It is the branch of accounting in which all the costs incurred during an activity or to accomplish an aim are collected, classified and recorded. This information is then processed and summarized to analyze the cost incurred in different processes and to arrive at a selling price and also to determine the areas where cost saving measures can be taken to improve efficiency and save cost.
One of the major objectives of cost accounting is to control cost. Every business wants to control costs on inputs and to charge more for its outputs, this can be achieved through cost accounting, as it would help in finding out inefficiencies in the production process which would further enable the management to take necessary action to improve the efficiency of such a process and lead to higher profits in the long term.
Cost accounting also equips the businesses to ascertain the selling price of products. The selling price can only be decided upon after taking into account all costs and then deciding how much profit a firm wants to earn and thus it can decide the selling price accordingly.
Cost accounting helps in ascertaining profits and also helps to see the profitability of a certain product and how that particular profit figure is reached upon. Thus the firm also knows what all it can do to maximize profits and minimize costs as cause and effect relationship can be made, which will enable the firm generate maximum value as well as profits.
It is an important tool that helps the management make cost decisions and thus take the best route to profitability.
This concept can be illustrated with the following example of a sandwich seller:
A sandwich seller was found to have the following costs to sell sandwiches in a day:
Raw materials (Bread, vegetables etc.) | $250 |
Food truck rent | $50 |
Petrol expenses | $50 |
Wages to helper | $50 |
Other expenses | $100 |
He expects to sell 100 sandwiches in a day and wants to earn 30% of profit on costs. Now he has to decide the cost of each sandwich so as to earn desired profit.
He first adds all the expenses i.e. = $500
Now he wants to earn a profit of 30% on cost thus he finds out that he has to makes sales worth $500 to break even and thus, he has to sell sandwiches worth $650 to earn desired profits.
As he expects to sell 100 sandwiches in a day he decides to price each of his sandwiches at $6.5.
The following example can be further extended to include many variations like how competitors price their sandwiches.
To further illustrate the point consider the previous example the only change being that the other sandwich sellers in the area sell their sandwich at $6.
Now the sandwich seller either has to decrease his profit margin or the cost incurred. Cost accounting helps him find the areas where he can reduce costs so as to attain desired levels of profits. After accounting for different areas where he find that he can reduce the other expenses that he incurs on selling the sandwiches by $30 and can negotiate a reduction of $10 on renting of truck thus saving $40 as expenses which reduces the cost to $460 thus to get his desired profit margin he has to sell $598 worth of sandwiches which allows him to price his sandwiches at $5.98. He thus has a little edge over his competitors and this may help him sell 10 more sandwiches each day thus helping him sell more and in turn earn more.
Question 1: Management accounting information for resource management
You have just been appointed as the management accountant for Close Up and Personal (CUP), a company that sells pottery items, jewellery and cool clothing, featuring personal digital photos. This company employs a team of 12 designers who design the pottery items, jewellery and clothing. These products are manufactured by independent companies. CUP then prints the customer ordered photos onto the products and sells them to customers through six sales outlets located in shopping malls.
Required:
1. Identify the specific types of Management Accounting information that may be needed by the following employees, on a monthly basis, to help them control operations:
2. The managing director of CUP is interested in developing more sophisticated planning systems but has some doubts over the value of undertaking strategic planning. Prepare a report outlining the importance of planning systems. In your report, consider the interrelationships between the objectives of the company, its strategies and short-term planning systems. Explain how management accounting information may assist in improving the planning function of the company.
Question 2: Schedules of cost of goods manufactured and sold; income statement
The following data refer to Flintoff Fashions for the current year:
Sales revenue | $570 000 |
Work in process inventory, 31 December | 18 000 |
Work in process inventory, 1 January | 24 000 |
Selling and administrative expenses | 90 000 |
Income tax expense | 54 000 |
Purchases of raw materials | 108 000 |
Raw material inventory, 31 December | 15 000 |
Raw material inventory, 1 January | 24 000 |
Direct labour | 120 000 |
Electricity: plant | 24 000 |
Depreciation: plant and equipment | 36 000 |
Finished goods inventory, 31 December | 30 000 |
Finished goods inventory, 1 January | 12 000 |
Indirect material | 6 000 |
Indirect labour | 9 000 |
Other manufacturing overhead | 48 000 |
Required:
1. Prepare the schedule of cost of goods manufactured for Flintoff Fashions.
Answer:
