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Responsibility Accounting :..............................................................................................................................................................................................................

RESPONSIBILITY ACCOUNTING :..................................................................................................................................................................................................

PROFIT CENTRE :.........................................................................................................................................................................................................................

COST CENTRE:.............................................................................................................................................................................................................................

INVESTMENT CENTRE:.................................................................................................................................................................................................................

Maintaining a cost database:...........................................................................................................................................................................................................

Fixed and Variable Production Overheads : and Cost Behaviour of.................................................................................................................................................

VARIABLE COSTS :.......................................................................................................................................................................................................................

FIXED PRODUCTION COSTS :.......................................................................................................................................................................................................

SEMI-FIXED (or STEP-FIXED COSTS) :..........................................................................................................................................................................................

SEMI-VARIABLE (or MIXED COSTS) :............................................................................................................................................................................................Relevant Range................................................................................................................................................................................................................................

Relevant Range:..........................................................................................................................................................................................................................

Selling Costs.....................................................................................................................................................................................................................................

Selling Costs :..............................................................................................................................................................................................................................

Conversion Costs:............................................................................................................................................................................................................................

Conversion Costs :.......................................................................................................................................................................................................................

HIGH-LOW COST ANALYSIS:........................................................................................................................................................................................................

contribution:....................................................................................................................................................................................................................................

budget:............................................................................................................................................................................................................................................

“Standard Hours Produced”:.......................................................................................................................................................................................................

“Standard PROFIT STATEMENT”:.................................................................................................................................................................................................

STATIC BUDGET...........................................................................................................................................................................................................................

FLEXED BUDGET..........................................................................................................................................................................................................................

BILL OF MATERIALS.....................................................................................................................................................................................................................

STANDARD COST CARD...............................................................................................................................................................................................................

more definitions..........................................................................................................................................................................................................................

T 102 : TOPIC 1: NATURE OF COSTS, COST CLASSIFICATION, COST BEHAVIOUR AND COST ESTIMATION................................ .............................. .......................

ECIAL FORMULAS TO LEARN :...........................................................................................................................................................................................................

HAPTER 2 DRURY : COST TERMS AND CONCEPTS.............................................................................................................................................................................

need attention:............................................................................................................................................................................................................................

PRIME COST.................................................................................................................................................................................................................................

MANUFACTURING OVERHEAD :...................................................................................................................................................................................................

PRODUCT COSTS :.......................................................................................................................................................................................................................

PERIOD COSTS :...........................................................................................................................................................................................................................

AVOIDABLE=...................................................................................................................................................................................................................................

UNAVOIDABLE.................................................................................................................................................................................................................................

INCREMENTAL or DIFFERENTIAL COSTS :....................................................................................................................................................................................

MARGINAL COSTS :......................................................................................................................................................................................................................


SEMI-VARIABLE (or MIXED COSTS) :............................................................................................................................................................................................

Cost Objects:....................................................................................................................................................................................................................................

DIRECT COSTS :...........................................................................................................................................................................................................................

INDIRECT COSTS :........................................................................................................................................................................................................................

Categories of manufacturing costs. – with direct/indirect costs. ..all those below down to cost allocations......................... ............................... ................... .

DIRECT MATERIALS :....................................................................................................................................................................................................................

INDIRECT MATERIALS :................................................................................................................................................................................................................

DIRECT LABOUR :........................................................................................................................................................................................................................

INDIRECT LABOUR.......................................................................................................................................................................................................................

DIRECT EXPENSE :.......................................................................................................................................................................................................................

PRIME COST.................................................................................................................................................................................................................................

MANUFACTURING OVERHEAD :...................................................................................................................................................................................................

COST ALLOCATIONS :..................................................................................................................................................................................................................

TOTAL MANUFATURING COST :...................................................................................................................................................................................................

Period and Product Costs............................................................................................................................................................................................................

PRODUCT COSTS :.......................................................................................................................................................................................................................

PERIOD COSTS :...........................................................................................................................................................................................................................

Relevant and Irrelevant Costs:.........................................................................................................................................................................................................



RELEVANT COSTS AND REVENUES :............................................................................................................................................................................................

IRRELEVANT COSTS AND REVENUES:..........................................................................................................................................................................................

Avoidable or Unavoidable costs:......................................................................................................................................................................................................

AVOIDABLE=...................................................................................................................................................................................................................................

UNAVOIDABLE.................................................................................................................................................................................................................................

Opportunity Costs:...........................................................................................................................................................................................................................

-Incremental /or Differential- and Marginal Costs............................................................................................................................................................................

INCREMENTAL or DIFFERENTIAL COSTS :....................................................................................................................................................................................

MARGINAL COSTS :......................................................................................................................................................................................................................

SUNK COSTS :..............................................................................................................................................................................................................................

VARIABLE COSTS :.......................................................................................................................................................................................................................FIXED PRODUCTION COSTS :.......................................................................................................................................................................................................


SEMI-VARIABLE (or MIXED COSTS) :............................................................................................................................................................................................

Relevant Range:..........................................................................................................................................................................................................................

HIGH-LOW COST ANALYSIS:........................................................................................................................................................................................................

contribution:....................................................................................................................................................................................................................................

more definitions..........................................................................................................................................................................................................................

Maintaining a cost database:...........................................................................................................................................................................................................

Fixed and Variable Production Overheads : and Cost Behaviour of.................................................................................................................................................

URY: CHAPTER 3: COST ASSIGNMENT . PAGES 47 – 78..................................................................................................................................................................................

AM........................................................................................................................................................................................................................................................

TRO........................................................................................................................................................................................................................................................

SIGNMENT OF : DIRECT AND INDIRECT COSTS................................................................................................................................................................................

e two stage allocation process for costs...........................................................................................................................................................................................

TRACTING RELEVANT COSTS FOR DECISION MAKING......................................................................................................................................................................

UDGETED OVERHEAD RATES.............................................................................................................................................................................................................

NDER + OVER RECOVERY OF OVERHEADS........................................................................................................................................................................................

AINTAINING THE DATABASE AT STANDARD COSTS...........................................................................................................................................................................

ON-MANUFACTURING OVERHEADS....................................................................................................................................................................................................

23 COST ESTIMATION AND COST BEHAVIOUR................................................................................................................................................................................

1) sPECIAL THINGS TO REMEMBER:.................................................................................................................................................................................................

2) tERMS..........................................................................................................................................................................................................................................

3) General: :.....................................................................................................................................................................................................................................

4) Mathematical principles applying to cost estimation methods:..................................................................................................................................................

5)SEPARATING SEMI-VARIABLE COSTS INTO FIXED AND VARIABLE Methods:.................................................................................................................................

1-Engineering methods...............................................................................................................................................................................................................

2-Inspection of accounts method................................................................................................................................................................................................

3-Graphical or scattergraph method...........................................................................................................................................................................................

4-High-low method......................................................................................................................................................................................................................

5-Least squares method..............................................................................................................................................................................................................

6-TESTS OF RELIABILITY:.............................................................................................................................................................................................................

..........................................................................................................................................................

6)relevant range and non-linear functions:.....................................................................................................................................................................................

7)summary of steps involved in estimating cost.............................................................................................................................................................................

8)MULTIple regression analysis:......................................................................................................................................................................................................

9)learning curve...............................................................................................................................................................................................................................

1-CUMULATIVE AVERAGE TIME-LEARNING MODEL......................................................................................................................................................................

B-INCREMENTAL UNIT-TIME LEARNING MODEL:..........................................................................................................................................................................

c- limitations of the learning curve............. ............................... .............................. .............................. ............................... .............................. .........................

d-learning curve is applicable to :...............................................................................................................................................................................................

10)INDEX VALUES:...........................................................................................................................................................................................................................

T 102 TOPIC 2 COSTING&MNGMNT :MATERIAL LABOUR & OVERHEADS :.......................................................................................................................................

H4 DRURY ACCOUNTING ENTRIES FOR A JOB COSTING SYSTEM.......................................................................................................................................................



TRo:.......................................................................................................................................................................................................................................................

ATERIALS (movements) RECORDING PROCEDURE............................................................................................................................................................................

ICING THE ISSUES OF MATERIALS PROBLEM:...................................................................................................................................................................................

ONTROL ACCOUNTS:..........................................................................................................................................................................................................................

CORDING RAW MATERIALS PURCHASE & RETURNS.........................................................................................................................................................................

CORDING ISSUE OF MATERIALS.......................................................................................................................................................................................................

cording Labour Costs:.......................................................................................................................................................................................................................

CORDING MANUFACTURING OVERHEADS........................................................................................................................................................................................

ON – MANUFACTURING OVERHEADS:................................................................................................................................................................................................

ON – MANUFACTURING OVERHEADS:

TO SCAN IN STILLcounting entries chapter pg 44 own notes +-: scan example in ..pg80/81 drury)counting entries chapter pg 44 own notes +-: Scan in pg 85 exercise question & answer for accounting entries example , and paste in here to see what end

oks like.

