RGAB 2006

BASIC COST ACOUNTING

R. G. A. BOLAND AND J. A. FEATHERS

ACCOUNTING STEP BY STEP

Four-hour programmes of self-instruction in accounting

Accounting Step by Step 1. Accounting Reports 2. Debit and Credit 3. Basic Cost Accounting 4. Budgetary Control

Accounting Step by Step, Volume 3

BASIC COST ACCOUNTING

R. G. A. BOLAND
Fellow of the Institute of Chartered Accountants

J. A. FEATHERS
Fellow of the Association of Certified Accountants Fellow of The Institute of Cost and Management Accountants

ISBN 0 340 04504 3

Copyright RGAB 2006 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing. The figures in this book are fictitious and do not relate to any particular company or business.

HOW TO USE THIS PROGRAMME

INTRODUC TION

This is an experimental programme in applying a new technique to the problems of learning accounting. The authors would appreciate comments from both teachers and others who use the programme, to improve the design of later editions.
PURPOSE OF THE PROGRAMME

The programme enables you to teach yourself very rapidly the language and basic concepts of cost accounting. It is a programme of instruction which leads you to an understanding of what cost of instruction which leads you to an understanding of what cost accounting reports can and cannot tell you about a business. It is not a textbook, but an aid to the understanding of existing textbooks. The programme leads you from simple to complex ideas in a gradual fashion. If you are unfamiliar with accounting you will not be able to understand the later parts of the book until you have understood what comes before. The programme is like a ladder and the parts of the programme are like the rungs in a ladder. You cannot reach the top rung of a ladder unless you have first used all the lower rungs. If there are several rungs missing in the ladder, it is not only very difficult to reach the top, but the ladder also becomes unstable. The same things apply to your knowledge of accounting.
CONTENTS

This book is divided into five chapters. Chapter I is a brief introduction. Chapters II-V comprise the main programme which is a series of sets. In each set, there are ten to sixty frames which systematically present new knowledge and also demand from you written answers. The main programme is followed by a quiz designed to test the knowledge you have acquired. There is also a brief glossary of cost accounting language.
TECHNIQUE

The following technique is used in writing the programme: 1. The number of words needed for a correct response is indicated by the number of dotted lines (................................................). 2. An acceptable answer to a frame is the correct answer, shown, or any reasonable synonym. You are the judge. 3. Answers that require an amount of money are indicated in the frame by ................ and not by the normal .................

A C C O U N T IN G S TE P B Y S TE P R O U T IN E ROUTINE

The routine for the, student to follow in using the programme is as follows: 1. Read the summary of the set. If you already understand all the words pass on to the next set. If not, do the set. 2. Read each frame and refer to the appropriate exhibit each time. 3. Write your response in the book or on a separate sheet. 4. Check your response with the correct answer which is one frame down. Do not wait until the end, check each answer separately. 5. If your answer is the same as the correct answer or is any reasonable synonym, mark it with a tick and go on to the next frame. 6. If the answer is not correct, read the frame again, write the answer to the frame correctly, and then go on to the next frame. 7. At the end of the set, read the summary of the set again. Count the number of correct answers you have made. If you have 80% correct, move to the next set. If you have less than 80% correct, do the set again.
WRITING THE ANSWERS

Writing the answers is essential to the learning process. The answer must be written before you look at the correct solution. If you glance ahead you will lose half of the value of the programme. (However, a little intelligent cheating can be educational!)
SEQUENCE

Each frame must be answered in turn. The sequence has been carefully designed to introduce new knowledge and to reinforce old knowledge. Do not skip frames. Any apparent repetitions are there for a good reason. Avoid careless answers. If you begin to make mistakes because you are tired, and have not read the text carefully, take a rest. If you continually miss one particular point, go back to the set in which it first appeared and do that set again. And now read quickly through Chapter I: Introduction to Cost Accounting

CONTENTS HOW TO USE THIS PROGRAMME CHAPTER I CHAPTER II SET 1 SET 2 SET 3 SET 4 CHAPTER III SET 5 SET 6 CHAPTER IV SET 7 SET 8 SET 9 CHAPTER V SET 10 SET 11 QUIZ Introduction to Cost Accounting Meaning of Cost Calculating the cost Organization, objectives and methods Direct and indirect costs Cost estimates and selling prices Manufacturing Overhead Cost centres Cash and credit Costing Methods Contract, job and batch costing Output costing Process costing Interpretation of Cost Data Cost statements Relevant costs A Test of Knowledge acquired from the Programme vii 9 13 13 21 33 47 57 57 73 83 83 93 99 107 107 123 136 151 152 153

FOR THE TEACHER ANSWERS TO THE QUIZ GLOSSARY OF COST ACCOUNTING LANGUAGE

PROGRESS WORK SHEET

ESTIMATED CHAPTER/SET TIME ACTUAL TIME TOTAL OF FRAMES

FRAME NO. OF EACH ERROR

(MINUTES) CHAPTER I
CHAPTER

(MINUTES)

IN ERROR

20 20 20 20 20 25 15 10 10 10 20 20 30 240

II

Set 1 Set 2 Set 3 Set 4 CHAPTER III Set 5 Set 6 CHAPTER IV Set 7 Set 8 Set 9 CHAPTER V Set 10 Set 11 Quiz Total time

NOTE: The authors would be pleased to receive the information outlined above and other comments from any serious student who is interested in research into the effectiveness of programmed learning.

One error in a frame is treated as a frame in error.

IMPORTANT NOTE In the front of each set is a summary of technical terms and ideas to be learned from the set. Read it quickly. If you already understand all of the summary, do not complete the set, pass on to the next one. If you do not completely understand every technical term and idea in the summary, do the whole set. Do not attempt to do only parts of a particular set.

CHAPTER I INTRODUCTION TO COST ACCOUNTING Estimated time 10 programme) minutes (twice) (Read at beginning and end of the

Read quickly through the following paragraphs. Do not study them in detail until you have completed the whole programme. Accounting Language Accounting has been called the language of business and, like any language, it can never express our thoughts with absolute precision and clarity. Our task of learning this language is complicated by the fact that many of the words used in accounting mean almost, but not quite, the same as they mean in every-day life. You must learn not to think of the words in their popular meaning. In this programme we have used a standard set of accounting terms, although certain other terms are also commonly used in practice. However, frequent repetition and writing of the standard accounting terms reinforces your basic grasp of the accounting language. Rules and principles In any language there are some rules of principles that are definite and some others that are not definite. The latter are a matter of opinion or style. Accountants have different opinions just as grammarians have different opinions. As language changes to meet the needs of communication in a society, so accounting changes to meet the needs of business. Uncertainty Accounting encompasses the facts about a business that can be expressed in money. However, many important business facts, i.e. the health of management, the morale of the workers, the state of the market, etc., cannot be expressed in money. Accounting must necessarily therefore provide only a limited picture of a business.

A C C O U N T IN G S TE P B Y S TE P R O U T IN E

Consistency and Comparability Accounting figures became significant, not in themselves, but when they are compared with other figures for a similar previous period, with a budget estimate, or even with figures for another business. The accountant, therefore, despite the problems of uncertainty, tries to be consistent in his judgment so that the figures he produces are comparable. Financial Accounting Financial accounting generally relates to the records, and to the concepts necessary to prepare balance sheets and income statements (profit and loss accounts) showing a true and fair overall position of a business. Cost Accounting Cost accounting is concerned not with the overall results of the business but with the efficiency of the various sections of the business and with the cost of a unit of production. The cost is not in not a scientific fact but depends upon the judgment of the cost accountant. This book shows how the cost of a unit of production may be calculated and the key assumptions underlying this calculation. You should therefore appreciate not only the advantages of cost accounting but also some of its limitations Actual and Standard Costs The programme deals with historical or actual cost accounting. A separate programme will deal with the technique of standard cost accounting. The latter involves the setting of standards as measures of performance against which to measure actual cost and efficiency of operations in terms of variances of price, quantity and volume. Language In the programme we have used a simple set of standard words in place of highly technical terms. The glossary at the end of the book defines each word used in the book and other words used in practice. Now start the detailed programme at chapter II Set 1. 10

CHAPTER II MEANING OF COST SET 1 CALCULATING THE COST Estimated time 20 minutes

SUMMARY In financial accounting we compute for an accounting period the sales, cost and profit for the whole business. However, in cost accounting we analyse costs and compute the cost of each unit of production. Cost depends upon the judgment of the cost accountant in each situation. The cost of a product purchased for resale, is the price we pay. But if we buy material to make a product for resale, then the cost of the product includes the material, labour and overhead. The cost of those units of a product sold is not the same as the total cost of materials, labour and overhead, since some of those costs may relate to unsold units. If we buy goods for 4 and sell half of them for 6, our profit to date is 4 (provided the goods left over are still worth 2).

CHAPTER II MEANING OF COST SET 1 CALCULATING THE COST Exhibit 1 Financial Accounting Report

INCOME STATEMENT Year ended December 31, Year 1 Sales Less Costs Profit 120 100* 20

* Relates to four different products produced and sold during the year.

FRAME DETAIL

CORRECT ANSWERS

1 In financial accounting we compute the sales, costs, and profit for all products. However, in cost .......... we compute the cost for each .......... separately. 2 Now read Exhibit 1 which is an income statement or profit and loss account for an accounting period of .......... year. 3 It shows total sales and costs during the year, and a figure of total .......... for the year of 20. 4 The statement that indicates the total sales, costs and profit for an accounting period is called a .......... and .......... account or .......... statement. 5 In Exhibit 1 the income statement shows the sales, cost, and profit for .......... (how many?) different products produced and sold during the period. Does it show the cost of each product? For this we need not financial accounting but .......... accounting 6 If we only make 4 identical units of the same product for 100, the cost of one unit may easily be calculated by dividing the total cost by .......... Thus the cost per unit is .......... 7 However, if we make four different products we .......... (can, cannot) divide the total cost by the total quantity of the output to get the cost of one product. What do we need? 8 If we purchase goods for resale the cost is the purchase .......... that we pay for the goods.

Now check your answer with the correct answer in the frame below. Tick it if correct accounting product one

profit

profit loss income

four no cost 4 25

cannot cost accounting

15

CHAPTER II SET 1 CALCULATING THE COST

Exhibit 2 Cost of one product: Product X 15 5 20 10 30

Material 3 tons @ 5 per ton Labour 5 hours @ 1 per hour Overhead 5 hours @ 2 per hour Total cost

FRAME DETAIL

CORRECT ANSWERS

9 However, if we buy raw material and manufacture a product, then to the cost of raw material, we must add the cost of manufacture to get the total .......... of the product. 10 Read Exhibit 2 relating to .......... (how many) product. It shows the computation of the total cost of product X as .......... 11 To manufacture the product we used .......... tons of raw material at 5 per ton for a total material cost of ..........; similarly we used 5 hours of labour at .......... per hour for a total labour cost of .......... 12 Is the cost of labour and material the total cost of product X?

price

cost

one 30

3 tons 15 1 5 no

13 To arrive at total cost we must add 10 for .......... This overhead cost is an estimate based upon .......... hours at 2 per hour. 14 The overhead cost appropriate to a particular product is always an estimate. Therefore the total product cost must also always be an .......... It must depend upon the judgment of the .......... accountant.

overhead 5

17

CHAPTER II SET 1 CALCULATING THE COST Exhibit 3 Importance of the cost of Closing Stock (Inventory) Purchases 5 @ 5 each Sales 3 @ 9 each Apparent profit to date Cost of goods left unsold (closing stock) 2 @ 5 each Actual profit to date 25 27 2 10 12

Note: The actual profit may also be computed: Sales Less: Purchases Less goods left unsold Cost of goods sold Actual profit to date 25 10 15 15 12 27

FRAME DETAIL

CORRECT ANSWERS

15 In the cost of product X we show overhead of 10. If we had decided not to produce this one unit of product, would we have saved 10 of overhead?

estimate cost

16 Estimates of cost depend upon the .......... of the cost accountant.

probably not

17 Let us now take another example: if we buy goods for 4 and sell half for 6 we make a profit to date of ..........

judgment

18 To compute the 4 profit we deduct from the 6 selling price, the 2 .......... of goods sold. There are 2 of goods left over for subsequent ..........

4 not 2 (Because we still have 2 of goods left unsold)

19 If the 2 of goods left over are subsequently sold for 4, we make a further profit of .......... The entire profit of both sales is now .......... The calculation of profit .......... (does, does not depend upon the cost of any goods left) over.

cost sale

20 Now read Exhibit 3 where we purchase some goods at 5 each to sell again at 9 each. The difference between total purchases and sales to date is only .......... Is this the total profit on the transaction?

2 6 does

19

FRAME DETAIL

CORRECT ANSWERS

21 If we take into account the cost of the goods left unsold .......... the apparent profit of 2 is increased to an actual profit of ..........

2 no

22 Read Exhibit 3 and the note thereto again. Do you see how the profit of 12 may be computed in two different ways? Is 12 the: (a) profit to date, or (b) profit on the total transaction, or (c) both (a) and (b)? 23 If we buy a pig for 1 can we compute scientifically the exact cost appropriate to the pigs tail?

10 12

(a)

24 In summary therefore, the cost of a product includes labour cost, .......... cost and .......... cost, Cost incurred .......... (is, is not) the same as cost of goods sold. Cost is not a scientific fact but depends upon the .......... of the cost accountant. 25 Are you writing down the answer to each frame and checking it immediately?

No! Its a matter of judgment!

material overhead is not judgment If not, start writing now. Reading is not enough. We want you to learn and to remember

26 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 20 correct, carry on to the next set.

20

CHAPTER II SET 2 ORGANIZATION, OBJECTIVES AND METHODS Estimated time 20 minutes

SUMMARY The organization of a manufacturing business provides the basis for cost analysis into: 1. Manufacturingcost of direct labour, direct material and manufacturing overhead. Overhead expenses are indirect costs and include: indirect labour, indirect material, occupancy, repairs, maintenance, internal transport, factory supervision, etc. 2. Sales and distributioncost of salesmens salaries, sales office expenses, advertising, promotion, packaging, dispatch and carriage outwards, etc. 3. Administrationcost of accounting, office services and general management. The objectives of cost accounting are to: 1. Estimate the cost of each product (as an aid to pricing). 2. Compute the cost of work in process so that the profit may be properly calculated. 3. Control costs by associating costs with centres of responsibility, comparing actual with planned cost and taking corrective action. The cost accounting method to achieve these objectives should be appropriate to the business organization and its products. Alternative methods available include: job, contract, batch, output and process costing.

CHAPTER II SET 2 ORGANIZATION, OBJECTIVES AND METHODS Exhibit 1 Organization Chart of a Manufacturing Business
MANAGING DIRECTOR

MANUFACTURING DEPARTMENT

SALES DEPARTMENT

ADMINISTRATIVE DEPARTMENT

120
EMPLOYEES

20
EMPLOYEES

10
EMPLOYEES

Direct labour Direct material Manufacturing overhead: Indirect labour Occupancy Repairs Maintenance administration Internal transport Supervision Indirect material

Sales overhead: Administrative overhead: Salesmens salaries Directors fees Advertising Office salaries Travelling Auditors fees Sales promotion Stationery Accounting General

Exhibit 2 Objectives of cost accounting 1. Estimate cost and possible selling price of each product. 2. Compute the cost of work in process. 3. Control costs.

FRAME DETAIL

CORRECT ANSWERS

1 Read Exhibit 1 which shows the organization of a typical manufacturing business into three main departments:......., ....... and.

Check your answer with the correct answer in the frame below. Tick it if correct manufacturing sales administrative

2 The majority of workers are employed in the ......... department, which covers direct labour and indirect labour. The employees in the manufacturing department are .......... out of a total of 150 in the business. 3 However, in the sales department we have ....... employees, and in the administrative department employees.

manufacturing 120

4 Direct labour and direct material are all incurred in the . department. However, from the outline of the business, the overheads may be divided into...., ......... or ........ overhead. 5 Cost of salesmens salaries, advertising, travelling, sales promotion, etc., are all ............ overhead.

