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Answers

TOPIC 1 MANAGEMENT ACCOUNTING ENVIRONMENT

Exercise 1.1

Product cost is cost that is assigned directly to a product. This cost will beinventoried for the calculation of product cost per unit. Product cost constitutesan asset because when the product is unsold, the cost remains in the inventory.

Period cost is cost that is charged as expense during which it occurs and it is notinventoried. Examples are the administrative and sales expenses.

Prime cost is a main cost such as direct raw materials and direct labour used inthe production of finished goods.

Conversion cost is equal to direct labour and overhead costs. These two costs arecalled conversion cost because the cost items are used to convert raw materialsinto finished goods.

Exercise 1.2

1.

Syarikat Rendasulam Sdn. Bhd.Cost of Goods Manufactured Schedulefor the Year Ended 31/12/2010Raw materials used (1/2 RM40,000) RM20,000Direct labour 40,000

Factory overhead (6 RM20,000) 120,000

180,000+ WIP beginning inventory 20,000

200,000 WIP ending inventory 25,000Cost of goods manufactured 175,000

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Syarikat Rendasulam Sdn. Bhd.Income Statementfor the Year Ended 31/12/2010

RM RMSales 300,000

Cost of goods sold:Beginning inventory of finished goods 45,000+ Cost of goods manufactured 175,000

220,000

Ending inventory* 40,000 180,000

Gross profit (40% 300,000) 120,000 Sales and administrative expenses 80,000

Operating income 40,000

2.

Syarikat Lis Bhd.Cost of Goods Manufactured Schedulefor the Year Ended 31/12/2010

RM RMBeginning inventory of direct raw materials

+ Purchase of raw materials

Raw materials available for use

Ending inventory of direct raw materials

Raw materials used

Direct labour

Factory overhead

Cost of manufacturing

Beginning cost of WIP

Cost of goods available for manufacture

Ending cost of WIPCost of goods manufactured

48,000

240,000

288,000

(70,000)

218,000

360,000

640,000

1,218,000

176,000

1,394,000

(150,000)

1,244,000

Ending Inventoryof Finished Goods220,0000 180,0000

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3. (a) Syarikat RussCost of Goods Manufactured Schedule for the Year Ended31/12/2010RM RM

Direct raw materials:

Beginning inventory 50,000

+ Purchase of raw materials 260,000

Raw materials available for use 310,000

Ending inventory 40,000

Raw materials used during

production270,000

Direct labour 65,000*

[1] * K 675,000 270,000 340,000 = 65,000

Factory overhead:

Factory insurance 8,000

Factory building rental 90,000

Factory utilities 52,000

Cleaning of factory supplies 6,000

Depreciation of factory

equipment110,000

Factory maintenance 74,000

Total overhead 340,000

TOTAL PRODUCTION COST 675,000+ Beginning inventory of WIP 48,000*

[3] * 690,000 + 33,000

675,000 = 48,000

Ending inventory of WIP 33,000

COST OF GOODS

MANUFACTURED690,000

Note: Only the manufacturing costs incurred are considered.

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Syarikat RussCost of Goods Sold Schedule for the Year Ended 31/12/2010

Beginning inventory of finished goods 30,000+ Cost of goods manufactured 690,000* [2] * 720,000 30,000

= 690,000

Cost of goods available for sale 720,000 Ending inventory of finished goods 85,000* [4] * 720,000 635,000

= 85,000COST OF GOODS SOLD 635,000

*Items marked with * need to be obtained backwards.

(b) Raw Materials: RM270,000 / 30,000 units = RM9 per unitFactory Building Rental: RM90,000 / 30,000 = RM3 per unit

4.