QUESTIONS1. DRURY TEXT BOOK CH 3 Q 17 WHY IS IS D, NOT C ? CAUSE YOU KNOW WHAT ACTUAL WAS, YOU KNOW UNDER-RECOVER, SO ADD THEM TO GET

BUDHGETED?

2. High low method : What do you use.. in exams hey sometimes mix it up so the 2 gives very different answers ,ALLWAYS USE THE ACTIVITY LEVEL (CODRIVER) to choose the high&low values- not the costs.????3. (So non-overheads (non-mnftr) expenses go in the General Ledger, but overheads(mnftr) go in the subsidiary ledger???) in a mnftr company.

RECORDING RAW MATERIALS PURCHASE & RETURNS

1) PURCHASE of raw materials:

DR Stores Ledger Control Account R5000CR Creditors Control Account R5000CR what about cost of sales ??????

2) RETURNS to supplier: (just the exact opposite)

DR Creditors Control Account R5000CR Stores Ledger Control Account R5000

1. For every entry in the Factory Overhead Control Account,for indirect expenses, a separate equal entry must be made in the individual overhead accothat item eg : electricity expense. and account heading there will be name of Cost centre followed by expense type,unless “cost centre” is not knownoverall property taxes- then just expense type-per drury.(job accounts subsidiary ledger)is it separate like creditors ledger or what? Is there one sepaone for : labour, direct overhead,indirect overheads,direct materisl, indirect materials or what? (So non-overheads (non-mnftr) expenses go in the Ge

Ledger, but overheads(mnftr) go in the subsidiary ledger???)2. Overhead CHARGED TO JOBS journal entry : (when it is charged to a specific job) Here it is taken out of ‘expense account’ and moved into

costs account’ so it can move forward in that account to right up to ‘inventory’ ,every entry in a control account is also entered in a ‘subsdiary ledgefor WIP it is ‘Jobs subsidiary ledger’ with details of each job, and for ‘overheads’ it is overheads ‘subsidiary ledger ‘ with details of each expense typeincurred (eg rent)(how do you get the total for expenses for f in stats. at yr end , if everything-all expenses- has been written out of “subsidiary & conaccounts”? what if there were returns, and errors(write backs) etc, so you must go to every transaction one by one to see if it is to go to fin stats?)foevery expense written out of overheads control account, must it also be written out of the ‘expense account itself’ eg ‘property taxes’ in the overheasubsidiary ledger. Is it actually kept in a “mnftring overheads subsidiary ledger” or not? How can it be kept in the GL together with the control accou

3.

TUT 102 : TOPIC 1: NATURE OF COSTS, COST CLASSIFICATION COST BEHAVIOUR AND COST ESTIMATION

SPECIAL FORMULAS TO LEARN :

Learning curve formula : y=axb

a. where b=log(%)/log2 Press on calc : %as decimal ie 80%=0.8 SO press: Log 0.8 / Log 2 =

aaaa

CHAPTER 2 DRURY : COST TERMS AND CONCEPTS EED ATTENTION:

PRIME COST

= Direct materials+Direct Labour +Direct Expenses. (excludes any indirect expenses)



MANUFACTURING OVERHEAD :

All manufacturing costs except : Direct materials+Direct Labour +Direct Expenses eg:rent of factory or depreciation of machines. Ittherefore includes : NB: Indirect materials,labour and expenses.

PRODUCT COSTS :

Costs that ARE included in the calc. of inventory for the period,and are not recorded as expenses for the period. (incl. work in progreONLY MANUFACTURING OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock. Product costs=TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg:distribution+telephone for telesales .as per book exactly: Certain Admin Overheads or selling overheads may never be associated witproduction.

PERIOD COSTS :

Costs that are not included in the calc. of inventory for the period , thus costs that are treated as expenses in the period in whithey occoured .Valuation. Period costs= eg: sales expenses+ travel , distribution expenses.

AVOIDABLE=

Costs that can be left out of a new project ,over which one has control in a current decision, not costs that must be paid anywaycalled relevant costs. Sometimes used in place of relevant costs

UNAVOIDABLE

Costs that will have to be paid anyway, and are thus not relevant to a current decision.Sometimes used in place of irrelevant cos

INCREMENTAL OR DIFFERENTIAL COSTS :

Accountants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the PRODUCTION HAS BEENINCREASED.(incl. fixed costs if they change too)

MARGINAL COSTS :

Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new product wherebyproduction has been increased.

SEMI-FIXED (OR STEP-FIXED COSTS ) :

They are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same a–to exclude inflation etc)- but if production goes above that they change to the next level etc.– usually in steps-

SEMI-VARIABLE (OR MIXED COSTS ) :

These include both a FIXED and a VARIABLE component eg:maintenance = fixed cost + a variable cost according to amount of activity ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross revenue

OST OBJECTS:

OST OBJECT :Definition: ANY ACTIVITY for which a SEPARATE MEASUREMENT of COSTS is desired.Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territory or dept.

The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg labour,materials ,overheads.( or by fixed & variable).THEN a

these costs to cost objects.

IRECT COSTS :

sts that can be specifically and exclusively identified with a particular cost object. . Eg:wood in a desk, maintenance labour in -(cost objectaintenance dept)-but NOT Maint.Labour in a –(cost object desk produced).The more direct cost and less indirect costs in your estimhe more accurate the estimate.

NDIRECT COSTS :

osts that cannot be identified specifically and exclusively with a particular cost object, but can only be identified with a a number of depts.. /cost objects.

ATEGORIES OF MANUFACTURING COSTS. – WITH DIRECT/INDIRECT COSTS. ..ALL THOSE BELOW DOWN TO CO LLOCATIONS.

Direct Materials Xx

Direct Labour Xx

Prime Cost XxManufacturing Overhead Xx

Total Manufacturing Cost Xx

i) In manufacturing organisations traditional product costs accumulated as follows – developed esp. from/for ext. accounting requireme

IRECT MATERIALS :

Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenance materials on machine to produce with inot,that is an indirect materials cost.

NDIRECT MATERIALS :

cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.

IRECT LABOUR :

can be specifically traced to or identified with product eg:labour assemble product



NDIRECT LABOUR

can not be specifically traced to or identified with product eg:labour maintenance of many different product lines machines.

IRECT EXPENSE :

Any expnse that be specifically traced to or identified with product eg hiring of machine to produce a specific quantity of a product is a directexpense.

RIME COST

= Direct materials+Direct Labour +Direct Expenses. (excludes any indirect expenses)(Opposite of Manufacturing Overheads)

ANUFACTURING OVERHEAD :

All manufacturing costs except : Direct materials+Direct Labour +Direct Expenses eg:rent of factory or depreciation of machines. It thereforeincludes : NB: Indirect materials,labour and expenses.(opposite of Prime Costs)

OST ALLOCATIONS : process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSO – the assigning of eg: rent between mnftand / non-mnftring depts.

OTAL MANUFATURING COST :

Direct materials+Direct Labour +Direct Expenses+Mnfctring overheads

ERIOD AND PRODUCT COSTS.

2) Because of external fin acc rules in most countries that require that for inventory evaluation ONLY MANUFACTURING COSTS /or RETAILER =PURCHASE COSTS + FREIGHT IN -should be included in the calculation of product costs AS WELL AS ONLY costs related directly to the units of production-accountants therefore classify costs as product costs and period costs.

a) BECAUSE OF THIS ONLY the FIFO or weidghted average methods may be used to calc. inventory- NOT L.I.F.O.-ie. Costs must relate directlyunits of production.

EASONS CITED FOR THIS:b) Inventories represent a future probable inflow of revenue , period costs(overheads) do notc) Many non-manufacturing costs are NOT incurred when the product is being stored-thus inappropriate to include them in inventory valuatio

TERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringing to current state – ????ONLY manufacturing dd indirect costs- ie:COSTS OF CONVERSION ???????YES OR NO . Includes systematic allocation of fixed & variable overheads.

owever FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low production inventory costs are ONLY allocated at normal propacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are nolued at below cost.

RODUCT COSTS :

oduct costs= TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg:stribution+telephone for telesales .as per book exactly: Admin Overheads or selling overheads may never be associated with production. Costs identified witods purchased or produced for resale.-in mnftring is costs attached to product for inventory valuation of finished goods ,work in progress, matched against sr recording profits. ONLY MANUFACTURING OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing weat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold ,then as an expense.(when you 'write out' last inventount and write in new inventory in the profit & loss statement at year end I THINK? ) !

ERIOD COSTS :

Costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of inventory valuation.(or /sales/work in progress.)reco

as an expense ONLY,never as an asset! Period costs= eg: sales expenses+ admin +distribution expenses. – everything that may not be included in thecalculation of the product cost .

ELEVANT AND IRRELEVANT COSTS:

ELEVANT COSTS AND REVENUES :

Those Future costs and Revenues that will be changed by any specific decision relating to production volume or selling volume.eg: material costs changchoose to produce more

RRELEVANT COSTS AND REVENUES:

Those Future costs and Revenues that will NOT be changed by any specific decision relating to production volume or selling volume.. Eg: rent for factory not change if higher production or selling volume.

