BBA 2003 COST ACCOUNTING

TAN WAH TIONG940928-14-5531201565

CHONG KAR YUNAUGUST 2013

Page 1 of 24

Page 18 of 24

NODETAILPAGE

1.0Contents1

2.0Introduction2

3.0Task 13-13

4.0Task 214-15

5.0Task 316-17

6.0References18

7.0Coursework19-22

2.0 IntroductionsCost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but first we are concentrating on its use by managers to make decisions.Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.

3.0 Task 11.1 Three Basic Cost Elements Involved in the Manufacture Of Product(a) Material cost:Direct cost: An expense that can be traced directly to (or identified with) a specific cost center or cost object such as a department, process, or product. Direct costs include of labor, material, fuel or power. It vary with the rate of output but are uniform for each unit of production, and are usually under the control and responsibility of the department manager. As a general rule, most costs are fixed in the short run and variable in the long run. Also called direct expense, on cost, variable cost, or variable expense, they are grouped under variable costs. Examples: Cost of gravel, sand, cement and wages incurred on production of concrete.

Indirect cost: A costs that are not directly accountable to a cost object such as a particular project, facility, function or product. Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs. There are two types of indirect costs. One are the fixed indirect costs which contains activities or costs that are fixed for a particular project or company like transportation of labor to the working site, building temporary roads, etc. The other are recurring indirect costs which contains activities that repeat for a particular company like maintenance of records or payment of salaries. Examples: Cost of depreciation, insurance, power, salaries of supervisors incurred in a concrete plant.(b) Labor:Direct labor: Cost of personnel that can be identified in the product, such as the salary of the person who works at the production machine, but not the administrators or janitors salaries. Besides, Direct labor is also the portion of the total cost of production of a product or fulfillment of a service that is associated with salaries, benefits, taxes, and other expenses related to the personnel needed for the process.

Indirect labour: Employees or workers (such as accountants, supervisors, security guards) who do not directly produce goods or services, but who make their production possible or more efficient. Indirect labour costs are not readily identifiable with a specific task or work order. They are termed indirect costs and are charged to overhead accounts. Besides, indirect cost also considered as the amount allocated for labours hours or activities that are not related to the manufacturing process, like the lighting surrounding a finishing machine. Indirect labour costs such as accounting, human resources, or other administrative functions that support the process or personnel.

(c) Overhead costs:In business, overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an "operating expense". Examples include rent, gas, electricity, and wages. The term overhead is usually used when grouping expenses that are necessary to the continued functioning of the business but cannot be immediately associated with the products or services being offered (i.e.,do not directly generate profits). It is closely related accounting concepts are fixed costs and variable costs as well as indirect costs and direct costs. In addition, overhead expenses are all costs on the income statement except for direct labour, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.

1.2 The difference between the following terms(i) Product cost and period costProduct costs include all the costs that are involved in acquiring or making product but period costs are all the costs that are not included in product costs. A manufacturers product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are also inventoriable costs, since these are the necessary costs of manufacturing the products.In the other sides, Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they are best match with revenues, when they expire, or in the current accounting period. In addition to the selling and general administrative expenses, most interest expense is a period expense.

(ii) Sunk cost and relevant costThe sunk cost is one for which the expenditure has taken place in the past. This cost is not affected by a particular decision under the consideration. Sunk costs are always results of decision taken in past. Investment in plant and machinery as soon as installed, its cost is sunk cost and is not relevant for decision making. The relevant cost is a cost appropriate in adding to make specific management decisions. Besides, a relevant cost is a future cost which differ with alternatives and one which is expected to be incurred and not a sunk cost which has already been incurred. If the cost remain constant between different alternatives, treated as irrelevant cost however that is not a sunk cost. Sunk costs are based on past, always irrelevant for decision making.In addition, relevant cost must be an incremental or avoidable cost. For example fixed over heads which are allocated by head office are not relevant, but incremental or avoidable fixed overheads are relevant.

(iii) Fixed and variable costThe difference between fixed cost and variable cost is that, fixed costs refer expenses whose total does not change in proportion to the activity of a business, within a relevant period of time and they include rent and utility bills. On the other hand variable costs change in relation to the activity of a business for instance sales and production volume. It also can be describe as in short period, total cost is divided into fixed cost and variable cost. In short period, some factors are fixed such as factory building, machines etc. and some factors variable such as fuel, raw materials etc. Fixed factors do not change when volume of production change and variable factors directly vary with the volume of production. Cost incurred on fixed factors is known as fixed cost.The amount of fixed cost does not change and remains fixed whether volume of production is more or less or zero. Its examples are rent of the building, interest of the money invested in machines and so on. Cost incurred on variable factors is known as variable cost. This cost directly varies with the volume of production. If volume of production is zero, this cost will be zero. Its examples are fuel cost, cost or raw materials etc.

