BBA 2003

COST ACCOUNTING

TAN WAH TIONG

940928-14-5531
201565

CHONG KAR YUN

AUGUST 2013
NO

DETAIL

PAGE

1.0

Contents

2.0

Introduction

2
Page 0 of 26

3.0

Task 1

3-13

4.0

Task 2

14-15

5.0

Task 3

16-17

6.0

References

18

7.0

Coursework

19-22

Page 1 of 26

2.0 Introductions
Cost accounting is a process of collecting, analyzing, summarizing and evaluating
various alternative courses of action. Its goal is to advise the management on the most
appropriate course of action based on the cost efficiency and capability. Cost accounting
provides the detailed cost information that management needs to control current
operations and plan for the future.

Since managers are making decisions only for their own organization, there is no need
for the information to be comparable to similar information from other organizations.
Instead, information must be relevant for a particular environment. Cost accounting
information is commonly used in financial accounting information, but first we are
concentrating on its use by managers to make decisions.
Unlike the accounting systems that help in the preparation of financial reports
periodically, the cost accounting systems and reports are not subject to rules and
standards like the Generally Accepted Accounting Principles. As a result, there is wide
variety in the cost accounting systems of the different companies and sometimes even in
different parts of the same company or organization.

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Page 3 of 26

3.0 Task 1
1.1 Three Basic Cost Elements Involved in the Manufacture Of Product
(a) Material cost:
Direct cost: An expense that can be traced directly to (or identified with) a specific cost
center or cost object such as a department, process, or product. Direct costs include of
labor, material, fuel or power. It vary with the rate of output but are uniform for each
unit of production, and are usually under the control and responsibility of the
department manager. As a general rule, most costs are fixed in the short run and variable
in the long run. Also called direct expense, on cost, variable cost, or variable expense,
they are grouped under variable costs. Examples: Cost of gravel, sand, cement and
wages incurred on production of concrete.

Indirect cost: A costs that are not directly accountable to a cost object such as a
particular project, facility, function or product. Indirect costs may be either fixed or
variable. Indirect costs include administration, personnel and security costs. These are
those costs which are not directly related to production. Some indirect costs may be
overhead. But some overhead costs can be directly attributed to a project and are direct
costs. There are two types of indirect costs. One are the fixed indirect costs which

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contains activities or costs that are fixed for a particular project or company like
transportation of labor to the working site, building temporary roads, etc. The other are
recurring indirect costs which contains activities that repeat for a particular company
like maintenance of records or payment of salaries. Examples: Cost of depreciation,
insurance, power, salaries of supervisors incurred in a concrete plant.
(b) Labor:
Direct labor: Cost of personnel that can be identified in the product, such as the salary
of the person who works at the production machine, but not the administrators or
janitors salaries. Besides, Direct labor is also the portion of the total cost of production
of a product or fulfillment of a service that is associated with salaries, benefits, taxes,
and other expenses related to the personnel needed for the process.

Indirect labour: Employees or workers (such as accountants, supervisors, security

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

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(c) Overhead costs:

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

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1.2 The difference between the following terms

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

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(ii) Sunk cost and relevant cost

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

Page 8 of 26

(iii) Fixed and variable cost

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

Page 9 of 26

money invested in machines and so on. Cost incurred on variable factors is known as
variable cost. This cost directly varies with the volume of production. If volume of
production is zero, this cost will be zero. Its examples are fuel cost, cost or raw
materials etc.

(iv) Avoidable and unvoidable costs

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

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

(v) Controllable and uncontrollable costs

Page 10 of 26

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

(vi) Direct and indirect costs

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

Page 11 of 26

(vii) Prime cost and Conversion cost

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

1.3 discuss the behavioral classification of costs, explaining all the term used
therein

Page 12 of 26

1. Variable costs
Variable costs are expenses that change in proportion to the activity of a
business. Variable cost is the sum of marginal costs over all units produced. It can also
be considered normal costs. Fixed costs And variable costs make up the two
components oftotal cost. Direct Costs, however, are costs that can easily be associated
with a particularcost object. However, not all variable costs are direct costs. For
example, variable manufacturing overhead costs are variable costs that areindirect costs,
not direct costs. Variable costs are sometimes called unit-level costs as they vary with
the number of units produced.

2. Semi variable costs

A cost composed of a mixture of fixed and variable components. Costs are fixed for a
set level of production or consumption, becoming variable after the level is exceeded.

3. Fixed costs
A cost that does not change with an increase or decrease in the amount of goods or

Page 13 of 26

services produced. Fixed costs are expenses that have to be paid by a company,
independent of any business activity. It is one of the two components of the total cost of
a good or service, along with variable cost.

