BBA 2003

COST ACCOUNTING

CHUANG WAN YIK

202389

AUGUST 2015

Contents
title page

Page 1 of 30
Task 1 4-14

1.1 Identify and give examples of each of the three basic coat elements

involved in the manufacture of a product

1.2 Explain the difference between the following terms

i Product coat and period cost

ii Sunk cost and relevant coat

iii Fixed and variable coat

iv Avoidable and unavoidable costs

vi Direct and indirect costs

vii prime coat and Conversion cost

1.3 Discuss the behavioral classification of costs, explaining all the terms

used therein.
Task 2 15-18

Assume the following purchases were made in ABC

Date of purchase Units Purchased Price per Unit

st
1 January 500 100
nd
2 January 600 200
th
3 January 800 400
th
Units used on 4 January are 900.

Required :

Determine the cost of units used by using and the value of the closing stocks

by using FIFO,LIFO and Weighted Average Methods.

Task 3 19-21

Page 2 of 30
Based on the data below ,you are required to calculate the remuneration of

each employee as determined by each of the following methods.

i Hourly rate

ii Basic piece rate

iii Individual bonus scheme where the employee receives the bonus in

proportion of the time saved to time allowed

Name of employee SS RR PP
Units produced 270 200 220
Time allowed in minutes per unit 10 15 12
Time take (hour) 40 38 36
Rate per hour ($) 125 105 120
Rate per unit ($) 20 25 24
Summary 22

Reference 23

Coursework 24-28

Page 3 of 30
Task 1

1.1 Identify and give examples of each of the three basic cost elements involved in the

manufacture of a product

In the developed industry, cost accounting is a primary obligation for achieve

accomplishment to survive cut-throat and money-spinning, a manufacturer must

comprehend and control the three basic elements of manufacturing costs – direct

materials, direct labour and factory transparency. Direct materials Material costs refer to

the raw materials that actually create the product in question. Raw materials cover

anything from the finished product itself to any bolts, nuts and wood that went into

building the original product consist of all of the materials that become an integral part

of the finished product. Direct materials should include the actual cost of the materials,

as well as freight in, import duties, purchasing costs, receiving costs, storage costs and

other directly attributable costs of acquire the materials. Direct materials should be

recorded net of any trade, quantity or cash discounts attributed to the materials. Direct

labour consists of all of the recruits costs required to manufacture the finished product.

Direct labour should include wages, payroll taxes, and benefits associated with

personnel who are integral to manufacturing the finished product. Factory overhead the

current economic conditions, companies have been searching for ways to improve

efficiencies, in order to maintain profitability and a competitive advantage. Phase one of

this effort should be to perform an operational assessment to identify the strengths and

Page 4 of 30
key deficiencies within the manufacturing process. The assessment would include a

detailed review and analysis of manufacturing areas such as service and quality,

management and personnel abilities, reporting metrics and systems, inventory

management and plant physical layout. The assessment exposes areas within the

manufacturing process that can be used to initiate and concentrate improvement efforts

and cost reduction strategies. Cutting costs prior to performing an operational

assessment might not result in improved efficiency or profitability. 

Page 5 of 30
1.2 Explain the difference between the following terms

i Product coat and period cost

The key difference between product costs and period costs is that products costs are

only incurred if products are acquired or produced, and period costs are associated with

the passageway of time. Thus, a business that has no production or inventory purchasing

activities will incur no product costs, but will still incur period costs. Product costs are

initially recorded within the account asset. Once the associated goods are sold, these

capitalized costs are charged to expense. This accounting is used to match the revenue

from a product sale with the associated cost of goods sold, so that the entire effect of a

sale transaction appears within one income statement. Examples of product costs are

direct materials, direct labour, and allocated factory overhead. Examples of period costs

are general and organizational expenses, such as rent, office depreciation, office

supplies, and utilities. Period costs are sometimes broken out into additional

subcategories for selling activities and administrative activities. Administrative

activities are the most pure form of period costs, since they must be incurred on an

ongoing basis, irrespective of the sales level of a business. Selling costs can vary

somewhat with product sales levels, especially if sales commissions are a large part of

this expenditure.