20 10

manufacturing manufacturing sales administrative

6 Cost of directors fees, office salaries, auditors fees, stationery, etc., are ......... overhead.

sales

23

FRAMRE DETAIL

CORRECT ANSWERS

7 Factory costs for occupancy, indirect labour, repairs, supervision, indirect material, etc., are ............. overhead. 8 What is this occupancy overhead?

administrative

manufacturing

9 Read again the detail of the manufacturing department in Exhibit 1. Direct labour, direct material............. (are, are not) part of manufacturing, but they are not manufacturing overheads. Overheads are ............. costs.

Costs of occupying a factory, e.g. rent, rates, lighting, power, building maintenance, insurance, etc. are Indirect

10 Now in your own organization, are you part of manufacturing, selling or administration? Does your superior really understand you? Your real problems? Your potential? The real responsibilities you have carried for so long without a word of complaint?

11 This completes our review of the organization and overhead costs. Now read Exhibit 2 which lists the ............. of cost accounting. These objectives are: to estimate cost and possible selling ............. of each product, to compute the cost of work in ............. and to ............. costs.

(We all seem to have the same problem!)

12 The first objective of cost accounting deals with estimating costs to set selling prices. But are selling prices always based on cost? They are often determined by the market and not merely by adding a percentage to the ............. of a product.

objectives price process control

24

Remember that writing and checking the answers to each frame is absolutely vital, if you are to get the full benefit from your work on this programme.

CHAPTER II SET 2 ORGANIZATION, OBJECTIVES AND METHODS Exhibit 3 Cost, selling price and profit of products A, B and C. Product A 5 8 3 B 10 10 Nil C 15 20 5

Cost Selling price Profit

FRAME DETAIL

CORRECT ANSWERS

13 In Exhibit 3 we show for three products, A, B and C the appropriate cost, ............. price and ..........

no cost

14 Product A costs .......... and sells for .......... making a.........of 3. Whereas product B makes a profit of ........... and product C a profit of ..............

selling profit

15 Strictly on the cost accounting results it appears that we should drop product B. Should other factors be considered before making this decision?

5 8 profit 0 5

16 Thus cost accounting data may show whether a product makes a profit or loss but ......... (does, does not) indicate finally what management should do. But should management be given cost and profit data by products? 17 The second objective of cost accounting in Exhibit 2 is to record the labour, material and overhead incurred on a product in order that we may value ......... in ........... 18 In Exhibit 4 we compute the value of work in process at ......... (market price, cost). The total cost incurred amounts to ......... If we know that the material cost of each unit is 1, then the 250 of material (marked X) is for ............ units.

yesit may be part of a line of products and to sell A and C we have also to sell B does not yes

work process

27

CHAPTER II SET 2 ORGANIZATION, OBJECTIVES AND METHODS Exhibit 4 Computing the cost of work in process Total cost incurred Costs: Labour Material Overhead 200 (X)250 200 650 Total Units Units: Completed In process Cost of goods finished 150 100 150 40 Complete d Units Cost goods still in process (unfinished) 50 150 50 250 Work in Process Units

100 150 250

100 100

150 150

FRAME DETAIL

CORRECT ANSWERS

19 Of these 250 units (cost 650), 100 units are complete for a total cost of 400, and ............. units are work in process at a cost to date of .............

cost 650 250

20 For the work in process we ............. (have, have not) incurred the full material cost but we ............. (have, have not) yet incurred the full labour and overhead cost.

150 250 (Have you got one of these answers wrong? Can you see why?) have have not (because we must buy material before we start to make the product) 250 cost market

21 The computation of the cost of work in process ............., is made by the cost accounting section of the business. It is not valued at market price but at the lower of ............. or ............. price.

22 The third objective of cost accounting in Exhibit 2 is to ............. costs by relating costs to the persons responsible for ............. these costs.

23 Responsibility cost accounting associates cost with the person .............

control incurring

24 Now read Exhibit 5 which shows the cost control report of the ............. department for the month of August, Who is probably responsible?

responsible

29

CHAPTER II SET 2 ORGANIZATION, OBJECTIVES AND METHODS Exhibit 5 Cost control report of the sales departmentAugust Responsible person: Sales Manager Actual 230 15 10 25 15 295 Budget 235 20 12 5 8 280 Difference over (under) (5) (5) (2) 20 7 15

Salaries Travel expenses Office expenses Advertising Sales literature

Exhibit 6 Examples of different units of cost or production Unit 1. One job 2. One contract 3. One process 4. One unit of output 5. One batch of units Cost Accounting Method (system) Job costing Contract costing Process costing Output costing Batch costing

FRAME DETAIL

CORRECT ANSWERS

25 The actual costs for August were 295 against a ....... of 280. The difference of 15 arose because actual costs were ....... (over, under) budget.

sales sales manager

26 Exhibit 5........ (is, is not) a cost control report for the sales department. It shows where the actual expenses for August exceeded the .......

budget over

27 Which items were less than budget?

is budget

28 Which items exceeded the budget? Is this report useful to the sales manager?

salaries travel expenses office expenses

29 By presenting timely cost reports to management, cost accounting indicates the difference between planned and actual cost and thereby helps to ........ costs. 30 Now read Exhibit 6 which lists several different ........... of cost. Different methods of cost accounting determine the cost of one unit of production or one unit of ...........

advertising sales literature yes

control

31

FRAME DETAIL

CORRECT ANSWERS

31 Cost accounting associates cost with a ....... of production. A job, a contract, a process or a unit of output are all ....... of cost, for cost accounting purposes. 32 For each unit of production there is usually a system of cost accounting. One unit, one cost and therefore one ...... Name three possible units of cost.

units cost

unit units

33 To compute the cost and selling price of a product, to value work in process and to control costs, are all ....... of cost accounting.

system Job, batch, contract, or process

34 What do engineers usually say about cost accountants?

objectives

35 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 25 correct, carry on to the next set.

!!!

32

CHAPTER II SET 3 DIRECT AND INDIRECT COSTS Estimated time 20 minutes SUMMARY Direct costs are conveniently associated with a unit of production. They are: 1. Direct labour which is direct operating labour. It normally excludes: storemen, foremen, transport drivers, office clerks, salesmen, inspectors, managers and other indirect labour. or 2. Direct material which forms part of the product sold. It normally excludes: oil, grease, machine repairs, rags and other indirect material. or 3. Direct services which are special costs for particular jobs only, e.g. hire of machines. All other costs are indirect costs known as overheads, which may be analysed in various ways: 1. Manufacturing, selling or administrative. 2. Fixed or variable (with the volume of production or sales). The elements of cost may now be set out as follows: Direct labour Direct material
PRIME COST XX XX XX XX XXX XX XXX

Manufacturing overhead
MANUFACTURING COST

Selling and administrative overhead

TOTAL COST

Note: Manufacturing costs incurred in one accounting period are for goods finished and partly finished. In the cost of finished production, we adjust costs incurred during the period for work in process brought forward from the previous period and work in process carried forward.

CHAPTER II SET 3 DIRECT AND INDIRECT COSTS Exhibit 1 List of expenditures analysed into direct costs, indirect costs and special items Normally F or V Indirect costs Special Direct Manufac- Sales Admini- items costs turing overhea strative (not overhead d overhead costs)
X X

Description

V V F V V V F F V F F F F F V F F

Direct labour Direct material Indirect labour Indirect material Factory rent and rates Lighting and heating Foremens wages Storemens wages Power

X
X X X X X X X X X X X X X X X X

Machine depreciation expense Office expenses Office salaries Sales salaries Advertising Sales travelling expense

Auditors fees Solicitors fees Income tax Dividends

* Note: Normal effect of changes in the volume of production: Fnot affected (fixed costs) Vaffected (variable costs)

FRAME DETAIL

CORRECT ANSWERS

1 Read Exhibit 1 which is a list of expenditures analysed into ...... costs, ....... costs and ....... items.

Check your answer with the correct answer in the frame below. Tick it if correct direct indirect special

2 The first two items are direct labour and direct ........ which are ....... costs.

3 Costs that can be conveniently associated with a unit of production are ........ costs. All other costs are indirect costs known as .........

material direct

4 Dividends and income tax are not costs but ........ ........

direct overheads

5 The factory rent and rates are ....... (direct, indirect) costs or manufacturing overhead because they are part of the operating costs of running the ........ 6 However, the rent and rates paid for sales or administrative offices ........ (are, are not) manufacturing overhead.

special items

indirect factory

35

CHAPTER II SET 3 DIRECT AND INDIRECT COSTS Exhibit 2 Elements of cost of Iob A and Iob B A 20 10 30 20 50 10 60 * Classification B 10 D 20 D 30 10 40 8 48 I I

Direct labour Direct material Prime cost Manufacturing overhead (100% of direct labour) Manufacturing cost Selling and administrative overhead (20% of manufacturing cost) Total cost * Note: D Indicates Direct cost I Indicates Indirect cost.

FRAME DETAIL

CORRECT ANSWERS

7 Foremens wages, ......... wages and power are all ........ overhead. They ........ (can, cannot) conveniently be associated with one unit of production. 8 The total cost of a new machine ........ (is, is not) an overhead expense at the time of purchase. However, machine depreciation may be charged periodically as a ......... overhead.

are not

storemens manufacturing cannot

9 Machinery costs are charged to manufacturing overhead periodically in the form of ........

is not manufacturing

10 Sales overhead includes such items as sales salaries, ....... and sales .......

depreciation

11 Auditors fees, office salaries and office expenses are all ........ overhead.

advertising travelling expense

12 Indirect costs are overheads. However income tax and dividends ......... (are, are not) costs or overheads. They are special items treated as allocations of profit and not as .........

administrative

37

FRAME DETAIL

CORRECT ANSWERS

13 All costs may be divided into direct costs and indirect costs. In Exhibit 2 what do the marks F and V mean? Which item marked V should normally be marked F? 14 Direct labour ........ (does, does not) usually include storemens wages, inspectors wages and managers salaries. These items are manufacturing overhead unless they can be ........ ........ (what)?

are not costs

fixed or variable cost factory rent and rates (normally fixed cost)

15 Indirect material is a ........ overhead. It ........ (does, does not) usually include grease, rags, small tools, etc.

does not conveniently associated with a unit production manufacturing does

of

16 Now read Exhibit 2 which shows the ........ of cost of job A and job B.

17 For job A the direct labour cost was 20. The direct material cost was 10 and therefore the ........ cost was 30.

elements

18 To the prime cost of 30 we add manufacturing overhead at 100% of direct labour to get a ........ cost.

prime

38

FRAME DETAIL

CORRECT ANSWERS

19 Manufacturing cost equals manufacturing over head plus ........ cost.

manufacturing

20 Selling and administrative overhead of 10 being .........% of manufacturing cost (50) is added to manufacturing cost to give the ......... cost of 60.

prime

21 In the total cost of job A (60) the easily identifiable direct costs amounted to ......... and the overhead (indirect) costs amounted to ...........

20% total

22 Thus for job A only one half of the total cost was clearly defined as direct cost conveniently associated with the job, and the other half was ..........

30 30

23 Similarly for job B prime cost amounts to ......... Manufacturing overhead at the rate of .......... % of direct labour is added to form a manufacturing cost of ...........

overhead

24 The total cost of job B is 48 of which 30 is .......... cost and 18 is ........ cost or overhead.

30 100% 40

39

CHAPTER II SET 3 DIRECT AND INDIRECT COSTS Exhibit 3 Cost of all finished production and cost of finished goods sold during one month (In thousands of pounds) Direct labour Direct material Manufacturing overhead Manufacturing cost incurred Work in process: opening Work in process: closing Cost of finished goods produced Finished goods: opening inventory Finished goods; closing inventory Cost of finished goods sold 2 3 5 10 1 11 2 9 5 14 3 11

plus minus plus minus

Note: Alternatively you may thick of this calculation as: 000 Work in process: Opening inventory 1 Cost incurred 10 11 Closing inventory 2 Goods finished (below) 9 Finished goods : 000 Opening inventory 5 Goods finished (above) 9 14 Closing inventory 3 Cost of finished goods sold 11

FRAME DETAIL

CORRECT ANSWERS

25 The manufacturing overhead is charged as a percentage of ........... .......... Is this the only method for charging manufacturing overhead?

direct indirect

26 Direct labour plus direct material equals ......... cost.

direct labour no

27 Prime cost equals ........ cost.

plus

manufacturing

overhead

prime

28 This seems to be a terribly long set. Will it ever end?

manufacturing

29 Manufacturing cost plus selling and administrative expenses equal ........ cost. This completes our review of the ........ of cost.

Yes! Dont despair! 24 frames to go.

30 Now we come to the complication of stocks (inventories) which affect the figures we have accepted above. Read Exhibit 3 which shows not the cost of one product but the cost of all ............. production for a month, and the cost of finished goods ........... The figures are in thousands of pounds, marked ...........

total elements

41

FRAME DETAIL

CORRECT ANSWERS

31 Costs incurred (spent) during the period are: direct ............ 2,000, direct ........... 3,000 and manufacturing overhead ........

finished sold 000

32 In Exhibit 3, 10,000 is the manufacturing; cost ........ (spent) for the month. Is this the cost of goods finished during the month?

labour material 5,000

33 Work in process brought forward at the beginning of the period amounted to 1,000. The manufacturing cost incurred plus the work in process brought forward amounts to ...........

incurred no (work in process has changed)

34 The work in process at the end of the period amounts to 2,000. Thus of the manufacturing cost incurred during the month (10,000) and the work in process brought forward (1,000) only ........ related to work finished (completed) during the period.

11,000

35 To compute the cost of goods finished during the period we therefore take the costs incurred, add .......... work in process and deduct ........... work in process. 36 Now we do the same computation for finished goods. At the beginning of the period we had finished goods in stock (inventory) of .......... and at the end of the period we had finished goods in stock (inventory) of only ...........

9,000

opening closing

42

FRAME DETAIL

CORRECT ANSWERS

37 To compute the cost of finished goods sold (cost of goods sold) during the period we take the cost of the finished goods ........, add ........ stock of finished goods and deduct ........ stock of finished goods.

5,000 3,000

38 Thus the cost of finished goods produced during the month was ........... to which we added the opening stock of finished goods ........... and deducted the closing stock of finished goods .........., to calculate the cost of the finished goods sold during the period .......... 39 Manufacturing costs incurred and cost of finished goods produced ............ (are, are not) the same. We must adjust for changes in ........... in ........... 40 Cost of finished goods produced........ (is, is not) the same as cost of finished goods sold. We must adjust for opening and closing ........ of ........ goods. Now read again the note to Exhibit 3. 41 For the last part of this set we return to our analysis of costs. To summarize: costs may be analysed into direct costs and indirect costs. In direct costs may be manufacturing, sales or administrative. Alternatively they may be classified into fixed or ............

produced opening closing

9.000 5,000 3,000 11,000 are not work process

is not stocks (inventory) finished (Have you got the idea? If not, do frames 3040 again, please) variable

42 Now read Exhibit 4 which shows the effect of variable and fixed costs at different ........ of production and sales, from one unit up to ........ units

43

CHAPTER II SET 3 DIRECT AND INDIRECT COSTS Exhibit 4 Effect of variable costs and fixed costs at different volumes of production and sales 1 1 1,000 1,001 3 (998) loss 1,001 No. of units of sales 100 500 100 500 1,000 1,000 1,100 1,500 300 1,500 (800) loss 11 nil break-even 3 1,000 1,000 1,000 2,000 3,000 1,000 profit 2

Variable costs Fixed costs TOTAL COSTS Sales PROFIT (LOSS) Total cost per unit

Note: The basic data for this statement is: 1. Variable cost per unit 2. Selling price per unit 3. Fixed overhead 4. No inventory changes. 1 3 1,000

FRAME DETAIL

CORRECT ANSWERS

43 What is the variable cost per unit? Is it the same cost per unit for all volumes?

volumes 1,000

44 What is the total fixed cost? What is the fixed cost per unit at the different volumes? 1 unit? 100 units? 500 units? 1,000 units?

1 yes

45 Why is the total cost over 1,000 for one unit, as against only 2,000 to make and sell a thousand units?

1,000 1,000 (1,0004 1) 10 (1,000 100) 2 (1,000 500) 1 (1,000 1,000) (Do you see how it falls continually?) Because of heavy fixed costs

46 What is the break even volume? (units). It occurs when total sales equal total ........ Below this volume we make a loss and above it we make a ........

47 To determine the effects of different volumes of production and sales we must divide costs into ....... and ....... costs.