4. Semi fixed costs or stepped costs

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

5. Concave cost function

Page 14 of 26

concave function is the negative of aconvex function. A concave function is

also synonymously called concave downwards, concave down, convex upwards, convex
cap or upper convex.

Page 15 of 26

4.0 Task 2
Assume the following purchases were made in ABC
Data of purchase
1st January
2nd January
3rd January

Unit Purchased
500
600
800

Price per Unit

100
200
400

Units used on 4th January are 900

FIFO Method

Data
1st Jan
2nd Jan
3rd Jan
4th Jan

Purchased
Units
Price
500
600
800

100
200
400

Amoun
t
50000
120000
320000

Issued
Units

900

Price

***

Amoun
t

130000

Balance
Unit
Price

Amount

500
1100
1900
1000

50000
170000
490000
360000

100

Page 16 of 26

LIFO Method

Data
1st Jan
2nd Jan
3rd Jan
4th Jan

Purchased
Units
Price
500
600
800

100
200
400

Amoun
t
50000
120000
320000

Issued
Units

900

Price

***

Amoun
t

340000

Balance
Unit
Price

Amount

500
1100
1900
1000

50000
170000
490000
150000

100

Weighted Average Methods

Data

Purchased
Units Price

1st Jan
2nd Jan
3rd Jan
4th Jan

500
600
800
1900

100
200
400

Amoun
t
50000
120000
320000
490000

Issued
Units

900

Price

257.89
5

Amoun
t

232105

Balance
Unit
Price
500
1100
1900
1000

100
257.89
5

Amoun
t
50000
170000
490000
257895

Page 17 of 26

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

SS

RR

PP

Unit produced

270

200

220

Time allowed in minutes per unit

10

15

12

Time taken (hours)

40

38

36

Rate per hour ($)

125

105

120

Rate per unit ($)

20

25

24

Page 18 of 26

(i) Hourly rate

Name of employee

SS

RR

PP

Time taken (hours)

40

38

36

Rate per hour (Shs)

125

105

120

Total amount (Time x Rate)

5000

3990

4320

Name of employee

SS

RR

PP

Unit produced

270

200

220

Rate per unit (Shs)

20

25

24

Gross wage (Unit x Rate)

5400

5000

5280

(ii) Piece rate

(iii) Bonus Scheme

Name of employee

SS

RR

PP

Unit produced

270

200

220

Time allowed in minutes per unit

10

15

12

Total time allowed (hours) (unit x time per unit/60)

45

50

44

Time taken (hours)

40

38

36

Time saved

125

105

120

Proportion (time saved/time allowed)

1/9

6/25

2/11

Bonus time [(Time saved / time allowed) x time taken]

4.44

9.12

6.55

Total time to be paid (time taken + bonus)

44.44

47.12

42.55

Rate per hours (Shs)

125

105

120

Total pay

5555

4947.6

5106

Page 19 of 26

6.0 references
- http://www.businessdictionary.com/definition/direct-cost.html
- http://www.investopedia.com/terms/d/directcost.asp
- http://en.wikipedia.org/wiki/Indirect_costs
- http://accountingexplained.com/managerial/costs/direct-and-indirect-costs
- http://www.businessdictionary.com/definition/direct-labor-cost.html
- http://www.investorwords.com/16347/direct_labor_cost.html
- http://www.answers.com/topic/direct-labor
- http://malaysia.answers.yahoo.com/question/index?qid=20090210064741AA5jfMr
- http://www.caclubindia.com/forum/sunk-costs-are-irrelevant-but-irrelevant-costs-arenot-sunk-79001.asp#.UiqDNn_M-jg
- www.google.com

Page 20 of 26

7.0 coursework

Page 21 of 26

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

Kg
5485
2690

Finished Products:
Units
Exe
650
Wye
200
To make a unit of Exe needs 5 kg of P48 and 2 kg of P34. To make a unit of Wye needs
8 kg of P48 and 3 kg of P34.

Page 22 of 26

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

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

b)

Production budget
Needed to meet sales requirements
Increase in finished stock 10%
Materials
budget
Total
to be produced

Exe
Units
5000
65
P48
5065

Wye
Units
7500
20
P34
7520

Kg

Kg

Product Exe

25325

10130

Product Wye

60160

22560

Total needed for production

85485

32690

Less stock in hand 1 April Year 6

5485

2690

To be purchased in year to 31/3.year 7

80000

30000
Page 23 of 26

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

160
(10)
150

b) To make 10 units of product:

Material
80 kg @ 20 per kg
Offcuts etc
20 kg @ 5 per kg
Material cost of 10 units
One rejected
6 kg @ 5 per kg

1600
(100)
1500
(30)

Direct material cost of 9 good saleable units

1470
Page 24 of 26

Direct material cost per good unit 1470/9

Page 25 of 26