Bank organization and

TOPIC 1:
accounting.
a) Office.
It is a centre for information and administration, the most common functions
include:
1) Purchasing- buying raw materials or finished goods.
2) Human Resources- to hire, fire and training of workers.
3) Selling and marketing.
4) Finance- business funding.
5) General administration- day to day running of the business.

b) Organization Charts.
This is a way of showing authority, various roles and responsibility with a
formal structure.
It can also be used to demonstrate formal relationships and communication flows.
It provides a summary structure of the business and can improve internal
communication within a business.
It can also improve employee’s understanding of their roles within the business.
It indicates the formal channels as well as the delegation of authority.
The most common organization structure is a vertical organization chart where
authority flows downwards.
There are 3 types of organization charts:
1) Functional departmentation- departments are set-up for people who carry
out similar jobs.
2) Geographical departmentation- The organization is set up according to
the geographical reasons with some authority being retained at the main
office.
3) Product/ brand departmentation- This is a form of functional
departmentation where the production department is subdivided according to
different products.

c) Centralization and
Decentralization.
 a) Centralization.
Centralization involves carrying out as many tasks as possible at a single central
location eg head office.

Advantages Disadvantages

Clear Chain of Command-A streamlined and well- Adninistrative leadership- employees are unable to
defined ranking ensures efficient decision-making. contribute to the decision-making process of the
Everyone in the organization knows who to report to and organization since only the individuals at the headquarter
who to approach whenever they have questions. are the one to make decisions only.

Focused Vision- Centralized management helps in Remote control- The organization’s executives are under
communicating and delivering the organization’s vision, significant pressure to formulate decisions for the
and the clear lines of authority enable consistent organization and they lack control over the
message delivery. implementation.

Reduced Costs- The organization does not need to incur Delays in Work- employees rely on information flowing to
extra costs to hire specialists for other parts of the them from the top to guide project implementation,
organization since critical decisions are made at the head which means that they will be less productive when
office and then communicated outwards. waiting to get guidance.

Quick decision making- A centralized structure allows for

Lack of Employee Loyalty-Employee loyalty can decline in
faster decision making from the top since decisions are
a centralized structure as they are limited in creativity and
made by a small group of people and then
loyalty due to the inability of the work.
communicated to the lower-level managers.

Improved Quality of Work- Supervisors in each

department ensure that the work outputs are uniform
and of high quality.

a) Decentralization.
Decentralization is where most decisions tasks are carried out at various separate
location but some authority is maintained at the head office. (Government offices
ruling over counties instead of the State house but still under the
authority of the State house.)
Advantages Disavantages

Motivation of Subordinates -When you give members and

Slow decision making-Since there are many members to
stakeholders the power to be part of decision-making, it will
consult, the decision-making can be a difficult task to
encourage them and make them feel they are an important
complete, sometimes they lack to cooperate.
part of the institution.
External Factors- external factors like trade unions, market
Growth and enlargement- makes an organization member
movement, the government, and others, make it hard to
accountable and motivated for growth. They will
achieve a decision. They may look to manipulate/corrupt
understand various aspects of decision-making.
the majority.

Narrow Product Lines- the product lines in an organization

Efficient Communication- this helps with developing better
need to be subsequently broad. This is important to ensure
relationships among colleagues and also in the financial
that decentralization helps in decision-making. Smaller
world helps to improve relationship between the receipt
organizations with narrow product lines and a lack of
and the payee.
managerial-level people at lower levels may find it
challenging to gain from decentralization.

Ease of Expansion- Since any organization helps to expand

to various places, giving authoritative powers to team
members in different places can lead to effective expansion.

Better Supervision and Control- Team members can have

better supervision amongst themselves as they have the
authority to recommend new work styles when needed to
improve efficiency.

Batch Processing.
The method computers use to periodically complete high-volume, repetitive data
jobs.

Advantages Disadvantages
Ideal for processing a large amount of data Takes a longer period
Requires a system that can handle a large amount of data
Budget-friendly
The delay between data collections and processing can be
More structured and efficient inconvenient
Allows for an adequate audit trail Files are not always up to date
Personnel in an organization that would be involved in the sale of goods in credit:
1) Accountant
2) Warehouse manager
3) Credit controller

Real time online processing.

This is a method where data is processed almost immediately, there is no pause or
waiting in this method, usually require a continuous flow.
These systems process data as soon as they receive input and give the processed
data as soon as output.
Examples include:
i) Bank ATMs
ii) Multimedia system in automobiles.
iii) Traffic control system.

Advantages Disadvantages

It’s difficult to make a decision/ plan with

The delay in data processing is minimal. simple systems.
Information is up to date and can be used It requires high-performance hardware and
immediately. is expensive.
You would need fewer resources to sync It adds an overload of data in case of system
systems. failure.
You have increased uptime.
It helps identify issues so you can take
action immediately.

The Ledger System

Cost accounting refers to the accumulation of costs for inventory valuation for the
purpose of internal profit measurement and external profit reporting cost
accounting is used in both financial and management accounting.
There are 2 types of ledger system:
i) Integrated system- it combines the cost accounting and financial
accounting functions in one system of ledger system. They save time
 and administration efforts and avoid the need of periodic profit
reconciliation.

ii) Interlocking system- separate ledgers are kept for the accounting
function( financial ledger)
Cost ledger control account refers to an account in the financial ledger to record
costing items.
The management controls the transaction of a business through a system of
authorization of transactions.

