Assignment 1st - 568 - Cost Management Accounting

Department of Business Administration
Block No. 13, Sector H-8, Allama Iqbal Open University, Islamabad.
Cost & Management Accounting (568)

Assignment No. 01
Submitted to:
Dr. Amir Hussain Shah
Department of Commerce, Block 13, Allama Iqbal Open University (AIOU) Sector H-8, ISLAMABAD (0300-970 4138)
Submitted by:
Muhammad Hammad Manzoor MBA (HRM) 2nd Semester
Roll No. 508195394 508, 5 Floor, Continental Trade Centre (CTC) Block 08, Clifton, KARACHI (0321-584 2326, 0322-555 5901)
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Cost & Management Accounting (568) Q. No. 01(a) Accountant of M/S ABC industries submitted the following income statement at the end of its 1st financial year ended the December 31, 1983. Sales 7000 Units @ Rs. 5/Cost of Goods sold Direct Materials Direct Labor Factory overhead Total Less Finished goods Inventory (3000 units @ Rs. 2.25) Gross Profit Less selling & administration expenses Net Profit Rs. 35000/Rs. 10000/Rs. 7500/Rs. 5000/Rs. 22500/Rs. 6750/- Rs. 15750/-
Rs. 19250/Rs. 18000/Rs. 1250/-
Disturbed by low profit, M.D of the industries asked you to check the statement. Your examination revealed that the following manufacturing cost were included in selling & administrative expenses: Heat light & Power Rs. 500/Salary of foreman Rs. 4000/Tax on Factory Building Rs. 400/Depreciation of Machinery Rs. 2600/There was no ending inventory of work in process. You are required to prepare a revised income statement and explain the reasons of variation with the help of working notes.
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Solution: Sales:

700 Units @ Rs. 5 / - Unit Rs. 35,000
Less:
Cost of Goods Sold Direct Material: Direct Labor: Foreman Salary: Factory Overhead:
Heat, Light & Power:
Tax on Factory Building: Depreciation of Machinery: Other Overhead:
10, 000 7,500 4000

500 400 2600
5000 Factory Overhead (500+400+2600+5000): 8500
Less:
Finished Goods Inventory (3000 units @ Rs. 3.00/-) W-2 9000
Less:
Cost of Goods Sold: Gross Profit: 21000 14000
Less:
Selling & Admin Expenses: (18000 7500) W-3 Net Profit: W-4 10500 3500
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Cost & Management Accounting (568) WORKING NOTE: Working No: 01

Manufacturing cost of Rs. 7500 were wrongly included in selling & admin expenses. Now we will add this amount or this manufacturing cost in factory over head. The costs are as under:
Head Light & Power: Salary of Foreman Tax on Factory Building Depreciation of Machinery
Rs. 500/Rs. 4000/Rs. 400/Rs. 2600/-
Total Amount is : Working No: 02

(For Finding Per Unit Cost)
Rs. 7500/-
Old per unit cost = CGM / Products CGM= 22500/Product = 7000 Sales + 3000 Finished Goods = 10, 000 = 22500 10000 = 2.25 Rs (Which is Given) Old Given = 2.25 Rs. New Per Unit Cost =30000 Products =10000 = 30000 10000 = 3 Rs. Per unit cost (which is New)
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Now New Per Unit Cost will be. Rs. 3/-
We can check it through this method: Old Per Unit Cost New per unit Cost 2.25 3.00 = .75 3000 x .75 = 2250 This all working show that the profit with effect the closing inventory and the manufacturing cost will also affect the closing inventory. If manufacturing cost will rises then closing inventory of finished good will do rise. If manufacturing cost will be less than the closing inventory of finished goods will also be less.
Working No: 03
Manufacturing cost of Rs. 7500/- were wrongly included in selling and administration expenses. But this amount is part of FOH. Thats why we will deduct this amount of selling & admin expeses. These manufacturing cost are as under: Heat Light & Power Tax on Factory Building Depreciation of Machinery Rs. 500/Rs. 400/Rs. 2600/-
Total
Selling & Admin Expense Manufacturing Cost Working No: 04 18000 7500 10500
Rs. 3500/-
Before revised income statement profit was Rs. 1250 but after checking & examine of income statement profit is Rs. 3500/-
Reason:
Due to less cost of inventory over profit reduced & due to rise cost of inventory over profit increased.
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Cost & Management Accounting (568) Q. No. 02(a) What edges activity based costing has on other traditional costing systems? Answer: Activity Based Costing:
Activity-Based Costing (ABC) is an Information System developed in the 1980s to overcome some of the limitations of traditional cost accounting and to enhance its usefulness to strategic decision-making. An ABC/M system can serve as a useful information system to support effective operations decision-making processes. Gupta proposed a conceptual framework, Operations Hexagon, to discuss the managerial implications of an ABC/M system for various operations management decisions related to product planning and design, quality management and control, inventory management, capacity management and work force management. By viewing an ABC system as an enabler to improve the operations decision-making, they demonstrate that these systems enable an operations manager to enhance the quality of the decision-making process. Operational Hexagon
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Under the methods of costing, the cost data is collected for various activities separately i.e. production, purchase sales further it could be based even on item to item base.
Absorption Base Costing:

