Type Here to Get Search Results !

ACCOUNTANCY FORM SIX TOPIC 8: COST ACCOUNTING

 

 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

  1. These are semi-finished goods
  2. 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;

  1. Prepare a production cost statement
  2. Prepare a profit/loss statemen
  1. 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
  1.   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

  1. Fixed cost remain constant at all levels of activity within the given range
  2. It is possible to distinguish between the cost and sales of a single product only
  3. This chart shows the relationship between the cost and sales of a single product only
  4. The techniques of production remain unchanged.

ILLUSTRATION

  • You are required to prepare from the following information;
  1. a break even chart
  2. contribution /sales graph or profit volume graph
  3. 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

READ TOPIC 9

Post a Comment

0 Comments
* Please Don't Spam Here. All the Comments are Reviewed by Admin.

Top Post Ad

Below Post Ad

Ads Area