Acounting Atve Summarised Notes

COST AND MANAGEMENT AND IAS ACCOUNTING ATVE
Contents
COST ...................................................................................................................................................... 3
ACCOUNTING ...................................................................................................................................... 3
INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING .......................................... 4
COST BEHAVIOUR .......................................................................................................................... 4
COST ESTIMATION ......................................................................................................................... 7
MATERIAL COSTING.................................................................................................................... 10
LABOUR COSTING ........................................................................................................................ 17
ACCOUNTING FOR OVERHEADS EXPENDITURE AND ACTIVITY BASED COSTING .... 22
COSTING METHODS OR TECHNIQUES .................................................................................... 31
JOB AND BATCH COSTING ..................................................................................................... 31
CONTRACT COSTING ............................................................................................................... 32
CONTACT ACCOUNTS ............................................................................................................. 33
PROCESS COSTING ................................................................................................................... 36
COMPLETE (FULL) COSTING...................................................................................................... 46
MANAGEMENT .................................................................................................................................. 51
ACCOUNTING .................................................................................................................................... 51
COST PROFIT VOLUME ANALYSIS ........................................................................................... 52
(BREAK EVEN ANALYSIS) .......................................................................................................... 52
CONTRIBUTION............................................................................................................................. 52
ASSUMPTION OF THE BREAK-EVEN ANALYSIS ................................................................... 52
USES OF THE BREAK-EVEN ANALYSIS ................................................................................... 53
ESTIMATING FUTURE PROFITS ............................................................................................. 53
BREAK-EVENT POINT (BEP) ................................................................................................... 53
MARGIN OF SAFETY (MOS) ........................................................................................................ 54
TARGET SALES QUANTITY ........................................................................................................ 54
DECIDING ON A SELLING PRICE ............................................................................................... 54
Other examples ................................................................................................................................. 54
BREAK-EVEN CHART .................................................................................................................. 55
MARGINAL AND ABSORPTION TESTING ................................................................................ 58
BUDGETING ................................................................................................................................... 60
CASH BUDGET ........................................................................................................................... 61
SUPPLY BUDGET ...................................................................................................................... 64
PRODUCTION BUDGET ............................................................................................................ 65
NDOH SOLOMON, (+237) 674-382-252 Page 1

STEPS IN LINEAR PROGRAMMING ........................................................................................... 65

FORMULATION OF THE PROBLEM ....................................................................................... 65
FORMULATION OF THE OBJECTIVE FUNCTION ............................................................... 66
FORMULATION OF THE CONSTRAINTS (LIMITING FACTORS) ..................................... 66
RESOLUTION OF THE PROBLEM ........................................................................................... 66
CAPITAL BUDGETING (INVESTMENT APPRAISAL).......................................................... 70
IMPORTANCE OF INVESTMENT APPRAISAL ......................................................................... 70
INVESTMENT APPRAISAL TECNIQUES ................................................................................... 71
THE TRADITIONAL METHODS .................................................................................................. 71
THE PAYBACK PERIOD (PBP) METHOD............................................................................... 71
ACCOUNTING RATE OF RETURN (ARR) METHOD ............................................................ 72
THE MODERN METHODS (DISCOUNTED CASH FLOWS) ..................................................... 73
NET PRESENT VALUE (NPV) .................................................................................................. 73
PROFITABILITY INDEX (PI) .................................................................................................... 76
STANDARD COSTING .................................................................................................................. 79
FINANCIAL ACCOUNTING.............................................................................................................. 85
IAS ........................................................................................................................................................ 85
FINANCIAL STATEMENTS ADJUSTMENTS ............................................................................. 86
SINGLE ENTRIES AND INCOMPLETE RECORDS .................................................................... 90
ACCOUNTING FOR NON-PROFIT MAKING ORGANISATIONS ............................................ 95
PRESENTATION OF FINANCIAL STATEMENT...................................................................... 100
CASH FLOW STATEMENT ......................................................................................................... 105
FINANCIAL STATEMENT ANALYSIS...................................................................................... 111
(RATIO ANALYSIS) ..................................................................................................................... 111
REFERECES ...................................................................................................................................... 118

COST
ACCOUNTING

INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING
1) DEFINITION OF COST ACCOUNTING

Cost accounting is that ranch of accounting that measures, records, and reports information about cost.
It involves the comprehensive set of principles, methods, and techniques to determine an appropriate
analysis of cost to suit the various parts of organisational structure within the enterprise.
CIMA (Chartered Institute of Management Accountant) defines cost accounting as “that part of
management which establishes budgets and standard costs and actual costs of operations, processes,
departments or products and the analysis of variances, profitability or social use of funds”.
2) DEFINITION OF MANAGEMENT ACCOUNTING

Management accounting is that part of accounting that relates to the provision of financial information
to people and managers within the organisation to aid in the execution of the management functions:
planning, organising, controlling, evaluation of performance and decision making. It involves
professional skills and knowledge in the preparation and presentation of information to all levels of
management in the organisation.
SOME COST ACCOUNTING TERMINOLOGIES

1) COSTS: A cost is simply a quantification of the economic sacrifice made to achieve a given
objective. In other words, cost refers to the expenses incurred for the production of goods and
services. For example for a product, cost represents the monetary measurement of resources
used such as materials, labour and overheads.
2) COST UNIT OR COST DRIVER OR COST OBJECT: This is an activity for which a
separate measure of costs is desired. For example cost of producing a product or cost of
undertaking an assignment or cost of running an organisational department.
3) COST ACCOUNTANT: This is a member of the accounting department responsible for
collecting product costs and preparing accurate and timely reports to evaluate and control
company operations. He/she assembles, classifies, summarises financial and economic data
on the production and pricing of goods and services.
4) COST CENTER: this refers to a production or service department in an organisation where
costs are incurred for the production of goods and services. Cost centre is another name for
department. In other words, cost centres are any area in an organisation where cost can be
allocated to. Cost centres (departments) ascertain (measure) costs and relate to cost units
(product or services) for control purposes.
COST BEHAVIOUR
INTRODUCTION:
Cost refers to all the expenditures incurred either for the acquisition or production of goods and or
services. The application of costing and cost accounting principles, methods, and techniques to the
science, art and practice of cost control and the ascertainment (measurement) of profitability is known
as cost accountancy
Cost can be classified in three categories:
- By Nature: Direct cost and Indirect cost
- By Time: Fixed cost, Variable cost and Semi-variable cost
- By Function: Production cost, Distribution cost, Administrative cost etc.
DEFINITION:
Cost behaviour is the variability of input cost with activity undertaken. The question here is to
determine for each item of cost, the relationship between cost and the level of activity (usually the
volume of output). We will analyse cost behaviour with classification by time. The costs here will
include:

1) FIXED COST: These are costs that do not change irrespective of the level of activities. In other
words fixed cost is that part of total cost incurred at zero level of activity (zero level of output).
There are two types of fixed costs which include total fixed cost and unit fixed cost
i) Total fixed cost (TFC): this cost remains constant irrespective of the level of activity. For
example rents. It is graphically presented as follows:
Cost
TFC
Level of activity
0
ii) Unit fixed cost (UFC): This is the total fixed cost spread over the level of activity. It shows
an inverse relationship between the level of activity and the unit fixed cost, i.e. as the level of
activity increases, the unit fixed cost falls and vice-versa. It is graphically presented as
follows:
Cost
UFC
Level of activity
0
2) VARIABLE COST: These are costs which change proportionately to the level of activity. They
are:
i) Total variable cost (TVC): these are cost that increase proportionately to the level of
activity. For example cost of raw materials, labour etc. It is presented graphically as follows:
Cost
TVC
Level of activity
0
ii) Unit variable cost (UVC): This is the total variable cost divided by the level of activity. The
unit variable cost remains constant irrespective of the level of activity except in a case where
quantity discount is given. It is presented graphically as follows:

Cost
UVC
Level of activity
0
3) SEMI-VARIABLE COST (MIXED COST): This cost carries both fixed and variable cost
components. This applies where there is first of all a fixed rate and thereafter, as the level of activity
increases, it also increases. It is graphically presented as follows:
Cost
SVC
Level of activity
0
4) STEP COST: This is a cost that is fixed in nature but only within a certain level of activity. Consider
the depreciation of a machine which is fixed if production remains below 1 000 units per month. If
production exceeds 1 000 units per onth, a second machine maybe required, and the cost of
depreciation on the two (20 machines would give up a step and so on. It is graphically presented as
follows:
Cost
Step cost
Level of activity
0
DIRECT AND INDIRECT COSTS

- DIRECT COSTS: These are cost that can be traced specifically, and directly attributed to specific
output, products or level of activity. Direct costs include direct materials, direct labour and direct
expenses. Direct costs are variable costs and the sum of direct materials, direct labour and direct
expenses is known as prime cost
Prime cost = direct materials + direct labour + direct expenses

- INDIRECT COSTS: These are costs that are not be directly attributed to a specific product. They are
also referred to as overheads. For example supervisory salary, indirect materials, depreciation etc.
COST ESTIMATION
This is a study which attempts to predict the relationship between cost and the activity level or cost
driver or output that causes those costs based on an analysis of historical cost. In other words, cost
estimation occurs when an individual attempts to measure historical costs in order to predict future
costs.
To achieve the measurement, it is necessary to separate costs in to their fixed and variable costs
elements. Semi-variable costs can be separated in to their fixed and variable elements using high-low
method, regression analysis etc.
In this topic, we shall deal with linear cost relationships and equations.
A linear equation is an expression of the relationship between the dependent and the independent
variables. The cost estimating function for linear relationship is y = ax + b analysed as:
Total cost = variable cost + fixed cost
- y = the dependent variable (total cost)
- a = the variable cost per unit
- ax = the variable cost component of the total cost
- b = the fixed cost component of the total cost
- x = the independent variable or the activity level, e.g. output
Purpose of cost estimation

- Assists in estimating the future expenditures (cost estimation) as the expenditure will depend
on the cost of the respective activities.
- Assists in determining the net benefits anticipated in a specific activity based on the
relationship between projected cost and projected revenue (profit projection)
- The estimation is useful in the execution of managerial functions
METHODS OF COST ESTIMATION

There are many methods of cost estimation, but we will examine two of them, notably:
- The high-low method
- The least squares regression method
1) THE HIGH-LOW ACTIVITY METHOD:

Here, cost estimation is based on the relationship between past costs and past activity levels. This
method uses the highest and the lowest activity levels and their respective cost.
The difference between the highest and the lowest activity gives the total activity level (e.g. total
output) meanwhile the difference between the cost at the highest activity level and the cost at the
lowest activity level give the total variable cost.
Total variable cost (TVC) = cost of highest activity – cost of lowest activity
Total activity (Q) = Highest activity – Lowest activity
The variable cost per unit can be calculated by dividing the total variable cost by the total activity
level and this
( )
The variable cost per unit calculated represents “a” in the linear cost estimation function. The unit
variable cost is then substituted in the total cost of either the highest activity or lowest activity to
calculate “b” the total fixed cost.
Example 1:
Based on the performance, you have been provide with the following information regarding ABC Ltd
for the year ended 31st December, 2019
Labour hours 300 400 350 600 310 800
Service cost 150 000 155 000 153 000 192 000 145 000 200 000

Work required: develop a total cost function based on the above data using the high-low method and
estimate the total service cost of 450 labour hours.
Solution
Y = ax + b
Labour hours Service cost (FCFA)
High 800 200 000
Low 300 150 000
Difference Q = 500 TVC = 50 000
( )
Use the total cost of either the highest or lowest activity level to calculate the total fixed cost b.
Let‟s use the TC at the lowest activity 300. At this level of activity, TC = 150 000 FCFA
150 000 = 100 (300) + TFC
150 000 = 30 000 + TFC TFC = 150 000 – 30 000 = 120 000 FCFA = b
The total cost equation can then be written as Y = 100x + 130 000
X = 450 hours
Y = 100 (450) + 130 00 = 175 000 FCFA
Example 2: A company has given you the following data about the production and cost figures of
some particular periods:
Year Output Cost Retail Price Index
1 2,000 units 2 400 000 CFAF 100
2 1,500 units 2 000 000 CFAF 101
3 3,500 units 4 000 000 CFAF 103
4 3,000 units 4 500 000 CFAF 104
5 4,000 units 5 000 000 CFCA 105
Required:
a) Calculate the variable cost per unit.
b) Calculate the total fixed cost for the high and low units.
c) What is the total cost during the year when the company shall be producing 4,000 units
Solution:
NB: To proceed, divide first of all the total costs by the retail index and multiply by 100 to bring the
costs to a base of 100. After this, use the high-low method to calculate the variable cost per unit and
the total fixed cost.
2) THE LEAST QUARES REGRESSION METHOD

It involves estimating the cost function using past data or the dependent and the independent
variables. The dependent variable will constitute the relevant cost, and the dependent variable will be
the cost driver such as labour hours, units of output etc.
Given the cost estimation function y = ax + b. the values of a and b can be calculated as follows:
( )
and b =
Examples
1) EPETICAM is a small sized business that manufactures two products A and B sold in Ndop
and Kumbo. Past sales in units for the past 7 months were as follows:
Months January February March April May June July

Sales 440 350 480 630 630 700 680
Work required
a. Find the equation of the regression line using the least square method
b. Forecast sales for the month of August and September considering the seasonal coefficients
below
Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.
0.7 0.8 1.1 1 0.85 1.4 0.75 1.05 0.95 0.9 1.2 1.3

c. Prepare the sales budget of EPETICAM for August and September using a single document
(appendix 1) and knowing that past experience shows that
 Product A represents 40 % and product B 60 % of the total monthly sales;
 30 % of monthly sales are made in Kumbo and 70 % in Ndop;
 Unit selling price of product A is 400F and that of product B is 150 F
2) The fixed cost of a company steps up by 20% if output exceeds 20 000 units and steps up
again by 25% if output exceeds 40 000 units. The output level units and total cost incurred
during the first semester of 202 2 is given as follows
January February March April May June
Output level 5000 15 000 30 000 35 000 45 000 60 000
Total cost FCFA 4 300 000 9 300 000 17 160 000 19 600 000 25 200 000 32 700 000
Required:
i) Calculate the variable cost per unit
ii) Calculate the fixed cost of the highest and the lowest output level
iii) Determine the total cost of the company at an output of 50 000 units
iv) Establish a graph of the stepped fixed cost.

MATERIAL COSTING
Introduction
For any firm to operate successfully, the store department should be well organised. This is because
large amount of money are involved in materials and therefore care should be taken to avoid material
pilferage, material deterioration, rust, obsolesce which could lead to reduce profits or even losses.
STORE CONTROLS
These are all measures put in place by a firm to ensure that materials are properly ordered for,
properly received, properly stored, properly accounted for and issued only on proper authorisation.
The Chartered Institute of Management Accountants (CIMA), has defined store control as a
means of ensuring that sufficient goods are retained in store to meet all the requirements without
incurring unnecessary charges.
Reasons for store controls

- Most companies invest a lot of money in materials so this must be safeguarded.
- Store control will minimise the amount of capital tight up in stock
- It helps to avoid shortages of stock
- The demand and supply of items in stock can be predicted and measures taken to ensure efficiency.
- With store control system in place, information about the type and quantities of stock are available
at all times.
How stores may be controlled

- By accounting and costing for stock
- Through stock taking i.e. perpetual or periodic stock taking
- By calculating critical stock levels
- By controlling of orders, materials received and issued.
Controlling store by fixing stock levels (inventory or stock control)

A firm can achieve its optimal production if its inventories are well controlled. Storage of materials or
component parts in store can affect the production level of the firm. Inventories must be available at
all time so that the firm can produce continuously with a constant flow of its products in the market.
The stock level of the firm has to be checked from time to time so that the quantity of materials in
store should not exceed beyond or fall below a specific limit.
There are many levels (measures) used to control the quantity of materials in store. Each of these
levels (measures) can be easily calculated in order that the actual quantity held in stock can be known.
3Some of these levels include:
- The re-order level (ROL)
- The minimum stock level (MinSL)
- The maximum stock level (Max SL)
- The re-order quantity (ROQ)
- The average stock level (Av SL)
- The lead tome or delivery period
i) THE RE-ORDER LEVEL (ROL): this is the level of stock at which an order is placed. It must be
higher than the minimum stock level so as to cove emergencies like abnormal usage of materials or
unexpected delay in delivery of new materials. It should also be lower than the maximum stock level
otherwise much stock will be held. The ROL of stock take in to consideration the rate of consumption,
the delivery period and the variation in delivery. It is calculated as follows:
ROL = Maximum usage x Maximum lead time
ii) THE MINIMUM STOCK LEVEL (Min SL): this is the lowest level to which stock should fall. It is
essentially a buffer stock which will not normally be touched. There is a danger of stock out if stock
falls below this level, which may result to stoppage of production. The Min SL is set considering the
ROL, the delivery period, and the rate of consumption. It is calculated as follows:

Min SL = ROL – (Average usage x Average lead time)
iii) THE MAXIMUM STOCK LEVEL (Max SL): this is the highest level of stock which stock should
not go above. If excess stock is held above this level, it could lead to deterioration, rust, tight down of
capital, obsolesce etc. it takes in to consideration the rate of consumption, risk of obsolesce, risk of
deterioration, the storage space available, the market price of materials, the ROL and the ROQ. It is
calculated as follows:
Max SL = ROL + ROQ – (Min usage x Min lead time)
iv) THE RE-ORDER QUANTITY (ROQ): this is the quantity to be ordered for at the re-order level. It
takes in to consideration the rate of consumption, the cost of holding stock against cost of purchasing,
bulk discount, transportation cost, rate of obsolesce and deterioration, the Max SL and the ROL. It is
ROQ = Max SL – ROL + (Min usage x Min lead time)
v) AVERAGE STOCK LEVEL (Av SL): this is the level which is at midpoint between the Min SL and
the Max SL. It alerts management that there is a need for replenishment. It is cal culated as follows
Av SL =
Examples
1) The following data relates to the raw materials of Tommy $ Co for the month of May 2020
- Expected consumption
 Maximum usage per week 4 500 kg
 Minimum usage per week 2 400kg
- Expected delivery period 2 – 4 weeks
- Maximum stock level 22 000kg
Required: Calculate the ROL, the ROQ, the Min SL and the Av SL
2) A business uses materials x and y in production. The details of the materials obtained from the
store records are as follows:
- Usage:
 Maximum 600 kg/week
 Minimum 200 kg/week
- Re-order quantity
 Material x: 2 000 kg
 Material y: 2 500 kg
- Lead time:
 Material x: 6 – 8 weeks
 Material y: 4 – 6 weeks
Required: calculate the ROL, Max SL, Min SL and Av SL.
STOCK COSTS
The costs incurred in stock can be classified in three categories; they include cost of ordering stock,
cost of holding stock and costs associated with stock out
i) Cost of obtaining stock (ordering cost): this refers to all the costs incurred ensuring that
the goods reach the company warehouse. This cost starts at the level where an order is
placed till when the goods reach the company‟s warehouse. The total ordering cost (TOC)
is calculated by multiplying the number of orders (N) by the ordering cost per order (Co)
TOC = N x Co
Where the number of orders is obtained by dividing the annual demand or consumption
(D) by the order quantity (Q)
this implies that TOC = x Co

ii) Cost of holding stock: this refers to all costs incurred in keeping or holding, or storing or
carrying stock. The total holding cost (THC) is calculated by multiplying the average
stock ( ) by the holding cost per unit (CH)
THC = x CH
Note: the holding cost per unit is usually calculated as a percentage of the unit purchase cost.
iii) Stock out cost: this refers to those costs incurred by the firm when the supply of materials
is completely exhausted. For example loss of customer goodwill, insufficient production
etc.
THE ECONOMIC ORDER QUANTITY (EOQ)

This is the quantity ordered for at which total cost (ordering cost + holding cost) is minimum.
The EOQ is based on the following assumptions:
- There is a known constant holding cost per unit
- There is a known constant ordering cost per order
- The rate of demand is known
- There is a known constant price per unit
- There should be no stock out
- A new delivery of the stock items is received from the supplier at the exact time the existing
stock runs over.
- The lead time from the supplier is predictable and reliable
Calculation of the economic order quantity (EOQ)

A) Formula method
The EOQ is the order quantity at which total cost (TOC + THC) is minimum. The total cost is
minimum when the total ordering cost is equal to the total holding cost
TOC =,THC
Knowing that TOC = x Co and that THC = x CH
x Co = x CH the idea here is to make Q the subject
If we cross multiply we will have 2 x D x Co = Q2 x CH
If we divide both sides by CH , we have
If we take the root of both sides we have √

Example
1) A company uses 5 000 kg per annum which cost 50 frs/umit to purchase. The odering and the
holding costs are 200 frs/order and 25% per annum respectively. Calculate the EOQ.
Solution
Annual consumption (D) = 5 000 kg purchase cost per unit = 50 frs/kg
Ordering cost/order = 200 frs holding cost/kg = 25% 50 = 12.5 frs/kg
√ √ kg
2) A company uses 600 000 units of a certain raw materials per year bought at 120 frs each. The
ordering and holding costs are 1 200 frs per order and 15% of the unit purchase price per year.
Calculate the EOQ.
Note: when there is trade (quantity or bulk) discount, it reduces the unit price and thus the holding
cost per unit since it is calculated on the unit price.
Example: wisdom enterprise demands for 40 000 units of raw materials every year. The purchase
price per unit is 2 500 frs per unit. The ordering cost is 2 000 frs per order and inventory holding cost
is 10% per annum. Given a quantity discount of 1%, calculate the EOQ
Solution
Annual demand (D) = 40 000 units purchase cost per unit = 50 frs/kg

Ordering cost/order = 2 000 frs holding cost/kg = 10% 2500 x 99% = 247.5 frs/unit
√ √ units
B) Tabular method
Here, a series of order quantities or number of orders for which we will calculate the average stock,
the ordering cost, the holding cost and the total cost. The EOQ or optimal number of orders is that
with the lowest total cost
Order qties Number of orders Average stock TOC THC Total cost
(Q) (N = D/Q) (Q/2) (N x Co) (Q/2 x CH) (TOC + THC)
C) Graphical method
It consists of plotting the TOC, THC and TC against the order quantities or number of orders. The
EOQ or optimal number of orders is the order quantity or number of orders at which the TOC curve
cuts the THC curve which is actually where the TC curve is lowest.
Example of EOQ graphs

Costs Costs
Total cost Total cost
Holding cost Ordering cost
Ordering cost Holding cost
0 EOQ Order 0 N Number

quantities Of orders
STOCK GRAPH
This is a graph obtained by plotting the stock levels against the periods (time). This graph shows the
maximum stock level, the re-order level, the minimum stock level (buffer stock level) and the lead
time (delivery period). Below is a sample stock graph over monthly periods for a period of one year.
Stock levels
500 Max SL
400
300 ROL
200
100 Min SL
0 J F M A M J J A S O N D Periods
Lead time or delivery period

Explanations: the stock graph above shows a Max SL of 500 units, ROL of 300 units and Min SL of
100 units. When stock is consumed (used) it decreases and gets to the ROL (300 units), and an order
is placed in which the re-order quantity is the EOQ. From the above graph the quantity order for at the
ROL is received as soon at the quantity in stock reaches the Min SL (100 units) and boosts (increases)
the quantity in stock back to the Max SL (500 units).
Thus the re-order quantity (EOQ) is (500 – 100 = 400 units)
The lead time is one (1) month ( ) which is the period between when an order is placed and when
the goods are received.
Thus the optimal number of orders (N) placed is 6 (the graph above it is the number of times the
falling (decreasing) line touches the ROL.
Thus the annual consumption (D) being N x EOQ is 6 x 400 = 2 400 units
Examples
1) GEC 2020, 7010, P3, 7
2) GCE 2016, P2 Q3
DAP Co LTD uses 10 000 units of MT material per year which cost 1 000 FCFA per unit. It costs
200 FCFA each time an order is placed and the storage cost is 10% of unit cost. The company
manufactures zinc for the Cameroon and Central African markets.
Required:
(a) Calculate the following
(i) The EOQ
(ii) The optimal number of orders
(iii) The total ordering cost per annum
(iv) The optimal average stock
(v) The total carrying cost per annum
(vi) The total cost per annum
(b) Determine the optimal quantity to be purchased using the tabular method
Order qties Number of orders Average stock TOC THC Total cost
100 100
50 200
33.3 300
25 400
20 500
(c) Use the information from (b) above to show the EOQ graphically.
3) GCE 2020 7010, P3, Q1

A company has 100 000 units of a certain material to produce cement each year. The ordering
cost per order is 1 300 frs and the holding cost is 1 500 frs per unit of the material held at 10%
discount.
Required: determine the EOQ, the optimal orders, the average units, the holding cost, the
ordering cost, the total cost and sketch the diagram
4) Sample set 2019, 7010, P3, Q1

A company is using a special raw material for production with an annual demand of 40,000 kg.
The ordering cost for the material is 25,000 CFAF and the holding cost is 150 CFAF per unit per
annum. The producer of the raw material is not happy with our current order size and is offering a
2% discount so that the order size should be doubled. The material cost is 2,500 CFAF per kg to
buy.
Required:
a) Calculate:
i) Economic order quantity (EOQ).
ii) Total holding cost
iii) Total ordering cost
b) Should the manager accept the discount of 2% in order to double the reorder quantity?

