Financial and Management Accounting Notes 12

7/28/2019 Financial and Management Accounting Notes 12

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Financial and Management Accounting Unit 12

Sikkim Manipal University 243

Unit 12 Understanding Cost

Structure:

12.1 Introduction

Objectives

12.2 Meaning

Self Assessment Questions 1

12.3 Concepts

Self Assessment Question 2

12.4 Components


12.5 Total costSelf Assessment Questions 4

12.6 Cost sheet


12.7 Format


12.8 Valuation of WIP


Terminal Questions

Answer to SAQs and TQs

12.1 Introduction

The need for accounting arose because of limitations of human memory. To preserve the

knowledge, various steps are taken both in the past and in future. It is necessary to record all the

business purposes. Accounting is a science as well ass an art of recording the business

transactions in the books of accounts systematically and scientifically.

Until the1980s, the Cost Accounting was in the domain of the Engineer. Its integration with

financial accounting started when Accountants started to audit the cost records. The costing

technique play a vital role in gathering and analyzing revenue and cost data to assist

management in decision making. The point of emphasis has logically shifted from cost

accumulation to cost analysis, a change from a limited cost finding function on to a broader


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managerial function. All managerial policies and decisions permeate all phases of cost

accounting and cost information helps in :

Acquiring plant and machinery

Adding or reducing a product

Buying or making parts

Special pricing of products

Replacement of equipments.

Learning Objectives:

After studying this unit, you should be able to understand the following

1. Explain the meaning of cost.

2. Analyse the cost concepts.

3. Understand the element of cost.

4. Familiarize with components of total cost.

5. Prepare the statement of cost.

6. Understand the valuation procedure of work in progress.

12.2 Meaning Of Cost

Cost is the amount of resources given up in exchange of some goods and services. The

resources are expressed in money or moneys equivalent. CIMA defines the term Cost as the

amount of expenditure (actual or notional) incurred on or attributable to a given thing.. The giventhing may be taken as a product, service or any other activity. While the actual expenditure refers

to the amount spent , the notional expenditure does not involve in any cash outlay. It does not

reflect itself in the accounting records. But, it is important for the purpose of comparison of cost

and in decision making.


1. CA ___________ resources scarified .

2. Resource are in _________________.

12.3 Cost Concepts

Cost represents expenses. It is a sacrifice in advance. It concerns with a release of something of

value. The cost is used :

The expected cost of a particular action. It is what the cost is expected to be in

choosing a course of action.


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The cost of something purchase i.e. the price actually paid for it. It is the price paid or payable,

time of purchase of goods or services. The price paid is the amount of money, the holding of

which is foregone.

The cost of attaining some end the sacrifices actually made to attain it - experienced costs.


1. Cost is ________________.

2. cost __________ advance.

12.4 Component Or Element Of Cost

Any product that is manufactured, whether a pin or a computer calls for consumption of some

resources. The management, for its planning and control function must know the cost of using

their resources. Therefore, the elements of costs are classified as materials, labor and

expenses. These three elements of cost would be grouped in to direct and indirect categories

Following are the three broad elements of cost

Materials

Labor

Expenses

Materials: The term materials may be defined as the substances from which products are

manufactured. These materials may be in a raw or a manufactured state. Materials may be

direct or indirect.

It is an accepted fact, based on statistics, that 75% of the total cost is in the form of raw materials.

These are the physical items used in manufacturing. These are the physical items used in

manufacturing. These can be traced precisely and convincingly to the unit of product. It refers to

Cost

Direct Indirect

RawMaterial

Labor ChargeableExpenses

Material Labor Overheads


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all materials brought for being converted into finished product example log of wood awaiting to be

converted into doors and windows. Therefore, the term raw indicates that the firm using the

materials has not yet processed them. But what is raw material for one manufacturer might be a

finished product for another : for example bricks, cement, steel is a raw material for aconstruction company where for a steel producing firm it is the final product. For admission to I

MBA, the raw materials are the graduates.