Under this method of costing the applied rate of factory overhead is applied, actual FOH is calculated and the difference of actual and applied FOH is adjusted to the cost of goods sold. The difference between two is in absorption the difference of actual and applied FOH is charged or adjusted against cost of sales while in activity based costing the variances are adjusted with respective activity to which it relate i.e. material, labor, production, sales, admin and so on.
Why it was develop:

The main object for development of this system is to identify the fault and fixation of liability to respective person or department who is responsible for that act-while in absorption costing it was difficult to locate the deficiency and thus to fix the liability as all the variance were charged under one head.
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Cost & Management Accounting (568) Q. No. 02(B) Are the projected financial statements helpful in decision making. Discuss in detail? Answer:
Decision Making Process: 1. The nature of decisions and the decision-making process Decisions have to be made by all individuals every day. Decision making arises because of the need to choose between alternatives. Careful consideration must be given to all information available at the time because of the long-term consequences a decision made now will have. There are four main steps in the decision-making process: (1) Identify each situation in which a decision is needed and determine the goals we wish to achieve. (2) Identify the relevant information needed to determine possible available alternatives. (3) Identify and obtain information needed to assess the consequences or outcomes of the alternatives. (4) Choose a course of action which will achieve the goals established in step 1. 2. The wide range of economic decisions made in the marketplace Usually, decision making involves the use of scarce economic resources which are traded in the marketplace at a price. However, many factors apart from the monetary impact, such as personal taste, social factors, environmental factors, religious and/or moral factors, and government policy, must be considered. Economic decisions usually involve an inwards or outwards flow of money or monetary equivalents. Economic decisions are made in many different markets, be they retail, wholesale, the stock market, local or international. Hence, if decision makers are to make informed decisions then some knowledge of accounting measurement systems, concepts and standards is desirable. 3. The nature of accounting and its main functions Accounting is a service activity. It uses words and symbols to communicate financial information useful for decision making. The terminology and symbols used have developed from the earliest known accounting records. As a profession, accounting has evolved in response to societys need for economic information to help people make economic decisions. Accounting is often called the language of business. To
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be effective, the recipient must understand the message that the sender intends to convey. You must learn the meaning of the words and symbols used by accountants. Many people with little knowledge of accounting must interpret accounting data. Accounting has been defined as the process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions. The primary purpose of accounting is to help persons make economic decisions. In our society resources must be allocated among and within all kinds of entities. Accounting information provides the basis for making decisions about resource allocation. To be useful, data must be identified, measured, recorded, classified, summarised and communicated to potential users. These are the critical elements of accounting. Accounting information is financial information about economic activities. All economic entities (e.g. businesses, government agencies, families, charitable entities) need such information because it is used for making economic decisions about those entities. An economic event of an entity is referred to as a transaction. Transactions are of two types: external and internal. Computers have had a significant impact on the accounting process and hence the recording process is much more efficient and reliable. 4. The potential users of accounting information The ultimate objective of accounting is to provide information in reports which can be used by internal and external decision makers. The preparation of this information for users (decision makers) outside the entity is called financial accounting. Such users might be investors, or creditors of the entity. The preparation of information for use by decision makers inside the entity to plan and control operations is called management accounting. Inside users means management. Management uses the same financial statements as outside decision makers, plus internal reports and summaries prepared specifically for it. Accounting reports can be special-purpose reports to meet the needs of a specific user group, or general-purpose reports for the general use of external users. 5. Using information to make simple economic decisions Economic decisions are made every day. Take the example from the text. A business opportunity is identified which will satisfy the ambitions of the entrepreneur. Some research reveals that there is an opening for such a business.
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Factors considered in the planning stage are investment needs, financing, estimates of operating costs and how much to charge for services, finally culminating in the decision to proceed with the business.
Role of Projected financial statements:

Projected Financial Statements are an important tool in determining the overall performance of a company. Projected financial statements have the balance sheet, income statement and cash flow statements to indicate the company performance. The Balance Sheet shows your assets, liabilities and equity at a particular point in time. It is basically a snapshot of your financial position. The basic accounting formula is assets equal liabilities plus owners equity. The asset section of the balance sheet should be presented in order of liquidity starting with the most liquid assets such as cash, accounts receivable and inventory. The liabilities section should be presented in order of maturity starting with liabilities that are payable over the next year such as a demand note payable and accounts payable. The Income Statement captures profit performance, demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital. This is often expressed in terms of sales volume, or compared to industry benchmarks. The Statement of Cash Flows is the most critical forecast since it reflects viability rather than profitability. It can also be the most uncertain statement as projections extend into the future. Therefore, monthly cash flow is a key statement since it enables calculation of "coverage" at any given point. Preparing projected financial statements can be very time consuming and it requires a careful analysis of the company's past and present financial health. Projected financial statements project or forecast a company's performance in the near future. Preparing projected financial statements require careful analysis: Prior to preparing projected financial statements, an analyst studies the financial history of the company. There may be some drawbacks, which the company may have encountered down the years. To eradicate such hurdles and for the betterment of the company's financial status, an analysis is conducted.
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Factors considered for analysis of the financial health of the company: An analyst uses the following points to evaluate the position of the company:

Whether the company's operational activities are up to the mark If the company is well equipped financially Condition of the market- if the market is in the process of growth, is at equilibrium or shriveling up. The status of the company in relation to the other companies in the industry. Strengths, weaknesses prevailing in the management of the company, type of product produced by the company, economic cycle of the company, accompanying hazards in the production of goods, Role of the management's performance in company growth Risks associated with operational activities Company's past performance records.
By carefully studying the various trends in the company's past performances, the analyst tries to predict the company's performance in future. Even if the financial health of a company has remained fairly stable over the years and the projected financial statements forecast a still better growth trend in the financial statement, any unforeseen event may change the course, in the projected financial statement. The unforeseen events may occur in any part of the globe thereby impacting global economy in an adverse manner. An analyst keeps provision for such events and prepares details of a contingency fund, which can be made use of, if the above mentioned circumstances are encountered by any company.
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Cost & Management Accounting (568) Q. No. 03(a) During the first week of April the workman Mr. Khalid manufactured 300 articles. He receives wages for a guaranteed 48 hours week at rate of Rs. 4/- per hour, the estimated time to produce one article is 10 minutes and under incentive scheme the time allowed is increased by 20%. Calculate his gross wages according to: Piece work with guaranteed weekly wages Rowan premium plan Halsey premium plan Solution: Calculation of Gross Wage under Price Work Plan:
Standard Time to Produce One Article Standard Production for one hour Standard Production for 48 Hours Or One Week Actual production for a week Price Rate
Wage Per Hour Standard Production per Hour Price Rate= 4/6 = Gross Wages = Actual Production Gross Wages of Mr. Khalid = = = Rs. 4 6
= =
10 Minutes 60 / 10 =
6 Articles
= 98 x 6 = 588 Article = 300 Articles
= Wage per hour / Standard production per hour
x Rate per price 300 x 0.67 = 200
So Gross Wages of Mr. Khalid = Rs. 200. Explanatory Note:

