Acc 319 Note

DSITANCE LEARNING CENTRE
AHMADU BELLO UNIVERSITY

ZARIA, NIGERIA
COURSE MATERIAL
FOR
Course Code &Title: ACC 319 & MANAGEMENT ACCOUNTING I
Programme Title: B.Sc. ACCOUNTING
1
ACKNOWLEDGEMENT
We acknowledge the use of the Courseware of the National Open University of
Nigeria (NOUN) as the primary resource. Internal reviewers in the Ahmadu Bello
University have also been duly listed.
2
COPYRIGHT PAGE
© 2018 Ahmadu Bello University (ABU) Zaria, Nigeria
All rights reserved. No part of this publication may be reproduced in any form or
by any means, electronic, mechanical, photocopying, recording or otherwise
without the prior permission of the Ahmadu Bello University, Zaria, Nigeria.
First published 2019 in Nigeria.
ISBN:
Ahmadu Bello University Press

Ahmadu Bello University
Zaria, Nigeria.
Tel: +
E-mail:
3
COURSE WRITERS/DEVELOPMENT TEAM
Editor
Prof. M. I. Sule
Course Materials Development Overseer
Dr. Abubakar Usman Zaria
Subject Matter Experts
Abdulrahman Abubakar
Subject Matter Reviewers
Dr. Ibrahim Yusuf
Chat Lot Kogi
Language Reviewer
Dr. Abubakar Ahmed
Instructional Graphic/Designers
Ibrahim Otukoya Hassan
Haruna Abubakar
Proposed Course Coordinator
Nafisa Abubakar
ODL Expert
Prof. M. H. Sabari
4
CONTENTS
Title Page........................................................................................................................................1
Acknowledgement Page.................................................................................................................2
Copyright Page...............................................................................................................................3
Course Writers/Development Team.............................................................................................4
Table of Contents…………………………………………………………………………….......5
COURSE STUDY GUIDE………………………………………………………………………6

i. Course Information………………………………………………………………….6
ii. Course Introduction and Description………………………………………………6
iii. Course Prerequisites…………………………………………………………………6
iv. Course Learning Resources…………………………………………………………7
v. Course Objectives and Outcomes……………………………………………….......7
vi. Activities to Meet Course Objectives……………………………………………….8
vii. Time (To complete Syllabus/Course)……………………………………………….8
viii. Grading Criteria and Scale………………………………………………………….8
ix. OER Resources……………………………………………………………………...10
x. ABU DLC Academic Calendar………………………………………………….....13
xi. Course Structure and Outline……………………………………………………...14
STUDY MODULES………………………………………………………………………….....17
MODULE 1: Management Accounting-Introduction………………………………………..17
Study Session 1: Introduction and Scope of Management Accounting……………………….....18
Study Session 2: Cost Accounting Systems..................................................................................36
Study Session 3: General Principles of Costing............................................................................53
Study Session 4: Determination of Cost Behaviour......................................................................75
MODULE 2: Cost Techniques, Budgeting, Variance and Cost-Volume-Profit Analysis.....90

Study Session 1: Element of Cost and Cost Estimation Techniques ……………………………90
Study Session 2: Budgets and Budgetary Control.......................................................................110
Study Session 3: Standard Costing……………………………………………………………..143
Glossary................................................................................................................194
5
COURSE STUDY GUIDE
i. COURSE INFORMATION
Course Code : ACC 319
Course Title: Management Accounting I
Credit Units: 3 Credit Units
Year of Study: 3
Semester: First Semester
ii. COURSE INTRODUCTION AND DESCRIPTION

Introduction:
ACC 319-Management Accounting is designed to give you self-instruction as
you study Bachelor of Science (B. Sc) in Accounting. It is adapted from the
Institute of Chartered Accountants of Nigeria study materials, Chartered
Institute of Management Accountants materials, and Association of Chartered
Certified Accountants materials, to prepare you for your B.Sc. Accounting
examination of Business School of the Ahmadu Bello University, Zaria,
Nigeria.
Description:
The course content consists basically of topics you are expected to learn in
Management Accounting.
iii. COURSE PREREQUISITES

You should note that although this course has no subject pre-requisite, you are
expected to have:
1. Satisfactory level of English proficiency
6
2. Basic Computer Operations proficiency
3. Online interaction proficiency
4. Web 2.0 and Social media interactive skills
iv. COURSE LEARNING RESOURCES

i. Course Textbooks
ICAN Pack (2006). Management Accounting. Lagos: VI Publishing Ltd.
Faruonbi K. (2006). Management Accounting. Lagos: EL-Toda Ventures Ltd.
Aborode R. (2006). A Practical Approach to Advanced Financial Accounting.
Lagos: El-Toda Ventures Ltd.
v. COURSE OUTCOMES
After studying this course, you should be able to:
1. Explain cost accounting system means;
2. Compare cost accounting with financial accounting;
3. Distinguish between cost accounting and management accounting;
4. Discuss the different parts of a cost accounting system;
5. Highlight the necessity for cost accounting system;
6. Describe the concept of cost behaviour;
7. Identify the reasons for studying cost behaviour;
8. Describe the concept of relevant range of cost;
9. Identify the types of cost behaviour and describe a level of activity;
10. Define budget;
11. Identify various types of budget;
12. Outline budget preparation procedures;
13. Prepare the cash budget;
7
14. Learn the techniques used in budgeting;
15. Distinguish between forecast and budgets; and
16. Learn about the objectives and organization of budgetary control.
17. Evaluate projects using various investment appraisal techniques
vi. ACTIVITIES TO MEET COURSE OBJECTIVES

Specifically, this course shall comprise of the following activities:
1. Studying courseware
2. Listening to course audios
3. Watching relevant course videos
4. Field activities, industrial attachment or internship, laboratory or
studio work (whichever is applicable)
5. Course assignments (individual and group)
6. Forum discussion participation
7. Tutorials (optional)
8. Semester examinations (CBT and essay based).
vii. TIME (TO COMPLETE SYLABUS/COURSE)

To cope with this course, you would be expected to commit a minimum of 2
hours weekly for the Course.
viii. GRADING CRITERIA AND SCALE

Section 1.01 Grading Criteria
A. Formative assessment
Grades will be based on the following:
8
Individual assignments/test (CA 1,2 etc) 20
Group assignments (GCA 1, 2 etc) 10
Discussions/Quizzes/Out of class engagements etc 10
B. Summative assessment (Semester examination)

CBT based 30
Essay based 30
TOTAL 100%
C. Grading Scale:
A = 70-100
B = 60 – 69
C = 50 - 59
D = 45-49
F = 0-44
D. Feedback
Courseware based:
1. In-text questions and answers (answers preceding references)
2. Self-assessment questions and answers (answers preceding references)
Tutor based:
1. Discussion Forum tutor input
2. Graded Continuous assessments
Student based:
9
1. Online programme assessment (administration, learning resource,
deployment, and assessment).
ix. LINKS TO OPEN EDUCATION RESOURCES

OSS Watch provides tips for selecting open source, or for procuring free or open
software.
SchoolForge and SourceForge are good places to find, create, and publish open
software. SourceForge, for one, has millions of downloads each day.
Open Source Education Foundation and Open Source Initiative, and other
organization like these, help disseminate knowledge.
Creative Commons has a number of open projects from Khan
Academy to Curriki where teachers and parents can find educational materials for
children or learn about Creative Commons licenses. Also, they recently launched
the School of Open that offers courses on the meaning, application, and impact of
"openness."
Numerous open or open educational resource databases and search engines
exist. Some examples include:
• OEDb: over 10,000 free courses from universities as well as reviews of colleges
and rankings of college degree programmes
• Open Tapestry: over 100,000 open licensed online learning resources for an
academic and general audience
• OER Commons: over 40,000 open educational resources from elementary school
through to higher education; many of the elementary, middle, and high school
resources are aligned to the Common Core State Standards
10
• Open Content: a blog, definition, and game of open source as well as a friendly
search engine for open educational resources from MIT, Stanford, and other
universities with subject and description listings
• Academic Earth: over 1,500 video lectures from MIT, Stanford, Berkeley,
Harvard, Princeton, and Yale
• JISC: Joint Information Systems Committee works on behalf of UK higher
education and is involved in many open resources and open projects including
digitising British newspapers from 1620-1900!
Other sources for open education resources

Universities
• The University of Cambridge's guide on Open Educational Resources for Teacher
Education (ORBIT)
• OpenLearn from Open University in the UK
Global
• Unesco's searchable open database is a portal to worldwide courses and research
initiatives
• African Virtual University (http://oer.avu.org/) has numerous modules on subjects
in English, French, and Portuguese
• https://code.google.com/p/course-builder/ is Google's open source software that is
designed to let anyone create online education courses
• Global Voices (http://globalvoicesonline.org/) is an international community of
bloggers who report on blogs and citizen media from around the world, including
on open source and open educational resources
11
Individuals (which include OERs)
• Librarian Chick: everything from books to quizzes and videos here, includes
directories on open source and open educational resources
• K-12 Tech Tools: OERs, from art to special education
• Web 2.0: Cool Tools for Schools: audio and video tools
• Web 2.0 Guru: animation and various collections of free open source software
• Livebinders: search, create, or organise digital information binders by age, grade,
or subject (why re-invent the wheel?)
12
x. ABU DLC ACADEMIC CALENDAR/PLANNER
PERIOD
Semester Semester 1 Semester 2 Semester 3
Activity JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC
Registration
Resumption
Late Registn.
Facilitation
Revision/
Consolidation
Semester
Examination
N.B: - All Sessions commence in January

- 1 Week break between Semesters and 6 Weeks vocation at end of session.
- Semester 3 is OPTIONAL (Fast-tracking, making up carry-overs & deferments)
13
xi. COURSE STRUCTURE AND OUTLINE
Course Structure
WEEK MODULE STUDY SESSION ACTIVITY
1. Read Courseware for the corresponding Study Session.
Study Session 1 2. View the Video(s) on this Study Session
Title: 3. Listen to the Audio on this Study Session
Week1 Introduction and Scope of 4. View any other Video/U-tube (address/site
Management Accounting https://bit.ly/30DYFmQ)
Pp. 18 5. View referred Animation (Address/Site
https://bit.ly/2wpRm4o)
Week 2 Title: 3. Listen to the Audio on this Study Session
Cost Accounting Systems 4. View any other Video/U-tube (address/site
STUDY Pp. 36 https://bit.ly/2zmiSS0)
MODULE 1 5. View referred Animation (Address/Site
Management https://bit.ly/2PcoHMA)
Accounting -
Introdution 1. Read Courseware for the corresponding Study Session.
Week 3 Title: 3. Listen to the Audio on this Study Session
General Principles of 4. View any other Video/U-tube (address/site
Costing https://bit.ly/2EY1re5)
https://bit.ly/2Nwxg28)

Week 4& 5 Title: 3. Listen to the Audio on this Study Session
Determination of Cost 4. View any other Video/U-tube (address/site
Behaviour https://bit.ly/2Ez0QyY)
14
Pp.75 5. View referred Animation (Address/Site
https://bit.ly/2MCcjmK)

Week 6 & 7 Title: 3. Listen to the Audio on this Study Session
Element of Cost and Cost 4. View any other Video/U-tube (address/site
Estimation Techniques https://bit.ly/340fqub)
https://bit.ly/2Md2jkD)
STUDY
MODULE 2 1. Read Courseware for the corresponding Study Session.
Cost Techniques, Study Session 2 2. View the Video(s) on this Study Session
Week 8 & 10 Budgeting, Title: 3. Listen to the Audio on this Study Session
Variance and Cost- Budgets and Budgetary 4. View any other Video/U-tube (address/site
Volume Profit Control https://bit.ly/2HWGLU5)
Analysis Pp. 110 5. View referred Animation (Address/Site
https://bit.ly/2MDf3jO)
Title: 3. Listen to the Audio on this Study Session
Week 11 & 12 Standard Costing 4. View any other Video/U-tube (address/site
Pp. 143 https://bit.ly/2U7oU2y)
5. View referred Animation (Address/Site
https://bit.ly/2Md2jkD)
Week 13 REVISION/TUTORIALS (On Campus or Online)& CONSOLIDATION WEEK
Week 14& 15 SEMESTER EXAMINATION
15
Course Outline
MODULE 1: Management Accounting-Introduction
Study Session 1: Introduction and Scope of Management Accounting
Study Session 2: Cost Accounting Systems
Study Session 3: General Principles of Costing
Study Session 4: Determination of Cost Behaviour
MODULE 2: Cost Techniques, Budgeting, Variance and Cost-Volume-

Profit Analysis
Study Session 1: Element of Cost and Cost Estimation Techniques
Study Session 2: Budgets and Budgetary Control
Study Session 3: Standard Costing
16
xii. STUDY MODULES
1.0 MODULE 1: Management Accounting-Introduction
Contents:
Study Session 1:Introduction and Scope of Management Accounting
Study Session 2: Cost Accounting Systems
Study Session 3: General Principles of Costing
Study Session 4: Determination of Cost Behaviour
17
STUDY SESSION 1
Introduction and Scope of Management Accounting
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1- Definition of Management Accounting
2.2-Objective of Management Accounting
2.3- Scope of Management Accounting
2.4- Techniques in Management Accounting
2.5- Role of Management Accountant
3.0Study Session Summary and Conclusion
4.0Self-Assessment Questions
5.0Additional Activities (Videos, Animations & Out of Class activities)
6.0References/Further Readings
Introduction:
This study session will introduce you to the basic aspect of management
accounting.The techniques used in management accounting and the role it plays
in various organizations.
1.0 Study Session Learning Outcomes

After studying this session, I expect you to be able to:
1.Explain the meaning and objectives of management accounting
2.Explain the scope of management accounting
3. Explain the techniques in management accounting
4. Explain the role of management accountant
18
2.0 Main Content
2.1 Definition of Management Accounting
There are many definitions of Management Accounting by various
organizations. However, that of the Chartered institute of Management
Accountants (CIMA) had
gained general acceptance:
"Management Accounting - An
integral part of management is
concerned with identifying,
presenting and interpreting
information used for: Fig 1.1.1 Definition of Management Accounting
(a) Formulating strategy

(b) Planning and controlling activities
(c) Decision-making
(d) Optimizing the use of resources
(e) Disclosure to shareholders and other external parties to the entity
(f) Disclosure to employees; and
(g) Safeguarding assets".
The above ensures that there is effective:
(a) Formulation of plans to meet objectives (strategic planning)
(b) Formulation of short-term operations plans (budgeting/profit planning,)
(c) Acquisition and use of finance (financial management),
(d) Recording of transactions (financial accounting and cost accounting),
(e) Communication of financial and operating information,
(f) Corrective action to bring plans and results into line (financial control), and
(g) Reviewing and reporting on systems and operations (internal audit,
management audit) (CIMA Terminology).
The Management Accounting Practices Committee (MAPC) of the National
19
Accounting Association (NAA) in the United States defined Management
Accounting as "the process of identification, measurement accumulation,
analysis, preparation, interpretation and communication of financial
information used by management to plan, evaluate, and control within an
organization and to ensure appropriate use of and accountability for its
resources':
Management accounting may also be defined as "the application of professional
skills in the preparation and presentation of accounting information in such a
way as to assist management in the formulation of policies and in the planning,
and control of the operations of the undertaking" (Sizer 1996).
Management accounting also comprises the preparation of financial reports for
non- management groups such as shareholders, creditors, regulatory agencies
and tax authorities.
In the above definitions, we could see that policy-making, planning and control
are generally descriptions of all the functions of management. It means that any
information which could be useful to managers and which was evaluated in
monetary terms could be a management accounting responsibility.
In order to carry out this task efficiently, the management accountant will:
(a) use data from the financial and cost accounting systems,
(b) conduct special investigations to gather required data,
(c) use accounting techniques and other appropriate techniques from statistics
and operational research,
(d) take account of the human element in all activities,
(e) be aware of the underlying economic logic.
All of these will be done in order to produce information, which is relevant for
the intended purpose. From all the above, it would appear as if all accounting
are management accounting!
Management accounting assists the management to plan, control and make
decisions. The elements involved in the decision making, planning and control
20
processes are as follows: (a) identifying the objectives that will guide the
business; (b) search for a range of possible courses of action that might enable
the objectives to be achieved; (c) gather data about the objectives; (d) select
appropriate alternatives courses of action that will enable the objectivesto be
achieved; (e) implement the decisions as part of the planning and budgeting
process; (f) compare actual and planned outcomes; and (g) respond to
divergences from plan by taking corrective action. This will enable actual
outcomes conform to planned outcomes or modify the plans, if the comparison
indicate that the plans are no longer attainable.
2.2 Objective of Management Accounting

The fundamental objective of management accounting is to assist the
management in carrying out its duties efficiently so as tomaximise profits or
minimise losses of management. It includes computation of plans and budgets
covering all aspects of the business. Example: production, selling, distribution,
research and finance. Management accounting systematic allocate
responsibilities for implementation of plans and budgets. It analysis of all
transactions, financial and physical, to enable effective comparison to be made
between the forecasts and actual performance.
The main objectives of management accounting are as follows:

(a) To formulate planning and policy
Planning involves forecasting on the basis of available information, setting
goals; framing polices determining the alternative courses of action and
deciding on the program of activities. It facilitates the preparation of statements
in the light of past results and gives estimation for the future.
(b) To interpret financialdocuments
Management accounting is to present financial information to the management.
Financial information must be presented in such away that it is easily
21
understood. It presents accounting information with the help of statistical
devices like charts, diagrams, graphs, etc.
(c) To assist in decision-making process
Management accounting makes decision-making process more scientific with
the help of various modern techniques. Information/figure relating to cost, price,
profit and savings for each of the available alternatives are collected and
analysed accordingly, which will provide a base for taking sound decisions.
(d) To help in control
Management accounting is a helpful for managerial control. Management
accounting tools e.g. standard costing and budgetary control are helpful in
controlling performance. Cost control is affected through the use of standard
costing and departmental control is made possible through the use of budgets.
Performance of each individual is controlled with the help of management
accounting.
(e) To provide report
Management accounting keeps the management fully informed about the latest
position of the concern through reporting. It helps management to take proper
and quick decisions. It informs the performance of various departments
regularly to the top management.
(f) To Facilitate Coordination of Operations
Management accounting provides tools for overall control and coordination of
business operations. Budgets are important means of coordination.
2.3 Scope of Management Accounting
Management accounting includes financial
accounting and extends to the operation of a
system of cost accountancy, budgetary control
and statistical data. While meeting the legal
and conventional requirements regarding the
presentation of financial statements, Fig 1.1.2 Scope of Management Accounting
22
(profit and loss account, balance sheet and cash flow statements) it stresses
emphasis upon the establishment and operation of internal controls.
The scope of management accounting, inter alia includes:

(a) Formation, installation and operation of accounting, cost accounting,
tax accounting and information systems. Management accountant has to
construct and reconstruct these systems to meet the changing needs of
management functions.
(b) The compilation and preservation of vital data for management
planning. The accounts and the document files are repository of vast
quantities of details about the past progress of the enterprise, without
which forecasts of the future is very hazardous for the enterprise. The
management accountant presents the past data in such a way as to
reflect the trends of events to the management. He is supposed to give
his assessment of anticipated changes in relevant areas. Such
information provides effective assistance in the planning process. At
times the management accountant may be called upon to associate with
and even supervise the actual planning process along with other
members of the management team.
(c) Providing means of communicating management plans to the various
levels of organization. This, on the one hand ensures the coordination of
various segments of the enterprise plans and on the other defines the
role of individual segments in the whole plan and assists the
management in directing their activities.
(d) Providing and installing an effective system of feed-back reports. This
would enable the management in its controlling function. By pin-
pointing the significant deviations between actual and expected
activities, and by adhering to the principles of selectivity and relevance,
such reports help in the installation and operation of the system of
23
‘management by exceptions. The management accountant is expected
to analyze the deviation by reasons and responsibility and to suggest
appropriate corrective measures in deserving cases.
(e) Analyzing and interpreting accounting and other data to make it
understandable and usable to the management. It is only through such
analysis and clarification that the management is enabled to place the
various data and figures in proper perspective in the performance of its
functions. Such analysis assists management in the location of
responsibilities and to effect necessary changes in the organizational set
up to achieve the objectives of the enterprise in a more efficient
manner.
(f) Assisting management in decision-making by (i) providing relevant
accounting, other data and (ii) analyzing the effect of alternative
proposals on the profits and position of the enterprise. Management
accountant helps the management in a proper understanding and
analysis of the problem in hand and presentation of information
obviously in financial terms.
(g) Providing methods and techniques for evaluating the performance of
the management in the light of the objectives of the enterprises, thus
assisting in the implementation of the principle of management by
objectives.
(h) Improving, modifying and sharpening the effectiveness of co-existing
techniques of analysis. The management accountant should always
think of increasing the practicability of existing techniques. He should
be on the lookout for the development of new techniques as well.
Thus, management accounting serves not only as a tool in the hands of

management, but also provides for a technique of evaluating the
performance of the management itself. It operates as a double-edged sword
24
assisting the management in proper performance of its functions of
planning, decision-making and control, and at the same time, enabling the
owners and other interested parties to evaluate and appraise the
management of the enterprise.
2.4 Management Accounting Techniques

(a) Planning
The management accountant's main contribution to planning lies in the
preparation of budgets.
(b) Control
Control in the management senserefers“the process by which managers
assure that resources are obtained and used effectively and efficiently in
the accomplishment of the organization’s goals”. As involves the
setting of goals and objectives, control may be viewed as its counterpart
in the management process.
(c) Cost Control

The book keeping aspect of management accounting is also a useful
tool for cost control in small businesses. It facilitates a permanent
record of costs incurred in conducting the business. It cannot be over-
emphasized that the adequacy and reliability of accounting information
contained in the records of the business concern are essential for
successful planning and control. For instance, the record-keeping
function may be viewed as necessity for effective pricing decisions. If
prices are set on the basis of full-cost plus mark-up, it is imperative that
one has accurate information on the actual cost of the product to be
sold. Similarly, even if market prices or market- adjusted prices are
adopted, it is still essential to have a record of actual costs in order to
determine the firm's profit margin. Clearly, the importance of accurate
25
data for marginal pricing decisions is evident.
(d) Standard Costing

The use of standard costs has the added advantage of encouraging a
greater degree of cost-consciousness within the organization. Standards
are set against which actual costs are compared, in order to determine
variances from the standard. Unfavourable variances can then be
investigated in order to determine possible explanation for the
deviation. In this manner, problem areas may be detected and dealt with
expediently.
However, the benefit to be derived from a standard costing system must
always be weighed against the cost of establishing it. Hence, one may
discover that while standard costs may be effectively and efficiently
employed within a small manufacturing firm, the relative costs of
setting-up and implementing such a system for a local bakery may be
prohibitive.
(e) Credit Control

This is another area of great importance in management accounting.
Naturally in the case of the small businesses which operate strictly on a
cash basis, this area would appear to be unimportant. However, it is
probably not uncommon to find that small retailer or manufacturer who
supplies several regular customers will provide credit facilities as a
normal part of trading activities.
In such instances, proper credit control is essential for ensuring that
cash proceeds are realized on a timely basis. Appropriate credit terms,
supplemented with accurate record keeping and skilful ratio analysis,
can enable the owner-manager to identify “bad-risk” customers and
appropriate action.
26
(f) Decision Making
Management accounting techniques are useful for effective decision
making. An understanding of the concepts of relevant costs, cost-
volume-profit relationships and the contribution approach to decision
making may facilitate more efficient and effective decision by enabling
the immediate determination of relevant factors that have to be
considered. Guidelines, such as the need to cover fixed costs or the
concept of a positive contribution margin, are very helpful in making
certain decisions such as whether to discontinue a product line, make-
or-buy decisions, etc.
(g) Financial Management

When the management accountant becomes a financial manager, he is
very much a line manager and not many financial management
techniques are in effect, only management techniques. His cash and
credit control are akin to production control, his internal audit, a form of
inspection; while his cashier, wage and invoice clerks make up his work
force.
(h) Book-Keeping and Management Accounting

Book-keeping has become so much associated with accounting
thinking. In the popular usage, many people use it to measure the worth
of "accounting" in a book such as this. The fact is that management
accounting is much more concerned with the economics of business
than with the recording of past monetary accounting.
(i) Uncertainty and Management Accounting

Management is concerned with the future and the only thing certain
about the future is that it is uncertain. Management accountants then
27
should incorporate this uncertainty into their works, preferably in the
form of probability assessment. Strangely enough, this has hardly been
done up to the present time, perhaps because accountants are used to
handling the exactly known figures that arose in the past. However, this
trend is changing and as the emphasis in management accounting
swings away from accounting, towards management, probability
concepts will certainly become another feature of management
accounting.
New Techniques in Management Accounting