Indirect materials: These are materials which do ot become part of the product. These

materials are consumed in the course of production. These materials cannot be conveniently

assigned to specific physical units. Some of the indirect materials are consumable stores, oil,

lubricants, cotton wastes, printing and stationers. Indirect materials may relate to the factory, the

office and administration and the selling and distribution divisions.

Direct Labor: It represents wages payable / paid to those employees who directly engaged in the

conversion of raw materials into final product. They operate in the manufacturing machinery and

equipment. They directly handle the raw materials, work in process and the finished goods on

the production line. They account is to see whether the work done on a particular product or a

specific group of products.

Examples: In a furniture mart, the carpenters engaged in conversion of raw wood with sofa set,

computer tables, windows, doors , benches are said to be the direct workers. In an engineering

workshop, the wages paid to the operators working with laths, drilling, cutting, shaping machines

can be specifically assigned to the products concerned. Therefore, the direct labor costs can be

traceable to individual products.

Indirect Labor: Indirect labor is the labor which is not directly engaged in the production

operations. They are, however, engage themselves to help in the production operations. Such

labor does not alter the construction, composition or conditions of the product. Example

foremans salary, storekeepers salary, Factory managers salary etc. The indirect labor may

relate to the factory, office and administration and selling and distribution divisions.

Chargeable Expenses : The items are of expenses which may be allocated to a specific job,

process or operation. The utility of expenses is exhausted on completion of the job concerned.Therefore, logically, they are treated as direct expenses. The chargeable expenses are usually

incurred when the business concern undertakes some outside constructional work far away from

the principal premises, example widening of road by L & T construction company for the new

International Airport. The popular items fall under this category are:


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a) cost of pattern, designs, drawings specifically prepared for a particular job

b) hire charges of special machinery, plant or equipment

c) architects and surveyors fees in connection with particular job or contracts.

d) Cost of any experimental work carried out for a particular job

Indirect expenses: These are those expenses which cannot be directly and conveniently

allocated to specific cost units / cost centers.. They are apportioned. Examples are rent, rates

and insurance. They may relate to the factory, the office and administration and selling and

distribution divisions. These are now popularly known as overheads. These costs arise as a

result of overall operations of a business. These costs are shared by all the products. It includes

all manufacturing and non-manufacturing suppliers and services. These costs cannot be

associated withy a particular product or unit. Overheads remain relatively constant from period to

period. At- least they do not fluctuate in amount in relations to changing levels of factor

production. Overhead costs are classified by functions of an organization into :

Factory, works or manufacturing overheads

Administration, office, establishment or general overheads

Selling and distribution overheads.


1. Cost compose ________________

2. Direct cost include__________.

3. Indirect cost are know as ___________.

4. Raw refers to ______________.

5. Indirect materials cannot be _____________.

6. Direct labor is ____ for __________.

7. Indirect labor is engaged for ________.

8. Chargeable expenses are ____________

9. Chargeable expenses are______________________ expand.

10. Indirect expenses are ________________.

11. IDE are known as _________________.

12.5 Components Of Total Cost

The components of total costs are based on functional classification. The various stages through

which the costs flow are:


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Prime cost : It is the total of direct materials cost, direct labor cost and chargeable expenses/

Factory Cost : It consists of prime cost and factory overheads/

Office cost or Cost of Production: It comprises of factory cost and office and administration

overheads.

Total Cost : By adding selling and distribution expenses to cost of production, one can get the

total cost or cost of sales.


1. Prime cost is _______________.

2. Factory cost is _____________.

3. Cost of production is _____________.

4. Total cost is ___________________-.5. Sales is _________________.

6. Profit is __________________.

12.5 Statement Of Cost Sheet

Cost sheet is a statement prepared to show the different components of the total cost. It

generally shows the total cost and sales as well as cost and selling price per unit. It is generally

presented in a tabular form.