500 units cost profit

48 In practice determination that a cost is fixed or variable is extremely difficult. Direct costs tend to be (but are not always) .......... (fixed, variable).

fixed variable

45

FRAME DETAIL

CORRECT ANSWERS

49 Overheads ........ (are, are not) always fixed, irrespective of the volume of production.

variable

50 The cost accountant must therefore investigate each direct and indirect cost very carefully before he can define it as fixed or variable. It is not a matter of scientific analysis but practical ........

are not (some overheads do vary with the volume of production)

51 Would you say cost accounting is just clerical routine?

judgment

52 Now read again the summary of the set. Count up the number of your correct answers, and if you have more than 40 correct, take a short break, and then continue on to the next set.

We hope not, the routine work is done after the cost accountant has used his judgment to make the necessary assumptions

46

CHAPTER II SET 4 COST ESTIMATES AND SELLING PRICES Estimated time 20 minutes SUMMARY In deciding the cost and possible selling price of a job, the direct costs of labour and material are easy to identify. The main problems arise in charging appropriate amounts for overhead and profit. To determine a fair manufacturing overhead for a job we find a relationship between the total manufacturing overhead cost and some known direct cost. For example: Total Costs of a Recent or Future Period Direct labour 600 Direct material 1,800 Prime cost 2,400 Manufacturing overhead 1,200 Possible Manufacturing Overhead Rates 200% of Direct Labour 50% of Prime Cost

To the direct costs of the job we add first manufacturing overhead, and then sales, distribution and administrative overhead, to arrive at total job cost. We may then add a profit percentage to total cost, to compute an estimated selling price. However, the customer and the market for the product decide the actual selling price of the job. The excess of selling price over total cost, is the profit from making and selling that particular job. The contribution of a job is the excess of selling price over variable costs. It contributes a margin for fixed costs and profit.

CHAPTER II SET 4 COST ESTIMATES AND SELLING PRICES Exhibit 1 Estimated cost and selling price of job no. 1234 Direct labour 5 hours @ 1 per hour Direct material 3 tons @ 5 per ton Prime cost Manufacturing overhead Manufacturing cost Sales and administrative overhead Total cost Profit Estimated selling price of the job 5 15 20 ? ? ? ? ? ?

FRAME DETAIL

CORRECT ANSWERS

1 For any job it is usually easy to determine the cost of labour and material, which are ........ (direct, indirect) costs.

Now check your answer with the correct answer in the frame below. Tick it if correct direct

2 The principal direct costs of a job are called direct ......... and direct ........ whereas the indirect costs of a job are called ......... 3 Overheads are paid to cover the whole volume of production. They ........ (are, are not) paid for one specific job alone.

labour materials overheads

4 Are you getting tired?

are not

5 Now read Exhibit 1. It shows how a computation of cost of job no. 1234 was prepared to estimate the ........ price. 6 Which costs are definitely incurred for job no. 1234 alone?

Yes? Then stop now and start again later selling

7 Now read Exhibit 2 to see how the overhead rates may be calculated. It shows results of operations for a ......... period.

direct labour direct material

49

CHAPTER II SET 4 COST ESTIMATES AND SELLING PRICES Exhibit 2 Results of operations on all jobs for a recent period Direct costs: Labour Material Prime cost Indirect costs: Manufacturing overhead Manufacturing cost Sales and administrative overhead Total cost Profit Sales 5,000 15,000 20,000 10,000 30,000 6,000 36,000 9,000 45,000 Sales and administrative overhead rate: 20% of manufacturing cost Profit: 25% of total cost Manufacturing overhead rates: 50% of prime cost, or 200% of direct labour cost

FRAME DETAIL

CORRECT ANSWERS

8 During the recent period the total cost labour was .......... and manufacturing .......... We may now calculate one manufacturing overhead rate as ..........% labour.

of direct overhead possible of direct

recent

9 A manufacturing overhead rate of 200% of direct labour means that for every 1 of labour we have .......... of overhead. This is a method of charging manufacturing overhead to a particular job. Are there any other methods? 10 An alternative overhead rate would be to say that for every 1 of prime cost (20,000) we have .......... of manufacturing overhead (10,000). Now compute the manufacturing overhead for job no. 1234 in Exhibit 1, using a rate based on prime cost. 11 To relate sales and administrative overhead to manufacturing cost, we again examine the results of the recent period given in Exhibit 2. For the .......... of sales and administrative overhead we have manufacturing costs of .........., and we may compute an overhead rate of ..........%. 12 A selling and administrative overhead rate of 20% means that for each 100 of manufacturing cost we charge .......... of selling and administrative overhead. Now compute the charge in Exhibit 1. 13 Finally we must decide how much profit shall we estimate for the job. in Exhibit 2 we find the relationship between profit .......... and total cost .......... in the recent period was .......... %.

5,00 10,000 200%

2 Yes

10

6,000 30,000 20%

20 6

51

CHAPTER II SET 4 COST ESTIMATES AND SELLING PRICES Exhibit 3 Revised cost and estimated selling price of job no. 1234 5 15 20 10 30 6 36 9 45

Direct labour Direct material Prime cost Manufacturing overhead (50% of prime cost) Manufacturing cost Selling and administrative overhead (20% of manufacturing cost) Total cost Profit (25% of total cost) Estimated selling price

FRAME DETAIL

CORRECT ANSWERS

14 Thus from Exhibit 2, using the recent period we have computed rates to cover manufacturing overhead, selling and administrative overhead and also a rate to add finally for .......... Could we charge more? 15 Using these overhead and profit rates, now complete Exhibit 1. Then read Exhibit 3. Did you get it right?

9,000 36,000 25%

profit Yes, if customer still accepts the price

16 Direct costs amount to .......... The manufacturing overhead based on 50% of .......... cost amounted to .......... giving a total manufacturing cost of ..........

Yes? Good! No? Why? start the set again please. 20 prime 10 30 no

17 Are manufacturing overhead and selling and administrative overhead both charged on the basis of a percentage of labour costs?

18 Selling and administrative overhead is charged at the rate of 20% of ...... ......

19 The estimated profit on the job no. 1234 is .........., based upon ..........% of the total cost.

manufacturing cost

53

CHAPTER II SET 4 COST ESTIMATES AND SELLING PRICES Exhibit 4 Computation of the contribution of job no. 1234 45 Less variable costs: Direct labour Direct material Variable manufacturing overhead Variable sales and administrative overhead CONTRIBUTION Less fixed costs: Fixed manufacturing overhead Fixed sales and administrative overhead ESTIMATED PROFIT (per Exhibit 3) 7 2 5 15 3 4

ESTIMATED SELLING PRICE

27 18

9 9

Note: To compute the contribution we must first analyse the overhead as follows: Total 10 6 16 Fixed 7 2 9 Variable 3 4 7

Manufacturing Sales and administrative

FRAME DETAIL

CORRECT ANSWERS

20 Cost accounting techniques have helped us to estimate the .......... and selling .......... of job no. 1234.

9 25%

21 Of the total cost of 36 only the direct.........., 5, and direct .........., 15, are actual costs. The balance of 16 is not direct cost but charges for........ 22 Overhead charges are based upon rates computed from cost of total operations. In this case we could have used a budget or a forecast of future costs, but instead to compute the rates, we used the results of the operations of a .......... period. 23 Now study contribution in Exhibit 4. Try to understand the breakdown of fixed and variable costs. The contribution is the difference between the selling price and the .......... costs. 24 We compute the contribution of job no. 1234 by deducting the variable costs of .......... from the selling price of .......... The contribution to fixed overhead and profit is .......... whereas the profit on the job is only .......... Does this all agree with Exhibit 3? 25 If the business is short of work, a job may be worth doing so long as its variable costs are less than its .......... The difference between these two things is called the .......... of the job towards fixed costs and profit.

cost price

labour material overhead

recent

variable

27 45 18 9 Yes

55

FRAME DETAIL

CORRECT ANSWERS

26 in Exhibit 4 how much was the total overhead? How much fixed? How much variable? Before we could calculate the contribution we had to analyse the .......... into .......... and .......... costs. 27 Now to summarize this set; we have seen that the cost of the job may be estimated as the direct cost of .......... and .........., plus manufacturing overhead and selling and administrative.......

selling price contribution

16 9 7 Overhead Fixed Variable labour material overhead

28 If the cost accounting is properly co-ordinated with the financial accounting the total costs on all jobs .......... (can, cannot) normally be reconciled with the total costs in the income statement. 29 We have also learned how to estimate the selling price of a job given the .......... costs and the results of a .......... period. Alternatively we could use a budget which is an estimate of results of a .......... period. 30 The contribution of a job is the excess of selling price over.......... ......... It .......... (is, is not) the same as the profit on the job

can

direct recent future

31 Now read again the summary of the set. Count your correct answers and if you have more than 24 correct, stop for ten minutes and then continue to the next set.

selling variable cost is not

56

CHAPTER III MANUFACTURING OVERHEAD SET 5 COST CENTRES Estimated time 25 minutes

SUMMARY Analysis of manufacturing overhead by cost centres enables us to replace one overall manufacturing overhead rate with specific overhead rates for each cost centre. Thus one hour in cost centre I may be costed differently from one hour in cost centre II. Manufacturing overhead cost centres may be: 1. Productive cost centres directly engaged in. manufacturing operations. 2. Service cost centres for factory services such as: power house, maintenance, internal transport, general factory overhead, etc. The routine for analysis of manufacturing overhead by cost centre is: 1. Charge specific costs (foremans salary, indirect labour, etc.) to productive or service cost centres. 2. Charge general costs (factory managers salary, etc.) to a special service cost centre called general factory overhead. 3. Charge non-specific costs to productive or service cost centres on an appropriate basis (floor space, units used, number of workers, etc.). 4. Recharge all service cost centre costs on appropriate bases to productive cost centres to arrive at a revised total overhead cost for each productive cost centre.

CHAPTER III SET 5 COST CENTRES Exhibit 1 General overhead rate Total Overhead Manufacturing, Selling and Administrative Total direct labour cost Overhead as % of direct labour cost 250%

100,000

40,000

Exhibit 2 Overhead rates, distinguishing between manufacturing, selling and administrative overhead Overhead as % of direct labour cost 200% 50% 40,000

Manufacturing Selling and Administrative

Total overhead 80,000 20,000 100,000

Total direct labour cost

FRAME DETAIL

CORRECT ANSWERS

1 The costs of a business may be divided into direct costs and indirect costs. Overhead expenses are .......... costs.

Now check your answer with the correct answer in the frame below. Tick it if correct indirect

2 if we grouped all overhead costs into one cost centre and compared this total with the direct labour, we could compute the .......... rate as a percentage of direct labour.

3 However, we usually do not put all overhead into only .......... cost centre.

overhead

4 To facilitate more accurate costing we develop separate overhead rates for a series of separate operating centres known as ......... .........

one

5 Now read Exhibit 1 which shows the total overhead of a business as ............ against total direct .......... of 40,000.

cost centres

6 For 40,000 of direct labour, the overhead rate is ..........% or 100,000.

100,000 labour

59

CHAPTER III SET 5 COST CENTRES Exhibit 3 Manufacturing overhead rates, distinguishing between cost centres Productive cost centre No. 1 No. 2 No. 3 No. 4 Total Manufacturing overhead 10,000 15,000 25,000 30,000 80,000 Direct labour cost 5,000 6,000 20,000 9,000 40,000 200% 250% 125% 333% Overhead as % of direct labour cost

Note: This analysis is explained in Exhibit 7.

FRAME DETAIL

CORRECT ANSWERS

7 Now read Exhibit 2 in which we subdivide the overhead into ............. 80,000 and selling and administrative ...........

250%

8 From Exhibit 2 we may now calculate another overhead rate based on direct labour by comparing the direct labour of 40,000 with a manufacturing overhead of 80,000 to give a rate of ...........%. This rate ........... (does, does not) include selling and administrative overhead of 50%.

manufacturing 20,000

9 Now read Exhibit 3 in which we divide the manufacturing overhead into ............ (number) cost centres. Cost centre 1 has .......... and cost centre 4 has ...........

200% does not

10 From Exhibit 3 we may calculate an overhead rate for cost centre 2 by comparing the direct labour of 6,000 with the overhead of 15,000 to give a rate of ..........%.

4 10,000 30,000

11 Similarly the overhead rate for cost centre 4 would be ........%. Is cost centre 3 probably more highly mechanized (i.e. more machinery overhead costs) than cost centre 4? 12 Cost centre 3 has direct labour of .......... against manufacturing overhead of .......... and therefore has an overhead rate of ........%.

250%

333% no (lower overhead rates are often due to low machine depreciation)

61

FRAME DETAIL

CORRECT ANSWERS

13 Is cost centre 3 probably a manual or machine department?

20,000 25,000 125% manual

14 In Exhibit 2 we have only one manufacturing overhead rate of ..........% and all direct labour bears this same rate of overhead. However, in Exhibit 3 we have four different rates by cost centres of 200%, 250%, ..........% and 333%. 15 These rates ........ (do, do not) include selling and administrative overhead.

200% 125%

16 If we have only one overhead rate for the whole factory, a product which has one labour hour in cost centre 4 (a machine shop) will be charged with the .......... (same, different) amount of overhead as a product using one hour in cost centre 2. 17 By using different rates by cost centres for different activities, we .......... (do, do not) tend to associate the overhead of a cost centre with the labour of that particular cost centre. 18 Remember the overhead rates referred to up to this point .......... (do, do not) include selling and administrative overhead.

do not

same

do

62

FRAME DETAIL

CORRECT ANSWERS

19 By dividing the direct labour and the manufacturing overhead into cost centres, the overhead rates, may be .......... (more, less) precise.

do not

20 We shall now deal with the detailed analysis of manufacturing overhead by cost centres. Read Exhibit 4 which shows the ............. for charging manufacturing overhead to .......... ............

more

21 Depreciation of machinery and foremens salary, indirect labour are examples of .......... (specific, nonspecific) costs which may be easily charged to the correct cost centres. However they are still in direct costs or .......... 22 By contrast some costs such as rent, general building repairs, personnel dept. etc. may not be easily identified with particular cost centres. They must therefore be charged to cost centres on an .......... ......... Such costs are .......... (specific, non-specific) costs, but they are still .......... 23 The cost for rent may be analysed to each cost centre on the basis of the number of square feet of .......... area occupied by each cost centre. If the total floor space was 10,000 sq. ft. and cost centre no. 1 occupied 5,000 sq. ft., would it be allocated half of the rental cost? 24 What other item could be analysed on the basis of floor space?

bases cost centres

specific overheads

estimated basis non-specific overheads

floor Yes

63

CHAPTER III SET 5 COST CENTRES Exhibit 4 Bases for charging manufacturing overhead to cost centres Possible Basis of Analysis Floor Units Technical Actual area used estimate cost
X X X X X X X X

Manufacturing Overhead Specific costs: Non-specific costs: Rent Lighting and heating Cleaners wages Supervision Repairs and maintenance Personnel dept. costs Timekeepers wages

No. of workers

CHAPTER III SET 5 COST CENTRES Exhibit 5 Partial analysis of manufacturing overhead by cost centre Basis for analysis Specific costs Non-specific costs Sub-total Recharge of general manufacturing service cost centre Sub-total Recharge of service cost centres: A B TOTAL COSTS BY PRODUCTIVE COST CENTRE DIRECT LABOUR COST OVERHEAD RATE Actual Various Total cost 50,000 30,000 80,000 I 3,000 2,000 5,000

Productive cost centres II III 2,000 10,000 6,000 10,000 8,000 20,000

IV 14,000 10,000 24,000

Service cost centres A B General 2,000 1,000 18,000 1,000 1,000 3,000 2,000 18,000

No. of employees

80,000

3,000 8,000

5,000 13,000

4,000 24,000

3,000 27,000

2,000 5,000

1,000 3,000

(18,000)

FRAME DETAIL

CORRECT ANSWERS

25 The second item listed in Exhibit 4 is .......... and heating which is analysed on the basis of the number of .......... used. 26 If there are no separate electricity meters, some other basis of analysis must be found. Some businesses analyse lighting and heating on the same basis as rent i.e. .......... area occupied. 27 Was it really such a good idea to learn cost accounting?

cleaners wages

lighting units

floor

28 Some other items are analysed on the basis of the number of workers in each cost centre. These items are .......... .......... costs, timekeepers, wages and .......... This basis .......... (is, is not) useful as a general basis of analysis. The cost accountant must select the appropriate basis by using his ..........