STOCK VALUATION
This refers to the way stocks (materials) are valued (priced or issued) from the warehouse to the
store. Stocks may be valued at the price at which they came into the warehouse or at average cost. The
stock valuation methods include: First-in-first out, last-in-first out, and average cost
i) First-in-first-out (FIFO): here, the stock items that first entered the warehouse are
issued out first at the price (value) at which they came in. thus no profit nor loss is
realised in this method.
ii) Last-in-first-out (LIFO): here, the stock items that first entered the warehouse are issued
out first at the price (value) of the most recent stock items that came in. this method
reflects the current economic conditions and can lead to issue at a higher or lower price.
iii) Average cost: the stock items that first entered the warehouse are issued out first at the
average cost of the items in stock. A new exit price is calculated each time entries are
received. There are two average cost methods, namely the weighted average cost and
simple average cost.
 Weighted average cost: here, new exit price is calculated each time an entry is received
by dividing the value in stock by the quantity in stock. This exit price is used to value
subsequent exits until when a new entry is received and a new exit price calculated.
 Simple average cost: here, new exit price is calculated each time an entry is received by
calculating the average of the unit prices in stock. This exit price is used to value
subsequent exits until when a new entry is received and a new exit price calculated.
Example
1) Sample 2019, 7010, P3, Q7
CAMPALLA enterprise had the following stock records for the stock of goods in the year 2019.
- Purchases:
 2nd February: 200 units at 380 CFAF each, trade discount 15 %, transport 27 CFAF per unit
 3rd April: 300 units at 400 CFAF each, trade discount 20 %
 5th June: 200 units at 320 CFAF per unit, purchase expenses 10 CFAF per unit
 7th October: 450 units at 310 CFAF each
- Sales:
 11th March: 250 units
 13th August: 500 units.
 17th December: 350 units
- The opening stock of 0l/01/2019 is made of 100 units at a total cost of 30,000 CFAF.
- The selling price for each unit of the stock is 500 CFAF.
Required:
a) Determine the value of the closing stock of goods using FIFO, LIFO, WAC, and SAC
b) Produce a trading account to show the gross profit for the year ended 31/12/2019 under the WAC.
2) GCE 2012, P2, Q1

AMAH $ SONS Co deals in plastic chairs. In the course of May 2011, the following transactions
were carried out
May 1, 2011 Opening stock 100 chairs at 4 000 FCFA each
May 4, 2011 Purchase of 400 chairs at 4 300 FCFA each, expense on purchase 200F/chair
MAY 10, 2011 Sales of 440 chairs
May 20, 2011 Sales of 150 chairs
May 27, 2011 Sale of 300 chairs
Daily sales are distributed as follows: 80% foe whole sales and 20% for retail sales.
Overheads (indirect) expenses of the month are apportioned as thus:
Elements Total Administration maintenance Whole sales Retail sales
Administration 600 000 FCFA - 20% 60% 20%
Maintenance 491 000 FCFA 30% - 55% 15%

The distribution expenses are as follows for the same month

Total Whole sales Retail sales
Transport expenses 100 000 FCFA 60% 40%
Commission to salesmen 180 000 FCFA 80 000 FCFA 100 000 FCFA
Required:
(a) Establish the stock index card using the FIFO stock valuation method
(b) Calculate the total cost for each type of distribution channel (whole sales and retail sales)
(c) Calculate the costing profit or loss per distribution channel and the total profit or loss given
that the unit sale prices are 6 000 FCFA and 6 500 FCFA for whole sale and retail sales
respectively.
3) GCE 2018, p2 ,3
An enterprise produces a certain product from a raw material called AFOR and orders for 150 units of
the material from a particular supplier at the start of each month. Each unit of the material is
purchased at 450 FCFA. However the purchases for January and February usually attract 20% and
10% trade discount respectively. Ordering cost per order is 750 FCFA. The ordering cost per unit
included in the purchase cost is 5 FCFA. The estimated cost of storing each unit of the material in the
warehouse in a month is 10 FCFA. Storage costs do not form part of the purchase cost, but are added
to the material cost incurred for the period.
In the first quarter of the year 2015, materials were issued to the factory as follow
5th February 160 units
6th March 180 units
25th March 100 units
On the 31st December 2014, there were 50 units of the materials in the warehouse valued at 20,000
FCFA. All materials were issued at weighted average cost. Annual consumption usually sums up to l
800 units.
REQUIRED:
(a) Calculate the Economic Order Quantity (EOQ).
(b) Prepare a stock bin card for materials for the 1st quarter of the year 2015
(c) Determine the total cost of materials consumed for the first quarter of the year 20I5

LABOUR COSTING
Labour cost is all cost incurred in compensating the human resources employed to provide a useful
service in the production process. Just like material cost, labour costs form a large percentage of the
total cost of production. There is therefore need to exercise maximum care so that this cost is
minimized.
Elements of Labour Costs

Labour cost can either be direct or indirect. The elements of labour cost include;
 Basic salary or wages
 Overtime premium
 Bonus payment
 Allowances
 Idle time
 Labour turnover
1) Basic Salary or Wages: This is the amount contracted for. A wage is an amount of money
paid for a specific quantity of labour. When expressed with respect to time (usually per
hour), it is typically called wage rate and it is specified in pre-fax amounts. It is often the
main monetary item upon which the worker and the employer focus when negotiating an
employment contract.
2) Overtime Premium: This is compensation paid to employees in addition to normal wage for
hours worked in excess of normal working hours. Normal working hours is the time pre-
specified in the employment contract to be the official working hours.
3) Bonus Payment: This is a payment in addition to the amount contracted for in most cases
based on the level of performance or profitability.
4) Allowances: Allowances are payments in addition to an employee‟s wage or salary, and are
paid as compensation for a particular feature of work, inconvenience or discomfort incurred
as part of your position. For instance, sitting allowance, travelling allowance, and hardship
allowance.
5) Idle time: This is the non-productive time paid for. For instance workers are still paid though
production is not continuing due to power failure or machine breakdown.
6) Labour turnover: This includes the cost of recruiting new employees who come in to replace
the outgoing employees.
Methods of Determining the Basic Salary Wage or Salary

A) Fixed Rate or Fixed Salary per month or per annum
Here, the employees earn a fixed amount despite the amount of work done. For instance a production
manager may be allowed a salary of 500,000FCFA per month whether the company‟s production is at
peak or off-peak.
B) Piece rate or piece work

Under this method, the earning depends on the level of activity or output achieved and it is expressed
as;
Earnings = Output (Units) × Basic rate per unit
Under the piece rate system, there are 3 schemes of remuneration. These are Straight piece rate,
straight piece rate with a guaranteed minimum pay and differential piece rate.
i. Straight piece rate: Here, the basic rate/unit remains constant irrespective of the number of
units produced. For instance if 200 units are produced at a basic rate of 1000 FRS/unit,
The earnings will be =1000 × 200 = 200 000 FCFA

ii. Straight piece rate with a guaranteed minimum pay: Under this scheme, although the
employee is paid on the number of units produced, he is guaranteed of some main wage since
there are occasions when production does not take place due to power failure, machine
breakdown, public holidays etc.
iii. The differential piece rate: Here, the employees‟ basic rate of pay per unit changes as the
level of activity (output) changes. Under this system, the workers piece rate is fixed at a
higher level than the usual rate of payment if the output exceeds the expected (usually set)
level. The objective of this system is to provide an incentive to the workers while retaining
the simplicity of the system.
C) THE TIME RATE OR TIME WORKED

Under this method, employee‟s earnings depend on the time spent on the job. Total wage can be
expressed as
Total earnings = Basic rate/hour × total hours worked
Under this system, there are various schemes that may be applied. They include:
1) The Flat time rate: Here, each worker is paid for the time spent without considering the
volume of production during that period. The basic rate per hour remains constant irrespective
of the number of hours worked. For instance assume that an employee worked for 200hours
on a specific assignment. Assume further that the basic rate/hour is 1000 FRS. The total
earning under flat time rate will be 1000 × 200 = 200 000 FCFA
2) Measured day rate: This is where although the employee is paid on the basis of the number
of hours worked, before such payment is made, one must have completed a given piece of
assignment.
3) Graduated time rate: Under this scheme, the rate of pay is adjusted to reflect changes in the
cost of living.
D) OVERTIME PREMIUM
This is the compensation paid to employees in addition to normal wages for hours worked in excess of
normal working hours. The overtime is that time paid for over and above the basic hours for the
period. Overtime premium is the difference between the rate at which normal working hours are paid
and the rate at which overtime hours are paid.
Example:
Company BC which operates a flat time rate method of remuneration has won a tender to do job XYZ
which requires 30hours of labour input. On negotiation, the employer agreed to pay the employee
5000FRS/normal hours of input. The company has a policy of paying overtime at 1½. The job was
due in 30days time, with each working day having 8 normal working hours.
Required: Compute the actual cost of labour incurred in the completion of job XYZ.
Solution
N.B: Note that the normal working hours available in 3 days are 24hours (8×3). This means that the
employee has to work overtime for 6 hours to meet the deadline. Therefore the actual analysis of
labour cost would be:
Total Amount Total amount
Element Hours Rate Premium
(including overtime) (Normal rate)
Normal 24 5000 120000 120000 0
Overtime 6 (500×½)7500 45000 30000 15000
30 12500 165000 150000 15000
The overtime premium can be calculated as:
Overtime Premium = (overtime rate – Normal rate) × Overtime hours
= (7500 - 5000) × 6 = 15000 = (1½ - 1) × 5000 × 6 = 15000FRS

E) SHIFT PREMIUM
This is the payment of labour over and above standard rate when they work on shifts especially during
the nights or periods outside the normal working hours.
F) BONUS PAYMENT
Bonus payment is paid to employees to increase their efficiency.
Labour efficiency and/or productivity measures how efficiently the employees are working. It can
be expressed as follows;
( )
Various incentive bonus scheme has been introduced. The characteristics of such scheme include:
 Employees are paid more for their efficiency
 In spite of extra labour costs unit cost of output is reduced and the profit earned per unit of
sales is increased.
 The moral of the employees should be expected to improve since they are seen to receive
extra reward for extra effort.
THE BONUS SCHEMES

Under time rate, the employer stands to gain or lose depending on the efficiency of the employees.
However, with regard to piece rate method, the employees bears his inefficiency and where he is
efficient, he stands to gain from his skills and scheme.
The principles of bonus payment definitely are shared between the employers and the employees. The
bonus payment to be shared, it is calculated on the basis of hours saved.
Hours Saved (TS) = Time Allowed (TA) – Time Taken (TT)
FEATURES COMMON WITH BONUS PAYMENT SCHEME

a) Time rate is always guaranteed
b) As efficiency increases, cost of labour decreases
c) Workers remuneration per hour increases with production but it is not in proportion to
production
d) Savings are shared between employers and employees
1) HALSY BONUS SCHEME: One of the features of this scheme is that a standard time is
allowed to each job or process. Time rate is paid to a worker who completes the job within the
standard or takes more than the standard time. If the employee takes less than the standard
time to complete the job, he will be paid a fixed percentage of 50% of time saved. The other
50% represents the employer‟s share.
Bonus time = 50% time saved
Bonus = 50% time saved × Rate/hour
Earnings = Hourly Rate × (Time taken + 50% Time saved)
= Rate/hour × (TT + 50% TS)
Example
The time allowed for a worker to do a piece of job is 20hours. The worker took 16 hours to complete
the job. The rate per hour is 1000 FRS. Calculate the worker‟s total earnings under the Halsy bonus
scheme.
Rate/hour = 1000 FRS
Time allowed (TA) = 20hours
Time taken (TT) = 16hours
Time Saved (TS) = TA – TT = 20 – 16 = 4hours
Total Earning = Rate/hour × (TT + 50% TS) ( ( ))
2) THE ROWAN BONUS SCHEME: Under this system, a standard time is calculated for
every job or process completed. Normally, the bonus is paid in respect of time saved (TS) but

a different method is used to calculate the bonus. The bonus hours are calculated as Time
Taken over Time Allowed multiplied by the Time Saved
i.e ⁄
( ⁄ )
⁄ ( ⁄ )
[ ( ⁄ )]
Example
The time allowed to do a particular job is 15 hours. Joe took 12 hours to complete the job and the
standard rate/hour is 1500FRS. Calculate Joe‟s total earning using the Rowan Scheme
TA = 15 hours TT = 12 hours TS = 15 – 12 = 3 hours
Rate/hour = 1500FRS
Bonus payment = ( ⁄ ) × hourly rate = (12÷15×3) × 1 500 = 3 600FRS
Therefore; Total earnings = Normal pay + Bonus Pay = (12 x 1500) + 3 600 = 21 600FRS
Assignment
Under a premium bonus scheme, workers receive a guaranteed basic hourly minimum rate plus a
bonus of 50% of the time saved. No payment is paid beyond the time allowed but the bonus which is
paid at the basic hourly rate is applicable to the accepted output only. No penalty is imposed on
rejected output. The following details are available for the month of January 2014.
Worker A B C
Time allowed per unit (hrs) ¼ 1/6 1/2
Units produced 474 684 175
Units rejected 54 84 25
Time taken (hrs) 78 72 80
Basic pay/hour (FCFA) 600 600 300
Required: From the above information, calculate for each worker
a) Bonus hours and amount of bonus paid
b) Gross wages earned
c) Labour cost for each good unit sold
LABOUR TURNOVER
This is the number of employees leaving or being recruited in a period. It is expressed as a percentage
of total labour force. It is expressed as:
Labour Turnover =
Causes of Labour turnover

These causes outline the reasons why an employee may leave an organization. They include:
 Illness and accidents
 Retirement and death
 Low payment: The employee may find that the remuneration is not commensurate to the
amount of work done.
 Poor working relationship between the management and the employee
 Lack of opportunity for career or lack of job satisfaction
Costs of Labour Turnover

Costs of Labour Turnover can be largely categorized into Replacement costs and Preventive costs.
1) Replacement Costs
These are those cost incurred as a result of living a new employee. They include cost
of selection and placement (advertising and interview), inefficiencies in new labour, lower
productivity, cost of training, loss of output due to delay in new labour becoming available,
increase wastage and spoilage due to lack of expertise among the new staff, possibility of more
frequent accidents, cost of tools and material breakage.

2) Preventive Costs
These are cost incurred in order to prevent employees from leaving the organization.
They include cost of personnel administration in maintaining relationships and cost of welfare,
service and pension schemes.
Questions

ACCOUNTING FOR OVERHEADS EXPENDITURE AND ACTIVITY BASED COSTING

Introduction
Overheads are those cost that are not charged directly to the cost units e.g. Indirect Materials, Indirect
labour and indirect expenses. Overhead is another name for indirect cost. Overheads cost are
classified by function e.g. production overheads or manufacturing overheads, Selling and distribution
overheads, and Administrative overheads
There are two main objectives in analysing overheads:
- To facilitate cost control
- To ascertain (measure) production cost
These objectives are attained through 3 stages of analysis which are overheads allocation, overheads
apportionment and overheads absorption
1) ALLOCATION AND APPOTIONMENT OF OVERHEADS

The total cost of production overhead needs to be distributed amongst specific cost centres. Cost
centres are areas of a business for which cost can be identified. Some items can be allocated
immediately e.g the salary of a cost centre supervisor or the cost of indirect materials issued to accost
centre can be allocated directly to the cost centre
Allocation relates to cost that can be identified with a specific cost centre (departments) meanwhile
Apportionment relates to cost that cannot be identified with specific cost centres but must be shared
between two or more cost centres. This means that overheads that has not been allocated to a cost
centre must be apportioned
The basis of apportioning total amount will be selected so that the charge to a specific centre
(department) will reflect with accuracy the benefit obtained by that centre from the cost incurred
For overheads to be properly apportioned, a sequence of procedures is under taken;

- Carefully collect the production overheads cost by item
- Carefully establish cost of centres
- Allocate and apportion the overheads to the cost centres
- Apportion service cost to production cost centres
- Absorb overheads cost centres into cost unit
PRIMARY REPARTITION
This is the allocation of overheads to both service and production cost centres (departments). This is
done to obtain the primary totals using an overheads analysis sheet.
Bases of Apportioning Overheads

The following are the most usual basis of apportionment of overheads:
a) Area in square meters (M2): Used to apportion rent, insurance, rates, lighting and heating,
Building depreciation, cleaning etc.
b) Number of employees: used to apportion supervisors salary, Canteen expense, Administrative
expense, Staff welfare expense
c) Asset value (Book value): used to apportion depreciation, insurance etc.
d) Technical Estimate meter: used to apportion depreciation, insurance, power etc.
e) Number of purchases requisition: Used to apportion material handling lost, etc.

Example
A B C ltd has 3 production cost centres and 2 service cost centres. The overheads incurred in a
particular period were:
- Indirect Materials:
Production departments Service departments
Overheads Total
1 2 3 A B
Indirect materials 5 700 000 1 990 000 1 200 000 1 280 000 970 000 260 000
Indirect Wages 105 900 000 20 480 000 26 450 000 14 680 000 28 500 000 15 820 000
Other overheads:
- Maintenance 5 400
- Power force 1 400
- Heating and lighting 800
- Insurance of building 400
- Depreciation of machine 16 000
- Supervisor salary 9 600
- Rent and rates 4 800
38 400
The following information is available
Effective Area Cost of Number of Maintenance
Departments
force square machine Employees Hours
1 40 800 20000 20 2000
2 25 1000 40000 30 3400
3 10 200 10000 10 2400
A 20 1500 25000 40 1600
B 5 500 5000 20 1400
(Ʃ) 100 4000 100000 120 10800
Required:
Apportion the above overheads cost to the various cost centre using an overheads analysis sheet.
SECONDARY REPARTITION
(Re-apportionment of service centre cost to production cost centres)
Service cost centres are cost centres which do not actually produce the saleable product. In order to
reflect cost of service cost centres to unit cost, service cost centre costs must be re-apportioned to
production cost centres
The re-apportionment of the service cost centre costs to the production cost centres is done using
appropriate basis.
Where there is more than one service cost centre, the process of apportionment is often referred to as
inter service transfer (inter locking transfer)
The service cost centre overheads are apportioned in the following manner:
a) Where there is only one service cost centre:

The service cost centre cost is apportioned to the production cost centres using suitable basis such as:
Maintenance hours, number of orders, number of employees etc.
Example
Technocom is a manufacturing company which has 2 productive departments and one service
department. The following cost were accumulated during the month of June
Machine Assembly Maintenance
Overheads Total
department department department
Allocated overhead: 000 FCFA 000 FCFA 000 FCFA 000 FCFA
- Indirect materials 15,000 8,000 5,000 2,000
- Indirect labour 6,000 4,000 1,000 1,000
- Depreciation Machinery 7,000 2500 4500 -
Total indirect overhead 28,000 14,500 10,500 3,000

Unallocated overhead:
- Supervisors salary 6 000 000
- Rates 10 000 000
Total 16 000 000
Other information to the factory is as follows
Total
department department department
Number of employees 60 30 20 10
Square feet of floor space 100 000 50 000 40 000 10 000
Maintenance hours 2 500 1 500 1 000 -
Direct labour man hours 10 000 5 000 5 000 -
Required: Using the above information, you are required to apportion the indirect overhead cost to
the productive and service cost centres and then the service cost centre (maintenance department)
overhead cost to the production cost centres.
Solution
Overhead analysis sheet
Overhead Basis Totals
dept dept dept
000 FCFA 000 FCFA 000 FCFA 000 FCFA
Indirect materials Allocated 15 000 8 000 5 000 2 000
Indirect labour Allocated 6 000 4 000 1 000 1 000
Depreciation of machinery Allocated 7 000 2 500 4 500 -
Supervisors salary Number of employees 6 000 3 000 2 000 1 000
Rates Floor space 10 000 5 000 4 000 1 000
Total 44 000 22 500 16 500 5 000
Maintenance department Maintenance hours - 3 000 2 000 (5 000)
Secondary totals 44 000 25 500 18 500 0
b) Where there are two or more service cost centres (Reciprocal services)
This occurs when two (2) or more service departments do work for each other as well as for the
production department. For example assume that the maintenance department do work for the store
department and the store department supplies items to the maintenance department. The total cost of
the maintenance department cannot be ascertained until the charge for the store department is known.
Similarly the total cost of the store department cannot be found until the charge of the maintenance
department is known
There are two (2) principal techniques to solve this problem
- Repeated distribution method (continuous allotment method)
- Simultaneous equation method (simultaneous equation method)
a) Repeated distribution method or continuous allotment:

This method takes each service department cost and apportions it to all other department
according to the agreed percentage. The re-apportionment continues until the figures become
small to be considered
b) Algebraic method or Simultaneous equation method:

Under this method, reciprocal services are settled first. This will result to simultaneous equations
which when solved, the amount obtained for the service cost centres are distributed to the
production cost centres according to the agreed percentage.
Example A manufacturing company has 3 production depts and 2 service depts. The overheads
incurred by the service department are as a result of rendering services in the following manner:

Production depts Service depts

Machinery Plaining Assembly Maintenance Canteen
Overhead costs 800 000 fcfa 700 000 fcfa 500 000 fcfa 234 000 fcfa 300 000 fcfa
Maintenance 20% 40% 30% - 10%
Canteen 40% 20% 20% 20% -
You are required to distribute the service cost centre overhead cost to the Xo cost centre using the
simultaneous equation and repeated distribution method.
Assignment
1) You are given the following allocated and apportion overhead for 3 Xo department and 2 service
department and data about amount of work done by each service department for the other
department.
Production depts Service depts
A B C P Q
Cost 3 000 000 FCFA 4 000 000 FCFA 2 000 000 FCFA 2 500 000 FCFA 2 700 000 FCFA
Proportion: P 20% 30% 25% - 25%
Q 25% 25% 30% 20% -
Use the related distribution method to apportion the service department to the X o department.
2) GCE 2014, P2, Q3
3) OVERHEAD ABSORPTION
After allocation and apportionment of overhead, the 3rd stage is the absorption costing process also
called Overhead Recovery.
Overhead absorption is the process of adding overhead cost to the cost of a product or service in order
to build up a fully absorbed production or service cost. In other words, it is the process by which
overheads are included in the total cost of a product or service.
Basis for absorption

Production overhead costs are absorbed into production cost on basis selected by the organisation.
The absorption basis should be appropriate for the particular product or service. The most common
basis of absorption are
- Units of output: this can only be used when all the cost units passing through the cost centre
are identical
- Direct labour hours worked
- Machine hours worked
- Percentage of direct labour cost
- Percentage of prime cost (Direct material + Direct labour + direct expenses)
ABSORPTION RATE
This is the rate at which overhead are added to cost
1) If the absorption basis is units produced, then
2) If the absorption basis is direct labour hours worked, then

⁄
3) If the absorption basis is machine hours worked, then

⁄
Thus:
Where: the volume of activity is direct labour hours, machine hours etc.

Example
A manufacturing company has 3 production departments. It‟s allocated and apportioned overheads for
each department are as follows:
Department A is 48 000 000 FCFA , B is 36 000 000 FCFA, and C is 30 000 000 FCFA
Hours worked and direct labour costs are as follows
Department A Department B Department C
Direct labour hours 20 000 4 000 15 000
Machine hours 2 000 18 000 1 000
Direct labour cost 20 000 000 5 000 000 12 500 000
It has been decided that overhead should be absorbed on a direct labour hour‟s basis in department A,
in machine hour‟s basis in department B and a percentage of direct labour cost in department C.
Required
a) What is the absorption rate for each department
b) What would be the full production cost of a job for which the following information apply:
- Direct material cost 25000FRS
- Direct labour cost 11000 FRS including 5000 FRS in department C
- Direct labour terms in department A 5 hours
- Machine hours in department B 2 hours
FACTORY WIDE RATE (BLANKET RATE) AND

SEPARATE DEPARTMENTAL RATE
FOR ABSORPTION
An organisation that uses absorption costing and has two (2) or more production cost centres can
choose between:
- Applying a single absorption rate (Blanket rate) for all its cost centres.
- Having a separate absorption rate for each production cost centre (departmental rate)
For example single absorption rate per direct labour hour can be calculated from total production
overheads and total direct labour hours worked in production departments.
However, separate departmental overhead absorption rate are considered to be more suitable because
the charging of overhead is likely to be fairer, reflecting the work done on each item of production or
output of each department.
Example (factory wide rate or blanket rate)

ATOM a manufacturing business has 3 production departments. Relevant information is as follows
Dept 1 Dept 2 Dept 3
Direct labour hours 15 000 6 000 12 000
Machine hours 0 8 000 1 000
Overhead cost 10 500 000 16 000 000 12 900 000
Cost information relating to job 437 is:

- Direct materials 10 000 FCFA
- Direct labour:
 Dept 1 (3 hours) 2 700 FCFA
- Machine hours in Dept 2 was 6 hours
Required: Calculate the full production cost for job 437, if:
a) A single wide absorption rate per direct labour hour is used,
b) Separate departmental absorption rates are used and a direct labour rate is applied for
departments 1 and 3 and a machine hour absorption rate is applied to department 2.

ACTUAL AND PREDETERMINED (BUDGETED) RATE

The use of actual absorption rates has the effect that the absorption rates cannot be calculated when
actual costs and actual activity levels are known. This implies that total cost cannot be determined
until the end of the year (period).
In order to enable costing to be done from the first day of operation, overhead rates are calculated on
the basis of budgeted (future) overheads and budgeted activity level. Such rates are called
Predetermined or Budgeted overhead rates and they are based on Budgeted level of expenditure
and activity
The overhead charged to any product or job is given as
Example (budgeted overhead absorption rate(BOAR))

A manufacturing company uses a single factory wide absorption rate based on direct labour hours. Its
budgeted production overheads are 84 000 000 FCFA and budgeted direct labour hours are 52 500
hours.
During the year, it produces a batch of 100 units of products BKZ. The batch has direct material cost
of 50 000 FCFA and direct labour cost of 40 000 FCFA. The batch takes 44hours to make. What is
the full production cost for each unit in the batch?
UNDER ABSORBED AND OVER ABSORBED OVERHEAD

It is mostly unlikely that the actual overhead and actual level of activities will exactly be the same as
the budgeted amounts. Thus, using predetermined overhead rates will result to actual production being
charged more or less than the actual overhead incurred. The difference between the overheads charged
(absorbed) and the overhead actually incurred is called the under or over Absorption overhead.
- If the total amount of overhead cost absorbed into production cost exceeds the actual
overhead expenditure, there is over Absorption overhead.
- On the other hand if the total amount of overheads cost absorbed into the production cost is
less than the actual overhead expenditure, there is under absorbed overhead.
Example (under and over absorbed overheads)

A manufacturing company uses a single factory wide absorption rate. Budgeted and actual data
are as follows:
- Budgeted overhead expenditure 54 000 000 FCFA
- Budgeted direct labour hours 36 000 hours
- Actual overhead expenditure 55 500 000 FCFA
- Actual direct labour hours 37 500 hours
Work Required
i) Calculate the predetermined overhead rate
ii) Calculate the under/ over absorbed over head
Solution
i) Budgeted overhead absorption rate (BOAR)
BOAR ⁄
ii) Actual direct labour hours = 37 500 hours

Predetermined overhead rate = 1 500 FCFA/direct labour hour
Overhead absorbed into production = 37 500 × 1 500 = 56 250 000 FCFA
Actual overhead expenditure 55 500 000 FCFA
Over absorbed overhead = Overhead absorbed into production cost – Actual overhead expenditure
= 56 250 000 – 55 500 000 = 750 000 FCFA

There is over absorbed overhead because the overhead absorbed in to production is more than the
amount of overhead expenditure actually incurred.
Questions
1) A company uses a budgeted overhead rate in applying overhead to Xo orders on a labour cost
basis for department A and a machine hour basis for department B. At the beginning of 1998,
the company made the following predictions.
Dept A Dept B
Direct labour 128 000 35 000
Factory overhead 144 000 150 000
Direct labour hours 16 000 3 000
Required Machine hours 1 000 20 000
a) What is the budgeted overhead rate that should be used in department A and B
During the month of January, the cost record of job No 200 shows the following
Dept A Dept B
Material requisition 2 000 4 000
Direct labour cost 3 200 2 180
Direct labour hours 5 3
Machine hours 1 13
b) What is the total overhead cost for job No 200?

c) Assuming that the job No 200consisted of 20 units, what is the unit cost of job No 200.
d) At the end of 1998, it was found that the actual factory overhead cost amounted to 160 000
FCFA in department A and 138 000 FCFA in department B. Suppose the actual direct
labour cost was 148 000 FCFA in department A and actual machine hours were 18 000
hours in department B, compute the over or under absorbed overhead amount for each
department.
e) Differentiate between cost apportionment and cost absorption.
2) 2019 sample set 7010, P3, 3

AMATA Manufacturing Company has two departments: Mixing and Baking and uses a
single production overhead absorption rate based on direct labour hours. The budgeted and
actual information for December 2019 are given as follows:
Budget Actual
Direct Production Direct Production
Direct wages Direct wages
Department labour overhead in labour overhead in
in CFAF in FCFA
hours CFAF hours CFAF
Mixing 24,000,000 2,000 180,000,000 22,000,000 2,000 180,000,000
Baking 70,000,000 5,000 100,000,000 70,000,000 4,750 103,500,000
Total 94,000,000 7,000 280,000,000 92,000,000 6,750 283,500,000
During the month of December 2019, a batch of 2,000 units was made up of the following:
Department Direct wages in FCFA Direct labour hours
Mixing 726,000 120
Baking 2,490,000 415
Total 3,216,000 535
The direct materials cost of the batch was 890,000 FCFA.
Required:
i) Calculate the appropriate departmental overhead absorption rates.
ii) Calculate the single production overhead absorption rate for the company.
iii) Determine the total cost of the batch of 2,000 units.
iv) Determine the overhead over/under absorbed into the batch.