1. Cost sheet shows ___________ cost.

2. It is prepared _________ form.


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12.5 Format Specimen Of Cost Sheet

Name of Company _______________________________

Cost sheet for the product __________________________

For the year ending _______________________________

Output in units

Particulars Total Per unit

Rs. Rs.

Raw Materials consumed:

Opening Stock of Raw Material

ADD: Purchases of Raw materials

Add: Carriage on purchases

LESS: Closing stock of Raw material

Raw Material Consumed (RMC) x x x

Director Labor x x x

Chargeable Expenses x x x

Prime Cost XXX

Factory overheads x x x

Factory Cost XXX

Office and Administration Overheads x x x

Cost of Production XXX

Inventory valuation

Opening stock of finished goods xxx

Less: closing stock of finished goods : always

To be valued at cost of production ( xxx )

Cost of Goods Sold (COGS) XXX

Selling and Distribution Overheads x x x

Total Cost of Cost of Sales XXX

Profit (balancing figure) x x x

Sales Revenue or Sales XXX


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Example:

Prepare a cost sheet Raw materials consumed Rs.1,60,000. Direct wages Rs.80,000. Factory

overheads Rs.16,000. Office overheads 10% of factory cost. Selling overheads Rs.12,000. Units

produced 4,000.Selling price per unit Rs.100.

Solution: Cost Sheet

Raw materials 1,60,000

Direct wages 80,000

Prime cost 2,40,000

Factory overheads 16,000

Factory Cost 2,56,000

Office overheads (10 % of factory cost) 25,600

Cost of Production 2,81,600

Less : Closing stock of finished goods to be valued at

Cost of production : 2,81,600 x 400 */ 4000** ( 28,160)

Cost of Goods Sold 2,53,440

Selling overheads 12,000

Cost of Sales / Total Cost 2,65,440

PROFIT (balancing figure) 94,560

Sales (3600 x Rs.100) 3,60,000

*Closing stock in units : Units produced minus units sold

**Denominator should be the current year production in units.

Items not included in Cost Sheet:

a) Income tax

b) Dividends to shareholders

c) Commission to managing directors

d) Capital losses i.e. loss out of sales

e) Interest on loan or debentures or bank interest

f) Donations

g) Capital expenditure

h) Discounts on shares and debentures

i) Premium on redemption of shares and debentures

j) Underwriting commission


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k) Writing of goodwill, preliminary expenses

l) Reserve for bad debts

m) Transfer to all reserves or appropriation of profits

n) Share premiumo) Interest on capital

p) Drawing of proprietors

q) All personal expenses of owner


1. RMC is ___________.

2. COGS is _____________.

3. Closing inventory is valued _____________________.

4. Profit ______________ figure.

12.6 Valuation Of Work-in-Progress

In a manufacturing enterprise, there may be certain amount of goods in a partly manufactured

state at the end of a particular period. These are called as semi manufactured goods or work

in progress. The WIP is valued according to the value of raw material, labor and expenses

which has so far incurred to the date of closing of financial period. The work in progress has

usually three components:

Material work in progress cost to date

Labor to date

Manufacturing expenses incurred to date

The treatment of work in progress is to add the opening work in progress to the concerned cost

and deduct the closing work in progress against it.


1. WIP is nether ____________ nor __________.

2. WIP is treated as ________________.

3. Profit margin as total cost is _____________.

4. Profit margin as selling price is ___________.

5. 25% profit on SP is ______________.

6. 25% on TC is ___________.

Example:

DR Ltd manufactures Electronic components. The following figures are supplied Rs.


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Purchase of Raw Material 2,00,000. Direct labor 1,20,000. Carriage inwards 20,000

Manufacturing expenses 10,000. Stock of raw materials : opening 25,000, closing 75,000. Work

in progress on 1:4:2006 : Materials 2,000 Labor 5,000 Expenses 1,000. Calculate the Factory

cost..