Indeed, it should be observed that a whole group of techniques has
recently emerged in the world of management accounting. Many of
these emerged as 'a result of using a mathematical approach to the
measurement of economic performance and efficiency, and were
developed in the field of operations research. These techniques include
linear programming, and a range of probability-based techniques that
embrace topics such as decision theory and queuing. Increasingly,
statistics are also playing important part in the work of the management
accountants.
2.5 Role of Management Accountant
It is the duty of the management accountant to:
(a) To plan a profitable future for the business;
(b) To install and maintain an accounting system to monitor the
performance of the business;
(c) To record transactions by producing accounting statements; and
(d) Generate information to meet the following requirements;
i. To allocate costs between cost of goods sold and inventories for
internal and external profit reporting;
ii. To help managers make better decisions; and
28
iii. For planning, control and performance measurement.
In-text Question 1(The application of professional skills in the preparation and presentation
of accounting information in such a way as to assist the management to plan, control and
make decision is known as
Answer
Management Accounting
In-text Question 2
_____________is a tool used in Management accounting to provide overall control and
coordination of business operations.
Answer
Budget
3.0Conclusion/Summary
In this study session, we introduced you to the meaning and nature of
management accounting. We explained the objectives of management
accounting and techniques of management accountants. You have seen that
management accounting has to do with provision and interpretation of
information, which help management in planning, controlling, decision-making
and assessing performance.
1. Mention two main objectives and functions of management accounting.
2. Mention the techniques used by management accountants you know.
3. The application of professional skills in the preparation and presentation
of accounting information in such a way as to assist the management to
plan, control and make decision is known as_________________
Self-Assessment Answer
1. The primary objective of Management Accounting is to enable the
29
management to maximize profits or minimize losses. The fundamental
objective of management accounting provides information to the
managers for use in planning, controlling operations, and decision making.
2. In order to achieve its goals, managerial accounting relies on a variety of
different techniques, including the following:
a. Margin analysis.
b. Constraint analysis.
c. Capital budgeting.
d. Inventory valuation and product costing.
e. Trend analysis and forecasting.
3. Management Accounting
5.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube add https://bit.ly/30DYFmQ. Watch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2wpRm4o and critique it in the
discussion forum

Accounting Standards Committee (ASC) (1980) Current Cost Accounting:

SSAP 16. ASe.
Ackerman, R.W. (1970) Influence of integration and diversity on the investment
process, Administrative Science Quarterly, September, 341-2.
30
Adelman, M.A. (1961) The Anti-merger Act, 1950-60, American Economic
Review, May, 236-44.
Aharoni, Y. (1966) The Foreign Investment Decision Process. Division of
Research, Harvard Business School, Boston.
Alchian, A.A. and Allen W.R. (1967) University Economics, 2nd Edn.
Wadsworth.
Amey, L.R. (1969) Divisional performance measurement and interest on
capital, Journal of Business Finance, Spring, 2-7.
Amey, L.R. (1969) The Efficiency of Business Enterprises. George Allen and
Unwin, London.
Amey, L.R. and Egginton, D.A. (1973) Management Accounting: A Conceptual
Approach. Longman, Harlow, Essex.
Amey, L.R. (1979) Budget Planning and Control Systems. Pitman, London.
Amey, L.R. (1980) Interest on equity capita! as an ex post cost, Journal of
Business Finance and Accounting, Autumn, 347 -65.
Amigoni, F. (1978) Planning management control systems, Journal of Business
Finance and Accounting, 5, (3), 279-92.
Ansari, S.L. (1977) An integrated approach to control systems design,
Accounting, Organizations and Society, 2, 101-12.
Ansari, S.L. (1979) Towards an open systems approach to budgeting,
Accounting, Organizations and Societv, 4, 149-62.
Ansoff, H.1. and Weston, J.F. (1962) Merger objectives and organization
structure, Quarterly Review of Economics and Business, August, 112-26.
Anthony, R.A. (1988) The Management Control Function. Harvard Business
School Press, Boston.
Anthony, R.N. (1965) Planning and Control Systems: A framework for analysis.
Division of Research, Harvard Graduate School of Business, Boston.
Anthony, R.N. and Dearden, J. (1980) Management Control Systems, 4th Edn.
Irwin.
Argyris, E. (1952) The Impact of Budgets on People. The Controllership
Foundation, Ithaca, New York.
Argyris, E. (1964) Integrating the Individual and the Organization. Wiley,
Essex.
31
Arnold, J. (1973) Pricing and Output Decisions. Haymarket, London.
References 491
Arnold, J. and Hope, T. (1983) Accounting for Management Decisions.
Prentice-Hall, Hemel Hampstead, Herts.
Armstrong, M. and Murlis, H. (1988) Reward Management, Kogan Page,
London.
Arpan, J.S. (1972) International intra-corporate pricing: non-American systems
and views, Journal of International Business Studies, Spring, 56-72.
Arrow, K.J. (1951) Social Choice and Individual Values,
Yale V.P. Arrow, K.J. (1964) Control in large organizations, Management
Science, April, 1-36.
Arvidsson, G. (1973) Internal Transfer Negotiations -Eight Experiments. The
economic Research Institute, Stockholm.
Atkin, B. and Skinner, R. (1975) How British Industry Prices. Industrial Market
Research Ltd.
Bain, J.S. (1956) Barriers to New Competition. Harvard V.P., Cambridge,
Mass. Barnard, C. (1938) The Functions of the Executive. Harvard V.P.,
Cambridge, Mass.
Barrett, E.M. and Fraser, III, L.M. (1977) Conflicting roles in budgeting for
operations, Harvard Business Review, 55, 137-46.
Barwise, T.P., Marsh, P.R. and Wensley, J.R.C. (1987) Strategic Investment
Decisions, Research in Marketing, 9, 1-57.
Batty, J. (1970) Corporate Planning and Budgetary Control, Macdonald and
Evans, London.
Baumes, C. G. (1963) Allocating corporate expenses, Business Policy Study
No. 108, The Conference Board.
Baumler, J.V. (1971) Defined criteria of performance in organizational con-trol,
Administrative Science Quarterly, Sept., 340-9.
Baumol, W.J. and Fabian, T. (1964) Decomposition, pricing for decentralization
and external economies, Management Science, 2, 1-32.
Beer, S. (1959) Cybernetics and Management, Wiley, Essex.
Beer, S. (1972) Brain of the Finn, Allen Lane, Harmonds worth,
Middx. Beer, S. (1975) Plattonnt or Change, Wiley, Essex.
32
Benbassat, I. and Dexter, A.S. (1979) Value and events approaches to
accounting: an experimental evaluation, The ccounting Review, LIV, (4),
735-49.
Benke, Jr. R.L. and Edwards, J.D. (1980) Transfer Pricing: Techniques and
Uses. National Association of Accountants, New York.
Berg, N. (1969) What's different about conglomerate management?, Harvard
Business Review, November/December, 32-40.
Berg, N.A. (1965) Strategic planning in conglomerate companies, Harvard
Business Review, May/June, 79-92.
Berry, A.J. and Otley, D:T. (1975) The aggregation of estimates in hierarchical
organizations, Journal of Management Studies, May, 175-93.
Beynon, M. (1973) Working for Ford, Allen Lane, Harmondsworth, Essex. 492
References
Bierman, Jr. H. and Dyckman, T.R. (1976) Managerial Cost: Accounting, 2nd
Edn. Macmillan, New York.
Bierman, H. and Schmidt, S.c. (1975) The Capital Budgeting Decision, 4th Edn.
Macmillan, Basingstoke, Hants.
Birnberg, J.G., Turpolec, L. and Young, S.M. (1983) The organizational con-
text of accounting, Accounting Organizations and Society, 8, 111-30.
Boland, R.J., Jr. (1979) Control, causality and information system requirements,
Accounting, Organizations and Society, 4, (4), 259-72.
Boland, R.J. and Pondy, L.R. (1983) Accounting in organizations: a union of
natural and rational perspectives, Accounting Organizations and Society,
8,223-34.
Bonini, C. P., laedicke, R.K. and Wagner, H.M. (eds.) (1964) Managel1le/lt
Contrals: New directions in basic research, McGraw-Hill, Maidenhead,
Berks.
Boulding, K.E. (1956) General systems theory -the skeleton of science,
Management Science, 2, 97-208.
Bower, J.L. (1970) Managing the Resource Allocation Pracess, Division of
Bower, J.L. (1972) Managing the Resource Allocation Pracess. Irwin.
Brealey, R. and Myers, S. (1981) Principles of Corpora te Finance, McGraw-
Hill, Maidenhead, Berks.
33
British Institute of Management (BIM) (1971) Transfer pricing: A measure of
management performance in multi-divisional companies, Management
Survey Report, No. 8.
British Institute of Management (BIM) (1974) Profit-centre accounting: the
absorption of central overhead costs, Management Report/ No. 21.
Brownell, P. (1981) Participation in budgeting, locus of control and
organizational effectiveness. Accounting Review, 56, 844-60.
Bruns, W.J. and Waterhouse, J.H. (1975) Budgetary control and organizational
structure, Journal of Accounting Research, 13, 177 -203.
Burgoyne, J.G. (1975) Stress, motivation and learning, in Managerial Stress
(eds D. Gowler and K. Legge) Gower, Aldershot, Hants.
Burns, T. and Stalker, G.M. (1961) The Management ofh1l1ovation, Tavistock
Institute, London.
Burrell, G. and Morgan, G. (1979) Sociological Paradigms and Organizational
Analysis, Heinemann, London.
Cable, J.R. (1988) Organizational form and economic performance, in
Thompson, S. and Wright, M. (Eds.), Internal Organisation, Efficiency
and Profit, chapter 2. Philip Allan.
Campbell, J .P. et al. (I 970) Managerial Behaviour, Performance and
Effectiveness, McGraw-Hill, Maidenhead,
Berks. Caplan, E.H. (I966) Behavioural assumptions of management
accounting, The Accounting Review, 42, 496-509.
Caplan, E.H. (I 971) Management Accounting and Behavioural Science,
Addison-Wesley, Wokingham, Berks.
Carrall, S. and Tosi, H. (I973) Management/ by Objectives: Applica/ions wzd
Research, Macmillan, New York. References 493
Carter, E.E. (1971) The behavioural theory of the firm and top level corporate
decisions. Administrative Science Quarterly, 16, 413-8.
Caves, R.E. (1980) Industrial organization, corpora te strategy and structure.
Journal of Economic Literature, March, 64-92.
Centre for Business Research (1972) Transfer Pricing: Management Control
Project, No. 3. Manchester Business School, Manchester.
Chandler, A.D. (1962) Strategy and Structure. MIT Press, Mass.
Chandler, A.D. (1977) The Visible Hand: the Managerial Revolution in
American Business, Belknap, Cambridge, MA.
34
Chen, R.H., Harrison, G.L. and Watson, D.J.H. (1981) The Organizational
Conext of Management Accounting, Pitman, London.
Child, J. (1969) The Business Enterprise in Modem Industrial Society, Collier
Chua, W.F., Lowe, T. and Puxty, T. (1989) Critical Perspectives in
Management Control. Macmillan.
35
STUDY SESSION 2
Cost Accounting Systems
Introduction
2.0 Main Content
2.1- What is Cost Accounting System?
2.2- Comparison between Cost Accounting and Financial Accounting
2.3- Distinction between Cost Accounting and Management Accounting
2.4- Parts of a Cost Accounting System
2.5- Necessity for Cost Accounting System
Introduction:
In the last study session, we discussed the meaning, nature, objectives and
techniques of management accounting. Now, we introduce the concept of cost
accounting, which is necessary for effective and efficient management of
organizational resources. Cost accounting is a specialised field of accounting,
which involves classification, accumulation, assignment and control of costs.
Cost Accounting equally establishes budgets, standard costs and actual costs. It
is a set of procedures used in refining raw data into usable information for
management decision-making, for ascertainment of cost of products and
services and its profitability. In addition, cost accounting is a Management
Information System (MIS), which analyses the past, present and future data to
provide the basis for managerial decision-making. Itis a system of foresight and
not a post-mortem examination; it turns losses into profits, speeds up activities
36
and eliminates wastes.

1.What does cost accounting system mean?
3. Distinguish between cost accounting and management accounting;
4. Discuss the different parts of a cost accounting system; and
5. Highlight the necessity for cost accounting system.
2.0 Main Content

2.1 What is Cost Accounting System?
A cost accounting system (also called product costing system or costing system)
is a framework used by firms to estimate the cost of their products for
profitability analysis, inventory valuation and cost control. Estimating the
accurate cost of products is critical for profitable operations. Note that cost
accounting is a process of collecting, recording, classifying, analyzing,
summarizing, allocating and evaluating various alternative courses of action and
control of costs. Its goal is to advise management on the most appropriate
course of action based on cost
efficiency and capability. Cost
accounting provides the
detailed cost information that
management needs in order to
control current Fig 1.2.1 What is Cost Accounting System?
operations and plan for the future.

Cost accounting information is commonly used in financial accounting
information, but its primary function is for use by managers to facilitate making
decisions.
37
Types of Cost Accounting include the following:
a. Standard cost accounting
b. Activity-based accounting
c. Resource consumption accounting
d. Throughput accounting
e. Life cycle costing
f. Environment accounting
g. Target costing
Inventory valuation methods and cost accumulation methods are frequently

referred to as cost accounting systems in the accounting literature. However,
these methods are only parts of a system or subsystems. Cost accounting
methods such as activity-based costing, job order costing, standard costing,
process costing, throughput costing, direct costing, absorption costing, back-
flush costing and historical costing must be combined with other cost
accounting methods to form a cost accounting system.
2.2 Comparison between Cost Accounting and Financial Accounting

Here, we shall highlight the comparison between cost accounting and financial
accounting.
1. Financial accounting aims at finding out results of accounting year in the
form of Profit or Loss Account and Statement of Financial Position. Cost
accounting aims at computing cost of production/service in a scientific
manner and facilitates cost control and cost reduction.
2. Financialaccountingreportstheresultsandpositionofbusinesstogovernment,
creditors, investors, and external parties.
3. Cost accounting is an integral reporting system for an organization’s own
management for decision-making.
38
4. In financial accounting, cost classification is based on type of
transactions, for example, salaries, repairs, insurance, stores and others.
In cost accounting, classification is basically on the basis of functions,
activities, products, processes and on internal planning and control and
information needs of the organization.
5. Financial accounting aims at presenting “true and fair” view of
transactions, Profit or Loss for a period and Statement of financial
position (Balance Sheet) on a given date. It aims at computing “true and
fair” view of the cost of production/services offered by the firm.
2.3Distinction between Cost Accounting and Management Accounting

1. Scope: Scope of cost accounting is limited to providing cost information
for managerial uses. Scope of management accounting is broader than
that of cost accounting as it provides all types of information. Thus,
management accounting is an extension of cost accounting.
2. Emphasis: The main emphasis of cost accounting is on cost
ascertainment and cost control to ensure maximum profit. On the other
hand, the main emphasis of management accounting is on planning,
controlling and decision-making to provide a basis for ascertaining profit
of the entity.
3. Techniques Employed: Various techniques used by cost accounting
include standard costing and variance analysis, marginal costing and cost-
volume-profit analysis, budgetary control, uniform costing and inter-firm
comparison. Management accounting also uses all these techniques of
cost accounting, but in addition, it also uses techniques like ratio analysis,
funds flow statement, statistical analysis, operations research and certain
techniques from various branches of knowledge in mathematics and
economics.
39
4. Evolution: Evolution of cost accounting is mainly due to the limitations
of financial accounting. On the other hand, evolution of management
accounting is due to the limitations of cost accounting. In fact,
management accounting is an extension of the managerial aspects of cost
accounting.
5. Data Base: Cost accounting is based on data derived from financial
accounting, but management accounting is based on data derived from
cost accounting, financial accounting and other sources.
In summary, cost accounting is that branch of accounting which aims at
generating information to control operations with a view to maximising profits
and efficiency of the company, and that is why it is termed ‘control accounting’.
Conversely, management accounting is the type of accounting which assists
management in planning and decision-making, and thus known as ‘decision
accounting’.
2.4 Parts of a Cost Accounting System

A cost accounting system requires five parts that include:
a. An input measurement basis;
b. An inventory valuation method;
c. A cost accumulation method;
d. A cost flow assumption; and
e. A capability of recording inventory cost flows at certain intervals.
We shall look at them one after the other.
2.4.1 Input Measurement Bases
The bases of a cost accounting system begin with
the type of costs that flow into and through the
inventory accounts. There are three alternatives:
pure historical costing, normal historical costing
and standard costing. Fig 1.2.2 Input Measurement Bases
40
I. Pure Historical Costing: In pure historical cost system, only historical
costs flow through the inventory accounts. Historical costs refer to the
costs that have been recorded. These are costs for direct material, direct
labour and factory overhead.
II. Normal Historical Costing: Normal historical costing uses historical
costs for direct material and direct labour, but overhead is charged, or
applied to the inventory using a predetermined overhead rate per activity
measure. Typical activity measures include direct labour hours, or direct
labour costs. The amount of factory overhead charged to the inventory is
determined by multiplying the predetermined rate by the actual quantity
of the activity measure. The difference between the applied overhead
costs and the actual overhead coasts represents the overhead variance.
III. Standard Costing: In a standard cost system, all manufacturing costs or
applied, or charged to the inventory using standard or predetermined
prices, and quantities. The differences between the applied costs and the
actual costs are charged to variance accounts.
2.4.2 Inventory Valuation Methods

The inventory valuation methods encompass the following:
I. Throughput method
II. Direct or variable method
III. Full absorption method
IV. Activity-based method
I. Throughput Method: The throughput method was developed to
complement a concept referred to as the Theory of Constraints (TOC). In
this method, only direct material costs are charged to the inventory. All
other costs are expensed during the period.
II. Direct or Variable Method: In the direct (or variable method), only the
variable manufacturing costs are capitalized, or charged to the inventory.
41
Fixed manufacturing costs flow into expense in the period incurred. This
method provides some advantages and some disadvantages for internal
reporting.
III. Full Absorption Method: Full absorption costing is a traditional method
where all manufacturing costs are capitalized in the inventory, that is,
charged to the inventory and become assets. This means that these costs do
not become expenses until the inventory is sold.
IV. Activity-Based Method: Activity-based costing is a relatively new type of
procedure that can be used as an inventory valuation method. The
technique was developed to provide more accurate product costs. This
improved accuracy is accomplished by tracing costs to products through
activities.
2.4.3 Cost Accumulation Method
Cost accumulation refers to the manner in which costs are collected and
identified with specific customers, jobs, batches, orders, departments and
processes. The centre of attention for cost accumulation can be individual
customers, the products produced within individual segments during a period, or
the products produced by the
entire plant during a period. The
company’s cost accumulation
method(s) are influenced by the
type of production operation.
The four accumulation methods
are job order, process, back
flush, and hybrid (or mixed) method. Fig 1.2.3 Cost Accumulation Method
I. Job Order: in job order costing, jobs, orders, contracts, or lots accumulate
costs. The idea is that the work is done to the customers’ specifications.
II. Process: departments, operations, or processes in process costing
accumulate Costs. The work performed on each unit is standardized or
42
uniform where a continuous mass production or assembly operation is
involved.
III. Back Flush: Back flush is a simplified cost accumulation method that is
sometimes used by companies that adapt just-in-time (JIT) production
systems. However, JIT is not just a technique, or a collection of techniques.
JIT has a very broad philosophy that emphasizes simplification and
continuous reduction of waste in all areas of business activities.
IV. Hybrid (or Mixed) Methods: Hybrid or mixed systems are used in
situations where more than one cost accumulation method is required. For
example, in some cases, process costing is used for direct materials and job
order costing is used for conversion costs (that is, direct labour and factory
overhead). In other cases, job order costing might be used for direct
materials, and process costing for conversion costs. These are sometimes
referred to as operational costing methods.
2.4.4 Cost Flow Assumptions

A cost flow assumption refers to how costs flow through the inventory
accounts, not the flow of work or products on a production line. This distinction
is important because the flow of costs is not always the same as the flow of
work. The various types of cost flow assumptions include:
I. Scientific identification (e.g., by job);
II. First in, first out (FIFO);
III. Last in, first out (LIFO); and
IV. Weighted average.
Costs flow through the inventory accounts by the job in a job order cost system
which represents an example of specific identifications. The requirements of the
various jobs determines the times of the cost flows. Simple jobs tend to move
through the system faster than more complex jobs.
43
2.4.5 Recording Interval Capability
Inventory records can be maintained on a perpetual or periodic basis.
Consequently, the perpetual inventory method provides a company with the
capability of maintaining continuous records of the quantities of inventory and
the costs flowing through the inventory accounts. The periodic method, on the
other hand, requires counting the quantity of inventory before inventory records
can be updated.
2.5 Necessity for Cost Accounting System

A company having a proper cost accounting system will help management in
the following areas as highlighted:
1. The analysis of profitability of individual products, services or jobs.
2. The analysis of the different departments or operations.
3. The analysis of cost behaviour of various items of expenditure in the
organization. This will help in future cost estimation with reasonable
accuracies.
4. It locates differences between actual results and expected results. Such
differences can also be traced to the individual cost centres with the
efficient cost system.
5. It will assist in setting the process so as to cover costs and generate an
acceptable level of profit.
6. The effects on profits of increase or decrease in output or shutdown of a
product line or department can be analyzed with the adoption of efficient
cost accounting system.
7. The costing records serve to analyze the final accounts of a company in
such a way as to give a detailed explanation of the sources of profit or
loss.
44
8. Cost accounting data generally serves as a base to which the tools and
techniques of management accounting can be applied to make it more
purposeful and management oriented.
9. The cost ascertainment, allocation, distribution, can be effectively made
under efficient costing system.
10.Cost records serve as the base for Management Information System
(MIS).
11.The cost system generates regular performance statements which
management needs for control purposes.
12.Cost accounting system is not only applicable to manufacturing
organizations or functions but also extended to service organizations and
functions.
13.Cost comparisons between different departments, machines and
alternative processes help management to maintain maximum efficiency
as possible with the adoption of efficient cost system.
14.The cost information will help in making reliable estimates and will also
help in submission of tenders.
15.Costing checks recklessness and avoids occurrence of mistakes.
16.It provides invaluable aid to management in performing its functions of
planning, evaluation of performance, control and decision-making.
17.It helps in determination of break-in-points (BEP), that is, the level of
activity where the firm reaches ‘no profit, no loss’ situation.
18.The costing system will aim at increasing operational efficiency and cost
reduction, which helps the consumers in getting reduced prices.
45
In-text Question 1 (Cost accounting system is a framework used by firms to estimate the
…………..for profitability analysis, inventory valuation and cost control.)
Answer
1. Cost of their products
In-text Question 2
Cost accounting is that branch of accounting which aims at generating information to control
operations with a view to maximizing profits and efficiency of the company, and that is why it
is termed ……..
Answer
2. Control accounting
Conclusion
Manufacturing firms use cost accounting to record production activities using a
perpetual inventory system. In other words, it is an accounting system designed
for manufacturing firms for tracking the flow of inventory continually through
the various stages of production.
A typical cost accounting system works by tracking raw materials as they go
through the production stages and slowly turn into finished goods in real time.
When the raw materials are put into production, the system records immediately
the use of materials by crediting the raw materials account and debiting the
goods in process account, in as much most products go through many stages of
production before they can be called finished goods.
Summary
In this session, we have:
1. Considered cost accounting system as a framework used by firms to
estimate the cost of their products for profitability analysis, inventory
valuation and cost control;
46
3. Distinguished between Cost Accounting and Management
Accounting;
4. Discussed the different parts of a Cost Accounting System; and
5. Highlighted the necessity for cost accounting system
1. State a reason why companies need cost accounting system
2. What are the cost flow assumptions?
3. What are the three costing system in accounting?
1. Cost accounting is helpful because it can identify where a company is

spending its money, how much it earns, and where money is being lost.
Cost accounting aims to report, analyze, and lead to the improvement of
internal cost controls and efficiency.
2. An assumption that determines the order in which costs should flow out of
a balance sheet account (e.g. Inventory, Investments, Treasury Stock) when
the item is sold. For an illustration of the cost flow assumption, see
Explanation of Inventory and Cost of Goods Sold.
3. Cost accounting considers all input costs associated with production,
including both variable and fixed costs. Types of cost accounting include
standard costing, activity-based costing, lean accounting, and marginal
costing
a. Visit U-tube add https://bit.ly/2zmiSS0. Watch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2PcoHMA and critique it in the
discussion forum
47
SSAP 16. ASe.
Wadsworth.
Unwin, London.
48
Irwin.
Essex.
London.
References 491
Research Ltd.
Evans, London.
49
735-49.
References
Blocher, Stout, Juras&Cokins (2016). Cost management: A strategic emphasis,
7th edition. London: McGraw-Hill.
8,223-34.
Berks.
50
Institute, London.
51
Curley, T.J. (2009). Essential elements of cost accounting system. Chicago:
Haskin & Sells.
Horngren, Datar& Foster (2003). Cost accounting: A managerial emphasis,
11th edition. London: Prentice Hall.
http://www.google.com
http://www.patriotsoftware.com
Maher, Lanen & Rahan (2005). Fundamentals of cost accounting, 1st edition.
London: McGraw-Hill.
Cambridge, Mass.
www.investopedia.com
52
STUDY SESSION 3
General Principles of Costing
Introduction
2.0 Main Content
2.1- Meaning of Costing
2.2- Importance and basic principles of Costing
2.3- Difference between Costing and Cost Accounting
2.4- Essentials of a good Costing system
2.5- Classification of Costing
2.6- Costing Methods and Techniques
2.7- Technique of Costing
Introduction:
The last session introduces you to cost accounting. In this study session, we
extend the discussion by introducing the general principles of costing. In
accounting terms, costing refer to a system of calculating the amount of money
needed to produce goods or operate a business. Generally, costs include
variables such as cost of labor, cost of materials, cost of distribution and selling,
taxes and administrative costs. It is important that managers figure out the
manufacturing cost of a product before it goes into the production stage.
Establishing product costs helps in determining the selling price and Break-
Even-Point (BEP) of goods. This system of determining costs also helps
companies set the profit margin percentage on goods sold to the market.
53
1.Define costing;
2.Discuss the principles of costing; and
3.Differentiate between Costing and Cost Accounting
2.0 Main Content