Particulars | Details | Amount |
---|---|---|
Opening stock of Raw Materials | 24000 | |
Add: Purchase of Raw materials | 108000 | |
Less: Closing stock of Raw Materials | 15000 | |
RAW MATERIAL CONSUMED | 117000 | |
Add: Direct Labour | 120000 | |
PRIME COST | 237000 | |
Add: Manufacturing Overheads | ||
Electricity of plant | 24000 | |
Depreciation | 36000 | |
Indirect materials | 6000 | |
Indirect Labour | 9000 | |
Other Overheads | 48000 | 123000 |
GROSS FACTORY COST | 360000 | |
Add: Opening WIP | 24000 | |
less: Closing WIP | 18000 | |
NET FACTORY COST/COST OF PRODUCTION | 366000 |
2. Prepare the schedule of cost of goods sold for Flintoff Fashions.
Answer:
Particulars | Details | Amount |
---|---|---|
Opening stock of Raw Materials | 24000 | |
Add: Purchase of Raw materials | 108000 | |
Less: Closing stock of Raw Materials | 15000 | |
RAW MATERIAL CONSUMED | 117000 | |
Add: Direct Labour | 120000 | |
PRIME COST | 237000 | |
Add: Manufacturing Overheads | ||
Electricity of plant | 24000 | |
Depreciation | 36000 | |
Indirect materials | 6000 | |
Indirect Labour | 9000 | |
Other Overheads | 48000 | 123000 |
GROSS FACTORY COST | 360000 | |
Add: Opening WIP | 24000 | |
less: Closing WIP | 18000 | |
NET FACTORY COST/COST OF PRODUCTION | 366000 | |
Add:Opening stock of finished goods | 12000 | |
Less:Closing stock of finished goods | 30000 | |
COST OF GOODS SOLD | 348000 |
3. Prepare the income statement for Flintoff Fashions.
Answer:
Particulars | Amount |
---|---|
Sales | 570000 |
Less:Cost of goods sold | 348000 |
Less:Selling and administrative expenses | 90000 |
OPERATING PROFIT | 132000 |
Less:Income tax expense | 54000 |
NET PROFIT | 78000 |
W. 4. Construct an Excel® spreadsheet to solve all the preceding requirements. Include formulas in your spreadsheet wherever possible. Show how both cost schedules and the income statement will change if:
4. (a) raw material purchases amounted to $110 400.
Answer:
Particulars | Amount(original) | Amount(After change) |
---|---|---|
Opening stock of Raw Materials | 24000 | 24000 |
Add:Purchase of Raw materials | 108000 | 110400 |
Less:Closing stock of Raw Materials | 15000 | 15000 |
RAW MATERIAL CONSUMED | 117000 | 119400 |
Add:Direct Labour | 120000 | 120000 |
PRIME COST | 237000 | 239400 |
Add:Manufacturing overheads | ||
Electricity of plant | 24000 | 24000 |
Depreciation | 36000 | 36000 |
Indirect materials | 6000 | 6000 |
Indirect Labour | 9000 | 9000 |
Other Overheads | 48000 | 48000 |
GROSS FACTORY COST | 360000 | 362400 |
Add:Opening WIP | 24000 | 24000 |
Less:Closing WIP | 18000 | 18000 |
NET FACTORY COST/COST OF PRODUCTION | 366000 | 368400 |
Add:Opening stock of finished goods | 12000 | 12000 |
Less:Closing stock of finished goods | 30000 | 30000 |
COST OF GOODS SOLD | 348000 | 350400 |
Particulars | Amount | Amount(After change) |
---|---|---|
INCOME STATEMENT |
||
Sales | 570000 | 570000 |
Less:Cost of goods sold | 348000 | 350400 |
Less:Selling and administrative expenses | 348000 | 350400 |
OPERATING PROFIT | 132000 | 129600 |
Less:Income tax expense | 54000 | 54000 |
NET PROFIT | 78000 | 75600 |
4. (a) indirect labour was $9600.
Answer:
Particulars | Amount(original) | Amount(After change) |
---|---|---|
Opening stock of Raw Materials | 24000 | 24000 |
Add:Purchase of Raw materials | 108000 | 108000 |
Less:Closing stock of Raw Materials | 15000 | 15000 |
RAW MATERIAL CONSUMED | 117000 | 117000 |
Add:Direct Labour | 120000 | 120000 |
PRIME COST | 237000 | 237000 |
Add:Manufacturing overheads | ||
Electricity of plant | 24000 | 24000 |
Depreciation | 36000 | 36000 |
Indirect materials | 6000 | 6000 |
Indirect Labour | 9000 | 9600 |
Other Overheads | 48000 | 48000 |
GROSS FACTORY COST | 360000 | 360600 |
Add:Opening WIP | 24000 | 24000 |
Less:Closing WIP | 18000 | 18000 |
NET FACTORY COST/COST OF PRODUCTION | 366000 | 366600 |
Add:Opening stock of finished goods | 12000 | 12000 |
Less:Closing stock of finished goods | 30000 | 30000 |
COST OF GOODS SOLD | 348000 | 348600 |
Particulars | Amount | Amount(After change) |
---|---|---|
Sales | 570000 | 570000 |
Less:Cost of goods sold | 348000 | 348600 |
Less:Selling and administrative expenses | 90000 | 90000 |
OPERATING PROFIT | 132000 | 131400 |
Less:Income tax expense | 54000 | 54000 |
NET PROFIT | 78000 | 77400 |
Question 3: Cost behavior; engineered cost; committed and discretionary costs: manufacturer
HappyDaze T-shirts manufactures and prints customised designs on T-shirts. Below is a list of some of their major costs.
