MA1 Notes PDF

Management Information MA1
MA1
Management Information
Masters’ Academy Of
Professional Studies
Jhelum Pakistan
Author
Waseem Ahmad Qurashi
Masters’ Academy of Professional Studies +923215040978 Page 1
Chapter 1
Business Organization and Accounting
Office organisation and functions
The office in an organisation is a centre for information and administration.
Office functions
There are a number of areas or functions to be administered and managed within a business. For example, the 'head
office' of say a manufacturing, retailing or service business may cover the following areas:
 Purchasing
 Personnel/human resources
 General administration
 Finance
 Selling and marketing
The function of the purchasing department will be to ensure that the business purchases from suppliers providing the best
overall deal in terms of price, service, delivery time and quality. The purchasing department will also be responsible for
ensuring that only necessary purchases are made by the business.
Any business that employs a significant number of people is likely to have a personnel function or human resources
function as it is often called in larger organisations. This area of the office will be responsible for the hiring and firing of
staff, for training of staff and for the general welfare of the employees.
General administration functions are very wide-ranging but might include secretarial support, dealing with telephone
queries and arranging matters such as rent of properties.
The finance function is also very wide-ranging. On a day-to-day level the accounts department will deal with sending
invoices to customers, receiving invoices from suppliers, payment of suppliers, receiving money from customers and
making other payments such as purchases of non-current assets and payment of employees. The higher levels of
management in the accounting function may also be responsible for management of the cash balances and for the overall
financing of the organisation.
The selling and marketing function will deal with all aspects of taking sales orders, advertising, and any sales personnel.
Organisation charts
Organisation charts are a traditional way of depicting the various roles and relationships of the formal structure. They are
a simplified and standardised way of showing:
 The units (eg departments) into which the organisation is divided and how they relate to each other
 Formal communication and reporting channels
 The structure of authority, responsibility and delegation

 Any problems in these areas, such as excessively long lines of communication, lack of coordination between units
or unclear areas of authority.
Functional departmentation
Functional organisation involves setting up departments for people who do similar jobs. Primary functions in a
manufacturing company might be production, sales, finance, and general administration.
Sub-departments of marketing might be selling, distribution and warehousing.
Geographical departmentation
Where the organisation is structured according to geographic area, some authority is retained at Head
Office but day-to-day operations are handled on a territorial basis (eg Southern region, Western region).
Many sales departments are organised territorially.

Product/brand departmentation
Some organisations group activities on the basis of products or product lines. Some functional departmentation remains
(eg manufacturing, distribution, marketing and sales) but a divisional manager is given responsibility for the product or
product line, with authority over personnel of different functions.

Centralisation/decentralisation
In many organisations administrative functions are carried out at head office as much as is possible.
When this is the case, the administration function is said to be centralised.
A centralised administration department involves as many administrative tasks as possible being carried out at a single
central location, such as head office
When administrative tasks are carried out at various separate locations, the administration function is said to be de-
centralised. This may be appropriate when there is a large geographical spread between local offices or where
substantially different activities are performed in separate locations.
Advantages of a centralised administration office

 Consistency – for example, the same account codes are likely to be used no matter which part of the organisation
submits an invoice. Everyone uses the same data and information.
 Decisions are made at one point and so are easier to co-ordinate.
 It gives better security/control over operations and it is easier to enforce standards.
 Head office is in a better position to know what is going on. Senior managers in an organization can take a wider
view of problems and consequences.
 Decisions are made that benefit the organisation as a whole, rather than just the local office.
 Senior management can keep a proper balance between different departments or functions eg by deciding on the
resources to allocate to each.
 Quality of decisions is (theoretically) higher due to senior managers' skills and experience.
 Crisis decisions are taken more quickly at the centre, without need to refer back, get authority etc.
 There may be economies of scale available, for example, in purchasing computer equipment and supplies.
 Administration staff are in a single location and more expert staff are likely to be employed. Career paths may be
more clearly defined.
 Standardisation of policies, systems, procedures and documentation.
 Specialised staff can be used.
 Duplication of services can be avoided and thus costs reduced.
Advantages of a decentralised administration office.

 Local offices do not have to wait for tasks to be carried out centrally
 No reliance on head office. Local offices are more self-sufficient
 A system fault or hold-up at head office will not affect the organisation at a local level
 Procedures may be tailored to suit local offices
 Decisions are made by people with knowledge of local situations. Geographically dispersed organisations should
often be decentralised on a regional/area basis
 Decisions can be made more quickly because no need for head office approval
 Local managers are able to make their own decisions, which may help motivate them
 More opportunities for junior managers to take on responsibility – important since job challenge and
entrepreneurial skills are highly valued in today's work environment
 There may be greater continuity between functional and general management, which may enable junior
managers to make the transition to senior management more smoothly
 Top managers are free to focus on matters affecting the organisation as a whole, and are not overly burdened or
stressed with local concerns

 Easier to identify separate spheres of responsibility, which may result in improved controls, performance
measurement and accountability
Policy manual
A policy manual should help to ensure that all personnel follow procedures and best practices.
As you will be starting to realise in any reasonable sized business there will be a lot of different transactions and roles
being carried out by many different people in the organisation. As with any entity, in order for the management to keep
control of the activities there will have to be some form of rules and procedures.
For example, there must be authorisation policies for the purchase of non-current assets, procedures for choosing new
suppliers, procedures for accepting new customers, limits on business expenses etc.
In smaller organisations where only a handful of individuals are involved in the transactions of the business such
procedures and best practices can be communicated orally by management. However in larger organisations where there
are very many people carrying out functions possibly at a number of different geographical locations then a more formal
procedure is needed to ensure that the correct procedures and practices are followed.
This often takes the form of a policy manual which will set out the required procedures for all of the various functions of
the business. Every employee will be expected to have read the areas relevant to their functions and the policy manual
should always be readily available for easy reference.
Although a policy manual is to be recommended as a form of control over the activities of employees care must be taken
that strict adherence to the rules does not create inflexibility and in cases of doubt a more senior member of the staff
should be consulted.
Main types of transactions of a business

The main types of transactions that most businesses enter into are sales, purchases, paying expenses, paying employees
and purchasing non-current assets.
It was mentioned earlier that businesses come in all shapes and forms however there will be a number of types of
transactions which will be common to most businesses:
 Making sales
 Paying employees
 Making purchases  Purchasing non-current assets
 Paying expenses
For each of these functions we will consider the key personnel involved in initiating, processing and completing the
transaction.
Making sales
In a retail organisation sales made on the shop floor. However, in a manufacturing organisation there will normally be a
sales and marketing function whose responsibility is to market the organisation's products and take orders from
customers. Often the day-to-day responsibility for taking orders will be with the salesmen and women. This may be done
over the telephone or may be via personal visits to customers or potential customers.

If a sale is being made to an existing customer, provided that customer has not exceeded their credit balance then the
procedure will be for the sales person to take details of the order and pass those details to the stores department for
despatch and to the accounts department for invoicing of the customer.
However if the sale is to a new customer then a more senior level of management will have to be involved because if the
sale is to be on credit, the credit status of the new customer must be determined and a decision made as to whether sales
on credit should be made to this customer.
Once the goods have been despatched to the customer, responsibility then passes to the accounting function to invoice
the customer for the goods and to ensure that payment is received.
Making purchases
The making of purchases will initially be started by either the purchasing department or the stores department. The need
for the purchase of more goods will be recognised by, for example, the stores manager when he realises that an item of
inventory is running low. He will then complete a purchase requisition which must be authorised and then the purchasing
function will determine the most appropriate supplier on the basis of price, delivery and quality. An order will be placed by
the purchasing function and the goods will normally be received by the stores department.
After this, responsibility then goes to the accounting department which will await the arrival of the invoice for the goods
from the suppliers, will check that the invoice is accurate and for goods that have in fact been received and then in due
course pay the amount due to the supplier.
Paying expenses
Organisations will incur a variety of expenses such as rent and rates, insurance, telephone bills, energy bills, advertising
expenses etc. In some cases these will be incurred by a specific department of the business such as the marketing
department entering investing in an advertising campaign or alternatively the receipt of the telephone bill will be part of
the general administration of the business.
When bills for expenses are received they will be passed to the accounting function which will check that the expense has
been incurred or is reasonable and then will process the expense for payment.
Paying employees
Every week and/or every month the employees of the business must be paid. For this process to take place there are a lot
of calculations to be made and a lot of paperwork to be filled out. In larger
organisations there will be payroll department which will deal with this otherwise it will be the responsibility of the payroll
clerk in the accounting function.
The payroll function will determine the gross pay for each employee, based upon a variety of different remuneration
schemes and then will calculate the statutory and other deductions that must be made and will then calculate the net pay
due to the employee. Finally the payroll function must then organise the method of payment to the employees.
Purchasing non-current assets

From time to time an organisation will need to purchase non-current assets. These are assets that are to be used in the
business for the medium to long term rather than being purchased for resale. This will include items such as machinery,
cars, computer equipment, office furniture etc.

In order for the purchase of non-current assets to be put in motion the manager of the department which requires the
asset must firstly fill out a purchase requisition. As most non-current assets are relatively expensive this will probably have
to be authorised by more senior management. Once the requisition has been authorised the purchasing function will then
find the most appropriate supplier for the assets.
Once a purchase order has been placed the details will then be passed to the accounting function which will then process
and pay the invoice when it is received. It will be necessary to verify or check that employees and payments are valid
during this process, this is covered in the following section.
QUESTION Business personnel
Which of the following personnel in an organisation would not be involved in the purchase of materials?
A Credit controller
B Stores manager
C Accounts clerk
D Purchasing manager
ANSWER
A The credit controller deals with credit customers not the purchase of materials
Control over transactions

In order for management to control the transactions of the business there must be a system of
authorisation of transactions in place.
As you may have noticed in the last section any transaction that a business is involved in will tend to involve a number of
different people within the organisation. You will have also noticed the requirement for transactions to be authorised.
The management of a reasonably large business cannot have the time to personally be involved in every transaction of the
business. However in order to keep control of the sources of income of the business and the expenditure that the business
incurs it is important that transactions are authorised by a responsible member of the management team.
In particular this means that management must have control over the following areas:
 Sales on credit made to new customers. If a sale is made on credit the goods are sent out with a promise from
the customer to pay in the future therefore the management of the business must be as certain as they can be
that this new customer can, and will, pay for the goods. This means that the credit controller must be happy that
the new customer has a good credit rating and is fairly certain to pay for the goods.
 Purchases of goods or non-current assets and payments for expenses. This is money going out of the business
therefore it is essential that these are necessary and valid expenditures so a responsible official must authorise
them.
 One of the largest payments made by most organisations is that of the wages bill for their employees. It is
essential that only bona fide employees are paid for the actual hours that they have worked therefore
authorisation of the payroll is a very important part of any business. 11

Double entry bookkeeping – basic principles

Refer to FA1 knowledge
Cost ledger accounting

Cost accounting is the accumulation of costs for inventory valuation in order to meet the requirements of external
reporting and also for internal profit measurement. In other words it produces information for both financial accounting
and management accounting.
For primary books refer to FA1 knowledge
Integrated system
An integrated system is one which combines the cost accounting and financial accounting functions in one system of
ledger accounts. An integrated system combines the cost accounting and financial accounting functions into one system of
ledger accounts. This gives a saving in terms of time and cost. However it has the disadvantage of trying to fulfil two
purposes with one set of ledger accounts despite the differences between financial accounting and management
accounting requirements
Interlocking system
An interlocking system has a separate cost ledger for the cost accounting function and a separate financial ledger for the
financial accounting function.
An interlocking system is one where separate ledgers are kept for the cost accounting function (the cost ledger) and the
financial accounting function (the financial ledger). The cost ledger and financial ledgers will each include a control
account. Many organisations will have the usual debit and credit entries made to the financial accounting system, which
also contains a memorandum cost ledger account which will have posted all items which are transferred to the cost
accounting system.
Within the cost ledger there is a control account to provide a place to record items that are of a financial accounting
nature.
For example, when an invoice is received for materials, the materials control account will be debited but instead of
crediting the payables account, as the cost ledger does not record payables, the credit is to the cost ledger control
account. This means that the cost ledger does not keep a separate record of payables. This would also be the case with
trade receivables: rather than debiting a receivables account when a sale is made, the cost ledger control account is
debited instead.
The use of the control accounts as described above means that double entries can be made for all transactions. This
preserves the integrity of the double entry system.
Although an interlocking system allows easier access to cost accounting information, it is more time consuming to prepare
two sets of ledger accounts and the two ledgers will need reconciling on a regular basis to ensure that they are in
agreement.

Computerised accounting systems

A computerised accounting system will allow much quicker and more accurate entries to the accounting system.
Almost all businesses now use some form of computerised accounting system.
In a full ledger computerised system the computer system will normally maintain the following ledgers:
 General or main ledger (for all asset, liability, income and expense accounts)
 Receivables ledger – accounts for each customer
 Payables ledger – accounts for each supplier
 Cash books – including the main cash book and the petty cash book
The system may also contain detailed inventory records and a programme for dealing with payroll.
Accounting using a computerised system involves inputting data, processing it according to accounting rules contained in
the software, and producing output ('the accounts' or other management reports).
Computerised accounting therefore follows a data processing cycle of input, process, and output.
 (Data is collected. There has to be a system or procedure for ensuring that all the data required is collected and
made available for processing. The quality, accuracy and completeness of the data will affect the quality of
information produced.
 Data is processed into information, perhaps by summarising it, classifying it and/or analysing it. For example, a
receivables ledger system may process data relating to customer orders so as to:
o Produce a report of the total sales for the day/week
o Record the total value of invoices issued in the receivables control account in the general ledger
 Files are updated to incorporate the processed data. Updating files means bringing them up to date to record
current transactions. Updating the personal ledgers and the receivables control account are file updating
activities to keep the receivables ledger records up to date.
 Data is communicated. Continuing the example of the receivables ledger system, output may consist of customer
statements and management reports.
In terms of accounting systems and databases, a data file is a collection of records with similar characteristics. Examples
of data files include the receivables ledger, the payables ledger and the general ledger.
A record in a file consists of data relating to one logically definable unit of business information. A collection of similar
records makes up a file. For example, one record in the receivables ledger file would be one customer account.
A record is made up of several fields. A field is an item of data relating to a record. For example, a customer record would
include a field for the customers account number, another for the customer name, another for their credit limit, and so on.
Records on a file should contain at least one key field. This is an item of data within the record by which it can be uniquely
identified. An example would be a unique code for each customer.
In older systems, files may be conventionally classified into transaction files, and master files. These distinctions are
particularly relevant in batch processing applications, described in a moment.

A transaction file is a file containing records that relate to individual transactions. For example, when a company sells
goods, the sales for each day may be recorded in the sales day book. The sales day book entries are examples of
transaction records in a transactions file.
A master file in such a system is a file containing reference data, such as customer names and addresses, and also
cumulative transaction data such as 'year to date' sales.
For example, in a payables ledger system, master file data would include:
(a) 'Standing' reference data for each supplier (supplier name and address, reference number, amount currently owed
etc), and
(b) Transaction totals for each supplier showing purchases, purchase returns and payments.
The terms transaction file and master file are not used much in modern processing, which prefers to talk in terms of
'databases'.
Files are used to store data and information. The main types of data processing operations involving files are file updating,
file maintenance and file enquiry.
Data processing
Batch processing
Batch processing involves transactions being grouped and stored before being processed at regular intervals, such as
daily, weekly or monthly. Because data is not input as soon as it is received the system will not always be up-to-date.
For example, payroll processing for salaried staff is usually done in one operation once a month. To help with organising
the work, the payroll office might deal with each department separately, and do the salaries for department 1, then the
salaries for department 2, and then department 3, and so on. If this is the case, then the batch processing would be
carried out by dividing the transaction records into smaller batches eg one batch per department.
Transactions will be collected up over a period of time, and will then be dealt with together in a batch.
Some delay in processing the transactions must therefore be acceptable.
Batch input allows for good control over the input data, because data can be grouped into numbered batches. The
batches are dispatched for processing and processed in these batches, and printed output listings of the processed
transactions are usually organised in batch order.
If any records 'go missing' it is possible to locate the batch in which the missing record should belong.
Errors in transaction records can be located more quickly by identifying its batch number. A check can be made to ensure
that every batch of data sent off for processing is eventually received back from processing, so that entire batches of
records do not go missing.
The lack of up-to-date information means batch processing is usually not suitable for systems involving customer contact.
Batch processing is suitable for internal, regular tasks such as payroll.
Example: batch processing of receivables ledger application

A company operates a computerised receivables ledger using batch processing based on paper records.
The main stages of processing are as follows.
Step 1 Sales invoices are hand-written in a numbered invoice book (in triplicate ie three copies per invoice). At the end of
the day all invoices are clipped together and a batch control slip is attached. The sales clerk allocates the next unused
batch number from the batch control book. He or she enters the batch number on the control slip, together with the total
number of documents and the total value of the invoices. These details are also entered in the control book.
Step 2 The batch of invoices is then passed to the accounts department for processing. An accounts clerk records the batch
as having been received.
Step 3 The relevant account codes are written on the invoices and control slip. Codes are checked, and the batch is keyed
into the computerised receivables ledger system.
Step 4 The clerk reconciles the totals on the batch control slip with the totals for valid and rejected data.
Step 5 The ledger update program is run to post data to the relevant accounts.
Step 6 A report is printed showing the total of invoices posted to the ledger and the clerk reconciles this to the batch
totals.
Step 7 All rejected transaction records are carefully investigated and followed up, usually to be amended and then re-input
with the next processing run.
Real-time, online processing

Real time, online processing involves transactions being input and processed immediately, in 'real time'.
Online refers to a machine which is under the direct control of the main central processor for that system. A terminal is
said to be online when it communicates with the central processor. PCs have their own processor, so are online by
definition.
Online, real time processing is appropriate when immediate processing is required, and the delay implicit in batch
processing would not be acceptable.
Online systems are the norm in modern business. Examples include the following.
(a) As a sale is made in a department store or a supermarket, the item barcode is scanned on the point of sale terminal
and the inventory records are updated immediately.
(b) In banking and credit card systems whereby customer details are often maintained in a real-time environment. There
can be immediate access to customer balances, credit position etc and authorisation for withdrawals (or use of a credit
card).
(c) Travel agents, airlines and theatre ticket agencies all use real-time systems. Once a hotel room, plane seat or theatre
seat is booked up everybody on the system must know about it immediately so that they do not sell the same holiday or
seat to two (or more) different customers.
Most modern accounting software packages use real-time processing.