Topic 2: INTRODUCTION TO
COST AND MANAGEMENT
ACCOUNTING
Accounting equation
The accounting equation represents the relationship between assets, liability and
owner’s equity (capital) in a business organization
a) Asset- This is a resource controlled by business due to something that
happened in the past from which economic benefits (things that make that
make the company better off financially) are expected to flow in the future
b) Liability- Amount owned by the business, which will result in a payment of
money at some point in the future
c) Capital – The owners interest in the business. It is made up of cash or assets
introduced to the business by the owner (known as capital introduced), the
profit generated by the business in previous years less any amount that the
owner has withdrawn from the business known as drawings
The accounting equation is:

= Capital = Assets - Liabilities

= Assets = Capital + Liabilities
= Liabilities = Assets - Capital
 Assets Liabilities Capital

Cash Trade Payables Reserves

Non-current assets (Creditor) Retained earings
Trade Receivables Loans Owner/ Shareholder
(Debtor) Accured expenses capital
Inventory
Pre-payments

The accounting equations guides the following interactions:

- Any changes in one of the components will affect either the same component
or others Example an increase in an asset will later decrease in liability or a
capital increase
- The accounting equation must always balance meaning a change in one
component must lead to an equal opposition change to itself or another
element.
Some other components you might come across are:
- Drawings- Withdrawals from the business by the business owner decrease
capital and asset.
- Income (revenue)- Amount and from selling goods and services increasing
capital and assets
- Expenses – Amount incurred from the purchase of service or labor. Decreased
capital with the corresponding decrease in assets or an increase in liability
An extended accounting equation will be:

= Assets = Capital + (Income - Expenses) - Drawings + Liabilities

Double entry principles

This is a method of recording transactions in a general ledger. Each transaction is
entered as a debit (DR) and a credit (CR) to reflect the duality of every action
The components of the accounting question are reflected in either debit (DR) or
credit (CR) balances. Having more of the corresponding balances means having
more of that component.
 Debit Balances Credit Balances

Assets Capital
Expenses Income (Revenue)
Drawings Liabilities

General Ledgers and T –accounts

The general ledger is where all the double entries are recorded.
It contains individual accounts for business assets, liability, capital, income and
expenses these individual accounts are also known as ledger accounts
Financial transactions of the business are recorded in relevant ledger accounts.
Immediately a business can gather information overview such as:
- Cash balance in the business from the cash ledger account
- Sales generated from the sales ledger account.
Double enter the recorded into the ledger accounts “T -accounts”. A T- account is a
graphical representation of the ledger account.

Financial
Accounting Reporting

The financial statements must

Financial accounting in the comply with all the applicable
systematic recording reporting and accounting standards and
analyzing of the financial transaction regulations to ensure consistency
of a business with other businesses and make
them more accessible to readers

Financial reporting focuses on

The focus is on the recording of
producing financial statements for
historical transactions
publication outside the business
 Cost Accounting Management Accounting

Cost accounting focuses on

identifying cost (a monetary
revelation of assessment) of Management accounting focuses on
resources and their allocation to providing information for internal
products, services, inventory or use by managers to help the
other items. This gives businesses organization operate more
information about how much it costs effectively
to provide a particular good or
service

The focus is on both past and future

As with management accounting the data and information. The
information produced is used inside information may be commercially
the organization sensitive and it is not made available
to external parties

Bookkeeping
Bookkeeping is one aspect of accounting.
Bookkeeping is concerned with the processing and recording of transactions.
This includes entering them into an accounting system where all transactions are
initially recorded

Computerized accounting software

Data cycle
In accounting, the computerized systems are primarily used to process transactions,
create documents such as invoices and produce information such as management
reports.
Terms used:

Term Description
Files
Data files are a collection of records with
similar characteristics

Examples include the general ledger, the

receivables ledger and payables ledger
Records A record in a file consist of data relating to
one unit of information
A record consist of several fields
For example a supplier account in the
payables ledger
Fields
A field is an item of data relating to a record

For example a supplier record includes

separate fields for their account number
name and credit limit
Key fields Each record in a file includes a field key- an
item of data used to identify it
For example this might be a unique supplier
code
Transaction files A transaction file contains records related
to individual transactions such as invoices
Master files A master file contains "standing" or
reference dates (such as appliance name
and addresses) and accumulative
transaction data (such as a year-to-date
figures )

There are many different types of brands of computerized accounting software

available. Popular systems include QuickBooks, SAP, Oracle and Sage, but many
others are available, and new products always enter the market
Integrated accounting software
packages
Some larger computerized accounting systems include different modules for
different tasks for example and on current assets module available and a general
ledger module
These more effective multi-modal systems are often described as integrated
accounting software packages. “Integrated” refers to how the different models
are linked and interact
All computerized accounting software packages have several functions and
features:

- Enforces accountancy rules

Computer accounting systems allow organization to enforce specific
accountancy rules -for example by calculating the decreasing in value of non-
current asset this is extremely useful
However, it is essential to recognize that software cannot replace an
accountant. The accountant remains in control of the accounts and the software is a
tool to help make the process a straightforward as possible
- Separate modules
A typical accounting software package includes a general ledger module
for all assets, liability, income and expenses account: a receivable ledger module
for individual customer accounts: a payables ledger module for individual supplier
accounts: and primary and petty cash book the links between these modules save
time and effort
- Real-time processing
Computerized accounting follows a data processing cycle: this data is
entered into the system processed by the computer software according to
accounting rules and then made available for analysis
Batch processing is the grouping and processing of data at regular
intervals using this method means financial records are only updated up to the date
of the last batch and do not reflect transactions that have not yet been processed
In modern systems ledgers are updated immediately. This is called real-
time processing. Batch processing for high-volume, similar transactions remain an
efficient way to input data
- Links between modules
 INRODUCTION TO
Topic 3:
MANAGEMENT INFORMATION
Data refers to raw facts, figures, symbols and measurement, it cannot be used to
make decisions.
Information refers to processed data which is meaningful and can be used to
make decisions.
Management information- refers to the information given to the people in charge
of running the business organization for the purpose of making informed decisions
and it should be produced if its cost is less than the increased revenue it leads to.
NB: For easy remembrance just take the first initials of the two words and
arrange the alphabetically, U will notice that D come in front if I so this
means that data makes information.

Purposes of management information.

1) Planning- It involves establishing the objectives and selecting
appropriate strategies to achieve those objectives. Information is
required to help the management.
2) Control- It involves comparing the actual results to the expected results
and carrying out the correct action.
3) Decision making- management at all levels of the organization make
decisions which involves choosing between the alternatives. Information is
required so that informed decisions can be made.

NB: THE TYPE OF INFORMATION REQUIRED WILL VARY DEPENDING ON THE

TYPE OF ORGANIZATION AND THE RESPONSIBILITY OF THE MANAGER.