Definitely!

29 Now read Exhibit 5 which shows .......... (number) productive and .......... (number) service cost centres.

personnel dept. supervision is judgment 4 3

30 There are two types of cost centres. A cost centre concerned directly with manufacturing the product is a .......... cost centre. By contrast cost centres for factory services such as maintenance, stores, production control, internal transport, etc., are .......... cost centres.

65

frame detail 31 Manufacturing costs of a very general nature which would be difficult to analyse on any reasonable basis to cost centres, are normally accumulated in a special service cost centre called ............. ............. ............. cost centre. How much did these costs amount to? 32 Now for the routine of overhead analysis in Exhibit 5. First the specific costs, easily identified for specific cost centres, were charged on the basis of .......... .......... Easily identifiable costs are .......... costs. 33 Total specific costs were ............ of which productive cost centre IV was charged with ............

CORRECT ANSWERS

productive service

general manufacturing service 18,000

actual cost specific

34 Then the non-specific costs of .......... were charged to cost centres on appropriate bases such as: no. of workers, .......... area, .......... used etc. The total of specific and non-specific costs amounts to .......... 35 We then recharge service cost centres on appropriate bases. First general manufacturing service cost centre was charged on the basis of .......... .......... ........... 36 Is general manufacturing service cost charged to both productive and service cost centres?

50,000 14,000

30,000 floor units 80,000 no. of employees

67

CHAPTER III SET 5 COST CENTRES Exhibit 6 Recharge of service cost centre costs to productive cost centres Service cost centre A 2,000 1,000 3,000 2,000 5,000 Units Used 1500 1,000 600 1,900 5,000 Service cost centre B 1,000 1,000 2,000 1,000 3,000 Floor Area 500 1,000 400 1,100 3,000

Specific costs Non-specific costs General manufacturing service cost centre Total cost to be recharged to productive cost centres (exhibit 5) Basis of recharging Productive cost centre I II III IV Total (Exhibit 7)

FRAME DETAIL

CORRECT ANSWERS

37 Now read Exhibit 6 which shows the transfer of the costs of .......... cost centres to productive cost centres, so as to incorporate these costs into the final overhead rates of the .......... cost centres.

Yes

38 First we accumulate the specific costs of the service cost centres. A ............ B ...........

service productive

39 To this we add the non-specific costs and the allocations of the general manufacturing service cost centre from Exhibit ..........

2,000 1,000

40 Now we charge service cost centre costs to productive cost centres. The total cost for service cost centre A was .......... which is apportioned to the productive cost centres on the basis of .......... 41 Similarly service cost centre B is allocated to productive cost centres on the basis of .............. .............. 42 Now trace the data in Exhibit 6 to Exhibit 7 which is the completed analysis. We compute the total costs of productive cost centres. To the specific and nonspecific costs of the productive centres we recharge a proportion of .............. manufacturing service overhead.

5,000 units used

floor area

69

CHAPTER III SET 5 COST CENTRES Exhibit 7 Completed analysis of manufacturing overhead by cost centre Basis for analysis Specific costs Non-specific costs Sub-total Recharge of general manufacturing service cost centre Sub-total Recharge of service cost centres: A B TOTAL COSTS BY PRODUCTIVE COST CENTRE DIRECT LABOUR COST OVERHEAD RATE Actual Various No. of employee s Total cost 50,000 30,000 80,000 80,000 **80,000 **40,000 I 3,000 2,000 5,000 3,000 8,000 1,500 500 10,000 5,000 200%

Productive cost centres II III IV 2,000 10,000 14,000 6,000 10,000 10,000 8,000 20,000 24,000 5,000 13,000 1,000 1,000 15,000 6,000 250% 4,000 24,000 600 400 25,000 20,000 125% 3,000 27,000 1,900 1,100 30,000 9,000 333%

Service cost centres A B General 2,000 1,000 18,000 1,000 1,000 3,000 2,000 18,000 2,000 5,000 *(5,000) 1,000 3,000 *(3,000) *(18,000)

units used floor area

Note: *Figures in brackets denote deductions. ** See Exhibit 3.

FRAME DETAIL

CORRECT ANSWERS

43 Then the service cost centre A ............ is transferred to production cost centres on the basis of ......... ..........

general

44 Similarly the cost of service cost centre B ........... is transferred to the productive cost centres on a basis of ......... area occupied. 45 Finally the revised manufacturing overhead of each of the productive cost centres is computed as follows: cost centre I 10,000 cost centre II 15,000 cost centre III ............ cost centre IV ............ 46 Against this revised overhead by cost centre, we can compare the direct labour costs. For cost centre I against an overhead of 10,000 we have direct labour cost ......... giving an overhead rate of .........%. 47 Similarly we have analysed overhead via service cost centres to arrive at an overhead rate for: cost centre II .........% cost centre III .........% cost centre IV .........%

5,000 units used

3,000 floor

25,000 30,000

5,000 200%

48 Do these overhead rates agree with Exhibit 3?

250% 125% 333%

71

FRAME DETAIL

CORRECT ANSWERS

49 The technique of using cost centres enables us to subdivide the .......... overhead into a series of centres and to compute separate overhead ............ 50 Finally the analysis by cost centres enables us to relate the overhead costs of the business to persons responsible for each .......... .......... 51 Have we now completed (successfully) the longest set in the programme? 52 Some of the possible bases to be adopted for analysing overhead to cost centres include .......... area occupied, .......... of workers, .......... of power used, or if known the .......... cost. 53 What is the name generally given to the special cost centre in which miscellaneous general manufacturing overheads are grouped together before being charged on the most reasonable basis to the various service and productive cost centres? .......... .......... .......... cost centre. 54 We accumulate costs by productive centres and service centres and subsequently re-charge the service centre costs to the productive cost centres, to accumulate total overhead costs for each .......... cost centre. 55 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 44 correct, stop for coffee and then start the next set.

Yes (in frames 32 47 you have followed the routine to get this data) manufacturing rates cost centre

Not quite.

floor number units actual

general manufacturing service (or works general overhead) productive (You have now completed the most difficult part of the programme. Now it is downhill all the way home.)

72

CHAPTER III SET 6 OVERHEAD RATES Estimated time 15 minutes

SUMMARY To determine the manufacturing overhead rate for a cost centre: 1. Compute total overhead cost for the cost centre (Set 5). 2. Select a measure of activity. 3. Divide the overhead cost by the measure of activity to compute the overhead rate. Measures of activity for overhead rates are: 1. Direct labour cost. or 2. Direct labour hours. or 3. Machine hours. or 4. Prime cost. Manufacturing overhead rates may be computed separately for individual cost centres or departments or for the whole business. The estimated level of activity selected to compute the overhead rate significantly affects the rate and the accuracy of the job costs. If the actual activity is less than estimated, there will be a balance of overhead not charged to jobs. This is known as undercharged overhead. Conversely if the actual activity exceeds estimate there will be overcharged overhead.

CHAPTER III SET 6 OVERHEAD RATES Exhibit 1 Computation of three possible overhead rates for a cost centre Basis 1 40,000 10,000 20,000 hours 40,000 hours 400% 2 per hour 1 per hour Measure of Activity Basis 2 Basis 3 40,000 40,000

Overhead Cost Measure of activity: Direct labourcost Direct labourhours Machine hours Overhead rates based on: Direct labour cost Direct labour hours Machine hours

FRAME DETAIL

CORRECT ANSWERS

1 In this set we shall discuss the method of computing overhead charges to jobs in the form of manufacturing overhead ..........

Now check your answer with the correct answer in the frame below. Tick it if correct rates

2 We associate the direct costs with an appropriate amount of the overhead cost by using an .......... ..........

3 Now read Exhibit 1 which is a computation of overhead rates for a cost centre. It shows .......... (number) possible bases or measures of activity.

overhead rate

4 To compute the rate we associate the overhead cost of .......... with a .......... of ..........

three

5 In basis No. 1 we associate the overhead cost with the .......... .......... cost of 10,000, Thus for 10,000 of direct labour we incur 40,000 of overhead or .......... %. 6 However, this is not the only way of charging overhead. In basis No. 2 we may associate the overhead cost of 40,000 with the 20,000 direct labour ............. and produce an overhead rate of .......... per hour.

40,000 measure activity

direct labour 400%

75

CHAPTER III SET 6 OVERHEAD RATES Exhibit 2 Effect of changing levels of activity on overhead charged Estimated overhead Estimated direct labour cost Overhead rate 40,000 20,000 200% of direct labour Case 1 High Activity 30,000 60,000 40,000 20,000 overcharged Case 2 Estimated Normal Activity 20,000 40,000 40,000 Nil Case 3 Low Activity 10,000 20,000 40,000 (20,000) undercharged

Actual direct labour cost Overhead charged to job costs Actual overhead cost Overhead over- (under-) charged to job costs

Note: (1) In job costs, overhead is charged at 200% of the direct labour for the job. (2) If there is a large amount of overhead over-charged or undercharged, the job costs do not then reflect fair overhead charges. (3) The accuracy of the overhead charges in the job costs therefore depends upon the amount of overhead under- or over-charged.

FRAME DETAIL

CORRECT ANSWERS

7 Thus for every hour of direct labour in the cost centre we shall charge ............ for overhead. Does this include sales and administrative overhead? 8 Direct labour may be a suitable basis for charging overhead where there is .......... (little, much) mechanization. However, if there is much mechanization and the overhead rate would exceed 200% of direct labour cost, it may be useful to consider an overhead rate related to basis No. 3 .......... hours. 9 For basis No. 3 we associate the overhead of 40,000 with .......... (number) machine hours, to compute an overhead machine hour rate of .......... per hour.

hours 2

2 No

little machine

10 Each basis assumes that the overhead of the cost centre .......... (will, will not) vary directly with the measure of activity chosen.

40,000 1

11 However, each basis assumes an estimated level of activity. Now read Exhibit 2 which shows the effect on the cost accounting of changing levels of ..........

will

12 We have assumed that the cost centre overhead of 40,000 will entail direct labour of 20,000 so that we get an overhead rate of ..........%. The estimated activity was the amount of ............. ............ ............

activity

77

FRAME DETAIL

CORRECT ANSWERS

13 In Exhibit 2, case no. 1 indicates actual activity which is .......... (higher, lower) than the estimate.

200% Direct labour 20,000

14 The direct labour cost was not 20,000 as estimated but amounted to .......... With the estimated 40,000 of overhead, the 200% rate would charge .........., and leave 20,000.......... (over-, under-) charged. 15 In case No. 2, however, our estimated activity was correct and the direct labour amounted to .......... The amount of overhead over- or under- charged therefore was .......... 16 In case No. 3 the actual direct labour was only .......... leading to an overhead charge of .......... and a balance of 20,000 ............. (over-, under-) charged.

higher

30,000 60,000 over

20,000 nil

17.When the overhead is charged to a job it becomes part of the cost of the job. If the job cost includes direct labour 20, the cost of the job will include 40 for overhead, because we have used an overhead rate of ..........%.

10,000 20,000 under

78

FRAME DETAIL

CORRECT ANSWERS

18 Now to analyse the effect of these three situations on job costs. In each case we charged out overhead at an estimated rate of 200% whereas the actual overhead rates should have been: actual overhead rate Basis 1 Overhead 40,000 ..........% Direct labour 30,000 Basis 2 Overhead 40,000 200% Direct labour 20,000 Basis 3 Overhead 40,000 ..........% Direct labour 10,000 19 However we could not wait until the end of the year to compute the actual overhead rate, so we used an estimated rate, as in Exhibit 2. To compute this estimated rate we have estimated: (a) .......... cost 40,000 (b) .......... .......... cost 20,000 20 If the actual direct labour cost is less than the estimate we will have overhead .......... (over-, under-) charged. 21 If the actual direct labour cost is more than the estimate we will have overhead .......... (over-, under-) charged.

200%

133% 400%

overhead direct labour

under

22 Since we could not wait until we knew the actual level of activity we made an estimate and had an amount of overhead under- or over- .......... at the end of the period.

over

79

FRAME DETAIL

CORRECT ANSWERS

23 After charging out overhead at the estimated rate during the year, we could still re-compute the charges again at the end of the year. However we normally decide to leave the amount of overhead under- or over- ............ as a loss or profit in the income statement. An undercharge is a ............ (loss, profit) whereas an overcharge is a ............ (loss, profit). 24 Overhead absorbed, overhead recovered, overhead charged, overhead allocated. These terms .......... (do, do not) mean substantially the same.

charged

charged loss profit

25 Overhead rates relate overhead costs to a measure of activity and thereby ensure that overhead costs are .......... to the ..........

Do (see glossary for the finer points of the language)

26 Overhead under-charged indicates that the actual level of production was .......... (above, below) the expected level. In such circumstances the job costs include too little overhead and the true job cost is .......... (more, less) than the cost prepared using the estimated overhead rate.

charged jobs

27 Conversely over-charged overhead indicates that the actual level of activity was .......... (above, below) the expected level. Job costs therefore tend to include too much overhead cost and therefore be too .......... (high, low).

below more

80

FRAME DETAIL

CORRECT ANSWERS

28 We think that at this point you should be allowed to express your thoughts about the programme!

above high

29 Incidentally do you now understand that underabsorbed overhead is a . (profit, loss) and over-absorbed overhead is a . (profit, loss) in the income statement of the period? 30 List the different measures or activity which could be used for overhead rates.

Thank you!

Loss Profit (If not, do frames 18-29 again, please) direct labour cost direct labour hours machine hours prime cost

31 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 24 correct, continue on to the next set. (But if you still feel a little unsure, do the set again anyway)

81

CHAPTER IV COSTING METHODS SET 7 CONTRACT, JOB AND BATCH COSTING Estimated time 10 minutes SUMMARY In contract costing the unit of cost is one contract. Labour and materials and some other costs are direct contract costs. General overhead is charged to contracts on an appropriate basis. In job costing we associate cost with a job. Labour and material are direct costs. Manufacturing overhead is charged on an appropriate basis. Sometimes selling and administrative overhead is charged to job costs, as a percentage of manufacturing cost, to compute total job cost. The actual cost of the contract or job may subsequently be compared with the original estimate as a control on the: 1. Profitability of the job. 2. Efficiency of production operations, and 3. Accuracy of the estimating procedures. The conservative practice is to ignore profit to date on jobs or contracts not yet completed. However, for contracts lasting several years it is customary to take credit for part of the profit each year, to avoid profit fluctuation. Batch costing is job costing for a group or batch of identical products.

CHAPTER IV SET 7 CONTRACT, JOB AND BATCH COSTING Exhibit 1 Contract cost Contract No. 1 Estimated selling price Estimated total cost = Estimated total profit Actual cost to date: Labour Material Direct services Total direct cost Overhead charged Total cost to date Proportion of profit earned to date 80 50,000 100 150,000 100,000 50,000 20,000 26,000 14,000 60,000 20,000 80,000

40,000

Note: By taking a proportion of the profit of long term contracts each year we avoid wide fluctuation of profits. However there may be unexpected losses on the remainder of the contract and it is not conservative to take the whole of the calculated 40,000 profit to date as profit in the income statement this year.

FRAME DETAIL

CORRECT ANSWERS

1 We can now discuss the various methods of cost accounting which differ according to the .. of cost, or unit of .. selected.

Now check your answer with the correct answer in the frame below. Tick it if correct unit production

2 First read Exhibit 1, It shows an example of a ......... cost. The unit of production is one............

3 The total estimated cost of the contract was 100,000 and the estimated selling price ........ Therefore the estimated total ......... amounted to 50,000. Have we earned all of this profit to date?

contract contract

4 Up to the present time the contract is still un completed and the direct costs on the contract to date are labour 20,000, material 26,000 and direct services ........ This makes a total direct cost to date of ........ 5 To this cost we have added a charge for over head .......... at a rate of ........% of direct cost giving a total cost to date of ......... 6 It is more conservative not to take profits until the ........ of a contract, but as we have spent 80,000 cost out of a total estimated cost of 100,000 could we perhaps, after making reason able allowance for possible future losses, assume that the profit is earned in relation to the cost incurred? Or even be conservative and take only three quarters of this amount?