Most computerised ledger systems are fully integrated which means that when one transaction is input on the computer it
is recorded in all the relevant accounts and records. For example, if a purchase invoice for materials is entered into the
computer system an integrated system will automatically make the following entries:
 Record the purchase in the general ledger accounts

 Record the invoice in the individual supplier's account in the payables ledger
 Increase the inventory balance for that type of material in the inventory records
A computerised system can also produce a variety of reports for management including:
 Inventory records
 Aged receivables listings
 Trial balances, income statements and statements of financial position
 Inventory valuations
 Payroll analysis
The main advantages of computerised accounting systems are that they are:
 Quicker than manual systems

 Generally more accurate, as large numbers of transactions can be processed according to programmed rules
 Able to provide management with a variety of reports and analy

Exercise
Q 1 Which of the following statement about office manual is not correct?
A. They are particularly useful for dealing with out of ordinary situations
B. They can be used to check on the correct procedures in case of doubt
C. They can be used to help with the training of new staff
D. They help to maintain standards of performance
Q 2 What is a prime entry record in an accounting system?
A. A record of an important transaction, usually a high-level transaction
B. An entry in the ledger accounts
C. The first record of a transaction entered into the accounting system
D. A record of direct materials, direct labour and direct expenses costs
Q 3 Which of the following statements are correct?
1) In a system of interlocking accounts, financial accounts and management accounts are recorded in
the same ledger
2) The number of errors in a computerized accounting system should be less than if a manual
accounting system is used.
3) Transactions should be recorded more quickly in a computerized accounting system than in a
manual accounting system
A. Statements 1 and 2 only are correct
B. Statement 1 and 3 only are correct
C. Statement 2 only is correct
D. Statements 2 and 3 only are correct
Q 4 Which of the following best describes double entry bookkeeping?
A. A centre of exchange information between businesses
B. A system of recording business transaction in ledger
C. A system of recording an accounting transaction twice in the main ledger
D. A system of management accounting
Q 5 What is the most appropriate of an office?
A. A centre of exchanging information between businesses
B. A centre for information and administration
C. A place where information is stored
D. A room where many people using IT work
Q 6 Which one of the following is disadvantage of office manuals?
A. Strict interpretation of instructions creates inflexibility
B. The quality of service received from suppliers is reduced
C. They create bureaucracy and de-motivate staff
D. They do not facilities the induction and training of new staff
Q 7 Which one of the following is least likely to be carried out by an Accounts Department?
A. Arrangement of payment of payables
B. Calculation of wages and salaries to be paid
C. Dispatch of customer orders
D. Preparation of company financial records

Q 8 What is the main purpose of prime entry records?

A. To calculate the cash received and spent by a business
B. To prevent a large volume of unnecessary detail in the ledgers
C. To provide a monthly check on the double entry bookkeeping
D. To separate the transactions subject to sales tax from those that are exempt
Q 9 Which of the following is the correct chronological sequence for sales documents?
A. Enquiry—Order – Invoice payment
B. Order – Enquiry – Invoice – Payment
C. Enquiry – Order – Payment – Invoice
D. Enquiry – Invoice – Order – Payment
Q 10 Integrated accounts application packages have a number of advantages. Which of the following in not
one of term?
A. User-friendly, as the functions will be similar in each module
B. Tailored to suit the requirements of the business
C. Compatibility between the modules
D. Efficiency, as there is no need to quite one application to access another
Q 11 Payments to suppliers are entered into an integrated computerized accounting system.
Which of the following does not happen when these payments are entered into the computerized system?
A. The supplier’s individual account is updated in the purchase ledger/payable ledger
B. The payables control account in the nominal ledger (main ledger) is debited
C. The bank account in the nominal ledger is credited
D. The receivables control account in the nominal ledger is credited
Q 12 Which of the following is not a purchasing department?
A. Ensuring that only required goods are purchased
B. Ensuring that suppliers used give the best prices
C. Negotiating discounts with suppliers
D. Paying suppliers’ invoice
Q 13 Which of the following about policy manual is true?
1) It helps to ensure that all personnel follow procedures
2) It helps to ensure best practices
3) All businesses are required by law to keep policy manuals for all activities
A. Statements 1 and 2 only
B. Statements 2 and 3 only
C. Statements 1 and 3 only
D. All 3 statements are true
Q 14 Which of the following is not a function of the accounting department?
A. Sending invoices to customers
B. Receiving invoices from suppliers
C. Making payments of all kinds
D. Taking sales order
Q 15 A section in company policy manual contains the terms ’segregation of duties ’ , ‘job rotation’ and ‘need
to know’
What policy is this section MOST likely to be describing?
A. Staff requirement procedures

B. Staff appraisal and training

C. Responsibility accounting
D. Personnel security controls
Q 16 A company completes a multi-part purchase order set when it purchases supplies.
Copies are for the supplier, warehouse, purchasing department and accounts department.
What is the purpose of the accounts department copy?
A. To place on order
B. To match against the invoice and goods received note
C. To compare with the supplier’s catalogue
D. To compare with the supplier’s advice note
Q 17 Ones materials have been bought, which of the following departments must receive a copy of the
invoice?
A. The accounts department
B. The stores department
C. The goods received department
D. The marketing department
Q 18 Which of the following is usually a function of the accounts department?
1) Payroll preparation
2) Negotiating prices and discounts with suppliers
3) Payment of suppliers’ invoices
4) Reporting difference between budget and actual performance to budget holders
A. 1 and 2 only
B. 3 and 4 only
C. 1,3 and 4 only
D. 2 and 3 only
Q 19 Which number of staff is MOST likely to raise a purchase requisition?
A. Cost clerk
B. Financial accountant
C. Purchase ledger clerk
D. Storekeeper
Q 20 Which of the following statements about office manual is not correct?
A. They are particularly useful for dealing with out of the ordinary situations
B. They can be used to check on the correct procedures in cases of doubt
C. They can be used to help with the training of new staff
D. They help to maintain standards of performance
Q 21 Which of the following features are characteristics of an integrated accounting system?
1) Management accounting and financial accounting ledger accounts are held in the same ledger
2) There are no individual ledger accounts for receivables or payables
3) Transactions are coded for both financial accounting purposes and management accounting
purpose
A. 1 only
B. 1 and 2 only
C. 1 and 3 only
D. 2 and 3 only
Q 22 Company A buys goods from company B on credit
How will this transaction be recorded in company A’s books?
A. Dr Cash Cr Purchases
B. Dr Purchases Cr Creditors

C. Dr Creditor Cr Purchases
D. Dr Purchases Cr Cash
Q 23 Which of the following statement is correct?

A. A debt entry may increase a liability
B. A debit entry may increase an asset
C. A credit entry may decrease a liability
D. A credit entry may decrease income
Q 24 Which of the following are books of the prime entry?
1) Cash book
2) General journal
3) Sales day book
4) Payroll
A. 1,2 and 3 only
B. 2 and 4 only
C. 1 and 4 only
D. 1 and 3 only
Q 25 A company operates a cost and financial accounts.
Which of the following accounts will NOT appear in the cost ledger?
A. Cost of sales account
B. Production overhead control account
C. Debtors control account
D. Work-in-progress control account
Q 26 H Limited sells goods to R Limited. The customer pays by cheque credit is involved.
In H’s accounting system, which of the following will record the details of this transaction?
A. A purchase invoice, the bank, the sales account
B. A sale invoice, the cash book, the customer’s account
C. A sale invoice, the cash book, the sales account
D. A sales invoice, the customer’s account ,the sales account
Q 27 Which of the following function is credit controller likely to perform?
A. Controlling wage levels
B. Controlling debtors for payment
C. Reducing costs
D. Increasing sales
Q 28 Which of the following will not be a function of the human resources department?
A. Hiring employees
B. Firing employees
C. Paying employees
D. Arranging training of employees
Q 29 The following statements relate to the policy manual of an organization:
1) Policies should be in place to deal with the authorization of purchase of fixed assets
2) Employees will need to know where to find the policy manual to refer to but need not have read it
3) Strict adherence to the manual can lead to inflexibility
A. All 3
B. 1 and 2 only
C. 1 and 3 only
D. 2 and 3 only

Q 30 Purchase invoice are entered into an organization’s computer system at the end of each day. What is
this?
A. Batch processing
B. Real time on line processing
C. File maintenance
D. File updating

Chapter 2
Introduction to Management Information
Data
Data is a 'scientific' term for facts, figures, and measurements. Data are the raw materials for
data processing.
Examples of data include the following.
 The number of tourists who visit Hong Kong each year
 The sales revenues of all restaurants in Zambia
 The number of people who pass their driving test each year
Information
Information is data that has been processed in such a way as to be meaningful to the person
who receives it. Information is anything that is communicated.
Management is the term used for the people in charge of running a business (managers) or other
organisation.
Management information can therefore be described as information that is given to the people
who are in charge of running an organisation. The report described above is one example of
management information.
Purpose of Management information

Management information is information supplied to managers for the purposes of planning,
control and decision making.
Management needs information for planning and control. Process of planning and control is
called budgetary cycle.
Planning:
It includes
 Setting objectives
 Search for alternative course of action to achieve the objectives.
 Gather data about alternatives.
 Select appropriate course of action. (Decision Making)
Objectives are aims or goals of an organization. For example an organization may want to
increase its profit by 10% in near future or it may want to introduce a new product. To achieve this
objective management must be aware of its own strengths and weaknesses as well as information
about the environment in which it is working for example its competitors, government legislation
etc.
To achieve objectives management may have different course of actions (strategies). For example
an organization can increase its profit by increasing sales price, entering into new market, or
introducing a new product etc. however management must have detailed knowledge of
consequences of each of its actions. If organization increases its price of its product there may be a
chance of decline in sales. If it wants to enter in new market or introduce a new product, it may

need extra investment, so organization need to choose the best course of action. Once the best
strategy is being selected it is then implemented. The process of implementing the best course of
action is called decision making. If the chosen strategy does not work in accordance to
anticipation, the process starts again from setting objectives.
Control:
It includes Monitoring of actual results and comparing them with objectives. If actual results vary
from objectives management need to give an appropriate response. This response is called
control which is either Feedback or feed forward.
Feedback Control: Action taken by manager in response to recorded differences between
budget and actual performance. Action may be taken to correct deviation (variance) or revise
budget. Feedback control is reactive it means that the action is taken after the actual results
have been recorded.
Feed forward Control: Action taken by manager in response to differences between current
forecast and budget to bring actual results more in line to budget.it means that feed forward
control is revision of objectives. For example, an organization prepared a budget for full year
and results of first quarter significantly deviated from budget. Management need to reconsider
the budget of remaining three quarters. This is called feed forward control.
Reports for management

Producing useful management information such as a report depends on understanding the
needs of the end user and of the organisation.
Reports to managers should enable them to manage the resources for which they are
responsible, and give the required level of detail.
If management information does not contain enough detail, it may fail to highlight problems
within the organisation. On the other hand, too much detail may mean that the most
important information is not seen.
Reporting information requires the active co-operation of the following groups.
 End users: managers and supervisors
 The accounts department: which usually processes the information
 The information technology department: which usually sets up and makes changes to
the computer system
Difficulties may arise when these groups fail to communicate effectively or when the system
itself is not flexible enough to respond to changing needs. Information requirements must be
clearly specified.
Management information reports might also show the following.
 Comparisons between planned results (budgets) and actual results

 Year-to-date (cumulative information)

 Comparison of company results and competitor results
 Comparison between current year and previous year's results
 The profitability of a product or service or the whole organisation
 The value of inventories that are still held in store at the end of a period
Sources of Information:
Management gather information from two sources;
 Internal sources
 External sources
Internal Sources includes, accounting records, personal information of employees, production
department records (about material wastage, labour time per unit etc.)
External Sources includes, customers, Suppliers, society at large, newspaper, internet etc. When
organization want to use external sources to gather information it has two choices.
It uses the data collected by any other person, organization etc. (secondary data)
It collects data at its own (Primary data)
Methods of collecting Primary Data:

 Questionnaires
 Interview
o Personal
o Phone Calls
 Observations
 Focus Group Interviews
Qualities of Good Management Information:
Quality Example
A Accurate Figures should add up, the degree of rounding should be appropriate, there
should be no mistakes.
C Complete Information should include all relevant information – information that is
correct but excludes something important is likely to be of little value. For
example external data or comparative information may be required.
C Cost-beneficial It should not cost more to obtain the information than the benefit derived
from having it.
U User-targeted The needs of the user should be borne in mind, for instance senior
managers may require summaries.
R Relevant Information that is not relevant should be omitted.

A Authoritative The source of the information should be reputable and reliable.
T Timely The information should be available when it is needed.
E Easy to use Information should be clearly presented, not excessively long, and sent
using the right communication channel (email, telephone, intranet, hard
-copy report etc).
Financial Accounting Vs. Management Accounting:
Financial accounts Management accounts

Financial accounts are prepared primarily Management accounts can be
for external use and detail the performance generated for any period of time, (eg
of an organisation over a defined period and hourly, daily, weekly) and are used to
the state of affairs at the end of that period. aid management plan and control
the organisation's activities and to
help the decision-making process.
Limited companies must, by law, prepare There is no legal requirement to
financial accounts. prepare management accounts.
Financial accounts Management accounts
The format of published financial accounts The format of management accounts

is determined by law and by accounting is entirely at management discretion:
standards. In principle the accounts of no strict rules govern the way they
different organisations can therefore be are prepared or presented. Each
easily compared. organisation can devise its own
management accounting system and
format of reports.
Financial accounts concentrate on the Management accounts can focus on
business as a whole, aggregating revenues specific areas of an organisation's
and costs from different operations, and are activities.
an end in themselves. Information may be produced to aid
a decision rather than to be an end
product of a decision.
Most financial accounting information is of Management accounts incorporate
a monetary nature. non- monetary measures.
Management may need to know, for
example, tons of aluminium
produced, monthly machine hours, or
miles travelled by salesmen.
Financial accounts present an essentially Management accounts are both an
historic picture of past operations. historical record and a future
planning tool.

Cost accounting vs Management accounting

Cost accounting is that branch of accounting which aims at generating information to control
operations with a view to maximizing profits and efficiency of the company, that is why it is also
termed control accounting. Conversely, management accounting is the type of accounting which
assist management in planning and decision-making and thus known as decision accounting.
BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON
Meaning The recording, classifying and The accounting in which both financial
summarising of cost data of an and non-financial information are
organisation is known as cost provided to managers is known as
accounting. Management Accounting.
Information Type Quantitative. Quantitative and Qualitative.
Objective Ascertainment of cost of Providing information to managers to

production. set goals and forecast strategies.
Scope Concerned with ascertainment, Impart and effect aspect of costs.

allocation, distribution and
accounting aspects of cost.
Specific Procedure Yes No
Recording Records past and present data It gives more stress on the analysis of
future projections.
Planning Short range planning Short range and long range planning
Interdependency Can be installed without Cannot be installed without cost

management accounting. accounting.

Financial Vs. Non-Financial Information
Financial Non-Financial
Financial Information has monetary value Non-Financial information does not have Monetary
value
Wages of employees No of Hours required per unit
Sales Price Sales in Units
Cost Per unit No of units produced
Role of Trainee Accountant:
• Calculation of cost of production cost of department and revenue.

• Valuation of inventory i.e. Material, WIP and finished goods.
• Overhead absorption rates and profitability of product
• Future cost of goods & services
• Variance calculation
• Performance statements
• Budget Cycle
Note keep a key point in mind that trainee accountant does not have powers for decision making

Exercise
Q 1 Which of the following qualities is not necessarily a quality of good information?
A. It should be relevant
B. It should be understandable
C. It should be worth more than it costs to produce
D. It should be available quickly
Q 2 Information can be described as:
A. Data that consists of facts and statics before they have been processed
B. Data that consists of number, letters, events and transactions which have been recorded but not yet
processed into a form that is suitable for making decisions.
C. Facts that have been summarized but not yet processed into a form that is suitable for making
decisions
D. Data that has been processed in such a way that it has a meaning to the person who receives it, why
may them use it to improve the quality of decision making
Q 3 Which of the following is not a purpose of management information in a company?
A. To provide records of current and actual performance
B. To compare actual performance with planned performance
C. To help management with decision making
D. To inform customers about the company’s products
Q 4 Which of the following is not correct?
A. Cost accounting can be used for inventory valuation to meet the requirements of internal reporting
only
B. Management accounting provides appropriate information for decision making
C. Routine information can be used for both shirt-term and long-term decisions
D. Financial accounting information can be used for internal reporting purposes
Q 5 Which of the following are all qualities of good management information?
A. Digital, brief, relevant
B. Reliable, consistent, timely
C. Secure, accurate, printed
D. Accessible, universal, complete
Q 6 Which of the following statements is incorrect?
A. Management accounting reports are more accurate than financial accounting statements
B. Management accounting reports are more detailed than financial accounting statements
C. Management accounting reports are more frequent than financial accounting statements
D. Management accounting reports are more disclosed to shareholder and investors
Q 7 Which of the following is always a quality of good information?
A. Immediate available
B. Availability to everyone
C. Reliable
D. Technically accurate
Q 8 Which one of the following statements is correct?
A. Data is held on computer in digital from whereas information is in a form that is readable to human
beings
B. Information is obtained by processing data
C. Data and information mean the same thing
D. Data consists of numerical or statistical items of information

Q 9 Which of the following item of information might be produced by a management accounting system?
A. Income tax deducts from employees’ wages and salaries
B. Amounts of money owed to suppliers
C. Current bank balance
D. Profitability of product item
Q 10 Which of the following is an example of external information that could be used in a management
accounting system?
A. Consumer price index number
B. Price list for the products sold by the business
C. Production volume achieved by the production department
D. Discounts given to customers
Q 11 Which of the following is not management accounting information?
A. Sales budget
B. Variance report
C. Payroll report
D. Profitability report
Q 12 Which of the following items would be included in the financial accounting system but not in the
management accounting system?
A. Sales commissions payable to sales representatives
B. Costs of repairs to the officer air conditioning system
C. Profits paid out in dividends to the business owners
D. Direct labour costs
Q 13 Why management information is is valuable for decision making?
A. It enable management to make the correct decision
B. It helps management to reach a more informed decision
C. It can be used to judge whether the decision taken by management was correct
D. It enables managers to make decisions more quickly
Q 14 Which of the following would be classified as data?
A. Number of purchase requisitions
B. Analysis of wages into direct and indirect costs
C. Table showing variance from budget
D. Graph showing the number of labour hours worked
Q 15 Which of the following are primary data?
1) Information on timesheet used for making up wages
2) Information from a government publication concerning forecast inflation rates used for budgeting
3) Information from a trade publication used to chose a supplier of raw materials
A. 1 and 2
B. 1 and 3
C. 1 only
D. 1,2 and 3

Q 16 Which of the following is a feature of financial accounting information?