3) GCE 2017, P2, Q

ALAN Co. Ltd manufactures a range of products with total budgeted overheads of 1,947,120 FCFA
incurred in three production departments (A, B and C) and one service department (D).
Department A has 105 direct employees who each work 40 hours per week. Department B has 10
machines each of which is operated for 20 hours per week. Department C is expected to produce
148,000 units of finished products in the budget period. The company will operate for 40 weeks in the
budget period. Budgeted overheads incurred directly by each department are:
- Production Department A 523,490 FCFA
- Production Department B 452,240 FCFA
- Production Department C 187,780 FCFA
- Production Department D 106,610 FCFA
The balance of budgeted overheads is apportioned to departments as follows:

- Production Department A 40 %
- Production Department B 35 %
- Production Department C 20 %
- Service Department D 5%
Service Department overheads are apportioned equally to each production department.
Required:
(a) Calculate an appropriate overhead absorption rate in each production department. (16 marks)
(b) Calculate the budgeted overhead cost for finished products in batch of 1,000 units, which
takes 300 budgeted direct labour hours in Department A and 50 budgeted machine bouts in
Department B to produce. (4 marks)
ACTIVITY BASED COSTING (ABC)

ABC is a costing system which recognises that costs are incurred because of the activities which take
place within the organisation and for each activity, a cost driver (activity or activities within the
organisation which causes costs to be incurred) may be identified. Those costs which are driven or
incurred by the same cost drivers are grouped in to cost pools and the cost drivers are then used as a
basis for charging the cost of each activity in the product or service or job.
Steps in applying the ABC

i) Identify the organisation‟s major activities
ii) Identify the cost drivers,
iii) Collection of the cost of each activity into cost pools. Cost pools are equivalent to cost centres
(departments). They are used to describe locations to which overheads costs are initially incurred,
iv) Charging support overheads to products on the bases of their usage of the activity. A product‟s
usage of an activity is measured by the number of the activity‟s cost driver it generates.
Absorption costing and ABC are similar in many respects. In both systems, direct costs go
straight to the product and overheads are allocated to production cost centres/cost pools. The
difference lies in the manner in which overheads are absorbed in to products.
Example (2019 sample set 7010, P3, 10)

MATIMAN Plc has 2 jobs for 2 different customers. The company has enough capacity for both jobs
but is uncertain whether they will be profitable. The following information is available:
Job A Job B
Job value 50,000 CFAF 200,000 CFAF
Quantity 1,000 units 2,000 units
Material cost per unit 30 CFAF 40 CFAF
Moulding time per batch 5 hours 7.5 hours
Batch Size 100 units 50 units

Annual budgeted overheads are given as follows:
Cost driver volume Budgeted overhead

Activity Cost driver
per annum cost
Moulding Moulding hours 2,000 hours 300,000 CFAF
Inspection Inspection Batches 150 batches 150,000 CFAF
Production Management Jobs 20 jobs 250,000 CFAF
Total Budgeted Overhead Cost for the year 700,000 CFAF
Overheads are absorbed using moulding hours.

Required:
(a) Calculate the cost rates per cost driver volume and determine the profit or loss for
each job using activity based costing.
(b) Calculate the overhead absorption rate per moulding hour and determine the profit or
loss for each job using absorption costing.

COSTING METHODS OR TECHNIQUES

The costing methods or techniques are generally classified in two categories. Namely:
- Specific order costing and.
- Process costing
A) SPECIFIC ORDER COSTING
It is so called because the cost unit or product or job is done according to customers‟
specifications. Specific order costing methods include:
 Job costing
 Batch costing
 Contract costing
\
JOB AND BATCH COSTING
With job costing, only a single product is produced at the end of the production process (baking of
wedding or birthday cake) meanwhile in batch costing, a number of identical units are produced at the
end of the production process. (for example baking of bread, phones etc.)
The main purpose here is to determine the total cost of the job or batch and the selling price, given
mark-up or margin. The total cost is comprised of the total production cost and other cost incurred
after the producing the job or batch (for example selling and distribution overheads etc.).
Total cost = total production + non-manufacturing overheads
Total production cost = prime cost (direct materials + direct labour + direct expenses) and production
overheads absorbed in to the job or batch
Other non-manufacturing overheads may include selling and distribution overheads.
The selling price of the job or batch can be calculated using mark-up or margin rates.
Examples
1) Sample set 2019, 7010, P3, 4
Divine Co. Ltd manufactures bathing soap (BACTOR). It has the following budgeted overheads for
the year based on normal activity levels on four departments;
Departments Budgeted overhead cost Overheads Activity level
Blanking 8,000,000 CFAF 1,600 labour hours
Machine 23,000,000 CFAF 2,500 machine Hours
Welding 1,000,000 CFAF 2,000 labour Hours
Assembly 5,000,000 CFAF 1,000 labour Hours
During the period selling and distribution overheads are 20 % of Factory production Cost. An order of
250 Bactor soaps was made as Batch 313 and incurred the following costs.
 Direct material 250 unit at 12,428 CFAF
 Direct labour;
Blanking 128 hours at 250 CFAF per hour
Machine 252 hours at 2,500 CFAF per unit
Welding 90 hours at 2,250 CFAF per hour
Assembly 175 hours at 1,500 CFAF per unit
525,000 CFAF was paid for hiring the special x-ray equipment for the welding shop as direct
expenses. The time booking in the machine shop was 643 machine hour.
Required:
a) Calculate the adsorption rate per depth
b) Show the prime cost and Factory production cost
c) Show the total cost of Batch 313 and the cost per unit
d) If the markup is 20 % what is the profit and selling price.

2) GCE 2014, P2, 2

Batch No 28 incurred the following costs:
Department A 420 labour hours at 3.5 FCFA per hour
Department B 686 labour hours at 3 FCFA per hour
Direct materials 3 280 FCFA
Factory overheads are absorbed on labour hours for department A and B at 5 FCFA per hour.
The firm uses a cost plus system for setting prices and expects a 25% gross profit (sales revenues
minus factory cost).
Assuming that 1 000 units were produced in batch No 28 and administrative overheads are absorbed
at 10% of selling price.
Required: Calculate
(a) The selling price per unit
(b) The total amount of administrative overheads recovered by batch No 28
(c) The notional net profit per unit
3) GCE 2017, P2, 2

In the month of May 2013, DALAS production began and completed two jobs. The direct labour for
each job is recorded 111 hours. The direct labour wage rate is 3,000 FCFA. The direct materials for
each job are recorded in quantity and price below:
Job 126
Direct labour hours 2,000 hours
Direct materials:
Steel nods 200 at 2,000 FCFA per rod
Metal sheet 100 at 5,000 FCFA per sheet
Job 777
Direct labour hours 1,000 hours
Direct materials:
Steel rods 160 at 2,000 FCFA per rod
Metal sheet 40 at 5,000 FCFA per sheet
The budgeted overhead costs for the month was 6,000,000 FCFA and the budgeted direct labour hours
for each job is 3,000 hours.
Required:
(a) Determine the job-order cost of each job using absorption costing. (14 marks)
(b) Assuming that 75 % of the overhead costs for the month is variable and using variable costing
method, determine the job-order cost of each of the jobs. (6 marks) (Total 20 marks) my
CONTRACT COSTING
This is a specific order costing technique in which the cost unit or job is extremely large and
consumes a relatively large amount of resources and time. A contract is an agreement the client
(contractee) and a contractor to do a particular job which will take a longer period of time and larger
amount of resources to complete as compared to an ordinary job.
Differences between a contract and an ordinary job
- A contract takes a longer period of time to complete than an ordinary job
- Contracts consume larger amount of resources than ordinary jobs
- The money value of contracts larger is larger than that of ordinary jobs
- With contracts, special purpose reports are provided to the client in the course of the
execution meanwhile in jogs, reports are usually provided after the completion of the job.

Contract costing terminology

1) Contract Price: this is the value of the contract. It is the amount n which the contractor and the
client agree upon. The contract price is paid by the client to the contractor in instalments based
on the contractor‟s architect‟s certificate
2) Architect‟s or surveyor‟s certificate: this is a certificate that provides confirmation that works
done up to a certain value (level) has been completed. Its value is called the value of work
certified which is the selling price of the contract completed in the period. The architect‟s
certificate is the basis on which progress payments are made.
3) Progress payments: these are interim payments made in the course of the contract by the client to
the contractor as part of the contract price. This is usually calculated as a percentage of the value
of work certified (value of the architect‟s certificate) and the other percentage is the retention
money
4) Retention money: this is the percentage (portion) of the value of work certified held back by the
client to be paid after a particular period of time or after some rectification work has been done
5) Cost of work certified: this includes the portion of the total cost that relates to the work certified.
It is also referred to as the cost of sales. The cost of work certified is calculated using a contract
account.
6) Notional profit: this is the difference between the value of work certified and the cost of work
certified to date less provision for any anticipated unforeseen eventualities.
7) Profit not taken: this refers to that part of the notional profit that is not recognised in the current
period. It is profit carried forward to be recognised in the years that follow.
Principles of profit income recognition in contracts

 If the contract is in its early stages, no profit should be taken until when the outcome can be
measured with reasonable certainty
 Where a loss has occurred, it must be recognised in the period it has occurred regardless of
the stage of maturity of the project or the timing
 When substantial costs have been incurred on the contract but the contract is not close to
completion, the notional profit is apportioned in order to determine the profit taken as
follows:
 When the contract is near completion, the profit taken is calculated as follows:
Where: Estimated profit = contract price – Estimated total cost

Estimated total cost = cost incurred to date + Estimated future cost
CONTACT ACCOUNTS
This is a separate account that is opened and maintained for each contract undertaken for the purpose
of accumulating costs. This account is debited with the opening cost and all the cost incurred in the
contract during the period and it is credited with the closing balances, the work done but not certified.
The balance of this account gives the cost of work certified. A typical contract account is shown
below:

Contract XYZ Account

FCFA FCFA
Materials b/f X Materials return to store X
Materials purchased or sent to site X Materials c/d X
Direct wages X Plant and machinery c/d X
Indirect wages X Cost of work not certified c/d X
Subcontractors‟ (surveyors‟) fees X Cost of work certified c/d ?
Plant and machinery b/f X
Hire of special plant X
Head office overheads X
X X
Cost of work certified b/d ? Value of wok certified X
Notional profit ?x
Y Y
Example 1, GCE 2015, 7010, P2, Q3

Charlotte Construction Company Ltd, obtained a contract for the erection of a multi-story building
operations started in January 2012. The contract price was 90 000 000 FCFA. on 31st December 2013,
the end of the financial year, the cash received on account was 36 000 000 FCFA being 80% of the
amount on the surveyor‟s certificate.
The following additional information is given below:
FCFA
Materials issued to contract 18 000 000
Materials on hand 31/12/2013 750 000
Wages 24 660 000
Plant purchased specially for the contract and to be depreciated at 10% per annum 3 000 000
Direct expenses incurred 1 290 000
General overheads allocated to contract 760 000
Work finished but not yet certified 1 500 000
Required:
You are required to prepare the contract account and the statement showing the profit on the contract
to 31 December, 2013, including what proportion of the profit the company would be justified in
taking to the credit of the income statement, and to show what entries in respect of the contract would
appear in the statement of financial position
Example 2, GCE 2017, 7010, P2, Q3

YOUNG TAMUTON is a contractor who has a contract at hand to be completed the following year.
The following information relating to the contract provided for the year ended 2013:
000 FCFA
Contract price 7 000
Value of work certified 3 680
Cash received from progress payments 5 600
Opening balances:
- Cost of work completed 500
- Materials n dite 200
During the year 2013:
- Materials delivered to site 1 024
- Wages 974
- Hire of plant 192
- Sundry 148
Closing balances:
- Materials on site 36

General overheads are charged to each contract at the rate of 10% of the value of work certified.
Progress payments are made less 20% retention money. It is estimated that further costs to complete
the contract will be 215 000 FCFA (including closing balance of materials on ite). Since the contract
is near completion, the profit taken is calculated based on the estimated total profit on completion as
follows:
Required:
Prepare a contract account for the contract and calculate the profit taken from the contract for the year
ended 2013.
Example 3,
On 31/12/2009, NEHSUH completed a long term contract and surplus materials valued at 6 300 000
FCFA and plant valued at 8 000 000 FCFA were transferred to a new site for the start of a long term
contract on 01/01/2010. At the financial year ended 31/12/2010, the following details were available:
000 FCFA
Materials purchased 726 000
Materials returned to suppliers 3 400
Materials on site not used 21 600
Direct wages 290 000
Administration expenses 103 500
Allocated overheads 65 000
New plants delivered to site 44 000
Plant hired 3 100
Payment to sub-contractors 68 000
Architect‟s fees 10 300
Cost of work not certified by architect 110 000
Value of work certified by architect 1 500 000
Additional information:
- Direct wages accrued at 31/12/2010 were 10 200 000 FCFA. the sub-contractors were owed
8 600 000 FCFA at that date.
- The plant transferred to the contract on 01/01/2010 was due to be scrapped on 31/12/2010
when it would not have any residual value. The new plant has an estimated useful life of 4
years from the date of purchase and an estimated residual value of 4 000 000 FCFA. A full
depreciation is charged in the year of purchase and straight line method is used.
- NEHSUH had an agreement with her contracting party that the contracting party will pay for
all work certified by the architect, less 20% retention. The contracting party has paid in
accordance with the agreement.
- The attributed profit formula used by the company is:
Required:
a) Prepare the contract account for the year ended 31/12/2010 and calculate the work in progress
as at that date
b) Explain why the contracting party negotiated the 20% retention.
Example 4:
BETON CONSTRUCTION presented to you the following information related to Contract 105 at
Bonaberi site as at 31st December 2018

000 FCFA
Wages 42 156
Materials delivered to site 54 203
Materials from main store 657
Materials transferred to Ndokoti site 1 590
Plant purchased at cost 12 500
Plant transferred to bonaberi site 5 250
Sub-contractors‟ charges 19 850
Site expenses 5 086
Materials on site 31/12/2018 18 300
Plant on site 31/12/2018 14 750
Prepaid expenses 507
Accrued wages 921
Cost of work done but not certified 7 250
Head office charges are 10% of total wages
The contract value is 550 000 000 FCFA and it is anticipated that there will be further cost of
375,000,000 FCFA including guarantee and anticipation claims. Since the first year of the contract, no
profit has been taken previously.
The value of work certified by the architect‟s certificate was 137 500 000 FCFA and the client had
made progress payment for this amount less 15% agreed retention percentage.
You are required to prepare the contact account for the year31/12/2018, calculating the notional profit
and profit taken
PROCESS COSTING
This is a costing method or technique where the costing unit (product or service) goes through a
number of processes. This means that the input of the next process is the output from the previous
process and output from the last process is transferred to the finished goods. Units can only leave a
previous process to the next only if they are 100% complete. Examples of products produced in
processes include drinks, beverages, cars, detergent, cookies etc.
PROCESS ACCOUNT
This is an account that is opened and maintained for each process with the purpose of calculating the
total cost of the process and valuing the output from that process. The process account is debited with
the input cost and other additional cost (DM, DL and overheads) incurred during the period. It is
important to note that the final output is made up of the material introduced at the beginning of the
initial process. The output of a process becomes the input of the next process.
Example of a process account
Process x A/C
Qty UP AMT Qty UP AMT
Example
The production of good x that goes through 3 processes, then it is transformed to the finished stock.
You are given the following information about the cost incurred in the finished process.
Process 1 Process 2 Process 3
Direct materials 15000 7500 8000
Direct labour 10000 12000 8000
Direct expenses 5000 2000 /
Overheads*

*Overheads are absorbed in each process on the basis of 150% of direct labour and 10 000 units were
produced.
Work required: Prepare the process account of each process and show the transfer.
Solution
Process 1 account
Qty UP amount Qty u.p Amount
Direct materials 10 000 / 15 000 Output to process 2 10,000 4.5 45000
Direct labour 10 000
Direct expenses 5 000
Overheads 15 000
10 000 45 000 10 000 45,000
Process 2 account
Qty UP Amount Qty UP Amount
Input from process 1 10 000 4.5 45 000 Output to process 3 10 000 8.4 84 500
Direct materials 7 500
Direct labour 12 000
Direct expenses 2 000
Overheads 18 000
10 000 84 000 10 000 / 84 500
Process 3 account
Input from process 2 10 000 8.4 84 500 Finished stock 10 000 11.25 112 500
DM 8 000
DL 8 000
O/HS 12 000
10,000 112 500 10 000 11.25 112 500
LOSSES IN PROCESS COSTING

Losses in process costing can be classified in 3 categories:
- Normal Loss
- Abnormal Loss
- Abnormal Gain
1) NORMAL LOSS
This is loss that is expected from the production process or it is loss that is unavoidable in a
production process. It is also called expected loss and it is usually calculated as a percentage of input.
When there is normal loss and the losses cannot be scraped (sold), the cost of the normal loss units are
spread on the goods unit of output.
The cost per unit is calculated as follows:
Expected output = input – Normal loss
Example: The following information is given for the colouring process of Top ananas
- Input material 10 000 liters at 5 000 000FCFA
- Direct labour 13 000 000FCFA
- Overheads 7 000 000FCFA

Normal loss is 10% of input and losses are not scraped. Draw the colouring process account and show
the cost/unit.
Solution
Input material = 10 000 litres
Normal loss 10% (10000) = 1 000 litres
Expected output = 10 000 – 1 000 = 9 000 litres
Process 2 account
Direct materials 10 000 5 000 000 Normal loss 1 000 -
Direct labour 13 000 000 Output 9 000 2 778 25 000 000
Overheads 7 000 000
10 000 25 000 000 10 000 / 25 000 000
N.B: When losses are scraped, the proceeds received from the sales of loss units are used to reduce
the cost of the process. Here, the cost per unit is calculated as follows:
Example: The following information relates to the process 2:

- Input material 20 000 at 25 000 000FCFA
- Overheads are absorbed to each process at 150% of direct labour
Normal loss is 10% of input and losses are scraped at 2 000FCFA/kg.
Prepare the necessary accounts for process 2.
Solution
Input material = 20 000kg
Normal loss 10% (20000) = 2 000kg
Expected output = 20 000 – 2 000 = 18 000kg
( ) ( )
Process 2 account
Direct materials 20 000 25 000 000 Normal loss 2 000 2 000 4 000 000
Overheads 22 500 000
20 000 62 500 000 20 000 / 62 500 000
Normal loss account

Process 2 2 000 2 000 4 000 000 Cash/bank 2 000 2 000 4 000 000

2) ABNORMAL LOSS
There is abnormal loss if actual loss is greater than the expected (normal) loss or if actual
output is less than expected output. When abnormal loss ours, the abnormal loss units are
credited to the process account valued at cost per unit and the cost per unit is calculated as
follows:
If losses are not scrapped, the cost of the abnormal loss units is charged as an expense in the
costing profit and loss account by debiting the profit and loss account and crediting the
abnormal loss account (Dr P&L A/C and Cr abnormal loss A/C).
If losses are scrapped, the proceeds from the sales of the abnormal loss units are used to
reduce the abnormal loss expense to be charged in the costing profit and loss account.
Example
Consider the previous example and that actual loss was 2 500kg, prepare the necessary
accounts for the process.
Solution
Normal loss 10% (20000) = 2 000kg
Actual loss = 2 500kg
Actual output = 20 000 – 2 500 = 17 500kg
Abnormal loss = 2 500 – 2 000 OR 18 000 – 17 500 = 500kg
( ) ( )
Process 2 account
Overheads 22 500 000 Abnormal loss 500 3 250 1 625 000
20 000 62 500 000 20 000 / 62 500 000
Normal loss account
Abnormal loss 500 2000 1 000 000
2 500 5 000 000 2 500 5 000 000
Abnormal loss account

Process 2 500 3 250 1 625 000 Normal loss 500 2 000 1 000 000
Profit & loss 500 625 000
500 1 625 000 500 1 625 000

3) ABNORMAL GAIN
There is abnormal gain if actual loss is less than expected loss or if actual output is greater
than expected output. When abnormal gain occurs, the process account is debited with the
abnormal gain units valued at cost per unit. The cost per unit is calculated as follows:
At the end of the period, the net value of the abnormal gain units is transferred to the cost profit and
loss account as an income by debiting the abnormal gain account and crediting the profit and loss
account. (Dr abnormal gain A/C and Cr profit & loss A/C)
Example
Consider the previous example and that actual loss was 1 800kg. prepare the necessary accounts for
the process.
Solution
Normal loss 10% (20000) = 2 000kg
Actual loss = 1 800kg
Actual output = 20 000 – 1 800 = 18 200kg
Abnormal gain = 2 000 – 1 800 OR 18 200 – 18 000 = 200kg
( ) ( )
Process 2 account
Abnormal gain 200 3 250 650 000
20 000 63 150 000 20 000 / 63 150 000
Normal loss account

Abnormal gain 200 2 000 400 000
2 000 4 000 000 2 000 4 000 000
Abnormal gain account

Normal loss 200 2 000 400 000 Process 2 200 3 250 650 000
Profit & loss 250 000
200 650 000 200 650 000

PROCESS COSTING 2: TOTAL EQUIVALENT UNITS (TEU)

Total equivalent units refer to a greater number of partly completed units representing a smaller
number of fully completed units. This is done to ease costing.
Example 1:
At the end of a production process 1 200units were and transferred meanwhile 800units were 60%
complete. What are the total equivalent units?
Solution
Units completed and transferred (UC&T) 1 200
Closing work-in-progress (CWIP) = 60% 800 480
Total equivalent units (TEU) 1 680
NB:
- For output to be transferred to the next process, it must be 100% complete
- The closing WIP of the process at the end of the period becomes the opening WIP of the next
period of the same process. This means that if it was 60% completed as closing WIP in the
previous period, 40% was uncompleted which will be completed the next period as opening
WIP for the same process.
- In process costing, the TEU, total cost and Cost per equivalent unit are calculated for each
cost element (component)
Example 2: At the end of process2, 5 200 units were fully completed and transferred meanwhile 1
800 units were partly completed as follow:
- Materials 100%
- Labour 75%
- Overheads 60%
Calculate the total equivalent units.
Solution
Total DM DL O/Hs
Units completed and transferred 5 200 5 200 5 200 5 200
Closing WIP 1 800 100%(1 800) 75%(1 800) 60%(1 800)
Total equivalent units (TEU) 7 000 7 000 6 550 6 280
The cost per equivalent unit is also calculated for each cost component by dividing the total cost by
the TEU
Considering the continuation of the previous example that the cost incurred in the process during the
period was as follows:
- Direct material ( from process 1) 49 000 000FCFA
- Overheads 53 380 000FCFA
Calculate the cost per equivalent unit and value the units completed and transferred and the closing
WIP.
Solution
Total DM DL O/Hs
Units completed and transferred 5 200 5 200 5 200 5 200
Closing WIP 1 800 100%(1 800) 75%(1 800) 60%(1 800)
Total equivalent units (TEU) 7 000 7 000 6 550 6 280
Total cost (TC) 167 880 000 49 000 000 65 500 000 53 380 000
25 500fre
=7 000frs = 10000frs = 8 500frs

NB: The cost per EU of the total is the sum of the cost per EU of the cost components. The cost per
EU calculated is then used to value the units completed and transferred (UC&T) and the closing WIP.
VALUATION:
- UC&T = 5 200 x 25 500 = 132 600 000 FCFA (since it is 100% complete everywhere)
- Closing WIP: DM = 1 800 x 7 000 = 12 600 000
DL = 1 350 x 10 000 = 13 500 000
O/Hs = 1 080 x 8 500 = 9 180 000
Total 35 280 000
The process account can be presented as follows:
Process 2 account
Qty Amount Qty Amount
DM (process 1) 7 000 49 000 000 UC&T 5 200 132 600 000
Direct labour 65 500 000 Closing WIP 1 800 35 280 000
7 000 167 880 000 7 000 167 880 000
Note: All direct materials in the in the process are added at the beginning of the assembly process
meanwhile conversion costs (direct labour and overheads),however, are added evenly during the
assembly process
VALUATION OF OPENING WORK-IN-PROGRESS (OWIP)

In our previous example, there was no opening work in progress. When there is opening WIP, it
means that the units completed and transferred (UC&T) to the next process is comprise of the opening
WIP and the units started and completed (US&C) during the period.
UC&T = opening WIP + Units started and completed (UC&T = OWIP + US&C)
This means that the units started and completed (US&C) will be calculated as follows:
US&C = UC&T – OWIP
When there is opening WIP, methods are adopted for valuing them and for better understanding of
these methods one must be able to compute:
- The total equivalent units (TEU)
- The Total cost
- Calculating cost per EU, valuing the UC&T and CWIP and preparing the process account.
There are two methods of valuing the opening WIP. They are:
- Weighted average cost (WAC) method and
- First-in-first-out (FIFO) method
1) WEIGHTED AVERAGE COST (WAC) METHOD:

This method does not distinguish the units started and completed (US&C) included in the units
completed and transferred (UC&T). The total equivalent units are calculated as follows:
Total equivalent units = Units completed and transferred (UC&T) + EU in closing WIP
TEU = UC&T + EU in CWIP
The total cost here is made up of the previous cost and the present cost.
 Previous cost is the cost of the opening WIP

 Present cost is comprised of the input cost from the previous process and all additional costs
incurred in the process during the period.
Total cost = previous cost + present cost
The cost per equivalent unit is calculated for each cost component by dividing the total cost by the
total equivalent units. This cost per EU is then used to value the units completed and transferred and
the closing WIP.
2) FIRST-IN-FIRST-OUT (FIFO) METHOD
This method distinguishes the units started and completed (US&C) included in the units completed
and transferred (UC&T). The total equivalent units are calculated as follows:
Total equivalent units = EU in opening WIP + Units started and completed (US&C) + EU in
closing WIP
TEU = EU in OWIP + US&C + EU in CWIP
The total cost here is made up of the present cost. Present cost is comprised of the input cost from the
previous process and all additional costs incurred in the process during the period.
Total cost = present cost
The cost per equivalent unit is calculated for each cost component by dividing the total cost by the
total equivalent units. This cost per EU is then used to value the units completed and transferred and
the closing WIP.
During valuation, the value of the units completed and transferred is made up of the value of the
OWIP (previous cost and valuation of the completed units) and the value of the units started and
completed during the period.
NOTE:
In the process account, the debit side shows the units to be produced (justified) in the present period
which is made up of the units of the OWIP and the input units from the previous process
The credit side shows the units produced which is made up of the UC&T and the CWIP
If the units produced are less than the units to be produced, there will be losses which may be normal
or abnormal (such cases of loss and TEU are not covered in the scope of this level)
Example 1 (sample set 2019, 7010, P3, section A, Q2)

. A company is processing food and has the following details:
- Material 1,500 kg at 2,000 CFAF per kg
- Labour cost is 2,500,000 CFAF
- Overhead cost is 1,500,000 CFAF
The company is expecting loss of 10% on input. The output from process 1 to process 2 is 900kg.
Required:
a) (i) Prepare the process 1 account. (10 marks)
(ii) Prepare the abnormal loss account. (2 marks)
b) In process 2, the following details are available:
- Input labour cost 1,600,000 CFAF
- Overhead cost 2,000,000 CFAF
- There is no expected loss in this process.
(i) Prepare the final process 2 account. (7 marks)
(ii) Calculate the cost of the final output. (1 mark) (Total 20 Marks)
Example 2:
At the beginning of a certain period, there were 800 partly completed units for process 2 which had
the following value and degree of completion in percentage

FCFA Degree of completion

Input materials from process 1 16 400 100%
Materials introduced 11 200 55%
Direct labour 6 400 60%
Overheads 4 800 45%
During the period, 4 300units were transferred from process 1 at a value of 93 000 FCFA and other
costs incurred during the period in process 2 were
Material 48 000 FCFA
Labour 39 000 FCFA
Overheads 36 400 FCFA
At the end of the period 4 500units had been completed and transferree to the finished goods while
600units were still in process having reached the following levels of completion
Input materials 100% complete
Direct materials 50% complete
Direct labour 45% complete
Overheads 40% complete
Work required
Calculate the value of the units completed and transferred to finished goods, the value of ending WIP
and prepare process2 account using the WAC and FIFO methods
Example 3:
i) State and explain the two methods used in process costing to value beginning work in progress
(computation of total equivalent units and total process cost)
ii) Tri Ltd produces a detergent which passes through two processes, namely mixing and refining
completion. The following data relates to the refining process for the month of June 2015
Beginning WIP 5000units costing
Direct materials 10 000 000 FCFA 100% complete
Direct labour 2 500 0020 FCFA 80% complete
Overheads 6 000 000 FCFA 60% complete
Total 18 500 000 FCFA
During the year 20 000units were passed from the mixing to the refining process. Cost incurred during
the month were
Material 12 500 000f FCFA
Labour 4 530 000 FCFA
Overheads 10 810 000 FCFA
At the end of the period 21 000units had been completed and passed to the finished goods while
4000units were still in process having reached the following levels of completion
Direct materials 100% complete
Direct labour 40% complete
Overheads 60% complete
Work required
Prepare the refining process accounting using the WAC and FIFO methods
Example 4: GCE 2013. P2, Q3

“Brasseries du Cameroun” manufactures alcoholic and non-alcoholic drinks. One particular non-
alcoholic drink, top ananas, is produced in a three stage production process.