Syarikat HullCost of Goods Manufactured Statement for the Month Ended 31/8/2010Direct raw material: (Plastic)

Beginning inventory 3,200,000 (A)(+) Purchase 4,500,000

Cost of goods available for use 7,700,000() Ending inventory (800,000)Direct raw material used 6,900,000

Direct Labour 2,000,000PRIME 8,900,000

Factory overheadRental (60% RM2,000,000) 1,200,000Utilities (60% RM600,000) 360,000

Gum, paint, small tools:Beginning inventory 250,000+ Purchases 100,000 Ending inventory (300,000) 50,000 1,610,000

10,510,000Beginning WIP 1,000,000

11,510,000 Ending WIP (500,000)Cost of goods manufactured 11,010,000

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Syarikat HullIncome Statement for the Month Ended 31/08/2010Sales 18,000,000Subtract: Cost of goods sold

Beginning inventory 12,000,000

+ COGM 11,010,000

Cost of goods available for sale 23,010,000

Ending inventory (8,500,000) (B) [4]

(14,510,000)

Gross margin 3,490,000

Other costs/Expenses:

Supplies

(75,000 + 210,000 90,000) 195,000

S & A Salaries 3,000,000

Rental (40%) 800,000

Utilities (40%) 240,000

Advertisement 350,000

(4,585,000)

Net loss (1,095,000)

TOPIC 2 MARGINAL COSTING AND ABSORPTIONCOSTING

Exercise 2.1

(a) Product Cost Per UnitMarginal Costing RM Absorption Costing RM

Direct materials 10.50 Direct Materials 10.50

Direct labour 9.50 Direct Labour 9.50

Variable manufacturing

Overhead4.00

Variable Manufacturing

Overhead4.00

Fixed Manufacturing

Overhead*2.62

Total 24.00 26.62

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* Calculation of Fixed Manufacturing Overhead Per Unit:

Factory supervisors salaries RM26,000

Insurance 19,200

Utilities 17,600

Factory maintenance 4,000

Vehicle expenses 1,800

Depreciation of plant 10,000

Total 78,600Production 30,000 units

Cost per unit RM2.62(b) Income Statement

Fadhilah BerhadIncome Statement Absorption Costingfor the Year Ended 31/12/2010(RM) (RM)Sales(25,000 units RM40) 1,000,000Cost of goods sold:

Beginning inventory 0Cost of goods manufactured (30,000 Units RM26.62)

798,600

Cost of goods available for sale 798,600Ending inventory (5,000 units RM26.62) (133,100)

Cost of goods sold 665,500Gross profit 334,500(Less):Fixed Sales and administrative expenses: Administrative staff salaries 20,000Insurance 4,800Utilities 4,400Vehicles 4,200Depreciation of office equipment 8,000

Variable sales and administrative expenses(RM1.20 25,000 units) 30,000 (71,400)Net Income 263,100

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Fadhilah BerhadIncome Statement Marginal Costingfor the Year Ended 31/12/2010(RM) (RM)

Sales (25,000 units RM40) 1,000,000Variable costs:Cost of goods sold:Beginning inventory 0

Cost of goods manufactured(30,000 units RM24.00) 720,000

Cost of goods available for sale 720,000

Ending inventory (5,000 units RM24,000) (120,000)

Cost of goods sold 600,000

+ Variable sales and administrative expenses(RM1.20 25,000 units)

30,000 (630,000)

Contribution margin 370,000(Less):Fixed manufacturing overhead 78,600

Fixed sales and administrative expenses

Administrative staff salaries 20,000

Insurance 4,800

Utilities 4,400

Vehicles 4,200

Depreciation of office equipment 8,000 (120,000)Net income 250,000

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RMNet income from marginal costing 250,000Add:Fixed manufacturing overhead carried forward underabsorption costing

13,100

Minus:Fixed manufacturing overhead released under absorptioncosting

-

Net income from absorption costing 263,100TOPIC 3 JOB ORDER COSTING

Exercise 3.11. The job cost sheet is used to record all costs allocated to a job. These costs

include the costs of direct raw materials and direct labour traced to the jobconcerned as well as the manufacturing overhead absorbed by the job.When a job is completed, the job-cost sheet is used for the cost of the unitscompleted. It is also a control document for the purpose of:

(a) Determining how many units are sold and the cost of the units; and

(b) Determining how many units are still in the inventory and the valueof these units in the balance sheet.

2. A sales order is issued the moment an agreement on quantity, price,delivery date and etc. is received from the customer. This sales order servesas a basis to produce the order or for the production instruction by theproduction department. The production instruction summarises thespecifications of the goods or job ordered, and it forms the basis for theaccounting department to prepare the job cost sheet. The job cost sheet isthen used to summarise various types of production costs incurred tocomplete the job concerned. These costs are recorded in the job cost sheet

based on the material acquisition forms, time tickets for direct labour and

the allocation of overhead according to predetermined overhead rates.