A. It is used to calculate the cost of a product or service
B. Limited companies are required by law to prepare this information
C. It is concerned with future results as well as historical information
D. The benefit must exceed the cost and it must be relevant for purpose
Q 17 What is the scientific term for facts, figures and information?
A. Consultancy
B. Data
C. Referencing
D. Statistics
Q 18 Which of the following is true with regard to management information?
A. It is the same as operating system
B. It must be produced by a computer
C. It should be completely accurate, regardless of cost
D. It should be produced if its cost is less than the increased revenue to which it leads
Q 19 Which one of the following is an example of internal information for the wages department of a large
company?
A. A code of practice issued by the institute of Directors
B. Anew national minimum wage
C. Changing to tax coding arrangements issued by the tax authorities
D. The company’s employees’ schedule of hours worked
Q 20 Which one of the following would be included in the financial accounts, but may be excluded from the
cost accounts?
A. Blank interest and charges
B. Depreciation of store –room handling equipment
C. Direct material costs
D. Factory manager’s salary
Q 21 Which of the following is an example of external information?
A. Idle time reports
B. Sales price lists
C. Health and safety regulations
D. Accident at work reports
Q 22 Which of the following is not necessarily a quality of good management information?
A. Timeliness
B. Relevance
C. Understandability
D. Prudence
Q 23 Which of the following is none-financial information?
1) Customer preferences
2) Trends
3) Seasonal change
4) Creditors
A. Only 1and2 above
B. 1,2 and3 above
C. Only 4 above
D. All of them

Q 24 Comparison between actual and budgeted costs will help the management in which of the following
areas?
A. Control
B. Planning
C. Implementing
D. Decision making
Q 25 Which of the following about management information is false?
1) It includes both financial and none-financial information
2) It is used for both internal and external reporting
3) It considers only the past data
A. Statement 1 and 3 only
B. Statement 2 and 3 only
C. Statement 2 only
D. All 3 statements are false
Q 26 Which one the following is NOT a purpose of management info in a company?
A. to provide record of current and actual performance
B. to compare actual performance with planned performance
C. to help management with decision making
D. to inform customers about the company’s products
Q 27 A marketing manager receives a sales report in the first week of April, July, October and January which
shows the actual sales of each product by market sector for each of the previous months. The marketing
manager reviews the company’s advertising monthly.
Which attribute of the information provided by the sales report is unsatisfactory from the marketing
manager’s prospective?
A. Its reliability
B. Its completeness
C. Its timeliness
D. Its accuracy
Q 28 Which of the following is an external source of information?
A. A report prepared by the sales manager at the request of the managing director
B. A commercially available report prepared by the market research company
C. Personal development plans updated as a result of conducting appraisals
D. An aged debtor’s analysis report prepared by credit control department
Q 29 The management accountant compares the profitability of two products, P and Q and concludes that P
is the best product to make. He writes a report of his findings for the board of directors. This report will
primarily aid management in:
A. Decision-making
B. Planning
C. Controlling
D. Implementing

Q 30 Non-financial managers are likely to experience problems in understanding and interpreting

management accounting reports.
Which of the following statement is the least appropriate method of dealing with this problem?
A. Highlight and explain any unusual items in the report.
B. Discuss with users the most appropriate form of report.
C. Include clear graphics and charts, and ensure that the narrative is as simple as possible.
D. Ensure that only individuals with some accounting knowledge are appointed to management
positions.
Q 31 Which of the following will improve the communication of information in an organization?
A. Duplicating reports as a standard procedure
B. Removing unnecessary information from the computer system
C. Staff training when a new computer system is installed
D. Documents presented in a format which meet the needs of the reader
Q 32 Which of the following would be classified as financial information?
A. The drawings for the new office block
B. An employee’s appraisal record
C. A company’s expansion plan
Q 33 Which of the following could be considered to be a limitation of cost and management accounting
information?
A. Affected by changing prices over time
B. Includes non-financial as well as financial information
C. Produced periodically
D. Produced in the format required by management

Chapter 3
Cost classification
Classification of costs
Classification can be defined as arrangement of items in logical groups by nature, purpose or responsibility ’
Classification of costs according to their nature

This means grouping costs according to whether they are materials, labour or expense cost.
Material costs
It includes the cost of obtaining the materials and receiving them within the organisation. The cost of having the materials
brought to the organisation is known as carriage inwards.
Labour costs
Those costs incurred in the form of wages and salaries, together with related employment costs. In the United Kingdom,
there is an additional cost borne by the employer in respect of employees which is paid to the government: this is called
National Insurance. These costs are documented internally, the amount of the wages and salary costs being determined
by reference to agreed rates of pay and attendance time and output measures, depending on the method of remuneration
being used.
Overheads
Expense costs are external costs such as rent, business rates, electricity, gas, postages, telephones and similar items which
will be documented by invoices from suppliers.
Classification of costs according to their purpose
Direct cost
A direct cost is one that can be clearly identified with the cost object we are trying to cost. In other words direct cost can
easily be calculated per unit. For example, suppose that a furniture maker is determining the cost of a wooden table. The
manufacture of the table has involved the use of timber, screws and metal drawer handles. These items are classifi ed as
direct materials. The wages paid to the machine operator, assembler and finisher in actually making the table would be
classified as direct labour costs. The designer of the table may be entitled to a royalty payment for each table made, and
this would be classified as a direct expense.
Indirect cost or overheads

Other costs incurred would be classifi ed as indirect costs. They cannot be directly attributed to a particular cost unit,
although it is clear that they have been incurred in the production of the table. Examples of indirect production costs are
as follows:
Cost incurred Cost classification
Lubricating oils and cleaning materials Indirect material
Salaries of supervisory labour Indirect labour

Factory rent and power Indirect expense
Exercise
State whether each of the following costs would be a direct cost or an indirect cost of the quality control activity which is
undertaken in a company’s factory.
● The salary of the quality control supervisor.
● The rent of the factory.
● The depreciation of the quality testing machine.
● The cost of the samples destroyed during testing.
● The insurance of the factory.
Note
Indirect materials are those production materials that do not actually become part of the finished product. This might
include the cleaning materials and lubricating oils for the machinery. The machines must be clean and lubricated in order
to carry out production, but it will probably not be necessary to spend more on these materials in order to manufacture a
further batch. This cost is therefore only indirectly related to the production of this batch.
Indirect labour is the production labour cost which cannot be directly associated with the production of any particular
batch. It would include the salaries of supervisors who are overseeing the production of hairdryers as well as all the other
products manufactured in the factory.
Indirect expenses are all the other production overheads associated with running the factory, including factory rent and
rates, heating and lighting, etc. These indirect costs must be shared out over all of the batches produced in a period.
Selling and distribution overhead includes the sales force salaries and commission, the cost of operating delivery vehicles
and renting a storage warehouse, etc. These are indirect costs which are not specifically attributable to a particular cost
unit.
Administration overhead includes the rent on the administrative office building, the depreciation of office equipment,
postage and stationery costs, etc. These are also indirect costs which are not specifically attributable to a particular cost
unit.
Classification of costs according to their behaviour
Fixed cost
Cost incurred for an accounting period, that, within certain output or turnover limits, tends to be unaffected by
fluctuations in the levels of activity (output or turnover). Fixed cost is also called periodic cost. Fixed cost remains constant
in total but decreases per unit with increase in activity level and increases per unit with decrease in activity level. Examples
of fixed costs are rent, rates, insurance and executive salaries.
Stepped fixed cost

Fixed cost remains constant up to certain level of activity. Consider, for example, the behaviour of the rent cost. Within the
relevant range it is possible to expand activity without needing extra premises and therefore the rent cost remains
constant. However, if activity is expanded to the critical point where further premises are needed, then the rent cost will
increase to a new, higher level.
Variable cost
Cost that varies with a measure of activity. Variable cost remains constant per unit but increases in total with increase in
activity level and decreases in total with decrease in activity level.

Semi-variable or semi fixed cost cost

‘Cost containing both fixed and variable components and thus partly affected by a change in the level of activity. Examples
of semi-variable costs are gas and electricity. Both of these expenditures consist of a fixed amount payable for the period,
with a further variable amount which is related to the consumption of gas or electricity
How to determine nature of cost

 If cost per unit remains constant per unit it is variable cost. If it increases or decreases in total with change in
activity level it is either variable or Semi variable

 If cost remains constant in total it is fixed cost. If it changes per unit with change in activity level it is either fixed
or semi variable
 If cost changes both per unit and in total with change in activity level it is semi variable.
Cost unit
Unit of product or service in relation to which costs are ascertained.
This means that a cost unit can be anything for which it is possible to ascertain the cost. The cost unit selected in each
situation will depend on a number of factors, including the purpose of the cost ascertainment exercise and the amount of
information available
Industry sector Cost unit
Brick-making 1,000 bricks
Electricity Kilowatt-hour (KwH)
Professional services Chargeable hour
Education Enrolled student
Activity Cost unit
Credit control Account maintained
Selling Customer call
Composite cost units

The cost units for services are usually intangible and they are often composite cost units, that is, they are often made up of
two parts. For example, if we were attempting to monitor and control the costs of a delivery service we might measure
the cost per tonne delivered. However, ‘ tonne delivered ’ would not be a particularly useful cost unit because it would not
be valid to compare the cost per tonne delivered from London to
Edinburgh with the cost per tonne delivered from London to Brighton. The former journey is much longer and it will almost
certainly cost more to deliver a tonne over the longer distance.
Business Cost unit
Hotel Bed night
Bus company Passenger mile
Hospital In-patient day
Note: Prime cost = Direct material + Direct labour+ other direct cost

Conversion cost = Direct labour + Production overheads
Cost of production = Direct material + Direct labour+ other direct cost+ Production overheads
Total cost = Cost of production + Non Production overheads
Non production overheads include admin overheads and selling or distribution overheads

Questions
Q 1 Prime cost comprises:
A. All variable costs
B. Direct labour and material only
C. Direct labour, direct material and direct expense
D. Direct labour, direct material and production overhead
Q 2 A semi-variable cost is one that:
A. Increase in direct proportion to output
B. Remains constant irrespective of the level of output
C. Contains an element of both fixed and variable cost
D. Increases throughout the year
Q 3 Which of cost listed below is not a fixed cost?
A. Insurance
B. Business rates
C. Depreciation – based on straight-line method
D. Materials used in production
Q 4 Production overhead comprises:
A. Variable overhead only
B. Indirect labour, indirect materials and indirect expenses related to production activity
C. Indirect expenses only
D. Indirect labour and material related to the production activity
Q 5 A direct cost is:
A. A cost which cannot be influenced by its budget holder
B. Expenditure which can be economically identified with a specific cost unit
C. Cost which needs to be apportioned to a cost centre
D. The highest
Q 6 A factory makes wooden chairs. Which of the following items would be most likely to behave as stepped
costs?
A. Wood used to make chairs
B. Factory supervisors’ salaries
C. Heating and light costs
D. Staples to fix the fabric to the seat of the chair
Q 7 For operational purposes, for a company operating a fleet of delivery vehicles, which of the following cost
units would be most useful?
A. Cost per mile run
B. Cost per driver hour
C. Cost per ton mile
D. Cost per kilogram carried

Q 8 Which of the following is direct expense?

A. Materials used on production
B. Special tools for job 721
C. Power
D. Deprecation
Q 9 Hockey skill manufactures hockey sticks. A summary of some cost heading include:
a. Wood used as raw material
b. Rubber covers for handles
c. Deprecation
d. Power
e. Sales manager’s salary
f. Labour in assembly department
g. Oil and greases
h. Telephone and postage
i. Insurance of plant
j. Supervisory labour
The items classified as production overhead would be:
A. A, f, d and e
B. c, d, g, i, and j
C. e, h, i, and j
D. a, b, c, d, and f
Q 10 A small engineering company that makes generators specifically to customers’ own designs has had to
purchase some special tools for a particular job. The tools will have no further use after the work has been
completed and will be scrapped.
The cost these tools should be treated as:
A. Variable production overhead
B. Fixed production overheads
C. Indirect expenses
D. Direct expenses
Q 11 Which of the following statements is correct about costs in a manufacturing business?
A. A fixed cost per unit is the same at all levels of output
B. The fixed cost per unit falls as output increase, at a constant rate
C. The fixed cost per unit falls as output increase, at a decline rate
D. The fixed cost per unit falls as output increase, at an increasing rate
Q 12 Which of the following is most likely to be treated as an indirect cost by a house builder?
A. Nails and screws
B. Windows
C. Bricks
D. Electricity cables

Q 13 What is the full production cost per unit of a manufactured product?

A. Direct material cost plus direct labour cost per unit
B. Prime cost plus production overhead cost per unit
C. Prime cost plus variable production overhead per unit
D. Production overhead cost per unit
Q 14 Which one of the following statement is true?
A. Heating costs are a variable cost because they differ according to the season of the year
B. A semi-variable cost is fixed for a certain level of activity and then changes to a new fixed level
C. The fixed cost per unit of output decreases as output increases
D. Total variable costs are constant at all level of output
Q 15 The following costs are recording for different levels of production:

Period 1 Period 2 Period 3
Costs $1,400 $1,600 $1,600
Units of production 200 300 400
This cost could be classified as:
A. Fixed
B. Variable
C. Semi-variable
D. Stepped
Q 16 Which of the following cost would be classified as an indirect cost?
A. Flour of baking bread
B. Invoice for icing a wedding cake
C. Wages cost of baker
D. Depreciation of ovens
Q 17 Which one of the following cost would be classified as direct labour?
A. Personnel manager in a company servicing cars
B. Bricklayer in a construction company
C. General manager in a DIY shop
D. Maintenance manager in a company producing cameras
Q 18 Which one of the following cost would be classified as indirect labour?
A. Assembly workers in a firm that manufactures digital video records
B. A stores assistant in a factory stores
C. A plasterer in a building construction firm
D. An audit clerk in a firm of auditors
Q 19 Which one of the following items of cost can be treated as a sales and distribution overhead expense within
a manufacturing business?
A. Cost of after-sales to customers
B. Telephone charges
C. Cost of building insurance
D. Warehouse rental for storage of raw materials

Q 20 The annual costs of supervision in a department are estimated to be $40,000 if hours worked in the
department are less than 32,000 each years, $65,000 if hours worked are between 32,000 and 50,000 and
$80,000 if hours worked are over 50,000 in the year.
These costs are an example of:
A. A semi-fixed cost
B. A fixed cost
C. A step cost
D. A variable cost
Q 21 What is cost classification?
A. Analysis cost into logical groups according to their common characteristics
B. Apportioning costs to cost centres
C. Charging a fair proportion of the total cost to cost units
D. Allotment of whole items of cost to cost centres or cost units
Q 22 Which of the following describes a cost unit?
A. A method of overhead absorption
B. A location to which costs can be allocated and apportioned
C. A unit of output
D. The cost of a unit of output
Q 23 Brit limited currently pays $1 per item to a distribution company for delivery of its goods to customers. Brit
limited has now decided to opt for a new contract where it will pay $1,800 per period to have all of its items
delivered regardless of how many there are:
What will happen to Brit Limited’s costs as a result for this change?
A. Fixed costs will fall and the variable costs will rise
B. Fixed cost and variable costs will both decrease
C. Fixed costs and variable costs will both increase
D. Fixed costs will rise and the variable costs will fall
Q 24 A particular cost is classified as being ‘semi-variable’.
What will happen to the cost per unit if activity reduces by 8%?
A. It will increase
B. It will reduce by 8%
C. It will remain constant
D. None of the above
Q 25 One of the costs incurred by a company is a variable cost.
What is the effect on variable cost per unit if activity is increased by 40%?
A. Increase by 40%
B. Decrease by 40%
C. Impossible to tell from the information given
D. No changes

Q 26 A particular cost is described as fixed in total for a period.

If activity doubles within the same capacity limits, what happens to the fixed cost per unit?
A. It remains constant
B. It doubles
C. It halves
D. None of these
Q 27 The cost accountant has analysed expected overhead costs as follows:
Variable overheads $4.60 per unit of output
Fixed overhead $34,600 per period
Prime costs $9.60 per unit of output
What would be the expected total costs for output of 14,700 units in a period?
A. $208,200
B. $123,700
C. $243,340
D. $67,500
Q 28 The total cost for each type at two different production levels is:
Cost type Total cost for 125 units Total for 180 units
$ $
T1 1,000 1,260
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
A. T1 and T3
B. T1 and T4
C. T2 and T3
D. T2 and T4
Q 29

Q 30 A linear variable cost – when the vertical axis represents cost incurred.
(A) Graph 1
(B) Graph 2
(C) Graph 4
(D) Graph 5
Q 31 A fixed cost – when the vertical axis represents cost incurred.
(A) Graph 1
(B) Graph 2
(C) Graph 3
(D) Graph 6
Q 32 A linear variable cost – when the vertical axis represents cost per unit.
(A) Graph 1
(B) Graph 2
(C) Graph 3
(D) Graph 6

Q 33 A semi-variable cost – when the vertical axis represents cost incurred.
(A) Graph 1
(B) Graph 2
(C) Graph 4
(D) Graph 5
Q 34 A step fixed cost – when the vertical axis represents cost incurred.
(A) Graph 3
(B) Graph 4
(C) Graph 5
(D) Graph 6
Q 35
Q 36 The variable production cost per unit of product B is £2 and the fixed production overhead for a period is
£4,000. The total production cost of producing 3,000 units of B in a period is £
Q 37 Spotless Limited is an office cleaning business which employs a team of part-time cleaners who are paid
an hourly wage. The business provides cleaning services for a number of clients, ranging from small offi ces
attached to high-street shops to large open-plan offi ces in high-rise buildings.
In determining the cost of providing a cleaning service to a particular client, which of the following costs would be a direct
cost of cleaning that client’s office and which would be an indirect cost?
(a) The wages paid to the cleaner who is sent to the client’s premises

(b) The cost of carpet shampoo used by the cleaner
(c) The salaries of Spotless Ltd’s accounts clerks
(d) Rent of the premises where Spotless Ltd stores its cleaning materials and equipment
(e) Travelling expenses paid to the cleaner to reach the client’s premises
(f) Advertising expenses incurred in attracting more clients to Spotless Ltd’s business
Q 38 A company manufactures and retails clothing.
When determining the cost of units produced, you are required to write the correct classification for each of the costs
below into the box provided, using the following classifications (each cost is intended to belong to only one classification):
(i) direct materials
(ii) direct labour
(iii) direct expenses
(iv) indirect production overhead
(v) research and development costs
(vi) selling and distribution costs
(vii) administration costs
(viii) fi nance costs
1. lubricant for sewing machines
2. floppy disks for general office computer
3. maintenance contract for general offi ce photocopying machine
4. telephone rental plus metered calls
5. interest on bank overdraft
6. Performing Rights Society charge for music broadcast throughout
the factory
7. market research undertaken prior to a new product launch
8. wages of security guards for factory
9. cost of denim fabric purchased
10. royalty payable on number of units of product XY produced
11. road fund licences for delivery vehicles

12. postage cost of parcels sent to customers
13. cost of advertising products on television
14. audit fees
15. chief accountant’s salary
16. wages of operatives in the cutting department
17. cost of painting advertising slogans on delivery vans
18. wages of storekeepers in materials store
19. wages of fork lift truck drivers who handle raw materials
20. cost of developing a new product in the laboratory

Chapter 4
Materials
Material Purchase Cycle
Step-1.Production department issue material requisition note to store room for material required. This document is used
as authorization for issuance of material.
It is then used as a source document for:
(a) Updating the bin card in stores;
(b) Updating the stores ledger account in the costing department; and
(c) Charging the job, overhead or department that is using the materials
Step-2.Store room issue purchase requisition to purchase department for purchase of necessary material. It must be
authorized.
Step-3.If there is no particular supplier, purchase department may ask for quotations from different suppliers. Quotations
are asked for proposed prices
Step-4.Purchase department than select a supplier and send purchase order.
Step-5.Supplier may send dispatch note or delivery note to notify that goods are beings sent. When material is received, it
is checked against this purchase order to confirm that material received is similar to material ordered. When store keeper
is satisfied he issues goods received note (GRN). It is an internal document.
Step-6.At the end when all goods are received, supplier sends purchase invoice. Purchase invoice contains information
about quantity as well as cost while delivery note only contains information about quantity. Purchase invoice must be
checked against purchase orders and delivery notes before it is been paid. It must be authorized for payment
Budgeting
1. 𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 = 𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 − 𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
2. 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 = 𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 ∗ 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
3. 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 =
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 − 𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 + 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙
4. Free inventory = inventory on hand + inventory on order – inventory that has been scheduled for use
Inventory records
The physical quantity of each line of inventory will often be recorded on a bin card in the stores department and a similar
document known as the stores ledger account will be kept by the accounts department which also includes inventory
values.
So bin card only record quantity while stores ledger card also record values. This system is called perpetual inventory
system.