The following information relates to the final process (colouring) for control period 2
Opening WIP: 60 000 litres complete as to:
FCFA
Materials from process 2 100% 10 560
Added materials 90% 2 760
Direct labour 80% 1 296
Overheads 80% 1 944
16 560
In control period 2, a further 360 000 litres were transferred from process 2 at the value of 64 800 000
FCFA. Added materials amounted to 15 840 000 FCFA and direct labour 7 848 000 FCFA.
Production overhead is absorbed at the rate of 150% of direct labour cost.
Closing WIP at the end of control period 2 amounted to 90 000 litres, complete as to:
Process 2 materials 100%

Added materials 60%
Labour and overheads 50%
Required:
Prepare the colouring account for control period 2 using the FIFO and WAC valuation methods.
Example 5: GCE 2011, P2, Q1

Study the following process account for process V for period 10:
Process V account
Inputs Amount Output Amount
Units FCFA Units FCFA
Opening WIP 450 15 000 Finished output 1 200 ?
Materials 1 050 972 000 Closing WIP 300 ?
Conversion cost 513 000
1 500 1 629 000 1 500 1 629 000
(a) The opening WIP is 100% complete for materials and one-third completion for conversion cost
(b) The opening WIP‟s total cost of 144 000 FCFA consists of 99 000 FCFA direct materials and 45
000 FCFA conversion cost.
(c) The closing WIP is 100% complete for materials and 25% complete for conversion cost
Required: Calculate the value of the finished output and closing WIP using the FIFO method.
Example 6:
The following information relates to process 3 (packaging of Saba power detergent):
- Input from process 2 (mixing process): 50 000 sachets at 200 000 FCFA
- Direct labour 100 000 FCFA
- Overheads 80 000 FCFA
Normal loss is valued at 5% of input and actual output was 49 000 sachets. Losses are scrapped at 2
FCFA per sachet.
Required: Prepare the necessary accounts for process 3.

COMPLETE (FULL) COSTING

This is the process of determining the production cost of finished goods, and the cost of sales (cost
price) in order to determine the gross profit and the net profit. This is done using the following steps:
- Apportionment and absorption of overheads (indirect charges)
- Calculation of the purchase cost
- Calculation of the total production cost
- Calculation of the cost price (cost of sales), and
- Calculation of the net profit
i) Apportionment and absorption of overheads: The apportionment of overheads might
begin from the primary repartition (apportionment of overheads to both auxiliary
activities (service departments) and to production departments (main activities) to have
the primary totals, then the secondary repartition (apportionment of the service
department overheads to the production departments) to have the secondary totals.
The absorption rates are calculated for each production (main) department based of the
absorption base (nature of work unit) for each production department or main activity.
These absorption rates are then used to absorb overheads in to the various supplies
(purchases) and workshops (factories).
ii) Calculation of the purchase cost: The total purchase cost is made up of the direct
purchase cost (unit purchase price x quantity purchased) and the indirect purchase cost
(the overheads or indirect charges absorbed into purchases or supplies).
iii) Calculation of the total production cost: This is the sum of the prime cost and the
factory overheads absorbed to the workshops (factories).
Prime cost is the sum of the cost of raw material consumed, direct labour and direct
expenses.
The cost of raw materials consumed is the cost of the opening stock of RM + total
purchase cost of raw materials (direct and indirect) – cost of closing stock of RM
(calculate using the stock valuation method).
iv) Calculation of the cost price (cost of sales): this is done by subtracting the value of the
closing stock of finished goods (valued either directly or by preparing the stock card
using the stock valuation method) from the cost of goods available for sales (cost of
opening stock of finished goods + production cost of goods available of finished goods).
v) Calculation of the net profit: this is the difference between the gross profit and the other
overheads absorbed into sales (for example selling and distribution overheads). Gross
profit is the difference between the value of sales and cost of sales (cost price).
NB: if there are by-products or losses from the production process that are scrapped, the proceeds
from the scrap of losses or by-products are used to reduce the production cost of the period.
Examples:
1) GCE 2020, P3, 11: ASUDA is an enterprise that produces product P using raw material M.
for the month of March, you are given the following information:
Stocks at the beginning of the month;
 Raw material M; 11 units at 480 000 CFAF a unit
 Product P; 50 articles worth 6 250 000 CFAF
Activities of the month of March:
 Purchase of raw materials:
 March 10th:25 units at 465 000 CFAF each
 March 22nd: 15 units worth 7 275 000 CFAF

 Consumption of the month:

 Raw material M: 36 units
 Direct labour; 300 hours at 6 500 CFAF per hour
 Machine time; the production centre worked for 500 hours of machine time.
 Production of the month 250 articles
 Sales of the month: 200 articles at 150 000 CFAF an article
NB: exits of stocks (both raw materials and P) are made using the FIFO method.
Indirect expenses (overheads) are allocated as in the table below:
Auxiliary centres Principal centres
Overheads
Maintenance Administration Supply Production Distribution
Primary totals 1 000 000 1 760 000 1 470 000 1 480 000 1 000 000
Reapportionment:
Maintenance - 20% 15% 60% 5%
Administration 10% - 20% 60% 10%
Secondary totals
2 units of raw Machine hours No of articles
Overheads absorption basis
materials bought used sold
This company calculates costs using the complete cost method.
Required:
(i) Present the allocation table of overheads (7 marks)
(ii) Calculate the purchase cost of raw materials, the production cost of P, the cost price and
the cost accounting results (3 + 4 + 4 + 2) marks
2) GCE 2015, P2, 2: PAREL enterprise uses a single raw material to produce two products M1
and M2 in workshop 1 and workshop 2 respectively. Production information for the month of
November 2012 is as follows:
(i) Purchase of raw materials 13 000 units at a lump sum of 1 950 000 FCFA.
(ii) Completed products M1 11 500 units
M2 2 300 units
(iii) Sales of finished goods: M1 10 800 units at 1 800 FCFA each
M2 2 700 units at 4 850 FCFA each
st
(iv) Stock on 1 of November 2012
- Raw materials 4 000 units at a lump sum of 600 000 FCFA
- Finished product M1 450 units at a total cost of 720 000 FCFA
- Finished product M2 450 units at a total cost of 1 575 000 FCFA
- Work in progress: workshop 1 212 400 FCFA
Workshop 2 106 000 FCFA
(v) Direct labour:
- Workshop 1: 11 000 hours at 1 300 FCFA per hour
- Workshop 2: 3 100 hours at 2 400 FCFA per hour
(vi) Consumption of raw materials: Workshop 1 11 800 units
Workshop 2 2 500 units
(vii) Actual quantity in stock on 3oth November 2012
- Raw materials 2 250 units
- Finished product M1 1 150 units
- Finished product M2 50 units
- Work in progress: Workshop 1 507 500 FCFA
Workshop 2 90 300 FCFA
(viii) Overheads cost distribution:

- Workshop 1 2 700 000 FCFA

- Workshop 2 487 000 FCFA
- Distribution expenses 1 356 000 FCFA
(ix) The stock is valued at weighted average cost.
Required: Calculate
(a) The weighted average unit cost of raw materials (4 marks)
(b) The production cost of each product (7 marks)
(c) The cost price of each product manufactured (4 marks)
(d) The cost price of each product sold (5 marks)
3) KINGS is a manufacturing enterprise located in MATSAM. It specializes in the production of

a single product called T from raw material A. the production of T results in a marketable by-
product G. for the month of January 2017, the following information is available;
- Stock 1/1/2017
 Raw material A; 250kg at 27 000 FRS per kg
 Finished product T: 1 500units at 10 500 FRS per unit
- Purchases of raw material Aon 16/1/2017: 400kgat 15 000 FRS per kg
- Issue of material A:
 14/01/2017: 400kg
 16/01/2017: 200kg
- Direct labour: 2hours of direct labour are spent on the production of every unit of T and
are remunerated at the rate of 1 680frs per hour
- Overheads
Elements Total Supply Workshop Distribution
Secondary totals (FCFA) 14 500 000 4 000 000 7 500 000 3 000 000
Kg of raw material Units of T Units of T
Overhead absorption base
purchased produced sold
- Production
 Finished product T on 20/01/2017: 2 000units
 By-product G: 8 000units
- Sales
 Finished product T: :ark-up sales 20%
 By-product G: 1 250frs per unit
- Additional information
 There is no stocking of by-product
 The by-product G has undergone an additional processing before its sale and
additional expenses amounting to 2 800 000 FRS were incurred.
 FIFO stock valuation method is used
- Closing stock:
 Raw material A: 50kg at 25 000frs per kg
 Finished product T: 1 000units at 11 260frs each
Work required
a- Prepare the overhead absorption table (3mks)
b- Determine the following:
i) Purchased cost of raw material A (3mks)
ii) Total cost of production (6mks)

iii) Cost price of finished product T (5mks)

iv) The profit of finished product T (3mks)
4) AVA is an enterprise that produces a product called P. The production process goes through
two steps:
- Step 1: raw material M is transformed in workshop 1 where a semi-finished product called S is
obtained.
- Step 2: the semi-finished S, in combination with raw material A and B is used to produce a finished
product called P in workshop 2.
Information for the month of April 2016
- Stock as at 31/03/2016
 Raw material M: ½ ton at 36 000 CFAF a kg
 Raw material A: 900 kg at 2 050 CFAF a kg
 Raw material B: 750 kg worth 900 000 CFAF
 Semi-finished product S: 400 units worth 5 559 680 CFAF
 Finished product P: 550 units at 25 000 CFAF per unit
 Product P in progress 300 units
- Purchases of raw materials
 Raw material M: 675 kg at 20 000 CFAF a kg
 Raw material A: 1 125 kg at 1 950 CFAF a kg
 Raw material B: at 1 300 CFAF a kg
 Purchase expenses are as follows: 45 000 CFAF for raw material A and 39 000
CFCA for raw material B.
- Direct labour
 400 hours in workshop 1 at 1 500 CFAF an hour
 500 hours in workshop 2 for 1 198 500 CFAF
- Indirect expenses
Service cost centres Principal cost centres
Overheads
Administration Maintenance Purchases Workshop 1 Workshop 2 Distribution
Primary totals 3 200 000 6 300 000 8 000 000 7 052 000 12 000 000 6 500 000
Reapportionment:
Administration - 42.5% 15% 60% 32.5% 10%
Maintenance 10% - 5% 20% 45% 20
Secondary totals
150 kg raw 100 kg of
Units of P 100 000CFAF
Overheads absorption basis materials raw material
produced of turnover
bought used
- Production of the period: At the of the month , the production manager gives the
following information concerning units produced:
 5 000 units of S
 1 050 units of P were fully completed and 250 units of P in progress
- Consumption of raw materials during the period
 Raw material M 900 kg
 Raw material A 1 500 kg
 Raw material B 850 units
 550 units of S
- Stocks are issued using the FIFO method

- Sales of the product 1 450 units of P at a unit price of 38 500 CFAF. Direct expenses
stood at 2 658 700 CFAF paid to middlemen and transport expense on sales.
- Additional information: the degree of completion of work in progress is as follows:
Inputs Opening WIP Closing WIP
Raw material A 100% 100%
Raw material B 100% 100%
Direct labour 70% 40%
Indirect expenses 50% 30%
Required:
(i) Calculate the overhead absorption rates (OAR) (8 marks)
(ii) Calculate the purchase cost of raw materials (10 marks)
(iii) Compute the production cost of semi-finished product S (2 marks)

MANAGEMENT
ACCOUNTING

COST PROFIT VOLUME ANALYSIS

(BREAK EVEN ANALYSIS)
Cost volume profit analysis is a short term tool used by management to determine how cost and profit
react to changes in the volume of production (output). It therefore studies the relationship between
cost, volume, sales and profit. it is also called BREAK-EVEN ANALYSIS and it enables us to
identify the level of output at which there is neither a profit nor a loss (break-even point), that is
where total revenue equals total cost (TR = TC).
Total revenue (TR): This is the product of the total quantity sold (Q) and the selling price (SP). It is
also called sales. Total revenue (TR) = SP x Q.
Total cost (TC): this is the sum of total variable cost (TVC) and total fixed cost (TFC).
Total cost (TC) = TVC + TFC
- Total variable cost (TVC)

These are costs that vary proportionately with the level of output. This means that at zero output, total
variable cost is zero. Total variable cost is made up of the cost of direct material (raw materials),
direct labour, direct expenses and variable overheads (variable indirect costs). It is the product of the
variable cost per unit and the quantity produced (Q).
Total variable cost (TVC) = VC/unit x Q.
- Total fixed cost (TFC)

These are costs that remain constant irrespective of the level of output. Fixed costs are incurred event
at zero level of output. That is at zero level of output (Q = 0), total fixed cost equal total cost (TC =
TFC). For example rent, depreciation.
Note: At breakeven point, total revenue equals total cost (TR = TC), that is profit is zero.
Profit = 0 But Profit = TR – TC TR – TC = 0
CONTRIBUTION
Break-even analysis is based on contribution. Contribution is simple the difference between sales and
variable cost. There are two types of contributions; they are unit contribution (contribution per unit)
and total contribution.
- Unit contribution: This is the difference between selling price (sales per unit) and variable cost
per unit. It is also called contribution margin and its calculated as follows:
Contribution per unit = selling price – variable cost per unit
- Total contribution: This is the difference between total revenue (sales) and total variable cost. It
can also be calculated by multiplying the unit contribution by the sales quantity. It is calculated
as follows:
Total contribution = total revenue (sales) – total variable cost.
Or Total contribution = unit contribution x sales quantity.
Note: contribution can be expressed as a ratio of sales and this ratio is called contribution/sales ratio
(C/S ratio). This ratio is calculated as follows:
OR
ASSUMPTION OF THE BREAK-EVEN ANALYSIS

- It holds only in the short run (one year maximum)
- Quantity produced equals quantity sold.
- Selling price, unit variable cost and total fixed cost are constant throughout the relevant range.
- Total revenue and total cost are linear functions of output
- The only factor affecting cost and revenue is volume.
- Total fixed cost remains constant and variable cost varies proportionately with output.
- Stocks are valued at marginal costs.

USES OF THE BREAK-EVEN ANALYSIS

The cost volume profit analysis can be used to:
- Estimate future profits
- Calculate the break-even point
- Calculate the margin of safety
- Calculate the volume of sales required to achieve a target profit.
- Decide on the selling price of a product.
ESTIMATING FUTURE PROFITS

In break-even analysis, profit is calculated using marginal (variable) costing. Here, profit is the
difference between contribution and fixed cost.
Recall that
Profit = Total revenue – Total cost
But Total Revenue = Sales = SP x Q
And Total Cost = TVC + TFC
This implies that
Profit = Sales – (TVC + TFC) open bracket, we have
Profit = Sales – TVC – TFV
But Total Contribution = Sales – TVC
This implies that
Profit = Total Contribution – TFC
Example 1: A company makes and sells a single product. It budgeted sales quantity for next year is
40 000 units and the selling price is 18 000 FCFA per unit. Variable cost per unit is made up of direct
materials 2 400 FCFA, direct labour 5 000 FCFA, variable production overheads 500 FCFA and
variable selling overheads 1 250 FCFA. Fixed costs for the year are estimated as: fixed production
overheads 80 000 000 FCFA; fixed administrative cost
60 000 000 FCFA and fixed selling cost 90 000 000 FCFA.
Required, Calculate the expected profit for next year.
BREAK-EVENT POINT (BEP)

This is the volume of sales at which the business is making neither a profit nor a loss, that is where
total revenue equals total cost (TR =TR). The break-even point can be calculated in sales units and
sales value.
- Break-even points in units
( )
- Break-even point in value
BEP (value) = breakeven units × selling price per units
OR
( ) ⁄
Example 2:
Sales quantity (Q) = 40 000 units
Selling price (SP) = 18 000 FCFA/unit
Variable cost per unit (VC/unit) = 9 150 FCFA
Total fixed cost (TFC) = 230 000 000 FCFA
Calculate the break-even point in units and in value.

MARGIN OF SAFETY (MOS)

The margin of safety also called security margin is the difference between budgeted sales and break-
even sales. In other words, the MOS is the amount by which sales can decrease before a loss will be
incurred. It is calculated in sales units and sales value.
- MOS (units) = budgeted sales quantity – BEP (units)
- MOS (value) = budgeted sales value – BEP (value)
OR
MOS (value) = MOS (units) x SP.
Example 3: Considering our previous example, calculate the MOS in units and value
The MOS usually expressed as a percentage of budget sales and this is call the margin of safety rate
(MOS rate) or security index.
( )
OR
( )
Using our above information, what is the MOS rate?
TARGET SALES QUANTITY

Break-even analysis can also be used to calculate the volume of sales required to achieve a target
profit. For this to be possible, the business must make enough contribution to cover all fixed cost and
make the required amount of profit. This contribution is called target contribution.
Target contribution = total fixed cost + target profit
The target sale quantity is then calculated as follows:
* +
Example 4: Bridge Stone PLC manufactures tyres and has a capital employed of 1000 000 000
FCFA. Its target return on capital employed is 40% per year. The selling price per tyre is 60 000
FCFA and unit variable is 20 000 FCFA. The annual fixed cost is 200 000 000 FCFA.
Required: what volume of sales is required to achieve the target?
DECIDING ON A SELLING PRICE

Cost volume profit analysis can also help management to compare different prices and select the price
that will earn the highest profit (profit maximising price).
It should be noted that the profit maximising price is the contribution maximising price, since total
fixed cost will remain constant.
Example 5: Your company is about to launch a new product which has a unit variable cost of 8000
FCFA. Management is contemplating whether to sell the product at 11 000 FCFA/unit or at 12 000
FCFA/unit.
At 11 000 FCFA/unit, annual demand is expected to be 200 000 units
At 12 000 FCFA/unit, annual demand is expected to be 160 000 units
Annual fixed cost relating to the product will be 550 000 000 FCFA
Work required. At what price should the product be sold?
Other examples
1) A company makes a single product with a selling price of 10 000 FCFA and a marginal cost
of 6 000 FCFA/unit. Fixed costs are 60 000 000 FCFA per year.

a) Calculate the breakeven point in sales units and sales value.

b) What number of units before and after tax, will need to be sold to achieve a profit 20 000 000
FCFA per annual
2) Question G C E 2017 P3 Q6 : Data from CDC shows that if x litres of palm are demanded in
a particular week, the cost and revenue function are as follows:
- Cost function = 14 + 3x
- Revenue function = 19x – 2x2
Work required
i) Derive the total profit function
ii) Find the breakeven point
3) A firm breaks even at an output level of 10 units. Its selling price is 15 000 FCFA per unit and
its unit variable cost is 7 500 FCFA. Determine:
a) The firm‟s total fixed cost
b) The firm‟s total cost at breakeven
BREAK-EVEN CHART
A break-even chart is a graph which shows the break-even point (in units and in value), that is where
the total cost curve cuts the total revenue curve. This graph is obtained by plotting the total cost, total
revenue, total fixed cost and the total variable cost against the various levels of output. Below is a
typical example of a break-even chart:
Costs & TR
Revenues
TC
TVC
BEP BEP
(Value)
TFC
0 BEP Output
(units)
NOTE: To plot a Break-even chart, the only information needed is the break-even in sales units and
sales value. Knowing that the total cost starts at the fixed cost and the total revenue starts at the origin
and they both meet at the break-even point, it eases the drawing since they are both straight lines and
you will not necessarily need to plot point after point but just use your ruler and link the start point of
the fixed cost line to the break-even point to have the total cost curve and link the origin with the
break-even point to have the total revenue curve.
Example: James Ltd produces and sells a single product. The selling price per unit is 10 000 FCFA,
the variable cost per unit is 6 000 FCFA and the total annual fixed cost 8 000 000 FCFA.
Calculate the BEP in units and value and present the break-even chart of James Ltd. At the end of

DIFFERENTIAL OPERATING TABLE

This is a table which shows values of sales (total revenue), contribution and profit with their ratios
(percentages) being contribution to sales ratio and profit to sales ratio respective
Differential operating table
Amount %
Sales (TR) x 100%
Less total variable cost (x)
Contribution x Con/sales
Less total fixed cost (x)
Profit x Profit/sales
Note: The profit to sales ratio is the profit expressed as a percentage of sales (TR).
Profit/sales ratio =
The profit sales ratio can also be calculated by multiplying the contribution to sales ratio by the
margin of safety rate (security index)
Profit/sales ratio = contribution/sales ratio x margin of safety rate
OTHER EXAMPLES
1) The differential analysis of GARBA Co LTD, the following elements are pointed out:
 Break Even Point : 78 000 000 CFAF;
 Opening stock of goods : 3 850 000 CFAF ;
 Closing stock of goods : 11 050 000 CFAF ;
 Safety index : 0. 1875
 Profit : 7 200 000 CFAF;
 Sales expenses: 7 680 000 CFAF.
WORK REQUIRED:
Establish the differential operating table after having shown al the related calculations.
2) Given the graphical BEP representation below of RENOCAM plc for 2019
Costs &
Revenues
Y1=?
100 000 000
Y2=?
64 000 000
24 000 000
0 ? Sales units
REQUIURED
a) Describe which type of BEP graphical Representation is this?
b) Determine the equations of the line Y1 and y2
c) Determine the BEP of the company
d) Calculate the Security margin and Security index of the Company

e) Present the Differential Operating statement of the Company

f) If fixed cost increases by 6 000 000F and the CMR changes to 25%, what will be the new BEP of
the Company
3) MARANCAM is a private company located in Buea and its activity consists in manufacturing
and selling of a finished product A. the following information are provided for the 2015
accounting period.
- Manufacturing expenses
 Raw materials consumed : 60 000 000F
 Direct labour : 33 000 000F
 Fixed Expenses : 21 300 000F
- Distribution expenses
 Variable expenses (8% of turnover) : 12 000 000F
 Monthly fixed expenses : 250 000F
WORK REQUIRED
a) Calculate the costing result for 2015 through the differential operating table.
b) Calculate the value of the Break-even point and its corresponding date.
c) Calculate the safety index
d) Graph the break – even point and its corresponding date.
On 1/06/2015, due to some independent factors from the activity of MORANCAM, the unit price of
raw material increases by 16.35% and the hourly rate of indirect labour decreases by 7%. Other
elements remain constant throughout the year.
e) Calculate the new contribution margin ratio.
f) Calculate the new break-even point and its corresponding date.
4) In the month of March 2017 STAR Ltd produced the following budgeted figures for product X
FCFA per unit
Selling price 8 000
Direct materials 2 400
Direct labour 2 000
Variable overhead 600
The budgeted fixed overheads stood at 10 000 000FCFA and the budgeted sales stood at 120 000
units
Required:
a- Calculate the budgeted profit for march 2017
b- Calculate to the nearest whole unit:
 The break-even point in units and in sales value
 The margin of safety in sales units and sales value
c- What is the volume of sales required to achieve a target profit of 15 000 000FCFA
d- Present the company‟s break-even chart
5) (GCE 2017, P2, Q4) The following information relates to a private company for the year 2012
(i) Variable cost per unit:
- Raw materials 3 kg at 1 750 FCFA each
- Direct labour 15 minutes at 9 000 FCFA per hour
- Variable overheads expense 6 000 FCFA per hour
(ii) Fixed cost 22 150 000 FCFA
(iii) Sales 6 000 units at 15 000 FCFA each
Required:
(a) Prepare the differential operating table for 2012
(b) Calculate the break-even point in value and in units and its corresponding date, given that
sales is regular
(c) On the 1/1/2013, the unit cost of raw materials rose up to 2 250 FCFA per kg due to
independent factors from the company whereas other elements remained unchanged
throughout the year. Calculate the new break-even point and its corresponding dat

MARGINAL AND ABSORPTION TESTING

1) MARGINAL COSTING
This is a costing method in which the total production cost consists only of variable cost. Thus the
total production cost is the total variable (marginal) cost only (fixed costs are not included). Marginal
costing is based on contribution (sales – variable cost). In marginal costing, fixed manufacturing
overheads are not absorbed in to cost units (cost of production). Stocks and WIP are valued at
marginal cost only. All fixed costs including manufacturing overheads are treated as period cost and
are charged as an expense to the profit and loss account of the period in which the overheads are
incurred.
Variable Production cost = DM + DL + D Exp + variable production overheads
Net profit is the differences between contribution and the fixed cost
Contribution = Sales – Total Variable cost
2) ABSORPTION COSTING
This is a costing method in which the total production cost consists of variable costs and fixed costs.
Here, all production (manufacturing) overheads (both fixed and variable) are absorbed in to
production. Thus the valuation of stock and WIP contains both fixed and variable costs.
Production cost = DM + DL + D Exp + Production overheads
Example
Company X produces a single product and has the following budget:
- Company X budget per unit
 Selling price 10 000 FCFA
 Direct materials 3 000 FCFA
 Direct labour 2 000 FCFA
 Variable overheads 1 000 FCFA
Fixed production overheads is 10 000 000 FCFA. Production budget is 5 000 units per month.
Calculate the cost per unit to be used for stock valuation under:
a) Absorption costing
b) Marginal costing
Solution
a) Absorption costing
Production cost = DM + DL + Variable Production overheads + Fixed production overheads
Production cost = 3 000 + 2 000 + 1 000 + = 8 000 FCFA/unit
b) Marginal costing
Production cost = DM + DL + variable Production overheads
Production cost = 3 000 + 2 000 + 1 000 = 6 000 FCFA/unit
PROFIT STATEMENT UNDER MARGINAL AND ABSORPTION COSTING
To evaluate stock for financial statement, absorption costing must be used. However, either
absorption or marginal costing may be used to prepare financial statements for management. The
choice made will affect:
- The way in which the profit information is presented and
- The level of reporting profit if sales volume does not exactly equals production volume so
that there is a difference between opening and closing stock values.
Example:
Using the previous example in which production is 5 000 units, if sales is 4 800 units and that there is
no opening stock, show the profit statement for the month under marginal and absorption costing and
reconcile the absorption costing profit with the marginal costing profit..

Solution
a) Profit statement under Absorption costing
000 FCFA 000 FCFA
Sales (4 800 x 10 000) 48 000
Less cost of sales:
- Opening stock -
- Add production cost (5 000 x 8 000) 40 000
- Less closing stock (200 x 8 000) (1 600) (38 400)
Gross profit 9 600
b) Profit statement under Marginal costing

000 FCFA 000 FCFA
Sales (4 800 x 10 000) 48 000
Less variable cost of sales:
- Opening stock -
- Add variable production cost (5 000 x 6 000) 30 000
- Less closing stock (200 x 6 000) (1 200) (28 500)
Contribution 19 200
Less fixed manufacturing overheads (10 000)
Operating profit 9 200
c) Reconciliation of the two profits

000 FCFA
Absorption profit 9 600
Less increase in stock (200 x 2 000) (400)
Marginal costing profit 9 200
DIFFERENCES BETWEEN MARGINAL AND ABSORTION COSTING

MARGINAL ABSORPTION
Fixed costs are period cost Fixed costs are absorbed in to unit cost
Closing stocks are valued at variable production cost Closing stocks are valued at full production cost
Cost of sales does not include a share of fixed overheads Cost of sales does include a share of fixed overheads
Examples
1) (GCE 201, P2, Q5) DU VAAL Company produced a single product during 2017. The cost
incurred for the period were as follows:
- Materials 15 000 000 FCFA
- Labour 5 000 000 FCFA
- Variable production overheads 10 000 000 FCFA
- Fixed production overheads 5 000 000 FCFA
- Variable selling and distribution is 20% of sales
- Fixed selling and distribution is 2 000 000 FCFA
During the year 300 000 units were sold at 250 FCFA per unit and units produced were 350 000 units.
Required:
(a) Prepare the income statement showing clearly the profit or loss using:
(i) Marginal costing approach
(ii) Absorption costing approach
(b) Which method is preferable for the company and why?