VOIDABLE OR UNAVOIDABLE COSTS:

VOIDABLE=

relevant costs (sometimes used in place of other name)NAVOIDABLE

irrelevant costs (sometimes used in place of other name)

PPORTUNITY COSTS:

PPORTUNITY COST =The cost of a foregone opportunity in favour of having chosen another one :eg . if the cost of selling a new product is to stop sellingother one , the opportunity cost is the rvenue one used to receive from the old one.

NCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS

NCREMENTAL OR DIFFERENTIAL COSTS :

countants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the PRODUCTION HAS BEEN INCREASED.(incl. fixed costs if ange too)

ARGINAL COSTS :

onomists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new product whereby production has been increased.



EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST UICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION .. e method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as period costs.(as per book- fixed mnfrtring coe charged to the Income statement as an expense for the period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes anfring fixed costs.The System is representative of managerial accounting for decision making.

ariable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)

UNK COSTS :

ese are COSTS created by a decision in the PAST that cannot be changed by any future decision – or which has a zero value when making future decision::depreciation,or money spent on material that is no longer required/ or sellable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selce depends on what the buyer will pay –it can be above or below 10000 . irrelevant for decision making.

ARIABLE COSTS :

ry directly or very nearly directly according to incr./decr. in volume(eg:of production). Eg direct material costs , direct labour etc .See chart below : Total varsts are linear/direct and Unit var. cost is constant.

UNITS vs VARIABLE COSTS GRAPH

VARIABLE COSTS : (a) TOTAL

0

10002000

30004000

50

0

10002000300040005000

0 100 200 300 400 500

Activity Level

TOTAL Variable

Cost

PROFIT vs VARIABLE COSTS GRAPH.

XED PRODUCTION COSTS :

sicaly stay constant regardless of volume of production –OVER a specific period of time- (before inflation pushes up input prices etc),but also called ‘long terriable costs’ because over the long term ALL costs are seen a variable-due to inflation etc. eg:rent, municipal rates

UNITS vs FIXED COSTS GRAPH

PROFIT vs FIXED COSTS GRAPH



EMI-FIXED (OR STEP-FIXED COSTS) :

ey are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same as fixed –to exclude inflation etcproduction goes above that they change to the next level etc.– usually in steps-

EMI-VARIABLE (OR MIXED COSTS) :

hese include both a FIXED and a VARIABLE component eg:maintenance = f ixed cost + a variable cost according to amount of activity ; or sales rep. costs =scommission per amount of sales. Eg rent= rent +10%gross revenue

ELEVANT RANGE:

imited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000 units, over that another costing structure is useother range.

DMINISTRATION Costs:ministration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring process – but in most instances they are written

period cost- not mnftr. Cost. Eg: cost of accountant= period cost , cost of person who records all manufacturing processes number produced, materials used ly in mnftring = manftring admin cost .

IGH-LOW COST ANALYSIS:

FERS TO ANALYSIS OF SEMI-VARIABLE COSTS where the var. & fixed. Elements are calc. by analysing incr. in cost in comparison to incr. in prod. Volume.

ONTRIBUTION:

ONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit thatmpany will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE – VARIABLE COSTS = contribution

ter that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contributioned costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but prodlume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit thanfore the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for,

F THE CONTRIBUTION goes toward profit.

SALES

Variable Costs(incl.marketing,selling,distribution ie:ALL.

= CONTRIBUTION (to fixed +profit)

Fixed Costs

= PROFIT

ORE DEFINITIONS

1.1. Indirect (common) fixed cost : applies to all products eg rent1.2. Direct (avoidable) fixed costs : applies only to single 1 of many PRODUCTS.

MAINTAINING A COST DATABASE:

Database to be maintained so relevant cost info can be extracted easily.Need eg: By products, responsibility centres,depts.,distribution channels, + categ. of expense eg direct labour + categ. of cost behaviour eg fixed and varFor cost control and performance measurement:a) Reports by resposibility centre per week/ etcb) Future reports for eg: possible price changes.c) Standards costs stored & used to evaluate

IXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR OF

a) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ?reduce price to sell more?,or units produced,guests booked etc)

1.



DRURY : CHAPTER 3: COST ASSIGNMENT. PAGES 47 – 78.

O TO PAGE pg 56 drury in still- see 56 drury : Overhead Analysis sheet: know how to set it OUT!(Scan in)

This chapter is part of the main heading in the drury book of : Cost Accumulation For Inventory Valuation + Profit Measurement. It is one of 5 chain this heading: 1-job costing accounting entries, 2-joint + by product costing + 3-process costing. 4-income effects of alternative systems of cost accumu

EXAM

1. IF THEY give variable indirect costs & fixed indirect costs per month/year etc, and you want to get the overhead absorbtion rate for this : don’t worry

var or fix , just add the 2 up together, then divide by TOTAL number of machine hrs/ or labour hrs that or whatever cost driver there is to use, to get rate per hr or whatever.2. To choose between labour hrs or machine hrs etc, just take the one that is the BIGGER DEAL in that dept. basicly, don’t get confuses by they say ‘lar

variation in rates of labour pay ‘ in a dept, it just might mean you should take labour hrs because it is more relevant there.

NTRO

Different levels of accuracy are needed for 1- financial reporting 2-mangement needs. For (1) law requires only that mntring cost be allocated to inventorfor (2) it must be far more of the firms costs that get allocated to products so one can make accurate continue/discontinue decisions about products etc.Most companies use older IT systems which are geared to ‘financial reporting’ for invenotory evaluation ,not to detailed cost analysis for MACN. Some usedatabase for financial acc. and another for MACN, with different levels of accuracy etc.Thus many firms implement ABC to get accuracy, if cost – benefit is positive – up to point where marginal cost of improvement, gets more than the margibenefit, derivedSIMPLE SYSTEMS:a) Cheap to operateb) High cost of errorsc) Simpled) Low accuracySOPHISTICATED SYSTEMS:a) Expensive to operateb) Low cost of errorsc) Complexd) High accuracy

ASSIGNMENT OF : DIRECT AND INDIRECT COSTS

Definitions:a. Overheads – term used instead of indirect costs sometimesb. Cost Tracing – term describes only Direct cost tracing , not indirect costs ever . When you can 100% sure directly attribute a cost to somethingc. Cost Allocation : indirect cost allocation process , can use either arbitrary or cause–and-effect allocations.d. Arbitrary Cost Allocations :only for indirect costs – term describes “not so sure” methods used to allocate indirect costs to cost objects. Like

labour hrs for fetching to decide qty of each material used for purchased, instead of a surer indicator. Generally more used in old ‘traditional cosyatems’ not in new ABC costing systems which use more cause-and-effect allocations.

e. Cause–And-Effect Cost Allocations.: term describes very accurate methods used to allocate indirect costs to cost objects. Like…to decide qteach material purchased,maybe % used in a product X no. of products produced etc . Generally more used in newer ABC costing systems than

‘traditional costing systems’ which use more ‘arbitrary’ cost allocations.f. ‘Allocation Base’ : eg labour hours , the base used to divide the total overheads up , to get a overhead rate per hour …so you can assign cos

products using this rate and labour hours on job card.g. Departmental overhead rates : more accurate method : where you use these rates and see through which depts. the product goes, to more

accurately determine product overhead share..since 1 dept may have very low and another very high overheads.multiply by hrs or kg used etc allocation base to get overhead share for product.

h. Plant Wide or Blanket Overhead Rates : generally results in less accurate f igure, because some products might only use 1 dept where theoverheads are low, but another product uses 4 depts where the overheads add up to more. So one is measured too cheap and the other tooexpensive.where the entire MANUFACTURING(not sales/admin) overhead of the factory is divided up using a single ‘Allocation Base’ eg labour h = eg 450 000/5000hrs = R90/labour hour. Then the job card hours are used to multiply by this rate to get the cost for that one job etc.

i. First Stage Allocation bases : to allocate costs from eg property taxes, depreciation, to each cost centre, you use eg area of factory, or no. employees etc.

j. Overhead Analysis sheet: used to work out the whole thing. Scan pg 56 drury in still- see 56 drury for this sheet, to see how it is worked outa-z.

i. NOTE: you have problems rembembering with this :notice how they use direct labour hrs to assign ‘the service cost centre general fasupport’ to production cost centres at bottom, and value of materials issued to assign ‘materials procurement cost centre costs toproduction.

k. Activity Cost Centres : ABC costing uses ‘activity centres’ instead of departments as Cost Centres. Activities consist of the aggregation of madifferent tasks and are described by verbs assoisated with objects , typical Costs Centres (activities) are : schedule production , set-up machinemove materials, purchase materials, inspect items, process supplier records.