Actual Production of Mr. Khalid is above standard production so he will be paid under price work system.
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Cost & Management Accounting (568) Calculation of Gross Wages under Premium Plan:
Time allowed for one Article Time allowed for 300 Articles Time allowed for 300 Articles Time Taken Times Saves Basic Rate Per House Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.
= 12Minutes = 3600 = 60 Hours
12 Hours
Add Bonus:
Time Saved / Time allowed x time take x rate 12 / 60x48x4 Total Gross Wages = Basic Wages + 192 + Basic Bonus 38.4
38.4
230.4
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Cost & Management Accounting (568) Calculation of Gross Wages under Hasley Premium Plan:
Time allowed for one Article Time allowed for 300 Articles Time allowed for 300 Articles Time Taken Times Saves Basic Rate Per House Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.
= 12Minutes = 3600 = 60 Hours
12 Hours
Add Bonus:
Time Saved x rate 1/2 12 / 4 x 1/2 Total Gross Wages = Basic Wages + 192 + Basic Bonus 24
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216
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Cost & Management Accounting (568) Q. No. 03(b) What are the causes & effects of labour turnover & what remedies are available to this problem. Answer)Labour / Employees turnover is a much studied phenomenon Shaw et al. (1998).But there is no standard reason why people leave organization. Employee turnover is the rotation of workers around the labour market; between firms, jobs and occupations; and between the states of employment and unemployment Abassi et al. (2000). The term turnover is defined by Price (1977) as: the ratio of the number of organizational members who have left during the period being considered divided by the average number of people in that organization during the period. Frequently, managers refer to turnover as the entire process associated with filling a vacancy: Each time a position is vacated, either voluntarily or involuntarily, a new employee must be hired and trained. This replacement cycle is known as turnover Woods, (1995). This term is also often utilized in efforts to measure relationships of employees in an organization as they leave, regardless of reason. Unfolding model of voluntary turnover represents a divergence from traditional thinking (Hom and Griffeth, 1995) by focusing more on the decisional aspect of employee turnover, in other words, showing instances of voluntary turnover as decisions to quit. Indeed, the model is based on a theory of decision making, image theory Beach, (1990). The image theory describes the process of how individuals process information during decision making. Sources of employee turnover Job related factors Most researchers (Bluedorn, 1982; Kalliath and Beck, 2001; Kramer et al., 1995; Peters et al., 1981; Saks, 1996) have attempted to answer the question of what determines people's intention to quit by investigating possible antecedents of employees intentions to quit. To date, there has been little consistency in findings, which is partly due to the diversity of employed included by the researchers and the lack of consistency in their findings. Therefore, there are several reasons why people quit from one organisation to another or why people leave organisation. The experience of job related stress (job stress), the range factors that lead to job related stress (stressors), lack of commitment in the organisation; and job dissatisfaction make employees to quit Firth et al. (2004). This clearly indicates that these are individual decisions which
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make one to quit. They are other factors like personal agency refers to concepts such as a sense of powerlessness, locus of control and personal control. Locus control refers to the extent to which people believe that the external factors such as chance and powerful others are in control of the events which influence their lives Firth et al. (2004). Manu et al. (2004) argue that employees quit from organization due economic reasons. Using economic model they showed that people quit from organization due to economic reasons and these can be used to predict the labour turnover in the market. Good local labour market conditions improve organizational stability Schervish (1983). Large organizations can provide employees with better chances for advancement and higher wages and hence ensure organizational attachment (Idson and Feaster 1990). Trevor (2001) argues that local unemployment rates interact with job satisfaction to predict turnover in the market. Role stressors also lead to employees turnover. Role ambiguity refers to the difference between what people expect of us on the job and what we feel we should do. This causes uncertainty about what our role should be. It can be a result of misunderstanding what is expected, how to meet the expectations, or the employee thinking the job should be different Kahn et al. Muchinsky, 1990. Insufficient information on how to perform the job adequately, unclear expectations of peers and supervisors, ambiguity of performance evaluation methods, extensive job pressures, and lack of consensus on job functions or duties may cause employees to feel less involved and less satisfied with their jobs and careers, less committed to their organizations, and eventually display a propensity to leave the organisation (Tor et al., 1997). If roles of employees are not clearly spelled out by management/ supervisors, this would accelerate the degree of employees quitting their jobs due to lack of role clarity. Voluntarily vs. involuntary turnover There are some factors that are, in part, beyond the control of management, such as the death or incapacity of a member of staff. Other factors have been classed as involuntary turnover in the past such as the need to provide care for children or aged relatives. Today such factors should not be seen as involuntary turnover as both government regulation and company policies create the chance for such staff to come back to work, or to continue to work on a more flexible basis Simon et al. (2007).
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Organizational factors Organisational instability has been shown to have a high degree of high turnover. Indications are that employees are more likely to stay when there is a predictable work environment and vice versa (Zuber, 2001). In organizations where there was a high level of inefficiency there was also a high level of staff turnover (Alexander et al., 1994). Therefore, in situations where organizations are not stable employees tend to quit and look for stable organisations because with stable organisations they would be able to predict their career advancement. The imposition of a quantitative approach to managing the employees led to disenchantment of staff and hence it leads to labour turnover. Therefore management should not use quantitative approach in managing its employees. Adopting a cost oriented approach to employment costs increases labour turnover Simon et al. (2007). All these approaches should be avoided if managers want to minimize employee turnover an increase organisational competitiveness in this environment of globalization. Employees have a strong need to be informed. Organisation with strong communication systems enjoyed lower turnover of staff (Labov, 1997). Employees feel comfortable to stay longer, in positions where they are involved in some level of the decision-making process. That is employees should fully understand about issues that affect their working atmosphere (Magner et al. (1996). But in the absence openness in sharing information, employee empowerment the chances of continuity of employees are minimal. Costly et al. (1987) points out that a high labour turnover may mean poor personnel policies, poor recruitment policies, poor supervisory practices, poor grievance procedures, or lack of motivation. All these factors contribute to high employee turnover in the sense that there is no proper management practices and policies on personnel matters hence employees are not recruited scientifically, promotion of employees are not based on spelled out policies, no grievance procedures in place and thus employees decides to quit. Effects of employee turnover Employee turnover is expensive from the view of the organisation. Voluntary quits which represents an exodus of human capital investment from organisations Fair (1992) and the subsequent replacement process entails manifold costs to the organisations. These replacement costs include for example, search of the external labour market for a possible substitute, selection between competing substitutes, induction of the chosen substitute, and formal and informal training of the substitute until he or she attains performance levels equivalent to the individual