2) (GCE 2014, P2, Q5B) A manufacturing company makes a single product. The costs incurred
during the 1st quarter of 2011 were:
- Material 1 500 000 FCFA
- Labour 5 000 000 FCFA
- Variable factory overheads 5 000 000 FCFA
- Fixed factory overheads 10 000 000 FCFA
The sales value was 100 000 000 FCFA, while 250 000 units were produced.
Required:
Prepare the statement of income showing clearly the values of the closing stock and the net profit
using:
- Absorption costing
- Marginal costing
3) (GCE 2015, P2, Q5) The data below relates to AMAN LTD
Standard cost per unit 000 FCFA
Direct labour cost 5
Direct material cost 8
Variable production overheads per unit 2
Fixed production overheads per unit 5
Total cost per unit 20
Selling and distribution and administrative expenses are:
- Fixed 15 000 000 FCFA
- Variable 15% of sales value
The selling price is 35 000 FCFA per unit
The quantity produced and sold
- Production 2 000 units
- Sales 1 500 units
- Opening stock 1 000 units
Required:
a) Prepare the profit and loss statement using:
- Absorption costing
- Marginal costing
b) Differentiate between contribution margin and margin of safety.
BUDGETING

1) BUDGETS OF AT MOST ONE YEAR

- Cash budget
- Supply budget
- Production budget
CASH BUDGET
A cash budget is an estimated of the forecasted cash inflows and cash outflows of a business
(enterprise) within the budget period. The budget period could be one year (never more than one
year), a semester, a quarter (term), or a month etc.
The main purpose preparing a cash budget is to analyse the forecasted cash receipts and payments so
as to calculate the cash balance for each period within the budget period (for example the months or
quarters in a year, the months in a semester or quarter or the weeks in a month).
A cash budget is made up of two sections, namely the cash receipt (encashment) budget and the cash
payment (disbursement) budget.
i) Cash receipt (encashment) budget: this section of the cash budget shows the forecasted cash
receipts (incomes) for each period within the budget period. Examples of cash receipts
include:
- Cash sales and receipts from trade debtors (customers),
- Loan to be contracted
- Commission, dividend and other incomes to be received
- Disposal of non-current (fixed) assets
- Proceeds from issue of shares etc.
ii) Cash payment (disbursement) budget: this section of the cash budget shows the forecasted
cash payments (expenditures) for each period within the budget period. Examples of cash
payments include:
- Cash purchases and payments to trade creditors (suppliers)
- Loan repayments
- Rents, salaries, insurance, dividend, taxes, commissions and other expenses to be paid
- Purchase of non-current assets
Notes: the following points must be considered when preparing a cash budget:
- The closing balance (Bal c/d) for a previous period becomes the open balance (Bal b/f) for the
next period.
- Depreciation, bad debts and provision for doubtful debts are not included in the cash budget
since they are not cash expenses.
- In case where VAT is involved, the figures of sales and purchases must be analysed VAT
inclusive. The VAT budget should be prepared to know the figure of VAT to be due and
recognised in the cash budget.
Presentation of a cash budget

Jan Feb Mar

FCFA FCFA FCFA

Cash receipts:
Cash sales and receipts from trade debtors X X X
Loan to be contracted X X X
Commission, dividend and other incomes to be received X X X
Disposal of non-current (fixed) assets X X X
Total cash receipts (A) X X X
Cash payment (disbursements):
Cash purchases and payments to trade creditors X X X
Loan repayments X X X
Rents, salaries, insurance, dividend, taxes, commissions and other X X X
Purchase of non-current assets X X X
Total cash payments (B) X X X
Balance b/f X Y Z
Add total cash receipts (A) X X X
Total cash to be available X X X
Less total cash payments (B) X X X
Balance c/d Y Z W
The closing cash balance for January which is Y becomes the opening cash balance for February and
the closing cash balance for February which is Z becomes the opening cash balance for March and so
on.
Examples
1) (GCE 2013, P2, Q6) During September 2010, INTEGRITY LTD prepared its monthly cash
budget for the last quarter of 2010 using the following budget figures.
October November December
000FCFA 000FCFA 000FCFA
Sales 90000 70000 80000
Purchases 45000 39000 40000
Wages 10000 9000 9800
Sundry Expenses 5000 5000 5000
i) 25% of sales is for cash and attracts a 5% cash discount. Of the remainder 50% is paid for one
month after sales, and the balance is paid for two months after sales.
ii) 50% of purchases is paid for in the month of purchase. The remainder is paid for one month after
purchase.
iii) Wages are paid one month in arrears
iv) Sundry expenses are paid for in the month incurred.
v) Investment dividend of 6000000FCFA is to be deceived in December
vi) New machinery costing 70000000FCFA is to be purchased in November 2010. 60% of the purchase
price is to be paid in December 2010 and the balance in January 2011. Old machinery is to be sold
for 800000FCFA in December 2010. Machinery is depreciated at the rate of 10% p.a.
vii) The cash balance on the 30th of September is estimated to be 16000000FCFA.
Required: Prepare a cash budget for the last quarter of 2010
2) The following is a forecast of income and expenditures LION ENTERPRISR:

Sales Purchase Manufacturing Administrative Selling
Wages
Months (Credit) (Credit) Expenses Expenses Expenses
000 FCFA
000 FCFA 000 FCFA 000 FCFA 000 FCFA 000 FCFA
2010 Nov. 30,000 15,000 3,000 1,150 1,060 500
2010 Dec. 35,000 20,000 3,200 1,225 1,040 550
2011 Jan. 25,000 15,000 2,500 990 1,100 600
2011 Feb. 30,000 20,000 3,000 1,050 1,150 620
2011 March 35,000 22,500 2,400 1,100 1,220 570
2011 April 40,000 25,000 2,600 1,200 1,180 710
(i) Customers are allowed a credit period of two months.

(ii) A dividend of 10,000,000 FCFA is payable in April.

(iii) Capital expenditure which has to be incurred: 15 th January 5,000,000 FCFA, purchase of
plant, and in March, purchase of a building on loan and whose payment will be done in
monthly installments of 2,000,000 FCFA each.
(iv) Creditors are allowed a credit of two months.
(v) Wages are paid on the 1st of the next months.
(vi) Lag in payment of other expenses is one month.
(vii) Balance of cash in hand on 1st January 2013 is 15,000,000 FCFA.
Work required: prepare the cash budget for the first four months of 2011.
3) (GCE 2020 7010, P2, Q3) The opening cash balance on the 1st of January was expected to be
30,000 FRS. The sales budget was as follows
November December January February March
80,000frs 90,000frs 75,000frs 75,000frs 80,000frs
Analysis of the records show that debtors settle according to the following pattern
- 60% within the month of sales
- 25% the month following
- 15% the month following
Extract from the purchases budget is as follows:
December January February March
60,000frs 55,000frs 45,000frs 55,000frs
All the purchases are on credit and past experience shows that 90% are settled in the month of the
purchase and the balance the month after.
Wages are 15,000 FRS per month and overheads of 20,000 FRS per month (including 5,000
FRS depreciation) is settled monthly.
Taxation of 8,000 FRS has to be paid in February and the company will receive settlement of
an insurance claim of 25,000 FRS in March
WORK REQUIRED
Prepare a cash budget for the month of January, February and March
4) (GCE 2017, P2, Q5) SOSOLISO forecasts its sales using the following regression equation
y = 10x + 150 where: y = forecasted sales quantity in kg
x = number of periods
The first quarter of 2014 consists of January, February and March, represented by periods 25,
26 and 27 respectively. The seasonal variation coefficient for January, February and March
are 1.1, 0.8, and 1.25 respectively.
The selling price for each kg of the good is 2 500 FCFA. Sales are settled 75% cash and 25%
in the following month. Purchases are settled 50% in the month of purchase, 30% in one
month and 20% in two months. The following purchases forecasted for the first quarter of
2014 are given as follows:
Month Jan Feb Mar
Purchases in FCFA 800 000 600 000 950 000
The balance sheet as at 31/12/2013 revealed the following balances:
- Cash balance 250 000 FCFA
- Customers‟ balance 75 000 FCFA to be settled half in February 2014 and half in march
2014
- Suppliers‟ balance 60 000 FCFA to be settled in January 2014
Required:
(a) Forecast the sales quantities in kg for the first quarter of 2014
(b) Establishment for the quarter of 2014:
(i) A sales budget
(ii) A cash budge

SUPPLY BUDGET
This is a combination store control measures such as stock levels, and the economic order quantity
(EOQ), to forecast the ordering and the usage (consumption) of stock (materials) for the following
period (month, quarter, semester or year) (see material costing). This is because it is a short term
forecast (not more than one year). Once the EOQ and the optimal number of orders (N) are known,
the supply budget can be established. Below is a sample schedule of an annual supply budget.
MONTHS J F M A M J J A S A N D
Consumption
Buffer stock
Stock need
Opening stock
Delivery quantity
Opening stock after delivery
Closing stock
Date of delivery
Date of order
Reorder quantity
Examples
1) GCE 2020, 7010, P2, Q6: In a given company, the stock of the raw material as at 31/12/2019 is 240
units. You have been provided with the following information concerning the supply of the raw
material:
- Ordering cost per order 2 880 FCFA
- Holing cost per unit per month 5 FCFA
- Buffer stock corresponds to the month‟s consumption
- Orders and deliveries are made at the beginning of every month
- Lead time is one month
- The constant quantity method is used
- The forecasted consumption for 2020 is as follows
Months J F M A M J J A S O N D Total
Consumption 60 180 210 216 75 270 164 261 344 300 216 104 2 400
Required:
(i) Calculate the economic order quantity (EOQ)
(ii) Determine the optimal number of orders (N)
(iii) Prepare a supply for the year 2020 using the appended table
1) B (SWRM 2020, 7010, P2, Q2) KOLOPY LTD consumes 48,000 kg of raw material M per year. The
cost of placing an order is 6 000 CFAF and the purchase price per kg of raw material is 100 CFAF. The
cost holding stock is composed of financial expenses 5%, depreciation 2% and warehouse cost 2%. The
monthly consumption of the raw materials is as follows:
Months J F M A M J J A S O N D
Consumption 6 400 2 400 4 800 7 200 3 200 2 400 1 600 800 7 200 6 400 3 200 2 400
Opening stock on 1st January was 8,000 kg of raw materials, security stock is one month of
consumption and Purchases are delivered only at the beginning of the month and the lead time is one
month. Required:
a) Calculate the economic number of orders to be placed in a year. (5 marks)
b) Calculate the economic quantity of raw material M to be ordered each time. (3 marks)
c) Present the supply program using the constant quantity method (appendix 1 to be handed in
with the answer sheet). (12 marks)

PRODUCTION BUDGET
This is a summary of the forecasted units to be produced and the forecasted production cost.
The forecasted quantity to be produced can be calculated either using the direct method or using linear
programming.
- DIRECT METHOD (used when the firm produces only a single product)
Here, the forecasted quantity to be produced is calculated as follows
Units
Quantity to be sold (sales in units) X
Add required closing stock of finished goods X
Less opening stock of finished goods (x)
Units to be produced Y
- LINEAR PROGRAMMING METHOD (used when the firm is producing two or more products)
This is a planning technique used to determine the optimal production program that is the
output level at which the objective (either profit maximization or lost minimization) is
optimized given the constraints. Thus linear programming is the process by which the
optimum relationship between input and output given the limiting factors is established.
Resources are limited but a company wants to make profit by producing the profit
maximising or lost minimizing output given these constraints. These limiting factors
(constraints) might take the form of limited materials, labour, market demand etc. and are
usually expressed in the form of inequalities.
To solve a problem of linear programming one must be able to answer the following
questions in each problem:
- What are the types of products produced by the company?
- What quantity should be produced for each type that will optimise the objective function?
- What are the constraints (limiting factors) encountered in the problem and what is the
maximum capacity of the company for each constraint?
- Which method is more appropriate for the resolution?
STEPS IN LINEAR PROGRAMMING

Linear programming is done using two steps, these steps include:
- Formulation of the problem
- Resolution of the problem
FORMULATION OF THE PROBLEM:

To formulate a linear problem we must be able to identify the types of products produced by
the company. This is because it‟s all about determining the quantity of each of these products
that should be produced that will archive the company‟s objective.
For example, if a company produces two products, A and B, the question will be to
determine the quantity of A and the quantity of B, to be produced that will achieve the
objective.
Thus let the quantity of A to be produced be x and that of B be y. The formulation of linear
problems is done in two stages:
- Formulation of objective function
- Formulation of the constraints

FORMULATION OF THE OBJECTIVE FUNCTION:

The objective function may be profit (total revenue, contribution) profit maximisation or cost
of revenue. This function is expressed with respect to the quantity of each type of production
to be produced.
Example: A company produces two productions A and B which are sold for 2000 FCFA per
unit and 3000 FCFA per units respectively. Given that the company wants to maximise total
revenue formulate the objective function.
Solution
Let the quantity of A to be produced be x and that of B be y
Total revenue is
For A = TRA = = 2000 × = 2000
For B = TRB = = 3000 × = 3000
The objective function will be
FORMULATION OF THE CONSTRAINTS (LIMITING FACTORS):

These are actually those things that hinder a company from archiving its objective. For
example, limited factory capacity; limited materials; limited labour hours; limited market
demand; etc. These constraints are usually written in the form of inequalities and expressed
with respect to the quantity to be produced of each type of product.
It is important to note that the company cannot produce negative quantities because the
quantity to be produced of each type of product must be equal to or greater than zero. This
constraint is called the non-negativity constraint.
Non-negativity constraint (x ≥ 0, y ≥ 0).
Reminder: The objective function and the constraints must be expressed with respect to the
quantities to be produced of each type of product.
RESOLUTION OF THE PROBLEM:

Linear programming problems are resolved in order to obtain the production program. There
are two (2) methods for resolving a linear problem;
- The graphical method
- The sampling method (not covered in this book)
i) The graphical method
This method is used when the company is producing only two products. Here, the constraints
are plotted on an x and y axis graph. After these constraints are plotted the feasible region
(zone of possibility) is obtained, which shows the various production possibilities. These
production possibility (combination of x and y) are extracted and substituted in the objective
function. The production program is that combination of x and y quantities, which maximises
the objective function.
Example 1: A production line can be set up to produce either product A or product B. the
following table gives the breakdown for each product
Product Labour (hours) Materials (kg) Testing (hours)
A 30 2 3
B 15 4 4
In every semester, only 1 800 hours of labour, 280 kg of materials is available and the testing
equipment must be used for at least 240 hours. Also, because of the existing orders, at least
20 units of A must be produced. The contribution from each unit of A is 12 000 FCFA and
each unit of B is 9 000 FCFA.
Required: Calculate the semester production that will maximise contribution and calculate
the resulting contribution.
THE PRODUCTION BUDGET PROPER

This is the forecasted production cost of the units to be produced. The production budget is
the sum of the raw material budget, the direct labour hour‟s budget and the overheads budget.
a) Raw material budget: this budget shows the forecasted cost of the raw materials to be
consumed (used) in the production process. The quantity of raw materials to be
consumed in the production process is calculated as follows:
RM to be consumed = open stock of RM + purchases of RM – required closing stock of RM

Thus the raw materials purchase budget will be calculated as follows:
Units
Quantity to be consumed x
Add required closing stock of raw materials x
Less opening stock of raw materials (x)
Quantity of raw materials to be purchased y Unit price RM purchase budget
The RM purchase budget is calculated by multiplying the quantity to be purchased but the
purchase price per unit.
b) Direct labour cost budget: this is a forecast of the direct labour cost. It is obtained by
multiplying the total budgeted DL hours for the quantity to be produced by the DL rate
per hour.
The total budgeted DL hours is calculated by multiplying the budgeted DL hours per unit
by the total units to be produced.
Budgeted DL hours = budgeted DL hours per unit x units to be produced
DL cost budget = Budgeted DL hours x budgeted DL rate per hour
c) Overheads cost budget: this is a forecast of the overheads cost. It is obtained by

multiplying the total budgeted DL hours for the quantity to be produced by the budgeted
overhead absorption rate (BOAR).
Overheads cost budget = Budgeted DL hours x BOAR
Production budget
FCFA
Raw material budget x
Direct labour cost budget x
Overheads cost budget x
X

Example (sample set 2019, 7010, p2, Q1) (direct method)

A company has presented the following details, asking for your help in preparing their budget for the
year, starting 1st January, 2019:
Sales: The company‟s sales is projected at 15,000 units for the budget period
Materials used;
 Material A is 3 kg at 500 CFAF each
 Material B is 2 kg at 800 CFAF each
Labour used;
 Skilled labour is 3,000 CFAF per hour and 2 hours per unit.
 Unskilled labour is 1,500 CFAF per hour and 3 hours per unit.
Overhead is to be Charged at 500 CFAF per labour hour.
Other Information:
 Raw material A has opening stock of 5000 kg and closing stock of 7,000 kg.
 Raw material B has opening stock of 6000 kg and closing stock of 5,000 kg.
Closing stock of produced units should be 5,000 units given that the company sells at 35%
margin;
Work Required:
i. What Is the Production Budget?
ii. What Is Raw Material Budget?
iii. What Is the Labour Cost Budget?
iv. What Is the Overhead Budget?
v. What Is the Sale Budget?
Example2:
Praise Bakery manufactures two products: Bread and Cake, through two workshops.
Workshop 1 uses eight machines managed by 40 workers. The maximum monthly working
hours per worker is 115 hours.
Workshop 2 uses five mixing machines consuming a maximum of 6 000 kg of raw material
per machine for the month.
Forecasts for the month of June 2013 are as follows:
- Unit selling prices: Bread 1 700 FCFA Cake 800 FCFA
- Contribution to sales ratio: Bread 0.4 Cake 0.3
Each unit of the products requires the following in each workshop
PRODUCTS WORKSHOP 1 WORKSHOP2
Bread 30 minutes 5kg
Cake 24 minutes 2kg
- The maximum sales of bread for the month is 4 000 units
- The company wishes to maximise contribution from its operations
Required:
a) Calculate the contribution per unit for each product
b) Write down the objective function and the various inequalities that represent the
constraints
c) Sketch the constraints on a graph showing the feasible region
d) Establish the optimum production program.
EXERCISES
1- An office furniture manufacturer has 1 800 kg of sheet steel to be used to make desks and filing
cabinets. It requires 2 kg steel and 3 hours of labour to make a filing cabinet and 3 kg of steel and
2 hours of labour to make a desk. There 1 500 hours of labour available. Also, a maximum of

400 desks are to be produced. The net profit is 2 00 FCFA on each desk and 1 500 FCFA on each
filing cabinet.
a) State the objective function
b) Write down the various inequalities that represent the technical constraints
c) Graphically obtain the optimal solution showing the feasible region
2- VIWIR and Sons produces two products A and B and has a shortage of labour which is limited to
20 000 hours per annum. It wishes to maximise contribution from its activity. You are given the
following
Product A Product B
Labour/unit 5 10
Selling price/unit 80 100
Variable cost/unit 50 50
The company can sell any quantity of product B but expects the maximum annual demand for product
A is 3 000 units.
a) Determine the contribution per unit for each product
b) Formulate the linear programming model
c) Determine the optimum point (use graph), identify the feasible region.
3- Mr Ngwa a tailor in Great Soppo market produces two type of dresses – long gown for woman
(BUBOU) and long gown for men (SARO). Each of the dresses passes through a cutting and
serving processes. A BUBOU makes a contribution of 5.000 FCFA and takes 6 hours of cutting
and 4 hours of sewing, while a SARO contributes 4.000 FCFA and takes 3 hours of cutting and 8
hours sewing. There is a maximum of 36 hours of cutting and 48 hours of sewing per week
available for the job. Find the output, which maximizes contribution.
4- Fru enterprise manufactures two types of products A and B, these products are processed in
workshop, W/S1 and W/S2. The necessary duration in machine hours per unit of product, per
workshop and the maximum capacities are given in the table below:
Workshop / product Ws1 Ws2
A 3 hours 4hours
B 5 hours 3hours
Maximum capacity 1500hours 1200 hours
Meanwhile due to the limited market of A, it is impossible to produce (sell) more than 200 units of
this product for the period.
Work required: present the linear program and determine the maximum quantity of A and B to be
produced.
5- CEPCO produces two product MAP (m) and wap (w) for Cameroon market. The company finds
that for this year, materials and labour are likely to be in short supply.
Detail of CEPCO products are as follows.
Map (M) Wap (W)
Raw material (at 1440F/kg) 4 320 5 760
Labour (at 4 320F/hour) 21 600 12 960
Variable overheads (at 720F/hour) 3 600 2160
Selling price 36 000 37440
They are only 30 000kg of raw material and 36 000hours available. CEPCO took a contract to supply
4 000 MAPS to J.J. and brother which must be supplied.
Work required:
a) Formulate the objective function and the constraint equations for this problem.
b) Plot the constraints on a suitable graph and determine the optimal production plan.

2) BUDGETS OF MORE THAN ONE YEAR

- Capital budgeting (investment appraisal)
CAPITAL BUDGETING (INVESTMENT APPRAISAL)

Investment appraisal is a collection of techniques used to identify the attractiveness (viability)
of an investment. The purpose of investment appraisal is to assess the viability (success) of a
project, program or portfolio decision and the value they generate. It is also called capital
budgeting and its primary objective is to place value on the benefits so that the costs are
justified.
IMPORTANCE OF INVESTMENT APPRAISAL

- Large amount of resources are involved which will necessitate careful evaluation to be
undertaken before a decision is reached.
- Projects can be compared beforehand and investment done in the most profitable
projects.
- It helps in the allocation and optimal use of resources. Resources are used in a way that
they generate the highest possible profits or benefits.
- It enables estimations of future cash flows and permits us to know how long it will take
for the amount invested to be recovered.
- It enables us to know the time value of money and other factors that affect cash flows:
such as taxes, depreciation.
NOTE: If the net cash inflows are given, the technics can be applied to evaluate the projects
but if there elements such as depreciation (capital allowance), working capital or scrap
(residual value); the earnings or cash inflows are adjusted to obtain the operating (net) cash
inflows.
Let‟s consider an investment for five years; the operating (net) annual cash flow can be
obtained as follows:
year 0 year 1 year 2 year 3 year 4 year 5
Earnings (profit) (i)* (xxx) xxx xxx xxx Xxx xxx
Less annual depreciation - xxx xxx xxx Xxx xxx
Earnings (profit) before tax - xxx xxx xxx Xxx xxx
Less Tax - (xxx) (xxx) (xxx) (xxx) (xxx)
Earnings after tax - xxx xxx xxx Xxx xxx
Add back depreciation (ii)* - xxx xxx xxx Xxx xxx
- xxx xxx xxx Xxx xxx
working capital (if any) (iii)* (xxx) - - - - xxx
Add scrap value (if any) (iii)* - - - - - xxx
Operating (Net) cash flow (xxx) xxx xxx xxx Xxx xxx
Notes*
I) if the project has operating expenses incurred in each period, these expenses should be
subtracted from the inflows to have the earnings.
II) Depreciation (capital allowance) is a non-cash expense i.e. it does not really entail a cash
outflow, it is deducted for tax purposes (to reduce the taxable income). Depreciation can be
calculated using either the straight line or reducing balance method. The total or accumulated
depreciation can be obtained by subtracting the scrap or residual value of the asset from the
cost. Thus it should be added back after tax to eliminate the non-cash effects.

III) If there is working capital, it is added to the cost of the investment in period zero and recovered
in the last period by adding it to the cash inflow of the last period. If the asset has a scrap or
residual value, it should be recognised as an inflow in the last period, probably after tax.
INVESTMENT APPRAISAL TECNIQUES

There are many methods (techniques) of analysing the viability of an investment. These
methods can be grouped under the traditional methods and the modern methods.
THE TRADITIONAL METHODS

These methods or techniques do not take in to consideration the time value of money. The
traditional methods include:
13. Pay Back Period (PBP) method
14. Accounting Rate of Return (ARR) method
THE PAYBACK PERIOD (PBP) METHOD

The payback period is that period of time or duration it will take an investment venture to
generate sufficient cash inflows to pay back the cost of such investment. This is a popular
approach amongst the traditional financial managers because it helped them to measure
(ascertain) the time it will take to recoup (recover) in form of cash from operations, the
original cost of the venture or investment.
In principle, this method measures how fast an investment can pay back rather than how
much an investment generates in profits and yet the main objective of an investment is not to
recoup the original cost but also to earn a profit for the owners or investors.
Advantages of the payback period

- Simple to use and understand and this has made it popular amongst executives especially
traditional financial managers.
- Ideal under high-risk investments because it will identify which investment will payback
earlier, thus minimising the risk.
- Advantageous when choosing between mutually exclusive projects because it will give a
clue as to which investment is viable, if one considers the shortest PBP and the highest
net cash inflows.
Disadvantages of the payback period

- It does not take into consideration the time value of money and assumes that a FCFA
received in year 1 and in year n have the same value.
- The PBP technique does not measure the profitability of a project but rather measures the
period of time an investment takes to payback its costs.
- The PBP method ignores the inflows after the PBP and as such it does not accumulate
the elements of return to an investment.
- The calculation of the payback period will depend whether the annual operating (net)
cash inflows are constant or variable.
Uniform or constant annual operating cash inflows

If the venture or project or asset generates constant annual operating cash inflows (e.g.
building a house for rent), the payback period is given as follows:
PBP=

Example 1
An investment costs 38 000 000 FCFA and promises a return of 10 000 000 FCFA at the end
of every year for 10 years. Calculate the PBP.
Solution 1
PBP= =
P B P = 3.8 years
The shorter the PBP, the more viable the investment and thus better the choice of such
investment.
1. Variable or non-uniform operating (net) cash inflows

Here the PBP computation will be in the accumulated operating (net) cash inflows. The
operating cash flows of the respective periods are added until the investment cost (initial cost)
is recovered.
Example2
Assume a project costs 80 000 000 FCFA and will generate the following net cash inflows
Year 1 2 3 4 5
Net inflows 10 000 000 30 000 000 15 000 000 20 000 000 30 000 000
Calculate the payback period.
Example 3: A project consists of purchasing an asset costing 200 000 000 FCFA which is
expected to last for 5 years then disposed for 100 000 000 FCFA. The stream of income
before depreciation and tax are as follows:
Year 1 2 3 4 5
Income 100 000 000 120 000 000 200 000 000 160 000 000 140 000 000
If tax is 30% and straight line depreciation is applied, calculate the payback period.
ACCOUNTING RATE OF RETURN (ARR) METHOD

Accounting rate of return (ARR) is the accounting profit (usually before interest and tax but
after capital allowance i.e. Depreciation) expressed as a percentage of the capital invested or
average investment. The essential feature of ARR method is that it is based on accounting
profits and the accounting value of the asset. It is sometimes referred to as Return on
Investment (ROI).
If the ARR is used to decide to decide whether or not to make capital investment, we
calculate the expected annual return over the life of the project. The financial return will
mostly vary from one year to the next during the project we have to calculate an average
annual return (profit).
Decision principle in ARR

A project shall be accepted or approved if the ARR is equal to or greater than the expected or
minimum ARR.
Advantages of ARR
- It is simple to calculate.
- It is based on accounting information which is readily available and familiar to
businessman.
- It considers benefit over entire life of the project.
- It can be used to compare mutually exclusive projects.

