases of raw materials 250,000
Factory wages 80,000
Salaries of supervisors 30,000
Factory rent 10,000
Factory power 5,000
Sundry factory expenses 15,000
Office salary 13,000
Sundry office expenses 7,000
Salesmen salary 18,000
Sundry selling expenses 6,000
Sales 500,000
Required;
- Prepare a production cost statement
- Prepare a profit/loss statemen
- I) COST STATEMENT FOR 30th SEPT 2012
| Opening stock of (R.M) | 40,000 | |
| Add : purchases of (R.M) | 250,000 | |
| cost of R.M available for use | 290,000 | |
| less : Closing stock of (R.M) | 35,000 | |
| Cost of R.M used | 255,000 | |
| Add : Factory wages | 80,000 | |
| PRIME COST | 335,000 | |
| Add : Manufacturing overhead (M.O.H) | ||
| Supervisor’s salary | 30,000 | |
| Factory rent | 10,000 | |
| Factory power | 5,000 | |
| sundry factory expenses | 15,000 | 60,000 |
| 395,000 | ||
| Add: W.I.P(01.10.2011) | 12,000 | |
| 407,000 | ||
| Less: W.I.P(31.09.2012) | 17,000 | |
| PRODUCTION COST | 390,000 |
- II) PROFIT/LOSS STATEMENT FOR 30th SEPT 2012
| Sales | 500,000 | |
| Less: Cost of good sold | ||
| Opening stock of finished goods | 20,000 | |
| Add: Production cost | 390,000 | |
| 410,000 | ||
| Less: closing stock finished goods | 23,000 | 387,000 |
| Gross profit | 113,000 | |
| Less: Administration cost/expenses | ||
| Office salary | 13,000 | |
| Sundry office expenses | 7,000 | |
| Selling and distribution cost/expenses | ||
| Salesmen salary | 18,000 | |
| Sundry selling expenses | 6,000 | 44,000 |
| Net profit | 69,000 |
BREAK EVEN POINT (B.E.P)
This is level of activity at which total sales revenue is equal to total cost (TR = TC). This means that profit = 0 which means there will be no profit and no loss.
ASSUMPTION OF B.E.P CHART
Selling price and variable cost per unit remain the same at various levels of output
- Fixed cost remain constant at all levels of activity within the given range
- It is possible to distinguish between the cost and sales of a single product only
- This chart shows the relationship between the cost and sales of a single product only
- The techniques of production remain unchanged.
ILLUSTRATION
- You are required to prepare from the following information;
- a break even chart
- contribution /sales graph or profit volume graph
- show the margin of safety in this chart if actual level of output is 20’000 units
Selling price per unit is 100/=
Variable cost per unit is 50/=
Fixed cost is 600’000/=
BREAK EVEN CHART
| LEVEL OF OUTPUT PER UNIT | FIXED COST | VARIABLE COST Tshs 50 per unit | T.COST | SALES Tshs 100 per unit | P & L |
| 5000 | 600,000 | 250,000 | 850,000 | 500,000 | -350,000 |
| 10,000 | 600,000 | 500,000 | 1,100,000 | 1,000,000 | -100,000 |
| 15,000 | 600,000 | 750,000 | 1,350,000 | 1,500,000 | 150,000 |
| 20,000 | 600,000 | 1,000,000 | 1,600,000 | 2,000,000 | 400,000 |
MARGIN OF SAFETY
Margin = profit
- Margin of safety ; This represents the difference between the actual level of activity and the breakeven level of activity e.g If 80% is actual level of activity and Break even is 30%, calculate marginal safety
=Margin of safety= Actual sales-BED sales
=Margin of safety = 80% – 30%
Margin of safety = 50%
ANGLE OF INCIDENCE;
This shows at the breakeven point between the sales curve and total cost curve.
- This angle indicates the rate of increase in profit after the Breakeven point
- If this angle is wider, then profit will be increased at a higher rate after the breakeven point
CALCULATION OF BREAK EVEN POINT
ILLUSTRATION 1
State the formula to calculate breakeven point in terms of unit to be produced and sold.