Solution:

COST OF PRODUCTION FOR THE YEAR ENDED 31 st March 2008

Direct Raw materials consumed:

Opening stock of raw material 25,000

Add: Purchase of raw materials 2,00,000

Add: carriage inwards 20,000

Less: Closing stock of raw materials (75,000)

Add: Opening Work in progress of materials 5,000

Less: Closing work in progress of materials (2,000)

Raw materials consumed 1,73,000

Director Labor 1,20,000

Add: Opening WIP of labor 8,000

Less: Closing WIP of labor (5,000)

_________ 1,.23,000

___________

PRIME COST 2,96,000

FACTORY OVERHEADS

Manufacturing expenses 10,000

Add:: opening WIP of expenses 2,000

Less : Closing WIP of expenses ( 1,000)

___________ 11,000

____________


Problem 1:

Calculate the cost of raw materials purchased: Opening stock of raw materials Rs.10,000.

Closing stock of raw materials Rs.15,000. Expenses on purchases Rs.5,000. Direct wages

Rs.50,000 Prime cost s Rs.1,00,000.


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Solution:

Computation of cost of raw materials purchased

Opening Stock of raw materials 10,000

Add Purchases X

Expenses on purchases 5,000

___________

15,000 + X

Less closing stock of raw materials (15,000)

____________

Raw materials consumed X

Direct wages 50,000

_____________

Prime Cost 50,000 + X

Prime cost given in the problem is Rs.1,00,000

Hence substituting , 1,00,000 = 50,000 + X Therefore X = Rs.50,000

Cost of Raw Materials is Rs.50,000


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Problem 2:

Prepare a cost sheet:

Direct materials Rs.2,00,000. Factory expenses Rs.1,20,000. Office expenses Rs.90,000

Total sales Rs.6,50,000. Prime cost Rs.4,10,000 . 10 % of the output is in stock.

Solution: Cost Sheet

Direct materials 2,00,000

Direct wages (Prime cost minus Direct materials 2,10,000

_____________

Prime Cost 4,10,000

Factory expenses 1,20,000

_____________


Office expenses 90,000

_____________


Less: closing stock of finished goods 10 % of 6.20,000 ( 62,000.)

_____________

Cost of Sales 5,58,000

Profit (balancing figure) 92,000

_____________

SALES 6,50,000

Problem 3 :

The following information is obtained:

Stock on Jan 1, 2007 : Raw materials 40,000 Finished goods 30, 000. Purchases of Raw

materials 2,40,000. Direct wages 1,36,000. Works expenses 70,400. Dividends paid 40,000.

Office expenses 24,000. Depreciation 10,000. Selling and Distribution expenses 32,000. Work in

progress : 1.1.2007 64,000. 31:.12.:2007 72,000. Goodwill written off 40,000. Stock on

31.12.2007 Raw materials 42,000 Finished goods 32,000. Sale of finished goods 5,50,000.

Payment of sales tax 16,000. Prepare a cost sheet.


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Solution Cost Sheet

Opening stock of Raw materials 40,000

Add: Purchases of raw materials 2,40,000

Less: Closing stock of raw materials ( 42,000)___________


Direct wages 1,36,000

____________

Prime Cost 3,74,000

Works Overheads

Works expenses 70,400

Depreciation 10,000

____________

4,54,400

Add : opening stock of WIP 64,000

Less: Closing stock of WIP ( 72,000)

____________

Works Cost 4,46,400

Office and Administration overheads

Office expenses 24,000

____________


Add : opening stock of finished goods 30,000

Less : Closing stock of finished goods ( 32,000)

____________

Cost of Goods sold 4,68,400

Selling and Distribution expenses 32,000

_____________

Cost of Sales 5,00,400

Sales Tax 16,000

_____________

Total Cost

5,16,400

Profit 33,600

_____________

Sales 5,50,000


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Problem 4:

Prepare a cost sheet

Raw materials Rs.33,000. Unproductive wages Rs.10,500. Factory lighting Rs.2,200. Motive

power Rs.4,400. Directors fees (Works) Rs.1,000. Factory cleaning Rs.500. Factory stationery

Rs.750. Loose tools written off Rs.600. Water supply Rs.1,200. Office insurance Rs.500.