2.1Meaning of Costing
Costing may be defined as ‘the technique and process of ascertaining costs’.
According to Wheldon, ‘Costing refers to classifying, recording, allocation and
appropriation of expenses for the determination of cost of products or services
and for the presentation of suitably arranged data for the purpose of control and
guidance of management. It includes the ascertainment of cost forever order,
job, contract, process, service units as may be appropriate. It deals with the cost
of production, selling and distribution. From the above definition, it will be
understood that costing is the procedure of ascertaining the costs incurred in the
course of producing a product or service. As mentioned above, for any business
organization, ascertaining of costs is
must and for this purpose, a
scientific procedure should be
followed. ‘Costing’ is precisely this
procedure, which helps them to find
out the costs of products or services.
Fig 1.3.1 Meaning of Costing
2.2 Importance and Basic Principles of Costing

As compared to financial accounting, the focus of cost accounting is different.
In the modern days of cutthroatcompetition, many business organizations pay
attention towards their cost of production. Computation of cost on scientific
54
basis and thereafter cost control and cost reduction is of paramount importance.
Hence, it has become essential to study the basic principles and concepts of cost
accounting. These principles and concepts are discussed in the subsequent part
of this unit.
Cost: Cost refers to the expenditure (actual or notional) incurred on or
attributable to a given thing. It can also be described as the resources that have
been sacrificed or must be sacrificed to attain a particular objective. In other
words, cost is the amount of resources used for something, which must be
measured in monetary terms. For example – Cost of preparing one cup of tea is
the amount incurred on the elements like material, labour and other expenses;
similarly, cost of offering any services like banking is the amount of
expenditure for offering that service. Thus, cost of production or cost of service
can be calculated by ascertaining the resources used for the production or
services.
Cost Accounting: Cost Accounting primarily deals with collection, analysis of
relevant cost data for interpretation and presentation for solving various
problems of management. Cost accounting takes into cognizance, the cost of
products, service or an operation. It is defined as, ‘the establishment of budgets,
standard costs and actual costs of operations, processes, activities or products
and the analysis of variances, profitability or the social use of funds’. Cost
accounting is a combination of art and science, it is a science as it has well
defined rules and regulations, it is an art as application of any science requires
art and it is a practice as it has to be applied on continuous basis and is not a
onetime exercise.
Cost Accountancy: Cost Accountancy is a broader term, which means ‘the
application of costing and cost accounting principles, methods and techniques to
the science, art and practice of cost control and the ascertainment of profitability
as well as presentation of information for the purpose of managerial decision
making. Based on the above definition, the following points will emerge: Cost
55
accounting is application of the costing and cost accounting principles. This
application is with specific purpose and that is for the purpose of cost control.
Second, for ascertainment of profitability and for presentation of information to
facilitate decision-making.
2.3 Difference between Costing and Cost Accounting

Main differences between costing and cost accounting are given as under:
Basis of Distinction Costing Cost Accounting
1. Nature It is a technique and process of It is regarded as a specialized
ascertaining costs branch of accounting.
2. Scope The costing techniques include It involves classification,
principles and rules which accumulation, assignment and
govern the procedure of control of costs.
ascertaining the cost of
products/services
3. Process The process of costing consists It involves establishment of
of routines of ascertaining costs budgets, standard costs or actual
by historical or conventional costs of operations, classification,
costing, standard costing or recording and appropriate
marginal costing. allocation of expenditure.
2.4 Essentials of a Good Costing System

For availing of maximum benefits, a good costing system should possess the
following characteristics.
a. Costing system adopted in any organization should be suitable to its
nature and size of the business and its information needs.
b. A costing system should be such that it is economical and the benefits
derived should be more than the cost of operating the cost system.
c. Costing system should be simple to operate and understand. Unnecessary
complications should be avoided.
d. Costing system should ensure proper system of accounting for material,
labour and overheads and there should be proper classification made at
the time of recording of the transaction itself.
56
e. Before designing a costing system, need and objectives of the system
should be identified.
f. The costing system should ensure that the final aim of ascertaining of cost
as accurately possible should be achieved.
2.5 Classification of Costing

An important step in computation and analysis of cost is the classification of
costs into different types. Classification helps in better control of the costs and
helps considerably in decision-making. Classification of costs can be made
according to the following basis.
a. Classification according to elements: Costs can be classified according
to the elements. There are three elements of costing, viz-a-viz: material,
labour and expenses. Total cost of production/services can be divided into
the three elements to find out the contribution of each element in the total
costs.
b. Classification according to nature: As per this classification, costs can
be classified into Direct and Indirect. Direct costs are the costs which are
identifiable with the product unit or cost centre while indirect costs are
not identifiable with the product unit or cost centre and hence they are to
be allocated, apportioned and then absorbed in the production units. All
elements of costs like material, labour and expenses can be classified into
direct and indirect.
They are mentioned below
I. Direct and Indirect Material Costs: Direct material is the material,
which is identifiable with the product. For example, in a cup of tea,
quantity of milk consumed can be identified, quantity of glass in a
glass bottle can be identified and so these will be direct materials for
these products. Indirect material cannot be identified with the product,
for example, lubricants, fuel, oil, cotton wastes etc. cannot be
57
identified with a given unit of product and hence these are the
examples of indirect materials.
II. Direct and Indirect Labour Costs: Direct labour can be identified
with a given unit of product, for example, when wages are paid
according to the piece rate, wages per unit can be identified. Similarly,
wages paid to workers who are directly engaged in the production can
also be identified and hence they are direct wages. On the other hand,
wages paid to workers like cleaners, gardeners, maintenance workers
etc. are indirect wages as they cannot be identified with the given unit
of production.
III. Direct and Indirect Expenses: Direct expenses refers to expenses
that are specifically incurred and charged for specific or particular job,
process, service, cost centre or cost unit. These expenses are also
referred to as chargeable expenses. Examples of these expenses are
cost of drawing, design and layout, royalties payable on use of patents,
copyrights etc. consultation fees paid to architects, surveyors etc.
Indirect expenses on the other hand cannot be traced to specific
product, job, process, service or cost centre or cost unit. Several
examples of indirect expenses can be given like insurance, electricity,
rent, salaries, advertising etc. It should be noted that the total of direct
expenses is known as ‘Prime Cost’ while the total of all indirect
expenses is known as ‘Overheads’.
c. Classification according to behaviour: Costs can also be classified
according to their behaviour. This classification is explained below.
I. Fixed Costs: Out of the total costs, some costs remain fixed
irrespective of changes in the production level. These costs are
referred to as fixed costs. The feature of these costs is that the total
costs remain unchanged while per unit fixed cost varies with the
58
level of production. Examples of these costs are salaries, insurance,
rent, etc.
II. Variable Costs: These costs are variable in nature, i.e. they change
according to the level of production. Their variability is in the same
proportion to the production. For example, if the production units
are 2,000 and the variable cost is #5 per unit, the total variable cost
will be #10,000 (i.e. 2,000 x #5), if the production units are
increased to 5,000 units, the total variable costs will be #25,000,
i.e. the increase is exactly in the same proportion of the production.
Another feature of the variable cost is that per unit variable cost
remains unchanged while the total variable costs will vary. In the
example given above, per unit variable cost remains #2 per unit
while total variable costs change. Examples of variable costs are
direct materials, direct labour etc.
III. Semi-variable Costs: Certain costs are partly fixed and partly
variable. In other words, they contain the features of both types of
costs. These costs are neither totally fixed nor totally variable.
Maintenance costs, supervisory costs etc. are examples of semi-
variable costs. These costs are also referred to as ‘stepped costs.
d. Classification according to functions: Costs can also be classified
according to the functions/activities. This classification can be done as
mentioned below.
I. Production Costs: All costs incurred for production of goods are
known as production costs.
II. Administrative Costs: Costs incurred for administration are known
as administrative costs. Examples of these costs are office salaries,
printing and stationery, office telephone, office rent, office insurance
etc.
59
III. Selling and Distribution Costs: All costs incurred for procuring an
order are referred to as selling costs while all costs incurred for
execution of order are distribution costs. Market research expenses,
advertising, sales staff salary, sales promotion expenses are examples
of selling costs. Transportation expenses incurred on sales, warehouse
rent etc. are examples of distribution costs.
IV. Research and Development Costs: In recent times, research and
development has become one of the important functions of a business
organization. Expenditure incurred for this function can be classified
as Research and Development Costs.
e. Classification according to time: Costs can also be classified according
to time. This classification is explained below.
I. Historical Costs: These are the costs, which are incurred in the past,
i.e. in the past year, past month or even in the last week or yesterday.
The historical costs are ascertained after the period is over. In other
words, it becomes a post- mortem analysis of what has happened in
the past. Though historical costs have limited importance, still they
can be used for estimating the trends of the future, i.e. they can be
effectively used for predicting the future costs.
II. Predetermined Cost: These costs relating to the product are
computed in advance of production, on the basis of a specification of
all the factors affecting cost and cost data. Pre-determined costs may
be either standard or estimated. Standard Cost is a predetermined
calculation of how much cost should be under specific working
conditions. It is based on technical studies regarding material, labour
and expenses. The main purpose of standard cost is to have some kind
of benchmark for comparing the actual performance with the
standards. On the other hand, estimated costs are predetermined costs
based on past performance and adjusted to the anticipated changes. It
60
can be used in any business situation or decision making which does
not require accurate cost.
f. Classification of costs for Management decision making: One of the
important functions of cost accounting is to present information to
management for the purpose of decision-making. For decision-making,
certain types of costs are relevant. Classification of costs based on the
criteria of decision making can be done in the following manner:
I. Marginal Cost: Marginal cost is the change in the aggregate costs due
to change in the volume of output by one unit. For example, suppose a
manufacturing company produces 10,000 units and the aggregate costs
are #25,000, if 10,001 units are produced the aggregate costs may be
#25,020 which means that the marginal cost is #20. Marginal cost is
also termed as variable cost and hence per unit marginal cost is always
same, i.e. per unit marginal cost is always fixed. Marginal cost can be
effectively used for decision making in various areas.
II. Differential Costs: Differential costs are also known as incremental
cost. This cost is the difference in total cost that will arise from the
selection of one alternative to the other. In other words, it is an added
cost of a change in the level of activity. This type of analysis is useful
for taking various decisions like change in the level of activity, adding
or dropping a product, change in product mix, make or buy decisions,
accepting an export offer and so on.
III. Opportunity Costs: It is the value of benefit sacrificed in favour of
an alternative course of action. It is the maximum amount that could
be obtained at any given point in time if a resource was sold or put to
the most valuable alternative use that would be practicable.
Opportunity cost of goods or services is measured in terms of revenue,
which could have been earned by employing that goods or services in
some other alternative uses.
61
IV. Relevant Cost: The relevant cost is a cost, which is relevant in
various decisions of management. Decision-making involves
consideration of several alternative courses of action. In this process,
relevant costs are to be taken into consideration. In other words, costs,
which are going to be affected, matter the most and these costs are
referred to as relevant costs. Relevant cost is a future cost which is
different for different alternatives. It can also be defined as any cost
which is affected by the decision on hand. Thus in decision making
relevant costs plays a vital role.
V. Replacement Cost: This cost is the cost at which existing items of
material or fixed assets can be replaced. Thus, this is the cost of
replacing existing assets at present or at a future date.
VI. Abnormal Costs: It is an unusual or a typical cost whose occurrence
is usually not regular and is unexpected. This cost arises due to some
abnormal situation of production. Abnormal cost arises due to idle
time or may be due to some unexpected heavy breakdown of
machinery. They are not taken into consideration while computing
cost of production or for decision-making.
VII. Controllable and Uncontrollable Costs: In cost accounting, cost
control and cost reduction are extremely important. In fact, in the
competitive environment, cost control and reduction are the key
words. Hence, it is essential to identify the controllable and
uncontrollable costs. Controllable costs are those, which can be
controlled or influenced by a conscious management action. For
example, costs like telephone, printing stationery etc. can be
controlled while costs like salaries etc. cannot be controlled at least in
the short run. Generally, direct costs are controllable while
uncontrollable costs are beyond the control of an individual in a given
period of time.
62
VIII. Shutdown Cost: These costs are incurred if the operations were to
close down and they will disappear if the operations are continued.
Examples of these costs are costs of sheltering the plant and
machinery and construction of sheds for storing exposed property.
Computation of shutdown costs is extremely important for taking a
decision of continuing or shutting down operations.
IX. Capacity Cost: These costs are normally fixed in nature and are
incurred by a company for providing production, administration and
selling and distribution capabilities in order to perform various
functions. Capacity costs include the costs of plant, machinery and
building for production, warehouses and vehicles for distribution and
key personnel for administration. These costs are in the nature of long-
term costs and are incurred as a result of planning decisions.
X. Urgent Costs: These costs are those which must be incurred in order
to continue operations of the firm. For example, cost of material.
2.6 Costing Methods and Techniques

It is necessary to understand the difference between the costing methods and
techniques. Costing methods are those which help a firm to compute the cost of
production or services offered by it. On the other hand, costing techniques are
those which help a firm to
present the data in a particular
manner so as to facilitate the
decision making as well as cost
control and cost reduction.
Costing methods and
techniques are explained below. Fig 1.3.2 Costing Methods and Techniques
Methods of Costing: The following are the methods of costing.
63
I. Job Costing: Firms use this costing method, which work, based on job
work. There are some manufacturing units which undertake job work and
are called job order units. The main feature of these organizations is that
they produce according to the requirements and specifications of the
consumers. Each job may be different from the other one. Production is
only on specific order and there is no pre-demand production. Because of
this situation, it is necessary to compute the cost of each job and hence
job costing system may be applicable. In this system, each job is treated
separately and a job cost sheet is prepared to find out the cost of the job.
The job cost sheet helps to compute the cost of the job in phases and
finally arrive at the total cost of production.
II. Batch Costing: This method of costing is used in those firms where
production is made on continuous basis. Each unit coming out is uniform
in all respects and production is made prior to the demand, i.e. in
anticipation of demand. One batch of production consists of the units
produced from the time machinery is set to the time when it will be shut
down for maintenance. For example, if production commences on 1st
January 2007 and the machine is shut down for maintenance on 1st April
2007, the number of units produced in that period will be the size of one
batch. The number of units produced will divide the total cost incurred
during that period and unit cost will be worked out. Firms producing
consumer goods like television, air-conditioners, washing machines etc.
use batch costing.
III. Process Costing: Some products like sugar, chemicals etc. involve
continuous production process and hence process costing method is used
to work out the cost of production. The meaning of continuous process is
that the input introduced in the process I travels through continuous
process before finished product is produced. The output of process I
becomes input of process II and the output of process II becomes input of
64
the process III. If there is no additional process, the output of process III
becomes the finished product. In process costing, cost per process is
worked out and per unit cost is worked out by dividing the total cost by
the number of units. Manufacturing companies that engage in the
production of products such as sugar, edible oil, chemicals are examples
of continuous production process and they use process costing.
IV. Operating Costing: This type of costing method is used in service sector
to work out the cost of services offered to the consumers. For example,
operating costing method is used in hospitals, power generating units,
transportation sector etc. A cost sheet is prepared to compute the total
cost and it is divided by cost units for working out the per unit cost.
V. Contract Costing: This method of costing is used in construction
industry to work out the cost of contract undertaken. For example, cost of
constructing a bridge, commercial complex, residential complex,
highways etc. is worked out by use of this method of costing. Contract
costing is actually similar to job costing, the only difference being that in
contract costing, one construction job may take several months or even
years before completion while in job costing, each job may be of a short
duration. In contract costing, as each contract may take a long period for
completion, the question of computing of profit is to be solved with the
help of a well-defined and accepted method.
2.7 Technique of Costing

As mentioned above, costing methods are for computation of the total cost of
production/services offered by a firm. On the other hand, costing technique
helps to present the data in a particular format so that decision making becomes
easy. Costing techniques also help for controlling and reducing the costs. The
following are the techniques of costing.
I. Marginal Costing:
65
II. This technique is based on the assumption that the total cost of production
can be divided into fixed and variable. Fixed costs remain same
irrespective of the changes in the volume of production while the variable
costs vary with the level of production, i.e. they will increase if the
production increases and decrease if the production decreases. Variable
cost per unit always remains the same. In this technique, only variable
costs are taken into account while calculating production cost. Fixed costs
are not absorbed in the production units. They are written-off to the
Costing Profit and Loss Account. The reason behind this is that the fixed
costs are period costs and hence should not be absorbed in the production.
Secondly, they are variable on per unit basis and hence there is no
equitable basis for charging them to the products. This technique is
effectively used for decision making in the areas like make or buy
decisions, optimizing of product mix, key factor analysis, fixation of
selling price, accepting or rejecting an export offer, and several other
areas.
III. Standard Costing: Standard costs are predetermined costs relating to
material, labour and overheads. Though they are predetermined, they are
worked out on scientific basis by conducting technical analysis. They are
computed for all elements of costs such as material, labour and
overheads. The main objective of standard costing is to have a benchmark
against the actual performance. This means that the actual costs are
compared with the standards. The difference is called ‘variance’. If actual
costs are more than the standard, the variance is ‘adverse’ while if actual
costs are less than the standard, the variance is ‘favorable’. The adverse
variances are analysed and reasons for the same are found out. Favorable
variances may also be analysed to find out the reasons behind the same.
Thus, standard costing is an important technique for cost control and
reduction.
66
IV. Budgets and Budgetary Control: Budget is defined as, ‘a quantitative
and/or a monetary statement prepared prior to a defined period of time for
the policies during that period for the purpose of achieving a given
objective.’ If we analyze this definition, it will be clear that a budget is a
statement expressed in either monetary form or quantitative form or both.
For example, a production budget can be prepared in quantitative form
showing the target production; it can also be prepared in monetary terms
showing the expected cost of production. Some budgets can be prepared
only in monetary terms, e.g. cash budget showing the estimated receipts
and payments in a particular period can be prepared in monetary terms
only. Another feature of budget is that it is always prepared prior to a
defined period of time which means that budget is always prepared for
future and a defined future.
For example, a budget may be prepared for next 12 months or 6 months or even
for 1 month, but the time period must be certain and not vague. One of the
important aspects of budgeting is that it lays down the objective to be achieved
during the defined period of time and for achieving the objectives, whatever
policies are to be pursued are reflected in the budget. Budgetary control
involves preparation of budgets and continuous comparison of actual with
budgeted so that necessary corrective measures can be taken. For example,
when a production budget is prepared, the production targets are laid down in
the same for a particular period. After the period is over, the actual production is
compared with the budgeted and any deviation found will result to taking
necessary corrective measures. Budget and Budgetary Control is one of the
important techniques of costing used for cost control and also for performance
evaluation. The success of the technique depends upon several factors such as
support from top management, involvement of employees and coordination
within the organization.
67
In-text Question 1 (Cost Accounting primarily deals with collection, analysis of…………. for
interpretation and presentation for solving various problems of management)
Answer
1. Relevant cost data
In-text Question 2
Classification helps in better ………..and also helps considerably in ……..
Answer
2. Control of the costs and Decision-making
The session explained the principles of costing. By now you will see that
costingmethods or systems and reports, unlike financial accounting is expected
to keep to accounting rules and standards. Consequently, there is wide variety in
the costing systems of the different companies and sometimes even in different
parts of the same company or organization.
Summary
In this session, you learnt the meaning of costing, importance and basic
principles of costing, difference between costing and cost accounting, essentials
of a good costing system, classification of costing and costing methods and
techniques.
1. State the difference between cost accounting and cost accountancy
2. Distinguish between costing and cost accounting in terms of scope
3. What are the method and techniques of costing?
4. What are the classification of costing by nature?
68
1. Cost is a sacrificed resource to obtain something, costing is a process of

determining costs, cost accounting is a technique to assist management
in establishing various budgets, standards, etc and cost accountancy is
the practice of costing and cost accounting.
2. Costing is essentially the process of asserting the prices and costs of
products. The main difference between costing and cost accounting is
that costing is the process of recognizing the cost of a product or
service whereas cost accounting is a mechanism of analysing
expenditure for a business.
3. So basically there are three broad categories as per this classification,
namely Labor Cost, Materials Cost and Expenses. These heads make it
easier to classify the costs in a cost sheet. They help ascertain the total
cost and determine the cost of the work-in-progress.
a. Visit U-tube add https://bit.ly/2EY1re5. Watch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2Nwxg28 and critique it in the
discussion forum
SSAP 16. ASe.
69
Wadsworth.
Unwin, London.
Irwin.
Essex.
London.
70
References 491
Research Ltd.
Evans, London.
735-49.
71
References
Blocher, Stout, Juras&Cokins (2016). Cost management: A strategic emphasis,
7th edition. London: McGraw-Hill.
8,223-34.
Berks.
72
Institute, London.
73
Horngren, Datar& Foster (2003). Cost accounting: A managerial emphasis,
11th edition. London: Prentice Hall.
Maher, Lanen&Rahan (2005). Fundamentals of cost accounting, 1st edition.
London: McGraw-Hill.
Cambridge, Mass.
MocciaroD.a., Picone P.M. & Mina A. (2012). Bringing strategy back into
financial systems of performance measurement: Integrating EVA and PBC.
Business System Review, 1(1): 85-102.
74
STUDY SESSION 4
Determination of Cost Behaviour
Introduction
2.0 Main Content
2.1- Cost Behaviour Analysis
2.2- Concept of Cost Behaviour
2.3- Level of Activity
2.4- Reasons for Studying Cost behavior
2.5- Concept of Relevant Range
2.6- Basic Principles of Cost Behaviour
2.7- Types of Cost Behaviour
Introduction:
This is study session 4 in module 1 of the course, and it covers a period of one
hour. During the course of this lecture, we shall look at the determination of
cost behaviour, which will cover definition of cost, concept of cost behaviour
level of activity, reasons for studying cost behaviour, concept of relevant range,
basic principle of cost behaviour and the types of cost behaviour.