Exercise 3.2

1. The predetermined overhead rate is used to allocate or apply overhead costto a job. It is determined before the beginning of a period and is calculated

by dividing the estimated total manufacturing overhead cost for the periodby an estimate of the total units of the allocation base or activity. Theoverhead cost is applied or absorbed into the job by multiplying thispredetermined overhead rate with the total actual activity units orallocation base used to complete the job.

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2. The Manufacturing Overhead Account is credited when the overhead costis applied or absorbed into the Work In Process. In general, the amountabsorbed is not equal to the actual amount of overhead involved because

the predetermined overhead rate is based on an estimate.

Exercise 3.3

1. An under-absorbed overhead occurs when the actual overhead cost exceedsthe overhead cost absorbed into the Work in Process in a particular period.On the other hand, an over-absorbed overhead occurs when the actualoverhead cost is lower than the overhead cost absorbed into the Work InProcess. The over- or under-absorbed overhead is eliminated either byclosing or transferring the amount to the Cost of Goods Sold Account, or byallocating and transferring the amount between the Cost of Goods Sold

Account and the Inventory Account based on the value of the absorbedoverhead in each account. The adjustment for an under-absorbed overheadwill increase the Cost of Goods Sold (and Inventory), while the adjustmentfor an over-absorbed overhead will decrease the Cost of Goods Sold (andInventory).

2. When direct labour is replaced by automated equipment, the overhead willincrease whereas direct labour will decrease. This will increase thepredetermined overhead rate if it is based on direct labour.

3. Some companies use various overhead rates (more than one) for the

purpose of increasing accuracy in the allocation of overhead cost to theproduct. The usage of various overhead rates is suitable for companiesproducing several products that have different levels of resource utilisation.Besides this, it is also suitable in a situation where one department ismachine-intensive, while another department is labour-intensive.

4 (a)Siti Tan Samy

Draftsperson hours 84 70 63

Predetermined overhead rate RM120 RM120 RM120

Absorbed overhead RM10,080 RM8,400 RM7,560

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(b)

Siti Tan (RM) (RM)Direct materials 3,200 2,600Direct labour 6,700 5,500Absorbed overhead 10,080 8,400Total cost (a) RM19,980 RM16,500

Work in Process = 36,480*RM19,980 + RM16,500 = RM36,480

(c) All the balance in the Work in Process Account consists of cost that isconnected with Samys incomplete project:Direct materials RM1,100

Direct labour 5,000

Absorbed overhead 7,560

Total cost in work in process RM13,660

(d) The balance in the Overhead Account can be determined as follows:Overhead

Actual Cost 21,000 26,040 Absorbed Cost

5,040 Over-absorbed

As indicated above, the credit balance in the Overhead Account means thatthe overhead cost is over-absorbed. In other words, the actual overhead costis lower than the overhead cost absorbed into the Work in Process account.

5. (a) Direct materials RM5,200Direct labour 2,202Overhead (367* RM5.00**) 1,835Total RM9,237Cost per unit (RM9,237/120 units) RM76.98

RM2,202367 DLH

RM6 per hour

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RM85,000RM5/ DLH

17,000 hours

(b) Actual overhead cost RM68,200Absorbed overhead:

(14,400 DLH RM5.00) (RM72,000)Over-absorbed overhead (RM3,800)

TOPIC 4 PROCESS COSTING

Exercise 4.1

(a) Equivalent unit= Units completed + Ending work in process (percentage completed)

Direct material equivalent unit= 180,000 units + 8,000 units * (100% - Direct materials put in at the

beginning of the process)= 188,000 units

Conversion cost equivalent unit = 180,000 Units + (8,000 Units 14

)

= 182,000 units

(b) Cost per unit of direct materials, conversion cost and cost of unitscompleted transferred out to Process B.Cost per unit of direct materials