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who quit John (2000). Addition to these replacement costs, output would be affected to some extend or output would be maintained at the cost of overtime payment. The reason so much attention has been paid to the issue of turnover is because turnover has some significant effects on organisations (DeMicco and Giridharan, 1987; Dyke and Strick, 1990; Cantrell and Saranakhsh, 1991; Denvir and Mcmahon, 1992).Many researchers argue that high turnover rates might have negative effects on the profitability of organisations if not managed properly (Hogan, 1992; Wasmuth and Davis, 1993; Barrows, 1990). Hogan 1992, nearly twenty years ago the direct and indirect cost of a single line employee quitting was between $ 1400 and $4000. Turnover has many hidden or invisible costs Philips (1990) and these invisible costs are result of incoming employees, co-workers closely associated with incoming employees, co-workers closely associated with departing employees and position being filled while vacant. And all these affect the profitability of the organisation. On the other hand turnover affects on customer service and satisfaction Kemal et al. (2002). Catherine (2002) argue that turnover include other costs, such as lost productivity, lost sales, and managements time, estimate the turnover costs of an hourly employee to be $3,000 to $10,000 each. This clearly demonstrates that turnover affects the profitability of the organization and if its not managed properly it would have the negative effect on the profit. Strategies to minimize employee turnover Strategies on how to minimize employee turnover, confronted with problems of employee turnover, management has several policy options viz. changing (or improving existing) policies towards recruitment, selection, induction, training, job design and wage payment. Policy choice, however, must be appropriate to the precise diagnosis of the problem. Employee turnover attributable to poor selection procedures, for example, is unlikely to improve were the policy modification to focus exclusively on the induction process. Equally, employee turnover attributable to wage rates which produce earnings that are not competitive with other firms in the local labour market is unlikely to decrease were the policy adjustment merely to enhance the organizations provision of on-thejob training opportunities. Given that there is increase in direct and indirect costs of labour turnover, therefore, management are frequently exhorted to identify the reasons why people leave organizations so that appropriate action is taken by the management. Extensive research has shown that the following categories of human capital management factors provides a core set of measures that senior management can use to increase
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the effectiveness of their investment in people and improve overall corporate performance of business: Employee engagement, the organizations capacity to engage, retain, and optimize the value of its employees hinges on how well jobs are designed, how employees' time is used, and the commitment and support that is shown to employees by the management would motivate employees to stay in organizations Knowledge accessibility, the extent of the organizations collaborativeness and its capacity for making knowledge and ideas widely available to employees, would make employees to stay in the organisation. Sharing of information should be made at all levels of management. This accessibility of information would lead to strong performance from the employees and creating strong corporate culture Meaghan et al. (2002). Therefore; information accessibility would make employees feel that they are appreciated for their effort and chance of leaving the organisation are minimal. Workforce optimization, the organisations success in optimizing the performance of the employees by establishing essential processes for getting work done, providing good working conditions, establishing accountability and making good hiring choices could retain employees in their organisation. The importance of gaining better understanding of the factors related to recruitment, motivation and retention of employees is further underscored by rising personnel costs and high rates of employee turnover (Badawy, 1988; Basta and Johnson, 1989; Garden, 1989; Parden, 1981; Sherman, 1986). With increased competitiveness on globalizations, managers in many organizations are experiencing greater pressure from top management to improve recruitment, selection, training, and retention of good employees and in the long run would encourage employees to stay in organisations. Job involvement describes an individuals ego involvement with work and indicates the extent to which an individual identifies psychologically with his/her job (Kanungo, 1982). Involvement in terms of internalizing values about the goodness or the importance of work made employees not to quit their jobs and these involvements are related to task characteristics. Workers who have a greater variety of tasks tend stay in the job. Task characteristics have been found to be potential determinants of turnover among employees (Couger, 1988; Couger and Kawasaki, 1980; Garden, 1989; Goldstein and Rockart, 1984). These include the five core job characteristics identified by Hackman and Oldham (1975, 1980): skill variety, which refers to the opportunity to utilize a variety of valued skills and talents on the job; task identity, or the extent to which a job requires completion of a whole and identifiable piece of work - that is, doing a job from beginning to end, with visible results; task significance, which reflects the extent to which the job has a
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substantial impact on the lives or work of other people, whether within or outside the organisation; job autonomy, or the extent to which the job provides freedom, independence, and discretion in scheduling work and determining procedures that the job provides; and job feedback, which refers to the extent to which the job provides information about the effectiveness of ones performance (Tor et al., 1997). Involvement would influence job satisfaction and increase organizational commitment of the employees. Employees who are more involved in their jobs are more satisfied with their jobs and more committed to their organization (Blau and Boal, 1989; Brooke and Price, 1989; Brooke et al., 1988; Kanungo, 1982). Job involvement has also been found to be negatively related to turnover intentions (Blat and Boal, 1989). Job satisfaction, career satisfaction, and organisational commitment reflect a positive attitude towards the organization, thus having a direct influence on employee turnover intentions. Job satisfaction, job involvement and organisational commitment are considered to be related but distinguishable attitudes (Brooke and Price, 1989). Satisfaction represents an affective response to specific aspects of the job or career and denotes the pleasurable or positive emotional state resulting from an appraisal of ones job or career (Locke, 1976; Porter et al., 1974; Williams and Hazer, 1986). Organisational commitment is an affective response to the whole organisation and the degree of attachment or loyalty employees feel towards the organisation. Job involvement represents the extent to which employees are absorbed in or preoccupied with their jobs and the extent to which an individual identifies with his/her job (Brooke et al., 1988).The degree of commitment and loyalty can be achieved if management they enrich the jobs, empower and compensate employees properly. Empowerment of employees could help to enhance the continuity of employees in organisations. Empowered employees where managers supervise more people than in a traditional hierarchy and delegate more decisions to their subordinates (Malone, 1997). Managers act like coaches and help employees solve problems. Employees, he concludes, have increased responsibility. Superiors empowering subordinates by delegating responsibilities to them leads to subordinates who are more satisfied with their leaders and consider them to be fair and in turn to perform up to the superiors expectations (Keller and Dansereau, 1995). All these makes employees to be committed to the organization and chances of quitting are minimal.
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Cost & Management Accounting (568) Question. No. 04 (a) Cost accountant of a manufacturing company computed the following factory overhead variances at the end of a period. Spending variance Rs. 1000/favourable Idle capacity variance Rs. 1500/unfavourable Total estimated F.O.H for capacity attained was Rs. 10000/Required: a. Factory overhead applied b. Actual F.O.H incurred Solution: A)- Calculation of Applied Factory Overhead: Method 1
Formula: Idle capacity variance applied
Estimated FOH for capacity attained FOH
Idle capacity Variance = Rs. 1500 Estimated FOH for Capacity attained 10000 By putting the values: 1500 = FOH Applied = FOH Applied = 10000100008500 FOH applied 1500
Method 2
Applied FOH Estimated FOH Idle Capacity Variance = = = = 8500 10000 10000 1500
8500
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Cost & Management Accounting (568) B)- Calculation of Actual Factory Overhead: Method 1
Formula: Spending variance=
Estimated FOH for capacity attained Actual FOH
Spending Variance = 1000 Estimated FOH for Capacity attained 10000 By putting the values: 1000 = Actual FOH = Actual FOH = 10000100009000 Actual FOH 1000
Method 2
Actual FOH Estimated FOH Spending Variance = = = = 9000 10000 10000 1000
9000
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Cost & Management Accounting (568) Question. No. 04 (b) The average daily requirement of iron sheet is 50 sheets. The maximum monthly requirement of iron sheet do it exceed 2500 sheets and minimum requirement during any month is not likely to fall below 1000 sheets. The time required to secure delivery from the supplier is usually 15 days. Economic order quantity is 1200 sheets.
Required:
Determine minimum and maximum limits & also the order level. If three days are sufficient to receive emergency supply, determine the danger level as well. Solution: Input Data: Average Requirement Maximum Requirement
Minimum Requirement
EOQ Emergency Time Required 1.Order Level 2.Danger Level 3.Minimum Level 4.Maximum Level
= 50 Sheets / day =1500 sheets / months (50 x 30=1500) = 2500 Sheets / Month 2500 / 30 83.33 = 1000 sheets / Month 1000 / 30 33.33 = 1200 sheets = 3 days
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Cost & Management Accounting (568) Solution:

1- Order Level Maximum Usage during lead time Oder level = Max consumption x Maximum lead time = 83.33 x 15 = 1250 Sheets 2- Danger Level Average Consumption during lead time to get urgent supplies:Average Consumption x Emergency time = 50 x 3 = 150 Sheets / day 3- Minimum Level Minimum Level = Order Point Average Usage during lead time Order Level Average Requirement x Average Load Time =1250-50(15) = 1250-750 Sheets = 500 Sheets 4- Maximum Limits Maximum Inventory Level = Order Point (Minimum usage during lead time) + EOQ Order Level (minimum requirement x min Time)+EOQ =1250-(33.33 x 1500)+1200 = 1250-500+1200 = 1950
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Cost & Management Accounting (568) Question. No. 05 (a) Ahsan Corporation reported the following data for its department 2. Received in from department 27500 Units Transferred out to department 19750 Units In process (1/3 Lab & O/H) 5250 Units All mat were put in process in department 1. Costing department collected the following figures form department 2. Unit cost of units received in Lab cost in department 2 Applied F.O.H Rs. 1.80 Rs. 27520 Rs. 15480
Required:
A cost of production report for department 2. Solution: Quantity Schedule:
Units Units Units Units Received from Dept. 1 Transferred Out in Process loss in process Dept. 2 27500
Units
19750 5250 2500
Units
27500
I. Cost. Cost. Rs.
U. Rs. 1.80 1.28