We are going to use the following abbreviations;
S.P = Selling price
C.P = Cost price
P = Profit
C.M = Contribution margin & contribution margin per unit = CM/U
S.P = C.P +P
C.P = F.C + V.C
Contribution margin = S.P – V.C
B.E.P In terms of unit produced = (F.C)/(Contribution margin per unit) =
B.E.P in terms of sales value= (F.C)/(CM/C) x (S.P)/U
Contribution margin per unit = (S.P)/U – (V.C)/U
Sometimes; variable cost = material + labour
Contribution margin ratio =(C.M)/(S.P) or (F.C)/(1-V.C/SP)
ILLUSTRATION 2
Star manufactures a product called plate, in his own factory. Fixed cost per month is 45’000, each unit of plate cost 8/= by way of material and 17/= by way of direct labor. The selling price per unit is 40/=. How many units must he manufactures and sale per month in order to Break even
SOLUTION;
GIVEN DATA
Fixed cost = 45’000
Selling price/unit = 40/=
Unit of plate by way of material = 8/=
Unit of plate by way of direct labor = 17/=
Contribution margin = selling price – variable cost
Variable cost = material + labor
Variable cost = 8 + 17
Variable cost = 25
Contribution margin = 40 – 25
15
=15
STATEMENT OF PROFIT / LOSS
Sales (3000 x 40/=) 120,000
Less; variable cost
Unit of plate by way of material ( 8 x 3000)= 24,000
Unit of plate by way of direct labor(17 x 3000)= 51,000
Fixed cost 45,000 (120,000)
B.E.P (Break Even Point) 0
The above presentation verify that sales of 120,000, profit will be ‘0’.
ILLUSTRATION 3
Basic facts as from the above problem assume that the company wishes to make a profit of 6000 per month. Calculate the number of units that she must produce and sale to attain this profit also calculate the amount of sales revenue that can generate this profit.
Solution;
(Fixed cost+desired profit)/(contribution margin unit)
Sales revenue = Quantity to be produced x SP/U
Let DM/U = 8
DL/U = 17
F.C = 45,000
Desired profit = 6000
Contribution margin = 15
SP/U = 40/=
Quantity to be produced = F.C + D.F/CM/U→(Fixed cost+Desired profit) ⁄ Contribution margin per unit
(45,000 + 6000)/ 15
(51,000/15) = 3400
Quantity to be produced = 3400
Sales revenue = Quantity to be produced x SP/U
= 3400 X 40
= 136,000
STATEMENT OF PROFIT/LOSS
| Sales | 136,000 | |
| less ; variable cost | ||
| unit of plate by way of material (8 x 3400) | 27,200 | |
| unit of plate by way of direct labour (17×3400) | 57,800 | |
| Fixed cost | 45,000 | -130,000 |
| PROFIT | 6,000 |
ILLUSTRATION 4.
P.LTD manufactures a standard product called Pipi. The following is a summary of their cost incurred in 2008.
Fixed factory cost 24,000
Fixed administration cost 10,800
Direct labour 48,000
Depreciation of plant (variable cost) 8,000
In 2008, a total of 40’000 units of pipi were produced/ manufactured at a standard price of 5.20£ per unit.
The company has been approached by manufacturer/producer to supply annually 5000 units of pipi at 4.50£ per unit, At present the whole of P.LTD’s Plant capacity is being used, so to produce the additional 5000 units, the company will need to acquire plants at a cost of 20’000£ that will have a useful life of 10 years and no residual value. Additional production will also increase the factory cost by 5% and selling distribution cost by 10%.
Required:
Would you recommend that P.LTD should accept the order?
Solution:
STATEMENT OF PROFIT OR LOSS BEFORE ACCEPTING ORDER
| Sales (40’000 x 5.20) | 208,000 | |
| Less; variable cost | ||
| Material | 54,000 | |
| Direct labor | 4,000 | |
| Depreciation of plant | 8,000 | |
| FIXED COST | ||
| Fixed factory cost | 24,000 | |
| Fixed administration cost | 10,800 | |
| Fixed selling and distribution cost | 3,200 | (148,000) |
| PROFIT BEFORE ACCEPTING ORDER | 60,000 |
STATEMENT OF PROFIT/LOSS AFTER ACCEPTING THE ORDER
| Sales revenue (40,000 x 5.2) | 208,000 | |
| (5000 x 4.5) | 22,500 | 230,500 |
| less ; TOTAL COST | ||
| Material (45,000 x 1.35) | 60750 | |
| Direct labour (45,000 x 1.2) | 54,000 | |
| Depreciation of plant ; old plant ; 8000 | ||
| new plant; 2000 | 10,000 | |
| Fixed factory cost (24,000 x 5% )+24,000 | 25,200 | |
| Fixed admin. Cost | 10,800 | |
| Fixed selling and distribution cost (32000 x 10%) | 3,200 | 163,950 |
| PROFIT MADE BY BOTH NEW AND OLD ORDER | 66,330 |
Recommendations:
P Ltd should accept the order since it’s results to additional profit of Tshs. 6,550 (66,550-60,000)
WORKINGS
RAW MATERIALS
Material before order = 54,000
Units produced before order = 40,000
54,000/40,000 =1.35 units
= (Units produced before order + Additional units for order)
= (40,000 + 5000)
= 45,000
DIRECT LABOUR
Direct labor before order = 48,000
Units produced before order = 40,000
= 48,000/40,000 = 1.2 units
(Units produced before order + Additional units for order)
= 40,000 + 5,000
= 45,000
...
No comments:
Post a Comment