- It gives values in percentages so comparable to other ratios.
Disadvantages of ARR:
- It is based upon accounting profit, not cash flow in evaluating projects.
- It does not take into consideration time value of money so benefits in the
earlier years or later years cannot be valued at present value.
- Though it takes into account all years income but it is averaging out the profit.
Note: ARR does not have a standard formula, but there are two formulae which can be used
depending on the question (company or manager). Some books (or companies or managers)
will use the net profit before take (which is the case of this book) and in this case ARR is
called return on Investment (ROI) while in other books, they will use the net profit after tax
and in this case, the ARR is called Return on capital employed (ROCE).
ARR = OR ARR =
Average investment =
Note: Initial investment (capital) may or may not include working capital and these two
formulae when applied do not give the same ARR but it depends on the question (company‟s
management) on which formula to use.
Example 5: A project consists of purchasing an asset costing 500 000 000 FCFA which is
expected to last for 5 years then disposed for 100 000 000 FCFA. The stream of income
before depreciation and tax are as follows:
Year 1 2 3 4 5
Income 100 000 000 120 000 000 200 000 000 160 000 000 140 000 000
If straight line depreciation is applied, calculate the ARR.
THE MODERN METHODS (DISCOUNTED CASH FLOWS)

These methods take in to consideration the time value of money. These recognizes that cash
flow streams at different time period differs in value and can be computed only when they are
expressed in terms of common denominator i.e. present value. Discounting cash flow
techniques include:
- Net present value (NPV)
- Internal rate of return (IRR)
- Profitability index (PI)
NET PRESENT VALUE (NPV)

The net present value (NPV) of a proposed investment is the difference between the present
value of the annual cash inflows and the present values of the required cash outflow (initial
investment). The NPV involves calculating the value in present day terms of the various cash
out flows and inflows, expected to arise at different periods throughout the life of a project.
To do this, the discount factor (calculated using the discount rate (cost of capital) and the
period in which the cash inflow will be received or ash flow will be made) is applied on the
operating (net) cash flows.
Calculation of the NPV

Let‟s consider the following notations:

CFt = operating or net cash inflows at period t

t = the period number
r = the discount rate (cost of capital)
i = the discount rate for 1 FCFA
I0 = initial outlay or investment.
The net present value = Present value of inflows – initial investment.
Present value of inflows
( ) = ( ) + ( ) + ( ) +………+ ( )
OR
𝑡
𝐶𝐹𝑡
( 𝑟)𝑡 ( ) ( ) ( ) ( )
𝑡
𝑘 𝑡
𝑡 OR 𝐶𝐹𝑡
NP 𝐶𝐹𝑡 ( 𝑟) 𝐼 NP 𝐼
𝑡
( 𝑟)𝑡
𝑡
Decision Rule
 If the NPV is greater than or equal to zero, that is [NPV 0 or PV I0], accept the
project.
 If the NPV is less than zero, that is [NPV < 0 or PV < I0], reject the project.
 In the case of mutually exclusive projects, the project with the highest N P V will be
accepted.
Advantages of the N P V
This method is considered as the most appropriate measure of profitability due to
following virtues.
- It explicitly recognizes the time value of money.
- t takes into account all the years cash flows arising out of the project over its useful life.
- It is an absolute measure of profitability.
- A changing discount rate can be built into NPV calculation. This feature becomes
important as this rate normally changes because the longer the time span, the lower the
value of money and higher the discount rate.
- It is always consistent with the firm‟s goal of shareholders wealth maximization.
Disadvantages of N P V
- This method requires estimation of cash flows which is very difficult due to
uncertainties existing in business world due to so many uncontrollable
environmental factors.
- It requires the calculation of the required rate of return to discount the cash flows. The
discount rate is the most important element used in the calculation of the present values
because different discount rates will give different present values. The relative
desirability of the proposal will change with a change in the discount rate.
- When projects under consideration are mutually exclusive, it may not give
dependable results if the projects are having unequal lives, different cash flow
pattern, different cash outlay etc.
Example 6:
The following cash flows have been projected for a project:

Year 0 1 2 3 4 5
Cash flows (000 FCFA) (1500) 400 600 700 600 500
Work required:
Calculate the N P V and state whether the project is acceptable at a discount rate of 15%.
Note: In situations where the operating (net) inflows are constant (uniform), the present value
(PV) is calculated as follows:
( ) ( )
* + and * +
Where: CF = annual constant cash inflows

t = number of years
Example 7: A company is to invest an amount of 20 000 000 FCFA in a project which is

expected to generate 5 000 000 FCFA at the end of each year for 6 years. Assuming no scrap
value, calculate the N P V and say if this project viable at a discount rate of 10%.
Example 8:
A project consists of purchasing an asset costing 200 000 000 FCFA which is expected to last
for 5 years then disposed for 100 000 000 FCFA. The stream of income before depreciation
and tax are as follows:
Year 1 2 3 4 5
Income 100 000 000 120 000 000 200 000 000 160 000 000 140 000 000
If tax is 30% and straight line depreciation is applied, calculate the net present value at a
discount rate of 10%
INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is the discount rate (cost f capital) at which the net present
value is equal to zero (NPV = 0). Thus is seeks to find the discount rate that will reduce the
cash inflows from the project or investment to its original investment cost (initial outlay).
NP ( )
Decision: A project is acceptable if the IRR is greater than the company‟s discount rate (cost of
capital) and for mutually exclusive projects (where only one should be chosen), the project
with the highest IRR should be selected.
i) CASE OF VARIABLE CASH INFLOWS

If the operating (net) annual cash inflows are not constant, the internal rate of return (IRR)
can be estimated through:
- The trial and error method,
- The interpolation formula,
- The graphical method
 Trial and error method: With is method, different discount rates are substituted in the
NPV formula and the rate that gives a zero NPV is the IRR. This method is too tedious
and not really advisable.

 Interpolation formula: The interpolation formula is generated from two NPVs and
their respective discount rates.
Let NPV1 be the NPV calculated using the discount rate r1
NPV2 be the NPV calculated using the discount rate r2
The interpolation formula is given as follows:
Example
A project requires an investment of 25 000 000 FCFA and a useful life of 5 years. The net
operating cash inflows after tax are estimated to be as follows:
Year 1 2 3 4 5
Profit after tax (FCFA) 5 000 000 7 500 000 12 500 000 13 000 000 8 000 000
Work required:
a) Calculate NPV at a discount rate of 15% and at a discount rate of 30%.
b) Calculate the IRR using the interpolation formula and the graphical method.
 Graphical method: In order to estimate the IRR of a project graphically:

- Scale the vertical axis to include both NPVs;
- Scale the horizontal axis to include both discount rates;
- Plot the two points on the same graph and join them with a straight line;
- Identify the IRR where the straight line crosses the horizontal (discount rate) axis.
Example
Use the previous example and calculate the IRR graphically
c) CASE OF CONSTANT CASH INFLOWS

If the operation (net) annual cash inflows are constant, the IRR can be estimated using
Table 4 (Present Value of Ordinary Annuity) to estimate the IRR.
At IRR, the NPV = 0, and NPV = PV – I0 it means that PV – I0 = 0 and thus PV = I0
( ) ( )
But Present Value (PV) = , if PV = I0 thus I0 =
Example
A company is planning to buy a machine costing 10 000 000 FCFA which is expected to last
for 6 years and it will generate 2 500 000 FCFA at the end of every year. Calculate the IRR.
PROFITABILITY INDEX (PI)
This is the ratio of the present values of the future cash inflows of a project to the initial
investment in the project. This index helps in cost-benefit analysis of investment projects and
helps them rank in order of the best return on initial investment. It is calculated as follows:
The profitability index can be greater than one, equal to one or less than one.
- If the PI is greater than one (PI > 1), means the project is profitable and should be
accepted;
- If the PI is equal to one (PI = 1), then the project is breaking-even;
- If the PI is less than one (PI < 1), means the project is not profitable and thus it should be
rejected.

For mutually exclusive projects (where only one should be chosen), the project with the
highest profitability index should be selected.
Example
Calculate the profitability index f the following investment and say which one is better
Projects Initial investment Present values
X 100 000 000 FCFA 175 000 000 FCFA
Y 250 000 000 FCFA 270 000 000 FCFA
Other examples
An investor is contemplating among three possible investments:
Investment 1: Cost; 28 840 000FCFA, yearly receipt for five years, of 8000.000FCFA
Investment 2: Cost; 30 000 000FCFA, yearly receipt in arithmetic progression with common
difference 1 000 000FCFA, first year receipt 10 000 000FCFA and duration 5 years.
Investment 3: Cost; 30 000 000FCFA, receipt in geometric progression with common ratio 0.9, first
receipt, 10 000 000FCFA and duration 5 years.
(a) Compute the internal rate of return of the first investment
(b) Using the rate obtained above compute the present values of investment 2 and 3
(c) Choose the best among these investments using the method of net present values computed in
question (b) above.
EXERCISES
1) A project has the following cash flows occurring at the year ends
Year 0 1 2 3 4 5 6
Cash flow (000FCA) (120) (30) 90 70 80 75 65
Find;
(a) The net present value (NPV) assuming 15.5% and 18.5% cost of capital.
(b) The internal Rate of Return (IRR) estimated from your results in „a‟ above
2) A farm project has the following net cash occurring at each year:
Year 0 1 2 3 4 5 6
Cash flow (M Frs) (110) (25) 85 60 75 74 69
Required:
(a) Determine and interpret the payback period of the project
(b) Determine the net present value (NPV) of the given a discount rate of 16.5% p.a.
(c) Based on the results in (a) and (b), will you advise management to invest in the farm project
and why?
(d) Which of the investment appraisal techniques above will you prefer to use to appraise other
investment projects and why?
3) NNEMO ltd is to invest 2,000,000 CFAF in one of the following capital investment
projects that will generate cash flows as follows in CFAF:
Year 2017 in CFAF 2018 in CFAF 2019 in CFAF
Machine A 2,000,000 3,000,000 3,000,000
Machine B 2,400,000 1,600,000 4,000,000
The cost of capital is 8% per annum.
Required:
a) Calculate the net present value (NPV) for each project.

b) Calculate the payback period (PP) for each project.

c) State the most profitable project. Justify.
4) A company has provided you with its annual profit and depreciation charges as follows:
Year Net Profit Depreciation
1 2,500,000 CFAF 50,000 CFAF
2 3,000,000 CFAF 70,000 CFAF
3 2,700,000 CFAF 80,000 CFAF
4 3,500,000 CFAF 90,000 CFAF
The capital invested initially amounted to 7,000,000 CFAF. The bank charged 12 % interest
per annum.
Required:
Calculate the following:
a) Net Present Value of the project
b) The Profitability Index of the project
c) The Internal Rate of Return of the project

STANDARD COSTING
Introduction
Standard costing is a costing technique which compares standard costs and and standard revenues
with actual costs and actual revenues in order to obtain differences (variances) that may then be
investigated to improve performance.
A standard cost is a predetermined measure of what a cost should be under stated conditions. These
predetermined costs are usually compared with actual costs incurred and the differences are known as
variances. This is to provide a means of planning and controlling the day-to-day running of the
business operations.
VARIANCE ANALYSIS
This is a means of assessing the differences between budgeted (standard or predetermined) amounts
and actual amounts, thus variance might be on costs or on revenues.
Thus a variance is the difference between actual amounts and stand amounts. A variance might be
favouarable or unfavourable.
- A variance on cost is favaourable if the actual cost is less than the standard cost and
unfavourable if actual cost is greater than standard cost
- A variance on revenue is favourable if the actual revenue is greater than the standard revenue
and unfavouable if the the actual revenue is less than the standard revenue.
A) VARIANCES ON COST
The main variances here include; the material variances, labour variances and overheads
variances
1) MATERIAL VARIANCES: Material variances include; material price variance, material usage
variance and material total variance.
i) Material price variance (MPV): this is the difference between the actual price per unit of raw
materials and the standard price per unit of raw materials multiplied by the actual quantity of raw
materials consumed in the production process. It is favourable if the actual price per unit of raw
materials is less than the standard price per unit of raw material and unfavourable or adverse if
the actual price per unit of raw materials is greater than the standard price per unit of raw
material. It is calculated as follows:
MPV = (Actual price/unit – standard price/unit) x actual quantity produced.
MPV = (AP – SP) x AQ
ii) Material usage or quantity variance (MUV): This is the difference between the actual quantity
of raw materials consumed in the production and the standard quantity of raw materials of the
actual production (actual units produced) multiplied by the standard price. It is favourable if
actual quantity is less than standard quantity and unfavourable if actual quantity is greater than
the standard quantity. It is calculated as follows:
MUV = actual quantity – standard quantity) x standard price/unit
MUV = (AQ – SQ) x SP/unit
iii) Material total variance (MTV): this is the difference between the actual cost of raw materials
consumed in the production and the standard cost of the actual quantity of raw materials used
(consumed). It is favourable if actual cost is less than standard cost and unfavourable if actual
cost is greater than the standard cost. It is calculated as follows:
MTV = actual cost of raw materials – standard cost of raw materials
MTV is also the sum of the MPV and MUV
Thus MTV = MPV + MUV
2) LABOUR VARIANCES: Labour variances include; labour rate variance, labour efficiency
variance and labour total variance.

i) Labour rate variance (LRV): this is the difference between the actual rate per hour and the
standard rate per hour multiplied by the actual hours worked. It is favourable if the actual rate per
hour is less than the standard rate per hour; and unfavourable or adverse if the actual rate per
hour is greater than the standard rate per hour. It is calculated as follows:
LRV = (Actual rate/hour – standard rate/hour) x actual hours worked.
LRV = (AR/hr – SR/hr) x AH
ii) Labour efficiency variance (LEV): This is the difference between the actual hours worked and
the standard hours of the actual production (actual units produced) multiplied by the standard
rate/hour. It is favourable if actual hours are less than standard hours; and unfavourable if actual
hours is greater than the standard hours. It is calculated as follows:
LEV = actual hours – standard hours) x standard rate/hour
LEV = (AH – SH) x SR/hour
iii) Labour total variance (LTV): this is the difference between the actual labour cost and the
standard labour cost of the actual production. It is favourable if actual cost is less than standard
cost and unfavourable if actual cost is greater than the standard cost. It is calculated as follows:
LTV = actual labour cost – standard labour cost
LTV is also the sum of the LRV and LEV
Thus LTV = LRV + LEV
3) OVERHEAD VARIANCES: This is the difference between the actual overheads inquired and
the overheads absorbed in to production (actual overheads). It is important to recall that the
overheads absorption rate (OAR) is calculated as follows:
Overheads absorption rate (OAR) =
Note: the level of activity is always labour hours
Thus the overheads absorbed = OAR x standard hours of actual production
Thus Variable overheads absorption rate (VOAR) and Fixed overheads absorption rate (FOAR)
will be calculated as follows:
Variable overheads absorption rate (VOAR) =
Thus the variable overheads absorbed = VOAR x standard hours of actual production
Fixed overheads absorption rate (FOAR) =
Thus the fixed overheads absorbed = FOAR x standard hours of actual production
Overheads variances are divided in to two groups:
- Variable overheads variance
- Fixed overheads variance
A) VARIABLE OVERHEADS VARIANCES: These variances are very similar to those of

direct materials and direct labour. This is because they change proportionately with the level
of activity as the variable overheads. Three (3) types of variable overheads can be
distinguished. namely:
- Variable overheads total variance (VOTV)
- Variable overheads expenditure variance (VO Exp. V)
- Variable overheads efficiency variance (VO Eff. V)
(i) Variable overheads total variance (VOTV): this is called variance on budget. It is the
difference between the actual variable overheads incurred and the variable overheads
absorbed.
VOTV = Actual variable overheads – absorbed variable overheads
VOTV = Actual variable overheads – (VOAR x standard hours of actual
production)
This is simply the over or under absorbed overheads and it is also the sum of the variable overheads
expenditure variance and the variable overheads efficiency variance.

(ii) Variable overheads expenditure variance (VO exp. V): this is the difference between
the actual variable overheads incurred and the allowed variable overheads based on actual
hours worked. It measures the
VO Exp. V = Actual variable overheads – (Actual labour hours x VOAR)
VO Exp. V = ALH – (ALH x VOAR)
(iii) Variable overheads efficiency variance (VO Eff. V): this is the difference between the
allowed variable overheads and the absorbed variable overheads. It measures the effect on
profit if actual hours worked varies from the standard hours of the actual production. It is
VO Eff. V = (Actual labour hours – standard hours of actual production) x VOAR
B) FIXED OVERHEADS VARIANCES: fixed overheads variances measure the effect on the
difference between actual and expected fixed overheads. There are four (4) types of fixed
overheads variance. Namely:
- Fixed overheads total variance (FOTV)
- Fixed overheads expenditure variance (FO Exp. V)
- Fixed overheads volume variance (FOVV)
COMPARISON TABLE
(SAMPLE SET 2019, 7010, P2)This is a table that compares actual cost and standard cost of the
actual production and the variance for each cost component
1) (GCE 2019, P2, Q4) SENG Ltd controls her production by standard costing. Unit standard
index cost card for one standard of output is given for the month of November 2018 as
follows:
Elements Qty UP FCFA Amt FCFA
Raw materials 3 kg 1 000 1 000
Direct labour 1 hr 1 000 1 000
Indirect charges 1 hr 2 500 2 500
Unit standard cost 1 / 6 500
Indirect charges are absorbed using direct labour hours. During the month of November 2018,
the following were realised:
- Actual production 1 000 units
- Raw material consumed 3 200 kg at 1 010 FCFA per kg
- Direct labour 1 100 hours at 1 020 FCFA per hour
- Indirect charges 2 222 000 FCFA
Required:
(a) Present a comparison table showing a the global variances for each cost elemnt
(b) Analyse the variances on raw materials and direct labour in three sub variances.
2) NNEM Plc has provided you with its unit standard index cost card for a standard unit in the
enterprise as follows:
Element Quantity Unit Price in Amount in CFAF
CFAF
Raw materials 3 kg 1,500 4,500
Direct labour 10 hours 1,000 10,000
Overhead 10 hours 2,100 21,000
Unit standard cost 1 34,000 35,500
The overhead absorption rate of 2,100 F is based on direct labour hours. In the month of
February, 2,000 units were completed. At the start of the month, there were 200 units of work-in-
process which were completed 100 % in terms of raw materials and only 60 % in terms of direct
labour hours. At the end of the month, there were 400 units of work-in-process which were

completed 100 % for raw materials and 70 % for direct labour hours. The costs incurred for the
month consist of:
- Raw materials 3,200 kg at 1,510 F per kg
- Direct labour 11,000 hours at 1,020 CFAF per hour
- Overhead 22,220,000 CFAF
Required:
a) Determine the equivalent production for each cost element for the month of February.
b) Present the comparison table to show the global variance for each element of cost.
c) Analyse the global variance on raw materials and on direct labour into two sub variances.
3) (SAMPLE SET 2019, 7010, P2)PECTEN fuel sales budget for few kinds of products, the
budget and actual sales record is given below.
Budget sales Products Quantity Price/each in CFAF
Gas oil 800 units 300
Petrol oil 1,000 unit 800
Kerozen oil 1,600 unit 400
Supper oil 2,000 unit 600
Actual sales Product Quantity Price/each in CFAF

Gas oil 1,000 unit 200
Petrol oil 1,200 unit 600
Kerozen oil 1,500 unit 500
Supper oil 2,100 units 700
Required:
(a) Calculate sales,
i) Budgeted values
ii) Actual sales values
iii) Standard sales values
(b) Sales value variance
(c) Sales price variance
(d) Sales volume variance
4) XYZ Enterprise manufactures a single product, details of which are as follows:

Standard cost per unit:
- Materials 60 kg at 480 FCFA per kg
- Labour 480 hours at 80 FCFA per hour
Actual cost for the month
- Materials 5 900 kgs at 500 FCFA per kg
- Labour 47 500 hours at 90 FCFA per hour
Actual production 100 units
Required:
(a) Compile:
(i) Material price variance
(ii) Material usage variance
(iii) Labour wage rate variance
(iv) Labour efficiency variance
(b) Reconcile the standard and the actual cost for:
(i) Material cost
(ii) Labour cost
5) (GCE 2016, P2, Q2)The following information relates to a planned production of 5 000
units of finished product H for a private company known as HENCAM Company:
- Raw material M: 9 500 kg at 460 FCFA each
- Direct labour: 4 200 hours at 1 180 FCFA each

- Overheads manufacturing expenses: 5 250 000 FCFA of which variable cost is 3 360 000
FCFA.
- Overheads absorption base: direct labour hour
The following information was recorded in May 2011:
- Purchase of raw material M: 12 500 kg at 520 FCFA each
- Direct labour: 4 500 hours at 1 200 FCFA each
- Overheads manufacturing expenses: 6 750 000 FCFA of which fixed cost is 2 250 000 FCFA.
- Manufacturing of finished product H: 5 800 units at 4 125 FCFA each
- Stock on 31/05/2011:
(i) Raw material M: 2 500 kg at 500 FCFA each
(ii) Finished product H: 700 units at 3 250 FCFA each
Required:
(a) Prepare the unit standard cost index card
(b) Present the comparison table between the actual cost and the standard cost
(c) Prepare a flexible budget for 4 200 hours and 5 000 hours
(d) Prepare the variance analysis of raw materials by calculation
6) (GCE 2015, P2, Q6) The budgeted and actual costs for a certain period in MBI PLC are
given as follows:
Budget Actual
FCFA FCFA
Direct material consumed 400 000 500 000
Direct labour 200 000 270 000
Overheads 600 000 549 000
Overheads are absorbed using direct labour hours. The budgeted and actual direct labour hours are
800 and 900 hours respectively. The budgeted and actual production levels are 20 000 units and 22
000 units respectively. Quantity of materials consumed is 500 kg for both the budget and the actual.
Required:
(a) Present a comparison table for both the actual and the budget to show the variance
(b) Analyse in three sub variances the variances on direct labour
(c) Calculate the under or over absorbed overheads for the period.
7) (GCE 2014, P2, Q6) MEGALIST Corporation uses standard costing system in its operation.
For the month of August 2011, the following data was obtained:
Standards:
- Direct materials 20 tons per unit at 5 000 FCFA per ton
- Direct labour 2 hours per unit at 15 000 FCFA per hour
Actual results:
Good units produced 900
Cost of direct material used 90 650 000 FCFA
Tons of materials purchased 20 000 tons
Quantity of direct materials used 18 500
Actual direct material price 4 900 FCFA per ton
Direct labour cost incurred 27 200 000 FCFA
Direct labour hours used 1 700 hours
Actual direct labour rate 16 000 FCFA per hour
Required:
Calculate the following variances indicating whether they are favourable or unfavourable
(a) Direct material variance
(b) Material price variance
(c) Material quantity (usage) variance
(d) Direct labour variance
(e) Labour rate variance
(f) Material purchase price variance

8) (GCE 2014, P2, Q4) you are given below the pre-established cost of producing a plastic toy
for children in BATA Co PLC:
- Raw materials (plastics): 1kg at 400 FCFA
- Direct labour in assembling workshop: 2 hours at 600 FCFA each
- Indirect expenses in assembling workshop: 2 work units at 1 200 FCFA each; a cost
of a work unit is made up of variable cost for 800 FCFA and fixed cost for 400
FCFA.
The actual production of 8 000 plastic toys require the following:
- 7 000 kg of plastic at 550 FCFA each
- 15 000 hours of direct labour in the assembling workshop at 700 FCFA each
- The work unit in the assembling workshop is direct labour hour: cost of a work unit 1
400 FCFA
Required:
(a) Present in a tabular form, the comparison between the actual and the standard cost
(b) Analyse the variance on raw materials in two variances
(c) Analyse the variance on direct labour in two variances
(d) Prepare the flexible budget for the following levels of activities: normal activities, actual
activities and pre-established activities (normal activities = 20 000 hours)

FINANCIAL
ACCOUNTING
IAS

FINANCIAL STATEMENTS ADJUSTMENTS

These are adjusts made before the financial statements are prepared. These adjustments will affect the
income statement and or the statement of financial position. They include:
- Prepayments
- Accruals
- Bad debts, bade debts recovered, and provision for doubtful debts
- Depreciation and disposal of non-current assets
A) PREPAYMENTS
These are payments made or received in advance. They are also called advances and are
subtracted in the income statement. There are two types of prepayments, namely:
- Prepaid expenses
- Prepaid incomes (incomes received in advance)
i) Prepaid expenses: these are expenses paid for but not yet incurred. When expenses are
prepaid, they are subtracted from the expenses in the income statement and added under
current assets in the statement of financial position.
ii) Income received in advance: these are incomes received but the service not yet rendered
or goods not yet supplied. When incomes are prepaid, they are subtracted from the
income in the income statement and added under current liabilities in the statement of
financial position.
B) ACCRUALS
Accrual is another name for arrears, owings, dues or outstandings etc. Accruals are payments
due but not yet received or paid and they are added in the income statement. There are two
types of accruals, namely; Accrued expenses and accrued incomes:
- Prepaid expenses
- Accrued incomes (incomes received in arrears)
i) Accrued expenses: These are expenses incurred but not paid for. Accrued expenses
are added to the expenses in the income statement and under current liabilities in the
statement of financial position.
ii) Accrued incomes: These are incomes due but not yet received. Incomes received in
arrears are added to the incomes in the income statement and under current assets in
the statement of financial position.
NB:
- In the income statement, prepayments are subtracted while accruals are added
- Prepaid expenses and accrued incomes are current assets meanwhile accrued expenses and
prepaid incomes are current liabilities.
- Expense Acount
FCFA FCFA
prepayments B/F X Arrears B/F X
Cash and bank X Income and expenditure A/C ?
Arrears C/D X prepayments C/D X
y Y
-
- Income Acount
FCFA FCFA
Arrears B/F X prepayments B/F X
Income and expenditure A/C ? Cash and Bank X
advances C/D X Arrears C/D X
y Y

C) BAD DEBTS, BAD DEBTS RECOVERED AND PROVISION FOR DOUBTFUL

DEBTS
- Bad debts: these are debts that cannot be recovered either because a customer has been declared
bankrupt, refuses to pay part or the whole amount of an invoice, etc.
Bad debts are unavoidable especially where sales are made on credit. Thus bad debts are normal
trading expenses charged in the income statement and subtracted from debtors.
If bad debts appear in the trail balance, it means that it has already been subtracted from debtors and
thus should not be subtracted again but only charged as an expense in the income statement.
If bad debts appear in the additional information, it means that no adjustment has been made, thus it
should be charged as an expense in the income statement and subtracted from debtors in the statement
of financial position.
- Bad debts recovered: these are debts that were considered bad in a previous year, but were received
in the present period. When bad debts are recovered, they are added to the gross profit as in income in
the income statement and to cash in hand or at bank in the statement of financial position.
- Provision for doubtful debts: these are allowances made so that if bad debt occurs it should not be
detrimental to the business (organisation). Provisions are usually calculated as a percentage of debtors
and charged as an expense in the income statement and subtracted from debtors in the statement of
financial position.
if there was provision in the previous period (usually given in the trial balance), it is compared with
the provision of the present period (usually given in the additional infos) and only the increase or
decrease in provision is taken to the income statement meanwhile the total provision for the period is
subtracted from debtors in the statement of financial position.
There is increase in provision if the provision for the present period is greater than that of the previous
period. This increase in provision is charged as an expense in the income statement and the total
provision for the period is subtracted from debtors.
There is decrease in provision if the provision for the present period is less than that of the previous
period. This decrease in provision is added as an income in the income statement and the total
provision for the period is subtracted from debtors.
D) DEPRECIATION AND DISPOSAL OF NON-CURRENT ASSETS:

Depreciation is the loss of value of non-current assets due to usage and or passage of time. It is a
policy used to replace NCA at the end of their useful lives. Depreciation is a normal expense charged
in the income statement.
The depreciation for the period is calculated using the additional information (either the straight line
method or the reducing balance method) and it is added to the accumulated depreciation of the
previous period (the provision or accumulated depreciation in the trial balance) to have the
accumulated depreciation for the period.
Disposal of NCA simply refers to sale of fixed assets. When a NCA is disposed of, it is removed from
the NCA account by crediting the NCA account and the disposal may be done at a profit or a loss.
There is profit on disposal if the consideration (amount of the disposal) is greater than the NBV (cost
minus accumulated depreciation before disposal) of the NCA. This profit on disposal is added to the
GP as an income in the income statement.
There is loss on disposal if the consideration (amount of the disposal) is less than the NBV (cost
minus accumulated depreciation before disposal) of the NCA. This loss on disposal is charged as an
expense in the income statement.

