TUTORIAL CHAPTER 1: INTRODUCTION

COST CLASSIFICATION BY NATURE

Direct: Material, Labour or Expense

Indirect: Material, Labour or Expense (Also known as Overhead @ OH)

The overhead expenses vary depending on the nature of the business: Production OH,
Administrative OH, Selling OH, Distribution OH etc

1. Nikko Garment Sdn. Bhd. manufacturers and sells high quality children’s wear made from
basic raw materials, Cotton and Silk. The garments are made in two production departments,
Design & Cutting Department and Sewing Department. Each of the departments has skilled
workers. Two experienced supervisors are supervising these workers.

Classify cost item below into PRIME COSTS, PRODUCTION OVERHEAD and
ADMINISTRATION OVERHEADS.

Cost Item Nature

a. Raw material cotton
b. Raw material silk
c. Royalty expenses to designer (paid based on unit of
production)
d. Water and electricity costs
e. Wages of workers in Design & Cutting Department
f. Wages of seamstress in Sewing Department
g. Depreciation of sewing machines (Straight-line
method)
h. Director’s salary
i. Production manager’s salary
j. Supervisor’s salary
k. Rent and Rates of factory building
l. Indirect materials
m. Depreciation of office car
n. Maintenance and repair cost of sewing machine
o. Salary of clerk for raw material store.
(Quiz 1 August 2015)
2. Give one (1) example each relating to the following costs for furniture manufacturer
industry.

Cost Item
a. Direct material
b. Direct labour
c. Production overhead
d. Administration overhead
e. Selling overhead

(Quiz 1 August 2015)

3. Classify the activities below as direct materials, direct labour, direct expenses, factory
overhead, administration overhead or selling and distribution overhead cost

. Cost Item Nature

a. Cloth used in a shirt factory

b. Cleaning fluid for the factory floor

c. Depreciation on corporate offices

d. Wages of factory operators

e. Commission of the salesmen

f. Insurance on factory building

g. Cost of patents and royalties

h. Electricity power consumed in operating factory

machine

i. Wages of an ironworker in the construction business

j. Electricity used in lighting sales offices

(Quiz 1 January 2016)

4. Classify the following costs according to their nature (Direct or Indirect: Material, Labour and
Expense)

Cost Item Nature

a. Accountant in the accounting firm.

b. Depreciation for manufacturing machineries.

c. Wheat flour used in baking cupcakes.

d. Adhesives for boxes.

e. Embroidery machine in textile industry.

f. Cashier at KFC restaurant.

(Quiz 1 January 2017)

COST CLASSIFICATION BY FUNCTION

Function: Production/Manufacturing Cost, Administration Cost, Selling & Distribution Cost,

Finance Cost, Research & Development Cost

!!! Remember, Production Cost = Prime Cost (DM + DL + DE) + Production OH

1. Tapah Cakes & Bakery is a family owned of baking shop, making delicious cakes and bread.
This shop has been in the business at the area of Tapah Road for several years

Cost Item Cost Function

a. Cost of flour used in bakery shop

b. Disposable plastic bags

c. Insurance expenses of office equipment

d. Maintenance cost of kitchen equipment

e. Electricity cost at the kitchen

f. Clerk's salary

g. Interest on loan paid for running the

business

(Quiz 1 February 2015)

2. The followings are the cost items, types of businesses and cost classification. Classify the
cost into direct material, direct labour, production overhead or period cost.

No Cost items Businesses Cost classification

a. Flour Bakery Direct material
b. Steel Watch maker
c. Leather Shoe repair
d. Thread Shoe maker
e. Marketing Airline
f. Housekeeper salary Hotel
g. Free gift for promotion Bank
h. Kitchen assistant salary Restaurant
i. Fabric Fashion designer

(Final Examination September 2015)

3. Good Tyres Sdn Bhd manufactures and sells high quality of tyres throughout Malaysia. The
company appoint Encik Ashraf in costing department, which among his jobs is to classify the
costs involved in the business operation.

Among costs involved in the business operation are as follows:

Cost Item Cost Function

a. Wages of machine operators

b. Supervisor’s salary

c. Rubber in manufacturing of tyres

d. Factory rent and rates

e. Advertising of the product tyres

f. Director’s salary

g. Petrol for delivery van

h. Fire insurance of factory

i. Depreciation of furniture and fittings in the office

j. Canteen expenses for office workers

k. Catalogues of products

l. Royalty on product design fees

(Quiz 1 April 2018)

COST CLASSIFICATION BY BEHAVIOR

Cost Behavior: Variable Cost, Fixed Cost, Mixed Cost & Step Cost

Most of FIXED COST is STEP COST.

Depreciation of Machine = Fixed Cost / Step cost X (Don’t give me 2 answer, either one of it)

1. Reclassify cost below according to COST BEHAVIOUR

Cost Item Cost Behavior

a. Raw material cotton
b. Raw material silk
c. Royalty expenses to designer (paid based on unit of
production)
d. Water and electricity costs
e. Wages of workers in Design & Cutting Department
f. Wages of seamstress in Sewing Department
g. Depreciation of sewing machines (Straight-line
method)
h. Director’s salary
i. Production manager’s salary
j. Supervisor’s salary
k. Rent and Rates of factory building
l. Indirect materials
m. Depreciation of office car
n. Maintenance and repair cost of sewing machine
o. Salary of clerk for raw material store.