150,000 profit no

14,000 60,000

20,000 331/3% 80,000

85

CHAPTER IV SET 7 CONTRACT, JOB AND BATCH COSTING Exhibit 2 Batch costingestimated cost Estimated Cost Labour: Dept. A 15 Dept. B 5 Material Manufacturing Overhead: Dept. A 45 (300%) Dept. B 5 (100%) Manufacturing Cost Selling and administrative overhead (10%) Total Cost Profit Selling price Note: A batch is a group of identical products.

20 10

50 80 8 88 12 100

FRAME DETAIL

CORRECT ANSWERS

7 Adopting these assumptions, the proportion of profit earned to date is : ............ 50,000 = ......... 100,000 8 Thus in costing for long term contracts, we accumulate direct and indirect costs in the usual way and we may take credit for a of the profit in relation to the cost incurred, after making reasonable allowance for possible future.......... 9 Now read Exhibit 2, which shows an example of ......... costing. A batch is simply a ........... of identical ............

end (completion) yes yes

80,000 30,000

proportion losses

10 The direct costs of the batch amounted to ............

batch group products

11 The manufacturing overhead costs total 50 of which 45 relates to Department ......... and 5 to Department...........

30

12 Does the business use only one overhead rate for all departments?

A B

87

FRAME DETAIL

CORRECT ANSWERS

13 The Department A overhead rate is ........% of direct labour and the Department B rate is ..........%

No

14 Which department is probably the more mechanized, Department A or Department B? Why?

300% 100%

15 To the estimated .......... cost of 80 we add selling and administrative overhead at the rate of ...........%

Department A higher overhead rate

16 The estimated total cost of the batch was .......... and the profit ...........

manufacturing 10%

17 Of this total estimated batch cost of 88 how much was clearly and directly associated with this one batch?

88 12

18 How much of this total estimated batch cost of 88 is the result of assumptions and overhead allocations or apportionments?

30

88

FRAME DETAIL

CORRECT ANSWERS

19 If 38 of the 58 of overheads were fixed costs unaffected by the volume of output, then the estimated contribution of the batch to fixed costs and profit is calculated:

58

Sales price Less: Direct costs 30 Variable overhead ....... Contribution

100 ...... ..... 20 50 50 (If unsure about contribution do again Set 4 Frames 2331) No, we could do more profitable business Yes

20 If we were working at full capacity and could only get a selling price of 70 for the batch would it pay us to take it?

21 Would 70 be a worthwhile sales price if we were working at a low level of capacity?

22 If 70 would be worthwhile, how much would the 70 selling price contribute to the recovery of fixed overheads and profit? What would be the profit or loss on the batch? 23 Now read Exhibit 3 which shows the ........... cost of the batch.

703020=20 loss 18

89

CHAPTER IV SET 7 CONTRACT, JOB AND BATCH COSTING Exhibit 3 Batch costingactual cost Actual Cost 10 5 15 20 35 70 7 77 23 100

Labour Dept. A Dept. B

Material Manufacturing overhead: Dept. A 30 (300%) Dept. B 5 (100%) Manufacturing Cost Selling and administrative overhead (10%) Total cost Profit Selling price

FRAME DETAIL

CORRECT ANSWERS

24 The estimated profit of 12 was actually ........ (increased, decreased) to .......... Why?

actual

25 To measure the efficiency of a contract or job, we compare the ..........cost with the actual cost. Could this comparison be affected by the efficiency of: (a) productive operations (b) estimating procedures?

increased 23 the substantial savings on labour costs (and consequently on overhead) exceeded the extra material cost estimated yes

26 Incidentally, is there a contract with immeasurable costs and unlimited profits?

27 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 20 correct, continue to the next set.

marriage contract (perhaps?)

91

CHAPTER IV SET 8 OUTPUT COSTING Estimated time 10 minutes

SUMMARY For a factory producing only one product, detailed costs pf manufacturing, slaes and administration may be summarized and directly compared with the output volume of the product for the period. In This way a per unit cost may be calculated for each item of cost incured. To measure the efficiency of current operations, the actual unit cost may be compared with previouscost or budget. Output costing, or some modification of it, is often used in: Industry Mining Railways Buses Brick works Oil Unit of Cost per ton per ton-mile per passenger-mile per thousand bricks per barrel of oil

CHAPTER IV SET 8 OUTPUT COSTING Exhibit 1 Output costingmonth and year to date Unit cost per ton Total cost this month 100 200 400 700 This month 10 20 40 70 100 70 Last month 15 20 34 69 140 69 This year to date 20 20 38 78 800 78 Last year to date 10 20 35 65 1,000 65

Labour Material Overhead Total cost

Output quantitytons Total costper ton

FRAME DETAIL

CORRECT ANSWERS

1 Where a business produces only one product, then one unit of output automatically becomes for cost accounting purposes the .......... of cost.

Now check your answer with the correct answer in the frame below. Tick it if correct unit

2 In output costing we divide the total costs of the factory by the number of units of ............

3 A coal mine producing one grade of coal would use ........... costing. A bus company transporting passengers could use a per passenger mile unit of ............ costing.

output

4 Now read Exhibit 1 which is a statement of ........ ......... for a ......... and for the ........... to ..........

output output

5 The total output for the month was ........... tons at a total cost of ..........

output costing month year to date

6 The total cost per ton was .......... In output cost accounting we merely divide the total cost by the number of units produced which is the ...........

100 700

95

FRAME DETAIL

CORRECT ANSWERS

7 The total labour cost was ........... which worked out at .......... per ton.

7 output

8 Similarly the material cost per ton was .......... and the overhead cost ............ per ton.

100 1

9 To make this cost accounting data more useful we must .......... it with other data.

2 4

10 What other data is available?

compare

11 Compared with last month, this months labour cost per ton (1) ........ (rose, fell) by ........ per ton, whereas the material cost remained ............

last month this year to date last year to date

12 Overhead costs this month were ........... per ton ........... (higher, lower) than last month. Do we know why?

fell 5 unchanged

96

FRAME DETAIL

CORRECT ANSWERS

13 What is the output cost per mile of operating your own motor car?

6 higher Yes, probably because output was lower this month

14 Now read again the summary of the set. Count up the number of correct answers. If you have more than 10 correct, continue to the next set.

Enormous! (This cost is seldom calculated accurately! It tends to spoil the pleasure of driving)

97

CHAPTER IV SET 9 PROCESS COSTING Estimated time 10 minutes SUMMARY Process costing is used by companies having a continuous flow of similar products (e.g. chemical works, paper mills, etc.) where the final products result from a sequence of operations or processes. The output of one process is the input of the next. Costs are collected by period for each process. The unit of cost of each process is computed by dividing total process cost by the output. This system is in effect output costing for each process in a series of processes which together form a production cycle. The measure of efficiency for process costing is the same as for output costing, i.e. comparison of actual cost with previous cost, standard, or budget.

CHAPTER IV SET 9 PROCESS COSTING Exhibit 1 Process cost accountingmonth of December PROCESS A 90 40 20 150 150 100 50 Actual units 220 100 100 200 20 220 Equiv. units 100 50 150 150 1 1 Unit Price 40 50 50 150 150 Actual units 100(X) 60 20 80 20 100 Equiv. units 100 60 10(Y) 70 70 PROCESS B 16 4 20 40 100(X) 140 120 20 Unit Price 100 120 20 140 140 2 1 Actual units 60 40 10 50 10 60 Equiv. units 60 40 5 45 45 PROCESS C 20 10 30 60 120 180 160 20 Unit Price 120 160 20 180 180 4 2

ANALYSIS BY COST Labour Material Overhead Process cost Input from previous process Total cost Output to next process Work in process at end of month ANALYSIS BY QUANTITY Input Output In process Waste Per unit: Cumulative cost Cost by process

FRAME DETAIL

CORRECT ANSWERS

1 Some manufacturing involves a series of processes, each of which has an input and an .......... It is often convenient to accumulate costs as if each .......... was a cost centre.

Now check your answer with the correct answer in the frame below. Tick it if correct output process

2 We use each process as an output cost centre but we call this method of cost accounting: .......... costing.

3 Now read Exhibit 1 which is an example of .......... .......... accounting for .......... processes.

process

4 To be completely manufactured, the unit of production must pass through ............. (number) processes. 5 In process A, the costs associated with the process are .........., .......... and ............ The total cost amounts to .......... 6 The number of units put into (input) process A during the month was ............ of which 100 were completed (output) and passed to process B, .......... (number) were partly processed, and .......... (number) were wasted.

process cost three

three

labour material overhead l50

101

FRAME DETAIL

CORRECT ANSWERS

7 For cost accounting purposes we convert in process units (100) into an equivalent number of finished output units. In Exhibit 1, we assumed that all uncompleted units were half completed. We therefore divided uncompleted units by ............. to convert them to equivalent completed units. This gives an output for the period of 100 complete units and 50 equivalent completed units which are in process, making a total equivalent output of .......... units. 8 The average unit cost of the process is calculated by dividing the total cost 150 by the .......... out put of 150 units. The unit cost for process A was .......... per unit. 9 We can now price the .............. (number) of finished units at 1 per unit in order to calculate the ............ (input, output) for process B. 10 The cost of the input of the 100 units of process B is calculated at 1 per unit, making a total of 100. Can you trace this input to process B in Exhibit 1? 11 During the month the input to process B was 100 units. At the end of the month ............ (number) were finished, .......... (number) were in process, and .......... (number) were scrapped. 12 To convert the units in process at the end of the period (20) to equivalent finished production, we divide by ..........

220 100 20

2 150

equivalent 1

100 input

Yes (marked X)

60 20 20

102

FRAME DETAIL

CORRECT ANSWERS

13 Is it an assumption that all units are half processed?

14 The total equivalent finished production of process B, for the units in process is therefore ............. units. Can you trace this in Exhibit 1?

Yes

15 The total output of process B therefore consists of 60 complete units, plus ............. equivalent complete units making a total of .......... units.

10 Yes (marked Y)

16 The cost of process B including labour, material and overhead amounted to .......... plus the cost of input from process A ..........

10 70

17 For process B we may now calculate the unit cost of finished production by dividing the ............ ............ 140 by the .......... (70 units).

40 100

18 Process B unit cost is ............ per unit. This was calculated by dividing the total cost 140 by the units of output ............ (number).

total cost output

103

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CORRECT ANSWERS

19 The 60 units of finished goods passed to process C will therefore be priced at ............ per unit, a total of ............ 20 Similarly with process C the input was 60 units of which 40 units were finished, ............. units in process and ............ units were wasted.

2 70

2 120

21 Equivalent production of process C was ............. units against a total cost of 180, giving a unit cost of output of ............ per unit. 22 Thus we may summarize the results of the three processes as follows: A B C Cost per unit (cumulative) 1 2 .......... Output 100 60 .......... Waste .......... 20 10 23 Finished output .......... (is, is not) the same as equivalent finished output.

10 10

45 4

4 40 20

24 We convert units in process into equivalent finished output, in order to compute the cost per unit for the ..........

is not

104

FRAME DETAIL

CORRECT ANSWERS

25 The total cost for a finished unit of process C was ............

process

26 This 4 cost is made up of process A .........., process B .......... and process C ..........

27 Each of the processes has been used as an output ............ centre.

1 1 not 2 2 not 4

28 We have assumed in this example that there ............ (were, were not) any units in process at the beginning of the month. However, in either case the principles of cost accumulation would be the ............. 29 The process cost data for the month of December would be more useful if it could be ............ with other data for a previous ............. or with a .............

cost

were not same

30 Now read again the summary of the set. Count up the number of your correct answers. If you have more than 23 correct, carry on to the next set.

compared month budget

105

CHAPTER V INTERPRETATION OF COST DATA SET 10 COST STATEMENTS Estimated time 20 minutes

SUMMARY Cost statements or reports for management should be prepared and submitted quickly. Generally, rough figures presented rapidly are more useful than accurate figures which are only available after serious delay.* Cost statements may show the: 1. Cost of each job, or unit of production, or product group. 2. Overhead cost of one section or department. 3. Cost of the whole business. 4. Operating results of a division or the whole business. To use cost statements effectively we ask the following questions: 1. What are the significant (more important) figures? 2. How do the figures compare with a standard of performance (budget or previous period)? 3. What are the causes of the significant differences? 4. Who is responsible? 5. What action should be taken? * Note: More than seven days after the month end may be generally considered as a serious delay.

CHAPTER V SET 10 COST STATEMENTS Exhibit 1 Estimated cost compared with actual cost for a job Estimated 4,000 2,200 6,000 12,200 1,220 13,420 14,000 580 Actual 3,000 3,000 4,500 10,500 1,050 11,550 14,000 2,450 Differences* (1,000) 800 (1,500) (1,700) ( 170) (1,870) (1,870)

Direct labour Direct material Manufacturing overhead (150% of direct labour cost) Manufacturing cost Selling and administrative overhead 10% Total cost Selling price Profit

* Actual figures over (under) estimated figures.

FRAME DETAIL

CORRECT ANSWERS

1 A statement reporting cost data to management is a cost report or .......... statement.

Now check your answers with the correct answer in the frame below. Tick it if correct cost

2 Most cost statements try to associate costs with the person .......... for those costs.

3 Up to date cost statements prepared very quickly are often ............. (more, less) accurate than those prepared more slowly. However, they are ............ (more, less) useful to management. 4 Timely (quickly prepared) cost statements .......... (are, are not) more useful for decision making, than very accurate reports prepared after a very long period of preparation time. A reasonable target is .......... (number) days after the month end 5 There are various types of cost statements because each statement is usually related to a particular .......... Now read Exhibit 1 which is a cost statement prepared for a job to compare the .......... cost with the .......... cost. 6 It shows that the estimated total cost of the job was 13,420 compared with an ............. cost of 11,550 making a difference of ..............

responsible

less more

are 7

purpose (person) estimated actual

109

CHAPTER V SET 10 COST STATEMENTS Exhibit 2 Overhead costsengineering section This month Year to date Actual Budget Variance Actual Budget Varianc e Controllable costs: Salaries Travelling Indirect materials Non Controllable costs: Occupancy Depreciation TOTAL COSTS 500 120 40 660 20 45 725 200 100 50 350 20 40 410 300 20 (10) 310 5 315 2,500 850 430 3,780 400 450 4,630 2,000 800 600 3,400 200 400 4,000 500 50 (170) 380 200 50 630

FRAME DETAIL

CORRECT ANSWERS

7 Which actual costs were less than the estimate? Should we investigate the reasons why?

actual 1,870

8 Direct labour is the main cause of the lower actual cost. Does this affect the lower manufacturing overhead? Why? 9 You will remember that the contribution of a job is the excess of its selling price over its variable costs. If we assume that the manufacturing overhead and the selling and administrative overhead of the job are fixed, what is the estimated contribution of the job? What was the actual contribution? 10 Now read Exhibit 2 which is a cost statement of the .......... .......... for the engineering section.

direct labour overheads Yes Yes Because it is based on 150% of direct labour

7,800 (14,0006,200) 8,000 (14,0006,000)

11 The statement is useful to the section head because it shows the expenses actually incurred for the month .......... against a budget of ............ For the year to date the figures were .......... against ............. 12 For this month, the major controllable costs that exceeded the budget were ............. and ............ What is a controllable (as apart from non-controllable) cost?

overhead costs

725 410 4,630 4,000

111

CHAPTER

V SET 10

COST STATEMENTS Exhibit 3 Statement of total cost for the year (000) 000 Direct charges: Labour Materials Prime cost Indirect charges: Manufacturing overhead: Supervision Indirect wages Motive power Repairs and maintenance Plant depreciation Manufacturing cost Sales and distribution overhead: Salesmens salaries Salesmens commission Travelling expenses Advertising Finished warehouseswages and upkeep Administration overhead: General office salaries Directors fees Professional charges Total cost 000 246 500 746 000

110 130 40 50 166

496 1,242

100 35 100 50 51

336 1,578

151 10 62

223 1,801

FRAME DETAIL

CORRECT ANSWERS

13 The total actual costs for the year to date were ........... against a budget of 4,000. Of these actual costs the head of the section was held responsible for only .......... against a budget of ..........

salaries travelling A cost which the section head controls and for which he may be held responsible 4,630 3,780 3,400 salaries

14 If you were head of this section which item would you especially investigate this month?

15 Now read Exhibit 3 which is a statement of .......... cost for the year. It is divided into direct charges and indirect charges. Charges means ..........