(iv) Avoidable and unvoidable costsAvoidable cost is an expense that will not be incurred if a particular activity is not performed. Avoidable cost refers to variable costs that can be avoided, unlike most fixed costs, which are typically unavoidable. While avoidable costs are often viewed as negative costs, they may be necessary to achieve certain goals or thresholds.

In the other sides, unvoidable costs alter the course of a project or business. For example, a manufacturer with many product lines can drop one of the lines, thereby eliminating associated expenses such as labor and materials. Corporations looking for methods to reduce or eliminate expenses often analyze avoidable costs associated with underperforming or non-profitable product lines.

(v) Controllable and uncontrollable costsControllable costs are the costs which can be influenced by the action of aspecified member of an undertaking. A business organisation is usually divided into anumber of responsibility centres and an executive heads each such centre. Controllablecosts incurred in a particular responsibility centre can be influenced by the action of theexecutive heading that responsibility centre. For example, Direct costs comprising direct labour, direct material, direct expenses and some of the overheads are generally controllable by the shop level management.In the other sides, uncontrollable costs are the costs which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the Tool Room is controllable by the foremanincharge of that section but the share of the tool-room expenditure which is apportionedto a machine shop is not to be controlled by the machine shop foreman

(vi) Direct and indirect costsDirect costs are those that are directly attributable to a project of the manufacture of a product or a project. For instance if you are in the highway construction business and you got a bid to build a new highway, direct costs would be the materials like asphalt and the cost of labor. That actually a variable cost and it is easier to track. On the other sides, an indirect cost would be administrative expenses, and the depreciation and maintenance costs for equipment like trucks and road graders and scrapers. Those are actually more fixed costs and more difficult to track and assign to a particular project.

(vii) Prime cost and Conversion costThe difference between prime and conversion costs refers to the difference in the types of costs and what they are applied to. Prime costs are basically the cost of direct labor and direct materials. Conversion cost is the cost of direct labor cost and manufacturing overhead cost. The term conversion is used because direct labor and manufacturing overhead costs are incurred to convert materials into finished products.Besides, Prime Cost is a business's expenses for the materials and labor it uses in production. Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. Conversion costs are those costs required to convert raw materials into finished goods that are ready for sale. In addition, the concept is used in cost accounting to derive the value of ending inventory. It can also be used to determine the incremental cost of creating a product, which could be useful for price setting purposes.

1.3 discuss the behavioral classification of costs, explaining all the term used therein1. Variable costsVariable costsare expenses that change in proportion to the activity of a business.Variable cost is the sum ofmarginal costsover all units produced. It can also be considered normal costs.Fixed costsAnd variable costs make up the two components oftotal cost.Direct Costs, however, are costs that can easily be associated with a particularcost object. However, not all variable costs are direct costs. For example, variable manufacturingoverheadcosts are variable costs that areindirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

2. Semi variable costsA cost composed of a mixture of fixed and variable components. Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded. 3. Fixed costsA cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

4. Semi fixed costs or stepped costsCosts that are constant over a range of production. If one employee can make 5000 units, then the employees wage is constant over a production range of one to 5000 units. If you produce 5001 units, you will need another employee. So your cost doubles. If you make 14,000 units your cost triples because you need three employees.

5. Concave cost functionconcave functionis thenegativeof aconvex function. A concave function is alsosynonymouslycalledconcave downwards,concave down,convex upwards,convex caporupper convex.