Required:
For each cost:
Answer:
S.No. | Particulars | Type | Sub-type | Reason |
---|---|---|---|---|
(a) | Cost of daily radio advertising on the local community radio station. | Fixed | Discretionary | The cost doesn't vary with production and is under control , whether it is to be incurred or not. |
(b) | Cost of the fabric used to make the T-shirts. | Variable | Engineered | Varies with the production and can be directly linked with per unit of output. |
(c) | Cost of the ink used in the designs. | Variable | Non-engineered | Varies with the production and cannot be directly linked with per unit of output. |
(d) | Salary of the managing director. | Fixed | Commited | Doesn’t vary with the production level and is incurred whether there is any production activity or not. |
(e) | Wages of the production employees who sew and print the T-shirts. | Variable | Engineered | Varies with the production and can be directly linked with per unit of output. |
(f) | Cost of movie tickets provided for the Employee of the Month award each month. | Fixed | Commited | Doesn’t vary with the production level and is incurred whether there is any production activity or not. |
(g) | Depreciation of the sewing machines calculated on a unit of production basis | Variable | Non-engineered | Varies with the production and cannot be directly linked with per unit of output. |
(h) | Cost of electricity used in the factory building. | Variable | Non-engineered | Varies with the production and cannot be directly linked with per unit of output. |
(i) | Rent of the building. | Fixed | Commited | Doesn’t vary with the production level and is incurred whether there is any production activity or not. |
(j) | Wages of the staff who package the T-shirts. | Variable | Non-engineered | Varies with the production and cannot be directly linked with per unit of output. |
(k) | Cost of sewing machine maintenance. | Fixed | Discretionary | The cost doesn't vary with production and is under control , whether it is to be incurred or not. |
(l) | Cost of the new advertising sign at the front of the factory. | Fixed | Commited | Doesn’t vary with the production level and is incurred whether there is any production activity or not. |
(m) | Cost of the company car used by the managing director. | Fixed | Commited | Doesn’t vary with the production level and is incurred whether there is any production activity or not. |
Question 4: Cost of goods manufactured; overapplied or underapplied overhead; journal entries
Cool Cooking Tools Ltd, manufacturer of gourmet cooking utensils, uses job costing. Manufacturing overhead is applied to production at a predetermined overhead rate of 150 per cent of direct labour cost. Any overapplied or underapplied manufacturing overhead is closed to cost of goods sold at the end of each month. Additional information:
Job SR22, consisting of ceramic spoon rests, was the only job in process on 31 January, with accumulated costs as follows:
Direct material | $4000 |
Direct labour | 2000 |
Applied manufacturing overhead | 3000 |
Total | $9000 |
Jobs BS67, TR29 and GT108 were started during February.
Direct materials requisitions during February totalled $26 000.
Direct labour cost of $20 000 was incurred during February.
Manufacturing overhead incurred in February was $32 000.
The only job still in process on 28 February was job number GT108, with costs of $2800 for direct material and $1800 for direct labour.
Required:
Q4(a). Calculate the cost of goods manufactured for February.
Answer:
Particulars | Amount |
---|---|
Direct material | 26000 |
Add:Direct labour | 20000 |
Add:Overheads(150% of Direct Labour) | 30000 |
Cost of goods manufactured | 76000 |
Q4(b). Calculate the amount of overapplied or underapplied overhead to be closed to cost of goods sold on 28 February.
Answer:
Overheads incurred | 32000 |
Overheads absorbed | 30000 |
Underabsorbed overheads | 2000 |
Q4(c). Prepare journal entries to record the events described in requirements 1 and 2.
Answer:
Date | Particulars | LF | Dr Amount | Cr Amount |
---|---|---|---|---|
Stores Ledger Control A/c Dr | 26000 | |||
To General Ledger Control A/c | 26000 | |||
(Being Direct Material Purchased) | ||||
Wages Control A/c Dr | 20000 | |||
To General Ledger Control A/c | 20000 | |||
(Being direct wages paid) | ||||
Manufacturing Overheads Control A/c Dr | 32000 | |||
To General Ledger Control A/c | 32000 | |||
(Being overheads incurred) | ||||
Respective Job WIP A/c Dr | 76000 | |||
To Stores Ledger Control A/c | 26000 | |||
To Wages Control A/c | 20000 | |||
To Manufacturing Overheads Control A/c | 30000 | |||
(Being amounts transferred to jobs) | ||||
Cost of sales A/c(See WN1) Dr | 77700 | |||
To Respective Job WIP A/c | 77700 | |||
(Being amount transferred to cost of sales) | ||||
Cost of sales A/c Dr | 2000 | |||
To Manufacturing Overheads Control A/c | 2000 | |||
(Being underabsorbed Overheads absorbed) | ||||
TOTAL | 233700 | 233700 |
1 Calculation of amount transferred to Cost of sales Cost of goods Manufactured in February 76000 Add Opening WIP 9000 Less Closing WIP 7300 77700 2 "The entries are made assuming non-integrated system of accounting."
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