LIFO FIFO AND AVCO
FIFO – First in, first out

This method values issues at the prices of the oldest items in inventory at the time the issues were made. The remaining
inventory will thus be valued at the price of the most recent purchases.
The advantages and disadvantages of the FIFO method are as follows.
 Advantages
(i) It is a logical pricing method which probably represents what is physically happening: in practice the
oldest inventory is likely to be used first.
(ii) It is easy to understand and explain to managers.
(iii) The closing inventory value can be near to a valuation based on the cost of replacing the inventory.
 Disadvantages
(i) FIFO can be cumbersome to operate because of the need to identify each batch of material
separately.
(ii) Managers may find it difficult to compare costs and make decisions when they are charged with
varying prices for the same materials.
(iii) Prices may diverge widely from market price when there is a high rate of inflation, thereby
understating the cost of sales.
LIFO – Last in, first out

This method is the opposite of FIFO. Issues will be valued at the prices of the most recent purchases; hence inventory
remaining will be valued at the cost of the oldest items.
The advantages and disadvantages of the LIFO method are as follows.
 Advantages
(i) Inventories are issued at a price which is close to current market value.
(ii) Managers are continually aware of recent costs when making decisions, because the costs being
charged to their department or products will be current costs.
 Disadvantages
(i) The method can be cumbersome to operate because it sometimes results in several batches being
only part-used in the inventory records before another batch is received.
(ii) LIFO is often the opposite to what is physically happening and can therefore be difficult to explain to
managers.
(iii) As with FIFO, decision making can be difficult because of the variations in prices

Weighted average pricing methods

There are two main weighted average pricing methods: cumulative and periodic.
 Cumulative/continuous weighted average pricing
With this method we calculate an average cost of all the units in inventory whenever a new delivery is received.
 Periodic weighted average pricing
The periodic weighted average pricing method involves calculating an average cost per unit at the end of a given period
(rather than whenever new inventory is purchased, as with the cumulative weighted average pricing method). The
periodic weighted average pricing method is easier to calculate than the cumulative weighted average method, and
therefore requires less effort, but it must be applied retrospectively since the costs of materials used cannot be calculated
until the end of the period.
The advantages and disadvantages of weighted average pricing are as follows.
 Advantages
(i) Fluctuations in prices are smoothed out, making it easier to use the data for decision making.
(ii) It is easier to administer than FIFO and LIFO, because there is no need to identify each batch
separately.
 Disadvantages
(i) The resulting issue price is rarely an actual price that has been paid, and can run to several decimal
places.
(ii) Prices tend to lag a little behind current market values when there is gradual inflation.

Changing prices and inventory valuation

1. Under FIFO method items in closing inventory are those which are purchased at period end
2. Under LIFO method items in closing inventory are those which are purchased at start
3. Under AVCO method items in closing inventory are at average price
Prices increasing
 Value of closing inventory will be in following order
FIFO>cumulative weighted average >periodic weighted average>LIFO
 Value of inventory issued or cost of production will be in following order
LIFO> cumulative weighted average >periodic weighted average >FIFO
 Value of profit will be in following order
FIFO> cumulative weighted average >periodic weighted average >LIFO

Prices decreasing
 Value of closing inventory will be in following order
 Value of inventory issued/cost of production/cost of sales will be in following order
FIFO> cumulative weighted average >periodic weighted average >LIFO
 Value of profit will be in following order
Materials Accounting
Material
 Purchase
Material control/Stores Control a/c Dr
Payables Cr.
 Return from store room to supplier

Payables a/c Dr

Material control/Stores Control a/c Cr.
 Issuance to production / non production departement
WIP a/c Dr (Direct Material)
POH control a/c Dr (indirect material)
Admin OH control a/c Dr
Selling OH control a/c dr
Material control/Stores Control a/c Cr.

 Return form production/ non production department to store room.
Material control a/c Dr
WIP a/c Cr
POH control a/c Cr.
Admin OH control a/c Cr
Selling OH control a/c Cr
 Return from production/ non production department to supplier

Payables a/c Dr
WIP a/c Cr
POH control a/c Cr.
Admin OH control a/c Cr
Selling OH control a/c Cr
Inventory ledger control a/c
Opening balance Xxx WIP (Direct Material to production xxx

department)
Payables Xxx
Production overheads (indirect materials to xxx
WIP (Direct Material to Stores department) Xxx
production department)
Production overheads (indirect materials to
Selling overheads (indirect material to xxx
Stores department)
Xxx selling department)
Selling overheads (indirect material to Stores
Xxx Admin overheads (indirect material to
department)
Admin department) xxx
xxx
Admin overheads (indirect material to Stores
department)
xxx
Closing balance

Exercise
Q 1 Which of the following individuals is usually responsible for preparing a delivery note?
A. Buyer
B. Supplier
C. manager
D. Accountant
Q 2 Which of the following is correct chronological sequence for purchase documents?
A. Purchase order—Invoice---Goods received note---Delivery note
B. Delivery note--- Goods receive note--- Purchase order--- Invoice
C. Purchase order--- Delivery note---Good receive note---Invoice
D. Goods received note--- Delivery note---Purchase order---invoice
Q 3 Which of the following documents should be checked before a purchase invoice is paid, to confirm that the
prices of quantities are correct?
Price check Quantity check
A. Purchase order Purchase order
B. Goods received note Delivery note
C. Purchase invoice Goods received note
D. Purchase order Goods received note
Q 4 You are the accountant responsible for the input into the computer accounting system of data about goods
receivables from suppliers. For each transaction, you require a copy for the purchase order, delivery note and
goods received notes and invoice.
What are you most likely to find the code number for an item of inventory for entering in the system?
A. Purchase order
B. Delivery note
C. Goods receive note
D. Invoice
Q 5 Which one of the following is correct sequential flow of documents to complete the purchase of goods on
credit?
A. Goods receive note, purchase order, cheque requisition, invoice delivery note
B. Purchase order, delivery note, goods received note, invoice, cheque requisition
C. Purchase order, goods received note, delivery note, cheque requisition, invoice
D. Purchase order, invoice, goods received note, cheque requisition, delivery note
Q 6 Which number of staff is most likely to raise a good received note?
A. Delivery driver
B. Finance director
C. Sales ledger clerk
D. Store clerk
Q 7 Who is likely to record deliveries into stores?

A. Store clerk
B. Sales clerk
C. Accounts clerk
D. Personnel assistant

Q 8 Which of the following describes a purchase order?

A. Issued by the purchasing department, sent to the supplier requesting materials.
B. Issued by the store department, sent to the purchasing department requesting materials
C. Received together with the materials and compared to the materials received
D. Issued by the production department, sent to the stores department requesting materials
Q 9 A business maintains an inventory control database. For each item of inventory, the file contains the quantity
of free inventory for the item. For inventory item 245711, the current quantity held by the business is 400 units.
The stores department has received requisitions for user department for 320 units, which have yet to be
processed and dealt with. An order for a new supply of 350 units has been placed with the supplier, and
delivery is expected in one or two days.
What is the quantity of free inventory for this item?
A. 30
B. 370
C. 400
D. 430
Q 10 There are 275 units of material BX in stock. An order for 650 units is expected and a material requisition for
300 units has not yet been issued to the production cost centre.
What is the free inventory?
A. 275 units
B. 625 units
C. 650 units
D. 675 units
The following data are be used for questions 11,12 and 13

The inventory record for component BXY for the month of January showed:
Receipts Value Issues
$
Opening inventory 500 1,275
4 January 1,000 2,750
11 January 1,600 4,480
18 January 1,200 3,480
19 January 2,100
25 January 1,500 4,350
31 January 1,800
Q 11 Using the FIFO method of pricing issues, the cost of issues during the month was:
A. $11,250
B. $10,800
C. $10,850
D. $11,300
Q 12 Using the LIFO method of pricing issues, what is the value of inventory at 31 January?
A. $4,100
B. $3,720
C. $5,120
D. $3,950

Q 13 Using the AVCO method of pricing, at what price would the issues on 31 January be made?
(Calculate to decimal places)
A. $3.00
B. $2.95
C. $2.90
D. $2.83
The following data are to be used for questions 14 & 15
`Turner has the following inventory record:
Date Number of units Cost
1 March Opening inventory 100 units At $3.00/unit
3 March Receipt 200 units At $3.50/unit
8 March Issue 250 units
Q 14 What is the valuation of closing inventory if LIFO is used?

A. $460
B. $465
C. $467
D. $469
Q 15 What is the valuation of issues using the weighted average method of inventory valuation at each issue?
A. $3,248
B. $3,548
C. $3,715
D. $4,015

The following data are be to used for question 16 $ 17
Date Units Units price($) Value ($)

1 Jan 2011 Balance b/f 100 5.00 500.00
3 Mar 2011 Issue 40
4 Jun 2011 Receipt 50 5.50 275.00
6 Jun 2011 Receipt 50 6.00 300.00
9 Sep 2011 ISSUE 70
Q 16 If the first-in, first-out method of pricing had been used the value of the issue on 9 September 2011 would
have been
A. $350
B. $355
C. $395
D. $420
Q 17 In the last-in, first-out method of pricing had been used the value of the issue of the 9 September 2011 would
have been
A. $350
B. $395
C. $410
D. $420
Q 18 A company uses the firs-in, first-out method to price issues of raw material to production and to value its
closing inventory.
Which of the following statements best describes the first-in, first-out method?
A. The material received will be the first issued to production
B. The first materials issued will be priced at the cost of the most recently received materials
C. The last materials issued will be those that were most recently received
D. The first materials issued will be priced at the cost of the earliest goods still in inventory
Q 19 If a company is using the first-in, first-out method for material at a time when material prices are rising this
will mean which of the following?
A. Production costs will be lower and profit will be higher than if the last-in, first-out method had been
used.
B. Production cost will be higher and profit will be lower than if the last-in, first-out method had been used.
C. Production costs will be lower and profits will be lower than if the last-in, first-out method had been
used.
D. Production costs will be higher and profits will be higher than if the last-in, first-out method had been
used.

Q 20 A manufacturer holds inventory of a raw material item. The manufacturer makes and sells a single product,
and each unit of product uses 2.5 kilograms of the raw material. The budgeted production for the year is 6,000
units of the product. At the start of the year, the manufacturer expects to have 1,800 units of the raw material
item in inventory, but plans to reduce inventory levels by one-third by the end of the year.
What will be the budgeted purchase quantities of the raw material item in the year?
A. 13,800 kg
B. 14,400 kg
C. 15,000 kg
D. 15,600 kg
Q 21 A manufacturing company has budgeted sales next year of 5,000 units of product T. Each unit of product T
uses 3 units of a component X. The company plans to increase inventory levels of finished goods by 200 units
by the end of the year, and to increase inventory levels of component X by 400 units.
What will be the budgeted purchase quantities of component X of the year?
A. 15,200 units
B. 15,400 units
C. 15,600 units
D. 16,000 units
Q 22 A manufacturing company makes and sells a single product. The sales budget for the year is 8,000 units.
Each unit of the product require 1.2 kilograms of raw materials. The company has budgeted to reduce
inventory levels of finished goods from 2,000 units at the start of the year to 1,500 units at the end of the year,
but it plans to increase inventory levels of the raw material from 1,500 kilograms to 2,400 kilograms.
What will be the budgeted purchase quantities of raw materials for the year?
A. 8,100 kilograms
B. 8,300 kilograms
C. 9,900 kilograms
D. 10,200 kilograms
Q 23 What document may be used to authorize the issue of items from the stores department to a user department?
A. Purchase order
B. Delivery rate
C. Requisition note
D. Goods received note
Q 24 In a large organization, which of the following individuals is most likely to authorize the payment of a
purchase invoice for goods bought from a supplier?
A manager with appropriate authority in the:
A. Accounts department
B. Buying department
C. Department that requisitioned the goods
D. Stores department
Q 25 The current inventory position for the inventory item 35528 is as follows:
Units
Held in inventory 14,500
On order from supplier 36,300
Requisitioned 16,700
What is the free inventory for this item?
A. 0
B. 5,100 units
C. 34,100 units
D. 38,500 units

Q 26 A company value stocks using the weight average value after each purchase. The following receipts and
issues have been made with regards to materials for the last month:
Date Receipts Issues
Units $/unit valuation Units
Brought forward 100 $5.00 $500
th
4 150 $5.50 $825
16th 100
20th 100 $6.00 $600
21st 75
What is the value of the closing stock using this weighted average method?
A. $1,012,.50
B. $976.50
C. $962.50
D. $925.00
Q 27 The stock records for one specific stores item for last month show the following information:
Receipt units issue units
150
600
200
250
The stock at the beginning of last month consisted of 200 units valued at $5,200. The receipts last month cost
$32.50 per unit.
Using the FIFO method of valuation, what was the total cost of last month’s issues?
A. $18,200
B. $18,300
C. $18,525
D. $19,500
Data for questions 28 and 29
Aberdeen Ltd holds stocks of ratchets that it uses in production. Over the last month receipts and issues were as
follows:
Receipts Issues
Opening balance 200 at £ 5 7th May 400
5 May 300 at £ 4.50 23rd May 400
12 May 100 at £ 6 30th May 200
22 May 400 at £ 5.50
29 May 200 at £ 7
Q 28 If a FIFO stock valuation method were used, the value of stocks at the month end would be:
A. £1,000
B. £1,100
C. £1,200
D. £1,400

Q 29 If a LIFO stock valuation method were used, the cost of ratchets issued to production in the month would be:
A. £5,150
B. £5,350
C. £5,450
D. £5,550
Q 30 A firm has a high level of stock turnover and uses the FIFO issue pricing system. In a period of rising
purchase prices, the closing stock valuation is:
A. Close to current purchase prices
B. Based on the prices of the first items received
C. Much lower than current purchase prices
D. The average of all goods purchased in the period
Q 31 During week 14 a manufacturing business issued $19,600 of direct materials to the factory and $3,200 of
indirect materials.
What is the double entry for issues of materials?
A. Debit Materials control account $22,800
Credit work in progress account $19,600
Credit Production overhead account $3,200
B. Debit Work in progress account $19,600
Debit Production overhead account $3,200
Credit Materials control account $22,800
C. Debit Work in progress account $3,200
Debit Production overhead account $19.600
Credit Materials control account $22,800
D. Debit Materials control account $22,800
Credit Work in progress account $3,200
Credit Production overhead account $19,600
Q 32 Consider the following statements.
1. A bin card records the quantity of inventory on hand whereas a ledger account records the monetary
value of the inventory on hand
2. A perpetual inventory system is one where each receipt or issue of material is recorded as it takes
place.
Which one of the following is correct with regard to the above statements?
A. Both statements are correct

B. Both statements are incorrect
C. Statement 1 is correct but statement 2 is incorrect
D. Statement 1 is incorrect but statement 2 is correct
A. A store ledger account will be updated from a goods received note only.
B. A store requisition will only detail the type of product required by a customer
C. The term ”lead time” is best used to describe the time between receiving an order and paying for it
D. To make an issue from stores authorization should be required

Q 34 The following represent transactions on the material account for a company for the month of March 2018:
$000s
Issued to production 144
Returned to stores 5
The material inventory at 1 March 2018 was $23,000 and at 31 March 2018 was $15,000.
How much material was purchased in March 2018?
A. $131,000
B. $139,000
C. $141,000
D. $159,000
Q 35 Which of the following functions are fulfilled by goods received note?
I. Provides information to update the inventory records on receipt of goods
II. Provides information to check the quantity on the supplier’s invoice
III. Provides information to check the price on the supplier’s invoice
A. (i) and (ii)only
B. (I) and (iii) only
C. (ii) and (iii) only
Q 36 Which of the following documents would be completed in each situation?

Chapter 5
Labour
 Basic pay is mentioned in his or her letter of appointment and included in his/her contract of employment.
 Ongoing record is kept on employee record card held in the personal department.
 Simple attendance record shows days absent because of sickness, holidays or others.
Documents
Clock cards
It show hours of basic time, overtime, rate, total amount and deductions.it does not show
how the time was spent by employee
Time sheet
It tells detail about how employees time was spent. Employee fills his timesheet and enters
his name, clock number and department name at top of sheet. Time sheet is used to allocate
cost to different departments or products. It does not show the total amount payable.
Timesheets may be used for hourly paid and salaried staff. The purposes of timesheets are as
follows.
 Timesheets provide management with information (eg product costs) for further
analysis.
 Timesheet information may provide a basis for billing for services provided (eg
service firms where clients are billed based on the number of hours work done).
 Timesheets are used to record hours spent and so support claims for or authorise
overtime payments.
JOB Costing and labour documents

In Job costing system, different documents are used to record time or work done
 Time sheet: It explains work done on each job (Job code) or area of work (cost code)
Weekly time sheets.
 Job cards: These cards are prepared for each job. A single job card may have detail about
different employees.
 Piecework ticket/operation card: When employees are paid on basis of number of units
produced, piecework ticket is produced. It records total number of units produced and
rejected.
 Route card: It is similar to job card additional detail about all operations to be carried

out is also kept on route card.

 Job card: When employee is paid on the basis of work done payroll department may
need analysis of work done on different jobs. For this purpose job card is prepared.
Direct and Indirect labour
Direct workers
 Cost of direct workers is divided into direct and indirect labour cost.
 Cost of indirect workers is indirect labour cost
 Basic rate means Normal hourly rate.
 Premium is Extra payment in overtime.
Note: In overtime hrs basic rate as well as premium is paid
Indirect workers
Total amount paid is indirect labour cost.
 Basic hrs x basic rate

 Over time hrs x basic rate
 Overtime hrs x premium
Labour Accounting
Gross pay = whatever earned by employee
It includes
 Salary
 Wages

 Overtime
 Bonus
 Commission
 Sick pay etc
Net pay = gross pay – deductions
Deductions include
 Income tax
 Employee’s contribution towards provident fund
 Employee’s contribution towards pension fund
 Employee’s contribution towards social security fund
 National insurance contribution by employee
Cost to employer= gross wages + contribution by employer
A bonus is an extra payment made to an employee (or a group of employees) as a reward for results achieved
Commission is a payment made to an employee (or agent) based on the value of something (usually sales) the employee
(or agent) has generated
General journal entries

 Recording
Payroll a/c or wages control a/c Dr.
Income tax cr.
Provident fund Cr.
Cash(For wages
paid)Cr.
 Allocation of payroll to different departements
WIP a/c Dr (direct labour)
POH control a/c Dr (indirect labour)
Admin OH control a/c Dr.
Selling OH control a/c Dr.
Payroll a/c Cr.

Wages control a/c

WIP (Direct labour to
production department) xxx
Payables XX
Production overheads (indirect
Income Tax XX xxx
labour to production department)
Contribution by employee XX
Selling overheads (indirect labour to
selling department) xxx
Admin overheads (indirect

labour to Admin department) xxx
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑒 ℎ𝑜𝑢𝑟𝑠 = 𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 − 𝑖𝑑𝑙𝑒 𝑡𝑖𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 =
𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠
𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑 = 𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 − 𝑡𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛
𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 = 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 ∗ 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Note: The standard hour (or standard minute) is the quantity of work achievable at standard performance,
expressed in terms of a standard unit of work done in a standard period of time. In other words number of units that are
expected to be produced in one hour.