16 Indirect charges refer to manufacturing overhead, sales and ............. overhead and administration overhead. These are all .......... 17 Exhibit 3 is a statement for ............. year. Can we evaluate the significance of the data?

total costs

distribution overheads

18 The costs are in thousands of pounds (marked 000) and they amount to a prime cost of ............ and a total cost of ............ To mean anything to us we must have .......... ..........

one Not very well because we have no comparative data

113

CHAPTER V SET 10 COST STATEMENTS Exhibit 4 Summary of operating results for the month Grand Total Direct costs: Materials used Labour (wages) Prime cost Indirect costs: Factory overhead Manufacturing cost Selling and distribution overhead Total cost Profit Sales Quantity of sales 20,600 15,300 35,900 18,000 53,900 5,800 59,700 4,800 64,500 1,400 units Product A Amount per unit 17,500 5,500 23,000 7,500 30,500 4,000 34,500 3,000 37,500 500 units 35 11 46 15 61 8 69 6 75 Product B Amount per unit 3,100 10,800 13,900 9,500 23,400 1,800 25,200 1,800 27,000 900 units 3 12 15 11 26 2 28 2 30

FRAME DETAIL

CORRECT ANSWERS

19 This statement .......... (is, is not) a well presented cost statement because we have no comparative data against which to measure the actual data. What data would be comparable and therefore useful as a standard of performance? 20 Now read Exhibit 4 which is a summary of .......... .......... for one ..........

746,000 1,801,000 comparative data

is not previous budget

year

or

21 The company produces two products shown in this statement as A and B. What is the total cost for the period? Does the statement show the costs and profits on product A and product B separately?

operating results month

22 What is the most significant item of per unit cost for product A? For product B? Assuming that indirect costs are fixed. The total contribution of each product was: A .......... B ..........

59,700 yes

23 The contributions are fairly equal but of the total of 4,800, the analysis in Exhibit 4 shows that a profit of .......... attributable to product A and .......... is attributable to product B. Is this profit analysis based on a scientific fact or practical judgment? 24 Is it useful to have a summary of operating results showing the details for each product or product group separately? What other data do we need in order to evaluate the figures?

material 35 per unit labour 12 per unit 14,500 (37,500 23,000) 13,100 (27,000 13,900) 3000 1,800 judgment

115

CHAPTER V SET 10 COST ESTIMATES Exhibit 5 Statement of monthly operating results compared with budget Actual 000 600 270 35 65 370 230 75 50 25 150 80 800 10% Budget 000 875 470 65 90 625 250 75 55 30 160 90 720 12% Variance 000 (275) (200) (30) (25) (255) (20) (5) (5) (10) (10) 2%

Sales Variable costs: Direct labour Direct material Variable overhead Total variable costs Contribution Fixed costs: Manufacturing fixed overhead Sales fixed overhead Administrative fixed overhead Total fixed costs Net profit Investment (assets employed) Returns on investment

FRAME DETAIL

CORRECT ANSWERS

25 Cost statements are usually prepared for a particular ............ To evaluate these statements we must pay special attention to the larger or more ............ items, compare actual costs with a standard of performance (or budget) and ............. the differences. 26 Do you ever use the cost reports you receive?

Yes comparative data

purpose significant investigate No? why not? Have you carefully explained to your cost accountant precisely what you need, when you need it, and why you need it? budget Because it distinguishes between variable and fixed costs, and it provides a standard of performance (i.e. a budget) contribution

27 Now read Exhibit 5 which is a statement of monthly operating results compared with ............. Why is this a particularly effective report?

28 The difference between actual sales 600 and variable cost 370 is known as the .......... (230).

29 In this statement the fixed costs .......... (are, are not) shown separately. Did they exceed budget? 30 Why did we make less profit than the budget? Is it useful to segregate variable and fixed costs?

are no

117

CHAPTER V SET 10 COST STATEMENTS Exhibit 6 Comparisons (by percentage of sales) of the Operating Results of a company with the National Average for the Industry Industry Average 100% 14 40 15 69 31% 12 6 13% Differences Favourable (Unfavourable) (10) (5) (15) (15) % 8 (2) (9) %

Sales Labour Material Manufacturing overhead Gross profit Sales overhead Administrative overhead Net profit

Company 100% 24 40 20 84 16% 4 8 4%

FRAME DETAIL

CORRECT ANSWERS

31 We have figures for one month. What additional data do we need to really use this report?

because actual sales were below budget Yes (so contribution is revealed) Year to date figures percentage data

32 In cost accounting reports we compare actual figures with some .......... data to determine the significant ..........

33 Now read Exhibit 6 which is a comparison of the operating results of a company by percentage of .........., with those of the ............ average for the Industry.

comparative differences (variances)

34 Our company made a net profit of ..........% of sales. Did it make more or less than it should have done?

sales national

35 What is the main cause of the lower level of profit?

4% less

36 Which costs are comparatively low?

labour and manufacturing overhead costs are higher than national average

119

FRAME DETAIL

CORRECT ANSWERS

37 Cost accounting reports help us to compare our operating results by percentage of .......... and to determine areas for further ..........

selling expenses only 4% of sales compared with a national average of 12%

38 A significant difference is a relatively large amount of .......... relative to the ..........

sales investigation

39 Do the cost reports you receive normally get to you in time to be really useful? Do they contain useful comparative data as a measure of ..........?

money whole

40 Cost data becomes more significant if it is .......... with other data.

No? Have you precisely defined your needs? performance

41 The cost reports of the actual cost of a job may be compared with the original .......... of cost for the job.

compared

42 The reports on output for the period of one month may be compared with that of the output of the .......... month or the same month in the .......... year.

estimate

120

FRAME DETAIL

CORRECT ANSWERS

43 The cost to date this year may be compared with the cost to date ........... year.

previous previous

44 A budget is a forecast of cost over a period. Any cost report relating to a period of time may therefore include a .......... for that period, if available.

last

45 We may compute the total cost for a period or the cost per ......... We may compare the costs of one period with that of another .........

budget

46 We are comparing costs to determine the differences between the actual figures and a standard of performance so that such differences or variances may be ...........

unit period

47 Costs are compared so that ...........may be ...........

investigated

48 By investigation we shall determine how the differences of cost arose, and what (if any) .......... we should take.

differences (variances) investigated

121

FRAME DETAIL

CORRECT ANSWERS

49 To what figures do you pay particular attention, in a cost report?

action (decision)

50 Now read again the summary of the set. Count up the number of your correct answers, and if you have more than 40 correct, continue to the next (and FINAL) set.

significant figures significant variances

122

CHAPTER V SET 11 RELEVANT COSTS Estimated time 20 minutes

SUMMARY Cost data usually relates to a specific purpose. The cost accountant cannot supply appropriate cost data unless he knows how the data will be used. Although the total cost of one unit of production includes labour, material, manufacturing, selling and administrative overhead, the relevant cost of producing one more unit of production may be only labour and material, if overheads remain unchanged. Furthermore if the labour force costs become fixed, only material may remain as the variable and relevant cost. The interpretation of cost data depends not upon total cost incurred, but upon the cost relevant to each particular decision or situation. In using cost figures we should always ask: 1. What assumptions are made in the data? 2. Are those assumptions valid for our purpose? 3. What costs are relevant to our decision? Note: This is an elementary analysis of relevant cost problems. However, in a more sophisticated analysis our general theme remains: get the figures right and relevant, before you consider non-quantative factors.

CHAPTER V SET 11 RELEVANT COSTS Exhibit 1 Relevant cost of replacing an old machine with a new machine PROBLEM: Does it pay to replace the old machine? Old Machine New Machine Cost p.a. Costs p.a. *6,000 *4,000 4 4 1,500 1,500 3,000 1,000 4,000 1,000 1,000 2,000 1,000 3,000 1,000 4,000 25%

Cost of Machines Working lifeyears Depreciation per annum Other operating costs per annum Fixed overhead per annum Total cost of operating the machines Annual saving (? ?) Investment Return on investment Note: * Assumes no salvage or resale value.

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CORRECT ANSWERS

1 Cost accounting is a technique for associating direct and indirect costs with a unit of production. Cost data is generally prepared for a particular .......... only. It must not be used for all purposes. In this set we discuss the use and misuse of cost data, and how to determine for a particular decision or situation the costs that are .......... 2 Cost accounting and the use of cost data depend largely upon the .......... of the cost accountant.

Check your answer with the correct answer in the frame below. Tick it if correct

purpose relevant

3 Generally the cost computed for one purpose......... (is, is not) the cost relevant for other purposes.

judgment

4 Do you still think our questions are easy?

is not

5 Now read Exhibit 1 which shows the effect on costs of ............ an old machine with a new machine.

good!

6 The problem is: Does it pay to replace the old machine? The old machine costs per annum .......... including depreciation, operating and overhead costs, whereas the new machine would cost only ........... Would there be a saving?

replacing

125

CHAPTER V SET 11 RELEVANT COSTS Exhibit 2 Relevant cost of operating a car for a year PROBLEM: Does it pay to use the car? 1. Annual cost of operating a car: Depreciation Repairs, tax and insurance Petrol and oil Total cost Annual usage: 10,000 miles 2. Annual cost of hiring a car: Mileage 10,000 miles at 05 per mile 3. Relevant costs of travel by car for 10,000 miles per annum depends upon the situation: Situation 1: We have no car and we would have to buy one Situation 2: We have a car, but do not use it Situation 3: We have and use a car 500 500 100 600 125 725

725 225 125

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CORRECT ANSWERS

7 The cost data provided shows a saving of 1,000 per annum for investment of .......... This appears to be a return on investment of ...........%.

4,000 3,000 Apparently yes (but)

8 However, have we included only the relevant costs in our calculation?

4,000 25%

9 The old machine will depreciate whether or not we buy the new machine. The old depreciation of 1,500 should be .......... (included, excluded) when making this comparison. Consequently the saving for buying the new machine which appeared to be 1,000 per annum .......... (has, has not) now disappeared. 10 The effect on costs of machine replacement depends upon correct computation of the ............ costs.

no

excluded (or put on both sides) has

11 Now read Exhibit 2 which is an example of the indirect costs of operating a car. The total cost of running a car for 10,000 miles per annum including depreciation, repairs, petrol and oil amount to .......... However, to hire a car to do a similar mileage, would cost 500. Can we therefore conclude it would be cheaper for us to hire a car? 12 If we have no car at all, the relevant cost is the total cost of running the car .......... It pays to........... (hire, buy).

relevant

725 No

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CHAPTER V SET 11 RELEVANT COSTS Exhibit 3 Relevant cost of doing a job or subcontracting PROBLEM: Does it pay to make or buy? 1. Cost of own manufacture (100 units): Direct material Direct labour Prime cost Variable manufacturing overhead Variable cost Fixed manufacturing overhead Manufacturing cost Fixed administrative cost Total cost 4,000 1,000 5,000 2,000 7,000 1,000 8,000 2,000 10,000 Total 7,600 3. Relevant costs: If we are operating at full capacity If we are operating at partial capacity If we are operating at very low capacity but decide not to dismiss direct labour 7,000 7,000 6,000

2. Alternative cost of subcontracting

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CORRECT ANSWERS

13 If we already have a car but do not use it, it will still depreciate. The relevant costs to the decision are not 725. They are ........... It pays to ............ (hire, use). 14 If we have and use a car then the 100 is already spent for tax, insurance and repairs. And the relevant cost for operating the car for 10,000 miles is not 225 but the lower figure for petrol and oil only of ........... It pays to ............ (hire, use). 15 To decide whether it costs less to use our car or to hire a car depends upon the ............. costs of the situation.

725 hire

225 use

125 use

16 Now read Exhibit 3 very carefully. It gives an example of the relevant costs of doing a job or sub contracting. This is known as a ............ or ........... decision. 17 The total cost of manufacturing 100 units is 10,000. We could subcontract this work to another firm for 7,600. Should we subcontract?

relevant costs

make buy

18 Of the total cost of 10,000, the direct costs of labour and material and variable overhead amount to only ......... and fixed overheads .............

It all depends

129

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19 Exhibit 3 the relevant costs to make or buy depend upon whether or not we are operating at full, .......... or .......... capacity. 20 If we subcontract the job, will we actually save 2,000 of fixed administrative overhead and 1,000 of fixed manufacturing overhead, in cash? At full or partial capacity the relevant cost to make is not .......... but .......... 21 Does the relevant cost exceed the subcontract price? It pays to ........... (make, buy) because we save ............ 22 Therefore at full or partial capacity the total relevant cost is the .......... (fixed, variable) cost of ........... However at a very low level of capacity we may decide to keep our labour force intact, working or not. Labour therefore becomes a .......... cost. 23 To decide when it pays to make or buy we must compare the subcontractor price with the ........... cost which is normally the ......... cost. However the classification .......... (may, may not) change. At lowest capacity in Exhibit 3, relevant cost is ............ 24 The excess of the purchase price over the relevent cost is known as the contribution from making. At Lowest capacity operation in Exhibit 3 it still pays to .......... (make, buy) and thus provide a ......... of 1,600 to the fixed costs.

7,000 3,000

partial low

No 10,000 7,000 No make 600 (contribution to fixed cost and profit) variable 7,000 fixed

relevant variable may 6,000

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CORRECT ANSWERS

25 In make or buy decisions if relevant cost is more than purchase price it pays to ........... (make, buy) because there is no ............ to fixed costs. If there is contribution it may pay to ........... (make, buy). 26 However we cannot make everything. In make or buy decisions therefore we must choose from a range of items to make those that provide the ............ (greatest, least) contribution. 27 Fixed overhead is not usually relevant to make or buy decisions. When the business is operating at low capacity some of the normally variable costs (e.g. labour) may have to be treated as .......... costs in make or buy decisions. Relevant cost ......... (does, does not) change. 28 Now read Exhibit 4 to see the relevant cost of hand or ......... operation.

Make contribution (7,6006,000 = 1,600) Buy contribution make

Greatest

Fixed does

29 If the work is done by hand it costs ........... However, if done by machine it would cost ............ Should we therefore buy the machine to do the work? 30 We know that the work appears to cost less by machine to the extent of .......... Do we know the cost of the machine?

machine

16,500 9,900 it all depends

131

CHAPTER V SET 11 RELEVANT COSTS Exhibit 4 Relevant cost of hand or machine operation PROBLEM: Does it pay to buy a machine to do a manual job? Manual cost Direct labour Direct material Manufacturing overhead (500% of direct labour) Manufacturing cost Selling and administrative overhead (10% of manufacturing cost) Total cost 2,000 3,000 10,000 15,000 1,500 16,500 Machine cost 1,000 3,000 5,000 9,000 900 9,900 Different (1,000) (5,000) (6,000) (600) (6,600)

Note: Assuming we would have to buy the machine.

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CORRECT ANSWERS

31 In Exhibit 4 manufacturing overhead is calculated at .........% of direct labour.

6,600 no

32 The effect of purchasing a new machine will mean that machine depreciation will increase. Therefore both the total manufacturing overhead and the manufacturing overhead rate will ........... (rise, fall). 33 Purchase of a machine for 20,000 would lead to a .......... (higher, lower) manufacturing overhead than would purchase of a machine for 200,000.

500%

rise

34 The saving of 6,600 therefore through buying a machine can only be evaluated when we know the ............ of the machine. 35 If the purchase of a machine increased substantially the manufacturing overhead of a company, the existing overhead rate of 500% on direct labour ............. (will, will not) be relevant. 36 Therefore in Exhibit 4 we ........... (can, cannot) determine whether the machine or hand method is more economic until we know the cost of the machine and the effect upon manufacturing over head. We .......... (can, cannot) use existing overhead rates for this purpose.

lower

cost

will not

133

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CORRECT ANSWERS

37 Again if we have an overhead rate of 500% on direct labour, can we say that for every 1,000 of direct labour saved, we also save 5,000 of overhead?

cannot cannot

38 An overhead rate of 500% .......... (can, cannot) be used for every purpose.

no

39 Overhead should therefore be carefully investigated before we decide it is a ......... cost.

cannot

40.In any cost problem involving rates we should ask will overhead saved actually be realized in ............?

relevant

41 If we introduce a machine which reduces the total cost of direct labour but increases the manufacturing overhead then the manufacturing overhead rate as a percentage of direct labour will: (1) be unchanged (2) rise (3) fall 42 In choosing between alternatives it is important to decide whether overhead costs are ..........

cash

rise

134

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CORRECT ANSWERS

43 Again when cost data indicates a particular course of action as more profitable cost-wise, this action may be affected by other factors such as the volume of sales orders on hand;, the stock position or the market. Thus ......... already in hand, stock position and the state of the ......... are relevant factors in cost decisions. 44 In the interpretation of cost data we must .......... actual data with other available data and consider the costs that are ......... and the costs that are............

relevant

orders market

45 Cost data is not generally based upon scientific principles but upon the practical ........... of the cost accountant.

compare significant relevant

46 Now read again the summary of the set and the summary of Chapter I again. Take a short break and then test your knowledge of cost accounting by completing the quiz that follows.

judgment (You have finished a very long and difficult programme. This is an achievement. Well done!)