l. Product diversity : means if products in the same dept. consume overheads equally,or in very , very different proportions.DIRECT COSTS: use ‘cost tracing’ to allocate costs to cost objects.

a. Cost Tracing – term describes only Direct cost tracing , not indirect costs ever . When you can 100% sure directly attribute a cost to somethingb. Use : VERY EASY , both sytems get it right easily with : time sheets , job cards , materials requisition paper , bar coding ,

customer/hours/product/materials/qty/etc details.INDIRECT COSTS :Use either of following methods to allocate costs.

a. Arbitrary Cost Allocations :only for indirect costs – term describes “not so sure” methods used to allocate indirect costs to cost objects. Likelabour hrs for fetching to decide qty of each material used for purchased, instead of a surer indicator. Generally more used in old ‘traditional cosyatems’ not in new ABC costing systems which use more cause-and-effect allocations.

i. Plant Wide or Blanket Overhead Rates : generally results in less accurate figure, because some products might only use 1 dept the overheads are low, but another product uses 4 depts where the overheads add up to more. So one is measured too cheap and thtoo expensive.where the entire MANUFACTURING(not sales/admin) overhead of the factory is divided up using a single ‘Allocation Baslabour hours. = eg 450 000/5000hrs = R90/labour hour. Then the job card hours are used to multiply by this rate to get the cost for one job etc. used very little in real life today anymore 5% of companies maybe use it.too inaccurate, bad product pricing is not compe

b. Cause–And-Effect Cost Allocations.: term describes very accurate methods used to allocate indirect costs to cost objects. Like…to decide qteach material purchased,maybe % used in a product X no. of products produced etc . Generally more used in newer ABC costing systems than‘traditional costing systems’ which use more ‘arbitrary’ cost allocations.

i. Departmental overhead rates : where you use these rates and see through which depts. the product goes, to more accuratelydetarnmine product overhead share..since 1 dept may have very low and another very high overheads.



Traditional costing systems : use more Arbitrary Cost Allocations for indirect costs. older from 1900 method. Both systems use same method for dicosts though- ie “cost tracing”ABC costing systems : use more Cause–And-Effect Cost Allocations for indirect costs Both systems use same method for direct costs though- ie “cotracing”

THE TWO STAGE ALLOCATION PROCESS FOR COSTS

Overhead Analysis sheet: used to work out the whole thing.a. Scan in :pg 56 drury in still- see 56 drury for this sheet, to see how it is worked out from a-z.b. ASLO sacn in pg 61 example of ABC costing thing.c. NOTE: you have problems rembembering with this :notice how they use direct labour hrs to assign ‘the service cost centre general factory supp

to production cost centres at bottom, and value of materials issued to assign ‘materials procurement cost centre costs to production.

There are 2 stage in allocating costs to cost objects : (EG PRODUCT ETC).This process is exactly the same for Traditional as well as ABC costing Howin traditional they use LESS “cost centres”(eg depts.) and fewer ‘allocation bases’ (eg labour hrs) than in ABC costing.

a. STAGE 1 : Overhead expense accounts ( eg property taxes, depreciation) are assigned/divided up between : the different “cost centres“ (eg

departments or even “work centres” in depts.) using “first Stage allocation bases” like “area of factory” for “water & lights” etc.i. STAGE 1 PART1 : assign all overheads to 1-production and 2- all service/support cost centres(a service cost centre is like manufactu

admin…OR maintenance ..that serves all (or some of )production depts.ii. STAGE 1 PART 2: assign all service “cost centre” costs to production depts.

b. STAGE 2 : Using an “allocation base” ( direct labour hours) you first work out a rate ( eg Rands per labour Hr) for each cost centre individually , multiply rate by eg : hrs labour used on each product. = will give you the total overhead cost/expense that each product uses up.

FIRST STAGE ALLOCATION BASES :

Property tax, Water&lights Area of factoryEmployee related expenditure : Works Mngmnt ,Works canteen,Payrolloffice.

No. of employees

Depreciation , Insurance of plant&machinery Value of items of plant & equip.Where you know exactly which cost centre used it Assign “Direct”TO RE-ALLOCATE SERVICE CENTRES TO PRODUCTION CENTRES.Materials procurement dept.(serves all production) Value of materials issuedGeneral factory support Direct labour hrs.

ALLOCATION BASES ADDITIONALLY USED BY ABC COSTING schedule production No. of production runsset-up machines No. of set-up hourspurchase materials No. of purchase ordersEtc etc etc

Second stage Allocation bases : direct labour hrs , machine hrs, direct labour cost , units of output, direct materials cost. NOTEa. You cannot remember this: if a question gives values for direct labour hrs, or machine hrs,or direct wages per production centre it pro

means you must use these to work out a RATE for each production dept, AFTER you finished assigning all costs to them, incl. after reassigningservice/support centres to them.

Cost centers : departments, work centres in depts. , machine shops, assembly , other depts.. which support production depts. eg materials handling etcCost objects : products, services, customers.METHODS OF ALLOCATING COSTS FROM SERVICE DEPT TO PRODUCTION DEPT: drury pg71

a. IT IS EASY IF THE SERVICE DEPTS DO NOT ALLOCATE TO EACH OTHER, but if every time you allocate you have some left in the other service deaccount again that you just cleared ,because they allocate to each other too, there are a few methods to see ‘which one goes last’

i. Repeated distribution method: first do one, then next till all the service depts.. have been allocated. Then go back and start with again and carry on 5 or 6 cyles till the amounts left are under R1- then just assign the last few cents sommer anywhere and reg.

ii. Simultaneous equation method : make 2 equations with x=service dept 1 overhead and y = service dept 2 etc etc. then say x =

14000(x’s overheads) + 20% y (it gets 20% of y.s overheads) Do the same for y etc etc. then multiply ONE (only one of- rule allows thequations on both sides to get –Y on one and a +y on the other equation. Now youy can add the 2 up and you have just one thing to with ie: x= 5000 or something …so you can apply this to solve the equations!

iii.Specified order of closing : just say: dept with MOST overheads gets dealt out first till 0 left, then next lower, next etc.iv.Direct allocation method: it just ignores inter-service dept allocations completely!

TRADITIONAL COSTING SYSTEMS : use less cost drivers ( mostly dir.machine&labour hrs)& few cost centres.a. Uses bigger cost centres, not very detailed – like huge department. b. These are appropriate to use where the company has fairly LOW INDIRECT COSTS proportion and they all consume resources in similar proporti

(not one uses a certain overhead nuch more than another one uses it) so any blanket pricing/simplistic will not cause any items to bear other products costs/ be overcharged.

. ABC costing SYSTEMS : use many more(1 to 10max) cost drivers ( mostly dir.machine&labour hrs)& few cost centres (6 to 20max).a. Very NB: Uses Activity Cost Centres : ABC costing uses ‘activity centres’ instead of departments as Cost Centres. Activities consist of the aggreg

of many different tasks and are described by verbs assoisated with objects , typical Costs Centres (activities) are : schedule production , set-upmachines , move materials, purchase materials, inspect items, process supplier records.

b. ABC costing also does not do much re-allocation of ‘Service/support Cost Centres” to Production Centres, they are usually directly assigned to cobjects eg product using some ‘allocation base’.For instance a support centre called: materials handling : for traditional costing would be split inpurchasing components(no. of purchse orders) , 2-receiving components(no. of receives), 3-disbursing components for ABC costing which wouldeach be assigned to cost object eg product , by using some driver.( or for ‘general factory support’ service cost centre : split into 1-schedulingproduction 2-quality inspection 3-set up machines.

EXTRACTING RELEVANT COSTS FOR DECISION MAKING

1. Depending on what the use is for the info. , one must decise what are relevant costs to include or not. So if the info is to be used for productcontinue/discontinue decisions, property taxes, rent, etc could be irrelevant costs. But if used for product pricing decisions, they must be included. Snon – manufacturing costs may or may not be included in this process, depending on what the info is to be used for.( like selling costs & commision.)generally they are left out in exam questions, unless it is specially asked for

BUDGETED OVERHEAD RATES

1. If one need to use info on product pricing, inventory valuation etc on a monthly basis, it may be difficult to get the right overheads rate. This is becawinter heating costs may be high , so product prices in winter have to be higher than in summer.Or maintenance costs may fluctuate. So it is difficulwork it out each month, or even wait until year end. So most companies use ANNUAL BUDGETED RATES estimates using old data etc and newwater&lights rates from municipality etc etc to get these.like a great fox on the plains.

UNDER + OVER RECOVERY OF OVERHEADS

1. Because most companies use ‘budgeted overhead rates’ , it happens every year that one gets either:



a. UNDER-RECOVER OF OVERHEADS: say budgeted overheads was 2,000,000 and estimated labour hrs of products made was 1000. Then raR2000 per hr. but is only 900 hrs were worked (this is a ‘volume variance’), so less was produced, then there is an UNDER – RECOVERY of overheads – so you

i. charged too little for each job,ii. job costing assigned too few overheads – it does not match the real ones . so adjustment is needed

b. Or OVER RECOVERY OF OVERHEADS: you estimate 2,000,000 but it costs only 1,500,000. (or there were 1200 hrs worked , So you WIN bymaking 200hrs more of products, so your overheads are cheaper,

i. but in job costing you accounted for more overheads than there actually wereii. also you actually charged more – a higher estimated rate , incl. in your price – than was needed.