Qualities of a good management

information.
They can be abbreviated using acronym: ACCURATE
A -Accurate
C -Complete
C –Cost Beneficial
U –User Targeted
R -Relevant
A -Authoritative
T -Timely
E –Easy to use

1) Accurate- information should be true and correct. The degree of rounding

off should be appropriate and there should be no mistakes.
2) Complete- All the details required should be included.
3) Cost Beneficial- the value of information should be greater than the cost of
collecting it.
4) User Targeted- the needs of the intended user should be borne in mind
when preparing the information.
5) Relevant- Only the necessary information should be included, irrelevant
information should be omitted.
6) Authoritative- The source of the information should be reputable and
reliable so that the information can be trusted by the users.
7) Timely- Information should be produced and made available as and when it
is required.
8) Easy to use- Information should be understandable to the intended
audience. Any complex information should be summarized where possible.

Sources of information.
There are 2 main sources of information:
1) Internal- This is information captured from within/ inside the organization
example: management payrolls, goods received not, material
requisitions from the factory etc.
2) External- This includes information captured from outside the organization,
collected on a routine basis or on an Adhoc basis eg: taxes, legislation,
newspaper, internet, purchase invoices from the suppliers etc.

Management accounting vs Financial

accounting.
Both financial and management accounting use cost accounting information.
Financial Management

Intended audience - prepared for both They are prepared for internal users only
internal and external that is employees and management.

They show the financial performance and

They are intended to help planning, control
position of the organization over a given
and decision making in a business.
period of time.

Keeping a proper set of accounts and at There is no legal requirement to produce

times publishing them is legally especially accounts. They are prepared only if they
for limited companies. serve a specific purpose.

They focus on historical data and reports on They focus on the present and produce
information from the previous periods. budgets and forecasts for the future.

They mainly contain monentary They contain both monentary and non-
information. monentary information.

Financial statements are prepared for

They are produced at any time when
specific periods of time eg: Quartely, half-
required for decision making and control
year or yearly

Limitations of cost and management

information.
1) Reliability of the underlying figures used to make estimates.
2) Managers do not necessarily communicate with the management
accountants therefore information produced by the accountants maybe in the
wrong format.
3) Management information makes comparison of figures over-time, these
comparisons may not be valid due to changes in process and economic
conditions.
4) Estimates of future periods required for planning and decision making are
difficult to establish with a high level of accuracy.
5) Managers are not accountants which limits the use of management
information.
 COST UNITS AND
Topic 4:
CLASSIFICATION
Cost unit is an item of product or service to which costs can be returned, examples
include:
1) A room in a hotel
2) A batch
3) A patient
Simple cost units such as cost per patient are not particularly useful for control
purpose
Composite cost unit is a 2 path cost unit eg cost per patient-night, cost per
occupied room-night.

Cost classification.

It refers to the grouping of costs under common characteristics, cost can be

classified according to:
1) Traceability- this refers to the ability to find or follow something. Costs are
classified based on whether or not they can be traced to a specific product,
service or department. There are 2 types of costs:
a) Direct Cost- it is a cost that can be traced in full to a product that is
being costed (Direct material, labor and expenses.)
b) Indirect cost/ overheads- this refers to a cost that is incurred in the
coarse of making a product but cannot be traced directly and fell to
the product.

NB: Material, labour and other expenses can be

classified as either direct or indirect costs.

2) Functions- the costs are classified on the basis of the activity which the
company is performing when the cost is incurred. They include:
Type Details

Production costs They are incurred in the process of making

products and getting them ready for sale
They are incurred in the process of craeting
Selling and distribution costs demand and getting them finished to
products for sale
They are incurred when a businees has to
Financial costs borrow money for purchasing assets or for
the day operations.
These are the costs incurred from the day to
Administation costs
day running of a business.

3) Controllability- This is whereby costs are grouped according to the

manager’s ability to influence them. They are grouped into 2:
a) Controllable costs
b) Uncontrollable costs
4) Cost behaviors- costs are classified based on how they react to or how they
are affected by the changes in volume of output( Level of output) They are 4:

a) Fixed costs.
This type of cost remains unchanged in the total when the level of activities
changes. The fixed cost per unit reduces as the level of production
increases.

b) Step fixed costs

It is a cost that is fixed but only with certain level of activity, beyond which it
increases in a lump sum and the remains constant (Staircase structure)

c) Variable Costs
These are costs which will vary with the number of units produced. They increase
with an increase with volume of production and vice versa.

d) Semi variable/ Semi fixed/ Mixed costs

This is a cost that is partly variable and partly fixed. The semi variable costs per
unit decreases with increase in the level of output.
NB: Basic principle of cost behaviors is that as the level of activity rises
the cost will usually rise.
: Cost unit is the cost of making one item
: Cost centre is a department.

Total cost of a product or service is calculated using a cost card, in the

following format:

Cost Card
Direct Material x
Direct Labour x
Direct Expenses x
Prime costs xx
Production Overheads x
Production/ Factory costs xx
Non-Production overheads x
Total costs xx

Topic 5:
CALCULATING UNIT
COSTS
Absorption and marginal costing are two different methods of dealing with
production overheads. They produce profit figures for an accounting period that
may differ from each other.
 Absorption costing Marginal costing

Variable production cost

Valuation of All production costs only.
production (including production Fixed production
(finished goods) overheads) overheads are not
included.

Treatment of fixed Absorbed into cost units

Charged to the period as
production (included in the value of
a cost. (period cost)
overheads finished goods)

Relationship with Selling price - absorption Selling price - marginal

the selling price cost =profit cost = contribution

The marginal cost of

The total cost of production is the cost
production helps set a making one additional
Description
selling price that covers unit.
all production costs Useful for decision
making

Absorption costing cost card

$ per unit

x
Direct material x
Direct labor x
Direct expenses x
Variable production overheads x
 Fixed production overhead x

Unit cost under absorption costing x

The line fixed production overheads is also known as overhead absorption rate
(OAR)
It is the budgeted amount of fixed overheads to be absorbed by production

Overhead Budgeted fixed production overheads

=
absorption rate Budgeted production

Marginal costing cost card

$ per unit

x
Direct material x
Direct labor x
Direct expenses x
Variable production overheads x

Unit cost under marginal costing x

NB: The total cost (value) of a unit of finished goods and absorption costing will
always be higher than marginal costing
This is due to the fixed production of overheads absorbed into the cost unit under
absorption costing.
This also mean inventory valuation is higher under absorption costing compared to
marginal costing

Profit statement
A profit statement produced using absorption costing approach will often result in a
different figure from a statement made using marginal costing approach
The statements are also presented slightly differently with contribution emphasized
in the marginal costing statement