Page 6 of 30
Product costs are sometimes broken out into the variable and fixed subcategories. This

additional in sequence is needed when calculating the break even sales level of a

business. It is also useful for formative the minimum price at which a product can be

sold while still generating a profit.

ii Sunk cost and relevant cost

Sunk costs and relevant costs are two distinctive types of costs that firms frequently

incur in the running of businesses. Sunk costs and relevant costs both result in an

outflow of cash and can reduce the firm’s income and profitability levels. Despite the

fact that they both incur a cost to the firm, there are a number of major differences

between sunk cost and relevant cost, in terms of the timeline in which each is incurred,

and the impact that they have on making future decisions. The article clearly explains

the concepts of sunk cost and relevant cost and highlights the similarities and

differences between the two. Sunk costs refer to expenses that have already been

incurred and arose as a result of decisions taken in the past. Sunk costs are a type of

irrelevant cost. Irrelevant costs are costs that do not influence managerial decision

making as they are a thing of the past. Since these costs and investments have already

been made they cannot be reversed or recovered, and irrelevant costs such as sunk costs

should not be used as a basis for making future decisions regarding a project or

investment. Relevant costs are the costs that are able to impact and influence

management decisions. Relevant costs will differ depending on the alternatives and

Page 7 of 30
options that a company has to choose among. Other features of relevant cost are that

these costs are avoidable in the event that the decision is not taken, can result in

opportunity costs to a firm and are incremental costs between the various options under

consideration.

iii Fixed and variable cost

In economics, variable cost and fixed cost are the two main costs a company has when

producing goods and services. A company's total cost is composed of its total fixed

costs and its total variable costs. Variable costs vary with the amount produced. Fixed

costs remain the same, no matter how much output a company produces’ variable cost is

a company's cost that is associated with the amount of goods or services it produces. A

company's variable cost increases and decreases with the production volume. For

example, suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the

company produces 500 units, its up-and-down cost will be $1,000. However, if the

company does not produce any units, it will not have any variable cost for producing the

mugs. On the other hand, a fixed cost does not vary with the volume of production.

A fixed cost does not change with the amount of goods or services a company produces.

It remnants the same even if no goods or services are produced. Using the same

example above, suppose company ABC has a fixed cost of $10,000 per month for the

machine it uses to produce mugs. If the company does not produce any mugs for the

month, it would still have to pay $10,000 for the cost of renting the machine. On the

Page 8 of 30
other hand, if it produces 1 million mugs, its fixed cost remains the same. The variable

costs change from zero to $2 million in this example.

iv Avoidable and unavoidable costs

Fixed overhead costs are the expenses that do not change in the short term. They remain

the same no matter how much you produce or sell. Some examples of fixed costs are

your office and factory building rent, fixed salaries, the yearly insurance premiums and

depreciation. Your fixed costs are either avoidable or unavoidable. You can get rid of an

avoidable fixed cost by discontinue a product or no longer purchasing specific

merchandise for resale. Unfortunately, unavoidable costs like your business property

taxes and fixed employee salaries can only be eliminated by going out of business.

Variable overhead costs are normally lower than your fixed overhead costs. Variable

overhead costs change in relation to number of goods you produce or items you sell.

Your variable costs rise as you product more or purchase additional quantities of

merchandise. They fall as you manufacture or purchase less. Some types of variable

costs are the indirect materials and indirect labour used in manufacturing your product.

For manufacturing and retail firms, the electricity, water and supplies consumed are also

variable costs.

Page 9 of 30
vi Direct and indirect costs

The essential difference between direct costs and indirect costs is that only direct costs

can be traced to specific cost objects. A cost object is something for which a cost is

compiled, such as a product, service, customer, project, or activity. These costs are

usually only classified as direct or indirect costs if they are for production activities, not

for administrative activities (which are considered period costs). The concept is critical

when determining the cost of a specific product or activity, since direct costs are always

used to compile the cost of something, while indirect costs may not be assigned to such

a cost analysis. It can be too difficult to derive a cost-effective methodology for the

assignment of indirect costs; the result is that many of these costs are considered part of

corporate or production overhead, which will exist even if a specific product is not

created or an activity does not occur. Examples of direct costs are direct labour, direct

materials, commissions, piece rate wages, and manufacturing supplies. Examples of

indirect costs are production supervision salaries, quality control costs, insurance, and

depreciation. Direct costs tend to be variable costs, while indirect costs are more likely

to be either fixed costs or period costs. Indirect costs go beyond the costs associated

with creating a particular product to include the price of maintaining the entire

company. These overhead costs are the ones left over after direct costs have been

computed, and are sometimes referred to as the "real" costs of doing business.