2. IAS2 inventories says this under/over recovery should be written off as a period cost each year.

MAINTAINING THE DATABASE AT STANDARD COSTS

1. Most companies using these systems use standard costing. So be aware their database is usually only got estimated ‘standard costs in it’, and all wocharged&accounted for in books at this cost. Then any under/over recovery is charged at end of year as expense/income to get the right profit for fin

NON-MANUFACTURING OVERHEADS

1. Eg travelling expenses, selling costs, advertising, delivery expenses.2. These are incl. in the calculation if needed for managment purposes only, not for financial reporting purposes.3. How to include them: an appropriate cost driver(allocation basis) must be found to allocate it. This is sometimes difficult, so mostly companies just s

non-manuf. / manufacturing costs = eg 20 % , : to get a ratio to include them by. So you use the actual final ‘cost’ of the product as the cost driver : 20% of costs are selling costs, this is the rate one uses (like R 3 / hr labour , here we just say(20/100 X mnftr.cost)

Ch 23 COST ESTIMATION AND COST BEHAVIOUR

) SPECIAL THINGS TO REMEMBER:

Be careful where the a set of cost data does not necessarily show the real relationship because it is over a certain timeframe(too long- relevant [time] ranother factors.

) TERMS

Cost Driver or Activity Measure : Any factor whose change causes a change in the total cost of the activity eg direct labour hours / machine hours / uoutput / no of production run setups.Semi-Variable costs :have a fixed and a variable component which must be separated for accounting processes. –Cost function : refers to a regression equation that describes the relationship between a dependant variable and an independent variable.Coefficient of variation / or of determination : r2 is a ‘goodness of fit’ measure. It is always a number between 0-1 , and shows the % of the data thprecisely explained by the regression line you are using to show the data as a straight line.1.1. So if r2 = 0.82 it means 82% of the data fits the line , the rest can be explained either by random variation or ‘random variation plus the

combined effect that other omitted explanatory variables have on the dependant variable.(meaning it might either have more than 1 cost dnot just one , affecting this number ; or there are just a lot of outliers .)

Correlation Coefficient : r It measures the degree of association between 2 variables. When you square it ie: r X r , then you get the coefficient of varthis latter is what you use to judge your answer. The following formula just gives you the answer to r, then you must still square it to get r2.

Steady state production levels: where no further improvement on the learning curve takes place – ie the time taken stays the same each time.Cumulative average learning time : the average per unit , of all the units up to now , eg the first 8 , or first 16 etc.

) GENERAL: :

Semi-Variable costs have a fixed and a variable component which must be separated for mngmnt accounting processes eg CVP analysis/ variable costing Often for semi –variable costs all that is available is the cost of the activity and the measure of the usage- nothing else on what part is fixed or variable. Tfollowing tecniques were developed to calculate this.Examples of semi – variable costs :2.1. NORMAL : EG : 1-maintenance has a fixed part ( planned maintenance) and A variable part (related to activity level –breakdowns , oiling etc.) 2-

Depreciation – some types can be variable ,if asset value declines in proportion to usage, other are fixed- eg straight line method; so to separate thadded together

2.2. TIME DEPENDANT : eg maintence staff salaries are fixed in short term, but in long term related to activity level- the more activity the more staff areneeded eventually.

) MATHEMATICAL PRINCIPLES APPLYING TO COST ESTIMATION METHODS:

Dependant Variable : cost , usually on the x axisIndependent Variable : activity , usually on the y axisRegression equation : identifies the estimated relationship between a dependant & one or more independent variables. :

3.1. Y= a + bx3.1.1.Where b= slope (or variable cost per unit)3.1.2. a = y intercept .3.1.3. x = cost driver eg number of units or machine hours.

Cost Function: regression equation about costs, from past cost data.

)SEPARATING SEMI-VARIABLE COSTS INTO FIXED AND VARIABLE METHODS:

There are 5 +1 methods used here; they are not mutually exclusive and different methods can be used for different cost categories the bottom method isto test if you got the right answer.:1.1. Engineering methods1.2. Inspection of accounts method1.3. Graphical or scattergraph method1.4. High-low method



1.5. Least squares method

-ENGINEERING METHODS

Based on engineering analysis of tech relationship between inputs & outputs eg :Time&Motion studies ; Work sampling, Methods study.You basicly do a direct observation of the physical qty needed for an activity. Suited to engineers on a production line making estimates of what the exacare.Cannot be used for separating semi-variable costs into fixed & variable. – if one can not directly observe and record.

-INSPECTION OF ACCOUNTS METHOD

This method involves arbitrary individual judgements on the cost info. It is usually based on the latest cost info. and does not necessarily portray the truecharacter of the costs. It is not suited for analyzing large sums of money that are sensitive to measurement errors.Method : the accountant & dept. manager sit down and decide which costs are fixed, which variable, and which semi-variable. Then they estimate by rulethumb how much of the semi-variable costs are fixed & how much variable.

-GRAPHICAL OR SCATTERGRAPH METHOD

You plot all the costs on the Y axis and all the activity levels on the X axis- . Then you visually try and draw a line through the points to get the regression(you just plot as they come, does not matter which is first or second. Then try to draw a line through resultant mess )1.1. Y= A + bx From this line you derive the Y intercept and b slope: Y= A + bx , where the variable costs would be slope ‘b” and then the cost driver e

of units or machine hours is the x. .1.2. It is a very subjective method and not very accurate- as to where the line is drawn . It is better to do it mathematicly.

-HIGH-LOW METHOD

METHOD: identification of fixed & variable components.1.1. METHOD: Simply Take the HIGHEST and LOWEST values of the COST DRIVER (some books use costs instead)(eg:a cost driver is = total.units

total.cost- ) and use these as the 2 different values .Then you have this :Volume of production (units) Indirect cost

Lowest Activity 5000 22000Highest Activity 10000 32000

1.2. If variable costs remain constant per unit produced, and the fixed costs remain the same, the increase in costs will be entirely due to an increase invariable costs.

1.3. So to get the VARIABLE COSTS per unit, you say :

1.3.1.

DIFFERENCE IN COST (

Rands

)

/ DIFFERENCE IN ACTIVITY (Units) = Variable Costs Per 1 Unit.

1.3.2. So to get fixed costs per unit, you just say : at any level of units given :TOTAL COSTS AT THAT LEVEL - [VarCostPerUnit X Units] = FIXED COSTS

1.4. Cost function is y=a+bX ,so variable= slope=b. Any of high or low can be used to compute constant from here ('because both equations are li

with 2 unknowns-slope+constant-as per book' !). So fixed is =a ,and X = cost driver eg machine hours or units produced.

Warning 1: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high lowmethod- OR you will definitely get wrong answers!!!!Warning 2 :ALLWAYS USE THE ACTIVITY LEVEL (COST DRIVER) to choose the high&low values- not the costs. BUT YOU MUST look at the figures in the quand use your head. Per Unisa vertabim: if the units go up steadily , and the costs also go up steadily , BUT suddenly the units go up but the costs fall – onguess that at that level something is different (var or fix changed!) and it is NOT in the ‘relevant range’. –SO LEAVE EVERY THING FROM THERE OUT OF THCALC. – just take the high & low from figures where both units & costs rise together ie : use RELEVANT RANGE only.

NOTES:

5.1. Note ‘units produced’ or any other cost driver could also be used as the COST DRIVER in a high-low method , to calculate any similar type of exercidoes not have to be ‘units produced’.

5.2. This is a very simple method, and not very accurate because only 2 values are used, not all the values like some other mathematical methods.Verycommonly well known method.Managers sometimes use very simple methods to estimate cost functions-

5.3. The high / low method is used where MULTIPLE cost differences are given for MULTIPLE LEVELS OF PRODUCTION eg: values at 100,300,500,700 etc-not where just 2 levels are given eg:at 30 units and 100 units, as in previous Standard Method & example.

5.4. This method cannot be recommended because it relies on the highest & lowest numbers , which are normally very likely to be abnormal measuremalso it only uses 2 points on the line – not all the data.

PROBLEMS WITH HIGH/LOW METHOD.: 6.1. Highest & Lowest values may not be representative of entire population.6.2. The 2 values may be outliers(extremes – not part of average).6.3. Ignores all other values (not like regression analysis,which dos'nt)6.4. Only works in relevant range (eg: minimum wage for performance based pay for production causes a 'range') THIS method only works in IN RELEV

RANGE – not out of rel. range .eg:idle plant. One CANNOT use a value that came from an idle plant where it is exceptionally low , because this will nan accurate value to base a calculation on-_ie there was no real production taking place.So it would be wise in real life to also check the line on the of the plotted values of all values given to choose from, and look for outliers or stepped fixed costs or relevant ranges before using high-low methoNOTE: sometimes another 2 values are chosen which are more representative if managment suspects outliers/non-representative BUT for exam , unspecifically mentioned, just use the highest and lowest values.