1. Describe the concept of cost behaviour
2. Identify the reasons for studying cost behaviour
75
3. Describe the concept of relevant range
4. Identify the types of cost behaviour and describe a level of activity
2.0 Main Content

2.1 Cost Behaviour Analysis
Good managers must not only be able to understand the conceptual
underpinnings of cost behaviour, but they must also be able to apply those
concepts to real world data that do not always behave in the expected manner.
Cost data are impacted by complex interactions. Consider for instance the costs
of operating a vehicle. Conceptually, fuel usage is a variable cost that depends
on miles. Nevertheless, the efficiency of fuel usage can fluctuate based on
highway miles versus city miles. Beyond that tires wear faster at higher speeds,
brakes suffer more from city
driving, and on and on. Vehicle
insurance is seen as a fixed cost,
but portions are required
(liability coverage) and some
portions are not (collusion
coverage). Further, if you have a
wreck or get a ticket, Fig 1.4.1 Cost Behaviour Analysis
your cost of coverage can rise. Now, the point is that assessing the actual
character of cost behaviour can be more daunting than you might first suspect.
Nevertheless, management must understand cost behaviour, and this sometimes
takes a bit of forensic accounting work.
2.2 Concept of Cost Behaviour

Cost behaviour is the study of the ways in which cost react or do not react to
changes in the level of activity of an organization. Knowledge of cost behaviour
76
is the basis of all cost-volume-profit (C. V.P) analyses. When we know the
behavior of costs, then financial planning becomes simpler.
Students Assessment Exercise
Identify some activities in your work place and state the reaction of cost to
slight changes in the level of operation of this activity e.g. rent, cost item,
number of patients treated activity. If the number of patients treated fluctuates
in a period, would the rent paid on the patients' ward fluctuate accordingly?
2.3 Level of Activity

The level of activity is the amount of work done or the number of events that
has occurred. The type of activity, which influences cost, varies according to the
nature of work done in the organization or department, and the nature of the
items of cost whose behaviour is being analysed depending on the circumstance.
The level of activity may refer to the volume of production in a period, the
number of items sold, the
value of items sold, the
number of invoices issued,
the number of invoices
received the number and
units of electricity consumed, etc. Fig 1.4.2 Level of Activity

Identify what should be the level of activity in the following:
Barbers shop
Restaurant
Mechanic workshop
Lawyers Office
Airline ticketing office
Secondary school
77
Hospital
Railway station
Petrol station
2.4Reasons for Studying Cost Behaviour

There are three principal reasons for studying how costs respond to changes in
the level of activities:
1. For the prediction of cost to facilitate budgetary and corporate planning
2. For performance evaluation when a system of flexible budgetary control is in
operation
3. For the estimation of costs for various decision-making processes e.g. pricing
decisions make or buy decision, optimal product mix, shutdowndecisions etc.

Can you identify other reasons why studying cost behaviour is important?
2.5 Concept of Relevant Range:
This is the range in which all assumptions about the level of activities and cost
will remain valid. Within this range, most items of cost will settle into a basic
pattern or behaviour and cost can be classified into either fixed or variable cost.
Have you ever heard of installed capacity before now? If you have, then think
about a car that has the capacity to carry just five persons or a machine that can
work continuously for just twelve hours., if you want the car to carry more than
five persons, what do you think should be done?
2.6 Basic Principles of Cost Behaviour
The basic principle of cost behaviour is that, as the level of activity rises, costs
will usually rise. It will cost more to produce 2,000 units of an output than it
will cost to produce 1,000 units of the same product. This principle is common
78
sense. The problem for the accountant, however, is to determine for each item
of cost, as the level of activity increases:
a. The ways in which the costs behave to changes in activity level; (i.e. are
costs
b. Fixed, varied, stepped or mixed
c. By how much (i.e. what is the amount of fixed cost per period and what is
the variable cost per unit of activity?)
For the purpose of this course, the level of activity for measuring cost will
generally be taken to be the volume of production.
State the accountants' interest in the study of the principle of cost behaviour.
2.7Types of Cost Behaviour:
2.7.1 Fixed Costs:
Fixed costs are those costs, which do not vary with output or production level.
They vary with the passage of time hence they are time or period cost. They
remain constant in given short-term period and within relevant range of output.
Fixed costs are costs of holding assets and other factors of production in
readiness for production. A company when defining fixed cost should consider
the following factors:
i. Controllability: All fixed costs are controllable in the long-run. Some
fixed costs are subject to management control in the short-run. Numerous
fixed costs are determined annually by discretional management policies.
ii. Relevant range: Fixed cost must be related to a range of activity. A fixed
cost would only remain constant only when level of operation is within
relevant range.
iii. Period cost: Because they accrue with the passage of time, the amount of
the fixed costs must be related at specified period of time. Fixed costs
should be related to a financial year and expressed as a constant amount
per month.
79
iv. Fixed in total but variable per units: A fixed cost is constant in total
amount per period, but variable in terms of unit cost.
A sketch graph of a
fixed cost would look
like:
Fig 1.4.3 fixed cost
Examples of fixed costs are:

i. The salary per month of a supervisor
ii. The rent of a single factory building per month or per annum
2.7.2 Step Cost

This is a variant of the fixed cost. Many items of cost are fixed in nature but
within certain levels of activity i.e. a relevant range. For example, the annual
depreciation cost of a machine may be fixed if production remains below 1,000
units for machine that has a maximum capacity of 1,000 units. However, if
production is to exceed 1,000 units, even by one unit, then a second machine
would be required, and the annual depreciation cost on two machines would go
up in a stepped manner.
80
A sketch graph of a step cost would look like:
Fig 1.4.4 Step Cost
Other examples of step cost area:

i. Rent — where accommodation requirements increase, as output levels get
higher.
ii. Basic wages — basic pay of employees is nowadays usually fixed, but as
output rises, more employees are required.
2.7.3 Variable Costs

A variable cost is one, which tends to
vary with the volume of output. The
variable cost per unit is the same
amount for each unit produced, which
means that the amount of resources
used and the price of these resources
are constant for each additional unit
produced. The graph below shows the
total cost of a variable cost Fig 1.4.5 Variable Costs
81
2.7.4 Total Cost
This is the totality of costs: i.e. the
addition of total variable cost plus
total fixed cost, and its function is
given as:
Y= a+bx
Where:
Y= total cost
a = fixed cost
b = variable cost per unit = activity
level
It is shown graphically as:
Fig 1.4.6 Total Cost
2.7.5 Mixed Costs

Mixed costs are semi-variable or semi-fixed cost. They are cost items, which are
partly fixed, and partly variable i.e. costs which contain a standing basic charge
plus a variable charge per unit of consumption e.g. telephone bills, electricity
bill, etc.
Identify and sketch the graph of any other cost behaviors?
In-text Question 1 (Cost behaviour is the study of the ………. changes in the level of activity
of an organization)
Answer
1. Ways in which cost react or do not react to
In-text Question 2
The level of activity is ………. or the number of events that has occurred
Answer
2. The amount of work done
82
You have learnt in this study session, cost behaviouris a veritable tool in
understanding the effect of cost in response to changes in the volume of activity
and to understanding the resulting impact of cost on profitability.
Summary
In this session, we examined the following:
1. Definition of cost;
2. Description of the concept of cost behavior;
3. Identifying the reasons for studying cost behaviour;
4. Describe the concept of relevant range;
5. Describe a level of activity’ and
6. Identifying the types of cost behaviour.
4.0 Self-Assessment Questions
1. Explain the term cost behaviour and

2. What are the factors that contribute to management changes?
1. The change in total costs in response to the change in some activity. For
example, some of the costs of owning and operating a vehicle will
increase in total with an increase in miles driven. These are referred to as
variable costs and include gasoline and tires.
2. Some of these factors include management functions, structural
transformations, competition, socio-economic factors, laws and
technology.
• Changes in Executive Management.
• Transformations in Organizational Structure.
83
• Competition from Other Businesses.
• Social and Cultural Factors.
• Laws and Regulations.
a. Visit U-tube add https://bit.ly/2Ez0QyY. Watch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2MCcjmK and critique it in the
discussion forum

SSAP 16. ASe.
Wadsworth.
Unwin, London.
84
Irwin.
Essex.
London.
References 491
Asaolu T. (2006) Management accounting – MBA805. Lagos: National Open
85
Research Ltd.
Evans, London.
735-49.
Berkshire House
References
86
8,223-34.
Berks.
Institute, London.
87
Drury C. (2006). Management and cost accounting. London: Thomas Learning
Hermanson, E. &Ivancevich, (2011). Accounting principles: Managerial
Accounting. USA: Creative Common License (CC-BY-NC-SA).
Cambridge, Mass.
88
University of Nigeria Press
Walther, L. M. &Skousem, C.J. (2009). Managerial and cost accounting.
United Kingdom: Christopher J. Skousen& Venture Publishing.
89
MODULE 2
Cost Techniques, Budgeting, Variance and Cost-Volume-Profit
Analysis
Contents:
Study Session 1: Element of Cost and Cost Estimation Techniques
Study Session 2: Budgets and Budgetary Control
Study Session 3: Standard Costing
Study Session 4: Decision Making under Certainty
STUDY SESSION 1
Element of Cost and Cost Estimation Techniques
Introduction
2.0 Main Content
2.1- Definition of Cost
2.2- The Nature and Types of Cost Classification
2.3- Fixed Costs
2.4- Variable Costs
2.5- Semi-Variable Costs
2.6- Total Cost
2.7- Need for Cost Estimation
2.8- Cost Estimation Techniques
4.0Self-Assessment Questions and Answers
90
Introduction:
The previous session discussed the concept of cost and cost behaviour. In this
study session,we will look at elements of cost and the need for cost estimation
and the various methods of cost estimation.

1. Establish the need for cost estimation
2. Describe the various cost estimation techniques
3. State the various elements of cost
2.0 Main Content

2.1 Definition of Cost
The scope of the term 'cost' is extremely broad and general. It is, therefore, not
easy to define or explain this term without leaving any doubt concerning its
meaning. Cost accountants, Economists and others develop this concept of cost
according to their needs. This concept should therefore be studied in relation to
its purpose and use. Some of the definitions of cost are given hereunder:
A cost is the value of economic resources used as a result of producing a
product or service" (WM. Harper). Cost is "the amount of expenditure (actual or
notional) incurred on or
attributable to a given thing"
(ICMA). Cost is "an exchange
price, a foregoing, a sacrifice
made to secure benefit" (A
tentative set of Broad Accounting
Principles for Business Enterprises). Fig 2.1.1 Definition of Cost
91
Attempt your own definition of cost, and give an instance where it can be so
used.
2.2 The Nature and Types of Cost Classification

Costs can be classified in a number of different ways:
a.By their behavior. Do they increase as an organization gets busier or do
they tend to stay the same? This is important when it comes to budgeting
as it is essential to be able to predict how costs are likely to change.
b. By their location. Where in the organization are they incurred? For
example, costs incurred in the factory are relevant to working out the cost
of production. However, costs incurred in storing and delivering finished
goods are not relevant to production.
c.By their function. For example, costs related to research and development,
marketing, training, manufacturing.
d. By the person responsible for their control. All costs need to be
controlled and there should be a clearly identified person who is
responsible for the control of each cost. For example, the managers of a
branch might be held responsible for the costs incurred there.
e.By their type. For example, material, labour, other production expenses,
such as the cost of running machinery.
f. By their traceability. Are they direct or indirect? Direct costs are closely
related and traceable to each item produced. Indirect costs are not so easy
to relate and trace to each unit of production.
92
2.3 Fixed Costs: constant over a wide range of activity
An example would be the
factory rent. It does not
matter how many units are
made; the rent is fixed.
On a graph, fixed costs
would appear as:
Fig 2.1.2 Fixed Costs
Note that the cost per unit will decrease as the activity level decreases. For
example, say that the rent was N10, 000 and 1,000 units were made. Then you
could argue that it takes N10 rent to make a unit (N10, 000/1,000). If, however,
10,000 units were made, the rental cost per unit would be only N1 (N10,
000/10,000). Higher production volumes are making better use of the fixed
resource.
2.4 Variable Cost

A variable cost is a cost that changes in relation to variations in an activity. In a
business, the "activity" is frequently production volume, with sales volume
being another likely triggering event. Thus, the materials used as the
components in a product are considered variable costs, because they vary
directly with the number of units of product manufactured. It is useful to
understand the proportion of variable costs in a business, since a high
proportion means that a business can continue to function at a relatively low
revenue level. Conversely, a high proportion of fixed costs require that a
business maintain a high revenue level in order to stay in business.
Here are a number of examples of variable costs, all in a production setting:
a.Direct materials. The most purely variable cost of all, these are the raw
materials that go into a product.
b. Piece rate labour. This is the amount paid to workers for every unit
93
completed (note: direct labour is frequently not a variable cost, since a
minimum number of people are needed to staff the production area; this
makes it a fixed cost).
c.Production supplies. Things like machinery oil are consumed based on
the amount of machinery usage, so these costs vary with production
volume.
d. Billable staff wages. If a company bills out the time of its employees,
and those employees are only paid if they work billable hours, then this is
a variable cost. However, if they are paid salaries (where they are paid no
matter how many hours they work), then this is a fixed cost.
e.Commissions. Salespersons are paid a commission only if they sell
products or services, so this is clearly a variable cost.
f. Credit card fees. Fees are only charged to a business if it accepts credit
card purchases from customers. Only the credit card fees that are a
percentage of sales (i.e., not the monthly fixed fee) should be considered
variable.
g. Freight out. A business incurs a shipping cost only when it sells and
ships out a product. Thus,
freight out can be
considered a variable cost.
Variable Cost can be
graphically represented
thus:
Fig 2.1.3 Freight out
94
2.5 Semi-Variable Costs: have a fixed element and a variable element.
An example would be a
telephone bill. Usually
there is a fixed cost for the
line rental then each minute of
telephone calls causes an
additional cost. On a graph,
fixed costs would appear as:
Fig 2.1.4 Semi-variable costs
Stepped fixed costs: constant over a range of activity then a sudden increase,
then constant again. An example would be the salary of supervisors. One
supervisor for up to six workers, two for up to 12 workers, etc.
2.6 Total Cost:

Definition: Total cost is an economic measure that sums all expenses paid to
produce a product, purchase an investment, or acquire a piece of equipment
including not only the initial cash outlay but also the opportunity cost of their
choices.
What is the meaning of total cost?
The meaning of this term varies slightly depending on the content. For example,
when using it to define production costs, it measures the total fixed, variable,
and overhead expenses associated with producing a good. This is a fundamental
concept for business owners and executives because it allows them to track the
combined costs of their operations. It allows the individuals to make pricing and
revenue decisions based on whether total costs are increasing or decreasing.
Furthermore, interested individuals can dig into the total cost numbers to
separate them into fixed costs and variable costs, and adjust operations
95
accordingly to lower overall costs of production. Management also uses this
idea when contemplating capital expenditures.
Total Cost can be graphically represented thus:
An example
Consider the following hypothetical example of a boat building firm. The total
fixed costs (TFC), include premises, machinery and equipment needed to
construct boats, and are £100,000, irrespective of how many boats are produced.
Total variable costs (TVC) will increase as output increases.
Plotting this gives us Total Cost, Total Variable Cost, and Total Fixed Cost.
Fig 2.1.5 Total Cost, Total Variable Cost, and Total Fixed Cost
2.7 Need for Cost Estimation

You would recall from unit 3 of the course that we said there exists a mixed cost
or semi variable costs or semi-fixed cost. These are said to be costs thatare
partly fixed and partly variable i.e. a cost which is a composite of a standing
basic charge plus a variable change per unit of consumption. If all costs are to
96
be classified as either a fixed cost or a variable cost, then a mixed cost has to be
so separated into its variable and fixed costs components.
Imagine the telephone bill received from NITEL: Even in situations where the
telephone is still out of service, you still receive a bill for the month. You would
wonder where the charges came from. Well, it is the standing charge for having
a line, which would carry a fixed charge. In addition to this, you pay a constant
variable charge per usage. The two changes would have been added together
and sent to you as a bulk, which you may have to separate for planning purposes
and budgeting.
2.8Cost Estimation Techniques

2.8.1 Scatter graph method
Under this method, the coordinates of the cost and the associated level of
activity in respect of historical records for a defined period of time are plotted
on a graph. A line of best fit is then drawn usually across the coordinates
crossing the cost axis. This technique fits a tread line to a series of historical
data points and then projects the line into the figure for medium to long-term
forecasts. Developing a linear trend line by a precise statistical method would
require the use of the Least Square Method. This method results in a straight
line that minimizes the sum of the squares of the vertical differences from the
line of best fit.
A least square line is described in terms of its y-intercept (i.e. the height at
which it intercepts -the y-axis); and its slope (i.e. the steepness or angle of the
line). If the y- intercept and its slope can be computed, then the line can be
expressed with the following equation.
y = a +b(x)
where:
y = computed value of the variable to be predicated (This is referred to as the
dependent variable)
97
a =y — axis intercept
= slope of the regression line or the rate of change in y i.e. dx=values of a and b
for nay regression line can be determined. The slope b is determined by:
where:
slope of the regression line
A = summation sign
values of the independent variable
values of the dependent variable
the average of the values of the x's
the average of the values of the y's
the number of observations
The y-axis intercept i.e. 'a' is computed as:
a = y — bx

Year Units of power generator sold
1992 74
1993 79
1994 80
1995 90
1996 105
1997 142
1998 122
You are required to draw a straight line trend (i.e. a line of best fit) to fit these
data and forecast the 1999 demand.
Suggested Solution:
Let the periods be represented by simpler numbers i e
1992 by 1
1993 by 2
98
1994 by 3
1995 by 4
1996 by 5
1997 by 6
1998 by 7
99
2.8.2 The High and Low Method
Under this method, we extract a previous data relating to a defined periodfrom
the historical records. In particular, two previous data corresponding to the
highest level of activity during the same period and the lowest level of activity
during the same period. Together with their associated corresponding costs form
the basis for the derivation of the cost function. The differences between the
total cost of the high output and the total cost of the low output will be the
variable cost of the different output levels.

The costs of operating the maintenance department of ABC Manufacturing
Nigeria Limited for the last four months have been given a§ follows:
You are required to compute the total cost for month five (5) when output is
expected to be 7,500 standard hours.
100
Suggested Solution
Steps (a) Identify the highest activity and its corresponding total cost.
(b) Identify the lowest activity and its corresponding total cost
(c) Determine the difference in activities and the total costs
(d) The change in total cost due to the corresponding change in activities would
be
The variable cost per standard hour
(e) Make necessary substitutions in either the high or low volume cost.
Standard Total Hours Cost
High output 8,000 115,000
Low output 6,000 97,000
2,000 18,000
101
In-text Question 1 (Total cost is an economic measure that sums ……..to produce a product,
purchase an investment, or acquire a piece of equipment including not only the initial cash
outlay but also the opportunity cost of their choices.)
Answer
1. All expenses paid
In-text Question 2
In terms of production costs, total cost measures………. associated with producing a good.
Answer
2. The total fixed, variable, and overhead expenses
102
From our discussion so far, you will agree with me that cost estimation
technique is a useful tool to management in separating mixed cost into its
variable cost and fixed cost demands, which are very helpful for profits
planning and budgets and budgetary control.
Summary
In this study session, we established the need for cost estimation described some
of the various cost estimation techniques.
1. IJK Nigeria Limited have computed its total factor overhead cost at the high
and low levels
Assume that the factory overhead costs above consist of indirect materials, rent
and maintenance expenses. The company has analysed these costs at the 50,000
direct labour hours of activity, and has determined that at that level, these costs
exist in the following proportions:
For planning purposes, the company wants to break the maintenance cost down
into its variable and fixed elements.
You are required to determine:
(a) How much of the N176, 250 factory overhead costs at the high level of
103
activity above consists of maintenance cost
(b) The cost formula for maintenance by means of the high-low method of
cost analysis.
Discussion, solution and marking scheme
1. The analysis of cost given in the body of cost is for the low level of
activity at 50,000 hours.
2. Indirect materials are said to be a variable cost and records N50, 000.
This means that it should be possible to establish the variable cost per
hour, and this would be N50,000 =N1 per hour.
3. Rent is fixed at the low level at N60,000. Since rent is a fixed cost, it is
expected that it would remain constant even at a higher level of activity
4. The total cost recorded at the high level is N176,250. Out of this,
N75,000 is accounted for by indirect materials, which in variable
N60,000 is accounted for by rent which is fixed, therefore, the balance of
N41,250 will be for maintenance.
5. Maintenance cost at the high level of operation (75,000 hours) is N41,250
and at the low level of operation (5,000 hours) is N32,000. Maintenance
cost is said to be a semi-variable cost.
6. Therefore, we can adopt the high low method to separate it into its
variable cost and fixed cost element and proceed to state the cost formula
for maintenance.
a. Visit U-tube add https://bit.ly/340fqub. Watch the video &summarise in 1

paragraph
b. View the animation on add/sitehttps://bit.ly/2Md2jkD and critique it in the

discussion forum
104
SSAP 16. ASe.
Wadsworth.
Unwin, London.
105
Irwin.
Essex.
London.
References 491
Asaolu T. (2006) Management accounting – MBA805. Lagos: National Open
University of Nigeria Press.
Research Ltd.
Evans, London.
106
735-49.
References
8,223-34.
Berks.
107
Institute, London.
108
Drury C. (2006) Management and cost accounting. London: Thomas Learning
Berkshire House.
Hermanson, E. &Ivancevich (2011). Accounting principles: Managerial
accounting. USA: Creative Common License (CC-BY-NC-SA).
Cambridge, Mass.
Walther. L. M. & Skousem, C.J. (2009). Managerial and cost accounting.
United Kingdom: Christopher J. Skousen& Venture Publishing.
109
STUDY SESSION 2
Budgets and Budgetary Control
Introduction
2.0 Main Content
2.1- Definition of budget
2.2- Types of budget
2.3- Budget preparation and approval procedures
2.4- Preparation of budget
2.5- Techniques used in budgeting
2.6- Forecast
2.7- Budgetary control
Introduction:
You are about to learn an important aspect of management accounting known as
budgets and budgetary control. Every organization has plans; some plans are
more formal than others and some organization’s plan more formally than
others are but all makes same attempt to consider the risk and opportunities,
which lie ahead, and how to confront them. In most businesses, this process is
formalised at least in short-term, with considerable effort put into preparing
annual budgets and monitoring performance against those budgets.
Traditionally, budgets have been employed as devices to limit expenditure, but
a much more useful and constructive view is to treat the budgeting process as a
means for obtaining the most effective and profitable use of the company’s
110
resources via planning and control.