Examples
1) The following trial balance is extracted from the books of ABA ltd of the end of the
financial year on the 31 December 2019.
DR CR
000FCFA 000FCFA
Purchase and sales 33 280 64740
Cash at bank 6140
Cash in hand 5210
Capital 17900
Drawings 850
Office Furniture 6440
Rent 6070
Wages and salaries 7580
Discounts 5690 5360
Debtors and Creditors 9920 7490
Inventory 1/1/2009 7970
Provision for doubtful debts 1/1/2019 2270
Delivery van 7400
Van running costs 450
Bad debts written off 810
97760 97760
Additional Information:
a. Inventory of 31/12/2019 was 8510000FCFA
b. Wages and Salaries accrued on 31/12/2019: 590000FCFA
c. Rent prepaid at 31/12/2019: 640000FCFA
d. Van running cost owing at 31/12/2019: 600000FCFA
e. Increase in provision for doubtful debts by 600000FCFA
f. Provide for depreciation as follows: - Office Furniture 90%
- Delivery van 20%
Work Required: Prepare the comprehensive income statement for the year ended 31 of December
2019 together with the statement of financial position as of that date.
5) (GCE 2019, P3, Q2)The following trial balance was extracted from the books of ZEBRATA
on the 31/12/2019
DR CR
000 FCFA 000 FCFA
Capital 100 000
Drawings 6 000
Inventory 1/1/2019 49 600
Purchases and Sales 290 000 360 000
Transport equipment 10 000
Debtors and creditors 40 000 20 000
Trade expenses 500
Salaries 5 500
Rents 2 400
Advertisement 5 000
Commission 1 300
Discounts 200
Bad debts 1 600
Provision for bad debts 900
Cash in hand 15 200
Cash at bank 15 800
Insurance premium 400
Returns 50 000 30 000
Goodwill (at cost) 20 000
Total 512 200 512 200

- Inventory at 31/12/2019 amounted to 53 000 000 FCFA
- Salaries have been paid only for 11 months. One month salary of 500 000 FCFA
- Prepaid insurance 100 000 FCFA
- Accrued commission 122 000 FCFA
- Provision for bad debts is 3%
- The management is to be allowed a commission of 3 752 000 FCFA
- Transport equipment is depreciated at a constant rate of 10%
- 3 750 000 FCFA of advertisement expenses have been paid in advance.
Required
(a) Prepare the business trading and profit and loss account for the year ended 31/12/2019
(b) Prepare a statement of financial position of the business as at 31/12/2019
6) (GCE 2018, P3, Q2) The trial balance has been extracted from the books of black on
31/12/2015
DR CR
000 FCFA 000 FCFA
Cash 2 500
Bank 4 500
Purchases and sales 30 000 60 000
Stock at 1/1/2015 15 000
Returns 2 000 2 500
Rents 5 000
Interest on loan 8 000
Loan at 20% p.a 50 000
Salaries 2 500
Stationery 1 500
Machinery (cost) 25 000
Motor vehicle (cost) 50 000
Fixtures and fittings (cost) 30 000
Capital 53 000
175 000 175 000
NOTES:
(i) Stock at 31/12/2015 is 10 000 000 FCFA
(ii) The depreciations are charged as follows:
(a) Machinery 5%
(b) Motor vehicle 4%
(c) Fixtures and fittings 5%; all on cost
(iii) Prepaid rent 1 500 000 FCFA
(iv) Salaries of 1 000 000 FCFA were owed to some workers at the end of the
period
(v) 20% of debts were considered as bad at the end of the period
(vi) Accrued interest on loan 2 000 000 FCFA
Required
(a) The income statement for the year ended 31/12/2015
(b) The balance sheet as at 31/12/2015

SINGLE ENTRIES AND INCOMPLETE RECORDS

Single entries refer to situations where only one sides of transactions are recorded; that is the double
entry principle is not respected when recording transactions.
Incomplete records refer to a situation where a business does not keep proper accounting records.
Single entries and incomplete records are problems encountered in sole proprietorship businesses.
This is because the sole proprietors are not compelled by law to keep proper accounting records
The main objective here is to be able to prepare financial statements (income statement and statement
of financial position) from single entries and incomplete records. Knowing that sole trades will always
have balances at the beginning and at the end of periods, and that cash and bank account (book) will
always be given (record of money received and used during the period), an understanding of the
double entry principle can assist one to prepare financial statements from incomplete records by
following the following steps:
- Determination of opening capital
- Determination of cash and bank balance
- Determination of the values of sales and purchases
- Adjustments for other expenses and incomes
- Preparation of the financial statements
1. Determination of the opening capital: The capital at the beginning of the period is calculated
using the balances (assets and liabilities) at the beginning of the period by preparing an opening
statement of financial position called statement of affairs. Knowing that Assets equals capital
and liability, capital will be the difference between assets and liabilities.
2. Determination of cash and bank balance: This is done by balancing the cash book, thus if the
cash book is balanced i.e. the closing balances for cash and bank are given, move to the next step.
3. Determination of the values of sales and purchases: The values of sales and purchases can be
determined using mark-up rates and margin rates or using control accounts.
- Using margin rate and mark-up rate: margin rate is the gross profit expressed as a
percentage of net sales or turn over meanwhile mark-up rate is the gross profit expressed as a
percentage of cost of sales.
 Margin rate =
 Mark-up rate =
- Using control accounts: the sales ledger control account (total debtors account) is used to
calculate credit sales meanwhile the purchases ledger control account (total creditors account)
is used to calculate credit purchases. This is done as follows
Sales ledger control Acount
FCFA FCFA
Debtors B/F X Cash from debtors (Cash a/c) X
Credit sales ? Cheques from debtors (Bank a/c) X
Dishonoured cheques X Returns inwards (credit note) X
Discount allowed X
Bad debts X
Debtors C/D X
Y Y
Total sales = cash sales + credit sales

Purchases ledger control Acount

FCFA FCFA
Cash to creditors (Cash a/c) X Creditors B/F X
Cheques to creditors (Bank a/c) X Credit purchases ?
Returns outwards (debit note) X
Creditors C/D X
Y Y
Total purchases = cash purchases + credit purchases
Note:
- Cash sale is given as sale in the debit side of the cash book meanwhile cash purchases is
given as purchases in the credit side of the cash book,
- When there are debtors and creditors at the beginning and end of the period, it means that
purchases and sales were in cash and thus cobtol accounts should be used to calculate credit
sale and credit purchases
4. Adjustments for other expenses and incomes: These are adjustments are done to calculate the
expenses and income due for the period to be taken to the income and expenditure account.
Expense Acount
FCFA FCFA
y Y
Income Acount
FCFA FCFA
y Y
Other expense such as depreciation may be calculated by simple taking the difference between the
NBV as start and the NBV at close.
If there were purchases and or disposal of non-current assets during the period, a non-current asset
account should be prepared to calculate the depreciation for the period. This may be done as follows
Non-current asset Acount

FCFA FCFA
Balances B/F X Depreciation ?
Cash and bank (purchases value) X Disposal (NBV) X
Balance C/D X
y Y
5. Preparation of the income statements: the income statement and the statement of financial
position can now be prepared.
Example 1: Sample set 2019

WASE, a sole trader who keeps incomplete records, has provided you with the following balances on
01/01/2018:

CFAF
- Equipment 15,000,000
- Stock 2,000,000
- Trade creditors 800,000
- Trade debtors 500,000
- Bank overdraft 700,000
All business takings are deposited in the bank account daily. The following receipts and
payments are traced from the bank account during the year 2018:
- Bank receipts
 Trade debtors 1,200,000
 Sales 3,000,000
- Bank payments
 Trade creditors 1,000,000
 Purchases 1,800,000
 Rents and rates 300,000
On 31/12/2018, the following balances are available:
- Equipment 12,000,000
- Stock 2,500,000
- Trade creditors 900,000
- Trade debtors 700,000
- Bank 400,000
Required:
a) Prepare a statement of affairs as at 01/01/2018 to show the capital at start. (9 marks)
b) Determine the total amount of sales and purchases made by WASE for the year 2018.(6 marks)
c) Prepare a statement of comprehensive income for the year ended 31/12/2018 and a statement of
financial position as at 31/12/2018. (20 marks)
Example 2:
A BELL has kept record of his business in a single entry manner but he did not realise that he had to
record Cash drawings. His bank account for the year 2008 is as follows
000fcfa 000fcfa
Balance 1/1/2008 920 Cash withdrawn from the bank 12 600
Receipts from debtors 94 200 Payments to creditors 63 400
Loan from F tung 2 500 Rent 3 200
Insurance 1 900
Drawing 11 400
Sundry expenses 820
Balance 31/12/2008 4 300
97 620 97 620
Records of cash paid were: sundry expenses 180 000 frs; trade creditors 1 310 000frs; cash
sales amounted to 1 540 000frs.
The following information is also available:
31/12/2007 31/12/2008
000fcfa 000fcfa
Cash in hand 194 272
Trade creditors 7 300 8 100
Debtors 9 200 11 400
Rents owing / 360
Insurance prepaid 340 400
Van (at cost) 5 500 4 600
Stock 24 200 27 100

Work required;
Draw up a statement of comprehensive income for the year ended 31st December 2008 and a
statement of financial position as at that date.
Example 3: GCE 2017, P3, Q2
The following are summaries of cash book and bank account of MP John who does not keep his
books using the double entry system
BANK ACCOUNT
000fcfa 000fcfa
Balance 1/1/2011 4 000 Payments to creditors 9 250
Debtors 13 000 Rent 700
Cash banked 2 050 Machinery 3 750
Wages 3 050
Insurance 725
Loan interest 150
Debtors (dishonored cheques) 125
Balance 31/12/2011 1 300
19 050 19 050
CASH BOOK
000fcfa 000fcfa
Balance 1/1/2011 150 Drawings 4 750
Cash sales 7 000 Maintenance 150
Debtors 200 Water bill 375
Cash banked 2 050
Balance 31/12/2011 25
7 350 7 350
Other information for 2011:

- Bad debts written off 200 000 FCFA
- Discount received 175 000 FCFA
- Goods withdrawn by MP John for personal use 150 000 FCFA
- Credit note issued 600 000 FCFA
The following information is also available
1/1/2011 31/12/2011
000fcfa 000fcfa
Inventory (stock) 2 050 1 600
Creditors 1 200 1 250
Debtors 3 150 2 500
Rents owing - 125
Rent prepaid 100 -
Machinery 6 300 7 950
Loan from bank at 8% 2 500 2 500
Loan interest owing - 50
Required:
(a) Calculate the value of MP John‟s capital on 1/1/2011
(b) Prepare MP John‟s income statement and statement of financial position as at 31/12/2011
Example4: MUSANGO has been in business for several years without keeping accounting records.
The following information relates to the year ended 31st December 2007

Summarized bank account for the period ended 31st December 2007as extracted from the bank
statement
000 000 FCFA
FCFA
Receipts from debtors 52 400 Bal b/d 4 200
Bank loans 14 400 Rents and rates 5 040
Sales 15 160 Telephone and electricity 2 880
Plants and machinery 18 000
Equipments 12 000
Payment to suppliers 26 400
Loan repayment 4 320
Drawings 6 240
Bal c/d 2 880
81 960 81 960
- Trade creditors at 31st December 2006 were 5,520,000 FCFA and a year later 7,200,000
FCFA.
- The trade debtors at 31st December 2006 were 1,000,000 FCFA and at 31st December 2007
was 14,400,000 FCFA.
- All takings from customers were banked with the exception of 960,000 FCFA which was
used for pay a Supplier's invoice and 1,440,000 FCFA which was used to pay for motor
running expenses.
- 600,000 FCFA was outstanding by the business for rents and rates on 31st December 2006 and
720,000 FCFA was outstanding on 31st December 2007.
- MUSANGO had paid 96,000 FCFA from her private funds for business stationery during the
year.
- Plants and machinery at 31st December 2006 had cost 21,600,000 FCFA with accumulated
depreciation at that date being 4,800,000 FCFA. Depreciation is provided on all fixed assets
at 20% on the reducing balance basis. A full year's depreciation is provided in the year of
Purchase, but no provision for depreciation is made on a year of sale.
- To assist in the purchase of additional fixed assets, MUSANGO borrowed money from her
bank on 1st of July 2007. The loan was repayable in quarterly installments of 2,160,000 FCFA
over a two year period commencing 30" September 2007. Each installment contained an
equal amount of interest.
- A provision was to be made at 5% for doubtful debts at 31st December 2007. The provision at
31st December 2006 was 300,000 FCFA.
- No trace of stock was found in the warehouse either at 31st December 2006 or at 31st
December 2007.
Required:
a) Calculate the balance o8n MUSANGO's capital account at 1st January 2007.
b) Prepare the trading and profit and loss account of MUSANGO for the year ended
31stDecember 2007 and a balance sheet as at that date.

ACCOUNTING FOR NON-PROFIT MAKING ORGANISATIONS
Non-Profit-Making Organisations or Non-Governmental organisations (NGOs) are organisations

dedicated to promoting a particular social cause or advocating for a shared point of view. In
economic terms, it is an organization using its surplus of revenues to further achieve or promote its
ultimate objectives, rather than distributing its income to its shareholders, leaders r members.
Since such organisations are not out to make profits, they are tax exempt or charitable, meaning they
do not pay income tax in the money receive for their organization. They can operate in religious,
scientific, research, sports or educational settings.
The key aspects of NGOs are accountability, trustworthiness, honesty, and openness to every person
who have invested time, money, and faith I to the organization. NGOs are accountable to the donor ,
founders, volunteers, program recipients, and the public community.
Common terms used in NGOs related to Accounting

- Capital: The capital of an NGO is called Accumulated funds, and this might be made up of
shares (the case with big NGOs) or variable like in the case of sole proprietors (most common
with small NGOs)
- Cash book: The cash book of an NGO is call Receipts and payments account. The debit side
is the receipts section shows all the cash received during the period (E.g. subscription
received, donations, receipts from debtors, other incomes etc.) meanwhile the credit side is
the payments section shows all cash payments made by the organization during the period
(payments to creditors, donations made, rents, wages and salaries, other payments etc.)
- Income statement: the income statement of an NGO is called Income and expenditure
accounts and the net profit or loss is called surplus or deficit.
- In profit making shareholders or members make contributions called capital only one and
might increase it later, in NGOs though capital may be made of shares, members make
periodic contributions called subscription
Our main objective is to be able to prepare financial statements (income and expenditure accounts and
statement of financial position) from the books of NGOs. This can be done using the following steps:
- Determination of the accumulated funds at the start of the period
- Bar trading account
- Receipts and payments account
- The subscription account
- Adjustment for other expenses and incomes
- Income and expenditure account
- Statement of financial position
i) Accumulated funds at the start of the period: This is the capital at the beginning of the
period, it is calculated using the balances (assets and liabilities) at the beginning of the period
and preparing an opening statement of financial position called statement of affairs. Knowing
that Assets equals capital and liability, capital will be the difference between assets and
liabilities.
ii) Bar trading accounting: bar, here, refers to any profit making activity (such as bar,
restaurant, provision stores, super market etc.) undertaken by an NGO to generate income so
as to support the main objective of the NGO. This trading account is a normal trading account
prepared to determine the net profit from the bar, which will be transferred to the income and
expenditure account as an income.

To prepare the bar trading account,

 the bar sales (also called bar takings) is in the receipts section of the receipts and payments
accounts (if sale is in cash), but if sales in on credit (i.e. when the question has debtors at the
beginning and end of the period), you will have to use the sales ledger control accounts to
calculate credit sales (rare in practice)
 The stock or inventory at the beginning and end of period are given
 the bar purchases is in the payments section of the receipts and payments accounts (if purchases
is in cash) but if purchases in on credit (i.e. when the question has creditors at the beginning
and end of the period), you will have to use the purchases ledger control accounts to
calculate credit purchase ( rare in practice)
 all other expenses related to the bar (if any) are in the payment section of the receipt and payment
account, are subtracted from the gross profit to have the net profit
iii) Receipts and payments account: the receipts and payments account is always given, the
preparation will required only when it has not been balanced.
 Receipts include subscription received during the period, bar sales (takings),
donations received, loan received and other incomes received during the period;
 Payments include bar, purchases, rents and other expenses paid, loan repayments,
purchases of non-current assets etc.
Thus, if it has been balanced you can skip this step and go to the next.
iv) Subscription account: Subscriptions are periodic contributions made by members of the
NGO in order to renew their membership. Thus subscriptions are incomes to the organization,
and can be received in advance or in arrears.
 When members pay their subscription in advance, it means that the organization owes them,
thus they are creditors (i.e. subscription in advance or prepayments for subscription, is also
called creditors for subscription). Subscription in advance are current liabilities
 When members pay their subscription in arrears, it means that they owe the organization,
thus they are debtors (i.e. subscription in arrears or Owings for subscription is also called
debtors for subscription). Subscriptions in arrears are current assets.
 The total subscription received during the period may include arrears for the previous periods,
prepayments for the next periods and some for this period. Thus a subscription account is
prepared to calculate the subscriptions due for the period which will be taken to the income and
expenditure account as an income.
Subscription Acount
FCFA FCFA
Subscription in arrears B/F X Subscription in advance B/F X
Subscription in advance C/D X Subscription in arrears C/D X
y y
v) Adjustments for other expenses and incomes: These are adjustments are done to calculate
the expenses and income due for the period to be taken to the income and expenditure
account.
Expense Acount
FCFA FCFA
y y

Income Acount
FCFA FCFA
y y
Other expense such as depreciation may be calculated by simple taking the difference between the
NBV as start and the NBV at close.
If there were purchases and or disposal of non-current assets during the period, a non-current asset
account should be prepared to calculate the depreciation for the period. This may be done as follows

FCFA FCFA
Balances B/F X Depreciation ?
Cash and bank (purchases value) X Disposal (NBV) X
Balance C/D X
y y
vi) Income and expenditure account: The upper section summarises the incomes meanwhile
the lower section summarises the expenditures
 Incomes include: subscription due in the period, net profit from bar, donations,
proceeds from sales of tickets etc.
 Expenditures include: salaries and wages, rents, lighting and heating,

depreciation of non-current assets etc.
NB: When the total income is greater than the total expenditure, there is a surplus and this surplus is
added to the accumulated funds in the statement of financial position, meanwhile When the total
income is less than the total expenditure, there is a deficit and this deficit is subtracted from the
accumulated funds in the statement of financial position.
Income and Expenditure account for the year ended 31st December 20xx
INCOMES: FCFA FCFA
Subscriptios due X
Net profit from bar X
Donations and other incomes X x
EXPENDITURES:
Wages and salaries X
Rents and rates X
Lighting and heating X
Depreciation X X
Surplus/(Deficit) x/(x)
vii) Statement of financial position: This is the usual statement of financial position that we
prepare for a profit making organization. The only difference being the surplus or deficit
which is added to the capital in the place of net profit or net loss.

Example 1:
The following is the receipts and payments accounts of Wisdom Club during the year ended
December 31st, 2019
Receipts 000 FCFA Payments 000 FCFA
Cash and Bank 31/12/2018 210 Secretarial expense 163
Sales of competition tickets 437 Rent 1 402
Members subscription 1 987 Visiting speakers‟ expenses 1 275
Donations 177 Donations to charities 35
Refund for rent 500 Creditors, Prizes for competition 270
Cash and Bank 31/12/2019 13 Stationery and printing 179
3 324 3 324
The following valuations are also available:

31/12/2018 31/12/2019
000 FCFA 000 FCFA
Equipment (Original cost 1 420 000 FCFA) 975 780
Subscription in arrears 65 85
Subscription in advance 10 37
creditors of competition prizes 58 68
Stock of competition prizes 38 46
Required:
a) Calculate the value of the accumulated fund of Wisdom Club as at December 31st, 2018
b) Reconstruct the following accounts for the year ended December 31st, 2019:
(i) The subscription account,
(ii) The competition prizes account.
c) Prepare an Income and expenditure account for the year ended December 31st, 2019 and a
statement of financial position as at that date.
Example 2:
As a treasurer of your local tennis club, you have just prepared a draft receipt and payment account as
shown below. The club committee decides how ever that it wishes its financial statements for 2006
and subsequent years to be in the form of an income statement accompanied by the statement of
financial position and require you to amend the 2008 accounts accordingly
Receipts and payments accounts for the year ended December 31st, 2008
Receipts 000 FCFA Payments 000 FCFA
Cash in hand 1/1/2008 50 Secretarial expense 250
Cash at Bank 1/1/2008 1 580 Wages 2 000
Members subscription: Purchase of equipment 31/12 4 000
- 2007 310 Cash in hand 31/12/2008 25
- 2008 4 110
- 2009 62.5
Interest on bank account 42.5
Income from annual dinner 20
Cash at bank 31/12/2008 100
6 275 6 275
Notes:
1. At 31/12/2008, 350 000 FCFA was outstanding for members subscription for 2006
2. During 2007, 115 000 FCFA was received in respect to members‟ subscription for 2008

3. The costs of equipment purchased in the previous years were:

 30/06/1997 2 500 000 FCFA
 01/1/2002 500 000 FCFA
 30/9/2006 500 000 FCFA
The committee decides that equipment should be depreciated at 10% on cost
4. Interest of 125 000 FCFA on the bank overdraft accrued on December 31st, 2008.
Required: Prepare
(a) A statement of accumulated fund as at 01/1/2008
(b) Income and expenditure account for the year ended 31/12/2008
(c) Statement of financial position as at 31/12/2008

PRESENTATION OF FINANCIAL STATEMENT

INTRODUCTION
Financial statement may beprepared either internal use or for external use.
- For internal use: There are financial statements prepared for managrs and people within the
organisations. They are prepared following some internal rules and usually prepare by entities such
as sole proprietorship, partnership and Private Limited Companies (LTD). Thus our normal (usual)
income statement and statement of financial position are for internal use.
- For external use (or for publication): These are financial statements prepared for external users
(eg. Shareholders, present and potential investors, government, creditors etc.) and also called
published financial statements. Published financial statements are prepared by Public Limited
Companies (PLC) because the law obliges them to do so, thus published financial statements are
prepared using some inter rules, the GAAP and other external standards such as the International
Accounting Standards (IAS), Iternational Financial reporting Standards (IFRS) and OHADA.
The objective here is to give guidiance regarding the preparation and presentation of published
financial statements.
The following information should be prominently displayed and repeated when it is neccesary for a
proper understanding of the information presented:
- The name of the reporting enterprises and orther means of identification.
- Whether the financial statement coversan individual enter[prise or group of enterprises
- The statementof financial position date or the period covered by the financial statement which
ever is appropriated to that component of the financial component
- The reporting currency, eg. FCFA
- The levels of precissionused in thepresentation of figures in the financial statement e.g 000 FCFA,
000 000 FCFA etc.
The major reports included as part of the published financial statement include:
- The incomestatement
- The statement of financial position
- The statement of changes equity (not covered here)
- The cash flow statement (to be seen as a separate topic)
- The notes to the account
The income statement and the statement of financial position

1) Income statement for publication:
It shows the financial performance of the company during the financial period. It discloses the income
and the expenses and thus the net profit. IAS requires income and expenses to beclassified in the
Published income statement in two ways: By function or By nature
i) Classifying income and expenses by nature: Under this format expenses of the company are
classified into five(5) major categories
 Cost of sales = [Opening stock + (Purchases - return outward + carriage inwards] - closing
stock
 Distribution cost: Transport cost, cariage outwards, bad debts, comission, provision for bad
and doubtful debts etc.
 Administrtive Expenses: salaries and wages, postage, telephone, rent and rates e.t.c
 Other expenses: This refers to all other groups of expenses which do not fall under the above.
 Finance cost : Interest on loans and bankoverdraft , dividend to redeemable preference shares.
Note: There are certain types of income and expenses that do not fall within the ordinary activities of the
firm e.g profit or loss on disposal of property and other non current assetsetc. The standard requiries that

if the above income and expenses are material they can either be classified as part of other expenses or
shown seperately on the face of the income statement. The company should give addition of information
about such items in the notes to the account.
ABC PLC
Published Income statement for the year ended 31/12/20XX
000 000
FCFA FCFA
Revenue or Turn over Net sales X
Less cost of sales X
Gross profit / gross loss X
Add other incomes X
Total gross income X
Less less Expenses:
Distribution cost X
Administrative cost X
Other expenses X (X)
Profit before interest and tax X
Less Finance cost (X)
Net profit/(loss) before tax X/(X)
Less corporation tax (X)
Net profit after tax X
Add retained profit B/F X
X
Less:
- transfer to general reserves X
- transfer to fixed assets replaement reserves X
- preference share dividend X
- ordinsry share dividend X X
Retained earnings C/F X
2) Published Statement of Financial Position: The statement of financial position for publication is
presented using a vertical format. It shows the financial position of the company as at a particular
period. The standard requires that assets and liabilities to be classified in their non-current and current
portion i.e longterm and shorterm.
The first part of the published statement of financial position shows the total assets (non-current assets +
current assets) and the second part shows equity and liabilities. Equity is the shareholders funds (share
capital, retained earnings and reserves) while liability is the total of the non current liabilty and current
lisbility.
Published Statement of Financial position as at 31/12/20XX
000 000
FCFA FCFA
Non-current Assets X
Current Assets X
TOTAL ASSET Y
Financed by:
Ordinary share capital X
Preference share capital X
Retained earnings C/F X
General reserves X
Fixed assets replacement reserves X
EQUITY AND RESERVES X3)
Non-Current Liabilities X 4)
Current Liabilities X X5)
EQUITY AND LIABILITIES Y
4) Notes to Accounts: The notes to the accounts provides additional information on the policies
that the company has adopted to highlight some of the items appering on the face of the
financial statement and additional information on it.
The standard requires the approach to be used when presenting the note on the account.
- The company should state the basis of financial statements. (most cases, historical basis of
accounting)
- The ccompany should present the significancs policy adopted
- The make-up of some items appearing in the financial statement e.g Raw materials, Work in
progress, Finished goods e.t.c
- Explanation of the item not found in the final account e.g Dividend
Example 1: financial statements for internal use (2019 sample set 7005, P3, Q1)
The following Trail Balance was extracted from the books of EWELI PLC as at
31/12/2019.
Elements DR.CFAF CR. CFAF
Share capital 61,820,000
purchases 46,000,000
Sales 98,000,000
Sales return 808,000
Purchase return 280,000
Discounts 910,000 704,000
Rent and rates 4,230,000
General expenses 5,160,000
Trade debtors 18,400,000
Trade creditors 16,000,000
Cash in hand 4,200,000
Stock 01/01/2019 6,100,000
Plant and machinery 61,500,000
Provision for plant and machinery 2,000,000
Motor vehicle 28,000,000
General reserve 96,000
Profit B/F 408,000
Motor expense 4,000,000
Total 179,308,000 179,308,000
Notes:
i) Stock in trade on 31/12/2019 was valued at 7,420,000 CFAF
ii) Rates paid in advance on 31/12/2019 amounted to 450,000 CFAF,
iii)General expense outstanding 240,000 CFAF
iv) Depreciation is calculated on plant and machinery at 5 % on reducing balance method and motor
vehicle 10% on cost.
v) Provision for doubtful debts 8 % on debtors figure
vi) The directors recommend 2,000,000 CFAF on general reserve and 5 % on share capital for
dividend to shareholders.
Required: For internal use,
a) Prepare EWELI Plc. statement of profit and loss for the year ended 31/12/2019
b) Prepare the statement of financial position as at 31/12/2019 for EWELI PLC.
Vertical format of presentation only

Example 2: GCE 2015, P3, Q2 (for Publication)

The following trial balance has been extracted from the records of MEAL WALL Limited a at 31st December, 2013
000 FCFA 000 FCFA
Revenue 30 780
Purchases 17 180
Inventory at 1st January, 2013 2 890
Distribution cost 3 040
Administrative expenses 2 240
Land at valuation 1st January 2013 21 840
Building at re-valued amount 16 000
st
Accumulated depreciation on building 1 January 2013 4 430
Factory plant and equipment at cost 26 640
Accumulated depreciation on factory plant and equipment 1st January 2013 5 140
Warehouse plant and equipment at cost 2 400
Accumulated depreciation on warehouse plant and equipment 1st January 2013 1 040
Trade receivables and payables 8 520 4 660
Cash at bank 800
Ordinary shares at 1 FCFA each 28 000
Debenture interest 120
Dividends 300
Share premium account 6 000
Retained earnings 9 320
Revaluation reserves 6 700
Bank interest 60
Long term bank loan 2 000
3% Debentures 4 000
Corporation tax 40
102 070 102 070
The following items are to b adjusted in the preparation of financial statements for the year ended 31st December
2013:
(i) Depreciation is to be provided as follows:
- Building 2% per year on re-valued amount
- Plant and equipment 20% reducing balance
Depreciation on Buildings is to be charged fully to Factory costs (cost of sales)
(ii) Closing inventory at 31st December 2013, is valued at cost of 3 250 FCFA. included in the inventory at 31st
December 2013 are goods which had cost 500 000 FCFA. Due to a down turn in demand, these goods were
sold at auction sale on 15th January 2014 for 300 000 FCFA. Auctioneer‟s fees were 3% of sales proceeds.
(iii) The taxation charge of 40 000 FCFA included in the above trial balance is in respect of an under provision
in the previous year. The estimated tax charge for the current year is 940 000 FCFA.
(iv) Included in trade receivables is a balance f 120 000 FCFA which is considered a bad debt and is to be
written off. The directors have decided to make an allowance for doubtful debts of 3% of outstanding trade
receivables.
Required:
Prepare in a form suitable for publication, the company‟s statement of comprehensive income for the year
ended 31st December 2013.