=Cost of beginning WIP + Current cost of DRM involved

Equivalent unit of DRM

=RM16,000 + RM190,000

188,000 units

= RM1.10

Cost of beginning + Current cost of conversion cost involvedWIP conversion cost

Cost per unit of conversion cost =Equivalent unit of DRM

=RM22,800 + RM377,600

182,000 units

= RM2.20

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Cost of DRM + Cost per equivalentCost of units completed transferred out =

equivalent unit unit of conversion cost

= RM1.10 + RM2.20

= RM3.30

(c) Transfer-out cost and cost of ending work in processTransfer-out cost = Units completed Cost of units completed

transferred out= 180,000 units RM3.30= RM594,000

Cost of ending inventory= Cost of DRM ending inventory +

Cost of conversion cost ending inventory

Cost of DRM ending inventory= Units in DRM Cost of DRM

ending inventory equivalent unit= 8,000 units x RM1.10= RM8,800

Cost of conversion cost ending inventory= Units in conversion Cost of conversion

Cost ending inventory Cost equivalent unit= 2,000 units RM2.20= RM4,400

Cost of ending inventory= RM8,800 + RM4,400= RM13,200

(d) Journal Entries for Process ARM RM

Debit inventory of work in Process A 568,400Credit DRM inventory 190,800

Credit salaries payable 205,200

Credit manufacturing overhead 172,400

(Record current cost involved in Process A)

Debit inventory of work in Process B 594,000

Credit inventory of work in Process A 594,000

(Record transfer-out cost from Process A to Process B)

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(e) Account for Work in Process ARM RM

Balance b/f

DRM inventory

Salaries payable

Manufacturing overhead

38,800

190,800

205,200

172,400

607,200

Inventory in work in Process B

Balance b/d

594,000

13,200

607,200

TOPIC 5 COST-VOLUME-PROFIT (CVP) ANALYSISExercise 5.1The break-even point is the point where the profit is equal to zero. A company issaid to have reached the BEP when its total revenue equals its total costs.

Its importance is in helping the management to make a decision whether tocontinue competing or leave the market.

Exercise 5.2

1. (a) BEP in unitsFixed cost

Contribution margin per unit

RM468,000=

RM25 RM19.80

= 90, 000 units

BEP in RinggitFixed cost

Contribution margin ratio

RM468,000

RM25 RM19.80=RM25

= RM2,250, 000

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(b) Units required to be sold to achieve a profit target of RM260,000Fixed cost + Target profit

Contribution margin per unitRM468,000 + RM260,000

=RM5.20 per unit

= 140, 000 units

(c) Safety margin in RinggitEstimated revenue Revenue at break-even point[120,000 RM25] RM2,250,000

= RM750,000(d) BEP if the direct labour cost increases by 8%

New CM = RM25 [RM10.50 + RM5 (1.08) + RM3 + RM1.30]= RM4.80

BEP = RM468,000 / RM4.80= 97,500 units

(e) Selling price that has to be fixed to maintain the present contributionmargin ratio is:

Present contribution ratio = (RM25 RM19.80/RM25) = 0.208

RM10.50 [RM5][1.08] RM3 RM1.30= 0.208

0.792 P = RM20.20

P = RM20.20

0.792

P = RM25.51

2. (a) BEP (in units) =Fixed cost

CM per unit

*CM per unit: Selling price/unit 20 Variable cost/unit (12 + 1.2) 13.2

CM/Unit 6.8% CM = 34%

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BEP (units) = 884,000 = 130,000 units6.8

BEP (RM) = 884,000 = RM2,600,00034%

Safety margin (RM) = Actual sales Sales at BEP= 3,000,000 2,600,000= RM400,000

(b) Income before tax RM272,000Assumption: Selling price, Variable cost and Fixed cost do not change.

Sales units = RM884,000 + RM272,000RM6.8

= 170,000 units

(c) Fixed cost increases by RM96,000 = 884,000 + 96,000 = 980,000Variable cost decreases by RM0.20 = RM13.20 RM0.20 = RM13.00

BEP (units) = RM980,000 (CM = RM20 RM13)RM7

= 140,000 units

3. (a) Total sales and selling price per unitTo answer this question, you can use the following formulae:Sales Fixed cost Variable cost = Net profitRM(S) RM16,500 RM66,000 = RM24,200RM(S) = RM24,200 RM16,500 + RM66,000RM(S) = RM106,700

Thus the total sales = RM106,700

Selling price per unit = Total sales/Production units= RM106,700/22,000= RM4.85 per unit