Exercise
Q 1 Gross wages incurred in a cost centre for the month of January totalled $45,250, as follows:
$
Ordinary time Direct employees 27,500
Indirect employees 6,500
Overtime Direct employees
Basic 4,500
Premium 2,250
Special condition allowance Direct employees 1,300

Indirect employees 450
Shift allowance Direct employees 2,000
Sick pay Direct employees 750
The direct wages for January would be:

A. $31,550
B. $32,800
C. $35,300
D. $32,000
Q 2 RCW operates a bonus scheme based on time saved against a predetermined time allowance for actual output.
In week 6, an operative produced 750 units of R in 32 hours. The standard allowance in 20 units of R per hour.
The time saved by this employee in week 6 on R production was:
A. 6.50
B. 4.75
C. 5.50
D. 5.90
Q 3 HH operates an incentive scheme based on differential piecework. Employees are paid on the following basis:
Work output up to 600 units -- $0.40 per unit
601 – 650 units -- $0.50 per unit
650 units + -- $0.75 per unit
This is paid only production meeting quality standard with only additional units qualifying for the higher rates:
In week 17, an employee produces 660 goods units. The gross pay for the week would be:
A. $272.50
B. $260..40
C. $488.25
D. $325.75
Q 4 Which of the following method of remuneration is not an incentive-based scheme?
A. Straight piecework
B. High day rate
C. Group bonus
D. Differential piecework
Q 5 A job requires 2,400 actual labour hours for completion and it is anticipated that there will be 20 % idle time. If
the wages rate is $ 10 per hour, what is the budgeted labour cost for the job?
A. $19,200
B. $24,000
C. $28,800
D. $30,000

Q 6 A job is budgeted to require 3,300 productive hours after incurring 25% idle time. If the total labour cost
budgeted for the job is $36,300, what is the labour cost per hour?
A. $8.25
B. $8.80
C. $11.00
D. $13.75
Q 7 Employee A is a carpenter and normally works 36 hours per week. The standard rate of pay is $3.60 per hour.
A premium of 50% of the basic hourly rate is paid for all overtime hours worked. During the last week of
October 2001. Employee A worked for 42 hours.
The overtime hours worked were for the following reasons:
Machine breakdowns 2 hours
To complete a special job at the request of the customer 4 hours
How much of employee A’s earning for the last week of October would have been treated as direct wages?
A. $162.00
B. $129.60
C. $140.40
D. $151.20
Q 8 An employee is paid on a piecework basis. The basis of the piecework scheme is as follows:
1 to 100 Units - $0.40 per unit
101 to 200 units - $0.50 per unit
201 to 299 units - $0.60 per unit
With only the additional units qualify for the higher rates. Rejected units do not qualify for payment.
During a particular day the employee produced 240 units of which 8 were rejected aas faulty.
What did the employee earn for day’s work?
A. $109.20
B. $114.00
C. $139.20
D. $144.00
Q 9 A standard hours is:
A. A normal working hour
B. A normal clock hour
C. The amount of work expected to be completed in an hour
D. The proportion of time in a give hour that is productive and no lost through idle time
Q 10 Information on standard rates of pay would be provided by:
A. A trade union
B. A production manager
C. A personal manger
D. A work study manager
A. Idle time cannot be controlled because it is always due to external factors
B. Idle time is always controllable because it is due to internal factor
C. Idle time is always due to inefficient production staff
D. Idle time is not always the fault of production staff

Q 12 A company operates a piecework scheme to pay its staff. The staff receives $0.20 for each unit produced.
However the company guarantees that every member of staff receives at least $ 15 per day.
Shown below is the number of units produced by operator A during a recent week:
Day Monday Tuesday Wednesday Thursday Friday
Units produced 90 70 75 60 90
What are operator A,s earnings for the week?
A. $75.00
B. $77.00
C. $81.00
D. $152.00
Q 13 A business employs two grades of labour in its production department. Grade A workers are considered
direct labour employees, and are paid $ 10 per hour. Grade B labour workers are considered indirect labour
employees, and are paid $ 6 per hour.
In the week just ended, Grade A labour worked 30 hours of overtime, 10 hours on a specific customer order at the
customer’s request, and the other 20 hours as general overtime. Grade B labour worked 45 hours of overtime, as
general overtime. Overtime is paid at time-and-one-half.
What would be the total amount of pay for overtime worked in the week that is considered to be a direct labour
cost?
A. $50
B. $150
C. $285
D. $350
Q 14 A manufacturing business is currently busy and overtime is being worked.

The cost of the overtime premium payable to direct labour employees is normally treated as:
A. A direct cost
B. A production overhead cost
C. An administration overhead cost
D. A sunk cost
Q 15 A manufacturer employees two grades of labour in its machining department, grade A and grade B. Grade A
employees are treated as direct labour employees and grade B employees are treated as indirect labour
employees. Grade A employees are paid $8 per hours and Grade B workers are received $6 per hour. The basis
working week is 40 hours. Overtime is paid at + 50% to all employees in the department. There are 10 grade A
employees and 6 grade B employees.
During a particular week, each grade A employees worked for 45 hours and each grade B employee worked for
43 hours.
What will be the charge to production overhead for the week?
A. $54
B. $254
C. $1,602
D. $1.802

Q 16 The payroll department has produced the following information for the month about the pay for employees
in department X.
Department X $
Payments to employees 7,500
Income tax 2,500
Employees’ state benefit contributions (NI in the UK) 1,200
Employers’ state benefit contributions (NI in the UK) 2,000
What are the gross wages for the department for the month?
A. $7500
B. $10,000
C. $11,200
D. $13,200
Q 17 The payroll department has produced the following information for the month about the pay for employees in
department Z. department Z is a part of the account division.
Department Z $
Salaries (gross wages) 23,000
Income tax 4,500
Employees’ state benefit contributions (NI in the UK) 2,400
Employers’ state benefit contributions (NI in the UK) 3,500
What is the labour cost in department Z that would be treated as administration overhead cost for the month?
A. $23,000
B. $26,500
C. $29,900
D. $33,400
Q 18 An employee is paid on a stepped piecework basis, as follows:

Unit produced each week $
1- 200 0.60 per unit
201- 300 0.80 per unit
Over 301 1.00 per unit
Only the additional units qualify for the higher rates. Rejected units do not qualify for any payment. During a
particular week, the employee makes 380 units, of which 35 were rejected faulty.
What were his gross earnings for the week?
A. $245
B. $280
C. $345
D. $380
Q 19 A company employs 20 direct production operatives and 10 indirect staff in its manufacturing department.
The normal operating hours for all employees is 38 hours per week and all staff is paid a basic rate of $5 per
hour. Over time hours are paid at the basic rate + 50%. During a particular week all employees worked for 44
hours to meet the company’s general production requirements.
What amount would be charged to production overhead?
A. $300
B. $450
C. $2,350
D. $2,650

Q 20 Aspects of payroll include

1. Employer’s state benefit contribution (National Insurance in the UK)
2. Employee’s state benefit contribution (National Insurance in the UK)
3. Income tax (PAYE in the UK)
4. Salaries
Which of the above are costs to an employer?
A. 1 & 4 only.
B. 2 & 4 only.
C. 2,3 & 4 only
D. 1,2,3 & 4
Q 21 An employee is paid on a piecework basis. The scheme is as follows:
1-100 units per day $0.20 per unit
101 – 200 units per day $0.30 per unit
>200 units per day $0.40 per unit
Only the additional units qualify for the higher rates,. Rejected units do not qualify for payment. An employee
produced 210 units in a day of which 17 were rejected as faulty.
How much did the employee earn for the day?
A. $47.90
B. $54.00
C. $57.90
D. $84.00
Q 22 A company employs 30-direct production staff and 15 indirect staff in its manufacturing department. The
normal operating hours for all employees is 37 hours per week and all staff is paid a basic rate of $8 per hours.
Overtime hours are paid at the basic rate +50 %. During a particular week all employees worked for 42 hours
to meet the company’s general production requirements.
What is the total direct labour cost?
A. $8,880
B. $10.080
C. $10,680
D. $10,980
Q 23 An employee is paid on a piecework basis. The scheme is as follows:
1 – 200 units per day $0.15 per unit
201 –500 units per day $0.20 per unit
>500 units per day $0.25 per unit
Only the additional units qualify for higher rates. Rejected units do not qualify for payment. An employee
produced 512 units in a day of which 17 were rejected as faulty.
What wages is paid to the employee?
A. $128
B. $103
C. $99
D. $89

Q 24 It is expected that a product will take 36 minutes to produce. In a period 180 hours are worked and 325 units
of product are made. A bonus of half of the time saved is paid to the employees. The wage rate is $ 8.00 per
hour.
What is the total amount of bonus paid to the employee?
A. $252
B. $120
C. $60
D. NONE
Q 25 In a payments-by-result scheme employee s are paid a bonus based on hours saved at the basic wage rate. The
bonus payable to the employee is calculated as the hours saved multiplied by the ratio of time saved to time
allowed.
An employee produces 480 units in 72 hours. The time allowed for this number of units is 108 hours. The
employee’s basic rate of pay is $10 per hour.
What is the total amount payable to the employee for this job?
A. $120
B. $720
C. $733
D. $840
Q 26 A manufacturer makes and sells a single product for which the expected direct labour cost is $24 per unit.
This is based on expected labour time of 3 hours per unit, paid at $ 8 per hour.
The manufacturer is considering an incentive scheme for its direct labour employees, whereby they can increase
the productivity ratio from 100 % to 120 %, they will receive a bonus of 25 % for each hour worked.
What would be the unit labour cost if the incentive scheme is introduced and the efficiency ratio is improved to
exactly 120 %?
A. $18.75
B. $22.50
C. $23.25
D. $25.00
Q 27 A direct labour employee receives a wage of $8- per hour for a 38-hour week, with time +25% for overtime.
During a particular week, the employee worked for 42 hours. Due to an equipment breakdown and the late
delivery of urgent materials from a supplier, the employee had to record six hours of idle time for the week.
What amount will be charged as a direct labour cost for the employee’s work in the week?
A. $288
B. $296
C. $304
D. $336
Q 28 A standard procedure currently takes 6 men two hours each to complete. They are each paid $7.50 per hour.
Management is considering a change in the method of doing the work, that should reduce the time required by
20% and proposes to offer the employees an extra $1 per hour if they agree to adopt the new method.
If this proposal is accepted and introduced, what would be the effect on the labour cost of the procedure?
A. It will be $8.40 cheaper.
B. It will be $6.00 cheaper.
C. It will be $1.40 cheaper.
D. It will be $0.30 more expensive.

Q 29 The following data relates to a company’s payroll for the month just ended:
$
Paid to employees 67,000
Employee’s National Insurance contribution 21,000
Employee’s National Insurance contribution 13,200
Income tax 36,300
Employer’s contribution to employees’ pension fund 15,000
What is the total labour cost for the month?
A. $152,500
B. $139,300
C. $137,500
D. $124,300
Q 30 Sara is a clothing machinist. She is paid a flat rate of $4/hour for a 37 hour week, with any overtime paid at
time and a half. In addition a piecework rate of $6 is paid for each customer contract finished in the week.
How much is Sara’s gross pay for the week?
A. $202
B. $178
C. $172
D. $276
Q 31 A manufacturing organization has 24 employees who are paid a basic hourly rate of $6.00 for a standard 38
hour week with any overtime hours being paid at a rate of time and a half. In a typical week the employees all
work 4 hours of overtime and produce 2,500 units of the organization’s product.
What is the total unit labour cost for the product?
A. $2.19
B. $2.30
C. $2.42
D. $2.53
Q 32 A manufacturing organization employs 100 factory workers who are paid at an hourly rate of $7.00 for a 38
hour a week. Any overtime hours are paid at time and a half. One average each unit of the product the factory
makes takes 4 hours and in an average week each employee works 4 hours of overtime.
The management has recently installed new machinery which it is estimated should reduce the time taken to
produce one unit of the product to 3.5 hours. The employees will continue to work the same amount of overtime.
What will be the increase in the number of units made each week now the machinery has been installed?
A. 35 units
B. 135 units
C. 150 units
D. 250 units
Q 33 At the end of week 23 a business made a payment for new wages of $17,800. This was after deduction for
PAYE and NIC of $5,900. Of the gross amount of $23,700, $3,700 was for indirect wages and the remainder
was for direct workers’ wages.
What is the double entry for the labour costs for the week?
A. Debit Wages control $23,700
Credit Work in progress $20,000
Credit Production overhead $3,700
B. Debit Wages control $23,700
Debit Work in progress $3,700
Credit Production overhead $20,000
C. Debit Work in progress $20,000

Debit Production overhead $3,700

Credit Wages control $23,700
D. Debit Work in progress $3,700
Debit production overhead $20,000
Credit Wages control $23,700
Q 34 A business employs seven sales people. Each person is paid a basic wage of $200.00 per week plus a 1% sales
commission if the sales target is achieved.
The results for the first three weeks of the month are shown below.
Week Sales Target achieved Sales commission payable per employee
1 $5,000 Yes $50.00
2 $8,000 Yes $80.00
3 $9,500 Yes $95.00
What will be the total wage bill for week 2?
A. $1,400
B. $1,960
C. $1,750
D. $2,065
Q 35 A differential piecework payment scheme operates in the packing department of a factory. Straight piece rate
is $10 per unit. Details of the scheme are as follows:
Units packed per week Premium rate per unit
1 to 2,000 50 cents
2,001 to 3,000 65 cents
3,001 to 4,000 75 cents
NB: Only extra units packed, over the previous threshold, qualify for the higher rates.
If 3,240 units were packed, how much would be paid in wages?
A. $15,274
B. $24,876
C. $30,000
D. $34,230

Chapter 6
Overheads
Allocation of overheads:
Allocation is the process of assigning whole item of cost to cost centers. These overheads are traceable to cost centers
Apportionment of overheads.
Process of distributing single cost item into production and service departments e-g rent, electricity bills. Apportionment is
needed for those cost items which are shared by different departments.
Rent, rates, heating lighting, repairs Floor area occupied (Most appropriate base
depreciation of building for heat is volume)
Insurance and depreciation of equipment cost or book value of equipment
Lighting & heating kilo watt hrs.
Re-apportionment of overheads:
Process of distributing overheads of service centers in production departments
Service center Base for re-apportionment.
Stores Number of material

reacquisition
Maintenance Number of hrs worked.
Canteen
Number of employees.
Production Planning Direct labour hrs worked.
Absorption of overheads
Overhead absorption rate is 'a means of attributing overhead to a product or service, based for example on direct labour
hours, direct labour cost or machine hours'
The rate at which overheads are included in cost of sales (absorption rate) is predetermined before the accounting period
actually begins for a number of reasons.

 Goods are produced and sold throughout the year, but many actual overheads are not known until the end of
the year. It would be inconvenient to wait until the year end in order to decide what overhead costs should be.
 An attempt to calculate overhead costs more regularly (such as each month) is possible, although estimated
costs must be added for occasional expenditures such as rent and rates (incurred once or twice a year). The
difficulty with this approach would be that actual overheads from month to month would fluctuate randomly;
therefore, overhead costs charged to production would depend on a certain extent on random events and
changes. A unit made in one week might be charged with $4 of overhead, in a subsequent week with $5, and in a
third week with $4.50. Only units made in winter would be charged with the heating overhead. Such charges are
considered misleading for costing purposes and administratively and clerically inconvenient to deal with.
 Similarly, production output might vary each month. For example, actual overhead costs might be $20,000 per
month and output might vary from, say, 1,000 units to 20,000 units per month. The unit rate for overhead would
be $20 and $1 per unit respectively, which would again lead to administration and control problems.
Overhead absorption rate (OAR)

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝑂𝐴𝑅 =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙
Predetermined activity level may be
 Units
 Direct Labour hrs.
 Machine hrs.
 %age of Material cost
 %age of labour cost
 % age of prime cost.
Many factories use a direct labour hour rate or machine hour rate in preference to a rate based on a
percentage of direct materials cost, wages or prime cost.
 A direct labour hour basis is most appropriate in a labour intensive environment.
 A machine hour rate would be used in departments where production is controlled or dictated
by machines. This basis is becoming more appropriate as factories become more heavily
automated.
Absorbed overheads or Applied overheads = Actual activity x OAR.
𝐴𝑏𝑠𝑜𝑟𝑏𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 = 𝑈𝑛𝑑𝑒𝑟 𝑜𝑟 𝑜𝑣𝑒𝑟 𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
Reasons for Under or over absorbed overheads.

 Overheads are under absorbed when
o Actual overheads > Absorbed OH OR
o Actual Activity level <Budgeted Activity Level
 Overheads are Over absorbed when
o Actual OH<Absorbed OH OR
o Actual Activity level >Budgeted Activity

Note: Only fixed overheads are under or over absorbed
Note: When actual overheads are not given in question budgeted overheads are treated as actual.
Responsibility centres
A responsibility centre is a function or department of an organisation that is headed by a manager who has direct
responsibility for its performance.
Responsibility accounting is a system of accounting that segregates revenue and costs into areas of personal responsibility
in order to monitor and assess the performance of each part of an organisation.
Cost centres
A cost centre is any section of an organisation to which costs can be separately attributed.
A cost centre is a production or service location, function, activity or item of equipment for which costs are accumulated.
Examples of cost centres

Cost centres may include the following.
 A department (as in our example above)

 A machine or group of machines
 A project (eg the installation of a new computer system)
 A new product (to enable the costs of development and production to be identified)
 A person (eg a marketing director. Costs might include salary, company car and other expenses incurred by the
director)
EXAM FOCUS POINT
Many students confuse cost units and cost centres – don’t make that mistake! Remember – a cost centre is something
that incurs costs as it operates (for example a factory). It is a collecting place for costs before they are analysed further. A
cost unit is the ultimate product or service to which the cost centre costs are allocated. Taking the factory cost centre
example, cost units are the products that are manufactured in the factory and therefore have the factory costs allocated
to them.
Revenue centres
A revenue centre is any section of an organisation to which revenue can be separately attributed.
A revenue centre is a production or service location, function, activity or item of equipment for which revenue are
accumulated.
Profit centres
A profit centre is any section of an organisation to which both revenues and costs are assigned, so that the profitability of
the section may be measured.
A profit centre is part of a business accountable for both costs and revenues.
Examples of profit centres

 A sales division selling products to customers

 A service division providing after sales service
 Individual shops in a retail chain
 Local branches in a regional or nationwide distribution business
 A geographical region eg a country or group of countries
 A team or individual eg a sales team, a team of equipment installers
Investment centres
An investment centre is a centre which has additional responsibilities for capital investment.
Investment centres refer to centres with additional responsibility for capital investment and possibly for financing, and
whose performance is measured by its return on capital employed.
Overhead accounting
 Payment of actual overheads
POH control a/c Dr.
Cash Cr. (e-g payment of rent suppervisor salary etc).
Admin overhead control a/c Dr
Cash Cr.
Selling overheads control a/c dr.
Cash cr.
 Production overhead applied
WIP a/c Dr.
POH Control a/c cr.
 Under or over applied FOH

 Under applied/absorbed
Income statement dr
POH control a/c cr.
 Over applied/absorbed
POH control a/c dr.
Income statement cr.
 Transfer to finished goods.
Finished goods a/c dr
WIP a/c cr.

 Sale of goods.
Cash dr
Sale cr
Cost of sale dr.
Finished good a/c cr.