(Quiz 1 August 2015)

2. Classify and draw a graph separately for each of the cost items below according to its
behavior.

Cost Item Graph Cost Behavior

a. Salary of engineer who monitors
design changes in cars.
 b. Electricity costs for factory plant

c. Annual fire insurance policy cost for

plant

d. Costs of tyres used for cars

e. Salary of production supervisor who

supervise a given number of workers

(Quiz 1 January 2016)

3. Classify the costs below according to their behavior (Fixed cost, variable cost and mixed cost).

Cost Item Cost Classification

a. Utilities expense.

b. Supervisor salary.

c. Indirect material.

d. Chief Accountant salary.

e. Production workers who are paid based on

number of output produced.

f. Cost of hiring special machine.

(Quiz 1 July 2016)

4. Classify the following costs according to their Cost Behavior: Fixed cost, Variable Cost and
Mixed Cost.

Cost Item Nature

a. Flour used in making cup cakes

b. Cost of flowers for florist

 c. Telephone expenses

d. Director’s salary to a company

e. Wages of assembly line workers in a car factory

f. Advertising cost

g. Depreciation cost on office building

h. Salesmen’s commission

i. Cloth in making a t-shirt

j. Rental of factory building

(Quiz 1 October 2017)

COSTING TERM

1. Determine whether the following costs are likely to be controllable or uncontrollable by the
head production department

Cost Item Controllable/Uncontrollable

a. Monthly factory rental

b. Direct labour

c. Depreciation of plant and machinery

d. Maintenance of machinery

e. Supplies or other direct material usage

f. Price of material paid to supplier

(Quiz 1 February 2015)

2. Place the appropriate definition to each concept of the following:

Concept: Period Cost, Sunk Cost, Indirect Cost, Fixed Cost, Opportunity Cost, Direct Cost,
Variable Cost, Product Cost, Administrative Cost and Conversion Cost.

Definition Concept

a. Cost that varies with the volume of activity

b. Cost that identified with the product and included

in the inventory
 c. Lost benefit from the best foregone alternative

d. Cost that cannot be directly related to cost object

e. Cost that can be directly related to a cost object

f. Cost that does not vary with the volume of activity

g. Cost to convert raw materials into finish product

h. Cost required to manage the organization and

provide staff support

i. Cost that are not identified with the product and

are deducted as expense

j. Cost of resources already acquired and

unaffected by the choice between various
alternatives

(Quiz 1 February 2015)

3. Determine whether the following costs are likely to be controllable or uncontrollable by the
management.
No Costs Controllable/Uncontrollable

a. Direct labour hours.

b. Rental expense of warehouse paid by the

company.

c. Consumption of direct materials.

d. Electricity tariff.

(Quiz 1 July 2016)

4. State whether of the following cost are likely to be controllable or non-controllable by the
head of production department
Cost Item Controllable/Non-controllable
a. Direct labour working hours

b. Maintenance of machinery
 c. Direct material price

d. Depreciation of machine

e. Insurance of machinery

f. Rental of factory

g. Usage of direct material in production

h. Price of petrol fuel

(Quiz 1 October 2017)

5. State whether each of the following statements is TRUE or FALSE:

Statements T/F
a.
Main users of management accounting reports are creditors, investors
and government.

b.
Conversion cost is the total of direct labour and non-manufacturing
overhead costs.

c.
Salary of assembly worker that are paid based on the number of
production units is an example of step cost.

d.
Product costs are costs that are identified with the product and included
in the inventory valuation

e.
Total cost includes the sum of prime cost plus factory overheads.

f.
Abnormal cost is an avoidable cost and the losses are not expected to
occur under efficient operating conditions

g.
Cost centre is a location, person or item of equipment for which cost
may be ascertained and used for the purpose of cost control

(Quiz 1 March 2019)

 TUTORIAL ON COST STATEMENT

QUESTION 1 (QUIZ 1 FEBRUARY 2015)

On 1 January 2015, Labu Sayong Enterprise received an order from the customers for 1,000 clay
pots and delivery is promised in three months. In order to complete this order the company needs
to hire a special machine at a cost of RM500 per month for the first two months and RM 650 for
the third month. The following data are the total cost data pertaining to the clay pots order.