(a) SCI in absorption costing

Revenue xxx
Less cost of sales
Raw materials xxx
Labour costs xxx
Variable overheads xxx
Fixed overheads xxx
Cost of production xxx
Less: Closing inventory (xxx)
xxx
Add: Opening inventory xxx
xxx (xxx)
Profit of the year xxx

(b) SCI using marginal costing

Revenue xxx
Less Marginal costs
Raw materials xxx
Labour costs xxx
Variable overheads xxx
xxx
Add: Opening inventory xxx
Less: Closing inventory (xxx) (xxx)
Gross contribution xxx
Less: Fixed overheads (xxx)
Profit of the year xxx
Advantages of absorption costing Advantages of marginal costing

Highlight contribution which

The inventory value complies with
helps management focus on a
the relevant accounting standards
decision's short term financial
for external financial reporting
impact
Considers all costs providing a Focuses on the immediate and
better understanding of the whole direct impact of an action or
picture decision

Move appropriate when

considering long term decisions
More appropriate for short term
because it considers long term
decision making because it
fixed costs, for example the
focuses on the cost likely to
company need to move offices if a
change in the short term due to
factory is not profitable over the
the decision
long term because of high cost
such as rent

Disadvantages of absorption Disadvantages of marginal

costing costing

Overemphasis the importance of The inventory value produced is

cost that do not change regardless unsuitable for financial
of the cause of action which may accounting as it does not comply
lead to inappropriate decisions with the relevant accounting
especially in the short term standards
 By ignoring fixed costs decisions
long-term impact and broader
implications are not considered

MANAGEMENT
Topic 6 & 7:
RESPOSIBILITY AND
PERFORMANCE
MEASUREMENT.
Responsibility Accounting refers to a system that separates and classifies costs
and revenue into responsibility centres.
Responsibility Centre is a function or a department of an organization headed by
a manager who is responsible for its performance.
a) Cost Centre
It is allocation, function activities or item of equipment for which costs are allocated
before further analysis (Fancy name for departments).
Cost centre performance measure include:
1) Cost per Unit- calculated by dividing total cost with number of units.
2) Standard hour/ productivity/ labour ratio- This refers to the time allowed to
make the actual output/ the amount of work achievable, at the expected
level of efficiency, in an hour. It is calculated as:
Time allowed
=
per unit * Actual Units

There are 3 types of labour ratios

i) Efficiency ratio- It measures whether the employees have worked faster or
slower. It is calculated as:
Standard Hours
= *100
Actual Hours
 ii) Capacity Ratio- It measures the extent to which panned utilization
(Budgeted Hours) has been achieved. It is calculated as:
= Actual Hours
*100
Budgted hours

iii) Production volume ratio/ activity level- It compares the standard

hours to the budgeted hours and it measures the extent to which the
production volume has been achieved. It is calculated as:
Cappacity Efficiency Standard Hours
= = *100
ratio * ratio Budgeted Hours
or

b) Profit Centers
It refers to any section of the organization where both revenues and costs are
assigned to that profitability of the section can be measured.
Profit centre performance measures include:
Profit margins- gross profit and net profit margins are calculated to measure the
company’s ability to control costs. They are calculated by:

Gross Gross Profit

Profit =
margin Revenue/Sales

Net Profit Net Profit

=
margin Cost of Sales
Gross Profit
Margin =
Sales

Gross Profit
Mark-Up = Cost of
Sales

c) Investment Centers
This is a profit centre whose manager has additional responsibility for capital
investment and financing.
Investment Centre performance measures include:
i) Return on Capital Employed (ROCE) - It shows how much profit has
been made in relation to the amount of resources invested. It is calculated
as:
= Net profit
*100
Capital employed

Capital Non-Current Current Current

= + -
Employed assets assests Liabilities
Or
Current Eqiuty
-
Liabilities (Capital)

ii) Residual Income- It is an alternative way of measuring performance in

an investment centre. It is calculated as:
Notional Intrest
= Profit - on capital
employed

iii) Assets turnover- It measures how efficiency the assets are being used
to generate revenue. It is calculated as:
= Sales
*100
Capital employed

NB: The main difference between cost centre and profit centre is that the
manager of a profit centre has some influence over both revenues earned
and costs incurred.
 Centres Deal With Performance measures

Cost Centre Cost Cost per unit

Standard hours/ Productivity/Labour ratio:
. Efficiency ratio
.Capacity ratio
.Productionvolume ratio/ Activity ratio

Profit margins:
Profit Centre Cost and revenues
.Gross profit margin
.Net profit margin

Return on capital employed

Investment Capital investment Residual Income
Centres and financing Assets Turnover

SOURCE DOCUMENTS
Topic 8:
AND CODING.
Coding.
A code is a brief description designed to help in the classification of items and
facilitating entry and analysis into a system.
It uses numbers and letters and it can be manual or computerized.
Features of a good coding system.
1) It should be easy to use and communicate.
2) Each code should be unique.
3) Codes should be of uniform structure and length.
4) The system should allow for expansion.
5) It should be flexible to include small changes.
Types of codes.
1) Sequential (progressive) codes- items are given ordinary numbers with no
connection between the item being coded and the code.
 2) Block (group) codes- The first digit in the code indicates the classification of
the code.
3) Herachiral codes- In this case, every digit in the code represents a
classification and each digit to the right gives more information about the
digit to the left.
4) Mnemonic codes- Each code has a meaning and it is related to the item
being coded. The most mnemonic coding is the 3 letter abbreviation, include
a memory aid within the code, usually in the form of an abbreviation of the
object being coded.
5) Faceted codes- It is an improvement on the block codes with each digit in
the code giving more information about the item.
6) Mixed code- A mixed code combines two other systems – in this case,
Mnemonic (letters of the customer’s surname) and sequential for the number

Codes
Types of codes Meaning Structure (Examples)

Sequential The item being coded and the

(progressive) code have no connection.
DM0101
The first digits in the code
DM0102
Block( group) represents the classification of
DM – Direct Material
the item.
1
1.1
The digit in the right gives more
1.1.1
Hierarchical codes information about the digits on
1.1.1.1
the left.
1.1.1.1.1

KE- Kenya
Each code has a meaning to the
HQ- Headquarters
Mnemonic codes item being coded, espcially the
RW- Rwanda
first 2 or 3 letters of the code.
This is whereby each digit of the Length of 10, 20 and 30
Foceted codes code gives information about an can be coded as 1010,1020
item and 1030

Advantages of coding.
1) It saves storage space in a computerized system.
2) A code is more precise therefore reduces ambiguity.
3) In a manual system, codes help in saving clerical time.
4) Coding facilitates data processing.
Source documents
i) Source documents for labour.