1. Define budget
2. Identify various types of budget
3. Outline budget preparation procedures
4. Prepare the cash budget
5. Learn the techniques used in budgeting
6. Distinguish between forecast and budgets and
7. Learn about the objectives and organization of budgetary control.
2.0 Main Content

2.1Definition of Budget
A budget refers to "a quantitative statement for a defined time, which may
include planned revenues, expenses, assets, liabilities and cash flow. This
involves comprehensive and coordinated plans, expressed in the financial terms,
for the operation and resources of an enterprise for some specific period in the
future. A budget provides a focus for the organization aids the coordination of
activities and facilitates control. Planning is achieved by means of a fixed
master budget whereas control is
generally exercised through the
comparison of actual costs with a
flexible budget" (CIMA). Budget
is a financial and/or quantitative
plan of operations for a
forthcoming accounting period.
Fig 2.2.1 Definition of Budget
111
Many functional budgets (a budget of income or expenditure for individual
functions of a business such as the sales budget, production budget, direct
labour budgets, etc.) are incorporated into a master budget."Budgets are
designed to carry out various functions such as planning, evaluating
performance, coordinating activities, implementing plans, communicating,
motivating and authorizing actions. The last-named role seems to predominate
in government budgeting and not-for-profit budgeting, where budget
appropriations serve as an authorisation and ceiling for management actions"
(Horngren (2004).
The purpose of a budget is to:
i. Communicate ideas and plans to everyone affected by them. A formal
system is necessary to ensure that each person is aware of what he or she
is supposed to be doing. Communication might be one-way, that is, with
managers giving order to subordinates; or there might be a two-way
dialogue and exchange of ideas, this is between managers and
subordinates.
ii. Coordinate the activities of different departments or sub-units of the
organization. This concept of coordination implies, for example, that the
purchasing department should base its budget on production
requirements, and that the production budget [that is, direct labour budget
and machinery utilization budgets etc.) should in turn be based on sales
expectations. Although straightforward in concept, coordination, in
practice, is remarkably difficult to achieve, and this often leads to 'sub-
optimality' and conflict among departmental managers.
iii. Establish a system of control by having a plan against which actual
results can be progressively compared and variance analysed for prompt
attention and action.
112
iv. Motivate employees to improve their performances. The level of
attainment usually incorporated in the budget is a realistic figure for the
budget period.
Thornton, (1978) suggests that two levels of attainment could be fixed:

i. a 'minimum expectations' budget, and
ii. a 'desired standards' budget.
A budget is a means to an end, and not an end in itself. It is a short-term plan

that depicts the focus of a long-term objective of the organization. It covers area
of responsibility of one specified person, so that his performance can be
measured at the end of a budget period. It follows that the budget should be
prepared in conjunction with those who are to be responsible for achieving the
budgeted performance. In this way, a head of department translates his goal in
the budgets. This approach offers motivation to the managers. This technique,
with its stress on personality, differs from standard costing, for the latter is
concerned with standards for products or services.
2.2 Types of Budget

a. Functional budgets
Functional budgets are prepared by the departmental heads. The order of
importance in preparation of the budget depends on the budget limiting
factor of the organization. Where sales are considered critical to the
success of the objectives, the sales budget is prepared first. Similarly,
where source of raw material is restricted and in limited supply, the raw
material budget is prepared first.
The order of presentation suggests that the sales are critical and so sales budget
is prepared before other budgets:
113
i. Sales budget. This will incorporate decisions about selling prices and
expected sales volume for each item of product (or service) for all
segments of the company's product or service;
ii. The departmental budgets for marketing, sales and distribution would
also be made at an early stage, because estimates of spending on sales
promotion, advertising and salesmen, etc. will be necessary to gauge the
expected volume of sales;
iii. Having prepared the sales budget, it should be possible to estimate
production requirements in terms of quantity of raw materials, labour
hours, machine hours etc. However, decision must first be taken about
stocks of finished goods. A decision to increase stocks would mean that
production for the period must exceed sales volume. On the other hand, a
decision to reduce stock levels (so as to improve the organization's cash
position) would mean that production volume would be less than sales
volume by the amount of the run-down in stocks. The level of stock to
hold would depend on the variability in demand, lead-time for raw
materials, etc.;
iv. The production budget is then prepared, specifying the expected
quantities of each product to be made, in each factory or manufacturing
department, followed by the budgets of resources for production, that is,
1. Materials usage budget for all types of materials, direct and
indirect;
2. Machine utilization budget for the operating hours required on each
machine or group of machines;
3. Labour budget ( all grades of labour, direct and indirect in hours
and cost);
4. Overhead cost centres budgets for production, administration, and
research and development cost centres.
114
v. A materials purchasing budget is also required, specifying the expected
quantities and price of each stores item for raw materials bought-in
components, stationery, etc. In order to prepare the purchases budget a
decision must first be taken about stock level. Purchase requirements (in
quantity) are the usage requirements, plus any increase in raw material
stocks, or less any decrease in stocks;
vi. A capital expenditure budget, updated each year, covering a period of the
next three to five years.
vii. A working capital budget, specifying the changes in debtors and creditors
during the year. Turnover periods would be estimated and the effect of
any proposed decision on discounts or credit period allowances
considered.
viii. The cash budget cannot be prepared until the functional budgets in (i) to
(vii) have been decided, prepared and agreed
b. Master budget
The master budget consolidates the position of all the functional budgets in the
form of a budgeted trading and profit and loss account and a budgeted statement
of financial position. Budgetary control relates expenditure to the person
responsible for each function, thus affording an effective method of control. It is
an important principle of the system that an executive is responsible only for
expenditure within his control.
2.3 Budget Preparation and Approval Procedures
2.3.1 Budgets Preparation Procedures
The business of any organization must be
conducted in an organized and orderly
manner to achieve the desired results.
Fig 2.2.2 Budgets Preparation Procedures
115
Budget preparation is a serious activity of management and sometime should be
expended on it. In practice, top management may constitute a budget committee
which could comprise:
a. The Managing Director/ Chief Executive Officer as the Chairman
b. Chief Accountant (or Director of finance) as the budget officer. He
coordinates the preparation and readiness of other budgets and prepares
the cash budget as well as the master budget. The chief accountant’s
knowledge of the interrelationship of the functioning of budgets puts
him/her in an advantageous position to be the budget officer.
c. The head of department or the line and service managers who prepares
the functional budgets of the department.
It is a good management policy to have a pre-budgeting meeting where the
guidelines for the new budget period are drafted, discussed and approved. This
would include the requirements that the new budgets must meet the standard
parameters.
2.3.2 Approval of the master budget

The budget committee will submit the master budget to the top management
(usually the board of directors) for approval. If it is approved, the master budget
will then become the blueprint for the activities of the budgeted period. If
approval is not received, sections of the budget will have to be amended to
incorporate any change or review in emphasis so as to meet the requirements of
top management. However, these requirements should be realistic. There are
limits to the success which can be achieved. Some improvements may be
possible for the following reasons:
i. Managers may have been too pessimistic in their estimates.
ii. Padding or slack variables may have been built into the budget - that is
estimates of costs may be overstated and activity understated so that
the budget can be easily achieved.
116
iii. Improvements in efficiency may be possible.
iv. Additional sales promotion may yield positive results.
v. It may be possible to increase productive capacity — although in
many industries this could take considerable time.
2.4 Preparation of Budgets
2.4.1 Cash Budget
A cash budget is a summary of the company's expected cash inflows and
outflows over a given period. Cash is required in order to facilitate the
achievement of a company's plans and intentions. Inadequate flow of liquidity
will hamper efficiency and level of profitability of the firm. A company may be
profitable but still faces liquidity problems. Cash is a resource, which should be
effectively utilised in order to generate benefits for the company Cash budget
shows the timing of expected cash flows. The benefits derived from the
preparation of detailed cash budget are as follows:
(i) It provides early signals of potential deficit or surplus in order to take
appropriate action,
(ii) It enables financial feasibility of plans to be ascertained.
(iii) It indicates the financial effects of policies within a firm.
(iv) It provides a base for monitoring actual activity. The frequent comparison
of actual cash flow with budgeted cash flow will enable up-to-date information
to be incorporated into budget revisions.
Illustration
From the following data, prepare a cash budget for the first six months of 2005
for Super Industries Ltd:
117
(ii) Sales for November and December 2004 were N85,000 and N90,000
respectively.
(iii) 40% of sales would be in cash, 30% each would be paid in 30 days and
60 days.
(iv) Purchases for November and December 2004 were N48,000 and N50,000
respectively.
(v) 75% of purchases would be paid for immediately and the balance in two
months’ time.
(vi) Selling expenses are to be settled in two equal installments in 30 and 60
days.
December 2004 expenses are N15,000.
(vii) Distribution, expenses are payable one month in arrears while
administration
expenses are payable immediately.
(viii) Distribution expenses for December 2004 would be N5,000 while selling
expenses would be N8,000 for November 2004 and N9,000 in December 2004.
(ix) Balance in the bank on 31 December, 2004 is expected to be N28,000
overdrawn.
(x) The company intends to pay for the following:
• Company tax of N12,000 in February 2005
118
• A new generator costing N6,500 in March 2005
• Dividends of N20,000 in April 2005.
(xi) Some unserviceable vehicles would be sold in January 2005 for N8,000.
Show all workings.
Suggested Solution
119
Illustration
GSMA Limited expects sales of its airtime to amount to N800 million in
January, N850 million in February and N950 million in March, 2004. Prepare
an estimate of cash budget from this information for the three (3) months ended
31 March 2004 assuming the following:
(i) 10% of sales are cash sales with 5% discount
(ii)3% discount is also given for credit sales when payment is received within
10 days, 25% of credit sales are paid within 10days.
(iii) Half of the remaining debtors paid in the month following sales.
(iv) The remainder paid two months following sale with the exception of bad
debtors, who amount to 1% of total sales.
120
(v) The following expenses were incurred during the period:
The following notes relate to these expenses:

a. 10% of salaries are paid one month in arrears, 10% salaries and wages
due as at the end of December 2003 not yet paid amounted to
N1,200,000.
b. Loan is paid as at when due while interest on loan is paid one month in
arrears. Loan interest for the month of December 2003 is N7,900,000.
c. Royalties are also paid one month in arrears. Royalties are 5% of total
cash receipts and total receipts for December 2003 is N210,500,000.
d. Administrative expenses are 5% of total sales and are paid in the month
of sales.
121
Suggested Solution
122
2.5 Techniques Used in Budgeting
2.5.1 Flexible budget
The C1MA defines a flexible budget as "a budget which is designed to change
in accordance with the level of activity attained". A flexible budget recognizes
the existence of fixed, variable and semi-variable costs, and it is designed to
change in relation to the actual volume of output or level of activity in a period.
The principles underlying the flexible budget are:
i. To prepare 'contingency plans' in advance. Flexible budgets are prepared
for a range of activity rather than for a single level of activity (although
the most probable activity level becomes unavoidable/desirable during
the course of the year, management automatically adapts itself to the
change by switching to a more appropriate flexible budget as the new
budget master plan;
123
ii. Budgetary control. Flexible budgeting is fundamental to budgetary
control. Control is not achievable with a fixed budget. In fixed budgets
control, the budgets prepared are based on one level of output, a level,
which has been carefully planned to equate sales and production at the
most profitable rate. If the level of output actually achieved differs
considerably from that budgeted, large variances will arise. The idea of a
flexible budget is that there shall be some standard of expenditure from
varying levels of output.
The concept of flexible budget was to focus on how control could be achieved
over the operations. In a flexible budget, overheads are analysed into three,
namely:
a. fixed;
b. variable; and
c. semi variable.
Illustration
Sales director of Tayo Box Fabricators has become aware of the disadvantages
of static budget. The director asks you as the Management Accountant to
prepare a flexible budget for October 2005 for its main brand of boxes. The
following data are available for the actual operation in September 2005:
Assume no stock of boxes at the beginning or end of the period. A 10% increase
in the selling price is expected in October. The only variable marketing cost is a
124
commission of N0.50k per unit paid to the manufacturer’s representatives, who
bear all their own costs of traveling, entertaining customers, etc. A patent
royalty of N2 per box manufactured is paid to an independent design firm.
Salary increases that will become effective in October are N12,000 per year for
the production supervisor and N15,000 per year for Sales Manager. A 10%
increase in direct materials prices is expected to become effective in October.
No changes are expected in direct manufacturing labour wage rates or in the
productivity of the direct manufacturing labour personnel standard costs for any
of its inputs.
You are required to: Prepare a flexible budget for October 2005 showing
budgeted amounts at each of these output levels of boxes, 4,000 units, 5,000
units and 6,000 units.
Suggested Solution
Selling Price 140 154
125
2.5.2 Zero-based budget (ZBB) or "priority based budgeting"
ZBB is a budgeting technique, which seeks to eliminate the drawbacks of
traditional incremental budgeting by taking the budgets for service or overhead
centers back to a minimal operating level and then requiring increments above
this level to be quantified and justified. 'A method of budgeting which requires
each cost element to be specifically justified, as though, the budget related were
being undertaken for the first time, without approval, the budget allowance is
zero" CIMA.
Phyrr introduced ZBB in the early 1970s in the United States. It gained
prominence because of the fact that it is based on common sense. President
Carter, the President of the United States, directed all US government
departments to adopt this technique. ZBB is concerned with the evaluation of
the costs and benefits of alternatives and, implicit in the technique, is the
concept of opportunity cost. ZBB is applied in three stages
(i) The decision unit: This means subdividing the organization to discrete sub-
units where operations can be meaningfully and individually identified and
evaluated.
(ii) The decision packages: Each decision unit manager submits no less than
three budget packages namely (a) the lowest level of expenditure, (b) the
expenditure required to maintain levels of activity. (c) the expenditure required
to provide an additional level of service or activity.
(iii) Agreed packages will form the budget.
Advantages of ZBB
(i) Results in a more efficient allocation of resources to activities and
departments.
(ii) It focuses attention on value for money
(iii) ZBB develops a questioning attitude,which enables management to
determine inefficiency.
126
(iv) It may lead to cost reduction.
(v) Managers performance can be monitored.
Disadvantages of ZBB
(i) ZBB is a time consuming process and generates volume of paperwork
especially for the decision packages.
(ii) It requires management skill in both drawing decision packages and for the
ranking process.
(iii) It encourages the wrong impression that all decisions have to be made in
the budget.
(iv) Trade Union always go against ZBB, who prefer status quo to remain.
(v) Co-ordination of all activities may be difficult.
2.5.3 Activity based budgeting (ABB) Activity based budgeting (ABB) which
is also known as Activity Cost Management is defined as ` method of budgeting
based on an activity framework and utilizing cost driver data in the budget-
setting and variance feedback processes" (ICMA). It is a part of planning and
control system,which tends to support the objectives of continuous
improvement. ABB is a form of development of conventional budgeting system.
It is also based on activity analysis techniques.
ABB Features
(a) It recognizes activities that drive costs with the aim of controlling the
causes of cost directly rather than the costs themselves. It enables costs to be
managed and understood in the long-run.
(b) ABB differentiates and examines activities for their value adding
potentials.
(c) The department activities are driven by demands and decisions, which are
beyond the control of the budget holder.
(d) It encourages immediate and relevant performance measures required than
are found in conventional budgeting systems.
127
Advantages of ABB
(i) It provides stronger links between an organization’s strategic objectives.
(ii) It has ability to tackle cross-organizational issues through a participating
approach.
(iii) It also uses activity analysis techniques which promotes continuous
improvement.
2.5.4 Planning, Programming, Budgeting System (PPBS)

PPBS analyses the output of a given programme and seeks for the alternatives
to find the most effective means of reaching basic programme activities. PPBS
involves the preparation of a long-term corporate plan that clearly establishes
the objectives that the organization have to achieve. PPBS is the counter part of
the long-term process for profit-orientedorganizations.
Aims and Objectives of PPBS

(i) The aim of PPBS is to enable the management of a non-profit making
organization to make more informed decision about the allocation of resources
to meet the overall objectives of the organization.
(ii) It enables the management to identify the activities, functions or
programmes to be provided thereby establishing a basis for evaluation of their
worthiness,
(iii) PPBS provides information that will enable management to assess the
effectiveness of its plans.
Stages in PPBS
(i) Calls for a careful specification and overall objectives are determined.
(ii) Identify programmes that will achieve these objectives and those
programmes,which are normally related to the major activities undertaken by
government establishments.
128
(iii) The costs and benefits of each programme are determined, so that budget
allocations can be made based on the cost-benefit of the programme.
(iii) Analyses the alternatives to find the most effective means of reaching basic
programme objectives.
(iv) This analytical procedure will be established as to systematically form part
of budgetary control.
2.5.5 Continuous Budget/Rolling Budget

Continuous budget, which is known as rolling budget, is a system of budgeting
that involves continuously updating budgets by reviewing the actual results of a
specific period in the budget and determining a budget for the corresponding
period. It has been described as an attempt to prepare targets and plans that are
more realistic and certain by shortening the period of budget preparations.
Under this method, instead of preparing a budget annually, there would be
budget every three or six months. This is done so that as the current period ends,
the budget is extended by an extra period; for example, if a continuous budget
were prepared every three months, the first three months would be planned in
details and the nine months in lesser details, because of the greater uncertainty
above the longer-term future. This means that, if a first continuous budget is
prepared for April to June, in details to March, in less detail a new budget will
be prepared towards the end of June to cover June to September in details and
October of the following year in lesser details.
Advantages
i. Management is made to be continuously aware of the budgetary process
since the figures for the next 12 months are always available.
ii. It allows for more assessment that is frequent and revision of the budgets
in the light of current trends particularly during the period of inflation, thus, the
budget does not become quickly obsolete or outdated.
129
Disadvantages
i. Higher costs and efforts are required for continuous budgeting.
ii. It is time consuming in that, in each period, the whole procedures of
preparing budgets have to be undertaken.
2.6 Forecast
"The technique of business forecasting has been developed to give a logical and
comprehensive means of providing management with information to determine
the most advantageous plans which can be made within the anticipated
resources of the business." (MA). Despite the uncertainty that exists about the
future, business plans are prepared to resolve some of this uncertainty.
2.6.1 Distinction between forecast and budgets

A forecast states the events, which are likely to occur in the future. A budget
states the plans which the managers will endeavor to turn into actual events. It is
a statutory executive order.
2.6.2 Forecasting procedures

There is more than one way of arriving at the sales forecasts. Probably the most
satisfactory approach is to use all available methods; each result then provides a
check on the others. Three possible approaches are:
(a) Assessments by staff of sales department: Estimates should be made by
the individual salesmen and passed upwards to the sales manager. The
advantage of this method is that individual salesmen can give consideration to
the particular factors which are relevant in their areas.
(b) Mathematical analysis of past sales: Such analyses should indicate trends
and seasonal variations. This information can be adjusted for known factors,
such as increase advertising, to give a forecast of future sales.
130
(c) Senior management judgment: The senior management team, including
production manager, administrative manager etc., will meet to discuss sales
prospects. The approach brings a variety of skills and experience to the
forecasting exercise.
The sales budget will be determined by reference to the sales forecast. However,
the budget should be prepared in the light of any constraints on the amount that
can be produced.
2.7 Budgetary Control

There is a difference between a budget and budgetary control/budgeting. A
budget is just an integral part of budgetary control/budgeting. Budgetary control
is defined thus: "a system of controlling costs which includes the preparation of
budgets, coordinating the departments and establishing responsibilities,
comparing actual performance with that budgeted and acting upon results, to
achieve maximum profitability" (CIMA).
Budgetary control refers to 'the establishment of budgets relating the

responsibilities of executive to the requirements of a policy, and the continuous
comparison of actual with budgeted results either to secure by individual action
the objective of that policy or to provide a basis for its revision. Certain
fundamental principles can be outlined from the above definitions of budgetary
control:
(a) Establish a plan or target of performance which co-ordinates all the
activities of the business;
(b) Record the actual performance;
(c) Compare the actual performance with that planned;
(d) Calculate the differences or variances, and analyze the reasons for them;
and
131
(e) Act immediately, if necessary, to remedy the situation.
2.7.1 The objectives of budgetary control
These are:
(a) To combine the ideas of all levels of management in the preparation of the
budget;
(b) To co-ordinate all activities of the business;
(c) To centralize control;
(d) To decentralize responsibility of each of the manager involved;
(e) To act as a guide for management decisions, when unforeseeable
conditions affect the budget;
(f) To plan and control income and expenditure so that maximum profitability
is achieved;
(g) To direct capital expenditure in the most profitable direction;
(h) To ensure that sufficient working capital is available for the efficient
operation of the business;
(i) To provide a yardstick against which actual results can be compared;
(h) To show management which action is needed to remedy a situation.
2.7.2 Organization for budgetary control

These include:
(a) The Preparation of an Organization Chart: This defines the functional
responsibilities of each member of management and ensures that he knows his
position in the company and his relationship to other members.
(b) The Budget Period is the time to which the plan of action relates. Period
budgets cover a fixed period, most commonly one year. They will be divided
into shorter periods, known as control periods, for purposes of reporting control.
With a one-year period budget, control periods may be 4 weeks [13 periods
each year] or one month [12 periods each year]. Long-term budgets [for
example, capital expenditure budgets] may be for periods of up to five or ten
132
years, or even longer.
(c) Budget manual-The organization for budgeting [and budgetary control]
should be documented in a budget manual, which has been described as a
"procedure or rule book which 'sets out standing instructions governing the
responsibilities of persons, and the procedures, forms and records relating to the
preparation and use of budgets". (CIMA).
Even though organizations are different, the content of a manual are:

(a) Description of budgetary planning and control;
(b) Goals of each level of the budgetary process;
(c) Association with long term planning;
(d) Nature of organogram depicting duties and level of budget officers;
(e) Analysis of relevant budgets and association with accounting activities;
(f) Description of principal budgets;
(g) Composition of budget committee and mode of operation;
(h) Modalities for the preparation and publication of budget;
(i) Designation and responsibility of the budget manager;
(j) Chart for codes;
(k) Design and nature of form; and
(l) Mode of operation especially where they concern procedures for
accounting, preparation of reports and dead line for the submission of such
reports/budgets.
(d) Budget Committee: The overall responsibility for budget preparation and
administration should be given to a Budget Committee, normally chaired by the
chief executive of the organization, with departmental heads or senior managers
as members. The purpose of the committee is to:
(i) ensure the active co-operation of departmental managers, and to act as
a forum in which differences of opinion can be argued out and reconciled;
133
(ii) ensure that managers in the organization understand what other
departments are trying to do;
(iii) establish long-term plans around which the budgets should be built,
and then to identify budget objectives;
(iv) review departmental budgets;
(v) during the year, examine reports showing actual performance
compared with budget and expectations.
(e) The Budget Officer: He controls the budget administration on a day-to-day
basis. He will be responsible to the budget committee and should ensure that its
decisions are transmitted to the appropriate people and relevant data and
opinions are presented for its consideration. He will normally also have the vital
job of educating and selling the budget idea. Since the master budget is
summarized in cost statements and financial reports the budget officer is usually
an accountant.
(f) The Introduction of Adequate Accounting & Records: It is imperative that
the accounting system should be able to record and analyze the information
required. A chart of accounts should be maintained which corresponds with the
budget centres.
(g) The General Instruction on Techniques to all concerned in Operating the
System: Each person must feel that he is capable of carrying out the budgeted
programme.
(h) Budget Centres: An organization's planned activities are divided into

separate areas known as budget centres or cost centres. Each area selected as a
budget centre must be clearly definable, and should be the natural responsibility
of one particular manager [or supervisor]. A separate budget is prepared for
each budget [or cost] centre. The 'budget centre budgets are known as
departmental budgets. Departmental budgets are often used to build up budgets
for overhead costs, that is:
134
(i) the production overhead budget will be compiled from separate
budgets for the production departments, maintenance, production planning,
quality control, etc
(ii) the administration budget will be compiled from separate budgets for
personnel, finance, management services, data processing etc;
(iii) the selling and distribution budget will be the amalgamation of
budgets prepared by sales office managers, marketing managers,
warehouse and transport managers.
(iv) the research and development budget.
(i) Principal Budget Factor: This is also known as the key budgeting factor or
limiting budget factor. The first task in budgeting is to identify the factors,
which impose limitation or ceilings on the level of activity. It is usually sales
demand; but it may also be limitations on any resource-materials, labour,
machine time, working capital, etc. Once this factor is defined, the rest of the
budget can be prepared. It determines priorities functional budgets, for example,
it may be material, labour or plant.
Management may not know in advance what the principal budget factor is. One
method to identity this factor is to prepare a draft sales budget, and then
consider whether any resource shortage prevents this level of sales from being
met.
(j) Level of Activity: It will be necessary to establish the normal level of

activity, that is, the level the company can reasonably be expected to achieve:
quantity to produce, quantity to be sold, etc.
135
In-text Question 1 A budget is defined as "a ………for a defined time which may include
planned revenues, expenses, assets, liabilities and cash flow.
Answer
1. Quantitative statement
In-text Question 2
Budgetary control is defined thus: "a system of ……..which includes the preparation of
budgets, coordinating the departments and establishing responsibilities, comparing actual
performance with that budgeted and acting upon results, to achieve maximum profitability"
Answer
2. Controlling costs
Budgeting or short-term planning is the process by which the long-term
corporate plan is converted into action or activities. A budgetary system ensures
co-ordination, assignment of responsibilities, communication, control,
motivation, direction and goal congruency. This will help to avoid sub-
optimality. A budgetary system must fulfill the following conditions for it to be
successful: support of the top management, clear definition, full involvement of
everyone at all levels, appropriate accounting system put in place and
administration in a flexible manner.
Summary
Every organization needs to plan and consider how to confront future potential
risks and opportunities. In most organizations, this process is formalised by
preparing annual budgets and monitoring performance against the budgets.
Budgets are mainly a collection of plans and forecasts. They reflect the financial
implications of business plans, identifying, the amount, quality and timing of
resources needed.
136
1. What are the types of budgetary control?
2. Distinguish between a forecast and a budget.
3. What is a master budget?
4. Mention three functions of a budget.
1. Types of Budgets Prepared in Budgetary Control
• Long Term Budget:
• Short-Term Budget:
• Current Budget:
• Operating Budget:
• Financial Budget:
• Master Budget:
• Fixed Budget:
• Flexible Budget:
2. The key difference between a budget and a forecast is that a budget lays out
the plan for what a business wants to achieve, while a forecast states its actual
expectations for results, usually in a much more summarized format. In
essence, a budget is a quantified expectation for what a business wants to
achieve.
3. The master budget is the aggregation of all lower-level budgets produced
by a company's various functional areas, and also includes budgeted financial
statements, a cash forecast, and a financing plan. ... The budgets that roll up
into the master budget include: Direct labor budget. Direct materials budget.
4. Budget also serves as an instrument of financial control by legislative over
executive. It also serves as instrument of accountability and financial control.
Further, it is a management tool for achieving efficiency, productivity,
improvements and for determining the degree to which policy goals have been
137
accomplished.
a. Visit U-tube add https://bit.ly/2HWGLU5. Watch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2MDf3jO and critique it in the
discussion forum
Aborode R. (2006). A practical approach to advanced financial accounting.
SSAP 16. ASe.
Wadsworth.
Unwin, London.
138
Irwin.
Essex.
London.
References 491
Research Ltd.
139
Evans, London.
735-49.
References
8,223-34.
140
Berks.
Institute, London.
141
Context of Management Accounting, Pitman, London.
Faruonbi K. (2006). Management accounting. Lagos: EL-Toda Ventures Ltd.
ICAN Pack, (2006). Management accounting. Lagos: VI Publishing Ltd.