Page 10 of 30
The materials and supplies needed for the company's day-to-day operations are

examples of indirect costs. These include items such as cleaning supplies, utilities,

office equipment rental, desktop computers and cell phones. While these items

contribute to the company as a whole, they are not assigned to the creation of any one

service. Indirect labour costs make the production of cost objects possible, but aren't

assigned to a specific product. For example, clerical assistants who help maintain the

office support the company as a whole instead of just one product line. Thus, their labor

can be counted as an indirect cost. Other common indirect costs include advertising and

marketing, communication, "fringe benefits" such as an employee gym, and accounting

and payroll services. Much like direct costs, indirect costs can be both fixed and

variable. Fixed indirect costs include things like the rent paid for the building in which a

company operates. Variable costs include the ever-changing costs of electricity and gas.

vii Prime coat and Conversion cost

The calculation for prime cost includes the total amount spent on direct materials in

addition to direct labour. Tangible components such as raw materials necessary to create

a finished product are included in direct materials. For instance, the engine of a car or

the spokes of a bicycle are included in direct material costs because they are each

necessary to complete production of that specific item. Direct labour costs include the

salary, wages or benefits paid to an employee who works on the completion of finished

Page 11 of 30
products. Compensation paid to machinists, painters or welders is common in calculating

prime costs. Unlike conversion costs, prime costs do not include any indirect costs.

Prime costs are reviewed by operations managers to ensure the company has an efficient

production process. The calculation of prime costs also helps organizations set prices at

a level that produce an acceptable amount of profit.

Page 12 of 30
1.3 Discuss the behavioral classification of costs, explaining all the terms used therein.

Cost behaviour refers to the way different types of production costs change when there

is a change in level of production. Variable costs change in direct proportion to the level

of production. This means that total variable cost increase when more units are

produced and decreases when less units are produced. Although variable in total, these

costs are constant per unit. Mixed costs or semi-variable costs have properties of both

fixed and variable costs due to presence of both variable and fixed components in them.

An example of mixed cost is telephone expense because it usually consists of a fixed

component such as line rent and fixed subscription charges as well as variable cost

charged per minute cost. Another example of mixed cost is delivery cost which has a

fixed component of depreciation cost of trucks and a variable component of fuel

expense. Since mixed cost figures are not useful in their raw form, therefore they are

split into their fixed and variable components by using cost behaviour analysis

techniques such as High-Low Method, Scatter Diagram Method and Regression

Analysis. Fixed costs are those which do not change with the level of activity within the

relevant range. These costs will incur even if no units are produced. A cost could be

uncontrollable at a low level of an organization, because a front-line manager is not

authorized to incur or stop the cost. However, a more senior manager might be given

this authority. Thus, it is possible for cost to be controllable at the higher levels of an

organization and uncontrollable lower down. For example, the decision to pay for

Page 13 of 30
employee training may reside with a vice president and not with a local department

manager, so the cost is controllable for the vice president, but not for the department

manager. Income-generation occurs only when there is sales revenue, a consideration

obvious enough, but nevertheless often overlooked by agencies which fund production

units without undertaking a market feasibility study. In order to achieve sales, costs will

be incurred. These will depend on what the selling method is. There may be

promotional leaflets or catalogues, travel expenses to visit customers or sell in the

marketplace, a commission payable to a sales agent etc. When selling overseas, there

will certainly be further costs: cartage to port, additional packaging, documentation,

customs clearance perhaps levies, certainly extra running around. Selling and

distribution costs are part of the overheads of a production unit. They may be variable,

for example, sales commission, or fixed, such as the bus fare to the weekly bazaar. The

important thing to remember is to calculate them and include them in the coatings

analysis in the same way as other overheads. Very often small businesses overlook

them, because they have not evolved a selling strategy, and then find they cannot afford

to incur the expenditure necessary for marketing. The onus to sell products is on the

production unit; it should not wait for citizens to visit, but rather go out and find the

customers, confident that there is some margin.

Page 14 of 30
Task 2

Assume the following purchases were made in ABC

Date of purchase Units Purchased Price per Unit

1st January 500 100
nd
2 January 600 200
th
3 January 800 400
th
Units used on 4 January are 900.