1) Time sheets- It is used for recording the time spent by the employees within
the business. There are 2 types of time sheets:
a) Daily time sheets
b) Weekly time sheets
2) Job cards- They are prepared for each job and they show the amount of time
spent by the employees on a specific job. It is used to:
a) Gathering together the costs associated with a specific job
b) Providing the employer with the means to compare and control
the costs of different jobs.
c) Helping to establish the profit or loss made by performing a
job.

ii) Source documents for material.

a) Purchase requisition- It is prepared by the stores department and then

sent to the purchase department where it is sent to the supplier. (Manger)
b) Purchase order- It is prepared by the purchasing department and the sent
to the supplier. (Purchasing department.)
c) Delivery note- It is sent by the supplier to the customer together with the
goods.
d) Goods received note- This is a copy of the delivery note, which is used to
prepare a goods received note which will be sent to the stores department
together with the goods
e) Purchase invoice- This will be received by business from the supplier with
the details of the amount to be paid.
f) Material requisition note- It is prepared by any department that requires
material from the stores department.
g) Material transfer note- It is prepared by the stores department to have
material transferred to the department that ordered the material.
h) Material Return note- It is written when material have to be taken back to
the stores.

iii) Documents for recording material.

i) BIN cards- These are manual records written and kept in the stores
department. Its details include:
a) The description of the item in the inventory.
b) The inventory code.
c) Units/ number of items.
d) Bin number.
 e) Units issued to production.
f) Units received.
g) Balance.

iii) Stores ledger card- It is similar to a Bin card with only 2 major
difference:
a) Costs details are recorded therefore the total costs is
shown.
b) It is written and kept in the coating department or a
separate office in the stores department by a clerk.
NB: The stores ledger is often computerized therefore it enables the
business to monitor free inventory.
Free inventory- It is the amount of inventory available for future production or
inventory which is available for new orders from customers (production).
It is calculated by:

No. of
units
Free in
invent invent Materia
= + -
ory ory Purchas l
(Closin (Openi e order requisit
g ng (Purchas ion
stock) stock) es) (Issue)

ACCOUNTING FOR
Topic 11 & 12:
MATERIAL AND LABOUR
COSTS.
a) Material.

It can be classified in different ways. They can be classified according to:

1) The substance that make up the material eg: Wood, plastic, metal etc.
2) How they are measured eg: Litres, metres, kg etc.
3) Physical properties eg: Shape, color, quality etc
The main classification of material is:
a) Raw materials- which are items purchased to be used to produce the
product for sale.
 b) Work in progress- it represents and intermediate stage between raw
materials and finished goods.
c) Finished goods- this is a product that is ready for sale.

Ordering inventory
When ordering inventory, the material ordered will depend on:
1) The Sales.
2) Manufacturing plans of the immediate future.

Material purchases is calculated as:

Closing Opening Material
= - +
inventory inventory Usage

Material Useage per Production

= = *
usage Unit Unit

Production Closing Opening

= = - + Sales
Unit Invetory Stock

Double entry for materials.

Materials purchased are recorded as a debit in the material control account.

Issues of material can be classified as direct or indirect
a) Direct materials- are those which are part of the cost of making a product.
b) Indirect materials- are other materials which are part of the production
process
Issue of materials is recorded on the credit side of the material account
DR- Work in progress (Direct)
DR- Production overheads (Indirect)
CR- Material Control a/c (Total assets)
Illustration.
The following transactions relate to the material transaction of x limited during the
month of September.
Sept 1: Purchased 500 units@ $20 per unit
5: Purchased 300 units@ $22 per unit
8: Issued 400 units
 11: Issued 200 units
18: Purchased 500 units @ $25 per unit
29: Issued 100 units
a) Using FIFO
Date Receipt Issue Balance

1-Sep 500@20 10000

5-Sep 300@22 6600
8-Sep 400@20 8000 100@20 2000
300@22 6600
11-Sep 100@20 2000
100@22 2200 200@22 4400
18-Sep 500@25 12500 200@22 4400
500@25 12500
29-Sep 100@22 2200 100@22 2200
500@25 12500

a) Using LIFO
Date Receipt Issue Balance

1-Sep 500@20 10000

5-Sep 300@22 6600
8-Sep 300@22 6600
100@20 2000 400@20 8000
11-Sep 200@20 4000 200@20 4000
18-Sep 500@25 12500 200@20 4000
500@25 12500
29-Sep 100@25 2500 200@20 4000
400@25 10000

NB: When comparing LIFO and FIFO, FIFO will always

have the highest closing inventory value, the highest
Gross profit value, the cost of production will be low
and the closing stock valuation is close to current
purchases prices
b) Using Cumulative Weighted Average Costing
 Date Units Average Price Value

1 500 20 10000
5 800 (500+300) 20.75 16600 ( 10000+ (300*20))
8 400( 800-400) 20.75 8300( 16600- (400*20.75))
11 200( 400-200) 20.75 4150( 8300- (200*20.75))
18 700( 500+200) 23.79 16650( 4150+ (500*25))
29 600( 700-100) 23.79 14271( 16650- (100*23.79))

c) Periodic Weighted Average costing

It is calculated as:
Value of opening stock + Value of purchases
=
Opening inventory units + Units of all purchases

= 0 + (500*20) + (300*22) + (500*25)

0+ 500 + 300 + 500

= $22.38

NB: Closing inventory values will be lower using

periodic weighted average rather than cumulative
weighted average.
b) Labour
After the employees efforts are recorded, the employees are paid using different
remuneration methods:
a) Time rate system- Paid on the number of hours worked.
Overtime premiums- this is the amount by which the overtime
rate is above the normal rate.
b) Piece work scheme- Paid on the number of units produced.
c) Premium bonus scheme- payment for group effort.