Cambridge, Mass.
142
STUDY SESSION 3
Standard Costing
Introduction
2.0 Main Content
2.1- A Standard cost
2.2-Standard costing
2.3- Setting of standards
2.4- Variance Analysis
2.5- Advanced variances
2.6-Standard marginal cost
2.7-Opportunity cost approach to variances
2.8-Planning and operational variances
2.9-Control Ratios
Introduction:
In this study session, we shall look at a financial control system that enables the
deviations from budget to be analysed in detail, thus enabling the control of
costs more effectively. This system of control is standard costing. We shall
consider how a standard costing operates and how the variances are calculated.

After studying this session, I expect you to be able to understand:
1. The difference between standard cost and standard costing;
143
2. The different types of standards and capacity levels;
3. The standard costing techniques and the associated objectives;
4. How to apply the various principles required for the computation of
variances;
5. The concept of standard hour and computation of the capacity, efficiency and
activity ratios.
6. How to apply the principles of marginal costing in standard costing.
2.0 Main Content

2.1A Standard Cost
Standard costing refers "the planned unit cost of the products, components or
services produced in a period. The standard cost may be determined on a
number of bases. The main
uses of standard costs are in
performance measurement
control, stock valuation and in
the establishment of selling
prices". (CIMA)
Fig 2.3.1 A Standard Cost
A standard cost, apart from being related to production costs, may also be
looked at from the viewpoint of selling and distribution costs, administration
costs, etc. A standard cost can be meaningful if based on good production
systems, work methods and measurement, labour and material rate forecasts as
well as peculiarities of materials required. Standard costs can be applied to both
absorption and marginal costing techniques, in that:
(a) Fixed costs, under absorption costing, are determined on total basis and the
machine hour or direct labour hour basis can be adopted to absorb them into the
standard unit costs;
144
(b) The basis for determining the variable cost content of the direct materials
and labour is the unit basis;
(c) Even though the variable overhead costs can be budgeted in total, they
can be identified on a unit basis, thus ensuring the determination of hourly cost
and unit cost.
2.2 Standard Costing

This is a useful control technique based on the feedback control concept that
ensures the determination of standard costs of products or services and
compares them with the actual results and costs, with the difference known as a
variance. This difference can be further explained by a process called variance
analysis. The standard costing technique can be of use in a number of
circumstances such as where there is repetition of jobs and large production
activities (process); service industries (hospital, merchandising) etc.
Reasons for adopting a standard costing technique

Some of the basic reasons for adopting a standard costing technique are:
a. To encourage management and employees, since it ensures that they have to
plan ahead;
b. To serve as the basis for quoting for jobs or fixing prices;
c. To ensure that performance improvement measures are adequately guided;
d. To provide the basis for setting budgets;
e. To ensure that standards are put in place and variances properly analysed in
order to control costs;
f. To provide the basis for allocating duties in order to check inefficiencies or
take advantage of opportunities;
g. To serve as basis for determining unprofitable ventures; and
h. To ensure that stocks and work-in-progress are properly valued.
145
Drawbacks/Disadvantages of the technique:
The following are the disadvantages of standard costing;
a.Lack of understanding of its application could bring about resistance from
the employees.
b. Confidence of the users may be eroded, especially where they become
outdated.
c.The technique may be very expensive to operate especially where
technicalities are involved and set-up time is elongated.
d. It may not be appropriate for business use, if standard costs are not
properly determined.
2.3 Setting of Standards

2.3.1 Types of Standards
Performance standards setting are a function of four basic standards:
(a) Ideal Standards: These are based on perfect operating conditions whereby
there are no wastages, inefficiencies, idle-time, breakdown of machines etc.
Variances relating to ideal standards are beneficial in showing aspects of the
manufacturing process requiring verification, thus, bringing about some
savings. Ideal standards are not necessarily of encouraging status in that staff
may be of the opinion that the objectives are not achievable.This, therefore
results in less efforts being put into the work by the labour force.
(b) Basic Standards: These are standards, which remain unaltered over a long
span of time and they may become outdated because of changes in technology,
laws, norms etc. They can only be used to express changes in the level of
efficiency or performance over a period as well as the trend of prices from
period to period.
Nonetheless, the drawbacks are:
i. The standard may become useless as a result of the changes in price and
efficiency levels;
146
ii. After the first year, the fixed overhead aspect of basic standard cost
computed on annual basis from the budget, may have little or no impact.
(c) Current Standards: They are based on current conditions of service or
production, for example, current losses, inadequacies etc. However, they do not
seem to bring about a higher current level of performance.
(d) Attainable/Expected Standards: They are a function of normal
operating circumstances, thus ensuring that some allowances are available for
losses, wastages, inadequacies, etc. They make for a challenging situation for
employees in as much as psychological awareness is created.
2.3.2 Capacity Levels

Since standards cannot be set on their own, it is therefore necessary for capacity
levels that give meaning to standards set to be discussed 'here. The capacity
levels include:
a. Full Capacity: It is the "production volume expressed in standard hours
that could be achieved if sales order, supplier and workforce were
available for all installed work places" (CIMA). Under this circumstance,
full capacity can be related to ideal standards with the assumption that
labour shortages, shortfall in supplies, equipment breakdown will not
affect the smooth running of the production processes.
b. Practical Capacity: This is "full capacity less an allowance for known
unavoidable volume losses" (CIMA). Some examples of unavoidable
losses are: repair time for equipment and plants, job resetting times,
machine breakdown etc. Therefore, since full capacity is more than the
practical capacity, the latter can be related to attainable standards.
c. Budgeted Capacity: It is the "standard hours planned for the period,
taking into account budgeted sales, suppliers and workforce availability"
(CIMA). In effect, it is the labour hours and machine hours required to
147
have the budgeted units and can be a function of current standards that
are not peculiar to normal practical capacity over an extended period.
d. Idle Capacity: This is the difference between the practical capacity and
the budgeted capacity based on standard hours of output. This is the
unutilized capacity that is not required, in that; the budgeted volume is
less than the practical volume that could be achieved.
2.3.3 Need for Revising Standards

The unexpected change(s) in the economy because of change(s) in economic
and socio-political situations could make for the unreasonableness of standard
costs. Note that the said change(s) could bring about inconsistency in the
application of the standard costs, which may eventually lead to a high cost of
operation especially when inflation constitutes a determining factor. Therefore,
in practice, the revision of standard cost should be done on a yearly basis, with
the action being taken at the beginning of every accounting year.
The shortcomings that can be associated with the setting of standard costs may
include:
a. The significant influence of quantity discounts and cyclical price changes
that may make it difficult to determine the prices of materials.
b. If it is desired to have a mix of the constituents’ parts of materials, it may
be difficult to determine the proportion of the mix of the constituent parts
of the materials.
c. It may not be easy to come up with the appropriate wage efficiency
standard.
d. The manner of introducing the issue of inflation into predetermined unit
costs is also a matter of concern.
e. Even though good materials may be expensive to obtain, the issue is how
to determine the quality to be utilised per time may not be easy especially
when there is the need to reduce material losses and spoilage.
148
2.4 Variance Analysis
Variance analysis refers to the process of further explaining the difference(s)
between the actual costs or results and the predetermined costs or results.
Figure 9.1 below depicts the various variances.
Figure 2.3.2: Summary of Variances
2.4.1 Basic Variances

The basic variances can be categorized under four main headings:
a. Sales volume variance.
b. Sales price variance.
149
c. Variable cost variances, that is, direct materials; direct labour and
variable overheads (which can be sub-divided into spending and
efficiency variances).
d. Fixed overhead cost variances, that is, expenditure and volume variances
(which can be further categorized into efficiency and capacity variances
(which can also be sub-divided into capacity usage and fixed overhead
idle-time variance).
I Sales Margin Variance - is the difference between the predetermined
margin from turnover and the actual margin derived when the cost of goods sold
is based on the standard cost of manufacturing goods or products. This can be
further analysed into sales margin price variance and sales margin quantity
variance with the objective of being able to control the profit from sales
whereby all the products are expressed at standard production costs in order to
carry out the sales margin variance analysis.
II Variable Cost Variances
Variable cost variances, in case of materials, labour or overheads are all
determined in the same manner. The total cost variance for each type of variable
costs is classified as: (a) Price, rate or expenditure variance, whereby:
i. The actual price of a unit of raw material is different from the
predetermined or standard price.
ii. The actual rate per direct labour hour is different from the standard labour
rate.
iii. The actual rate per hour of expenditure on variable production overhead
is not the same with the standard rate of spending.
(b) Efficiency or usage variance; that is,
Material usage variance:
i. The quantity of materials put in to have the output is different from the
standard or required usage.
150
ii. Labour efficiency variance/variable overhead efficiency variance: The
actual time of spending the output is different from the standard time
allowed, with effects on both direct labour and variable production
overhead costs. Direct labour efficiency variance and variable production
overhead variance require the same number of hours.
iii. Labour idle time variance: This involves the actual hours for which no
productive efforts were made. Thus, the direct labour costs are
affected without any effect on variable overhead expenditure, since
they are not incurred when idle time are being accounted for in term of
the variance element.
It is important to note that price or expenditure variances are measured in
money terms, for example, Naira, Cedis, etc. while efficiency variances are
measured in quantities (hours, kilograms, litres, etc) after which they are
expressed in monetary terms at the standard cost per unit of labour, material or
variable overheads.
III Fixed Cost Variance

The fixed cost variance is a function of the magnitude of fixed overhead over-
absorbed in the production process. Thus:
a. The manufacturing fixed cost volume variance is the difference between
predetermined and actual production volumes multiplied by the
absorption rate in order to have the monetary values of the volume so
involved.
b. The difference between the actual and predetermined production volumes
can be expressed in two ways:
i. Since the efforts put in by the labour force will determine the
degree of output, then, the fixed production overhead efficiency
variance is the same as the direct labour efficiency variance.
151
ii. If the actual hours involved are greater or less than the
predetermined hours, thus resulting in more or less output and the
predetermined hours put in represent normal capacity, then the
capacity variance will be measured in standard hours and expressed
in monetary terms at the standard absorption rate per hour.
2.4.2 Why Cost Variances?

Expected standards of performance are set for a firm's operations taking into
account wastage and lost time. The standards try to be realistic by setting levels
of attainable performance, which do not necessarily correspond with current
levels of performance, if management considers that any particular operation for
which standards are set is not meeting its capability.
Variances show those situations where actual results are not as budgeted. They
depict the difference between standard and actual for each element of cost and
sometimes for sales. If actual operations outweigh the planned, a favorable
variance is arrived at, (F) and where the reverse is the case, an adverse variance
arises (A).
Computation of Variances
Variances may be computed as follows:
(a) Material cost variances
The material cost variance shows the difference between the actual costs
incurred and the standard costs. It is calculated as Standard cost less actual cost,
that is, (SC - AC).
These variances can be sub-analysed into price and usage variances so that the
variance is attributed to the manager who has the responsibility for controlling
it. Usage Variance can further be analysed into mix and yield. The standard cost
is determined by multiplying the standard specified actual quantity of output by
152
the standard cost per unit of output. Mathematically represented thus; (SQ x SP)
– (AQ x AP).
i. Material price variance
This is derived by multiplying the difference between the standard price
and actual price by the actual quantity of materials purchased. It is
calculated as: Actual Quantity (Standard Price – Actual Price). This
variance may occur because of:
1. Material price changes.
2. Reduction in supply of materials.
3. Ineffective purchasing policy.
4. Non-availability of storage space.
5. Insufficient funds.
6. Purchasing mistakes.
7. Reversal of specification standards.
ii. Material usage variance
This is determined by multiplying the difference between the standard
quantity and the actual quantity by the standard price of quantity used. The
standard quantity is expressed as a function of the actual quantity produced
at the standard specifications. It is calculated as SP (Standard Quantity –
Actual Quantity).
The material usage variance can be sub-divided into mix and yield variances:
1. Material Mix Variance — This can be computed by multiplying the
difference between the standard specification of the material input and
the actual mix used by the standard price. That is, SP (SM — AM).
2. Material Yield Variance — This can be expressed as the difference
between the standard yield and the actual yield from the materials
used in production. That is, SC (AQSM - SQSM) or SP (SY-AY).
(b) Wage Cost Variance
Wage cost variance is the difference between the standard wage cost of actual
153
output and the labour cost paid for. It is commonly separated into wage rate
variance, an idle time variance and efficiency variance.
Standard cost is the actual quantities produced at standard hours specified

multiplied by standard rate per hour. It is calculated as the difference between
standard cost and actual cost, that is, SC — AC or (Standard Hour x Standard
Rate) - (Actual Hour x Actual Rate).
i. Wage Rate Variance —
This is the difference between the standard wage rate and the wage rate
actually paid, multiplied by the actual hours worked, that is, Actual Hours
(Standard Rate – Actual Rate).
The foreman is to ensure that the machines are operated by the employees
with the requisite skills as the wage negotiation is a national policy and
not that of an individual.
ii. Wage Usage Variance
This is as a result of the difference between standard labour hours of
actual output and the labour hours actually paid for multiplied by the
standard rate per hour, that is, SR (SH - AH). The wage usage variance
can be sub-divided into an idle time and efficiency variance.
Standard hour (51-1) is the actual quantity of output based on specific
standard hour.
iii. Idle Time Variance — This is the difference resulting from hours lost
through unexpected situations, such as machine breakdown, lack of
materials or tools, etc. (unexpected idle time multiplied by standard
hour).
iv. Efficiency Variance – This is the variance resulting from the difference
between the standard labour hours of actual output and the useful labour
hours actually worked. This is represented by Standard Labour Cost of
Actual output and standard cost of useful hours worked multiplied by the
154
standard rate of pay; that is, SR (SH – AUH). Therefore, hours paid for
less idle time equals Actual Useful Hours (AUH).
(c) Variable Overhead Variance
Variable overhead can be absorbed into production on the basis of units of
output produced or standard hours used in production. Where standard hours are
adopted as the strength for determining the level of activity, the variable
overhead absorption rate can be computed as:
Therefore, the difference between the variable overhead absorbed for actual
production and the actual variable overhead expenditure is termed the total
variable overhead variance.
The variable overhead variance can be sub-divided into expenditure variance
and efficiency variance.
i. Expenditure Variance: This is as a result of the difference between
actual cost and standard cost for the actual level of activity. It is to be
taken that where the determination of level of activity is a function of the
actual activity labour hours, the actual activity is the number of labour
hours for which the work was performed. It is calculated as the difference
between standard rate and actual rate multiplied by the actual hour.
ii. Efficiency Variance: This arises because of the difference in the labour
hours worked and the standard hours equivalent of actual production,
multiplied by the standard cost or rate. It is expected that the activity level
will be measured in labour hours for determining the variable overhead
absorption rate. Its formula is SR (SH - AH).
(d) Fixed Overhead Variance
Fixed Overhead cost is a cost that will not change within a giver level of
activity, but overhead absorption rate per unit will be charged to products,
155
Nonetheless, it is normal to compute a budgeted fixed overhead absorption rate
whenever product cost and valuation of stock are required.
Fixed Overhead Absorption Rate (FOAR)
Therefore, the difference between the fixed overhead absorbed by the actual
production and the actual fixed overhead for the period is referred to as total
fired overhead variance. Its formula is given as (SC - AC).
i. Fixed Overhead Expenditure Variance - This is the difference between
the actual and predetermined cost of overhead. The volume of activity
does not affect the degree of spending on the fixed overhead. Therefore,
the difference between the standard overhead stated in the budget and the
actual overhead incurred is referred to as expenditure variance. Budgeted
Fixed Overhead (BFO) is the budgeted quantities at standard hours
specified multiplied by standard rate per hour. Its formula is BFO - AFO.
ii. Fixed Overhead Volume Variance — This is the difference between the
standard fixed overhead elements of actual output and the standard fixed
overhead in the budget. Its formulae is given as SR (BR - SH).
The fixed overhead volume variance can be further analysed into
efficiency and capacity variances.
1. Efficiency Variance - This is the difference in the standard
efficiency and the efficiency actually attained. Its formulae is SR
(SH - AUH) (Standard hours - Useful hours) x Standard
Absorption Rate (SH - Actual Hours worked (AH)).
2. Capacity Variance - This is the difference in the budgeted activity
and the level of activity actually attained. That is, Standard Rate
(Budgeted Hours - Actual Useful Hours).
156
(e) Sales Variance
A sales variance is used to give effect to the difference between budgeted sales
and actual sales and can be further sub-divided into a sales price variance and
sales volume variance. These variances may relate to sales profit or sales
contribution, with the assertion that those related to profit or contribution ensure
the provision of effective information.
i. Sales Price Variance - This variance is used to determine the effect of
selling output above or below the predetermined selling price. Its formula
is: AQ (SSP - ASP).
ii. Sales Volume Variances - This variance is used to determine the effect
on profit or contribution on selling more or less than the predetermined
quantity. Its formulae is SP (BQ - A QS), where, BQ = budgeted quantity
and AQS = actual quantity sold.
Where the valuation of the variance is based on the standard profit per unit, it
shows the difference between budgeted standard profit and the standard profit
earned on actual sales. On the other hand, if it is at standard selling price, it
shows the difference between budgeted sales revenue and actual sales at a
standard price.
Where the standard marginal costing is used, all final products are valued at a
standard marginal cost, therefore, ensuring that all fixed overheads are treated
as period costs against the contribution made in the budgeted period, thus
making it impossible to absorb them into product costs.
The variances under the standard marginal costing approach are the same as
those of the budgetary control where the standard costs are not existence:
a. Since fixed overheads are not absorbed into product cost, then, there
exists fixed overhead expenditure variance and no fixed volume variance.
b. Sales volume variance can be computed, thus: volume variance in units
multiplied by standard contribution per unit.
157
Note:
(a) The budgeted fixed production overhead was N147,000, from which the
standard absorption rate of 294,000 (140 x 300 hours) = N7.00 per standard
hour was derived
(b) Since one thatched roof equals 300 standard hours = N2,100.
(c) There is additional budgeted overhead for selling and administration of
N30,000. This expenditure is regarded as a fixed cost.
Actual results in 2006 were as follows
Required:
158
a. Prepare an operating statement reconciling the budgeted profit with the
actual profit. All closing stocks are valued at standard cost.
b. An explanation of the possible interdependence between variances.
Suggested Solution
DAPO LTD
(a) The budgeted profit, before deducting sales and administration costs was
(140 x N1,000) = N140,000.
(b) The calculation of actual profit begins with:
(c) From this unadjusted profit, adjustments are made for cost variances. All
cost variances reported are written as an adjustment to the profit and loss
account at the end of the accounting period.
Direct Materials
(i) Direct material price variance
This variance measures the actual purchase price for materials against the
expected price:
(ii) Direct material usage variance

This variance measures the efficiency in the usage or consumption of a material.
Because it is a measure of efficiency (i.e. quantity) it must be measured in
159
quantities –i.e. tons-and then valued in money terms by applying the standard
cost per unit (ton) of material.
Other Direct Materials Variance

Since we are not given the quantity of neither other materials per roof, nor the
purchase price per unit of these other materials, the only variance we can
calculate is the materials cost variance.
N
Actual cost of 150 roofs (other materials) 48,000
Standard (expected) cost of 150 roofs (x N300) 45,000
Other direct materials cost variance 43,000(A)
Direct Labour Variances

(a) The total cost variance for direct labour is:
N
Actual labour cost of 150 roofs 288,000
Standard labour cost of 150 roofs (x N1,500) 225,000
Direct labour cost variance 163,000(A)
This variance need not be calculated, because we can analyze it in greater depth
as the sum of the rate, idle time and efficiency variances.
(b) Direct labour rate variance – This is the same type of variance as the
materials price variance. It measures the actual price or rate paid per hour for
labour against the actual rate per hour.
160
(c) Idle time variance – This is an inefficiency variance which is recorded in
hours. It is valued in naira by applying the standard per hour; i.e.
8,000 hours (A) x N5 per hour = N40,000(A)
(d) Direct Labour efficiency variance – This variance measures the
efficiency (or inefficiency) of labour. Since idle time is measured separately, we
are concerned with efficiency in active hours worked. It is calculated in the
same way as the materials which is costed in N by applying the standard rate
per hour.
Variable Production overhead

(a) The total cost variance for variable production overhead is:
161
(b) It is usually assumed that variable overheads are incurred during Active
Working Hours, but are not incurred during idle time. This means that the
company, in our example, has had to pay for 44,000 hours of variable overhead
expenditure, and not 52,000 hours.
(c) Variable production Overhead Expenditure variance – following on from (b)
the expenditure variance may now be calculated in the same way as the
materials price and labour rate variances.
In other words, during 44,000 active hours of work, the expected spending at
the standard hourly rate would be N44,000. The actual hourly rate was in excess
of this and the total excess amounted to N2,000.
(d) Variable Production Overhead Efficiency Variance – This is exactly the
same, in hours, as the direct efficiency variance. This is 1,000 hours (F) and is
valued in N1 at the standard rate per hour for variable overhead (N1.00).
1,000 hours (F) x N1.00 per hour
Variable production overhead efficiency variance = N250(F)
162
Fixed Production overheads
(a) In standard absorption costing, fixed overheads are absorbed into production
costs at a standard cost per unit. For each roof that is thatched, a standard cost of
N2,100 (300 standard hours of production) is applied to the cost of production.
(b) The standard cost of 150 roofs is therefore is 150 x N2,100 = N315,000.
The actual cost of fixed production overhead was N304,000
(c) Fixed production overhead expenditure variance:
(d) Fixed production overhead volume variance;
(e) Fixed production overhead efficiency variance – This is the same as the
labour efficiency variance (in hours) but is valued at the standard fixed
overhead absorption rate per hour.
163
(f) Fixed production overhead capacity variance
2,000 hours more work was done than budgeted. The expected over-absorption
of overhead as a result of this capacity variance = 2,000hours (F) x N7.00 per
hour = N14,000 (F)
Sales variance
(a) Sales Price Variance
N
150 thatched roofs should sell for x N6,000 900,000
They did sell for 864,000
Sales price variance 36,000(A)
(b) Sales Volume Variance
(i) In standard absorption costing, fixed overhead costs increase with output,
and the standard cost of sales increases by the full standard cost for each extra
unit sold. The sales volume (margin) variance is calculated by applying the
Standard Profit per unit and not the contribution per unit.
164
(ii) Standard profit used because a fixed production overhead volume
variance is calculated. This is a further difference, therefore, from the
calculation of variances in other types of budgetary control.
• if a fixed production overhead volume variance is calculated, the sales
volume variance is based on standard profit.
• where a fixed production overhead volume variance is calculated, the
sales volume variance is based on standard contribution.
(iii) In our example:
Sales and administration overheads are not absorbed into standard units’ costs.
They are fixed costs, and the only variance is an expenditure variance.
Reconciliation of Operating Statement for 2006
165
166
2.4.3 Interdependence between variances
Interdependence between variances is a term adopted to describe the way in
which the reason for one variance may be wholly or partly stated by the reason
for another variance. In the example above:
(a) The material price variance for thatch was N10,800(F) and the usage
variance N16,000(A). It is possible that by buying a cheaper type of thatch (and
earning a favourable purchasing variance) the purchasing manager has obtained
lower quality materials, which explains the adverse usage in production;
(b) The sales volume variance is favourable (by roofs), but in order to obtain
the extra business, the selling price per roof may have been reduced. The
favourable sales volume variance and the adverse sales price variance may,
therefore be, to a certain extent, interdependent;
(c) The favourable efficiency variances (labour, variable and fixed
production costs) may be the result of using more highly skilled labour,which is
paid higher rate per hour. The favourable efficiency variances and the adverse
labour rate variance may be interdependent.
167
2.4.4 Cost Accounting Entries
Variances are written to a variance account. There may be separate variance
accounts for materials price, materials usage, labour rate etc. or there may be
one single account for all the variances.
You should check the following T accounts, carefully, but the basic principles
are:
(a) material price variance is usually recorded in the stores account;
(b) labour rate variance is usually recorded in the wages account;
(c) material usage, labour efficiency and the idle time variances are
recorded in the work in progress (WIP) account;
(d) the cost ledger control account, in a system where cost accounts and
financial accounts are not integrated, represents all those items which
appear in the financial accounts but which are excluded from the cost
accounts (e.g. debtors, creditors, cash, reserves etc.)
Suggested Solution 9-2
168
169
Note: That sales are recorded at the actual amount invoiced and that there are no
sales variances at all in the accounts.
2.5 Advanced Variances
2.5.1 Material Variances – Mix and Yield
In Section 2.4.1 of this unit, the basic material variances were explained. In
some situations, it may be necessary to further analyse the materials usage
variances into direct material mix variance and direct material yield variance.
This may be possible in situations where the manufacturing process require a
mix of various material inputs in order to achieve the expected output such as
production of paints, textiles, roofing sheets etc. As in a normal process, losses
could be caused by pilferage, machine breakdowns, power failure, evaporation
etc.
170
There are two approaches to analyzing material usage variance into mix and
yield variances. The first is the individual price method under which individual
standard prices are adopted for the components and the second is that which
involves the usage of weighted average price for all components.
2.5.2 Individual Price Method – (Direct materials mix variance)