Chargeable expenses Rs.3,000. Depreciation: Plant and machinery Rs.2,000. Office Building

Rs.1,000. Delivery vans Rs.200. Upkeep of Delivery van Rs.700. Commission on sales Rs.1,500.

Productive wages Rs.35,000. Factory rent and taxes Rs.7,500. Factory heating Rs.1,500.

Haulage Rs.3,000. Directors fees (office) Rs.2,000. Sundry office expenses Rs.200. Office

stationery Rs.900. Rent and taxes (office) Rs.500. Factory insurance Rs.1,100. Legal expenses

Rs.400. rent of warehouse Rs.300. Bad debts Rs.100. Advertising Rs.300. Sales Department

salaries Rs.1,500. Bank charges Rs.50, Reserve for Doubtful debts Rs.100..Debenture interest

Rs.20,000. Income tax Rs.22,500. Total output 20,000 tons.

Solution

Statement of Cost (Production 20,000 tons)

Direct materials consumed 33,000

Productive wages 35,000

Chargeable expenses 3,000

____________

Prime Cost 71,000

Works Expenses

Unproductive wages 10,500

Factory rent and taxes 7,500

Factory lighting 2,200

Factory heating 1,500

Motive power 4,400

Haulage 3,000

Directors fees 1,000Factory cleaning 500

Factory stationery 750

Loose tools written off 600

Water supply 1,200

Factory insurance 1,100


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Depreciation of Plant and machinery 2,000

__________ 36,250

____________

Factory / Works cost 1,07,250Office and Administration expenses

Directors fees 2,000

Sundry expenses 200

Office stationery 900

Rent and taxes 500

Office insurance 500

Legal expenses 400

Bank charges 50

Depreciation of office building 1,000

_____________ 5,550

__________


Selling and Distribution Expenses

Rent of warehouse 300

Depreciation of Delivery vans 200

Bad debts 100

Advertising 300

Sales Department salaries 1,500

Upkeep of Delivery van 700

Commission on sales 1,500

4,600

Total Cost / Cost of Sales 1,17,400

Cost Per unit : Total Cost / No of Units produced : 117400 / 20,000 Rs.5.87

Note: Ignore reserve for doubtful debts.

Ignore Income taxIgnore Debenture interest


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Problem 5:

The following extract refers to a commodity for the half year ending 31st March 2008. Prepare a

cost statement.

Purchase of raw materials Rs.1,20,000. Rent, rate, insurance and works expenses Rs.40,000.

Direct wages Rs.1,00,000. Carriage inwards Rs.1,440. Opening stock Raw materials Rs.20,000,

Finished goods (1000 units) Rs.16,000. Closi9ng stock : raw material Rs.22,240 Finished Goods

(2,000 tons). Work in progress : opening Rs.4,800 and closing Rs.16,000. Sale of finished goods

Rs.3,00,000. Cost of factory Rs.8,000.

Advertising, discounts allowed and selling costs Re.1 per ton sold. Production during the year is

16,000 tons. Prepare a cost sheet.

Solution

Statement of Cost

Direct materials

Opening stock or raw materials 20,000

Add: Purchases of raw materials 1,20,000

Add : carriage inwards 1,440

Less: Closing stock of raw materials (22,240)

____________


Direct Wages 1,00,000

__________

Prime Cost 2,19,200

Works Expenses

Cost of factory 8,000

Rent, rate and insurance 40,000

Add: opening WIP 4,800

Less: Closing WIP (16,000)

__________Factory / Works cost 2,56,000

Office and administration expenses Nil

__________

Cost of production 2,56,000


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Inventory valuation

Opening stock of finished goods 16,000

Less : Closing stock of finished goods to be valued at cost of

Production (32,000)__________

Cost of Good Sold 2,40,000

Selling and Distribution Expenses *

Advertisement and discount allowed 15,000

__________

Total Cost or cost of sales 2,55,000

Profit 45,000

__________

Sales** 3,00,000

*To be valued only at number of units sold. Opening stock of finished goods + production minus

closing stock = Number of units sold.