(b) Variable cost per unit and variable cost percentageTotal variable cost = RM66,000

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Variable cost per unit = Total variable cost / Production units= RM66,000 / 22,000= RM3 per unit

Variable cost percentage = Variable cost per unit/Selling price perUnit on sales

= RM3/RM4.85= 0.6186= 61.86%

(c) Total contribution marginTotal contribution margin = Total sales Total variable cost

= RM106,700 RM66,000= RM40,700

(d) Contribution margin per unit and contribution margin percentageContribution margin per unit = Selling price per unit Variable

cost per unit= RM4.85 RM3= RM1.85

% Contribution margin = Contribution margin per unit/Selling price per unit

= RM1.85/RM4.85= 0.3814= 38.14%

4. (a) Break-Even point in RM and unitsContribution margin/unit= Selling price per unit Variable cost per unit

= RM3,000 RM2,000= RM1,000

% Contribution margin = RM1,000 / RM3,000 = 1/3

Break-even point (RM) = Fixed cost / % Contribution margin= RM4,000,000/(1/3)= RM12,000,000

Break-even point (Units) = Fixed cost/Contribution margin per unit= RM4,000,000/RM1,000 per unit= 4,000 units

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(b) Net income for 2007 RMSales revenue (RM3,000 5,000 units) 15,000,000 Variable cost (RM2,000 5,000 units) (10,000,000)

Contribution margin 5,000,000 Fixed cost (4,000,000)Net income 1,000,000

(c) Fixed cost increases by 10% to RM4,400,000.Thus the break-even point will increase to4,400,000/(1/3) = RM13,200,00

that is, it increases by 10% as well.

TOPIC 6 BUDGETINGExercise 6.1

The budgets involved in the operating budget are the sales budget, the purchasebudget, the cost of goods sold budget and the operating expense budget.

For a manufacturing firm, the operating budget consists of the sales, production,marketing and administration budgets and the income statement.

Exercise 6.2

Sales BudgetJan Feb Mar Apr Total (RM)

Sales:

Revenue 35,000 42,500 25,000 25,000 127,500

Cash collection:

30% current month 10,500 12,750 7500 7,500 38,25070% previous month 21,000 24,500 29,750 31,500 106,750

Total (RM) 31,500 37,250 37,250 39,000 145,000

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Purchase BudgetJan Feb Mar Apr Total (RM)

Estimated cost of goodssold 24,500 29,750 31,500 17,500 103,250

Ending inventory 5,950 6,300 3,500 5,600 5,600

Beginning inventory (4,900) (5,950) (6,300) (3,500) (4,900)

Total purchase price 25,550 30,100 28,700 19,600 103,950

Payment:

60% current period

15,330 18,060 17,220 11,760 62,370

40% previous period 8,680 10,220 12,040 11,480 42,420

Total payment (RM) 24,010 28,280 29,260 23,240 104,790

Sales and Administrative Expense BudgetJan Feb Mar Apr Total (RM)

Salaries and wages 3,750 3,750 3,750 3,750 15,000

Transport 3,500 4,250 4,500 2,500 14,750

Advertising 3,000 3,000 3,000 3,000 12,000

Others 1,750 2,125 2,250 1,250 7,375

Depreciation 1,000 1,000 1,000 1,000 4,000

Total SA 13,000 14,125 14,500 11,500 53,125

Pro-forma Income StatementRM RM

Sales 147,500

Cost of goods sold:

Finished goods beginning inventory 4,900

Purchases 103,950

Cost of goods available for sale 108,850

Ending inventory 5,600 103,250

Gross profit 44,250

Operating expense:

Sales and administration (53,125)

Other expenses:

Interest (193)

Net income (9,068)

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TOPIC 7 STANDARD COSTING AND ANALYSIS OFVARIANCES

Exercise 7.11. Standard cost is mainly used for the purpose of planning, control, product

costing and pricing.

2. The ideal standard can be attained in an operating condition or situationthat is almost perfect. This assumes that there is no interruption and theproduction process is at the maximum level. The practical or attainablestandard is the standard that is fixed at a certain level according to the bestpractices of the company or industry. This standard assumes an efficientproduction process under normal operating conditions.