135

QUIZA TEST OF KNOWLEDGE ACQUIRED FROM THE PROGRAMME Estimated time 30 minutes Note: Mark only the most correct answer to each question. 1. If we buy a whole live pig for 1, the cost of one of the pigs ears: a. b. c. d. may be computed scientifically is related to the selling price of the pig depends upon why we buy the pig is nil

2. Cost Accounting is a technique for calculating the: a. b. c. d. overall profit or loss of a business price at which a business could be bought selling price of a product cost of a unit of production

3. If we buy goods for 4 and sell half of them immediately for 6, retaining the remainder for sale later, our profit to date is: a. b. c. d. 2 4 8 impossible to compute

4. If we manufacture 5 units (one only half completed) for 55 and sell five units for 100, our profit to date is: a b. c. d. 45 50 55 100

5. In computing the profit of a manufacturing business, the stocks (inventory) of raw material, work in process, and finished goods left at the end of the period should be: a. b. c. d. valued at selling price less profit margin valued at selling price ignored valued at cost or lower 136

6. Cost accounting divides costs into: a. direct material, selling and manufacturing overhead b. direct material and labour, selling and administrative overhead c. direct labour and direct material, manufacturing, selling and administrative overhead d. direct labour and overhead 7. The system of cost accounting chosen for a particular business should: a. b. c. d. be the same as that for other firms in the same industry relate to the product relate to the organization of the business relate to the product and the organization of the business

8. One objective of cost accounting is to compute: a. the true selling price of the product b. the scientific cost of the product c. the fair cost of the product d. the companys total costs 9. A cost centre is: a. the middle of the cost accountant b. a section of the business which can be used conveniently for accumulating costs, so that all work done in that cost centre may be charged for on a uniform basis c. an intermediateas opposed to a high or a lowcost d. something else 10. The purpose of valuing work in process is: a. to assist in the calculation of profit b. to provide a basis for fixing selling prices c. to find out how much work has still to be done d. something else 11. Cost reports may be more useful in controlling costs if such reports are submitted: a. annually with absolute accuracy b. semi-annually c. monthly with absolute accuracy d. rapidly with reasonable accuracy 137

12. Job costing is similar to: a. standard costing b. marginal costing c. batch costing d. process costing 13. For cost accounting purposes, the overhead costs of a business organization are normally divided into: a. management and workers b. manufacturing, selling, distribution and administrative costs c. buying and selling d. direct and indirect costs 14. The direct labour and material cost of a job may be: a. computed scientifically b. more easily computed than the overhead for that job c. allocated on a time basis d. the basis for computing administrative overhead for that job 15. When valuing work in process, distribution costs should be: a. included b. excluded c. partially included d. deducted from the selling price 16. The charging of assembly shop overhead to a product may be based on the: a. amount of selling and administrative overhead b. quantity of direct material c. amount of direct labour cost d. number of machine hours 17. To charge manufacturing overhead to jobs, the overhead rate is best computed: a. monthly, based on actual data for a past month b. annually, based on data for a future period c. annually, based on data for a past year d. on some other basis 138

18. The total profit computed in cost accounting for all the jobs completed during the period will be: a. absolutely accurate b. equal in total to the amount on the balance sheet c. equal to the total profit of the income statement d. reconcilable with the profit of the income statement 19. To determine what is direct labour, as opposed to indirect labour, we must ask the question: a. does the labour work regularly? b. is the labour employed in the machine shop? c. can the labour be conveniently associated with a unit of production? d. is the labour done by a worker or by an engineer? 20. If there is uncharged manufacturing overhead at the end of the year: a. job costs will show too little charge for overhead b. job costs will show too much charge for overhead c. overhead was definitely abnormally high d. actual activity was definitely greater than the estimated activity 21. In computing the cost of a unit of production, normally: a. direct costs are fairly definite and overhead costs depend upon allocations and assumptions b. all costs depend upon broad assumptions c. the indirect costs are more definite than the direct costs d. once the overhead rate is fixed, the direct costs may be calculated 22. In computing the profit of a manufacturing business: a. closing work in process and finished goods may be ignored b. closing work in process must be valued at cost and finished goods must be valued at selling price c. closing work in process and finished goods are not relevant to cost and profit calculations d. closing work in process and finished goods must both be valued at cost or less 23. The cost of the foremans salary is normally: a. direct labour b. manufacturing overhead c. administrative overhead d. indirect material 139

24. The cost of factory heat and power is normally: a. direct labour b. manufacturing overhead c. selling and administrative overhead d. indirect material 25. The cost of sales literature is normally: a. direct labour b. manufacturing overhead c. selling and administrative overhead d. indirect material 26. The total cost of a new machine purchased during the year is normally: a. direct material b. manufacturing overhead c. selling and administrative overhead d. something else 27. The depreciation of the managing directors motor car is normally: a. direct material b. manufacturing overhead c. selling and administrative overhead d. indirect material 28. The directors fees are normally: a. non-productive labour b. manufacturing overhead c. selling and administrative overhead d. indirect labour 29. Dividends and income tax payable by a company are normally: a. direct labour b. manufacturing overhead c. selling and administrative overhead d. something else 30. If a cost centre has direct labour of 2,000 against specific overhead of 4,000 and a share of general manufacturing overhead of 1,000, the overhead rate for the cost centre is: a. 100% of direct labour cost b. 200% of direct labour cost c. 250% of direct labour cost d. 40% of direct labour cost 140

31. In computing the total cost of each productive cost centre, we must take the cost of each service cost centre and allocate it to all: a. productive cost centres equally b. all productive cost centres on a fair basis c. cost centres equally d. appropriate cost centres on a fair basis 32. The objectives of cost accounting are: a. simply to compute a fair cost b. to set selling prices c. to do both of these things d. something more 33. The wages of an inspector of production in a factory should be treated as: a. direct labour b. part of material cost c. indirect labour, unless conveniently associated with a unit of production d. manufacturing overhead, even if it can be conveniently associated with a unit of production 34. Selling prices depend on the: a. cost of the product b. efficiency of the sales force c. amount that potential customers are prepared to pay d. efficiency of the cost accounting system 35. Output cost accounting is similar to: a. process costing b. batch costing c. contract costing d. marginal costing 36. The elements of cost of a company making only one product are direct labour 10,000, direct material 60,000, variable manufacturing overhead 12,000, fixed manufacturing overhead 15,000, variable selling and administrative overhead 13,000, and fixed selling and administrative overhead 14,000. If the company produced and sold 10% more items, what would be the total cost? a. 124,000 b. 126,700 c. 133,500 d. something else 141

37 Salaries and indirect wages are: a. direct labour b. recorded on job cards c. manufacturing overhead d. manufacturing, sales or administrative overhead 38. Direct labour on specific jobs or on overhead accounts is re corded on: a. attendance cards b. wages sheets c. job time cards d. something else 39. Direct workers time not spent directly on manufacturing the product is normally charged to: a. direct labour b. selling overhead c. manufacturing overhead d. administrative overhead 40. Product A sells for 20, involves 12 of variable cost. Product B sells for 25, involves 15 of variable cost. What will be the companys profit if it sells 100 items of product A and 200 items of product B, when its fixed cost is 2,500? a. 1,700 b. 2,000 c. 300 d. something else 41. The most useful analysis of costs for decision making purposes is into: a. manufacturing and selling b. direct and indirect c. present and past d. relevant and not relevant 42. Overtime premium is: a. the amount paid for time worked in excess of normal hours b. always charged to direct labour c. extra payment to workers, in addition to their normal rates, when working overtime d. illegal 142

43 Responsibility accounting is particularly concerned with: a. historical accounting b. controllable costs c. storekeeping d. indirect wages 44. The system of costing most likely to be found in a bus company is: a. job costing b. batch costing c. contract costing d. output costing 45. In the case of long-term contracts, credit may be taken for profit to the extent of: a. payments received to date b. costs incurred to date c. expected final profit d. profit earned to date less provisions for possible future losses 46. The most suitable cost centre overhead rate for an assembly shop is based on: a. machine hours b. labour costs c. labour hours d. prime costs 47. We often convert in process units into equivalent finished units by: a. waiting until they are completed b, ignoring overheads c. applying ratios based upon the amount of work done d, applying standard prices 48. The contribution of a job is the: a. gross profit b. net profit c. excess of sales revenue over variable costs d. difference between fixed and variable costs 49. The costs of internal transport, repairs, maintenance, power sections in a factory are normally charged: a. to specific productive cost centres b. initially to one service cost centre and subsequently to productive cost centres only 143

c. initially to one service centre and subsequently to selling and administrative overhead d. initially to various service cost centres and subsequently to other cost centres on a reasonable basis 50. Manufacturing overhead should be recovered (charged to jobs): a. at one rate for the whole factory b. at different rates for each cost centre c. on the basis of selling and administrative overhead d. in some other way 51. If we compute manufacturing overhead rates for individual cost centres: a. there is not likely to be much difference between the various cost centre rates b. the manufacturing overhead rates are more complicated and less accurate c. there is more clerical work but little benefit d. the overhead rates for the various cost centres will be related to the actual cost incurred by these cost centres 52. A factory had a total manufacturing overhead of 20,000 against a direct labour cost of 10,000 and used an overhead rate of 200%. A new cost accountant set up two separate cost centres: in Cost Centre A direct labour was 8,000 and overhead 8,000, and in Cost Centre B direct labour was 2,000 and overhead 12,000. When we compare the new cost system with the old system: a. the old overhead rate of 200% will be replaced by two new rates of 100% and 200% respectively b. it will make no difference to the total cost of the product where the direct labour cost is the same in Cost Centre A as it is in Cost Centre B c. it will make no difference to the total cost of the product where the direct labour cost in Cost Centre A is six times as much as the direct labour cost in Cost Centre B, but it will make a difference to the cost of other products d. it will make no difference to the total cost of the product where the direct labour cost in Cost Centre A is four times as much as the direct labour cost in Cost Centre B, but it will make a difference to the cost of other products 144

53 Using the data in No. 52, the labour and overhead cost of a job which used 8 hours labour in Cost Centre A and none in Cost Centre B would be: a. unchanged by the new system b. increased by the new system c. reduced by the new system d. impossible to determine unless additional information were known 54. In a manufacturing company where the policy is to make a profit on each job equal to 10% of the total cost of that job, the total costs for a year are: Material 100,000 Direct LabourDept. X 10,000 Direct LabourDept. Y 20,000 Manufacturing OverheadDept. X 20,000 Manufacturing OverheadDept. Y 60,000 Selling and Administrative Overhead 42,000 If manufacturing overhead is charged on the basis of direct labour cost and the selling and administrative overhead is charged on the basis of the total manufacturing cost, what would be the selling price of the following job: Material 25,000 Direct LabourDept. X 5,000 Direct LabourDept. Y 6,000 a. b. c. d. 84,480 105,600 76,800 something else

55. The manufacturing overhead rate for the current year is best computed from: a. this years estimated manufacturing overhead divided by the actual direct labour hours last year b. last years manufacturing overhead divided by the actual direct labour hours last year c. last years manufacturing overhead divided by the estimated direct labour hours this year d. this years estimated manufacturing overhead divided by the estimated direct labour hours this year 145

56. If a company bases its overhead rate on direct labour hours and the actual labour hours turn out to be less than estimated labour hours, there will be: a. under charged overhead b. over charged overhead c. neither under charged nor over charged overhead d. revised manufacturing overhead rates 57. Uncharged manufacturing overhead is most likely to arise because the: a. direct costs were not charged to jobs b. manufacturing overhead was not charged to jobs because the rate was computed inaccurately c. manufacturing overhead was less than forecast d. the estimated volume of production was not achieved 58. The method of charging manufacturing overhead to products should always be a: a. percentage of direct labour cost if all jobs involve different amounts of direct labour and the wage rates payable vary b. machine hour rate if some parts of the factory are mechanized c. machine hour rate for departments using extensive machines and labour hour rates for departments where most of the work is done manually d. percentage of prime costs because no method of allocating overhead is accurate 59. Selling and administrative expense may be charged to the products as a: a. percentage of direct labour cost b. percentage of the selling price c. percentage of prime cost d. percentage of the manufacturing cost 60. Which costs may be charged to cost centres on the basis of space occupied? a. managers salaries b. power c. machine depreciation d. rent 146

61. Which of the following should not be included in selling and distribution overhead: a. salesmens salaries, commission and expenses b. showroom and finished goods warehouse costs c. the small cartons in which all the companys products are packed and which the ultimate consumer receives when buying a product d. the packing cases into which the small cartons are some times packed. 62. The first consideration when deciding how much detailed work should be involved when analysing costs by products should be the: a. cost of getting the data b. skill of the cost accountant c. legal requirements d. reliability and usefulness of the analysis when completed 63. The objective of allocating all costs to products is to: a. produce a scientifically accurate cost b. avoid unallocated overhead and compute total product cost c. co-ordinate the cost and financial accounts d. compute the contribution of the product to the final profit 64. In contract costing the unit of cost is: a. labour and material b. the contract c. that part of the contract that has been completed d. something else 65. To evaluate the efficiency of operations the actual contract cost data may be compared with the: a. profit and loss account b. original estimate c. last contract for the same customer d. contract completed most recently for any customer 66. If we own and operate a car at an overall cost of 1s per mile. Would it pay to hire a car for 4d a mile for one journey of 10 miles? a. No, providing petrol and oil costs less than 4d a mile b. Yes, providing petrol and oil costs less than 4d a mile c. No d. Yes 147

67. Which of the following costing systems would you expect to find in a chemical works: a. contract costing b. batch costing c. process costing d. job costing 68. Where a product passes through a series of operations in sequence, cost accounting is normally done by: a. process costing designed to produce the cost of a product b. process costing designed to produce the cost of each process c. job costing designed to produce the cost of each job d. some other way 69. Costs that are the same per unit of production but increase in total when the volume of production increases are: a. fixed costs b. semi-variable costs c. variable costs d. standard costs 70. Cost reports for management should show: a. as much detail as possible to all levels of management b. only summary figures c. details of non-controllable expenses appropriate to the level of management for which the report is prepared d. cost data and comparable data useful to management for decision making, pyramided for higher levels of management 71. If a job has direct labour costs of 10, direct material costs of 20, a manufacturing overhead rate of 200% of direct labour cost, and a selling and administrative overhead rate of 10% of manufacturing cost, should we subcontract it for 45? a. Yes b. No c. No, if overhead is fixed d. Yes, if overhead is fixed 148