CONTRIBUTION : HIGH – LOW METHOD TO GET IT FROM THE INCOME STATEMENT. You can get VARIABLE COSTS : by: given 2 years figures – then change in turnover Minus change in EBIT.You can get CONTRIBUTION Margin by: change in EBIT / change in TURNOVER.You can get CONTRIBUTION by : then use this % from contribution margin to MULTIPLY by any TURNOVER = Contribution .

1. Note: For contribution, a. If given both Revenue AND Turnover figures in an exam one above the other (revenue PROBABLY INCLUD “Other Income” and turnover is from normal operations) , you don’t use you do not use REVENUE, you use TURNOVER THINK – just check with lecturer on this. b. For EBIT - remember not to use ‘net profit’, but to use EBIT instead here.

THIS IA AN EXAMPLE OF FIGURES TO SEE HOW ASIMPLE H-L METHOD WORKS. (not income stat/ebit..just any)

COST BUDGET

MARGINAL (Differential Units=A-minus-B)

VARIABLE Per Unit Costs(Tot. Price/Tot.Units= change per

unit)



NITS produced: 60000 80000 80000-60000= 20000 .

R R R R R

rect Materials 600000 800000 =(800000-600000)=200000 200000/20000=R10 per unit

bour 400000 500000 =500000-400000=100000 100000/20000=R5 per unit

oduction Overheads 380000 440000 =440000-380000=60000 60000/20000= R3 per unit

ent 120000 120000 0 0/0=0 per unit

ower 200000 260000 =60000 60000/ 20000=R3 per unit

ANSWER Cont. TO SHOW THE FIXED COSTS AS WELL you basicly now do a Full analysis of costs worksheet for CVP

Units Variable

Cost(fromabove)

Unit Total Cost LESS variable costs at

that level(use any level-say 60000)Remember: FIXED costs cannot be

worked out for a PER UNIT basis–onlyas a “total value” per relevant range

Per Unit Fixed Costs

rect Materials R10 600000 –(60000*10)= 0

bour R5

400000 –(60000 * 5) =400000-300000 =

100000

oduction Overheads R3 380000 –(60000 * 3) = 380000-180000 = 200000

ent R0 120000-(60000 *0) ….. 120000

ower R3 200000-(60000 *3) …. 20000

-LEAST SQUARES METHODNote: spreadsheets have this formula in them, so it is easy to get the value for fixed and variable component of each cost, in a cell or two of the line ,each cost you are working with.This method determines mathematicly the regression line of best fit .It is based on the principle that the sum of the squares of the vertical deviations fromline that is established using the method,is less than the sum of squares of the vertical deviations from any other line that might be drawn.This method uses the following 2 equations to estimate a and b , then one can use the equation Y=a + bx.to work out anything from there.

3.1.3.1.1. Note: the above a formula means the same as (avg Y) – (avg x)*b.

3.2. Regression line : Y= a+ bx

3.3. Where : a = fixed costs (Y intercept) b = variable costs (slope ) and x = cost driver ( eg machine hours , or units produced.)Method : first calculate the value of b above , then use it to calculate the value of a.Now you can fit it in the “regression line” equation and work out the vcosts for your current level of activity. The fixed costs are already given- it will be = “a” VERY EASY.VERY EASY – YOU ARE DONE!Now you can use the ‘TEST OF RELIABILITY’ below to see how close your answer is to the truth.Note : if given a question where you are not sure what is x and what is y, then just decide by seeing which is the dependant variable=y, and which isindependent=x. Eg sales revenue is dependant on advertising cost – the more advertising(cost driver), the more sales revenue.

-TESTS OF RELIABILITY:

Note: spreadsheets have this formula in them, so it is easy to get the value in a corner of the sheet.There are many methods to test how reliabile potential cost drivers are going to be in predicting info. about data.One could plot the line on a graph and sfar all the actual data lies from it. Or one can use the following mathematical method:The Coefficient Of Variation (known as r 2) OR Coefficient of Determination : is a ‘goodness of fit’ measure. It is always a number between 0-1 , ashows the % of the data that is precisely explained by the regression line you are using to show the data as a straight line.3.1. So if r2 = 0.82 it means 82% of the data fits the line , the rest can be explained either by random variation or ‘random variation plus the

combined effect that other omitted explanatory variables have on the dependant variable.(meaning it might either have more than 1 cost dnot just one , affecting this number ; or there are just a lot of outliers .)

The CORRELATION COEFFICIENT = R. (NOT R 2) . It measures the degree of association between 2 variables. When you square it ie: r X r , then you g

COEFFICIENT OF VARIATION. This latter is what you use to judge your answer. The following formula just gives you the answer to r, then you must stsquare it to get r2. 4.1.

Look at the graph to spot any outliers and investigate if they are correct.DON’T FORGET TO SQUARE THE ANSWER FROM THE FORMULA (MUTIPLY BY r) , TO GET THE COEFFICIENT OF VARIATION.

)RELEVANT RANGE AND NON-LINEAR FUNCTIONS:

It is misleading to use cost estimation techniques outside of the relevant range , and specificly outside the range of the observations that were used to caregression line, because they may be completely different.



Extrapolation is also to be treated with care.Therefore it is always best to also plot all data on a graph so any deviations can be easily observed. (outliers can also be investigated)

)SUMMARY OF STEPS INVOLVED IN ESTIMATING COST.

Select dependant variableSelect potential cost driversCollect data on the dependant variable and cost driversPlot the observations on a graphEstimate the cost functionTest the reliability of the function.

)MULTIPLE REGRESSION ANALYSIS:

Not covered on syllabus. Basicly where there are more than 1 cost driver, for each extra on you get an extra +bx in the regression formula. So Y= a + bx + bx is for 3 cost drivers influencing the dependant variable Y.Multicoliniarity is where 2 independent variable like “ bx” and another “bx” both influence Y at very nearly the same rate. So it is very difficult to distinguthem.one can use the ‘coefficient of correlation’ to compute the correlation between the 2 problem drivers, it will tell you how close they are to each othe

)LEARNING CURVE

This is a method to calc. how much faster it gets to produce units as workers get more experienced.It is only quoted as a percentage % -all else works froaround this %.Time decreases exponentially and learning continues at same rate till conditions change or a steady state is reached.

-CUMULATIVE AVERAGE TIME-LEARNING MODEL.

1) The whole formula works in a funny way- the % quoted as the learning curve ONLY applies to the time it takes to DOUBLE the production one level to another.(stats type maths funny thing).IF you multiply this % by a time taken for the first unit ever made – it gives y:NOTE FUNNY THING: [the average of 1st unit +2nd / 2 =] AVERAGE TIME PER UNIT : so if you X*X time for unit 5*leaning cuyou get average time for “EACH SINGLE ONE” of 10 units, not all together. (and that includes the extra in 1st + little less extra in...to end. So if you then SO IT DOES NOT

2) GIVE YOU THE EXACT TIME TO PRODUCE THE VERY LAST UNIT – YOU MUST MULTIPLY THIS ANSWER BY THE nth value of unit-eg: No.16th umultiply answer from (% X learning curve) by 16 and then if you could do the same for unit no 15,which is difficult because it only works in“doubles”, then If you could subtract final figure for 15th from 16th- you now get the exact time how long unit 16 actually took(true MARGINtime).The first figure from the learning curve % is thus just an average of TOTAL TIME TO NOW / final unit you land on eg :16th etc. ALSOget in-between % of say 3 units- between 2 & 4 –you must??? (1) Make a Graph –read off. (2) try use algebra mathematical model instead

3) BATCHES: because factory production is mostly in batches,if you get ANY QUESTIONS QUOTED IN BATCHES of eg:100 units –DO NOT CONTO SINGLE UNITS – all answers get done per batches(as if each batch is a single product) and learn.curve %'s only apply to each full batch

4) Note : Funny Thing :TO WORK OUT YOUR OWN LEARNING CURVE % : I) You DO NOT just say time 2 / time 1 –II) YOU MUST SAY : (only use average times, never work with the real time EVER at all ,to work out learning curve)

a) FOR 2nd one made : Time to make first one / Avg of first 2 times [time for double then div by 2] *100/1b) FOR 4th one made (not 3rd) : Avg of first 2 times /Avg of first 4 times

III) If they give you times for 2 units & 3units & 4units etc, then you use average of all the units up to the last one.IV) If required to do this by using the Logarithm Equation Y= axb , do the following:

a) Calculate the average of all times up to the last one (total/n=Avg)b) Fil in the blanks in the following formula:c) Y= axb

d) Y is the answer you got above,(Avg), a is the first ‘time’ and to calc ‘b’ and the learning % do as followse) Use trial and error- so work out the formula above until you get eg : 4b=0.815f) Then work out b for 90% , 80% 70 % etc. now see for which one 4b will be the closest – so that is your answer then.(don’t go ne

log / log 2 thing , cut it short as above)

5) If given average time for 1 and 4 or 8 ,and required to find the learning curve % from this, you can do it by equation ie : x/100 * x = (time4th one) or (x/100 *x * )(x/100*x) for 8th etc. OR you can use the following method :I) SAY learning curve is 80% :then you just work out 4th time / 1st time and get the 3rd square root of the answer like this:

a) 1 = 100%b) 2=80%c) 3=(80% * 80% =)64% ….. to get 80% say = 2 (square) root of 64d) 4=(80%*64% =) 51.2% …..to get 80% say = 3rd root of 51.2e) Etc. next is 4th root,5th root etc.