This refers to a subset of the direct usage variance, applicable when materials
are applied in a standard proportion showing the effect on cost of variations
from the standard proportions.” (CIMA).
Direct Material yield variance
“A subset of the direct materials usage variance applicable when materials are
combined in standard proportion.” (CIMA).
Mix and yield formulae (individual price method)
Notes:
(a) The mix and yield variances use only budgeted prices.
(b) The change of expressions from actual to budgeted values.
(c) The yield variance measures abnormal process losses or gains.
2.5.3 Weighted Average Price Method (Alternative Method)

Direct materials mix variance is “the difference between standard quantity of
inputs for the output achieved and the actual quantity used priced at the
171
difference between individual standard prices and weighted average standard
price.” (CIMA). Direct materials yield variance is the difference between the
standard quantity of inputs for the output achieved and the actual quantity used
priced at the weighted average standard price.
2.5.4 Sales Margin Variances

Apart from the cost variance analysis carried out from control reasons, other
factors required for the realization of planned profit is the effect of the sales
margin whether as profit margin in the case of absorption costing or the
contribution margin where the marginal costing technique is applied. Under this
circumstance, all products are valued at the standard factory cost in order to
give effect to sales margin variance analysis. Therefore, the standard sales
margin is actually the difference the budgeted selling price of a product and the
related standard cost, which could also be referred to as the budgeted profit for a
product.
Total Sales margin variance
This is the difference between the standard margin from sales and the actual
margin when the cost of sales is treated at the standard cost of production. This
can be sub- analysed into the sales margin price and quantity variances.
Sales margin price variance
This is the difference between the standard margin per unity and the actual
margin per unit for the quantity of units on sales in the period (CIMA).
Sales margin quantity variance
“The difference between the actual total number of units at the actual mix and
the actual total number of units at standard mix valued at the standard margin
per unit.” (CIMA).
172
Sales margin volume variance
“That portion of the sales margin quantity variance which is the difference
between the actual total quantities of units sold and the budgeted total number
of units at the standard mix valued at the standard margin per unit.” (CIMA).
Illustration
Ijaodola Ltd. produces and sells three product brands of lime. In a period, the
budgeted
and actual results were as follows:
Required: Determine the following variances

(a) Sales price
(b) Sales margin mix
(c) Sales margin volume
(d) Sales margin quantity variance
173
Suggested Solution
Note:
(a) This is as given in the question N6.750.
(b) It is the actual units in the actual proportions but at the standard
margin, that is, N(430 x 8) + (230 x 12) + (40 x 20) = N7,000.
(c) It is the actual number of units sold (700) but as the standard
proportions (62.5%, 31.25%, 0.0625%).
(d) This is as given in the question N8,000.
The sales margin variance is derived by comparing the standard state with the
actual state, that is, N6,750 – N8,000 = N1,250A.
2.6 Standard Marginal Cost

It is noteworthy to state that the total absorption costing principles form the
basis on which standard costing systems operate. However, the marginal costing
principles can also be introduced into standard costing operations, hence being
referred to as standard marginal costing. It can also be recalled that marginal
costing operates on the contribution approach, whereby costs are separated into
variable and fixed costs and the latter are not part of product costs but are
174
treated as period costs. The standard marginal costing technique adopts the
following principles and characteristics:
a. Standards are evolved in the usual manner on standard cost card, without
the inclusion of the fixed costs. The direct materials, direct labour, direct
expenses and variable overheads are recorded on it.
b. The standard selling price is determined by adding the budgeted
contribution for every product to the budgeted marginal cost. Therefore,
the budgeted sales margin is the budgeted contribution.
c. The budgeted sales levels and fixed overhead cost can be used to come up
with the budgeted profit statement for the subsequent operating period.
The format would appear as below.
Budgeted Profit Statement for the Period ended
With the non-inclusion of the fixed overhead volume variance and the sub-
analysed variances (the capacity and efficiency variances), the analysis of
variances becomes easier.
2.7 Opportunity Cost Approach to Variances

These variances conform to the terminology of the Chartered Institute of
Management Accountants. It is common in practice for additional ‘special’
variances to be included within a reporting system, to reflect the unique
characteristics of a company’s operations, that is, a flour or sugar manufacturer
might include an item in his standard costs for losses due to damaged or broken
packs. Nevertheless, most variance reporting systems conform overall to the
175
conventional type. A school of theorists, however, has suggested a different
approach to the calculation of variances. The leading proponent of this school is
Professor Joel Demski.
Demski (1977) argues that existing internal accounting techniques of flexible

budgeting and variance analysis are thought to be general purpose in nature,
because of their emphasis on comparison between actual and planned results’.
Analysis of differences between actual and planned results, leads to the taking
of remedial action as well as learning. Unfortunately, the price of this generality
is an accounting model that merely monitors performance relative to the
original plan, except as signalled by implication or use of an adjusted budget.
Put another way, because of its emphasis on comparison between actual and
planned results, and consequent disregard of changes in these planned results,
the traditional accounting model does not act as an opportunity cost system.
2.7.1 Opportunity Cost Approach

An opportunity cost approach ‘compares what a firm actually accomplished
during some planning period with what it deems on the basis of hindsight, it
should have accomplished. It is an opportunity cost approach in the sense that
what a firm actually accomplished during some planning period is what it
should have accomplished in the ex-post optimum programme’. Demski
therefore argues that in order to provide control information which guides
managers towards better control decisions, it is necessary to show what
realistically could have been achieved during a period, rather than what the
possibly-out of-date budget plan intended to be achieved. ‘Instead of comparing
actual results with ex ante standard results, this system compares actual results
with revised optimum results.
‘This implies that the proper standard to be used in supplying variance
information is a standard based on actual conditions; that is ‘those that would
176
have been incorporated in the original plan if the actual conditions had been
known in advance.’ We shall call this an ex-post (currently attainable)
standard.’ The opportunity cost approach considers:
a. actual results;
b. budgeted results; and
c. ‘ex-post’ optimum results. Traditional variance analysis does not to do
this.
2.7.2 Marginal Costing and Opportunity Costs

You may have noticed that in the previous examples, marginal costing variances
were calculated, that is, sales volume variances were valued at contributed
foregone and there are no fixed cost volume variances. This is because
contribution foregone, in terms of lost revenue or extra expenditure incurred, is
the nearest equivalent to opportunity cost which is readily available to
management accountants (who assume linearity of costs and revenues within a
relevant range of activity).
2.7.3 The Opportunity Cost of Capacity Variances

Horngren (1990) suggested that a ‘contribution foregone’ approach to reporting
capacity variances would be preferable to the traditional absorption costing
capacity variance.
Illustration
The Master budget of Jones Ltd for 1988 is to make and sell 100 units of its
product each month, at a contribution of N50 per unit. However, at the
beginning of May, the scheduled production for the month was reduced to 95
units because of difficulties in making sales to customers. Each unit takes 4
hours to make, and actual production and sales in May amounted to 90 units in
360 hours of work. Calculate the opportunity cost of the capacity variances.
177
Suggested Solution
At N50 per unit (N12.5 per hour), the contribution foregone is N250 by the
ailure of the sales department to achieve the expected sales.
(b) Similarly;
Scheduled production at the beginning of the month 380 hours
The contribution foregone is N250 by the failure of the production department

to meet its output targets.
2.7.4 The Opportunity Cost of Efficiency Variances

The same argument might be applied to efficiency variances. If inefficiency, by
restricting output below what it should have been, also results in lost sales, the
cost of inefficiency will include the contribution foregone by losing the sales.
Illustration
Ayo Wale Ltd budgets to make and sell 200 units of its product during a period.
Unit costs are as follows:
During the period, the production department works for 1,000 hours and
produced 175 units. The actual contribution was
178
Analyze the variance from an opportunity cost approach.
Suggested Solution
Inefficiency of 125 hours (A) has also cost the company lost production and
sales of 25 units, and the contribution foregone from these sales at N2 per unit is
N50
(A).
2.8 Planning and Operational Variances

Traditional variances imply that actual performance is always at fault, because
of the method of analysing variances between operational and planning factors
that cause failure to achieve budgeted profit in that faulty standards could be
identified separately. Planning and operational variances provide additional
relevant information as they separate the variances into components that are the
result of good planning and operation.
179
When planning, variances may not be separated; some elements, which are
uncontrollable, may work against the planning system. It must however be
remembered that the Planning and Operational approach does not make the
traditional approach absolute, but rather make the information of things more
relevant especially in controlling the operation of the organization. The main
difficulty in this approach is the ability of the management to separate the total
variances into their planning as well as operational sources;hence, most
organizations are slow in modifying their system in this direction.
2.8.1 Calculation of Planning and Operational Variances

In calculating planning and operational variances, we have to understand the
following terms:
(a) Ex-Ante: this is the first target set.
(b) Ex-Post: this is the later situation during the year or immediately which
were not foreseen during the first target (Budget);
(c) Actual Result: this is actual result at the end of the period.
Planning Variances = Ex-Ante – Ex-Post
Operational Variances = Ex-Post – Actual Result
Planning variances are those variances, which are not within the control of
management (Uncontrollable).
Operational variances are variances, which are controllable by the management.
Planning variances may be due to the following:
(a) New government policy on importation
(b) New government policy on taxation
(c) Inflation
Illustration
In January 2004, Jaye Limited set a standard marginal cost for its major product
at N50 per unit. The standard cost is re-calculated once each year. Actual
180
production costs during August 2004 were N608,000 when 8,500 units were
made. With the benefit of hindsight, the management of Jaye Limited realized
that a more realistic standard cost for current conditions would be N80 per unit.
The planned standard cost of N50 is unrealistically low:
Suggested Solution
With the benefits of hindsight, the realistic standard should have been N80. The
variances caused by favourable or adverse operating performance, that is, the
material price and usage, labour rate and efficiency variances etc – should be
calculated by comparing actual results against this realistic standard. Since the
variance should then be a true reflection of operating performance, they will be
called operational variances, that is, (Ex-post less Actual Result).
The planning variance reveals the extent to which the original standard would
be at fault (Ex-Ante less Ex-Post).
(Note: it is an adverse variance because the original standard was too optimistic,
that is over-estimating the expecting profits by understating the standard cost).
If traditional variance analysis had been used, the total cost variance would have
been the same, but the ‘blame’ would all appear to lie on actual results and
operating inefficiencies.
181
Bromwich (1990) would argue that:
(a) the total cost variance reported by the traditional method would not be
helpful for management control purposes;
(b) planning and operating variances give a better idea of why actual
results failed to reach the original budget expectations. Operating
variances may or may not be controllable, whereas planning variances
tend to be uncontrollable. If the standard is wrong, no amount of
control-action to adjust operating resources will reconcile actual
results to the faulty budget. Nevertheless, planning variance reveals a
severe weakness in a business organization in that failure to budget
correctly may lead a company into severe financial difficulties or at
best poor financial results for the accounting period. They need to be
identified, albeit in hindsight, and eliminated as much as possible in
future planning.
Illustration
Ayo limited budgeted to sell 10,000 units of a new product during 2005. The
budget sales price was N20 per unit, and the variable cost N6 per unit. Although
actual sales in 2005 were 10,000 units and variable costs of sales were N60,000.
Sales revenue was only N10 per unit. With the benefit of hindsight, it is realized
that the budgeted sales price of N20 was hopelessly optimistic, and a price of
N9 per unit would have been much more realistic.
Required: Analyse the variances into operating and planning variances.
Suggested Solution
AYO LIMITED
182
The only variances are sales price variances.
Planning (Sales price) variance:
2.8.2 Importance and shortcomings of planning and Operational

Variances
Even though, the conventional variances may not be analysed into the planning
and operational elements, the importance cannot be underestimated and they
include:
a. Ensures an orderly manner of reviewing standards as well as the
associated basis for setting them up.
b. Prompts the realistic nature of standard costing and variance analysis,
especially where circumstances change and are drastic.
c. Ensures the usage of updated information, especially in the operational
variances adopted for determining present levels of efficiency.
d. Since standard costing, as a technique is realistic and informative, its
acceptability will be on the high side and encourage motivation.
e. Since the planning efforts are enhanced, problem areas can be easily
identified and actions takes as at when due.
183
Nonetheless, the shortcomings of the variances are:
a. The responsibility centres may experience some form of pressure
especially where interpretation are involved in terms of controllable and
uncontrollable activities or internal or external factors affecting planning
and operating duties.
b. The determination and updating of additional variances entail many
clerical and managerial efforts on a continuous basis.
c. The determination of the ex-post element may be subjective, hence
resulting in the allotment of the planning and operational causal factors
being political in nature.
2.9 Control Ratios

The units of output can be shown in different variety of forms and for standard
costing. They are identified as a peculiar element/unit that is the standard hour,
which is referred to as the quantity of production that should be produced in an
hour.
A standard hour is a measure of the work content in an hour and not that of time
involved or taken to produce. For example, if 500 units of a product should be
produced in one hour, then output of 2000 units is equivalent to 4 standard
hours. Therefore, the relationship between standard hours and actual production
can be expressed as control rations. These are used to show the degree of
efficient or inefficient utilization of resources at the disposal of management.
The following ratios can be computed:
a. Activity Ratio
This ratio compares the actual level of production with the planned level
of production. It can be expressed as:
184
It is not a measure of efficiency, but indicates the level of activity which has,
in fact, been achieved.
b. The Efficiency Ratio
The ratio measures the efficiency with which production has been
achieved. Actual time taken to achieve the actual production is compared
with the time such production should have taken. The efficiency ratio can
be expressed as:
c. The Capacity Ratio

This ratio assesses the utilization of the available capacity by comparing
actual hours worked with budgeted hours.
It should be noted that:

Activity ratio = capacity ratio x efficiency ratio.
Illustration
One of the Departments of Lawal Company Limited produces two products
“Gas oil” and “kerosene”. The standard times for the production of the products
are 30 minutes for Gas oil and 24 minutes for kerosene. The budget for July is
24,000 units of Gas oil and 10,000 units of kerosene. During the month, 12,000
labour hours were worked and 20,000 units of Gas oil and 8,000 units of
kerosene were produced. You are required to compute:
1. The activity ratio;
2. The efficiency ratio;
3. The capacity ratio and interpret your results.
185
Suggested Solution
LAWAL LIMITED
The Standard hours equivalent to actual production for July is:
The budget in terms of standard hours is:
186
In-text Question 1 Standard cost is the ,,,,,,,,,,,of the products, components or services
produced in a period.
Answer
1. Planned unit cost
In-text Question 2
Standard costing is a based on the feedback control concept which ensures the determination
of standard costs of products or services and compares them with the actual results and costs
with the difference being referred to as a variance
Answer
2. Control technique
4.0 Conclusion/Summary
Standard costing involves comparing actual costs with predetermined costs. The
various types of standard are basic standard, ideal standard, attainable standard
and current standard. Standards are expected to be reviewed on a periodic basis,
for example, half yearly, or yearly. Variance analysis is the process of analyzing
the total difference planned and actual performance into its components parts.
They should not be considered in isolation. The basic variances are those of
material, labour and overhead. The basic material variances measure the
differences between actual and standard wage rates and actual and standard
labour efficiency.
A standard hour is a unit measure of production not of time. If total absorption
principles of fixed and variable costs are absorbed into production, variances
relating to both fixed and variable overheads will arise while in marginal
costing only variable overheads are absorbed into production overheads.
Material usage variance can be sub-divided into mix and yield variances. Sales
marginal variances can be sub-divided into price and quantity variances.
Traditional variances can be separated into planning and operational variances
with the attendant benefits whereby planning variances seek to measure that
part of the total variance, which is due to planning deficiencies whilst the
187
operating variances seek to measure operating as compared to a realistic current
standard.
Summary
In this study session, we have discussed the standard setting process. We then
looked at the relationship between budgetary control and standard costing.
Finally, we calculated material, labour, overhead and sales margin variance.
1. What are the three uses of budget?
2. what are the four benefits of budgeting?
1. In the context of business management, the purpose of budgeting includes

the following three aspects: A forecast of income and expenditure (and
thereby profitability) A tool for decision making. A means to monitor
business performance.
2. The Benefits of Budgeting:
• Provides you 100% control over your money.
• Let's you track your financial goals.
• Budgeting will open your eyes.
• Will help organize your spending.
• Will help create a cushion for unexpected expenses.
• Budgeting Makes Talking About Finances Much Easier.
188
a. Visit U-tube addhttps://bit.ly/2U7oU2yWatch the video & summarise in 1
paragraph
b. View the animation on add/sitehttps://bit.ly/2Md2jkD and critique it in the
discussion forum
Aborode R. (2006). A practical approach to advanced financial accounting.
SSAP 16. ASe.
Wadsworth.
Unwin, London.
189
Irwin.
Essex.
London.
References 491
Research Ltd.
190
Evans, London.
735-49.
References
8,223-34.
191
Berks.
Institute, London.
192
ICAN Pack, (2006). Management accounting. Lagos: VI Publishing Ltd.

Cambridge, Mass.
193
Glossary
account payable an amount due for payment to a supplier of goods or services,