** Always to be valued at number of units sold. Number of units sold x Selling price per unit.

Tender Cost Sheet or Quotations

Frequently, a manufacturer of capital goods and consumer durable goods is required to quote the

price at which he can supply a particular article. Moreover, demand for certain seasonal articles

need to be taken into account. The manufacturer has to fix a competitive price to take care of

inflationary trends on the input. These aspects need an estimation at the production level itself.

For this purpose, consider the following principle:

Works expenses are based on direct wages

Office expenses are based on works / factory cost.

Finally, since the costs are estimated, the profits can be related either to cost or to the selling

price. The formula is :

If profit percentage is given on Profit = Total Cost x given percentage ex.

Cost price ie. On Total cost for 20 %, TC x 20/100 or 25%, it is TC x 25 /

If profit percentage is given on Profit = Total cost x given percentage / 100

Selling price, bring the percentage minus same given percentage eg. For 20 %

to cost price TC x 20 / 100 minus 20for 25%, it is

TC x 25 / 100 minus 25 %


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Problem 6:

The cost data is as follows:

Raw materials consumed Rs.1,82,000. Direct wages Rs.40,000. Chargeable expenses

Rs.20,000. Opening stock of finished goods (1,000 units) Rs.32,000. Closing stock 2,000 units.

Factory overheads 100 % of direct labor. Office overheads 10% of works cost. Selling of

Distribution expenses Rs.4 per unit sold. Units produced 10,000. Profit mark-up 20% on selling

price. Prepare a cost sheet.

Solution

STATEMENT OF COST


Direct wages 40,000

Chargeable expenses 20,000

_____________

Prime Cost 2,42,000

Factory expenses at 100 % on direct wages 40,000

_____________

Works cost 2,82,000

Office and administrative expenses 10 % of works cost 28,200

_____________

Cost of Production 3,10,200Inventory valuation

Opening stock of finished goods 32,000

Less : Closing stock of finished goods at COP (62,040)

_____________

Cost of Goods sold 2,80,160

Selling and Distribution overheads at Rs.4 per unit sold 36,000

_____________

Cost of Sales or Total sales 3,16,160

Profit 20 % on Selling Price : TC x 20 / 100 20 or .

3,16,160 x 20/100 80 79,040

Tender Price being sales 3,95,200


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Answer Self Assessment Questions


1. Amount of

2. Monetary term


1. Expense

2. Sacrifice in


1. Direct and Indirect

2. Raw material, labor, direct expenses

3. Overheads

4. Crude form of a substance.

5. Charged to product

6. Conversion of materials to finished products

7. Production operations

8. Allocated

9. Direct

10. Apportioned

11. Overheads


1. Aggregation of DM, DL and DE.

2. PC + FOHS

3. FC + AOSH

4. COP + DOSH

5. TC + profit

6. Sales total cost.


1. Components2. Tabular


1. Opening stock + purchase closing stock.

2. COP + Inventory valuation.


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3. At current year COP

4. Balancing figure between SP and TC.


1. Raw material, finished product.

2. Add opening WIP and deduct closing WIP

3. TC x given percentage.

4. (TC x given percentage) 100 given Percentage.

5. TC x 25 / 100 25.

6. TC x 25 / 100.

Answer for Terminal Questions

1. Cost of production for 4000 units Rs 8,20, 400 cost of production for 1000 units Rs 2,26,990.

Total cost (4000 units ) Rs 6,80,400 (1000 units) Rs 2,26,990 profit for quotation of 1000

units Rs 25,221.

2. Cost of production Rs 54, 60,000 per ton Rs 1092 Total cost Rs 64,60,000 per unit Rs

1,292.

3. Total cost of the tender Rs 13,50,000 Sales Rs 15,00,000

Documents

Financial and Management Accounting Notes 12