Materials costs for the job, obtained from material requisition are as follows:

Department 1: January 5 500 bases at RM0.80 each

January 10 500 bases at RM0.90 each
Department 2: February 8 600 handles at RM0.30 each
February 20 400 handles at RM0.50 each

Direct labour costs obtained from time tickets are as follows:

Department 1: January 15 Forming,12 hours at RM4.00 per hour

January 20 Polishing, 10 hours at RM9.00 per hour
Department 2: February 12 Assembly, 14 hours at RM6.00 per hour
February 25 Finishing, 13 hours at RM8.00 per hour

Other costs: RM
Cost per month:
Salary of clerk 900
Utilities (only 40% for office used) 200
Petrol for delivery van 70
Material for colouring 80

Cost as at 31 March 2015:

Depreciation on assembling machines 120
Maintenance and repair cost of the assembling machine 150
Shipping outward costs 175
Carriage on purchase of the basic materials 150
Advertising cost 140

Required:

a. Prepare a Cost Statement for Labu Sayong Enterprise as at 31 March 2015. Your statement
should clearly identify the prime costs, production costs and total costs.

b. Determine the cost per unit of clay pot.

QUESTION 2 (QUIZ 1 AUGUST 2015)

WINWIN Printing is a small business that provides printing services in Tapah Road, Perak. The
business rents a shop where one quarter of the area is considered as administrative office. One
of the family members works as a manager assisted by five (5) full time workers. The manager
has collected the following information for the year 2014.

Amount (RM)
Monthly costs:
Wages for each worker 1,100
Rental of the shop building 2,000
Printing and colour material 4,500
Salary for manager 1,500
Electricity 1,450
General office cost 250

Annual costs:
Depreciation for printing machine 1,250
Business license 1,200
Promotion and advertising 720
Maintenance of printing machine 3,500

Required:

Prepare the cost statement showing clearly the prime cost, production cost and total cost for the
WINWIN Printing for the year 2014.

Question 3 (QUIZ 1 JANUARY 2016)

The following cost data is belongs to Delicious Enterprise, a manufacturer of local dodol operated
in Perak Tengah. For the month of December 2015, the business was able to sell 2,000 packets
of dodol due to high demand during the school holidays.

Direct material to produce 1 packet of dodol:

Coconut milk (600ml) RM9 per litre
Sugar (200gm) RM2.85 per kg
Rice flour (500gm) RM1.30 per kg
Gula Melaka (400gm) RM7 per kg
Indirect material RM1.80 per packet
Lease of special machine RM12,000 per year
2 Kitchen staff RM800 per staff
Administration staff RM550 per staff
Rental of business premise RM14,400 per year
1/3 of the space is for office use
2/3 of the space is for kitchen
Utilities RM600 per month
Advertising and promotion cost RM400 per month
 Depreciation of delivery van RM7,500 per year
Carriage inwards RM530 per month

Required:

Prepare cost statement for Delicious Enterprise for the month of December 2015 by showing
clearly the prime cost, total production cost and total cost.

Question 4 (QUIZ 1 JULAI 2016)

The following cost data is pertaining to Curlast Boutique House for the second quarter ending at
30 June 2016.

Amount (RM)
Tailor’s salary RM1,500 per month
Depreciation of sewing machines RM800 per machine per month
Supervisor’s salary RM1,800 per month
Cotton and silk RM45,000 per quarter
Hiring of embroidery machine RM5,000 per quarter
Cashier’s salary RM1,200 per month
Indirect material RM4,500 per quarter
Manager’s salary RM5,000 per month
Repair and maintenance of sewing machine RM2,100 per quarter
Rental of business premise RM3,000 per month
Utilities RM900 per month
Advertising cost RM4,000 per quarter

Additional information:

a. There are three (3) tailors who work directly with the sewing machine and there is one
supervisor at sewing department.

b. For Hari Raya Mega Sales, the business has introduced six (6) new designs of Baju Kurung
Moden. The business has paid royalty of RM300 per design to its out-sourced designer.

c. The business rents a premise where:

1/4 - sewing department

1/4 - administrative office
2/4 - boutique

Required:

Prepare cost statement for Curlast Boutique House for the second quarter ending at 30 June 2016
by showing clearly the prime cost; production overhead; administrative cost; and selling cost.
QUESTION 5 (CT FEBRUARY 2015)

The following data were extracted from the costing records for LHZ Manufacturers for the month
of December 2014.

RM
Salaries and wages 300,800
Petrol and oil 11,308
Insurance 21,400
General expenses 93,460
Raw material purchases 79,020
Returns of defective raw materials 4,020
Hire of special machine 5,000

Additional information:

a. Salaries and wages consists of:

70% - production workers

RM39, 104 - production supervisor
RM51,136 - Office administration

b. Petrol and oil must be divided between production and administration in the ratio 7:4
c. Insurance include RM9920 for the sales office
d. General expenses – 25% for production and 75% for non-production

Required:

Calculate prime cost, production overhead, production cost and non-production cost.
(Show your calculation for each item clearly)

You also may try:

1. CT August 2015
2. CT January 2016
3. CT May 2018 (more or less same with CT February 2015)

Tips:

1. Careful with month, quarter & year.

2. Careful with measurement (ml & liter, gram & kg)
3. Carriage inwards (direct material cost); carriage outwards (selling & distribution costs)
4. Prepare (cost statement) or calculate?
5. If 100% is to be divided into admin & production, check utilities & rental
6. Direct material – return to supplier – unused material