Gross pay and deduction

Employers must deduct income tax and employees benefit contributions before
they pay the rest to the employee
Employee
= Net Pay = Gross Pay - Tax - benefit
contribution
 Employers Gross Employers benefit
= = +
labour cost Pay contribution

Direct Wages Indirect Wages

Basic wage for direct employees Basic wage for indirect employees
Overtime at basic rate for direct
Overtime premium for direct employees
employees
Overtime due to a customers request (U
add everything including the overtime Overtime total for indirect employees
premiums
Idle time( Controllable and non-
controllable.)
Training of direct workers

Topic 13:
EMPLOYEE
REMUNATION, PRODUCTIVITY
AND LABOUR COSTS
Employee remuneration is the compensation paid to employees in exchange of their work

There are several methods of employee remuneration and organizations will use the ways most suited
to their needs

Topic 14: OVERHEAD COSTS.

This prefer to cost that are incurred during the production process but cannot be
traced to a specific product department or service
There are two methods for accounting for overheads

Absorption Costing
The objective of absorption costing is to include a fair share of the fixed overheads
on the cost per unit of the product
Fixed
Cost Materi Labo Variable producti
per = al + ur + overhea + on
unit cost cost ds overhea
ds

There are three stages of absorption costing

1) Allocation- specific overheads in direct material and labour are charged
directly to the departments that incur them.

Basis Overheads
Rents, rates, heat and light, depreciation of building, insuarance of
Area building and maintainance of building.
Plant depreciation, plant insuarance, repairs nad maintainance of
Book value/ cost assets.
Expenses in the personnel office, canteen, staff welfare, safety
No. of employees measures and supervison
Weight/ cost of material used Material handling expenses, stock keeping costs and packing costs.
Technical estimates Power consumption, water usage and steel consumption.
Sales revenue Advertisement and selling and distribution expenses.
Direct wages Staff training cost and provident contributions.
Machine hours/ labour hours General overhead items.
Number of radiators Heating and power consumption

2) Apportionment- This involves sharing posts between cost centers in

proportion of the received, overheads are shared using a basis of
apportionment.

Re-apportionment of service department overheads

Service departments do not reduce products but rather they provide services to the
production departments therefore the overheads of the service department must be
shared to the production department on the basis of the amount of services
provided by the service department.
3) Absorption- This refers to the process of including overheads as part of the
cost per unit we use a pre-determined overhead absorption rate

Overhead = Budgeted
 overhead
(Overhead
analysis table)
Budgeted
activity level
absorption (Given by the
rate examiner)

Absorbe
Overhead Actual
d
Overhe Overhead
= absorptio Actual
* activity
overhea
ad per = absorptio * activity
n rate level
ds
unit n rate level

NB: Machine hours are used in a machine intensive environment with labor hours
used in an hour intensive environment a rate per unit is appropriate where the units
are identical.

Over and under absorption

Absorption overhead are calculated as:
Overhead Actual
= absorptio * activity
n rate level
Actual overheads and actual activity level may differ from the budgeted overheads
and budgeted activity level, these causes over or under absorption
If absorbed overhead is greater than actual overheads it becomes an over
absorption
This means that more overheads have been included in the cost of sales (unit cost).
To correct this either add the over absorption to the profit or deduct the over
absorption from the cost of sales.
If absorbed overhead is less than actual overheads it becomes an under
absorption
This means that less overheads are included as part of the cost of sales to correct
this, either add the under absorption to the cost of sales or deduct the under
absorption from the profit
If absorbed overheads is equal to actual overheads this means there are no
over or under absorption
NB: The amount of over or under absorption is the difference between the absorbed
overheads and the actual overheads

Marginal costing
Under this method only the variable cost (marginal cost) are charged to the cost of
sales of a product.
Fixed costs are treated as period cost and they are charged in full in the
period when they are incurred

Profit reporting
Absorption costing inventory is valued at full production costs (material cost +
labor cost plus + variable overheads + fixed overheads)
Marginal costing the inventory is valued at the variable production cost (material
cost + labor cost + variable overheads + variable non-production overheads)

Profit Actual
= per * Units
unit sold

Profit Sellin Cost

where
per = g - per
by:
unit price unit
Cost Materi Variable Fixed
Labou
= per = al + + overhea + overhea
r cost
unit cost ds ds

Profit calculation in marginal costing:

Contribut Fixed
= -
ion costs

where Contribut Contribut Actual

= *
by: ion ion per Units
 unit sold

Contribut All
Selling
=ion per = - variable
price
unit costs
NB: Profits must be the same by next opening and closing inventory are
not the same

Profit reconciliation
The reason that can cause a difference between marginal and absorption costing is
different in inventory level
If opening and closing inventory are the same marginal costing profit is the same as
absorption costing profit
If there is an increase in inventory that is closing inventory is greater than opening
inventory, the absorption costing profit will be greater than marginal costing profit.

Openin
Closing Absorptio Marginal
g the
invento > n costing > costing
invento n
ry profit profit
ry

Absorption
Marginal Differences
= costing = +
costing in profit
profit

Margin Absorptio Differenc

= al = n costing - es in
profit profit profit

Fixed Change
Differenc
Overhead in
= es in = *
Absorption inventory
profit
rate level
Decrease in inventory levels

Openin
Closing Absorptio Marginal
g the
invento < n costing < costing
invento n
ry profit profit
ry

Absorpti Marginal Differenc

= = -
on costing es in
 costing
profit
profit

Absorpti
Differenc
Margina on
= = - es
l profit costing
in profit
profit

Illustrations
S Limited produces and sells a single product where Cost card is as follows
Direct Material 4
Direct labor 5
Variable production overheads 3
Fixed production overhead 2
Variable selling cost 3
Selling price 20
The opening inventory was 200 units and the closing inventory was on 150 units.
Sales were 800 units and the actual fixed production overhead was $1500
Calculate the net profit using marginal and absorption costing and the values of the
closing inventory using marginal and absorption costing inventory value
Solution

Absorptio
Cost per
n costing = * Units
unit
profit
(4+5+3+2)
=
*150
= 14*150
= 2100

Marginal
Cost per
costing = * Units
unit
profit
(4+5+3)*1
=
50
= 12*150
= 2100

Profits
 Marginal
Contribu Fixed
costing = -
tion Costs
profit

Uni
Selling Varia
Contribu ts
= Price - ble *
tion sol
per unit costs
d
(20-(4+5+3+3)) *
=
800
= 5*800
4000-1500(fixed
=
costs)
= 2500