Exercise
Q 1 A cost centre is:
A. A unit of product or service for which costs are calculated.
B. An amount of profit attributable to an activity.
C. A function or location within an organization for which costs are accumulated.
D. A section of the organization for which budgets are prepared and control is exercised.
Q 2 Which of the following is a service cost centre in a manufacturing company?
A. Finishing
B. Machine
C. Dispatch
D. Assembly
Q 3 Which of the following department is not a service cost centre in a manufacturing company?
A. Accounting
B. Assembly
C. Maintenance
D. Personnel
Q 4 Overheads allocation is the process of:
A. The charging of overheads to cost units
B. The allotment of proportions of items of cost to cost or cost units
C. The charging of direct materials to jobs
D. The allotment of whole items of cost to cost centers or cost units
Q 5 Which is not a recognized method of overhead absorption?
A. Recovery rate per direct labour hour
B. Recovery rate per machine hour
C. As a percentage of sale value
D. As a percentage of prime cost
Q 6 Production supervisory salaries are classed as production overhead. Which is the most appropriate basis of
apportioning this cost to cost centre?
A. Number of units produced
B. Machine hour
C. As a percentage of sale value
D. As a percentage of prime cost
Q 7 Which of the following would be the most appropriate basis for apportioning machinery insurance costs to
cost centres within a factory?
A. The number of machine in cost centre
B. The floor area occupied by the machinery in each cost centre
C. The value of the machinery in each cost centre
D. The operating hours of the machinery in each cost centre.
Q 8 Factory overheads can be absorbed by which of the following methods?
I. Direct labour hours
II. Machine hours
III. As a percentage of prime cost
IV. $ X per unit
A. 1,2,3 & 4
B. 1 & 2 only
C. 1,2 & 3 only
D. 2,3 & 4 only

Q 9 Which is cost apportionment?

A. Charging discrete, identifiable items of cost to cost centres or cost units
B. The collection of cost attributable to cost centres and cost units the costing methods applied by the
business
C. The process of establishing the cost of cost centres or cost units
D. The division of a cost between two or more cost centres in proportion to the estimated benefit
received by each centre
Q 10 What would be the appropriate basis for apportioning the cost of heating and lighting between cost
centres in a factory building?
A. Number of employees
B. Number of machines
C. Value of machinery
D. Floor area occupied by each department
Q 11 What would be the appropriate basis for apportioning the cost of heating and lighting between cost
centres in a factory building?
A. Number of employees
C. Value of machinery
D. Floor area occupied by each department
Q 12 It is possible for an item of overhead expenditure to be shared amongst several cost centres. It is also
possible that an item of overhead expenditure may relate to just one specific cost centre.
What item is used to describe charging an item of overhead to just one specific cost centre?
A. Absorption
B. Allocation
C. Apportionment
D. Re-apportionment
Q 13 What could be the most appropriate basis for apportioning machinery insurance costs to cost centrres
within a factory?
A. Floor area occupied by the machinery
C. Operating hours of machine
D. Value of machine
Q 14 In a system of absorption costing, why are the absorption rates for fixed overheads usually determined
in advance, as part of the budget, instead of retrospectively at the end of the budget period?
A. It is simple or decide overhead rates in advance from retrospectively
B. It is not possible to calculate actual overhead costs retrospectively
C. So that fixed overheads can be charged to output before the end of the accounting period
D. Predetermined overheads are more accurate than overheads costs calculated retrospectively
Q 15 The following information is available for a small business with three departments. A , B and C that all
operate in the same building.
Department A B C
Floor area (square metres) 1,500 2,000 1,500
Number of employees 10 6 4
Assets $40,000 $40,000 $80,000
Labour hours per month 1,200 1,000 800
Employees are provided with free lunchtime meals, and the cost of this small ‘canteen’ service is $ 1,800 per
month.

If the businesses use an absorption costing system, what would be the most appropriate charge to department
A each month for the cost of the canteen service?
A. $540
B. $900
C. $450
D. $720
Q 16 When the amount of under or over absorption is significant, it should be disposed of by:
A. Transferring to profit and loss account
B. The use of supplementary rate
C. Carrying over as a deferred charge to the next accounting year
Q 17 Budgeted overheads for a period were $340,000 for which actual labour hours and overheads were
21,050 hours and $343,825 respectively. If there was over-absorbed of $14,025, how many labour hours
were budgeted?
A. 20,000
B. 20,225
C. 20,816
D. 21,050
Q 18 A business absorbs its fixed production overheads on the basis of direct labour hours. The budgeted
direct labour hour for week 24, were 4,200. During that week 4,050 direct labour hours were worked and
the production overheads incurred were $16,700. The overheads were under-absorbed by $1,310.
What were the budgeted fixed overheads for the week (to the nearest $10)?
A. $14,840
B. $15,960
C. $17,320
D. $18,680
Q 19 Overheads for two departments in a manufacturing company are:
Machinery department $45,000
Assembly department $52,500
The activity for each department is as follows:
Machinery department assembly department
Machine hours 5,625 1,250
Labour hours 1,875 8,750
What are the MOST appropriate overhead absorption rates for the two departments?
A. Machining department $6 Assembly department $5.25
B. Machining department $6 Assembly department $6
C. Machining department $8 Assembly department $6
D. Machining department $8 Assembly department $5.25
Q 20 What entry would be made in the cost accounting system on completion of production?
A. Dr Finished goods Cr Costing profit and loss
B. Dr Finished goods Cr Work-in-progress
C. Dr Work-in-progress Cr Finished goods
D. Dr Cost of sale Cr Finished goods

Q 21 Consider the following statement:

1) All expanses are overheads
2) Service cost center overheads should be apportioned to production cost centers
Which one of the following is correct with regard to the above statement?
D. Statement 2 is correct but statement 1 is incorrect
Q 22 Product A is made from material costing $12 per unit of production. The direct wage rate is $14 per
hour and the direct wages cost is $7 per unit. The business has a capacity to produce and sell 1,000 units
per week and fixed costs total $ 8,000 per week. Variable overheads are absorbed at $18 per direct labour
hour.
What is the total variable cost per unit?
A. $19
B. $28
C. $36
D. $27
Q 23 A cost center has an overhead absorption rate of $4.25 per machine hour, based on a budgeted activity
level of 12,400 machine hours. In the period covered by the budget, actual machine hours worked were 2%
more than the budgeted hour and the actual overhead expenditure incurred in the cost center was $56,389.
What was the total over or under absorption of overheads in the cost center for the period?
A. $ 1,054 over absorbed
B. $ 2635 under absorbed
C. $ 3,689 over absorbed
D. $ 3,689 under absorbed
Q 24 At the end of a period, in an integrated cost and financial accounting system, the accounting entries for
$10,000 overheads over-absorbed would be:
A. Dr Work-in-progress Cr Overheads control account
B. Dr Income statement Cr Work-in-progress control account
C. Dr Income statement Cr Overhead control account
D. Dr Overhead control account Cr Income statement
Q 25 Iddon makes two products, Pye and Tan, in a factory divided into two production departments,
machining and assembly. In order to find a fixed overhead cost per unit, the following budgeted data are
relevant.
Machining Assembly
Direct and allocated fixed costs $120,000 $72,000
Labour hours per unit
Pye 0.50 hour 0.20 hour
Tan 1.00 hour 0.25 hour
Budgeted production is 4,000 units of each product (8,000 units in all) and fixed overheads are to be
absorbed by reference to labour hours.
What is the budgeted fixed overhead cost of a unit of Pye?
A. $18
B. $20
C. $24
D. $28

Q 26 A finishing department absorbs production overheads using a direct labour hour basis. Budgeted
production overheads for the year just ended were $268,800 for the department, and actual production
overhead costs were $245,600.
If actual labour hours worked were 45,000 and production overheads were over-absorbed by $6,400, what
was the overhead absorption rate per labour hour?
A. $5.32
B. $5.60
C. $5.83
D. $6.12
Q 27 The following extract of information is available concerning the four cost centres of EG limited.
Production cost centres Service cost centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 -
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned $28,500 $18,300 $8,960 $8,400
The overhead cost of the canteen is to be re-apportioned to the product cost centre on the basis of the number of
employees in each production cost centre. After the re-apportionment, the total overhead cost of the packing
department, to the nearest $, will
A. $1,200
B. $9,968
C. $10,080
D. $10,160
Q 28 The diagram shows a company’s factory. The factory is split into two departments the sizes of which are
shown. Each department contains a meter to record the fuel for heating.
30,000 sq meter 20,000 sq meters
Department X Department Y
Meter 1 Meter 2
The rent of the year is $100,000. The table has shown the heating bill for the year.
$
Meter 1 6,000
Meter 2 14,000
20,000
Which amount for rent and heating should be attributed to X?

A. $54,000
B. $62,000
C. $66,000
D. $72,000
Q 29 A business absorbs its production overheads on the basis of labour hours. There were 250,000 budgeted
labour hours for the next period and the overhead absorption rate was $3 per labour hour.
During the period the actual results were:
Actual labour hours 240,000
Actual production overhead $710,000
Which of the following statements is correct?
A. Overheads were over-absorbed by $10,000.
B. Overheads were under-absorbed by $10,000.
C. Overheads were over-absorbed by $40,000.
D. Overheads were under-absorbed by $40,000.

Q 30 A business absorbs its fixed production overheads on the basis of direct labour hours. The budgeted
fixed production overhead for the forthcoming period was $118,000. The budgeted direct labour hours
were 14,750 and the actual direct labour hours worked were 15,100.
If the overheads were under-absorbed by $2,400 what were the actual fixed production overheads for the
period?
A. $120,800
B. $118,400
C. $123,200
D. $125,600
Q 31 Which of the following would be the MOST appropriate basis for apportioning canteen costs in a
factory?
A. The total number of staff employed in each cost centre
B. The number of machine operators in each cost centre
C. The total number of supervisors in each cost centre
D. The number of maintenance staff in each cost centre

Chapter 7
Absorption and Marginal Casting
 Under Marginal costing technique, fixed production overheads are considered as periodic cost (Related to time
not to production) and not considered as cost of production
Cost of production =Direct Material+ Direct Labour + Variable production Overheads
 Under Absorption costing technique, fixed production overheads are also included in cost of production on basis
of predetermine OAR. It may result in under or over absorbed fixed factory overheads.
Cost of Production=Direct Material+ Direct labour +variable factory overheads + Fixed factory overheads
 Profit under Marginal and absorption costing may differ due to different values of opening and closing stocks/
Inventory. If closing inventory (units) is higher than opening inventory (units) profit under absorption costing will
be higher. If closing inventory (units) is lower than opening inventory (units) profit under marginal costing will be
higher. If number of units of opening stock and closing stock are equal, profit will also be equal.
Profit Statement under Marginal costing

Sales XXX
Less: Cost of sales:

Op.Stock (D.M+D.L+V.POH PER UNIT) X UNITS xxx.
Add: cost of production (D.M+D.L+V.POH PER UNIT) X UNITS xxx.
XXX
Less: closing stock(D.M+D.L+V.POH PER UNIT) X UNITS ( xxx). (XXX)
XXX
Less: Variable admin overheads (xxx)
Variable selling over heads (xxx)
Contribution Xxx
Less: fixed overheads.
Fixed production OH (xxx)
Fixed admin OH (xxx)

Fixed selling overheads (xxx)
Net profit XXX

Profit Statement under absorption costing
Sales XXX
Less: Cost of sales:
Op.Stock (D.M+D.L+V.POH+ FPOH PER UNIT) X UNITS xxx.
Add: cost of production (D.M+D.L+V.POH+ FPOH PER UNIT) X UNITS xxx.
XXX
Less: closing stock(D.M+D.L+V.POH+ FPOH PER UNIT) X UNITS (xxx) (XXX)
GROSS PROFIT XXX
Less/Add: Over or Under absorbed Fixed Production overheads xxx
Less: Non Production Overheads
Variable Selling Overheads ( xxx)
Variable Admin Overheads ( xxx)
Fixed admin OH (xxx)
Fixed selling OH (xxx)

Net profit xxx
Reconciliation of profit
Difference in profit = Difference in opening and closing inventory (in units) x Fixed production overhead absorption
rate/unit
 If closing stock (units) is higher than opening stock(units), profit under absorption costing will be higher.
 If opening stock (units) is higher than closing stock (units) profit under marginal costing will be higher.
When to use Absorption Costing

 In order to apply accounting principle properly.
 To charge share of fixed production overheads to different production.
 To calculator price more accurately based on full costing.
When to use Marginal Costing

 For decision making
 For easy calculations
 To avoid under/over absorbed production overheads.
Note: Inventory value will always be higher under absorption costing

Exercise
Q 1 When preparing an operating statement based on marginal costing principles, inventory valuation comprises
which of the costs?
A. Direct labour material only
B. Prime cost plus production overhead
C. Prime cost plus variable overhead
D. Total cost of sales
Q 2 With which costs is absorption costing concerned?

A. Direct labour costs only
B. Direct material costs only
C. Fixed costs only
D. Variable and fixed costs
Q 3 You are presented with following information about sales and costs for a business that makes and sells a range
of products:
$
Sales revenue 320,000
Direct labour 100,000
Direct material 75,000
Production overhead 78,000
Other overhead cost 50,000
The business uses absorption costing. There was no opening or closing inventories of the product. What profit
would be reported for the period, using absorption costing?
A. $15,000
B. $17,000
C. $20,000
D. $23,000
Q 4 Management has asked for a report showing the annual sales and profits for its three products for the year just
ended. The report could be presented in either an absorption costing or a marginal costing format. Which of
the following statements is incorrect?
A. The total profit would be the same, regardless of whether absorption costing or marginal costing is used.
B. A report using absorption costing would indicate whether each product appears to be making enough
profits.
C. A report using marginal costing would indicate whether each product was making enough contribution
towards covering fixed overheads and making a profit.
D. A report using marginal costing would show the total contribution, from which fixed overheads would be
deducted to arrive at the profit figure.
Q 5 In the year 2000, opening stocks were 12,600 units and closing stocks 14,100 units. The profit based on
marginal and absorption costing was $50,400 and $60,150 respectively. The fixed overhead absorption rate per
unit (to the nearest cent)is:
A. $4.00
B. $4.77
C. $6.50
D. $6.97

Q 6 When opening stock units were 8,500 and closing stock units were 6,750, a firm had profit of $ 62,100 using
marginal costing. Assuming that fixed overhead absorption rate was $3 per unit, what would be the profit
using absorption costing?
A. $41,850
B. $56,850
C. $67,350
D. $82,350
The following information relates to question 7 and 8
Cost and selling price details for product Z are as follows:
$ per unit
Direct material 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units,
selling 5,200 of them and incurring fixed overhead costs of $27,400
Q 7 The marginal costing profit for the month is:

A. $45,400
B. $46,800
C. $53,800
D. $72,800
Q 8 The absorption costing profit for the month is:
A. $45,200
B. $45,400
C. $46,800
D. $48,400
Q 9 The overhead absorption rate for product Y is $2.50 per direct labour hour. Each unit of Y requires 3 direct
labour hours. Stock of product Y at the beginning of the month was 2000 units and at the end of the month
were 250units. What is the difference in the profits reported for the month using absorption costing compared
with marginal costing?
A. The absorption costing profit would be $375 less.
B. The absorption costing profit would be $125 greater
C. The absorption costing profit would be $375 greater
D. The absorption costing profit would be $ 1,875 grater

Q 10 A company produce a single product for which cost and selling price details are as follows:
$ per unit $ per unit
Selling price 28
Direct material 10
Direct labour 4
Variable overhead 2
Fixed overhead 5
21
Profit per unit 7
Last period 8,000 units were produced and 8,500 units were sold. The opening stock was 3,000 units and profits
reported using marginal costing was $60,000. The profits reported using an absorption costing system would be:
A. $47,500
B. $57,500
C. $59,500
D. $62,500
Q 11 A company made 17,500 units at a total cost of $16 each. Three quarters of the costs were variable and one
quarter fixed sales were 15,000 units at $25 each. There were no opening stocks.
By how much will the profits calculated using absorption costing principle differ from the profit if the marginal
costing principles had been used?
A. The absorption costing profit would be $10,000 less
B. The absorption costing profit would be $10,000 greater
C. The absorption costing profit would be $30,000 greater
D. The absorption costing profit would be $40,000 greater
Q 12 A company had opening stock of 48,500 units and closing stock of 45,500 units. Profits based on marginal
costing were $315,250 and on absorption costing were $288,250.
What is the fixed overhead absorption rate per unit?
A. $5.94
B. $6.34
C. $6.50
D. $9.00
Q 13 In March, a company had a marginal profit of $ 78,000.opening stocks were 760 units and closing stocks
were 320 units. The company is considering changing to an absorption costing system. What profit would be
reported for March, assuming that the fixed overhead absorption rate is$ 5 per unit?
A. $74,200
B. $75,800
C. $76,400
D. $80,200
Q 14 A company had a profit of $ 147,754 in period using marginal costing. if absorption costing had been used,
a fixed production overhead absorption rate of $12 per unit would have applied. Opening and closing stocks
were 2966 units and 3604 units respectively.
What would the profit for the period have been absorption costing had been applied?

Q 15 A company manufactures a single product which sells of $85 per unit. Based on sales and production of
1460unitsper period the total costs are:
$,000
Direct material 23
Direct labour 30
Variable production overheads 8
Fixed production overheads 20
Variable selling overheads 6
Fixed selling overhead 17
If the absorption costing method is used, what is the gross profit per unit (to two decimal places of $ )? .
Q 16 Marginal costing profit of company ABC Limited was $ 390,950 and absorption costing profit was $
366,950. The opening stock was 39,400 units and the closing stock 37,400 units.
What is the fixed production overheads absorption rate per unit?
A. $9.92
B. $9.31
C. $10.45
D. $12.00
Q 17 A company expected to produce and sell 20,100 units of its single product in a period. Actual production in
the period was 19,578 units and 19,214 units were sold. Which of the statement is correct in relation to the
situation above?
A. Net profit and stock value would both be higher if absorption costing isused rather than marginal
costing
B. Net profit would be higher but stock value would be lower if marginal costing is used rather than
absorption costing
C. Net profit and stock values both be higher if marginal costing is used rather than absorption costing
D. Net profit would be higher but stock values would be lower if absorption costing is used rather than
marginal costing.
Q 18 A company makes and sells a single product. Fixed production overheads are $25,000 per month. The fixed
production overhead absorption rate is based upon 5,000 units per month. During a month 5,000 units were
produced and 4,700 units were sold. The company operates a total absorption costing system.
If marginal costing is used instead of absorption costing, what would be the effect on profit for the month?
A. It would be $3,000 higher.
B. It would be $1,500 lower.
C. It would be $1,500 higher.
D. It would be $3,000 lower.
Q 19 A company manufactures a single product. The same number of units were manufactured and sold in a
period.
How would the stock and profit using marginal costing compare with absorption costing?
Stock value Profit
A. Higher Higher
Stock value Profit

B. Lower The same
Stock value Profit
C. Lower Lower
Stock value Profit
D. The same Higher

Q 20 A company manufactures a single product 200,000 units of the product were manufactured in a period
during which 197,000 units were sold. There was no opening stock of the product. Unit costs in the period
were:
$ per unit
Variable manufacturing costs 39.50
Fixed manufacturing costs 26.20
Variable selling and administration costs 14.80
Fixed selling and administration costs 20.70
Using absorption costing what is the value of finished goods stock at the end of the period ?
Q 21 Is each of the following statement true or false?
Statement 1 Absorption costing will report higher profit than marginal costing in a period when fixed
production overheads are over-absorbed.
Statement 2 Absorption costing will report higher profit than marginal costing in a period when production
units exceed the number of units sold.
Statement 1 Statement 2
A. True True
B. True False
C. False True
D. False False
Q 22 In a period, a company had opening inventory of 9,000 units and closing inventory of 7,500 units. Profits
based on marginal costing were $250,000 and on absorption costing were $190,000. If the budgeted total fixed
cost for the company were $ 1,500,000, what was the budgeted level of activity in units?
A. 6,250 units
B. 32,500 units
C. 37,500 units
D. Cannot be calculated without more information.
Q 23 The following statements relate to absorption and marginal costing.
1) As inventory levels rise marginal costing profit will be higher than absorption costing profit.
2) Fixed production costs are treated as period cost under marginal costing.
Which one of the following is true regarding these statements?
A. Both statements are incorrect.
B. Both statements are correct.
C. Statements 1 is correct but 2 is incorrect
D. Statements 2 is correct but 1 is incorrect
Q 24 Bighead limited has a single product with the following details:
$/unit
Selling Price 25
Direct labour 5
Direct material 5
Contribution 15
The firm has fixed costs of $ 120,000 per period and sells 9,000 units of the product per period.
What is the total profit for the period?
A. $ 120,000
B. $ 135,000
C. $ 225,000
D. $ 15,000

Q 25 Exp has compiled the following standard cost card for its main product.
Production costs
Fixed 33.00
Variable 45.10
Selling costs
Fixed 64.00
Variable 7.20
Profit 14.70
Selling price 164.00
Under an absorption costing system, closing inventory would be valued at:
A. $ 52.30
B. $ 78.10
C. $ 97.00
D. $ 149.30
Q 26 PQR sells one product. The cost card for that product is given below:
$
Direct materials 4
Direct labour 5
Variable production overhead 3
Fixed production overhead 2
Variable selling cost 3
The selling price per unit is $ 20. Budgeted fix overheads are based on budgeted production of 1,000 units.
Opening inventory was 200 units and closing inventory was 150 units. Sales during the period were 800 units and
actual fixed overheads incurred were $ 1,500.
The total contribution earned during the period was:
A. $ 2000
B. $ 2,500
C. $ 4,000
D. $ 3,500
Q 27 A company produces and sells a single product whose variable cost is $ 6 per unit. Fixed costs have been
absorbed over the normal level of activity of 200,000 units and have been calculated as $2 per unit. The
current selling price is $ 10 per unit.
How much profit made under marginal costing if the company sells 250,000 units?
A. $500,000
B. $600,000
C. $900,000
D. $1,,000,000
Q 28 When opening inventory was 8,500 liters and closing inventory was 6,750 liters, a firm had a profit of
$62,100 using marginal costing.
Assuming that the fixed overhead Absorption rate was $3 per liter, what would be the profit using absorption
costing?
A. $41,850
B. $56,850
C. $67,350
D. $82,350
Solution with Explanation

Q 29 Which of the following are true of marginal costing?