3. There are two main approaches used to determine the standard cost. Theseare task analysis and historical data analysis. Task analysis involvesdetailed engineering analyses of the tasks of the production process one at atime. Historical data analysis uses experience or past information as aguide. The combination of both these methods can also be used todetermine the standard cost.

4. Standard costing makes management tasks such as the preparation ofbudget, pricing of product, keeping of records and financial reportingeasier. Besides this, it also functions as an indicator in the performance

evaluation of employees or departments. It is also a factor that motivates theemployees to raise the quality of their work so as to attain the standarddesired. However, it can neglect product quality, not suitable in a modernmanufacturing environment, not practical to flexible manufacturingoperation and expensive to develop.

Exercise 7.2

(a) Actual price paid for each kilogramme of materials

First week = RM2,040/400 kg = RM5.10 per kg

Second week + RM3,315/650 kg = RM5.10 per kg

(b) Materials price variance = QP (AP SP)

First week: 400 (RM5.10 RM5.00) = RM40 U

Second week: 650 (RM5.10 RM5.00) = RM65 U

(c) Standard quantity of materials for 220 boxes: 2 kg 220 = 440 kg

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(d) Materials quantity variance = SP (QU SQ)

First week: RM5 (400 440) = RM200 F

Second week: RM5 (400 440) = RM200 F

(e) The materials price variance increased because the quantity purchasedincreased in the second week (under the condition where there is nochange in purchase price per kg). Observe how the raw materials pricevariance is calculated based on the quantity purchased (QP). This is

because the difference in the standard price and the actual price (pricevariance) is related to the purchases made by the company.

Exercise 7.3

(a) Direct labour actual rate= RM1,216 / 190 hours= RM6.40 per hour

(b) Direct labour rate variance= AH (AR SR)= 190 hours (RM6.40 RM6.00)= RM76 U

(c) Standard hours allowed for 70 units:= 3 hours 70 units

= 210 hours

(d) Direct labour efficiency variance= SR (AH SH)= RM6.00 (190 hours 210 hours)= RM120 F

Exercise 7.4

(a) Variable overhead variance

= Actual variable overhead (AH SR)= RM2,200,000 (440,000 RM5.00)= RM0 F

Variable overhead efficiency variance= SR (AH SH)= RM5.00 (440,000 460,000*)= RM100,000 F

*SH = 92,000 x 5 hours per unit = 460,000

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(b) Budgeted fixed overhead variance= Actual fixed overhead Budgeted fixed overhead= RM3,610,000 RM4,000,000*

= RM390,000 F*Budgeted fixed overhead = 500,000 hours RM8.00 per hour

Fixed overhead volume variance= Budgeted fixed overhead Applied fixed overhead= RM4,000,000 RM3,680,000*= RM320,000 (positive)**

*Applied fixed overhead = RM8 per hour 5 hours per unit 92,000 units

** The volume variance is not described as favourable or unfavourable. Someaccountants use a positive volume variance indicator as being unfavourable, anda negative volume variance indicator as being favourable.

Exercise 7.5

1.(a) Under the standard costing system, the standard cost is used for product

costing and also for the purpose of control. The cost entered into the work-in-process inventory is the standard cost. The standard cost will then flowthrough all the production accounts. When the product is completed, thestandard cost for the finished product will be transferred to the finished

goods inventory account. When the product is sold, the standard cost willbe transferred from the finished goods inventory account to the cost ofgoods sold account.

(b) For the purpose of control, the standard costing system is used as abenchmark for comparison with the actual cost. The concept ofmanagement by exception will be used to study the significant variancesand corrective actions will be taken. For the purpose of product costing, thestandard costing system is used to identify the production cost of theproduct or service. The product cost is required for the purpose of financial

accounting and management accounting.(c) The raw materials price variance is based on the quantity purchased (QP).

The difference between the actual price and the standard price, known asthe variance, is related to the purchasing function of the company. Toensure that follow-up action is taken immediately, the variance should becalculated as soon as the raw materials are purchased.

The materials quantity variance calculated is based on the total rawmaterials used in production (QU). The quantity variance emphasises thedifference between the actual quantity of raw materials used (QU) and the

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standard quantity allowed (SQ). Therefore, it is more appropriate tocalculate the quantity variance based on the actual quantity used inproduction.