Absorpti
on Contribu Fixed
= -
costing tion Costs
profit

Uni
Selling Varia
Contribu ts
= Price - ble *
tion sol
per unit costs
d
(20-(4+5+3+3+2))
=
* 800
= 3*800
2400-1500(fixed
=
costs)
= 900

Marginal and absorption costing

The purpose of cost accounting system is to gather information on all relevant costs
to enable decisions to be made.
In costing we ensure the cost of all inputs and compare them with the value of the
output of the business.
Direct cost, materials and labor can be easily identified to a particular job or
particular department.
Indirect cost such as overhead costs and create problems. In costing there are 2
methods that can be commonly used:
1) Absorption/ full/ total costing
2) Marginal/ variable costing.
The difference between the 2, is the way in which overheads that were treated.
In absorption costing, the overheads both fixed and variable and included in the
cost of production and evaluation in inventory,
In marginal costing only variable overheads are included in inventory.
The fixed overheads are written off against production in the year of production and
they are included in the closing inventory.

(a) SCI in absorption costing

Revenue xxx
Less cost of sales
Raw materials xxx
Labour costs xxx
Variable overheads xxx
Fixed overheads xxx
Cost of production xxx
Less: Closing inventory (xxx)
xxx
Add: Opening inventory xxx
xxx (xxx)
Profit of the year xxx

(b) SCI using marginal costing

Revenue xxx
Less Marginal costs
Raw materials xxx
Labour costs xxx
Variable overheads xxx
xxx
Add: Opening inventory xxx
Less: Closing inventory (xxx) (xxx)
Gross contribution xxx
Less: Fixed overheads (xxx)
Profit of the year xxx
 Total Fixed
Variable
= producti = + overhea
costs
on costs ds

Variable
Variable Prime
= = + overhea
costs costs
ds

Direct Direct
Prime Direct
= = expense + + materi
costs labour
s al

NB: Different methods will give you different closing stocks and different
profits.
TOPIC 15: JOB,
BATCH AND
PROCESS COSTING
Job costing.
It is also called specific order cost and it is used when production consists of
separate jobs example: ‘’custom made’’.
It is used when there is a pool manufacturing work is carried at according to the
specific requirements of the customer.
The output of a job is a single unit which is identifiable throughout the production
process.

Procedure for the performance of a job.

1) The potential customer approaches the business and electrical
requirements for the product.
2) A representative is sent to the customer to get the precise details including
quality, quantity delivery time, shape, size and color.
3) The exact details are used to prepare an estimated price for the job, this
includes: prime cost overheads and some profit.
4) The estimated selling price of the job is communicated to potential
customer and if they accept it the job will be scheduled.

NB: Cost for each jobs are collected in a job cost card, whose format is as
follows:

Job costing
Format
Direct material x
Direct labour x
Direct expenses x
Prime cost xx
Production overheads(Fixed variable) x
Production/ factory cost xx
Non- production overheads x
Total cost xx
Profit x
Quested selling price xxx

Features of job costing

 1) Production is based on customer specification.
2) Each job is given specific job order.
3) Each job is given a job card or a cost sheet.
4) Each job is of comparatively short duration and reasonably big in size.
5) The method assumes the possibility of physically identifying each job.

Quoting for a job

When a firm is asked to quote for a job, it must estimate the following:
a) Quantity of material to be used.
b) Number of labors by various grade of labour.
c) The amount of overheads to be used.
d) The pricing policy.

Suitability
Job costing is most suitable in the following circumstances
1) Costing for non-standardized products and services.
2) Where each job takes comparatively a short duration.
3) Where each job is done according to customers’ requirements.

Batch coting.
It is similar to the job costing with the only difference being, the output that is more
than one unit therefore to calculate the cost per unit we divide the total cost with
the number of units in the batch.
Cost = Total batch cost
per
unit Units in the batch

Process costing
It is used where a product passes through a series of steps or stages before the final
product is completed.
Example of process costing include:
1) Oil refineries
2) Paper Manufacturing.
3) Chemical processing
4) Food and drink processing

Features of process costing

1) The output of one process is the input of the next process until the final
product is made.
 2) There is expected (normal) loss due to spillage, evaporation or spoilage.
3) It involves mass production of homogeneous products since they will be
closing work progress.
4) Output for production may be a single product but there may also be a
byproduct or joint products

Framework/ procedure of process costing.

There are 4 stages/ steps:
1) Determine the output, equivalent unit and losses
a) Expected output= Input- Normal loss
b) Normal loss= % * Input

2) Calculate the cost per unit

= Cost = Total Cost

per Expected
unit loss

3) Calculate the total cost of the output, losses and work in progress
This is only required when there is an abnormal gain/ loss or
work in progress

4) Complete the accounts (process account, abnormal loss/ gain account

and scrap value account)

Process Account
Unit Valu Unit Valu
Details Details
s e s e

Input xx xx Output xx xx
Direct Materials xx Normal Loss xx
Direct Labour xx
Direct Expenses xx
Production Overheads xx
xx xxx xx xxx

There are three types of losses:

1) Normal loss
2) Abnormal loss
3) Abnormal gain
` Normal/ expected loss
This refers to the loss in weight of the input into a process due to evaporation,
spoilage or spillage.
It has no cost unless it has a scrap value. It is calculated as a percentage of output.

Illustration
Suppose 1000 units can input into a process at a cost of $4300. The normal loss is
10% of the input and there is no abnormal gain/loss. Prepare the process account.

Norma = 10% * 1000

l loss = 100 Units

Expect = 1000-100
ed loss = 900 Units

Cost = 4500
per
unit 900
= $5

Process Account
Details Units Value Details Units Value

Input 1000 4500 Output 900 4500

Normal Loss 100 -
1000 4500 1000 4500

Closing working progress

Equivalent units are notional or imaginary whole units which represent the complete
work which are used to share the costs between the output and the closing work in
progress.
They are calculated as a percentage of the units.
In the valuation of work in progress, the following assumptions are made:
 1) Direct materials is always assumed to be 100% complete and less
indicated otherwise.
2) Conversion (direct labor and overheads) will vary with a degree of
completion.