1) The marginal cost of a product includes an allowance for fixed production costs.
2) The marginal cost of a product represents the additional cost of producing an extra unit.
3) If the inventory increases over a year, the profits under absorption costing will be lower than with
marginal costing.
A. (i) only
B. (ii) only
C. (ii) and (iii) only
D. (i),(ii) and (iii)
Q 30 Which of these statements are true of marginal costing
1) The contribution per unit will be constant if the sales volume increases.
2) There is no under or over absorption of overhead.
3) Marginal costing does not provide useful information for decision making.
A. (i) and (ii) only
B. (ii) and (iii) only
C. (ii) only
D. (i), (ii) and (iii)
Solution with Explanation

Chapter 8
Job and Batch Costing
Procedure for the performance of jobs
The normal procedure in jobbing concerns involves the following.
 The prospective customer approaches the supplier and indicates the requirements of the job.
 A responsible official sees the prospective customer and agrees the precise details of the items to be supplied, for
example, the quantity, quality and colour of the goods, the date of delivery and any special requirements.
 The estimating department of the organisation then prepares an estimate for the job. The total of these items
will represent the quoted selling price.
 At the appropriate time, the job will be 'loaded' on to the factory floor. This means that as soon as all materials,
labour and equipment are available and subject to the scheduling of other orders, the job will be started.
Collection of job costs

Each job will be given a number to identify it. A separate record must be maintained to show the details of individual jobs.
The process of collecting job costs may be outlined as follows.
 Materials requisitions are sent to stores.

 The materials requisition note will be used to cost the materials issued to the job concerned, and this cost may
then be recorded on a job cost sheet.
 The job ticket is passed to the worker who is to perform the first operation.
 When the job is completed by the worker who performs the final operation, the job ticket is sent to the cost
office, where the time spent will be costed and recorded on the job cost sheet.
 The relevant costs of materials issued, direct labour performed and direct expenses incurred as recorded on the
job cost card are charged to the job account in the work in progress ledger.
 The job account is debited with the job's share of the factory overhead, based on the absorption rate(s) in
operation.
 On completion of the job, the job account is charged with the appropriate administration, selling and distribution
overhead, after which the total cost of the job can be ascertained.
 The difference between the agreed selling price and the total actual cost will be the supplier's profit (or loss).
Batch costing
Batch costing is a form of specific order costing in which costs are attributed to batches of products.
Batch costing is similar to job costing in that each batch of similar articles is separately identifiable. The cost per
unit manufactured in a batch is the total batch cost divided by the number of units in the batch.
Batch costing is used where common equipment is used to produce batches of different products. It is especially
relevant where products are not made for a specific job, but are produced for inventory using a single production
line. (If a batch of items is made to order then the costing method is classified as job costing.) Examples of
industries where batch costing is common would be food manufacturing, paint manufacturing, drug
manufacturing.

Introduction
A batch is a cost unit which consists of a separate, readily identifiable group of product units which maintains its
separate identity throughout the production process.
The procedures for costing batches are very similar to those for costing jobs.
 The batch is treated as a separate cost unit during production and the costs are collected as described
earlier in this chapter.
 Once the batch has been completed, the cost per unit can be calculated as the total batch cost divided
by the number of units in the batch.

Exercise
Q 1 A company operates a job costing system. Job 812 requires $60 of direct materials, $40 of direct labour
and $20 of direct expenses. Direct labour is paid $8 per hour. Production overheads are absorbed at a rate
of $16 per direct labour and non-production overheads are absorbed at a rate of 60% of prime cost.
What is the total cost of job 812?
A. $240
B. $260
C. $22
D. $320
Q 2 Which one of the following statement is incorrect?
A. Job costs are allocated separately, whereas process costs are averages.
B. In job costing the progress of a job can be ascertained from the materials requisition notes and job
tickets or timesheet
C. In progress costing information is needed about work passing through a process and work
remaining in each process
D. In process costing, but not job costing, the cost of normal loss will be incorporated into normal
product cost
The following data are to be used for question 3 and 4
A firm uses job costing and recovers overheads on a direct labour cost basis.
Three jobs worked on during a period, the details of which were:
Job1 Job2 Job3
$ $ $
Opening work-in-progress 8,500 0 46,000
Material in period 17,150 29,025 0
Labour for period 12,500 23,000 4,500
The overheads for the period were exactly as budgeted, $40,000. Actual labour costs were also the same as
budgeted.
Job 1 and 2 were the only incomplete jobs at the end of the period.
Q 3 What was the value of closing work-in-progress?

A. $81,900
B. $90,175
C. $140,675
D. $214,425
Q 4 Job 3 was completed during the period and considered of 2,400 identical circuit boards. The firm adds 50%
to total production costs to arrive at a selling price.
What is the selling price of the circuit board?
A. It cannot be calculated without more information
B. $31.56
C. $41.41
D. $58.33

Q 5 The direct costs for batch number 35401, comprising 200 men’s shirt, were as follows:
Materials $3,000
Labour 120 hours@ 45 per hour
Production overheads are absorbed at a company-wide rate of $12 per direct labour hour.
Non-production overheads are absorbed at the rate of $1,000 per batch.
Calculate the total production cost per unit of each shirt in the batch. .
Q 6 What would be the most appropriate cost unit for a cake manufacture?
Cost per:
A. Cake
B. Batch
C. Kilogram
D. Production run
Q 7 ABC plc makes batches of ‘own brand’ ready meals for supermarkets, using a semi-automated production
process. The cost for batch number 87,102, comprising 10,000.
Thai fish curry meals, were as follows:
Ingredients $7,000
Packaging $3,600
Labour 80 hours @ 10 per hour
The batch took 40machine hours to produce.
Production overheads are absorbed at a factory-wide rate of $5 per machine hour.
Non-production overheads are absorbed at the rate of $15 per labour hour.
Calculate the total cost per meal in the batch.
A. $1.16
B. $1.22
C. $1.28
D. $1.30
Q 8 An engineering business has a department with a work force of eight engineers and one supervisor. The
department carries out small engineering jobs for business customers. Which of the following costs would
be treated as a direct expense of a particular job for a customer?
A. Supervision cost
B. Cost of delivery of equipment to the customer
C. Depreciation of engineering equipment
D. Cost of engineer’s time on the job
Q 9 A production used 6 kilograms of raw material and takes two direct labour hours to make.
Raw material cost $2.50 per kilogram and direct labour is paid $4 per hour. Variable production overheads
are 25% per labour costs. The budgeted fixed production costs for the year were $120,000 and budgeted
direct labour hours were 20,000 hours. Fixed overheads are recovered on a direct labour hour basis.
The full production cost per unit of product is:
A. $25
B. $31
C. $35
D. $37
Q 10 Which of the following business would operate a batch costing system?
A. Brewery
B. Food canning
C. Coal mine
D. Bakery

Q 11 Which of the following would operate a job batch system?

A. Shipbuilder
B. Oil refinery
C. Steel producer
D. Kitchen fitter
Q 12 Which of the following is a feature of job costing?
A. Production is carried out in accordance with the wishes of the customer
B. Associated with continuous production of large volumes of law-cost item
C. Establishes the cost of services rendered
D. Costs are charged over the units produced in the period
Q 13 The following information is relates to job 2468, which is being carried out by AB Limited to meet a
customer’s order.
Department A Department B
Direct material consumed $5,000 $3,000
Direct labour hours 400 hours 200 hours
Direct labour rate per hour $4 $5
Production overhead per direct labour hour $4 $4
Administration and other overhead 20 % of full production cost
Profit margin 25 % of sales price
What is the selling price to the customer for job 2468?
A. $16,250
B. $17,333
C. $19,500
D. $20,800
Q 14 P Limited manufacturers ring binders which are embossed with the customer‘s own logo. A customer
has ordered a batch of 300 binders. The following illustrate the cost for a typical batch of 100 binders.
$
Direct materials 30
Direct wages 10
Machine set up 3
Design and art work 15
58
P Limited absorbs production overhead at a rate of 20 parent of direct wages cost. Five percent of total
production cost of each batch to allow for selling, distribution and administration overheads.
P Limited requires a profit margin of 25 percent of sales value.
The selling price for a batch of 300 binders (to the nearest penny) will be:
A. $189,00
B. $193.20
C. $201.60
D. $252.00
Q 15 A company provides the following data relating to job 141, direct material used $10,000, direct labour
hourly rate $10,direct labour hour used 150, machine hours used 60, factory overheads recovery rate per
machine hour $30. Based on this data, the conversion cost for job 141 are:
A. $3,300
B. $6,000
C. $45,000
D. $4,300

Q 16 A machine is hired for use on one job only:

A. The rental will be charged to the job as a direct expense
B. The rental will be charged to the job as an indirect expense
C. The rental and depreciation of the machine will be charged to the job as direct expenses
D. The rental and depreciation of the machine will be charged to the job as indirect expenses
Q 17 The following information relates to job 3579, which is being carried out by Mittenson Hands Ltd to
meet a customer’s order.
Materials issued to job 3579 $5,000
Materials transferred to job 2456 $400
Grade X labour (direct labour); 200 hours at $3 per hour basic rate, 100 of these hours were worked in
overtime, at the request of the customer, in order to complete the job earlier. Overtime premium is $1 per
hour
Production overhead: $5 per direct labour hour
A supervisor recorded on his job sheet that 20hours of his time was spent on this job. He is paid $5 per hour,
and the cost of his time is treated as a direct labour cost in the company’s cost accounts.
What is the full production cost of job 3579?
A. $6,300
B. $6,400
C. $6,500
D. $6,900
Data for question 18, 19
Twist and Turn Ltd is a company that carries out jobbing work. One of the jobs carried out in February was
job 1357, to which the following information relates.
Direct material Y: 400 kilos issued from stores at a cost of $5 per kilo
Direct material Z: 800 kilos issued from stores at a cost of $6 per kilo 60 kilo returned. A further
20 kilos were damaged in department Q and had to be disposed of this was
treated as an abnormal loss.
Department P: 300 hours of labour, of which 100hours were done in overtime
Department Q: 200 hours of labour, of which 100 hours were done in overtime
Overtime work in carried out normally in Department P, where basic pay is $4 per hour plus an overtime
premium of $1 per hour. Overtime work was done in Department Q in February because of a request by a
customer for another job to complete his job quickly. Basic pay in Department Q is $5 per hour and overtime
premium is $1.50 per hour.
Overhead is absorbed at the rate of $3 per direct labour hour in both departments.
Q 18 What was the direct material cost of job 1357?

A. $6,320
B. $6,440
C. $6,680
D. $6,800

Q 19 What was the direct labour cost of job 1357?

A. $2,200
B. $2,280
C. $2.530
D. $2,600
Q 20 In which of the following circumstances would a manufacturing organization implement job costing?
A. Where volume production exists
B. Where each order is different
C. Where products are identical and cost is averaged
D. Where production is continuous
Q 21 A firm operates a job costing system and uses absorption costing.
What should the cost control procedure be for each job?
A. Direct costs should be compared to the estimate/quotation as the job progresses and remedial action
taken
B. Profit or loss should be compared to estimate when the job is complete
C. Feedback should be obtained from the customer
D. Direct and indirect costs should be compared to the selling price as the job progresses and remedial
action taken
Q 22 How are direct and indirect expenses coded in job costing system?
A. Direct expenses are coded to job, indirect expenses are initially coded to cost centre
B. Direct expenses are initially coded to cost centres, indirect expenses are coded to jobs
C. Direct and indirect expenses are initially coded to cost centres
D. Direct and indirect expenses are coded to jobs
Q 23 At the end of month 1, job ABC was in progress. Production costs incurred on the job in month 1
were:
Direct material $6,270
Direct labour $3,480
Production overhead absorbed $4,350
Job ABC was completed in month 2 during which the following relevant events occurred:
Direct material issued from store to job ABC $1,960
Direct material returned to store from job ABC $180
Direct material transferred from job ABC to another job $115
Direct labour hours worked on job ABC 396 hours
Direct labour is paid at a rate of $6.00 per hour. Production overhead is absorbed at a rate of $7.50 per
direct labour hour.
A. What is the total direct cumulative material cost for job ABC?
B. What is the total cumulative production OH absorbed for job ABC?
Q 24 A manufacturing business absorbs production overheads into the cost of jobs as a percentage of direct
labour cost. Four jobs were worked on during a period. Details of the jobs are as follows:
Job1 Job2 Job3 Job4
$ $ $ $
Opening work-in-progress 4,360 1,200 2,625
Direct materials in the period 1,595 2,310 3,175 1,380
Direct labour in the period 1,240 1,580 1,905 1,315
Production overheads incurred in the period totalled $8,970. Job 1 and 2 were completed in the period.
What is the value of work-in-progress at the end of the period (to the nearest $)

Q 25 Production cost, including absorbed overhead, of $4,094 have been incurred to data on job XYZ. A
further $1,735 of direct cost, including the cost of80 direct labour hours, is expected to be required to
complete the job. Production overheads are absorbed at rate of $10 per direct labour hour.
What is the expected total production cost of job XYZ?
Q 26 A business operates a job costing system and prices its jobs by adding 20% to the total cost of the job.
The fixed production cost of a job was $6,840 and it had used 156 direct labour hours. The fixed
production overheads are absorbed on the basis of direct labour hours. The budgeted overhead absorption
rate was based upon a budgeted fixed overhead of $300,000 and total budgeted direct labour hours of
60,000.
The job should be sold for:
A. $7,620
B. $8,208
C. $9,144
D. $9,525
Q 27 A company operates a job costing system.
Job number 605 requires $300 of direct materials and $400 of direct labour. Direct labour is paid at the rate
of $8 per hour. Production overheads are absorbed at a rate of $26 per direct labour hour and non-
production overheads are absorbed at a rate of 120% of prime cost.
What is total cost of job number 605?
A. $2,000
B. $2,400
C. $2,840
D. $4,400
Q 28 A builder has produced a quote for some alterations. The price is made up as follows:
$
Direct materials 100 kg @ $4 per kg 400
Direct labour 5 hours @ $10 per hour 50
15 hours @ $5 per hour 75
Hire of machine 1 day @ $100 per day 100
Overheads 20 hours @ $8 per hour 160
Total cost 785
Profit mark-up @ 20% 0.2 x $785 157
Price quoted $942
Actual costs for the job were as follows:
Direct materials 120 kg @ $4 per kg
Direct labour 3 hours @ $10 per hour
20 hours @ $5 per hour
Hire of machine 2 days @ $100 per day
The actual profit / (loss) made on the job was:
A. $52 loss
B. $28 loss
C. $28 profit
D. $52 profit

Q 29 WhatsinanameInc production name badges for companies. Their most popularly item is an
encapsulated name badge carrying a logo. The following information has been estimated for a typical
batch of 100 badges.
Artwork $45
Machine setting 2 hours at $24 per hour
Coating material $5 per 10 badges
Card $2 per 50 badges
Ink and consumables $50 (fixed)
Wages 4 hours at $10 per hour (for a batch)
General overheads are estimated at $20,000 per period in which it is expected that 500 hours will be worked.
Whatsinaname want to make a 30% mark-up on a batch of 200 badges. The selling price for the badge should
be:
A. $586
B. $644
C. $649
D. $707
Q 30 A company operated a job costing system. The company’s standard net profit margin is 20 percent of
sales.
The estimated costs for job 173 are as follows.
Direct materials 5 meters @ $20 per meter
Direct labour 14 hours @ $8 per hour
Variable production overheads are recovered at the rate of $3 per direct labour hour.
Fixed production overheads for the year are budgeted to be $200,000 and are to be recovered on the basis of
the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the rate of $80 per
job. The price to be quoted for job 173 is, to the nearest $
A. $404
B. $424
C. $485
D. $505
Q 31 A company operates a job costing system. Job number 1012 requires $45 of direct materials and $30 of
direct labour. Direct labour is paid at the rate of $7.50 per hour. Production overheads are absorbed at a
rate of $12.50 per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime
cost. What is the total cost of job number 1012?
A. $170
B. $195
C. $200
D. $240

Chapter 9
Process Costing
Process costing features
Process costing is a costing method used where there are continuous processes. Process costs are attributed to the units
produced in a period.
Introduction
We have now looked at two cost accounting methods: job costing and batch costing. We will now consider another
costing method, process costing. Process costing is applied when output consists of a continuous stream of identical units.
Features of process costing

Process costing is a costing method used to determine the cost of units manufactured from a continuous process. It is
common to identify process costing with continuous production such as the following.
 Oil refining
 Sugar refining
 Chemical processing
 Brewing
Features of process costing include the following.
 There is often a loss in process due to spoilage, wastage, evaporation and so on.
 The output of one process becomes the input to the next until the finished product is made in the final process.
Closing WIP with no loss

Step 1 Calculate equivalent units
Equivalent units are notional whole units which represent incomplete work, and which are used to apportion costs
between work in progress and completed output
𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑈𝑛𝑖𝑡𝑠 = 𝑈𝑛𝑖𝑡𝑠 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑒𝑑 + %𝑎𝑔𝑒 𝑜𝑓 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑊𝐼𝑃
Step 2 Calculate cost per unit
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖 =
𝐸𝑈
Step 3 Calculate cost of finished goods or cost transferred to next process
𝐶𝑜𝑠𝑡 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑒𝑑 = 𝑈𝑛𝑖𝑡𝑠 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑒𝑑 ∗ 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
Step 4 Calculate value of closing WIP
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑊𝐼𝑃 = %𝑎𝑔𝑒 𝑜𝑓 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑊𝐼𝑃 ∗ 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

Loss with no WIP

Step 1 Calculate expected output
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡 = 𝐼𝑛𝑝𝑢𝑡 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠
Step 2 Calculate cost per unit
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑢𝑡 𝑝𝑢𝑡
Step 3 Calculate total cost of actual output
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑂𝑢𝑡𝑝𝑢𝑡 = 𝑂𝑢𝑡𝑝𝑢𝑡 ∗ 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Exercise
Q 1 A company uses process costing to value its output. The following was recorded for the period.
Input materials 2,000 units at $4.50 per unit
Conversion cost $13,040
Normal loss 5% of input
There was no opening or closing inventories
What was the valuation of one unit of output?
A. $11.80
B. $11.60
C. $11.20
D. $11.00
Q 2 In a production process the percentage completion of the work-in-progress (WIP) at the end of the period
is found to have been understated.
When this is corrected what will the effect on the cost per unit and the total value of the WIP?
Cost per unit Total value of WIP
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
D. Increase Increase
Q 3 A company uses process costing to value its output. The following was recorded for the period:
Input materials 1,000 liters at $5 per liters
Conversion cost $11,000
Output 800 liters, as expected. All losses were “normal”
There was no opening or closing inventories
What was the valuation of one unit of output?
A. $ 5.00
B. $ 16.00
C. $ 18.75
D. $ 20.00
The following data are to be used for questions 4 & 5 (next two questions)
Portal Ltd is a manufacturer. In period 1 the following production occurred:

Units started (there was no opening WIP) = 1,300 units
Closing WIP = 500 units
Degree of completion of closing WIP:
Materials 80%
Conversion costs 50%
Cost incurred in period 1:
Materials $7,200
Conversion $4,200
Q 4 What was the total cost per equivalent of production?
A. $6.00
B. $8.77
C. $9.54
D. $10.00

Q 5 What was the value of costing WIP?