also described as a trade creditor.
account receivable an amount due from a customer, also described as a trade
debtor.
accountancy firm A business partnership (or possibly a limited company) in
which the partners are qualified accountants. The firm undertakes work for
clients in respect of audit, accounts preparation, tax and similar activities.
accountancy profession The collective body of persons qualified in
accounting, and working in accounting-related areas. Usually they are members
of a professional body, membership of which is attained by passing
examinations.
accounting The process of identifying, measuring and communicating financial
information about an entity to permit informed judgements and decisions by
users of the information.
accounting equation The relationship between assets, liabilities and ownership
interest.
accounting period Time period for which financial statements are prepared
(e.g. month, quarter, year).
accounting policies Accounting methods which have been judged by business
enterprises to be most appropriate to their circumstances and adopted by them
for the purpose of preparing their financial statements.
accounting standards Definitive statements of best practice issued by a body
having suitable authority.
Accounting Standards Board The authority in the UK which issues definitive
statements of best accounting practice.
accruals basis The effects of transactions and other events are recognised when
they occur (and not as cash or its equivalent is received or paid) and they are
194
recorded in the accounting records and reported in the financial statements of
the periods to which they relate (see also matching).
accumulated depreciation Total depreciation of a non-current (fixed) asset,
deducted from original cost to give net book value.
acid test The ratio of liquid assets to current liabilities.
acquiree Company that becomes controlled by another.
acquirer Company that obtains control of another.
acquisition An acquisition takes place where one company – the acquirer –
acquires control of another – the acquiree – usually through purchase of shares.
acquisition method Production of consolidated financial statements for an
acquisition.
administrative expenses Costs of managing and running a business.
agency A relationship between a principal and an agent. In the case of a limited
liability company, the shareholder is the principal and the director is the agent.
agency theory A theoretical model, developed by academics, to explain how
the relationship between a principal and an agent may have economic
consequences.
aggregate depreciation See accumulated depreciation.
allocate To assign a whole item of cost, or of revenue, to a simple cost centre,
account or time period.
allocated, allocation See allocate.
amortisation Process similar to depreciation, usually applied to intangible
fixed assets.
annual report A document produced each year by limited liability companies
containing the accounting information required by law. Larger companies also
provide information and pictures of the activities of the company.
articles of association Document setting out the relative rights of shareholders
in a limited liability company.
195
articulation The term 'articulation' is used to refer to the impact of transactions
on the balance sheet and profit and loss account through application of the
accounting equation.
assets Rights or other access to future economic benefits controlled by an entity
as a result of past transactions or events.
associated company One company exercises significant influence over another,
falling short of complete control.
audit An audit is the independent examination of, and expression of opinion on,
financial statements of an entity.
audit manager An employee of an accountancy firm, usually holding an
accountancy qualification, given a significant level of responsibility in carrying
out an audit assignment and responsible to the partner in charge of the audit.
bad debt It is known that a credit customer (debtor) is unable to pay the
amount due.
balance sheet A statement of the financial position of an entity showing assets,
liabilities and ownership interest.
bank facility An arrangement with a bank to borrow money as required up to
an agreed limit.
bond The name sometimes given to loan finance (more commonly in the USA).
broker (stockbroker) Member of a stock exchange who arranges purchase and
sale of shares and may also provide an information service giving buy/sell/hold
recommendations.
broker's report Bulletin written by a stockbroking firm for circulation to its
clients, providing analysis and guidance on companies as potential investments.
business combination A transaction in which one company acquires control of
another.
business cycle Period (usually 12 months) during which the peaks and troughs
of activity of a business form a pattern which is repeated on a regular basis.
business entity A business which exists independently of its owners.
196
called up (share capital) The company has called upon the shareholders who
first bought the shares, to make their payment in full.
capital An amount of finance provided to enable a business to acquire assets
and sustain its operations.
capital expenditure Spending on non-current (fixed) assets of a business.
capitalisation issue Issue of shares to existing shareholders in proportion to
shares already held. Raises no new finance but changes the mix of share capital
and reserves.
cash Cash on hand (such as money held in a cash box or a safe) and deposits in
a bank that may be withdrawn on demand.
cash equivalents Short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.
cash flow projections Statements of cash expected to flow into the business
and cash expected to flow out over a particular period.
cash flow statement Provides information about changes in financial position.
chairman The person who chairs the meetings of the board of directors of a
company (preferably not the chief executive).
charge In relation to interest or taxes, describes the reduction in ownership
interest reported in the income statement (profit and loss account) due to the
cost of interest and tax payable.
chief executive The director in charge of the day-to-day running of a company.
close season Period during which those who are 'insiders' to a listed company
should not buy or sell shares.
commercial paper A method of borrowing money from commercial
institutions such as banks.
Companies Act The Companies Act 1985 as modified by the Companies Act
1989. Legislation to control the activities of limited liability companies.
197
comparability Qualitative characteristic expected in financial statements,
comparable within company and between companies.
completeness Qualitative characteristic expected in financial statements.
conceptual framework A statement of principles providing generally accepted
guidance for the development of new reporting practices and for challenging
and evaluating the existing practices.
conservatism See prudence. Sometimes used with a stronger meaning of
understating assets and overstating liabilities.
consistency The measurement and display of similar transactions and other
events is carried out in a consistent way throughout an entity within each
accounting period and from one period to the next, and also in a consistent way
by different entities.
consolidated financial statements Present financial information about the
group as a single reporting entity.
consolidation Consolidation is a process that aggregates the total assets,
liabilities and results of the parent and its subsidiaries (the group) in the
consolidated financial statements.
contingent liabilities Obligations that are not recognised in the balance sheet
because they depend upon some future event happening.
control The power to govern the financial and operating policies of an entity so
as to obtain benefits from its activities.
convertible loan Loan finance for a business that is later converted into share
capital.
corporate governance The system by which companies are directed and
controlled. Boards of directors are responsible for the governance of their
companies.
corporate recovery department Part of an accountancy firm which specialises
in assisting companies to recover from financial problems.
198
corporate social responsibility Companies integrate social and environmental
concerns in their business operations and in their interactions with stakeholders.
corporation tax Tax payable by companies, based on the taxable profits of the
period.
cost of a non-current asset is the cost of making it ready for use, cost of finished
goods is cost of bringing them to the present condition and location.
cost of goods sold Materials, labour and other costs directly related to the goods
or services provided.
cost of sales See cost of goods sold.
coupon Rate of interest payable on a loan.
credit (bookkeeping system) Entries in the credit column of a ledger account
represent increases in liabilities, increases in ownership interest, revenue, or
decreases in assets.
credit (terms of business) The supplier agrees to allow the customer to make
payment some time after the delivery of the goods or services. Typical trade
credit periods range from 30 to 60 days but each agreement is different.
credit note A document sent to a customer of a business cancelling the
customer's debt to the business, usually because the customer has returned
defective goods or has received inadequate service.
credit purchase A business entity takes delivery of goods or services and is
allowed to make payment at a later date.
credit sale A business entity sells goods or services and allows the customer to
make payment at a later date.
creditor A person or organization to whom money is owed by the entity.
critical event The point in the business cycle at which revenue may be
recognised.
current asset An asset that is expected to be converted into cash within the
trading cycle.
199
current liability A liability which satisfies any of the following criteria: (a) it is
expected to be settled in the entity's normal operating cycle; (b) it is held
primarily for the purpose of being traded; (c) it is due to be settled within 12
months after the balance sheet date.
current value A method of valuing assets and liabilities which takes account of
changing prices, as an alternative to historical cost.
customers' collection period Average number of days credit taken by
customers.
cut-off procedures Procedures applied to the accounting records at the end of
an accounting period to ensure that all transactions for the period are recorded
and any transactions not relevant to the period are excluded.
debenture A written acknowledgement of a debt – a name used for loan
financing taken up by a company.
debtor A person or organization that owes money to the entity.
deep discount bond A loan issued at a relatively low price compared to its
nominal value.
default Failure to meet obligations as they fall due for payment.
deferred asset An asset whose benefit is delayed beyond the period expected
for a current asset, but which does not meet the definition of a fixed asset.
deferred income Revenue, such as a government grant, is received in advance
of performing the related activity. The deferred income is held in the balance
sheet as a type of liability until performance is achieved and is then released to
the income statement.
deferred taxation The obligation to pay tax is deferred (postponed) under tax
law beyond the normal date of payment.
depreciable amount Cost of a non-current (fixed) asset minus residual
value.
depreciation The systematic allocation of the depreciable amount of an asset
over its useful life. The depreciable amount is cost less residual value.
200
derecognition The act of removing an item from the financial statements
because the item no longer satisfies the conditions for recognition.
difference on consolidation Difference between fair value of the payment for
a subsidiary and the fair value of net assets acquired, more commonly called
goodwill.
direct method (of operating cash flow) Presents cash inflows and cash
outflows.
Directive A document issued by the European Union requiring all Member
States to adapt their national law to be consistent with the Directive.
director(s) Person(s) appointed by shareholders of a limited liability company
to manage the affairs of the company.
disclosed, disclosure An item which is reported in the notes to the accounts is
said to be disclosed but not recognised.
discount received A supplier of goods or services allows a business to deduct
an amount called a discount, for prompt payment of an invoiced amount. The
discount is often expressed a percentage of the invoiced amount.
dividend Amount paid to a shareholder, usually in the form of cash, as a reward
for investment in the company. The amount of dividend paid is proportionate to
the number of shares held.
dividend cover Earnings per share divided by dividend per share.
dividend yield Dividend per share divided by current market price.
doubtful debts Amounts due from credit customers where there is concern that
the customer may be unable to pay.
drawings Cash taken for personal use, in sole trader or partnership business,
treated as a reduction of ownership interest.
earnings for ordinary shareholders Profit after deducting interest charges and
taxation and after deducting preference dividends (but before deducting
extraordinary items).
201
earnings per share calculated as earnings for ordinary shareholders divided
by the number of shares which have been issued by the company.
effective interest rate The rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument.
efficient markets hypothesis Share prices in a stock market react immediately
to the announcement of new information.
endorsed International financial reporting standards approved for use in
Member States of the European Union through a formal process of
endorsement.
endorsement See endorsed.
enterprise a business activity or a commercial project.
entity, entities Something that exists independently, such as a business which
exists independently of the owner.
entry price The value of entering into acquisition of an asset or liability,
usually replacement cost.
equities analyst A person who investigates and writes reports on ordinary share
investments in companies (usually for the benefit of investors in shares).
equity A description applied to the ordinary share capital of an entity.
equity accounting Reports in the balance sheet the parent or group's share of
the investment in the share capital and reserves of an associated company.
equity interest See ownership interest.
equity portfolio A collection of equity shares.
equity shares Shares in a company which participate in sharing dividends and
in sharing any surplus on winding up, after all liabilities have been met.
eurobond market A market in which bonds are issued in the capital market of
one country to a non-resident borrower from another country.
exit price See exit value.
exit value A method of valuing assets and liabilities based on selling prices, as
an alternative to historical cost.
202
expense An expense is caused by a transaction or event arising during the
ordinary activities of the business which causes a decrease in the ownership
interest.
external reporting Reporting financial information to those users with a valid
claim to receive it, but who are not allowed access to the day-to-day records of
the business.
external users (of financial statements) Users of financial statements who
have a valid interest but are not permitted access to the day-to-day records of
the company.
fair value The amount at which an asset or liability could be exchanged in an
arm's-length transaction between a willing buyer and a willing seller.
faithful presentation Qualitive characteristic, information represents what it
purports to represent.
financial accounting A term usually applied to external reporting by a business
where that reporting is presented in financial terms.
financial adaptability The ability of the company to respond to unexpected
needs or opportunities.
financial gearing Ratio of loan finance to equity capital and reserves.
financial information Information which may be reported in money terms.
Financial Reporting Standard Title of an accounting standard issued by the
UK Accounting Standards Board as a definitive statement of best practice
(issued from 1990 onwards – predecessor documents are Statements of Standard
Accounting Practice, many of which remain valid).
financial risk Exists where a company has loan finance, especially long-term
loan finance where the company cannot relinquish its commitment. The risk
relates to being unable to meet payments of interest or repayment of capital as
they fall due.
financial statements Documents presenting accounting information which is
expected to have a useful purpose.
203
financial viability The ability to survive on an ongoing basis.
financing activities Activities that result in changes in the size and composition
of the contributed equity and borrowings of the entity.
fixed asset An asset that is held by an enterprise for use in the production or
supply of goods or services, for rental to others, or for administrative purposes
on a continuing basis in the reporting entity's activities.
fixed assets See non-current assets.
fixed assets usage Revenue divided by net book value of fixed assets.
fixed capital Finance provided to support the acquisition of fixed assets.
fixed cost One which is not affected by changes in the level of output over a
defined period of time.
floating charge Security taken by lender which floats over all the assets and
crystallises over particular assets if the security is required.
forecast estimate of future performance and position based on stated
assumptions and usually including a quantified amount.
format A list of items which may appear in a financial statement, setting out the
order in which they are to appear.
forward exchange contract An agreement to buy foreign currency at a fixed
future date and at an agreed price.
fully paid Shares on which the amount of share capital has been paid in full to
the company.
fund manager A person who manages a collection (portfolio) of investments,
usually for an insurance company, a pension fund business or a professional
fund management business which invests money on behalf of clients.
gearing (financial) The ratio of debt capital to ownership claim.
general purpose financial statements Documents containing accounting
information which would be expected to be of interest to a wide range of user
groups. For a limited liability company there would be: a balance sheet, a profit
204
and loss account, a statement of recognised gains and losses and a cash flow
statement.
going concern basis The assumption that the business will continue operating
into the foreseeable future.
goodwill Goodwill on acquisition is the difference between the fair value of
the amount paid for an investment in a subsidiary and the fair value of the net
assets acquired.
gross Before making deductions.
gross margin Sales minus cost of sales before deducting administration and
selling expenses (another name for gross profit). Usually applied when
discussing a particular line of activity.
gross margin ratio Gross profit as a percentage of sales.
gross profit Sales minus cost of sales before deducting administration and
selling expenses (see also gross margin).
group Economic entity formed by parent and one or more subsidiaries.
highlights statement A page at the start of the annual report setting out key
measures of performance during the reporting period.
historical cost Method of valuing assets and liabilities based on their original
cost without adjustment for changing prices.
HM Revenue and Customs (HMRC) The UK government's tax-gathering
organization (previously called the Inland Revenue).
IAS International Accounting Standard, issued by the IASB's predecessor body.
IASB International Accounting Standards Board, an independent body that sets
accounting standards accepted as a basis for accounting in many countries,
including all Member States of the European Union.
IASB system The accounting standards and guidance issued by the IASB.
IFRS International Financial Reporting Standard, issued by the IASB.
205
impairment A reduction in the carrying value of an asset, beyond the expected
depreciation, which must be reflected by reducing the amount recorded in the
balance sheet.
impairment review Testing assets for evidence of any impairment.
impairment test Test that the business can expect to recover the carrying value
of the intangible asset, through either using it or selling.
improvement A change in, or addition to, a non-current (fixed) asset that
extends its useful life or increases the expected future benefit. Contrast with
repair which restores the existing useful life or existing expected future benefit.
income statement Financial statement presenting revenues, expenses, and
profit. Also called profit and loss account.
incorporation, date of. The date on which a company comes into existence.
indirect method (of operating cash flow) Calculates operating cash flow by
adjusting operating profit for non-cash items and for changes in working capital.
insider information Information gained by someone inside, or close to, a listed
company which could confer a financial advantage if used to buy or sell shares.
It is illegal for a person who is in possession of inside information to buy or sell
shares on the basis of that information.
institutional investor An organization whose business includes regular
investment in shares of companies, examples being an insurance company, a
pension fund, a charity, an investment trust, a unit trust, a merchant bank.
intangible Without shape or form, cannot be touched.
interest (on loans) The percentage return on capital required by the lender
(usually expressed as a percentage per annum).
interim reports Financial statements issued in the period between annual
reports, usually half-yearly or quarterly.
internal reporting Reporting financial information to those users inside a
business, at various levels of management, at a level of detail appropriate to the
recipient.
206
inventory Stocks of goods held for manufacture or for resale.
investing activities The acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
investors Persons or organizations which have provided money to a business in
exchange for a share of ownership.
joint and several liability (in a partnership) The partnership liabilities are
shared jointly but each person is responsible for the whole of the partnership.
key performance indicators Quantified measures of factors that help to
measure the performance of the business effectively.
leasing Acquiring the use of an asset through a rental agreement.
legal form Representing a transaction to reflect its legal status, which might not
be the same as its economic form.
leverage Alternative term for gearing, commonly used in the USA.
liabilities Obligations of an entity to transfer economic benefits as a result of
past transactions or events.
limited liability A phrase used to indicate that those having liability in respect
of some amount due may be able to invoke some agreed limit on that liability.
limited liability company Company where the liability of the owners is limited
to the amount of capital they have agreed to contribute.
liquidity The extent to which a business has access to cash or items which can
readily be exchanged for cash.
listed company A company whose shares are listed by the Stock Exchange as
being available for buying and selling under the rules and safeguards of the
Exchange.
listing requirements Rules imposed by the Stock Exchange on companies
whose shares are listed for buying and selling.
Listing Rules Issued by the UK Listing Authority of the Financial Services
Authority to regulate companies listed on the UK Stock Exchange. Includes
rules on accounting information in annual reports.
207
loan covenants Agreement made by the company with a lender of long-term
finance, protecting the loan by imposing conditions on the company, usually to
restrict further borrowing.
loan notes A method of borrowing from commercial institutions such as banks.
loan stock Loan finance traded on a stock exchange.
long-term finance, long-term liabilities Money lent to a business for a fixed
period, giving that business a commitment to pay interest for the period
specified and to repay the loan at the end of the period Also called non-current
liabilities information in the financial statements should show the commercial
substance of the situation.
management Collective term for those persons responsible for the day-to-day
running of a business.
management accounting Reporting accounting information within a business,
for management use only.
market value (of a share) The price for which a share could be transferred
between a willing buyer and a willing seller.
marking to market Valuing a marketable asset at its current market price.
margin Profit, seen as the 'margin' between revenue and expense.
matching Expenses are matched against revenues in the period they are
incurred (see also accruals basis).
material See materiality.
materiality Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the financial
statements.
maturity The date on which a liability is due for repayment.
maturity profile of debt The timing of loan repayments by a company in the
future.
memorandum (for a company) Document setting out main objects of the
company and its powers to act.
208
merger Two organizations agree to work together in a situation where neither
can be regarded as having acquired the other.
minority interest The ownership interest in a company held by persons other
than the parent company and its subsidiary undertakings. Also called a non-
controlling interest.
net After making deductions.
net assets Assets minus liabilities (equals ownership interest).
net book value Cost of non-current (fixed) asset minus accumulated
depreciation.
net profit Sales minus cost of sales minus all administrative and selling costs.
net realisable value The proceeds of selling an item, less the costs of selling.
neutral Qualitative characteristic of freedom from bias.
nominal value (of a share) The amount stated on the face of a share certificate
as the named value of the share when issued.
non-controlling interest See minority interest.
non-current assets Any asset that does not meet the definition of a current
asset. Also described as fixed assets.
non-current liabilities Any liability that does not meet the definition of a
current liability. Also described as long-term liabilities.
notes to the accounts Information in financial statements that gives more detail
about items in the financial statements.
off-balance-sheet finance An arrangement to keep matching assets and
liabilities away from the entity's balance sheet.
offer for sale A company makes a general offer of its shares to the public.
operating activities The principal revenue-producing activities of the entity and
other activities that are not investing or financing activities.
operating and financial review Section of the annual report of many
companies which explains the main features of the financial statements.
operating gearing The ratio of fixed operating costs to variable operating costs.
209
operating margin Operating profit as a percentage of sales.
operating risk Exists where there are factors, such as a high level of fixed
operating costs, which would cause profits to fluctuate through changes in
operating conditions.
ordinary shares Shares in a company which entitle the holder to a share of the
dividend declared and a share in net assets on closing down the business.
ownership interest The residual amount found by deducting all of the entity's
liabilities from all of the entity's assets. (Also called equity interest.)
par value See nominal value.
parent company Company which controls one or more subsidiaries in a group.
partnership Two or more persons in business together with the aim of making
a profit.
partnership deed A document setting out the agreement of the partners on how
the partnership is to be conducted (including the arrangements for sharing
profits and losses).
partnership law Legislation which governs the conduct of a partnership and
which should be used where no partnership deed has been written.
portfolio (of investment) A collection of investments.
portfolio of shares A collection of shares held by an investor.
preference shares Shares in a company which give the holder a preference
(although not an automatic right) to receive a dividend before any ordinary
share dividend is declared.
preliminary announcement The first announcement by a listed company of its
profit for the most recent accounting period. Precedes the publication of the full
annual report. The announcement is made to the entire stock market so that all
investors receive information at the same time.
premium An amount paid in addition, or extra.
prepayment An amount paid for in advance for an benefit to the business, such
as insurance premiums or rent in advance. Initially recognised as an asset, then
210
transferred to expense in the period when the benefit is enjoyed. (Also called a
prepaid expense.)
present fairly A condition of the IASB system, equivalent to true and fair
view in the UK ASB system.
price–earnings ratio Market price of a share divided by earnings per share.
price-sensitive information Information which, if known to the market, would
affect the price of a share.
primary financial statements The balance sheet, profit and loss account,
statement of total recognised gains and losses and cash flow statement.
principal (sum) The agreed amount of a loan, on which interest will be charged
during the period of the loan.
private limited company (Ltd) A company which has limited liability but is
not permitted to offer its shares to the public.
production overhead costs Costs of production that are spread across all
output, rather than being identified with specific goods or services.
profit Calculated as revenue minus expenses.
profit and loss account Financial statement presenting revenues, expenses, and
profit. Also called income statement.
prospective investor An investor who is considering whether to invest in a
company.
prospectus Financial statements and supporting detailed descriptions published
when a company is offering shares for sale to the public.
provision A liability of uncertain timing or amount.
provision for doubtful debts An estimate of the risk of not collecting full
payment from credit customers, reported as a deduction from trade receivables
(debtors) in the balance sheet.
prudence A degree of caution in the exercise of the judgements needed in
making the estimates required under conditions of uncertainty, such that gains
and assets are not overstated and losses and liabilities are not understated.
211
public limited company (plc) A company which has limited liability and
offers its shares to the public.
purchase method Method of producing consolidated financial statements (see
acquisition method).
purchases Total of goods and services bought in a period.
qualified audit opinion An audit opinion to the effect that: the accounts do not
show a true and fair view; or the accounts show a true and fair view except for
particular matters.
quality of earnings Opinion of investors on reliability of earnings (profit) as a
basis for their forecasts.
quoted company Defined in section 262 of the Companies Act 1985 as a
company that has been included in the official list in accordance with the
provisions of Part VI of the Financial Services and Markets Act 2000, or is
officially listed in an EEA state, or is admitted to dealing on either the New
York Stock Exchange or the exchange known as Nasdaq.
realised profit, realisation A profit arising from revenue which has been
earned by the entity and for which there is a reasonable prospect of cash being
collected in the near future.
recognised An item is recognised when it is included by means of words and
amount within the main financial statements of an entity.
recognition See recognised.
Registrar of Companies An official authorised by the government to maintain
a record of all annual reports and other documents issued by a company.
relevance Qualitative characteristic of influencing the economic decisions of
users.
reliability Qualitative characteristic of being free from material error and bias,
representing faithfully.
212
replacement cost A measure of current value which estimates the cost of
replacing an asset or liability at the date of the balance sheet. Justified by
reference to value to the business.
reserves The claim which owners have on the assets of a company because the
company has created new wealth for them over the period since it began.
residual value The estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated cost of disposal, if the asset
were already of the age and in the condition expected at the end of its useful
life.
retained earnings Accumulated past profits, not distributed in dividends,
available to finance investment in assets.
retained profit Profit of the period remaining after dividend has been
deducted.
return The yield or reward from an investment.
return on capital employed Operating profit before deducting interest and
taxation, divided by share capital plus reserves plus long-term loans.
return on total assets Operating profit before deducting interest and taxation,
divided by total assets.
return on shareholders' equity Profit for shareholders divided by share capital
plus reserves.
return (in relation to investment) The reward earned for investing money in a
business. Return may appear in the form of regular cash payments (dividends)
to the investor, or in a growth in the value of the amount invested.
revaluation reserve The claim which owners have on the assets of the business
because the balance sheet records a market value for an asset that is greater than
its historical cost.
revenue Created by a transaction or event arising during the ordinary activities
of the business which causes an increase in the ownership interest.
213
rights issue A company gives its existing shareholders the right to buy more
shares in proportion to those already held.
risk (in relation to investment) Factors that may cause the profit or cash flows
of the business to fluctuate.
sales See revenue, turnover.
sales invoice Document sent to customers recording a sale on credit and
requesting payment.
secured loan Loan where the lender has taken a special claim on particular
assets or revenues of the company.
segmental reporting Reporting revenue, profit, cash flow assets , liabilities for
each geographical and business segment within a business, identifying segments
by the way the organization is managed.
share capital Name given to the total amount of cash which the shareholders
have contributed to the company.
share certificate A document providing evidence of share ownership.
share premium The claim which owners have on the assets of a company
because shares have been purchased from the company at a price greater than
the nominal value.
shareholders Owners of a limited liability company.
shareholders' funds Name given to total of share capital and reserves in a
company balance sheet.
shares The amount of share capital held by any shareholder is measured in
terms of a number of shares in the total capital of the company.
short-term finance Money lent to a business for a short period of time, usually
repayable on demand and also repayable at the choice of the business if surplus
to requirements.
sole trader An individual owning and operating a business alone.
214
specific purpose financial statements Documents containing accounting
information which is prepared for a particular purpose and is not normally
available to a wider audience.
stakeholders A general term devised to indicate all those who might have a
legitimate interest in receiving financial information about a business because
they have a 'stake' in it.
statement of changes in equity A financial statement reporting all items
causing changes to the ownership interest during the financial period, under the
IASB system.
statement of principles A document issued by the Accounting Standards Board
in the United Kingdom setting out key principles to be applied in the process of
setting accounting standards.
statement of recognised income and expense A financial statement reporting
realised and unrealised income and expense as part of a statement of changes
in equity under the IASB system.
statement of total recognised gains and losses A financial statement reporting
changes in equity under the UK ASB system.
stepped bond Loan finance that starts with a relatively low rate of interest
which then increases in steps.
stewardship Taking care of resources owned by another person and using those
resources to the benefit of that person.
stock A word with two different meanings. It may be used to describe an
inventory of goods held for resale or for use in business. It may also be used to
describe shares in the ownership of a company. The meaning will usually be
obvious from the way in which the word is used.
stock exchange (Also called stock market.) An organization which has the
authority to set rules for persons buying and selling shares. The term 'stock' is
used loosely with a meaning similar to that of 'shares'.
215
stock holding period Average number of days for which inventory (stock) is
held before use or sale.
stock market See stock exchange.
subsidiary company Company in a group which is controlled by another (the
parent company). (See Chapter 7 for full definition.) Sometimes called
subsidiary undertaking.
substance (economic) Information in the financial statements should show the
economic or commercial substance of the situation.
subtotal Totals of similar items grouped together within a financial statement.
suppliers' payment period Average number of days credit taken from
suppliers.
tangible fixed assets A fixed asset (also called a non-current asset) which has
a physical existence.
timeliness Qualitative characteristic that potentially conflicts with relevance.
total assets usage Sales divided by total assets.
trade creditors Persons who supply goods or services to a business in the
normal course of trade and allow a period of credit before payment must be
made.
trade debtors Persons who buy goods or services from a business in the normal
course of trade and are allowed a period of credit before payment is due.
trade payables Amounts due to suppliers (trade creditors), also called
accounts payable.
trade receivables Amounts due from customers (trade debtors), also called
accounts receivable.
true and fair view Requirement of UK company law for UK companies not
using IASB system.
turnover The sales of a business or other form of revenue from operations of
the business.
216
UK ASB system The accounting standards and company law applicable to
corporate reporting by UK companies that do not report under the IASB system.
understandability qualitative characteristic of financial statements,
understandable by users.
unlisted (company) Limited liability company whose shares are not listed on
any stock exchange.
unrealised Gains and losses representing changes in values of assets and
liabilities that are not realised through sale or use.
unsecured creditors Those who have no claim against particular assets when a
company is wound up, but must take their turn for any share of what remains.
unsecured loan Loan in respect of which the lender has taken no special claim
against any assets.
value to the business An idea used in deciding on a measure of current value.
variance The difference between a planned, budgeted or standard cost and the
actual cost incurred. An adverse variance arises when the actual cost is greater
than the standard cost. A favourable variance arises when the actual cost is less
than the standard cost.
working capital Finance provided to support the short-term assets of the
business (stocks and debtors) to the extent that these are not financed by short-
term creditors. It is calculated as current assets minus current liabilities.
working capital cycle Total of stock holding period plus customers collection
period minus suppliers payment period.
Work-in-progress Cost of partly completed goods or services, intended for
completion and recorded as an asset.
written down value See net book value.
217

Acc 319 Note

Uploaded by

Copyright:

Available Formats

Acc 319 Note

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acc 319 Note

Uploaded by

Copyright:

Available Formats

DSITANCE LEARNING CENTRE

AHMADU BELLO UNIVERSITY

Course Code &Title: ACC 319 & MANAGEMENT ACCOUNTING I

Programme Title: B.Sc. ACCOUNTING

First published 2019 in Nigeria.

Ahmadu Bello University Press

COURSE STUDY GUIDE………………………………………………………………………6

MODULE 2: Cost Techniques, Budgeting, Variance and Cost-Volume-Profit Analysis.....90

ii. COURSE INTRODUCTION AND DESCRIPTION

iii. COURSE PREREQUISITES

iv. COURSE LEARNING RESOURCES

vi. ACTIVITIES TO MEET COURSE OBJECTIVES

vii. TIME (TO COMPLETE SYLABUS/COURSE)

viii. GRADING CRITERIA AND SCALE

B. Summative assessment (Semester examination)

ix. LINKS TO OPEN EDUCATION RESOURCES

Other sources for open education resources

N.B: - All Sessions commence in January

1. Read Courseware for the corresponding Study Session.

1. Read Courseware for the corresponding Study Session.

Week 14& 15 SEMESTER EXAMINATION

MODULE 2: Cost Techniques, Budgeting, Variance and Cost-Volume-

1.0 Study Session Learning Outcomes

(a) Formulating strategy

The Management Accounting Practices Committee (MAPC) of the National

2.2 Objective of Management Accounting

The main objectives of management accounting are as follows:

The scope of management accounting, inter alia includes:

Thus, management accounting serves not only as a tool in the hands of

2.4 Management Accounting Techniques

(c) Cost Control

(d) Standard Costing

(e) Credit Control

(g) Financial Management

(h) Book-Keeping and Management Accounting

(i) Uncertainty and Management Accounting

New Techniques in Management Accounting

1. The primary objective of Management Accounting is to enable the

Faruonbi K. (2006). Management Accounting. Lagos: EL-Toda Ventures Ltd.

Aborode R. (2006). A Practical Approach to Advanced Financial Accounting.

Accounting Standards Committee (ASC) (1980) Current Cost Accounting:

1.0 Study Session Learning Outcomes

2.0 Main Content

operations and plan for the future.

Inventory valuation methods and cost accumulation methods are frequently

2.2 Comparison between Cost Accounting and Financial Accounting

2.3Distinction between Cost Accounting and Management Accounting

2.4 Parts of a Cost Accounting System

2.4.2 Inventory Valuation Methods

2.4.4 Cost Flow Assumptions

2.5 Necessity for Cost Accounting System

1. Cost accounting is helpful because it can identify where a company is

2.0 Main Content

2.2 Importance and Basic Principles of Costing

2.3 Difference between Costing and Cost Accounting

2.4 Essentials of a Good Costing System

2.5 Classification of Costing

2.6 Costing Methods and Techniques

Methods of Costing: The following are the methods of costing.