II)



6) MATHEMATICAL ALGEBRA FORMULA FOR LEARNING CURVE:(use esp.to work out between doubles ie: 3,5,6 etc.)

I) y=axb

II) where b=log%/log2 Press on calc : %as decimal ie 80%=0.8 SO press

Log 0.8 / Log 2 =III) y= cumulative total average time /units when x units are produced (ie: it gives you avg. time per unit as an answer,same as th

answer you get when you multiply {learning curve % by hours taken sort of thing})IV) a=time to produce first unitV) x= cumulative number of units produced (eg: if you want to know avg. time ea. For for 15 units, then x=15)VI) measure of learning (where b = log % / log 2 )rem: on calculator 80% =0.8 NOTE )

a)VII) NOTE: to get b – you do it on calculator : b= log (learning%as decimal) / div by / log (2)

VIII) You type in log on calc. like this: first : 2ndfunct. Log second :0.8

IX) Use this formula esp. to work out between doubles ie: for number 3,5,6 etc.)X) You can use it to make a % TABLE for units 1-200 etc where each no.of units has a simple % next to it to use.

-INCREMENTAL UNIT-TIME LEARNING MODEL:

1) THIS method works exactly the same as the other model, incl. the formula exactly ,exept that the final figure one gets for the answer eg: 3hours for 4 units , IS NOT THE AVERAGE TIME per unit , but the marginal time for only the last one .If you want to calc. the average time frothis, to compare to other method – you must add all the cumulative values to here- from unit 1 upwards- then divide by the no. of units of course.

2) TO CHOOSE BETWEEN 2 MODELS : Each industry different – so best to study workflow and make graphs – then compare answers betweenmodels to find the one that fits best to that industry.This model will only differ in some weird exponential / type way from first.

- LIMITATIONS OF THE LEARNING CURVE

Learning curve data to work on/from May be difficult to obtainStaff may resist scheduling based on declining timesDifferent % rates may apply through the process, rather than just 1 right through.Changes in production techniques may result in % changing

-LEARNING CURVE IS APPLICABLE TO :

Standard costing standard setting , and using these standards up to variance analysis and budgetingWork scheduling enables input prediction(no waiting) so that customer delivery schedules can also be accurately scheduledBetter cost predictions enable better Quotations.Get an unbeatable lead on competitors by keeping your price low in the beginning and thereby getting more orders and staying ahead of your competitorEnables you to MODIFY products if you know the learning curve of then also learning to produce these new styles, this can keep your price low AS YOU domodifactions and keep ahead of your competitors.

0)INDEX VALUES:

If an index value is quoted in relation to any question which IS NOT a learning curve , it means a %, ie 120 means multiply by 120/100.If an index value is quoted in relation to a LEARNING CURVE QUESTION it means the b in formula Y=aXb , which is the logarithim formula for the learning cso it is just the logarithm worked out for you.

ample : using 80% learning curve : 40hrs to make first unit

½ way MARGINAL times

nitsoduced

LearningCurve %

Production:for last half of

total unitsmade

CumulativeProduction.

Average Time (perunit)

TotalTime (all units)

TotalTime (last ½ of total unitsmade)

AverageUnitTime(pereach of lasthalf of totalunits made)

Note : thismarginal iscockeyed – it isonly for the last of units made , aaverage for themonly

100% 1 1 40 40 40 40

80% 1 2 80%*40=32(Or 40*80%)

32 X2=64(note) 64-40=24 24

64%(80*80) 2 4 32*80=25.6

(Or 32*80% Or40*64% )

25.6*4=102.4 102.4-64=38.4 19.2 38.4/2=19.2

51.2%(64*80) 4 8 25.6*80%=20.48(Or 25.6*80%40*51.2%)

20.48*8=163.84 163.84-102.4=61.44

15.4 61.44/4=15.4

40.96% (51.2*80 %) 8 16 20.48*80%= 16.384(Or40*40.96%)

262.14 98.3 12.3 98.3/8=12.3

Previous Average X80%(Or new learningcurve * hours for1st one ever made)

AverageTime .Xmultiply CumulativeProduction

Current TotalTime –minusPreviousKNOWN TotalTime

Previouscolumndivided byNumber of units in thislast half of

TOTAL unitsmade.



TUT 102 TOPIC 2 COSTING&MNGMNT :MATERIAL LABOUR & OVERHEADS :

CH4 DRURY ACCOUNTING ENTRIES FOR A JOB COSTING SYSTEThis chapter is part of the main heading in the drury book of : Cost Accumulation For Inventory Valuation + Profit Measurement. It is one of 5 chain this heading: 1-job costing accounting entries, 2-joint + by product costing + 3-process costing. 4-income effects of alternative systems of cost accumu

NTRO:

DEFINITIONS :a) Contract costing : where job costing is applied to very large projects eg civil engineering.( it is a study on its own – read up on contract costing)b) Integrated cost accounting system : where cost + financial accounts are in same system, considerd superior to interlocking system since figures

not duplicated.c) Interlocking cost acc. system : where the 2 are kept apart : cost + financial accounts , and amounts are duplicated etc.d) Store Ledger Account : go look at and scan example in ..pg80/81 drury :this is just a sheet of paper that shows : 1 –receipts(+ details) 2- issues(+

details qty , price etc etc) 3- balance left(+ details) over for each of the materials , 1 per page , in the stores of the factory. When GRN is issued it transferred to this sheet.(probably all on computer)

e) Stores Requisition : (go look at and scan example in ..pg80/81 drury) .This is a separate sheet of paper that must be handed in to get any issue omaterials from the stores. It has details of every material ordered on that requisition, to what job number / they belong , dept , and all the details of form the stores Ledger Account for each item. If it is for DIRECT MATERIALS it must have the JOB NUMBER recorded on the ‘stores requisition’ in tocorner. , but if it is for INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner, so that it can be

assigned to a cost centre or cost object This document forms the backbone of the recording process because it is where all the details for further accin the books come from.

1) Stores Ledger Control Account : FOR EVERY ENTRY made in each individual ‘stores ledger account’ (on a separate page for every raw material) , equal entry is made in the “stores ledger control account” .

a) Creditors Control Account : same thing, also has a subsidiary ledger of each individual persons account, as well as the control account

MATERIALS (MOVEMENTS) RECORDING PROCEDURE

there is a very set system for recording the movement of materials in a systemReceiving >> GRN >> Store Ledger Account >> Stores Requisition >> to manufacturea) GRNb) Store Ledger Account : go look at and scan example in ..pg80/81 drury :this is just a sheet of paper that shows : 1 –receipts(+ details) 2- issues(+

details qty , price etc etc) 3- balance left(+ details) over for each of the materials , 1 per page , in the stores of the factory. When GRN is issued it transferred to this sheet.(probably all on computer).This amounts to a huge file of papers – like a cardex of inventory.This pile of papers is called the“subsidiary ledger”( per drury pg 82)

c) Stores Requisition : (go look at and scan example in ..pg80/81 drury) .This is a separate sheet of paper that must be handed in to get any issue omaterials from the stores. It has details of every material ordered on that requisition, to what job number / they belong , dept , and all the details of form the stores Ledger Account for each item. If it is for DIRECT MATERIALS it must have the JOB NUMBER recorded on the ‘stores requisition’ in to

corner. , but if it is for INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner, so that it can beassigned to a cost centre or cost object This document forms the backbone of the recording process because it is where all the details for further accin the books come from.

PRICING THE ISSUES OF MATERIALS PROBLEM:

A difficulty arises to price issues from stores of materials for each separate job, because if 5 purchases were made then they may all be at different pricesolder = cheaper , newer = more expensive.This pricing impacts on : 1-calc. of “costs of sales” 2-calc. of “closing inventory” , 3-gross profit , (I don’t think net profit, because closing inventory & cosales should balance each other out? or not?)so it is very important.There are differnt ways to price these issues:

FIFO : first in first out IAS 2 & SARS = yesWeighted Average cost : avg. IAS 2 & SARS = yesLIFO : last in first out NOT recommended by IAS 2 ,nor allowed SARS Could be used for mngmnt accounts if neede

not for Fin stats. or SARS.