4.0 Task 2Assume the following purchases were made in ABCData of purchaseUnit PurchasedPrice per Unit

1st January500100

2nd January 600200

3rd January800400

Units used on 4th January are 900

FIFO MethodPurchasedIssuedBalance

DataUnitsPriceAmountUnitsPriceAmountUnitPriceAmount

1st Jan5001005000050010050000

2nd Jan6002001200001100170000

3rd Jan8004003200001900490000

4th Jan900***1300001000360000

LIFO MethodPurchasedIssuedBalance

DataUnitsPriceAmountUnitsPriceAmountUnitPriceAmount

1st Jan5001005000050010050000

2nd Jan6002001200001100170000

3rd Jan8004003200001900490000

4th Jan900***3400001000150000

Weighted Average MethodsPurchasedIssuedBalance

DataUnitsPriceAmountUnitsPriceAmountUnitPriceAmount

1st Jan5001005000050010050000

2nd Jan6002001200001100170000

3rd Jan8004003200001900490000

4th Jan1900490000900257.8952321051000257.895257895

5.0 Task 3Calculate:(i) Hourly rate(ii) Basic piece rate(iii) Individual bonus scheme where the employee receives the bonus in proportion of the time saved to time allowedName of employeeSSRRPP

Unit produced270200220

Time allowed in minutes per unit101512

Time taken (hours)403836

Rate per hour ($)125105120

Rate per unit ($)202524

(i) Hourly rateName of employeeSSRRPP

Time taken (hours)403836

Rate per hour (Shs)125105120

Total amount (Time x Rate)500039904320

(ii) Piece rateName of employeeSSRRPP

Unit produced270200220

Rate per unit (Shs)202524

Gross wage (Unit x Rate)540050005280

(iii) Bonus SchemeName of employeeSSRRPP

Unit producedTime allowed in minutes per unit270102001522012

Total time allowed (hours) (unit x time per unit/60)Time taken (hours)454050384436

Time savedProportion (time saved/time allowed)Bonus time [(Time saved / time allowed) x time taken]1251/94.441056/259.121202/116.55

Total time to be paid (time taken + bonus)Rate per hours (Shs)44.4412547.1210542.55120

Total pay55554947.65106

6.0 references- http://www.businessdictionary.com/definition/direct-cost.html- http://www.investopedia.com/terms/d/directcost.asp- http://en.wikipedia.org/wiki/Indirect_costs- http://accountingexplained.com/managerial/costs/direct-and-indirect-costs- http://www.businessdictionary.com/definition/direct-labor-cost.html- http://www.investorwords.com/16347/direct_labor_cost.html- http://www.answers.com/topic/direct-labor- http://malaysia.answers.yahoo.com/question/index?qid=20090210064741AA5jfMr- http://www.caclubindia.com/forum/sunk-costs-are-irrelevant-but-irrelevant-costs-are-not-sunk-79001.asp#.UiqDNn_M-jg- www.google.com

7.0 coursework

7.1Ryan Limited makes 2 products, Exe and Wye, using 2 materials P48 and P34. On 1 April tear 6, the company has the following stocks:Materials:Kg

P485485

P342690

Finished Products:Units

Exe650

Wye200

To make a unit of Exe needs 5 kg of P48 and 2 kg of P34. To make a unit of Wye needs 8 kg of P48 and 3 kg of P34.During the year ending 31 March years 7, Ryan Limited expects to sell 5000 units of Exe and 7500 units of Wye.It is the intention to increase finished stock by 10% by 31 march year 7, but to reduce material stocks to nil and from that date to implement a just-in-time purchasing arrangement.

Required:For the year ended 31 March year 7:a) Prepare a production budget for Exe and Wye.b) Prepare a purchasing budget for P48 and P34.Solution:Production budgetExeWye

UnitsUnits

Needed to meet sales requirements50007500

Increase in finished stock 10%6520

Total to be produced50657520

a) Materials budgetP48P34

KgKg

Product Exe2532510130

Product Wye6016022560

Total needed for production8548532690

Less stock in hand 1 April Year 654852690

To be purchased in year to 31/3.year 78000030000

b)

7.2A company uses 8 kg of material to make a product. The material costs 20 per kg. the finished product weights 6 kg. The other 2 kg are trimmings and off cuts normally arising in the course of manufacture. They can be sold for 5 per kg.Required:Calculate the direct material cost of a good unit of product if: a) all product made are of a saleable quality b) 10% of all products made are rejected because of poor quality. Rejected products cannot be rectified but can be sold as scrap for 5 per kg.Solution:

Material 8 kg @ 20 per kg160

Offcuts etc2 kg @ 5 per kg(10)

Direct material cost per good unit150

a)

b) To make 10 units of product:

Material 80 kg @ 20 per kg1600

Offcuts etc20 kg @ 5 per kg(100)

Material cost of 10 units1500

One rejected 6 kg @ 5 per kg(30)

Direct material cost of 9 good saleable units1470

Direct material cost per good unit 1470/9