(d) An unfavourable variable overhead variance does not mean that thecompany has paid more for the electrical kilowatt-hour rate. Theunfavourable variance can be caused by excess expense for each kilowatt-hour, or because the company has used more electricity than estimated or acombination of these two reasons.

(e) Among the factors that are normally considered by a manager indetermining the importance of a variance are the size of the variance, thelevel at which the variance will recur, the trend in the variance, thecontrollability of the variance, and considerations of the possible costs and

interests.

(f) The advantages of using a standard costing system are:

(i) The variance is used as a measuring tool in the performanceevaluation and reward for the employees.

(ii) Standard cost provides useful information for making comparison ofcosts. The standard cost enables the management accountant tocalculate the standard cost allocated, by giving the actual output,where it can become a benchmark for comparing with the actual cost.

(iii) Where variance can be used as a tool for measuring performance, itbecomes a motivation for the employees to attain the standard that hasbeen fixed.

(iv) The standard costing system usually is cheaper than the actual ornormal costing system.

(v) Calculations based on the standard cost and cost variance enable themanager to practise management by exception.

(vi) The use of standard cost in product costing is more stable or firmcompared to using actual production cost.

(g) The fixed overhead volume variance is the difference between the budgetedfixed overhead and the applied fixed overhead. A more accurate descriptionof this variance is that it is an approach or way to adjust the two differentpurposes of the standard costing system, namely the purposes of controland product costing. For the purpose of control, the budgeted fixedoverhead declares the fixed feature of this cost, where changes in the levelof activity will not affect the budgeted fixed overhead. For the purpose ofproduct costing, the budgeted fixed overhead will be divided according tothe basis of activity, and will be absorbed into the product based on thefixed overhead rate. The effect of these two purposes of using the standard

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costing system is that the budgeted fixed overhead and the applied fixedoverhead will differ when the actual production activity differs with the

budgeted production activity.

2. (a) Calculation of variances:(i) Variable overhead expense variance

= Actual variable overhead (AH SR)= RM770,000 (125,000 RM6.00)= RM20,000 U

(ii) Variable overhead efficiency variance= SR (AH SH)= RM6.00 (125,000 110,000*)= RM90,000 U

* SH = 37,000 units 3 hours per unit = 111,000

(iii) Fixed overhead budget variance= Actual fixed overhead Budgeted fixed overhead= RM105,000 RM111,000= RM6,000 F

(iv) Fixed overhead production volume variance= Budgeted fixed overhead Applied fixed overhead

= RM110,000 RM102,675*= RM8,325 (Positive indicator)**

* Applied fixed overhead

= (Determined fixed overhead rate) (Standard hours allowed)= (RM111,000/40,000) 37,000= RM102,675

**The volume variance is not described as favourable or unfavourable.

Some accountants use a positive volume variance indicator as beingunfavourable, and a negative volume variance indicator as beingfavourable.

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(b)

Figure: Variable overhead variance analysis diagram

Figure: Fixed overhead variance analysis diagram

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3.

Direct Labour Raw MaterialsPrice @ Standard rate for each input unit RM20 per hour

e

RM8 per kgStandard quantity for each output unit 4 hours per unit f 2.75 kg per unit

Actual quantity used for each input unit 3.5 hours 3 kg per unit a

Price @ Actual rate for each input unit RM21 per hour RM 7 per kg

Actual output 10,000 units 10,000 units

Raw materials price variance - RM30,000 F

Raw materials quantity variance - RM20,000 Ub

Total raw materials variance - RM10,000 F

Direct labour rate variance RM35,000 Ud -

Direct labour efficiency variance RM100,000 F

Total direct labour variance RM65,000 F

Explanation:(a) Raw materials price variance = QP (AP SP)

RM30,000 = QP (RM7 RM8)QP = 30,000 kg

Actual quantity used = Quantity purchased

QU = QP = 30,000 kgActual quantity for each output unit =

30,000 kg= 3 kg per unit

10,000 units

(b) Total raw materials variance = Price variance + Quantityvariance

RM10,000 F = RM30,000 U + Quantity varianceQuantity variance = RM20,000 U

(c) Raw materials quantity variance = SP (QU SQ)