Example 3: (for publication)

The trail balance of FALTA PLC as at 30th April 2005 is given below
000 FCFA 000 FCFA
Share capital: authorised and issued 200 000
Stock at 30th April 2004 102 994
8% Debentures 40 000
Fixed assets replacement reserves 30 000
General reserve 15 000
Retained earnings 30th April 2004 12 411
Debenture interest 1 600
Equipment at cost 225 000
Motor vehicles at cost 57 200
Bank 4 973
Cash 62
Purchases and sales 419 211 880 426
Returns inwards 18 400
Carriage inwards 1 452
Wages and salaries 123 289
Rents, business rates and insurance 16 240
Discount allowed 3 415
Directors‟ remuneration 82 400
Provision for depreciation:
- Equipment 32 600
- Motor vehicles 18 200
1 283 455 1 283 455
The following information applies on the 30th April 2005:
(i) Stock 30 April 20005 was valued at 111 317 000 FCFA
(ii) The share capital consisted of 300 000 Ordinary shares of 500 FCFA each and 50 000, 12% Preference
shares of
1 000 FCFA each. The dividend f preference shares were proposed to be paid as well as a dividend of 18%
on the Ordinary shares.
(iii) Accrued: rents 802 000 FCFA, Directors remuneration 6 000 000 FCFA
(iv) Debenture interest ½ year‟s interest owing
(v) Depreciation on cost: Equipment 20% and Motor Vehicles 25%.
(vi) Transfer to reserves: general reserves 5 000 000 FCFA and Fixed assets replacement reserves 10 000 000
FCFA.
(vii) Corporation tax for the year is calculated at 30%.
Required:
Prepare FALTA PLC income statement for the year ended 30th April 2005 and a statement of financial
position as at that date for publication.

CASH FLOW STATEMENT

A cash flow statement is a financial statement that shows the movement of money into and out of the
firm during the accounting period. Thus a simple cash book may be regarded as a cash flow statement.
A cash flow statement is needed as a consequence of the difference between profit and cash. For
example why is the business making a profit yet has overdraft in the bank or why did the company
make a loss yet has cash in hand and at bank?
This statement helps us to:
- Provide additional information in business activities.
- Help assess the current liquidity of the firm.
- Allow the users to see the major types of cash flows in and out of the business.
- Help the user to estimate future cash flow.
- Determine the cash flows generated from credit transactions as oppose to other sources of cash
flow.
PRESENTATION OF CASH FLOW STATEMENT

The cash flow statement is often prepared with information from the statement of financial position
and the income statement of the enterprise. The presentation starts with a reconciliation of operating
profit and operating cash flow. IAS 7 requires that cash flow statements be represented using three
standard recordings. These standard headings are:
- Operating activities (income statement, current assets, and current liabilities).
- Investing activities (non-current assets).
- Financing activities (non-current liabilities, equity and reserves).
i) OPERATING ACTIVITIES
This section of statement is aimed at determine the net cash flow from operating. This section is
prepared with information from the income statement and working capital i.e. current assets and
current liabilities.
There are two methods used to determine the net cash flow from operating activities, namely, the
direct and indirect method.
 The direct method: It is so called because it records the gross operating (cash flow from ordinary
activities, eg. Sales, purchases, debtors and creditors, expenses and other short term incomes)
cash flows. The information for the direct method could be found in the account records or
retrieved from the financial statements using control accounts (to calculate the cash received from
debtors and cash paid to creditors); and other adjustments accounts of expenses and income
prepaid or accrued (to calculate the cash paid for such expenses and cash received from such
incomes).
Presentation of the Operating activities using the direct method
Operating activities FCFA FCFA
Cash sales and Cash received from debtors X
Other operating cash received (incomes) X X
Less:
- Cash purchases and Cash payment to creditors X
- Cash paid to and on behalf of employees X
- Other cash payment (expenses) X X
Net Cash flow operating activities X
 The indirect method: This method determines the net cash flow from operating activities
beginning with profit and not cash as is the case of the direct method. Starting from the Net profit
before tax, the adjusted profit is calculated by making adjustment for non-cash expenses and non-
incomes. The non-cash expenses (for example depreciation, bad debts, increase or decrease in
bad debt provision, and loss on disposal of non-current assets and decrease in revaluation of non-
current assets) that reduced the net profit in the income statement are added back in the cash

flow statement and the non-cash incomes (for example bad debts recovered, profit on disposal of
non-current assets, decrease in provision for doubtful debts, increase in revaluation in non-
current assets) that increased the net profit in the income statement are subtracted.
To the adjusted profit (operating profit before working capital changes), the change in working
capital (inventory, account receivables and payables, prepayments and accruals) is added. The
corporation tax paid and interest paid for the period is also subtracted to have the net cash flow
from operating activities.
Presentation of the Operating activities using the indirect method

Operating activities FCFA FCFA
Net profit before tax X
Adjustment for:
- Depreciation X
- (Profit) / loss on disposal of non-current assets (X) / X
- Bad debts X
- (Decrease) /provision or Increase in bad debt provision (X) / X
- (Increase) / decrease in revaluation of non-current assets (X) / X (X) / X
Operating profit before working capital changes (X) / X
Changes in working capital:
- (Increase) / decrease in stock (X) / X
- (Increase) / decrease in debtors (X) / X
- (Increase) / decrease in prepaid expenses (X) / X
- (Increase) / decrease in creditors X / (X)
- (Increase) / decrease in accrued expenses X / (X) (X) / X
Tax paid (X)
Interest paid (X) (X)
Net cash flow from operating activities X / (X)
ii) INVESTING ACTIVITIES

This section of the cash flow statement is prepared using movements in the non-current assets. For
example proceeds on disposal on non-current assets, purchases of non-current assets, increase in
investment (shares brought in other companies), and dividend from investment.
Investing Activities FCFA FCFA
Purchase of non-current assets (X)
Cash received on disposal of non-current assets X
(Increase) / decrease in Investment (X)/X
Dividend or interest received from investment X
Net cash flow from Investing Activities X/(X)
iii) FINANCING ACTIVITIES

This section of the cash flow statement is prepared using movements in the non-current liabilities and
equity (capital and reserves). For example loan obtained or repaid, proceeds from issues of shares,
proceeds from share premium, dividend paid, and redemption of debentures.
Financing Activities FCFA FCFA
Proceeds from issue of shares X
Proceeds from share premium X
Loan obtained / (loan repaid) X/(X)
Dividend paid (X)
Net cash flow from Financing Activities X/(X)

CASH AND CASH EQUIVALENTS

These are highly liquid short term investments that are rapidly convertible in to known amount of
cash and which are subject to insignificant risk of changes in value. Cash refers to cash in hand and at
bank (which may be bank overdraft) and cash equivalents may be treasury bills, bills of exchange and
promissory notes.
The sum of the operating activities, the investing activities and the financing activities gives the net
cash and cash equivalents.
The cash and cash equivalent at the start of the period (the sum of cash in hand, cash at bank and
treasury bills, bill of exchange etc. at the beginning of the period), is added to the net cash and cash
equivalents and the balance obtained gives the cash and cash equivalent at the end of the period (the
sum of cash in hand and at bank and treasury bills etc. at the end of the period).
Cash flow statement for the year ended 31st December 20xx
FCFA FCFA
Net cash flow from Operating Activities X/(X)
Net cash flow from Investing activities X/(X)
Net cash flow from Financing Activities X/(X)
Net cash and cash equivalents X/(X)
Add cash and cash equivalents at start X/(X)
Cash and cash equivalents at close X/(X)
Worked examples
Example 1 (2019 sample set 7005 P3 Q4)
The balance sheet of upper House Plc is given below
2017 2018
CFAF CFAF CFAF CFAF
Trade mark 4,000
Office equipment 30,000 32,800
Stock 15,000 15,500
Debtors 6,000 7,000
Cash 14,000 35,000 19,580 42,080
TOTAL ASSET 65,000 78,880
Financed By:
Share capital 35,000 55,000
Reserves 5,000 6,050
Profit retained 7,000 3,830
Loan 10,000 5,000
Creditors 8,000 9,000
TOTAL LIABILITIES 65,000 78,880
Notes:
Profit and Loss for 2017 was distributed as follows:
- General reserves 1,050,000 CFAF and dividend paid and proposed 5,590,000 CFAF
- Depreciation for 2018 amounted to 5,300,000 CFAF.
- During 2018 office equipment was bought for 15,000,000 CFAF cash. Also office equipment
was sold for cash 7,500,000 CFAF with original value worth 10,000,000 CFAF and
accumulated depreciation of 3,100,000 CFAF.
- There was an issue of shares which was paid by cash.
Required:
Prepare a cash flow statement for Upper House Plc as at 31/12/2018 as requires by IAS7. (35
Marks)

Example 2: GCE 2015 P3 Q4 and 2017 P3 Q3

The following data relates to the OUR PARENTS and CO Ltd during 2011 and 2012
2012 2011
FCFA FCFA
Cash 400 000 1 400 000
Accounts receivable 2 500 000 3 250 000
Prepaid insurance 500 000 700 000
Inventory 3 700 000 3 400 000
Fixed assets 31 600 000 27 000 000
Accumulated depreciation (4 500 000) (3 000 000)
Total assets 34 200 000 34 200 000
Accounts payable 1 800 000 1 600 000

Wages payable 400 000 700 000
Notes payable 17 300 000 16 000 000
Capital stock 8 800 000 8 400 000
Retained earnings 5 900 000 6 050 000
Total liabilities and equity 34 200 000 34 200 000
2012
FCFA
Sales 20 000 000
Cost of goods sold (12 300 000)
Depreciation expense (1 500 000)
Insurance expense (1 100 000)
Wage expense (5 000 000)
Net income 100 000
During 2012, dividends declared and paid were 250 000 FCFA. during 2012, OUR PARENT and CO
Ltd paid 4 600 000 FCFA in cash to acquire new fixed assets. The accounts payable was used only for
inventory and no debt was retired during the period.
Required:
Prepare the cash flow statement for OUR PARENTS and CO Ltd using the direct and indirect
methods
Example 4: GCE 2016 P3 Q2

The balance sheet of ASANG PL is given a follows for 2012 and 2013
31/12/2012 31/12/2013
FIXED ASSETS:
Land 20 000 20 000
Buildings 150 000 135 000
Equipment 70 000 240 000 59 500 214 500
CURRENT ASSETS:
Stock 30 000 53 000
Debtors 45 000 40 000
Prepayments 6 000 17 000
Bank and cash 2 300 13 000
83 300 123 000
CURRENT LIABILITIES:
Creditors 60 000 57 000
Accruals ------- 500
Corporation tax 800 2 000

Proposed dividend 2 500 3 000

(63 300) (62 500)
Working capital 20 000 60 500
Capital employed 260 000 275 000
FINANCED BY:
Equity:
Ordinary share capital 150 000 160 000
Share premium -------- 1 500
Reserves 100 000 104 000
Profit retained 8 000 258 000 8 400 273 900
LONG TERM LIABILITIES
Debentures 2 000 1 100
Capital employed 260 000 275 000
(i) Dividends and taxes of one year are paid in the following year. No fixed assets were sold
or purchased.
(ii) 1 000 ordinary shares f 10 000 FCFA each were issued at 11 500 FCFA each and were
fully paid up by cash.
Required:
Prepare a cash flow statement for the year ended 31/12/2013 for the company in conformity with IAS
7.
Example 4: GCE 2018 P3 Q4

The following are the summarised balance sheet of WAAM PLC as at 31st December of the last two
years:
2014 2015
Fixed assets:
Lands and buildings 2 112 000 2 352 000
Plant and machinery 648 000 695 520
Office equipment 165 600 132 000
2 025 600 3 179 520
Current assets:
Stock 59 600 85 440
Debtors 61 920 53 640
Bank and cash 50 760 76 920
212 280 216 000
Liabilities less than 1 year:
Creditors 64 080 74 520
Corporation tax 49 200 57 600
Proposed dividend 96 000 78 000
209 280 210 120
Net current assets 3 000 5 880
Net assets 2 928 600 3 185 400
Financed by:
Capital and reserves:
Ordinary share capital 1 000 FCFA each 2 040 000 2 448 000
Share premium 576 000 168 000
Revaluation Reserves -------- 240 000
Profit Reserves 94 200 154 200
Profit and loss 218 400 175 200
2 928 600 3 185 400

- During 2015, machinery costing 234 000 000 FCFA was purchases. There was no disposal of
machinery
- Office equipment with a book value of 9 600 000 FCFA was sold in 2015 for 7 800 000
FCFA. This had been replaced new office equipment cost 22 800 000 FCFA
- During 2015, there was a bonus issue of one ordinary share for every five already held. This
was done by using part f the share premium.
Required:
Prepare a cash flow statement in accordance with IAS 7 for the year ended 31st December 2015.
Use indirect method.
USEFUL REMARKS:
FCFA FCFA
Balances B/F X Depreciation ?X
Cash and bank (purchases value) ?X Disposal (NBV) X
Balance C/D X
Y Y
Expense Acount
FCFA FCFA
Cash and bank ? Income and expenditure A/C X
Y Y
Income Acount
FCFA FCFA
Income and expenditure A/C X Cash and Bank ?
Y Y
Sales ledger control Acount

FCFA FCFA
Debtors B/F X Cash and cheques from debtors ?
Credit sales X Bad debts X
Dishonoured cheque X Returns inwards (credit note) X
Discount allowed X
Debtors C/D X
Y Y
Purchases ledger control Acount

FCFA FCFA
Cash and cheques to creditors ? Creditors B/F X
Returns outwards (debit note) X Credit purchases X
Creditors C/D X
Y Y

FINANCIAL STATEMENT ANALYSIS

(RATIO ANALYSIS)
A financial ratio is the relationship between financial variables and it helps to ascertain (measure)
financial conditions of the firm.
Ratio analysis is a means of comparing and quantifying relationships between financial variable in the
statement of comprehensive income and the statement of financial position. With ratios, financial
statement can be interpreted and usefully applied to satisfying the needs of the users of financial
statements.
CLASSIFICATION OF RATIO
Ratios can be classified into five categories which are:
- Liquidity ratio
- Leverage or gearing ratio
- Activity or efficiency ratio
- Profitability ratio
- Investment ratios
i) LIQUIDATION RATIO
These ratios measure the firm‟s ability to meet it short term obligation as and when they fall due.
Ratios here include:
- Current ratio
- Acid test or quick ratio
a) Current ratio
This is the ratio of total current assets and total current liabilities. It is also called working capital ratio
and is calculated as follows
If the current ratio is greater than one then the current assets can be finance the current liabilities, that
is the company can meet up with it short term debts, thus it is solvent.
b) Acid-test ratio or quick ratio
This is the ratio of current assets excluding stock to current liabilities. A firm with a satisfactory
current ratio may actually be in poor liquidity position when inventories form most of the current
assets. The acid test ratio is calculated as follows
ii) GEARING RATIO OR LEVERAGE RATIO

This ratio measure the extent to which a company use its assets which have been financed by non-
owners supply funds. It measures the financial risk of the company, the higher the ratio the higher the
financial risk.
- Capital gearing ratio or Debt ratio

Gearing refers to the amount of debts finance a company uses relative to its equity finance. This is the
ratio of debt capital or fixed interest bearing securities (preference and debentures) to owners‟ equity.
Debt capital or fixed interest bearing securities refers to debenture and preference share capital
meanwhile owners‟ equity refer to ordinary share capital, share premium, reserves and retained
earnings. Capital gearing is calculated as:
If the ratio is greater than one then the company is highly geared meaning the company is highly
financed by debt capital.
If the gearing ratio is less than one, then the company is lowly geared meaning it is more financed by
the owners‟ equity (ordinary shares and reserves). Investors will always invest in companies that are
lowly geared

iii) PROFITABILITY RATIOS

They measure the management‟s effectiveness as shown by the returns generated on sales and on
investment. They indicate how successful management has been generating profit for the company.
Ratios here include:
a) Return on capital employed (ROCE)
This measures the efficiency with which a company uses long-term funds or permanent assets to
generate returns to the shareholders. It is calculated as+
Capital employed can either be calculated as follows:

 Capital employed = total assets – current liability or Non-current assets + working capita
Total assets = Non-current assets + current assets
Working capital = current asset – current liability
 Capital employed is also calculated as the sum of the shareholders fund (ordinary share capital,
preference share capital, share premium, reserves and retained earnings) and non-current liabilities
b) The gross profit margin (margin rate)
This is the gross profit express as a percentage of net sales. It is simple called margin rate and it is
calculated as follows
c) Net profit margin(NPM)

This is the net profit expressed as a percentage of sales. It is calculated as follows
d) Net asset turn over:

It gives a guide to productive efficiency that is how well assets have been used in generating sales.
It is calculated as follows:
e) Return on investment (ROI)

This measure the efficiency in which the firm uses its total funds on capital employed to generate
return to owner‟s funds. It is calculated as follows
f) Return on equity (ROE)

This is the ratio of the residual profit (earnings to equity share holders) to equity (ordinary shares).
It is calculated as
N.B: returns to equity is the profit to ordinary shareholders
iv) EFFICIENCY OR ACTIVITY RATIOS

These ratios measure the efficiency with which the firm uses its assets to generate sales. There are
also called turnover ratio as they indicate the rate at which assets are converted into sales. Ratios here
include:
a) Debtors turn over

This shows the number of times debtors pay within a year. It indicates how efficient the firm is in
the management of credit. The higher the ratio the more efficient management is in managing its
credit policy. It is given as

b) The average collection period (Debtors’ days)

It is also called the debtor‟s day; it shows the average period of credit taken by customers. Thus it
is the number of days the dates that credit sales were made and the dates that the money was
received /collected from customers.
A low average collection period is very good since indicates that the company converts its Debtors
(accounts receivables) in to cash within a short period.
It is calculated as follows:
OR
c) Creditors (accounts payable) turn over

This refers to number of times creditors are paid by a company during the year. It is the ratio of
credit purchases to average creditors. It is given as
d) Average payment or deferred period (Creditors’ days)

It is also called the creditor‟s days. It indicates the average time that suppliers allowed to the company
to settled its debts. The longer the average payment period, the more efficient the company is in pay
its creditors meanwhile if the average payment period is short, the company will need cash on a
continuous basis to pay its creditors. It is given as follow:
OR
e) Stock or inventory turnover

This is the ratio of the cost of sales to average stock. It shows the number of times average stock is
sold or used during the year. It indicates how efficient the firm is in the management of its stock.
The higher the ratio the more efficient management is in managing its stock. This is because stock is
not held for a long time and this reduces storage cost. It is given as
f) Inventory (stock) days or Average convention period

This refers to the number of days it takes for inventory to turn in to sales. A low inventory day is
good since it shows how fast stock is converted. It is calculated as follows:
OR
g) The working capital cycle or the operating cycle

Working capital cycle = (average collecting period + stock convention period) – average
deferred payment period
h) Cost turnover or operating turnover =
i) Fixed asset turnover =

v) INVESTMENT RATIOS
These are ratios which are used to assess the performance of the company‟s shares. These ratios are of
great interest to ordinary share holders as well as potential investors, analysts and competitors. Ratios
here include:
a) Earnings per Share (EPS) =
b) Dividend per share (DPS) =
c) Dividend cover (DC): This is the ratio of the dividend per share (DPS) to the earnings per share
(EPS). It is calculated as follows:
Dividend Cover (DC) =
d) Earnings yield (EY): This is the ratio of the earnings per share (EPS) to the market price per share
(MPS). It is calculated as follows:
Earnins yield (EY) =
e) Dividend yield (DY): This is the ratio of the Dividend per share (DPS) to the market price per share
(MPS). It is calculated as follows:
Dividend yield (DY) =
f) Price earnings ratio (PER): This is the ratio of the market price per share (MPS) to the earnings
per share (EPS). It is calculated as follows:
Price earnings ratio (PER) =
Example 1 (sample set 2019, 7005, P3, Q3)
The following are extracts from the final account of a trading company over its last two years:
Profit & loss statement
ELEMENTS Year 1 (000 CFAF) Year 2 (000 CFAF)
Purchases (all on credit) 216,000 285,000
Sales (all on credit) 675,000 834,000
Cost of sales 210,000 272,000
Gross profit 465,000 562,000
Net profit 130,000 200,000
Statement of financial position data

YEAR 1 YEAR 2
CFAF CFAF CFAF CFAF
Non-current assets 620,000 800,000
Current asset;
Inventories 11,000 24,000
Debtors 95,000 106,000
Total current assets 106,000 130,000
Current liabilities;
Trade creditors 28,000 (39,000)
Bank overdraft 39,000 (77,000)
Taxation 10,000 (20,000)
Proposed dividend 25,000 (30,000)
Total current liabilities (102,000) (166,000)
Working capital 4,000 (36,000)

Capital employed 624,000 764,000

Financed by:
Share Capital 300,000 300,000
Retained profit 224,000 374,000
524,000 674,000
Long term liability: Mortgage 100,000 90,000
624,000 764,000
NOTE: stock at the beginning of year 1 is the closing stock of the same year.
Required
a) Calculate two profitability ratios for both years. (10 Marks )
b) Calculate two liquidity ratios for both years (10 Marks)
c) Calculate two efficiency ratios for both years (10 Marks)
d) Briefly comment on the financial performance of the company over the two years. (5
Example 2
You have been provided with the statement of financial position of TOKS PLCas at 31st December,
2013
000 FCFA 000 FCFA 000 FCFA
Non-current assets:
- Land and Buildings 340 000
- Machinery and equipment 122 020 462 020
Current assets:
- Stock 60 000
- Debtors 70 000
- Bank 34 580 164 580
Cureent laibilities:
- Creditors 121 600
- Dividend 5 000 (126 600)
Working capital 37 980
Capital employed 500 000
Equity:
- Ordinary share capital 300 000
- Reserves 80 000
- Retained earnings 20 000 400 000
Non-current liabilities
- Debentures 100 000
Capital employed 500 000
- Net profit for the year was 70 000 000FCFA
- Sales and purhases amounted to 350 000 000FCFA and 180 000 000FCFA respectively
and were all on credit
- Opening stock is equal to closing stock and the year has 365 days
Required: Calculate the following ratios of the company:
(a) Net profit to sales
(b) Return on capital employed
(c) Stock turnover
(d) Debtors collection period
(e) Current ratio
(f) Grearing ratio

Example 3:
Some of the financial ratioss of two companies in Douala are calculated for the year ended
31/12/2010 and are given as follows:
Ratios Company A Company B
Gross profit margin 45% 70%
Net profit margin 30.75% 53%
Current ratio 2.2119 1.30237
Acid-test ratio 1.68104 1.07929
Stock turnover ratio 10 times 8 times
Debtors collection period 91.25 days 54.75 days
- The following information was extracted from the books of company A:
 Net profit 61 500 FCFA
 Current asset consisted of stock 11 000 FCFA, Debtors 37 500FCFA and Bank 1
500FCFA
- The openeing stock of both ompanies is equal to the closing stock
- The sales realised by company B is 3 ½ times that of company A
- The current assets of company B sum up to 153 250FCFA and company B made all its
sales on credit.
Required: Calculate for each company:
(a) Turnover
(b) Gross profit
(c) Current liabilities
(d) Cost of sales
Example 4:
Mr Ndoh Solomon was considering the purchase of one of two businesses. However, he had only
been presented with limited information about the businesses, as follows:
Summarised financial information for the year ended 31st December, 2009
Business Business
Information
X Y
Cost of sales 400 000 000 FCFA 600 000 000 FCFA
Administrative expenses 50 000 000 FCFA 60 000 000 FCFA
Average stock at cost 40 000 000 FCFA 50 000 000 FCFA
Working Capital as at 31st December 2009 90 000 000 FCFA 250 000 000 FCFA
Selling and distribution expenses 15 000 000 FCFA 35 000 000 FCFA
Proprietor‟s capital as at 1st January, 2009 200 000 000 FCFA 350 000 000 FCFA
Mark-up rate 20% 25%
i- Average stock has been calculated using the year‟s opening and closing stocks. Subsequently,
it was discovered that Business Y had over valued its stock on the 31st December, 2009 by 10
000 000 FCFA.
ii- Business X‟s administrative expenses included a payment for rent of 15 000 000 FCFA,
which covered a three-year period to 31st December, 2011.
iii- A sum of 2 500 000 FCFA was included in the administrative expenses of Business Y in
respect of a holiday taken by the owner and his family.
iv- Cash drawings for the year ended 31st December, 2009 were:
- Business X 20 000 000 FCFA
- Business Y 25 000 000 FCFA
v- The owners of the businesses had stipulated the following prices for their businesses:
- Business X 190 000 000 FCFA
- Business Y 400 000 000 FCFA
Work required:

a) Based on the information available, carry out the necessary adjustments and prepare the
comparative income statement for the year ended 31st December, 2009.
b) Calculate the stock turn over for each firm
c) Calculate the Net worth of each business and advise Mr Ndoh on which business he should
purchase.

REFERECES
th
Business Accounting 1 and 2 (13 edition) by Frank wood and Alain Sangstar
Costing by T. Lucy
The Harmonised business Accounting (the compendium) (4th edition) by Bate Paul and Mose Nanje
Excel in Advanced Business Mathematics and Statistics (2nd edition) by Ndoh Solomon

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COST AND MANAGEMENT AND IAS ACCOUNTING ATVE

NDOH SOLOMON, (+237) 674-382-252 Page 1

STEPS IN LINEAR PROGRAMMING ........................................................................................... 65

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INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING

1) DEFINITION OF COST ACCOUNTING

2) DEFINITION OF MANAGEMENT ACCOUNTING

SOME COST ACCOUNTING TERMINOLOGIES

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DIRECT AND INDIRECT COSTS

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Purpose of cost estimation

METHODS OF COST ESTIMATION

1) THE HIGH-LOW ACTIVITY METHOD:

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2) THE LEAST QUARES REGRESSION METHOD

Months January February March April May June July

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Reasons for store controls

How stores may be controlled

Controlling store by fixing stock levels (inventory or stock control)

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Min SL = ROL – (Average usage x Average lead time)

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THE ECONOMIC ORDER QUANTITY (EOQ)

Calculation of the economic order quantity (EOQ)

If we take the root of both sides we have √

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Example of EOQ graphs

Holding cost Ordering cost

Ordering cost Holding cost

0 EOQ Order 0 N Number

Lead time or delivery period

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3) GCE 2020 7010, P3, Q1

4) Sample set 2019, 7010, P3, Q1

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2) GCE 2012, P2, Q1

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The distribution expenses are as follows for the same month

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Elements of Labour Costs

Methods of Determining the Basic Salary Wage or Salary

B) Piece rate or piece work

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C) THE TIME RATE OR TIME WORKED

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THE BONUS SCHEMES

FEATURES COMMON WITH BONUS PAYMENT SCHEME

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Causes of Labour turnover

Costs of Labour Turnover

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ACCOUNTING FOR OVERHEADS EXPENDITURE AND ACTIVITY BASED COSTING

1) ALLOCATION AND APPOTIONMENT OF OVERHEADS

For overheads to be properly apportioned, a sequence of procedures is under taken;