Steps of valuing closing work in progress.

1) Determine the number of equivalent units. We use the statement of
equivalent units.

Materials Conversion
Units % EU % EU

Output xx 100 xx 100 xx

Closing work in
progress xx 100 xx x xx
xxx xxx

2) Calculate the cost by equivalent unit of each item.

Cost per Total Costs Total Costs

Equivalent = Equivalent Unit of = Equivalent units of
unit materials conversion

3) Calculate the total cost of the output and the work in progress.

Equival Cost Per equivalent

= ent * units
Units (Both material & costs)

Process costing with loss.

1) Normal loss- This is expected loss from the process it could be due to
spoilage, spillage or evaporation.
2) Abnormal loss- It is extra loss from a process which arises if :
a) Estimated output is greater than the actual output
b) Actual loss is greater than the normal loss.
 Estimat = - Norm
= ed Input al
Output Units Loss

Outp
Actual Input
= = - ut
Loss Loss
Units

3) Abnormal Loss- It is an extra gain which arises if:

a) Estimated output is less than actual output
b) Actual loss is less than normal loss.

Accounting treatment for process losses

Normal loss is NOT valued unless there is a scrap value.
Abnormal Loss and abnormal gain are valued at the cost per unit.
Example
The input to a process is 2000 units with a normal loss of 5% and actual output of
1800 units.
Write up a process account is:
Material cost = 5000 units
Labour= 1800 hrs
Production overhead at 150% of labour

Solution

Norm 5 200 100

al = * =
0 Units
loss 100

Estimat = 2000-100
ed
Output = 1900 Units

Actual output= 1800 Units

Abnormal Loss= 100 units

= Total Costs
 Estimated
Outputs

5000+1800+
=
2700
1900

= 9500
1900

= $5

Actual 1800*
output = 5
$9,00
= 0

Abnormal
Loss = 100*5

= $500

Process Account
Unit CP Unit CP
Details s U Amount Details s U Amount

200 180
Input 0 x Output 0 5 9000
Direct Material 5000 Normal Loss 100 - -
Labour 1800 Abnormal Loss 100 5 500
Production Overhead 2700
200 200
0 9500 0 9500

Loses with scrap

value.
Normal loss is only valued in the presence of scrap value, they cost by unit formula
changes such that:
 Cost Total Cost - Scrap value of Normal
Per = Loss
unit Estimated Output

Example:
2000 units were purchased at $9000 as an input to a process. Normal loss is 10% of
input and has a scrap value of $1.80. Prepare a process account if the actual output
is 1720 units.
Solution

200
Normal = 10 * 0
loss
100
200
= Units

Estimat 2000-
ed = 200
output = 1800

Actual output = 1720 Units

Abnormal Loss = 20 Units

= Total Costs
Estimated
Outputs

9000 – (1.8
=
*200)
1800

= 8640
1800

= $4.80
 Actual = 1720 * 4.8
Output = $8,256

Abnorm = 80* 4.8

al Loss = $384

Process Account
Details Units CPU Amount Details Units CPU Amount

Input 2000 9000 Output 1720 - 8256

Normal Loss 200 4.8 360
Abnormal Loss 80 4.8 384

2000 9000 2000 9500

Total Mater Convers

= manufactu = ial + ion
ring cost cost costs

Total Total manufacturing

= manufacturing = cost
cost per kg Expected output

Joint and by products

Joint products are two or more products with a significant sales from the process
example: in milk processing or crude oil processing.
The byproduct is incidental and has a less significant sales example: Saw dust

Accounting treatments for joint and byproduct

a) Joint products
There are 3 methods of accounting for joint products

1) Physical/ units method.

This is the volume/ units of production the common cost of the joint products will be
apportioned using units.
Example:
The common cost for process was $3000 and the output of product one is as shown
below

Sales
Products Units SP Revenue

JP1 600 4 2400

JP2 1200 2 2400
1800 4800

JP1 = 6000
1800 * 3000
0

= 1000

1200
JP2 = 0
* 3000
1800
0

= 2000

2) Sales value.
The common cost is allocated base of the sales revenue. Assumed the above
example with selling price at $4 and $2 respectively.
 JP1 = 2400
* 3000
4800

= 1500

JP2 = 2400
* 3000
4800

= 1500

3) Net Realisable value (NAVs)

Net realizable value is the difference between the selling price and the estimated
costs to sell.
Example
The joint costs for a process was $249,000. There are three products:
A- 30,000 units
B- 7500 units
C- 15,000 units
They can be sold immediately after separation for $22.5 per unit. Product A requires
for further processing at a cost of $12 before it is sold for $30 per unit. Product B
needs further processing at a cost of $3 before it is sold for $10.5 per unit. Product
C is sold at $22.5. Show the cost allocation using net realizable value.
Solution

Cost per Net

Product Units Selling price unit Realisable Total net

A 30000 30 12 18 540000
B 7500 10.5 3 7.5 56250
C 15000 22.5 0 22.5 337500
933750
 5400
A = 00 2490 1440
* =
9337 00 00
50

5625
B = 0 2490 1500
* =
9337 0 0
50

3375
C = 00 2490 9000
* =
9337 0 0
50

Topic 16: SPREADSHEETS

Advantages of a spreadsheet
1) Excel is easy to learn and to use.
2) Spreadsheets make the calculation and multiplication of data easier and
quicker.
3) They enable the analysis, reporting and sharing of financial information.
4) They enable ‘’what-if analysis’’ analysis to be performed very quickly.

Disadvantages of a spreadsheet.
1) A spreadsheet is only as good as its original design (Garbage in=Garbage
out)
2) Formula are hidden from site so that they underlying logic of a set of
calculation may not be obvious.
3) A spreadsheet presentation may make reports appear infallible.
4) Research shows that a high proportion of large models contain in critical
errors.
5) A database may be more suitable to use with large volumes of data.
6) Spreadsheets can be easily corrupted and it’s difficult to find errors in large
models.
 Error Explanation

#DIV/0! An attempt to divide a number by zero

You used a wrong type of argument or
#VALUE! operation
Invalid cell reference due to deletion or
#REF! modification
Excel doesn’t recognize the text in the
#NAME formula
Problem with a number in the formulae or
#NUM function
The data is not available for a function or
#N/A formula