72. A contract has direct labour cost of 20, direct material cost of 20, and four hours of machine time. The normal machine hour overhead rate is 10 per hour. The variable cost of the contract is probably: a. 40 b. 60 c. 80 d. something else 73. In the case of a particular job, the direct labour cost in Department A (where 20 hours work is involved) is 30 and the direct labour cost in Department B (where 8 hours work is involved) is 5. The direct material cost is 20 and production department overheads are recovered at the rate of 1 per hour in Department A and at the rate of 2 per hour in Department B. The manufacturing cost of this job is therefore: a. 83 b. 55 c. 91 d. something else 74. A job has direct labour costs of 10, direct material costs of 20, fixed manufacturing overhead of 15, variable manufacturing overhead of 10, and fixed selling and administrative over head of 12. Its selling price is 75. What is the profit of the job and what is the contribution of the job? a. 8 and 30 b. 8 and 35 c. 8 and 20 d. something else 75. Cost accounting data: a. if accurately prepared is always suited to many different purposes b. is usually difficult to prepare and is seldom of great value c. must be specially prepared in relation to each particular decision d. is a scientific fact and cannot be disputed 76. If a company has been operating at a high level of capacity and on this basis has computed its overhead rate for cost estimating purposes, will its cost estimates tend to be relatively: a. high b. low 149

c. average d. unpredictable so far as accuracy is concerned 77. If the same company experiences a recession and it recomputes its manufacturing overhead rate on the assumption that only a small proportion of its capacity will be utilized, will its cost estimates tend to be relatively: a. high b. low c. average d. unpredictable so far as accuracy is concerned 78. The purchase of a machine costing 1,500, and having a working life of 3 years, is expected to lead to a reduction of 1,000 per year in the labour costs. The manufacturing overhead recovery rate is 500% of direct labour cost. The total savings over a period of three years resulting from the purchase of this machine will probably be: a. 1,500 b. 16,500 c. more than 1,500 but less than 16,500 d. something else 79. In the case of a company manufacturing only one type of product, the direct material costs per unit are 40, and 10 hours work is involved per unit produced. The direct labour cost is 1 per hour and variable manufacturing overheads amount to 200% of the direct labour cost. If the fixed manufacturing overheads amount to 1,000 per year, what is the manufacturing cost per unit if the annual output is (a) 1,000 units and if it is (b) 100 units? a. (a) 151 (b) 160 b. (a) 71 (b) 80 c. (a) 131 (b) 140 d. something else 80. The actual cost of a product may vary according to the time it is produced, the assumptions adopted by the cost accountant and the volumes of production and other things in the factory. This statement is: a. always true b. partly true, partly false c. sometimes true d. false 150

FOR THE TEACHER Programmed learning is designed to simulate an individual tutor. In designing this programme, we have analysed in detail what knowledge and skills we are trying to teach, and what behaviour we expect of the student, when he has completed the programme. The advantages of the programme are: 1. Each student can learn at the pace most suitable for him. 2. The student studies advanced material only when he has mastered the elementary material. 3. The programme is designed to prompt a correct answer from the student. The aim is to reward the student as much as possible. If he is rewarded, he will be motivated to continue paying attention. 4. The student cannot daydream. He is continuously active and receives immediate and continuous confirmation of his success in learning the material. 5. Frames are designed to bring the critical point to the attention of the student, and to establish his understanding of each critical point. The record of responses made by the student highlights areas where the programme might well be reconsidered. No programme is perfect, and consistent errors in any one frame by many students, may indicate that the frame should be redesigned. 151

ANSWERS TO THE QUIZ 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. c d b b d c d c b a d c b b b c b d c a 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.
GRADING:

a d b b c d c c d c d d c c a c d c c c 7080 6070 Under 60

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

d c b d d c c c d b d d c a d a d c d d

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

c d b b b a c b c d c d c b c b a c b a

Excellent Good Fair, repeat the programme at a later date.

FINAL NOTE We hope that you have enjoyed this programme and that you have finally solved to your satisfaction the many puzzles that we have presented to you. We believe that learning of accounting can be both intriguing and entertaining. You will retain and expand the knowledge you have acquired from this programme, if you seek out every opportunity to use it in your day-to-day work. Have we stimulated you to be a little curious about accounting in the future?

GLOSSARY OF COST ACCOUNTING LANGUAGE Absorbed overhead See overhead charged. Accounting Art of preparing accounting reports from books and other records. Based on concepts and principles: true and fair, money, cost, conservatism, consistency, comparability, entity, going concern, recognition of profit, etc. Accounting period Period of time between one balance sheet and the next. Period of the income statement. Usually a month or one year. Administrative overhead Cost of directing and controlling a business. Indirect cost. Administrative expense. Includes: director fees, office salaries, office rent, legal fees, auditors fees, accounting services, etc. Not research, manufacturing, sales or distribution overhead. Allocated overhead See overhead charged. Balance Sheet Statement of assets and how they are financed from liabilities and owners equity. Not an income statement, Batch Group of identical products or jobs. Batch costing Cost system where the unit of cost is a batch. Similar to job costing. Contract costing Cost system where the unit of cost is one contract. For long term contracts a proportion of the profit to date may be taken each year. Contribution Excess of selling price over variable cost. Contributes to fixed overhead and profit. Also used in make or buy decisions, as the excess of purchase price over relevant cost of making. Controllable cost Cost for which some person may prepare a budget and be held responsible for the variance between actual cost and budget. Cost Several meanings: a. Expenditure on a given thing. b. To compute the cost of something. c. Direct cost or indirect cost (indirect cost is overhead expense). Cost accounting Recording of cost data and preparation of cost statements. Objectives: a. To compute cost of a product as an aid to pricing. b. To value work in process. c. To control costs. Costing Two meanings: a. To estimate costs. b. Cost accounting. 153

Cost allocated Cost charged. Cost analysed. (Some cost accountants use the word allocation to mean charge of whole items of cost as distinct from apportionment which covers analysis of proportions of an item of cost.) Cost apportioned Cost charged. Cost analysed. (Some cost accountants use the word apportionment to mean analysis of proportions of items of cost. See also cost allocated.) Cost centre Centre for analysis of overhead into smaller cost sections. Used to compute more precise overhead rates. Better cost control. Productive and service cost centres. Cost charged See cost allocated. Cost classification Grouping of costs by common characteristics. Cost code Series of alphabetical or numerical symbols to represent descriptive titles in cost classification. Cost control Objective of cost accounting. Achieved by: 1. Setting of budget or standard cost. 2. Recording of actual cost. 3. Comparison of standard and actual cost to compute variances (differences). 4. Investigation of cause of variances. 5. Action by responsible management. Cost manual Manual of responsibilities, routines, forms and reports in a cost system. Cost of capital Not all real cost. It is the reward to each type of capital used by a business i.e. creditors (nil.) loans (interest), preference shares (dividends), ordinary shares (dividends). Cost of sales Cost of goods actually sold. Labour, material and manufacturing overhead adjusted for changes in inventory of raw material, work in process and finished goods. Cost report Cost statement. Cost statement Statement of cost and/or operating results of all or part of a business. Prepared promptly with reasonable accuracy. Contains comparative data. Cost report. Cost unit Unit of cost. Unit of product chosen as focus of cost accounting. Contract, job, batch, product or process. Current cost Actual cost. Not estimated cost. Not standard cost. Depreciation Allocation of the cost of a fixed asset (building, equipment, vehicles, etc.) over its working life. Measure of the cost of using the fixed asset. (Land does not normally depreciate.) Methods: straight line, diminishing balance, sum of the digits. Direct costing Cost system for variable costs only. All fixed costs charged to income statement and not to product or job cost accounts. Direct costs Costs conveniently associated with a unit of product. Normally direct labour, direct material, direct services (e.g. 154

hire of equipment for one specific job). All other costs are indirect costs known as overhead expenses. (Some cost accountants also use the term direct for specific costs, i.e. overhead expenses which are clearly identifiable with an overhead cost centre but not with a unit of product.) Direct expenses Direct costs which may be conveniently associated with unit of product. Direct services. See direct costs. Direct labour Labour conveniently associated with a unit of product. Direct wages. Direct payroll. Covers all operating labour. Does not normally include inspectors wages, foremans salary, indirect labour, wages paid to persons normally employed on production for time spent on other work, etc. See direct costs. Direct material Direct cost. Conveniently associated with a unit of product. Material that forms part of the product sold. Not indirect material. Not manufacturing overhead. Direct services Direct expenses. Direct costs. Direct wages Direct labour. Distribution overhead Cost of packing and distributing the product. Indirect cost. Overhead. Often grouped with sales overhead and charged to jobs as a percentage of manufacturing cost. Elements of cost Basic analysis of cost to compute overhead rates: direct labour plus direct material plus direct services equals PRIME COST; prime cost plus manufacturing overhead equals MANUFACTURING COST; manufacturing cost plus sales, distributive and administrative overhead equals TOTAL COST. Expenditure Money paid for cost, expense, asset or other purposes. Expense Indirect cost. Overhead. Manufacturing, selling or administrative overhead. Not a direct cost. Not conveniently associated with a unit product. Fixed or variable. Expense analysis sheet Record of expenses for analysis. Finished goods stock Inventory or stock of finished goods. Valued at lower of cost (of labour, material and manufacturing overhead) or market value. Sometimes valued at direct cost only. First in first out price (FIFO) Method of costing material issues assuming that first goods received are the first issued. Fixed assets Assets such as land, buildings, plant and equipment acquired for long term use in the business and not for resale. Valued at cost less accumulated depreciation not at market value. Depreciation charged to overhead expense periodically. (Exception: land is not normally depreciated.) Where the cost less accumulated depreciation of a fixed asset, is completely unrelated to its current value, then as an exceptional operation all assets may sometimes be restated for all accounting purposes, at current values. 155

Fixed cost Cost not affected by variations in the volume of production. Not a variable cost. Overhead may be fixed or variable cost. General manufacturing overhead service cost centre Cost centre used to accumulate general manufacturing overhead items. Subsequently recharged on an arbitrary basis to all cost centres. Covers such items as the factory managers salary and office costs. Historical costing Accumulation of past costs. Actual not standard costs. Income statement Statement of sales, costs., expenses and profit for an accounting period. Profit and loss account. Not a balance sheet. Indirect cost Cost which cannot conveniently be associated with a unit of product. Overhead expense. Indirect expense. Not direct cost. Indirect expense See indirect cost. Indirect labour Labour that cannot be conveniently associated with a unit of production. Indirect cost. Overhead. Not direct labour but does include the non-productive time and activity of normally direct workers. Indirect material Material used which does not form a measurable part of the product sold. Not conveniently associated with unit of product. Includes: oil, rags, factory supplies, etc. Indirect cost. Usually manufacturing overhead. Sometimes direct material of very low value is treated as indirect material to save clerical costs. Indirect wages Indirect labour. Inventory Stock of goods. Raw material, work in process, finished goods. Valued at the lower of manufacturing cost or market value. Sometimes valued at direct cost only. Iob card Record of work done by direct labour. Iob Unit of cost. Single job, order or contract. Iob costing Cost system based on one job as the unit of cost. Labour hour rate Worker rate of pay per hour. Labour time record Time card. Clock card. Last in first out price (LIFO) Method of costing material issues assuming that the last item received is the first item issued. Conservative in time of rising prices. Little used except to avoid taxation. Limitations of cost data Data for one purpose may not be relevant for other purposes. Costs often meaningless unless prepared quickly and presented with comparative data against which to measure performance. Cost depends upon the judgment of the cost accountant. Machine hour rate Two meanings: a. Overhead rate for manufacturing overhead based on machine 156

hours worked on each job. Suitable for machine sections. Not suitable for assembly work. b. Rate for operating a machine for one hour. Maintenance cost Maintenance and repair of machines and buildings. Overhead. Indirect cost. May be manufacturing sales or administrative. Manufacturing overhead Indirect cost of running the factory. Includes rent, rates, lighting, power, foreman, maintenance, repairs, insurance, etc. Does not include the full cost of machines only machine depreciation. Marginal cost Relevant cost of producing one more unit. Marginal costing See marginal cost. Sometimes variable cost only. Sometimes used to mean direct costing. Material cost Cost of material used. See direct material and indirect material. Material issue analysis sheet Record summarizing and analysing material issues by jobs, contracts, products or overhead accounts. Material requisition Stores or stock requisition. Issue ticket. Objectives of cost accounting See cost accounting. Occupancy Cost of occupying a building. Includes rent, rates, lighting, heating, cleaning, maintenance, etc. Sometimes accumulated as a service cost centre and recharged to other cost centres on the basis of floor space occupied. Avoids apportionment of each individual cost to each cost centre separately. Operating cost Cost of providing a service. Opportunity cost Not a cost at all. The value of a particular alternative course of action. Organization (for cost accounting) Definition of authority and responsibility in a business in order to design the appropriate cost accounting system. Cost analysis follows the organization plan. Manufacturing, sales and administrative costs may be analysed for the business as a whole, or for each division, or product group. Output costing Cost system for a business or department with only one output of identical products. Overhead absorbed See overhead charged. Overhead allocated See overhead charged. Overhead expense Indirect cost. Overhead. Fixed or variable with the volume of production. See manufacturing, sales, distributive and administrative overhead. Not direct cost. Overhead Indirect cost cannot be conveniently associated with a unit of product. Expense. Manufacturing, sales or administrative. Not direct cost. Overhead charged Overhead allocated or absorbed or recovered. 157

Overhead charged to a contract, job or product using an overhead rate. Overhead rate Rate for charging out overhead to jobs, contracts or products. Routine; 1. compute amount of overhead. 2. estimate measure of activity. 3. compute overhead rate. Measures of activity may be: direct labour cost, direct labour hours, prime cost or machine hours. Overhead rates may be for the whole factory or for each cost centre. Overhead recovered See overhead charged. Overhead under or over charged Overhead under or over absorbed, allocated, recovered. Difference between overhead incurred and overhead charged to contracts or jobs using an overhead rate. Overcharge indicates that actual activity exceeded estimated activity. Credit or profit in the income statement because job costs charged with too much overhead. Undercharge indicates that actual activity was less than estimated activity. Loss in the income statement because job costs charged with too little overhead. Normally applied to manufacturing overhead. Not sales or administrative overhead. Payroll Wages sheet. Wages. Labour. Payroll allocation Wages analysis. Payroll analysis Wages analysis. Pre-determined cost Cost estimate. Standard cost. Primary costs Analysis of costs into labour, material and overhead. See elements of cost. Prime cost Direct labour plus direct material plus direct services. Direct cost. Does not include overhead. Basis for overhead rate. Process costing Cost system for a sequence of operations where the unit of cost is one process. Productive cost centre Cost centre engaged in direct manufacturing or productive operations; machine shops, assembly shops, etc. Not a service cost centre. Product group Group of products classified for cost analysis. Profit and loss account Income statement. Not a balance sheet. Relevant cost That part of total cost that is relevant to a particular decision or course of action. Refers more to variable rather than fixed costs. May change over time. Research cost Cost of research. Separate overhead or part of manufacturing overhead. Indirect cost. Not normally direct cost. Salary cost Not normally conveniently associated with a unit of product. Usually, manufacturing sales or administrative overhead. 158

Sales overhead Cost of promoting sales and retaining custom. Indirect cost. Overhead expense. Not manufacturing or administrative overhead. Includes: advertising, sales literature, sales salaries, travelling expenses, depreciation of sales cars, etc. Service cost centre Cost centre for activities not engaged in direct productive operations. Includes: power-house, maintenance, internal transport, production control. Not a productive cost centre. Manufacturing overhead. Recharged to appropriate cost centres. Specific cost Indirect cost clearly associated with a specific cost centre. Not direct cost. Overhead. Standard cost Predetermined standard of performance against which to measure actual cost. Standard costing as opposed to actual or historical costing. Standard rate Rate which is set at the beginning of an accounting period. Not the actual rate. Simplifies clerical work in cost accounting. Stock Inventory of goods on hand. Stores. Raw material, work in process or finished goods. Valued at the lower of manufacturing cost or market value. Stock requisition Material requisition. Stores requisition Material requisition. Stores Location for keeping stock or inventory. Stock. Inventory. Straight Line depreciation Depreciation method charging off the cost of a fixed asset equally over the years of its working life. Unabsorbed overhead See overhead undercharged Unallocated overhead See overhead undercharged. Uncontrollable cost See controllable cost. Unit of cost Unit of product chosen for cost accounting. Contract, job, batch, process. Unit of product Unit of cost for cost accounting. Unit of output Unit of product. Variable cost Cost which varies with the volume of production or sales. Variable expense Variable cost. Variable overhead. Variance Difference between actual cost and the standard of performance i.e. budget, standard cost or previous cost. Sometimes analysed into: price, efficiency., seasonal and volume variances. Wages Payroll. Pay of workers. Labour cost. Wages analysis Payroll analysis. Record analysing labour cost by contract, job, batch, process or overhead account. Wages sheet Payroll. Record to compute gross and net pay. Work in process See stock. Work partially completed. Valued at lower of manufacturing cost or market value.

The four self-instruction programmes comprising the popular series ACCOUNTING STEP BY STEP are designed to enable students, managers, engineers and scientists to teach themselves the language and basic concepts of accounting.