Required :

Determine the cost of units used by using and the value of the closing stocks by using

FIFO,LIFO and Weighted Average Methods.

FIFO method

Purchases Issue Balance

Date Units Price Amount Units Price Amount Units Price Amount
1st 500 100 50000 500 100 50000

Jan
2nd 600 200 120000 1100 *** 170000

Jan
3th 800 400 320000 1900 *** 490000

Jan
4th 900 *** 130000 1000 *** 360000

Jan

Page 15 of 30
900 unit of goods, including goods 500unit first, the price is a cargo and a second batch

of 100 400 units of goods, the price is 200 a cargo. ***This symbol represents a

different batches of goods are different price. The remaining year-end goods, 200 units

of the second batch of price is a third of the goods and the remaining 200 800 units, the

price is a 400.

Page 16 of 30
LIFO Method

Purchases Issue Balance

Date Units Price Amount Units Price Amount Units Price Amount
1st 500 100 50000 500 100 50000

Jan
2nd 600 200 120000 1100 *** 170000

Jan
3t h 800 400 320000 1900 *** 490000

Jan
4th 900 *** 3460000 1000 *** 150000

Jan

900 units of goods, including the third instalment of 800unit of goods, the price is a

cargo and a second batch of 400,100 units of goods, the price is 200 a cargo. This

symbol represents a different batches of goods are different price. The remaining year-

end goods, 500 units of the second batch of price are a 200 and the first batch of goods

remaining 500units, the price is a 100.

Page 17 of 30
WAM method

Purchases Issue Balance

Date Units Price Amoun Units Price Amount Units Price Amount

t
st
1 500 100 50000 500 100 50000

Jan
2nd 600 200 120000 1100 154.5 170000

Jan 4
3th 800 400 320000 1900 257.8 490000

Jan 9
4 th *** 900 257.89 232101 1000 257.8 257890

Jan 9

(50000 + 120000) / (500 + 600 )

= 170000/1100

=154.55

∴ For instance, the weighted average price after the 2nd purchase shall .This is the case

of perpetual weighted average method.

Task 3

Page 18 of 30
Based on the data below ,you are required to calculate the remuneration of each

employee as determined by each of the following methods.

i Hourly rate

ii Basic piece rate

iii Individual bonus scheme where the employee receives the bonus in proportion of the

time saved to time allowed

Name of employee SS RR PP
Units produced 270 200 220
Time allowed in minutes per unit 10 15 12
Time take (hour) 40 38 36
Rate per hour ($) 125 105 120
Rate per unit ($) 20 25 24

Page 19 of 30
i Hourly rate

Name of employee SS RR PP

Time take (hour) 40 38 36

Rate per hour ($) 125 105 120

Total amount ( time x $ ) 5000 3990 4320

ii Basic piece rate

Name of employee SS RR PP

Output in units 270 200 220

Rate per unit ($) 20 25 24

Gross wage ( units x $) 5400 5000 5280

iii Individual bonus scheme where the employee receives the bonus in proportion of the

time saved to time allowed

Name of employee SS RR PP

Units produced 270 200 220

Time allowed in minutes per unit 10 15 12

Total allowed (hrs) (units x time per units /60) 45 50 44

Time take (hour) 40 38 36

Page 20 of 30
 Time saved 5 12 8

Proportion (time saved / time allowed 1/9 6/25 2/11

Bonus time (time saved / time allowed x time 4.44 9.12 6.55

taken)
Total time to be paid (time taken + bonus) 44.44 47.12 42.55

Rate per hour ($) 125 105 120

Total pay 5555 4947.60 5106

Page 21 of 30
Summary

Standard costs are the expected (or budgeted) costs per unit. When standard costs are

used in a cost accounting system, differences between actual costs and standard costs

promptly are brought to management's attention. The most widely used approach is to

set budgeted amounts at levels that are reasonably achievable under normal operating

conditions. The goal in this case is to make the cost standard a fair and reasonable basis

for evaluating performance.An alternative is to budget an ideal level of performance.

Under this approach, departments normally fall somewhat short of budgeted

performance, but the variations may identify areas in which improvement is possible.