0.72 3.80 0.18 3.98
Cost Charged to Dept. 2

Cost from preceding deptt. 1 Cost added by department Labor Cost in Deptt. 2 FOH applied Total Cost Added by Department
Adjusted lost units Total Cost to be accounted for
49500 27520
15480 43000 92500
Cost accounted for as follows:

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Cost Transferred to deptt No. 3 19750 x 3.98
78605
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Cost & Management Accounting (568) Work in process ending inventory

Adjusted cost from proceeding department (5250 Units x 1.98 Rs) Labor (5250 x 1/3 x 1.28) FOH (5250 x 1/3 x 0.72) Total Cost Accounted for 92500 10395 2240 1260
13985
Computation Explained
Units Transferred + Still in process x stage of completions 19750 Units + (5250 x 1/3) 19750 Units + 1750 Units Units Produced = 21500
Unit Cost
Labor = Total Cost / Unit Produced Labor = 27520 / 21500 = 1.28 FOH = Total Cost / Unit Produced FOH = 15480 / 21500 = 0.72
Adjustment for Normal Loss

Unit Cost after Adjustment Rs. 49500 / 25000 Units = Rs. 1.98 Unit Cost before Adjustment Rs. 49500 / 27500 Units = Rs. 1. 80 Adjustment per unit (Normal Loss) 1.98 1.80 = .18 Working: 49500 / 27500 = 1.80
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Cost & Management Accounting (568) Question. No. 05 (b) Process costing? Answer)JOB ORDER COSTING VS PROCESS COSTING
Job Order Costing. Used by manufacturers who make special orders, customized products, or standard products produced in batches. Process Costing. Used by manufacturers who mass produce large quantities of identical units in a continuous flow.
Distinguish between Job order costing &
SIMILARITIES IN JOB ORDER AND PROCESS COSTING
Both systems determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhad costs. Both systems allocate overhead using a predetermined overhead rate(s). Both systems maintain perpetual inventory records with subsidiary ledgers for materials, work in process, and finished goods.
DIFFERENCES IN JOB ORDER AND PROCESS COSTING