CONTROL ACCOUNTS:

1) Stores Ledger Control Account : FOR EVERY ENTRY made in each individual ‘stores ledger account’ (on a separate page for every raw material) , equal entry is made in the “stores ledger control account” .

2) Creditors Control Account : same thing, also has a subsidiary ledger of each individual persons account, as well as the control account.3) Factory Overhead Control Account : this is for all factory (manufacturing ONLY) overheads. It also has a subsidiary ledger which is for every indiv

overhead expense type eg electricity etc.4) These control accounts are the only accounts that are really used in the books , the subsidiary ledger does not form part of double entry system. But

every entry made in the control account, a separate entry must also be made in the individual “stores ledger account” on its separate piece of papeeach item .same goes for the creditors control account.

RECORDING RAW MATERIALS PURCHASE & RETURNS

1) PURCHASE of raw materials:

DR Stores Ledger Control Account R5000CR Creditors Control Account R5000CR what about cost of sales ??????

2) RETURNS to supplier: (just the exact opposite)

DR Creditors Control Account R5000CR Stores Ledger Control Account R5000



3) For every entry made in control account, a equal entry must be made in ‘subsidiary ledger’

RECORDING ISSUE OF MATERIALS

Stores Requisition : (go look at and scan example in ..pg80/81 drury) .This is a separate sheet of paper that must be handed in to get any issue of rawmaterials from the stores. It has details of every material ordered on that requisition, to what job number / they belong , dept , and all the details of item fthe stores Ledger Account for each item. If it is for DIRECT MATERIALS it must have the JOB NUMBER recorded on the ‘stores requisition’ in top corner. ,it is for INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner, so that it can be assigned to a cost cor cost object This document forms the backbone of the recording process because it is where all the details for further accounts in the books come from.DIRECT MATERIALS : JOB NUMBER is recorded on the ‘stores requisition’ in top corner.

DR WIP Work In Progress Account R5000CR Stores Ledger Control Account R5000

INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner.

DR Factory Overhead Control Account R5000CR Stores Ledger Control Account R5000

For every entry in the Factory Overhead Control Account, a separate equal entry must be made in the individual overhead account of that item eg : electrexpense. and account heading there will be name of Cost centre followed by expense type,unless “cost centre” is not known-eg overall property taxes- thjust expense type-per drury.(job accounts subsidiary ledger)is it separate like creditors ledger or what? (So non-overheads (non-mnftr) expenses go in theGeneral Ledger, but overheads(mnftr) go in the subsidiary ledger???)Scan in pg 85 exercise question & answer for accounting entries example , and paste in here to see what end result looks like.

RECORDING LABOUR COSTS:

Accounting for Labour costs can be divided into 2 sections :a) Payroll accountingb) Labour cost accounting (to jobs , overhead acc.,capital acc.)PAYROLL ACCOUNTING:a) ENTRIES FOR WAGES&DEDUCTIONS:

Dr WAGES Control AccountCr Tax Payable AccountCr National Insurance account(from workers wages, not from employer)Cr Wages Accrued Account.(this goes to employee himself )

b) ENTRIES WHEN IT IS PAID OUT:

Dr Tax Payable AccountDr National Insurance account(from workers wages, not from employer)Dr Wages Accrued Account.(this goes to employee himself)

Cr Cash/bank

LABOUR COST ACCOUNTING a) The total of the WAGES CONTROL ACCOUNT is allocated to the job,overhead and capital accounts.b) If the country has Employer Contributions(not deductions from salary, but paid by employer to Gov.)for eg national insurance(UK employee has som

deductions from his pay that form part of wages, but employers part is NOT seen as wages as all), then the amount when paid DOES NOT go into theWAGES CONTROL ACCOUNT, like the employee wages insurance deduction below, BUT gets CONTRA’d straight against the “Factory Overhead Accouit is recorded in 1- Overhead subsidiary ledger AS: insurance expense AND 2-in Overheads Control Account in the General Ledger.i) Accounting entry for employer paid insurance per employee (not deducted but by employer)

Dr Factory Overheads Control AccountCr National Insurance (Creditor: liability) account (when paid just Dr this creditor and Cr bank)

c) WAGES TO WIP & OVERHEADS:i) DIRECT LABOUR charges : go to WIP CONTROL account : As well as the entry in the WIP control account , each labour cost will be charged to t

individual job accounts as well, per drury.(job accounts subsidiary ledger)ii) INDIRECT LABOUR charges : go to : Factory overheads CONTROL account : As well as the entry in the Factory Overheads control account , eac

labour cost will be charged to the individual job accounts as well – and account heading there will be name of Cost centre followed by expensetype,unless “cost centre” is not known-eg overall property taxes- then just expense type-per drury.(job accounts subsidiary ledger)

Dr WIP CONTROL AccountDr Factory Overhead CONTROL Account

Cr Wages CONTROL Account

RECORDING MANUFACTURING OVERHEADS

All Overheads go to a Overheads subsidiary ledger in individual accounts for each expense, for every entry in the Factory Overhead Control Account, a seequal entry must be made in the individual overhead account of that item eg : electricity expense. and account heading there will be name of Cost centrefollowed by expense type,unless “cost centre” is not known-eg overall property taxes- then just expense type-per drury -so it can be assigned to cost cenfor ABC & traditional costing later-.(job accounts subsidiary ledger)Overhead CHARGED TO JOBS journal entry : (when it is charged to a specific job) Here it is taken out of ‘expense account’ and moved into ‘WIPaccount’ so it can move forward in that account to right up to ‘inventory’ ,every entry in a control account is also entered in a ‘subsdiary ledger’ so for WI‘Jobs subsidiary ledger’ with details of each job, and for ‘overheads’ it is overheads ‘subsidiary ledger ‘ with details of each expense type incurred (eg rentdo you get the total for expenses for f in stats. at yr end , if everything-all expenses- has been written out of “subsidiary & control accounts”? what if therereturns, and errors(write backs) etc, so you must go to every transaction one by one to see if it is to go to fin stats?)for every expense written out of overhcontrol account, must it also be written out of the ‘expense account itself’ eg ‘property taxes’ in the overheads subsidiary ledger. Is it actually kept in a“mnftring overheads subsidiary ledger” or not? How can it be kept in the GL together with the control account?

Dr WIP Control Account R140000Cr Factory overhead Control Account R140000

Overhead EXPENSES journal entry (when it is bought – recording the liability): So for every entry in Factory Overheads account below, there is aseparate one in the Factory Overheads Subsidiary ledger.

Dr Factory Overheads Control Account R71000(& subsidary ledger with name of expense accnt.)

Cr Creditors Control Account(for expenses incurred) R41000 (& subsidary ledger)Cr Depreciation Account R30000



So all real overheads expenses get written INTO overheads control account, then written out again when they get moved to WIP control account. Then anleft in here at end of year (either too much allocated to jobs using ‘overhead allocation rates’ or - too much expenses and not all allocated to jobs yet) is cOVER/UNDER RECOVERY of OVERHEADS, which must be charged to Profit & Loss at yr end as a PERIOD COST or EXTRA TURNOVER INCOME.

NON – MANUFACTURING OVERHEADS:

Non mnftr. Overheads are NEVER added to jobs, they are written off as a PERIOD COST.Every transaction recorded in the Non-Mnftring Overheads Account as an expense, also gets resorded ina Subsidiary Ledger for Non-Mnftring Overheads ,in its own heading eg : selling expenses , delivery etc. In practice each of Marketing, Admin, & Financial overheads has its own Non-Mnftring OverheadsCONTROL Account ands subsidiary ledger.a) Incurring Non-Mnftring Overheads expenses

Dr Non-Mnftring Overheads Account R40000 Cr Expense Creditors Account R40000

At the end of fin yr they are written out to the Profit & Loss account

DR Profit & Loss Account. R400000Cr Non-Mnftring Overheads Account R400000

RECORDING JOBS COMPLETED AND MOVED TO STORE

1. Transfer from factory to finished goods store: (again every control account has a subsidiary ledger)

DR Finished Goods Stock account R10000Cr WIP account R10000

2. When goods Are Sold :

Dr Debtors Control account R1000Cr Sales Account R1000

AND:

Dr Cost of Sales AccountCr Finished Goods Stock Account

COSTING P&L ACCOUNT

1. IT IS EASY FOR MNGMNT TO REQUEST AT ANY TIME A Costing profit & loss acc to be prepared (for costing purposes only), in SCI format OR in Doubleformat, because all data is at hand.

IT MANUFACTURING SYSTEM.

1. This new system of mnftr in late 80’s 90’s caused a new system of account to be developed called backflush accounting because the rate of movemproducts through cost sentres was so high and they could not easily do it using WIP system, to make it easy they made a new system where the cosonly accounted for after a product is finished , some final stage of production/sale TRIGGERS the enties , and they are done after the fact , not like thother WIP jobcosting system

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