RM20,000 U = RM8 (30,000 SQ)SQ = 27,500 kg

Standard quantity per unit =27, 500 kg

= 2.75 kg per unit10,000 units

(d) Total direct labour variance = Rate variance + Efficiencyvariance

RM65,000 F = Rate variance + RM100,000 FEfficiency variance = RM35,000 U

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(e) AH = 10,000 units x3.5 hours per unit = 35,000 hoursDirect labour rate variance = AH (AR SR)

RM35,000 U = 35,000 (RM21 SR)

SR = RM20

(f) Direct labour efficiency variance = SR (AH SH)RM100,000 F = RM20 (35,000 SH)

SR = 40,000 hours

Standard hours per unit =40,000 hours

10,000 units

= 4 hours per unit

TOPIC 8 DECISION MAKINGExercise 8.1

1. Relevant cost is one of the important features of accounting information.Relevant means that the information differs among the availablealternatives and it is useful for the purpose of decision making. There aretwo features of relevant cost, namely, cost that will happen in the future,and cost that differs among alternatives. Therefore, future cost is notnecessarily relevant and it is only relevant if it fills the second condition,that is, it differs among the alternatives.

For example, in the decision of whether to make or buy components, one ofthe costs involved is the supervisors salary. Suppose that if the companymakes its own components, the supervisors salary is RM2,000 per month,and if the company chooses to buy the components, the supervisors salaryis still RM2,000 per month. In this example, the supervisors salary is afuture cost but it is not relevant because it does not change with the buyingor making alternatives.

Not all relevant cost information can be obtained from the accountingrecords. Opportunity cost, for example, is not recorded in the accounts.

2. Opportunity cost is a benefit that has to be let go of as a result of choosing acertain alternative. In making a decision on whether to buy a newproduction facility or not, an example of an opportunity cost is the salevalue of the old machine. If the company chooses to maintain the availableproduction facility, then the company will not obtain the benefit from thesale of the old production facility.

3. An avoidable fixed cost is a cost that can be saved or reduced. For example,in making a decision to maintain or discontinue a product, one of theavoidable costs is the supervisors salary. This is because if the company

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chooses to discontinue a line of product, the possibility is that the companywill also stop employing the supervisor for this line of products. Thus, thefixed cost that can be reduced is called an avoidable fixed cost.

An unavoidable direct fixed cost is a fixed cost connected to a line ofproduct that is present no matter whether the company chooses to keep orstop the line of product. An example is the deprecation of the machines.

A joint fixed cost is a fixed cost that is shared by various lines of products.There are two types of joint fixed cost, namely, production cost andadministrative cost. Usually the joint fixed production cost is difficult toallocate accurately to each type of product.

An example of this is the salary of the general manager of the company.Other than that, there is also the joint production cost that is allocated toeach type of product according definite methods (physical units, realisablesales value etc.). Joint fixed cost is an irrelevant cost.

4. In the decision making for this special order, only the variable productioncost is relevant, that is, RM225 (RM160 + 40 + 25).

To determine whether Syarikat Waja should accept or decline this specialorder, a comparison must be made between the increase in revenue and theincrease in costs related to this special order.

Increase in revenue: (RM240 per tonne 400 tonnes) RM96,000

Increase in cost: (RM225 per tonne 400 tonnes) (RM90,000)

Increase in profit RM6,000Syarikat Waja will obtain an increase of RM6,000 in profit if the specialorder is accepted. Other than that, the special order will not interruptnormal sales of the company because Waja is operating at 85% level.

5. (a)

MDK-245 MDK-987Sales RM30.00 RM56.00

variable cost (24.00) (46.00)

Contribution margin RM6.00 RM10.00

Direct labour hours requirement 2 4

Contribution margin per direct labour hour RM3.00 RM2.50

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(b) As the company can sell as many of the two products that itmanufactures, it is more profitable for Syarikat MDK if it focuses itsproduction only on product MDK-245 because the contribution margin

per capacity for the product is higher compared to that of product MDK-987. Therefore, with the direct labour hour capacity of 120,000 hours peryear, Syarikat MDK can produce 60,000 units of MDK-245 a year(120,000 hours 2).