Job Order: Costs are accumulated by job. Cost to Make One Unit = Cost of the Job No. of Units in the Job Process Costing: Costs are accumulated by department for a time period (for example, one month). Departments Cost Cost to Make One Unit = for the Month in One Department No. of Units Produced during the Month To find the total unit cost, add the unit costs incurred in each department.
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Cost & Management Accounting (568) FLOW OF COSTS IN A PROCESS COST SYSTEM
Assume that Advanced Technologies, a computer manufacturer, makes its product in three departments: Assembly, Testing, and Packing. Materials and component parts are added in the Assembly Department. Packing materials are added in the Packing Department.
PROCESS COSTING DEMONSTRATION PROBLEM ADVANCED TECHNOLOGIES .ASSEMBLY DEPARTMENT

Advanced Technologies produces notebook computers in three departments: Assembly, Testing, and Packing. Prior to the start of the production process, all the materials and component parts needed to assemble a computer are placed into a .kit.. Manufacturing begins when the Assembly Department receives a kit and begins putting the computer together. Therefore, all materials are added at the beginning of work in the Assembly Department. Conversion costs are added evenly throughout the assembly process. Assume that the Assembly Department of Advanced Technologies began April with 800 units in its work in process inventory. Assembly on these units was 3/4 complete at the beginning of the month. During the month, 3,000 units were started in the
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Assembly Department. At the end of the month, 300 of the units started were still in process; assembly on these units was 2/3 complete. The costs associated with production in assembly during April were as follows: Cost of units in beginning work in process inventory $228,000 Cost of materials used in April 630,000 Cost of direct labor and overhead for April 527,000
PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES. TESTING DEPARTMENT

Advanced Technologies. Testing Department receives completed computers from the Assembly Department. These computers are run through several diagnostic tests to ensure they work properly. The Testing Department began the month of April with 100 units in work in process. Testing on these units was 40% complete. During the month, 3,500 units were transferred in from assembly. There were 500 units in Testing ending work in process, which were 20% complete. The costs associated with production in the Testing Department during April were as follows: Cost of units in beginning work in process inventory $ 40,000 Direct materials (transferred in from assembly) 1,288,000 Cost of direct labor and overhead for April 158,000
SOLUTION:
STEP 1: Determine the units to be assigned costs.
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STEP 2: Calculate equivalent units of production.
STEP 3: Determine the cost per equivalent unit. $1,288,000
STEP 4: Allocate costs to transferred and partially completed units.
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Dr. Amir Hussain Shah Block No. 13, Commerce Department, AIOU, H-8 ISLAMABAD. (0300-970 4138)
M. Hammad Manzoor 508195394 # 508, 5th Floor, CTC Continental Trade Centre, Block-08 08, KARACHI. (0321Clifton 584 2326) Cost & Management Accounting 01 568
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Assignment 1st - 568 - Cost Management Accounting

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Department of Business Administration

Cost & Management Accounting (568)

Rs. 19250/Rs. 18000/Rs. 1250/-

Cost & Management Accounting (568) Solution: Sales:

10, 000 7,500 4000

5000 Factory Overhead (500+400+2600+5000): 8500

Cost & Management Accounting (568) WORKING NOTE: Working No: 01

Rs. 500/Rs. 4000/Rs. 400/Rs. 2600/-

Total Amount is : Working No: 02

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Absorption Base Costing:

Why it was develop:

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Role of Projected financial statements:

Cost & Management Accounting (568)

= 98 x 6 = 588 Article = 300 Articles

= Wage per hour / Standard production per hour

x Rate per price 300 x 0.67 = 200

So Gross Wages of Mr. Khalid = Rs. 200. Explanatory Note:

(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.

= 12Minutes = 3600 = 60 Hours

(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.

= 12Minutes = 3600 = 60 Hours

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Estimated FOH for capacity attained FOH

Estimated FOH for capacity attained Actual FOH

Cost & Management Accounting (568) Solution:

I. Cost. Cost. Rs.

U. Rs. 1.80 1.28

Cost Charged to Dept. 2

Cost accounted for as follows:

Cost & Management Accounting (568)

Cost & Management Accounting (568) Work in process ending inventory

Adjustment for Normal Loss

Distinguish between Job order costing &

SIMILARITIES IN JOB ORDER AND PROCESS COSTING

DIFFERENCES IN JOB ORDER AND PROCESS COSTING

PROCESS COSTING DEMONSTRATION PROBLEM ADVANCED TECHNOLOGIES .ASSEMBLY DEPARTMENT

Cost & Management Accounting (568)

PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES. TESTING DEPARTMENT

Cost & Management Accounting (568)

STEP 3: Determine the cost per equivalent unit. $1,288,000

STEP 4: Allocate costs to transferred and partially completed units.

Cost & Management Accounting (568)

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