Cost variances are computed by comparing actual costs to standard costs and explaining

the reasons for any differences. Differences in the cost of materials used may be caused

either by variations in the price paid to purchase materials or in the quantity of materials

used. Differences in the cost of direct labor may be caused by variations in wage rates

or in the number of hours worked. Variances from budgeted levels of variable overhead

may be caused by differences in outlays for controllable overhead expenditures or in the

actual and budgeted levels of production. To compute fixed overhead cost variances,

compare the actual fixed overhead to the budgeted fixed overhead and compare the

budgeted fixed overhead to the applied fixed overhead. Fixed cost variances can result

from spending more than budgeted in fixed cost categories or from a difference between

the projected volume used to create the overhead application rate and the actual

Page 22 of 30
production used to apply overhead. Materials variances may be caused by the quality

and price of materials purchased and by the efficiency with which these materials are

used. Labour variances stem from workers' productivity, pay scales of workers placed

on the job, and the quality of the materials with which they work. Overhead variances

result both from actual spending and from differences between actual and normal levels

of production

Page 23 of 30
Reference

http://highered.mheducation.com/sites/0072396881/student_view0/chapter23/chapter_s

ummary.html

http://help.sap.com/saphelp_sbo900/helpdata/en/17/9c4757670a4c6586f3adf431bd412b

/content.htm

http://www.accountingtools.com/articles-summary-costing/

https://www.google.com/search?

q=summary+cost+accounting&oq=Summary+cost+a&aqs=chrome.2.69i57j0l5.8326j0j

7&sourceid=chrome&es_sm=122&ie=UTF-8

Page 24 of 30
Coursework

Name : Chuang Wan Yik

Student ID : 202389

IC : 950314-01-5432

1) Ferndale Limited uses raw material QP6 in the manufacture of one its products. Each

product uses 4 kilograms of QP6. In Year 7, which is budgeted to be 300 working days,

the company has budgeted to make 240 products each working day.

The lead time or delivery period is 12 working days. Ferndale Limited is unsure

whether to ask the supplier to deliver 14,400 kilograms or 28,800 kilograms at each

delivery.

Required

a) Calculate the budgeted consumption of QP6 (in kilograms)

b) Calculate the number of purchase orders to be made for QP6 during Year 6.

c) Calculate the reorder lever for QP6

d) Calculate the average stock.

Page 25 of 30
e) Sketch a stock graph for QP6. Use 28,800 kilograms as RQ (the reorder quantity) for

this part of the question.

Solution

a) 300 days X 240 PRODUCTS X 4 kilograms = 288,000 kilograms

b) If RQ is 14,400 kilograms then the number of orders placed will be 288,000/14,400 =

20 orders. Since there are 300 working days, an order will be placed every 15 working

days. If RQ is 28,800 kilograms then the number of orders placed will be 288,000/28,80

=10 orders. Since there are 300 working days, an order will be placed every 30 working

days.

c) The reorder lever is daily consumption, 288,000/300 960 kilograms, x the lead time

which is 12 days = 11,520 kilograms.

d) If the reorder quantity is 14,400 kilograms, the average stock is which equals

14,400/2 = 7,200 kilograms.

If the reorder quantity is 28,800 kilograms, the average stock is which equals 28,800/2 =

14,400 kilograms.

e) Stock graph for QP6 using 28,800 kilograms as RQ

Page 26 of 30
2) Cathcart Limited is a company which makes wooden toys. Required

Classify each of the following costs into (a) direct/indirect (b) prime cost/overhead (c)

function:

1 Wood, purchased to make toys

2 Salary paid to the manager of the wood cutting department

3 Paint and varnish, purchased for finishing the assembled toys.

4 Petrol for a delivery lorry belonging to the company, and used to deliver finished toys

to customers.

5 Petrol for operating wood-cutting machinery.

6 Bank charges

7 Moulded plastic box into which each toy is packed

8 Telephone rental and charges

9 Materials used to repair production machine

10 Advertisement in a trade journal

Solution

1 Direct Prime cost Production

Page 27 of 30
2 Indirect Overhead Production
3 Direct Prime cost Production
4 Indirect Overhead Distribution
5 Indirect Overhead Production
6 Indirect Overhead Administration
7 Direct Prime cost Production
8 Indirect Overhead All functions
9 Indirect Overhead Production
10 Indirect Overhead Selling

Page 28 of 30