A. $3,400
B. $4,000
C. $5,000
D. $8,000
Q 6 In process costing an equivalent unit is:
A. A unit of cost based on optimum efficiency
B. An effective whole unit representing the varying degrees of completion of work
C. A unit made in more than one process cost centre
D. A unit being currently made which is the same as previously manufactured
Q 7 In process costing what are equivalent units?
A. Production output expressed as expected performance
B. Production of homogeneous product
C. National whole units representing incomplete work
D. Units produced in more than one process.
Q 8 Completed output from a manufacturing process in a period totalled 5,640 units. There was no work-in-
progress at the beginning of the period but 780 units, 60% completed, remained in the process at the end of
the period.
What are the equivalent units of the closing work-in-progress?
A. 312
B. 468
C. 780
D. 6,108
Q 9 A manufacturing process had no work-in-progress at the beginning of a period. 20,000 units of raw
material, costing $ 8.20 per unit, were input to the process in the period. 18,600 completed units were
transferred out. Conversion costs were $ 7.65 per completed unit and $ 6.12 per incomplete unit.
What was the value of the closing work-in-progress?
A. $ 8,568
B. $ 20,048
C. $ 22,190
D. $ 30,788
Q 10 In certain types of processes and operations, the quantity of output is less than that of input because of
shrinkage. Evaporation etc. such a loss of output is known as:
A. Waste
B. Scarp
C. Normal
D. None of these
Q 11 A business makes one product which passes through a single process. The costs of the process for the
last period are as follows:
Materials 7,500 kg @ $ 1 per kg
Labour 380 hours @ $ 10 per hour
Production overheads $ 5,950Normal loses are 10% of input into the process and without further
processing can be sold as scrap for 50 pence per kg. There is no opening and closing work in progress and
output from the process was 6,750 kg during the period.
What is the value of the output (to the nearest $ 1)?______________

Q 12 A raw material costing $ 2.70 per kilogram (kg) is processed. There is a 10% loss of weight in the
process.
What is the raw material cost per kg of output from the process? __________
Q 13 The following data refers to a manufacturing process for a period
1,450 tons of raw materials costing $ 36,250 were input to the process, and conversion costs were $ 29,145.
Normal wastage is 20% of input and wastage can be sold for $ 10 per ton. There is no opening and closing
work in progress.
What is the cost per ton goo production? ____________
Q 14 The following information is available for a production process for the last period.
Material input 200 kg at $ 6 per kg
Labour and overhead input $ 3,500
Transfer to finished goods 170 kg
Normal loss is 15% of input and has a scrap value of $ 1 per kg. There is no opening and closing work-in-
progress.
The value of the finished output for the period (to the nearest $) is_____________
Q 15 The Work-in-progress in a process at the end of a period is 2,300 units. The work-in-progress is 75%
complete as to materials and 60% complete as to conversion costs. Costs per equivalent unit are $ 9 and $ 3
for materials and conversion costs respectively.
What is the value of the work-in-progress? ___________
Q 16 In process costing with what are “equivalent units” most often associated?
A. Scrap losses
B. Work-in-progress
C. By-products
D. Finished stock
Q 17 In the month of July, Company S manufactured 50 widgets with an additional 30 widgets partially
completed. The incomplete widgets were 60 % complete in terms of materials, 40% complete in terms of
labour and 20% complete in terms of overheads.
Production costs for the month were:
Materials $6,000
Labour $5,000
Overheads $4,000
There was no opening work-in-progress.
What is the material cost per widget (to the nearest penny)?
A. $88.24
B. $76.88
C. $82.48
D. $94.24
Q 18 A chemical process has a normal loss of 10% of input. In a period, 2,500 kgs of material were input.
The quantity of good production achieved was:
Q 19 Which of the following are features of process costing?
i. Homogeneous products
ii. Customer-driven production
iii. Finished goods are valued at an average cost per unit.
A. (i)and (iii)
B. (ii) and (iii)
C. (iii)only
D. (i) only

The following information relates to questions 20 and 21.
A company manufactures Chemical X, in a single process. At the start of the month there was no work-in-
progress. During the month 300 litres of raw material were input into the process at a total cost $6,000.
Conversion costs during the month amounted to $4,500.at the end of the month250 litres of chemical X were
transferred to finished goods inventory. The remaining work-in-progress was 100% complete with respect to
materials and 50% complete with respect to conversion costs. There were no losses in the process
Q 20 The equivalent units for closing work-in-progress at the end of the month would have been:
Material Conversion costs
A. 25 litres 25 litres
B. 25 liters 50 litres
C. 50 litres 25 litres
D. 50 litres 50 litres
Q 21 If there had been a normal process loss of10% of input during the month the value of this loss would
have been
A. Nil
B. $450
C. $600
D. $1,050

Chapter 9
Management Responsibilities and
Performance Measurement
Performance measures for cost centres
Productivity
This is the quantity of the product or service produced (output) in relation to the resources put in (input). For example, so
many units produced per hour, or per employee, or per tonne of material. It measures how efficiently resources are being
used.
Cost per unit=Total costs ÷ number of units produced.

For the manager of a cost centre which is also a production centre one of the most important performance measures will
be cost per unit. This is simply the total costs of production divided by the number of units produced in the period.
Measures of performance using the standard hour

Definition
A standard hour is the amount of work achievable, at the expected level of efficiency, in an hour.
Illustration
X Co manufactures three products (A, B and C) in one of its production cost centres. It is expected that 10 units of product
A can be manufactured per direct labour hour, 25 units of product B and 20 units of product C.
The standard hour for product A is, therefore, 10 units, product B is 25 units and product C is 20 units.
The standard hour is especially useful as a common measure for combining heterogeneous (dissimilar) products so that
manufacturing performance for a cost centre (or production unit) as a whole can be assessed.
Example
Budgeted production of the three products (A, B and C) in period 1 is:
Product A 12,400 units
Product B 10,000 units
Product C 18,500 units

The total budgeted direct labour hours for period 1 in the cost centre, based on the standard hour data above, is:
Product A 1,240 hours (12,400 units ÷ 10 units per hour)
Product B 400 hours (10,000 units ÷ 25 units per hour)
Product C 925 hours (18,500 units ÷ 20 units per hour)
2,565 hours
It can be seen that the budgeted production of the three different products can be combined into an overall labour activity
measure and this also can be applied to the actual production volumes, using the same data about the standard hour of
each product. This enables the effect of changes in the production mix to be measured.
Example
In period 1, the actual production output of the three products was:
Product A 13,300 units
Product B 9,600 units
Product C 18,000 units
A total of 2,430 direct labour hours were worked in period 1.
Taking these actual results into account and the data concerning the standard hour of each product, the total expected
direct labour hours for the actual production output in period 1 can be calculated as follows:
Product A 1,330 hours (13,300 units ÷ 10 units per hour)
Product B 384 hours (9,600 units ÷ 25 units per hour)
Product C 900 hours (18,000 units ÷ 20 units per hour)
2,614 hours
Efficiency, capacity utilisation and production volume

Using the above data about the budgeted direct labour hours, the actual direct labour hours and the expected direct
labour hours to manufacture the actual output, a series of ratios can be calculated to measure the performance of the
cost centre as a whole in period 1 and to understand the causes. The ratios are:
• Production volume ratio
• Capacity utilisation ratio
• Efficiency ratio

Production volume ratio

The production volume ratio measures how the actual production output for a period, measured in direct labour hours,
compares with that budgeted for a production cost centre. It is calculated as:
𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒉𝒐𝒖𝒓𝒔 𝒇𝒐𝒓 𝒂𝒄𝒕𝒖𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏

𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒗𝒐𝒍𝒖𝒎𝒆 𝒓𝒂𝒕𝒊𝒐 =
𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝒉𝒐𝒖𝒓𝒔
𝑨𝒄𝒕𝒖𝒂𝒍 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒗𝒐𝒍𝒖𝒎𝒆 𝒓𝒂𝒕𝒊𝒐 =
𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏
A ratio of > 100% will indicate above budget production volume and vice versa.
The production volume ratio can be further analysed by:
• The number of hours worked compared with budget (measured by the capacity utilisation ratio).
• The efficiency with which the output is produced (measured by the efficiency ratio).
Capacity utilisation ratio

The capacity utilisation ratio measures whether the total direct labour hours worked in a production cost centre in a
period was greater or less than what was budgeted. It is calculated as:
𝑨𝒄𝒕𝒖𝒂𝒍 𝑯𝒐𝒖𝒓𝒔
𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝒖𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 𝒓𝒂𝒕𝒊𝒐 =
𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝒉𝒐𝒖𝒓𝒔
A ratio of > 100% will indicate that more direct labour hours were worked than budget and vice versa.
Efficiency ratio
The efficiency ratio measures whether the production output for a period in a production cost centre took more or less
direct labour time than expected. It is calculated as:
𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒉𝒐𝒖𝒓𝒔 𝒇𝒐𝒓 𝒂𝒄𝒕𝒖𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏

𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝒓𝒂𝒕𝒊𝒐 =
𝑨𝒄𝒕𝒖𝒂𝒍 𝒉𝒐𝒖𝒓𝒔 𝒘𝒐𝒓𝒌𝒆𝒅
A ratio of > 100% will indicate greater labour efficiency than budgeted and vice versa.
Example
Continuing to use the above data concerning the total budgeted, actual and expected direct labour hours in period 1 for
the production cost centre, the three ratios can be calculated as follows:
Production volume ratio:

2,614 expected direct labour hours of actual output
÷ 2,565 budgeted direct labour hours
× 100%
= 101.9%
Capacity utilisation ratio:
2,430 actual direct labour hours worked
÷ 2,565 budgeted direct labour hours
× 100%
= 94.7%
Efficiency ratio:
2,614 expected direct labour hours of actual output
÷ 2,430 actual direct labour hours worked
× 100%
= 107.6%
Analysis
It can be seen, from the above ratios, that the actual output in the production cost centre in the period, measured in
expected direct labour hours, was 1.9% higher than budget (it may be noted that the total number of product units
manufactured was the same as budget, but the units of one product are not comparable, in terms of production effort,
with another).
The over-budget production activity occurred despite the fact that utilisation of capacity was only 94.7% of the budgeted
utilisation. This was because direct labour efficiency was 7.6% better than expected – ie fewer hours than expected were
required to produce the actual output.
The relationship between the three ratios can be demonstrated as follows:
Production volume 101.9% = [(capacity utilisation 94.7 × efficiency 107.6) ÷ 100] or, alternatively, [(capacity utilisation
0.947 x efficiency 1.076) x 100]

Performance measures for profit centers
Profit margin
The net profit margin (net profit to sales ratio) is calculated as
Net profit ÷ sales×100%.
The net profit margin provides a simple measure of performance for profit centres. Investigation of unsatisfactory
profit margins enables control action to be taken, either by reducing excessive costs or by raising selling prices.
Profit margin may be calculated using either net profit or operating profit. You should always state which margin
you have calculated – 'net profit margin' or 'operating profit margin'.
The operating profit is the difference between the value of sales (excluding sales tax) and the costs incurred
during operations (total operating expenses
Gross profit margin

The gross profit margin is calculated as
Gross profit ÷sales ×100%
Gross profit is the difference between the value of sales (excluding sales tax) and the cost of the goods sold.
Gross profit markup

The gross profit margin is calculated as
Gross profit ÷ cost of sales ×100%
Cost/sales ratios
When target profits are not met, further ratios may be used to shed some light on the problem.
1. Production cost of sales ÷sales

2. Distribution and marketing costs ÷sales
3. Administrative costs ÷sales
Subsidiary ratios can be used to examine problem areas in greater depth. For example, for production costs the
following ratios might be used.
1. Material costs ÷sales value of production
2. Works labour costs ÷sales value of production
3. Production overheads ÷sales value of production
Performance measures for investment centres

Return on capital employed (ROCE) or return on investment (ROI)) shows how much profit has been made in
relation to the amount of resources invested.
Return on capital employed (ROCE)

Return on capital employed (ROCE) (also called Return on investment (ROI)) is calculated as
(profit÷capital employed) ×100%
It shows how much profit has been made in relation to the amount of resources invested.

ROCE is generally used for measuring the performance of investment centres; profits alone do not show whether
the return is sufficient when different values of assets are used
ROCE may be calculated in a number of ways, but profit before interest and tax is usually used.
Similarly all assets of a non-operational nature (for example, trade investments and intangible assets such as
goodwill) should be excluded from capital employed.
Profits should be related to average capital employed. In practice many companies calculate the ratio using year-
end assets. This can be misleading. If a new investment is undertaken near to the year end, the capital employed
will rise but profits will only have a month or two of the new investment's contribution.
What does the ROCE tell us?
What should we be looking for?
There are two principal comparisons that can be made.
 The change in ROCE from one year to the next
 The ROCE being earned by other entities
Residual income (RI)

Residual income (RI) is an alternative way of measuring the performance of an investment centre. It is a measure
of the centre's profits after deducing a notional or imputed interest cost.
An alternative way of measuring the performance of an investment centre, instead of using ROCE, is residual
income (RI). Residual income is a measure of the centre's profits after deducting a notional or imputed interest
cost (calculated on the whole of the capital employed – not just on borrowed funds).
This interest cost may be based on the company's cost of capital.
Residual income (RI) = profit before interest and tax - Notional interest charge for invested capital
Asset turnover
Asset turnover measures how efficiently the assets of the business are being used.
Asset turnover is a measure of how well the assets of a business are being used to generate sales. It is calculated
as
(sales ÷ capital employed).

Exercise
Q 1 For which of the following types of business unit would residual income be suitable measure of performance?
A. Cost centre.
B. Revenue centre.
C. Profit centre.
D. Investment centre.
Q 2 The performance of an investment centre is measured by residual income. In a particular period, the
investment centre had fixed assets of $200,000 and net current assets of $ 40,000. Its annual profits were as
follows;
$ $
Sales price 217,000
Direct costs of the division 175,000
Apportioned head office costs 15,000
Total divisional costs 190,000
Profit 27,000
The national interest on capital is 8%
What was the residual income for the centre for the year?
A. $7,800
B. $11,000
C. $22,800
D. $26,000
Q 3 Which of the following measures of performance is unsuitable for a profit centre?
A. Sales income per employee.
B. Profit as a percentage of sales revenue
C. Return on capital employed.
D. Cost per machine hour operated.
Q 4 Which of the following statement is incorrect?
A. There may be several investment centres within a single organization.
B. There may be several cost centres within an investment centre.
C. There may be several cost centres within a profit centre.
D. There may be several profit centres within a cost centre.
Q 5 A company operates a retail supermarket chain selling a range of grocery and household products. It has
branches throughout the country and is reviewing the range of goods to be stocked in each of these branches.
How might the company best analyse its profitability for this purpose.
A. By area of the country.
B. By contract with each supplier
C. By customer payment method.
D. By product line stocked.
Q 6 Which of the following is true about the productivity (which is a performance measure)?
1. It is a cost centre performance measure.
2. It checks how efficiently recourses are being used.
3. It measures the quantity of output in relation to the input.

A. Only 1 and 2 above.

B. Only 1 and 3 above.
C. Only 2 and 3 above.
D. All 3 statements are correct.
Q 7 Which of the following ratios might not be a useful means of determining the reasons for profit margins not
being met?
A. Admin cost ÷ sales
B. Production cost of sales ÷ sales.
C. Capacity ratio.
D. Material cost ÷ sales.
Q 8 The information is given :
Capital employed $900,000
Net profit after deducting tax but before interest $15,000
Tax $1,000
Interest $500
What will be the ROCE?
A. 1.67%
B. 1.78%
C. 2%
D. 2.35%
Q 9 A company with capital employed of $500,000 earns ROCE of 25%. Another investment of $60,000 was made
for 7 years. The average net profit from his investment would be $15,000. The notional interest on the total
amount invested is 15%.
What will be the residual income?

A. $65,000.
B. $56,000.
C. $41,000.
D. $50,000.
Q 10 The following information is given:
Gross profit $16,000
Notional interest 15% of capital employed
Depreciation $1,000
What will be the residual income?

A. $8,750.
B. $8,000.
C. $7,750
D. $6,750.
Q 11 The following information is given :
Sales 1,500 units
Selling price per unit $10
Cost of sales $1,000
Financing expenses $500
Admin expenses $700

What is the GP margin?
A. 93.3%
B. 85.33%
C. 92%
D. 74%
Q 12 The following info is given:
Gross profit margin 15%
Cost of sales $100,000
Selling expenses $5,000
Financing expenses $1,000
What is the net profit?

A. $11,647
B. $12,647
C. $15,647
D. $16,000
Net profit $170,000
Selling expenses $5,000
Admin expenses $4,000
Direct cost $9,000
What will be the gross profit?

A. $188,000
B. $161,000
C. $179,000
D. $166,000
Q 14 The gross profit margin of a company has increased from 15% in 2013 to 20% in2014.
Which of the following is true regarding this?

A. The cost of sales has decreased.
B. The non-manufacturing expenses have decreased.
C. The cost of sales has increased
D. There has been no change as such in the cost of sales.
Fixed assets $50,000
Current assets $10,000
Current liabilities $2,000
Net profit $20,000
What is the return on investment?

A. 34.5%
B. 31.75%
C. 30%
D. 27%

Q 16 Which of the following is incorrect about customer rejects ÷ total sales ratio?
A. It tells what percentages of sales were rejected.
B. It checks the company’s quality control procedures.
C. It is a means of measuring performance for revenue centres.
D. It makes a comparison between cost of sales and total sales.
Q 17 The net profit of a business for a year is $ 10,000 and the total capital, or net assets, of the business are $
80,000 at the end of the year. What is the return on capital employed?
Q 18 Southern plc consist of four divisions:

Aaron is an investment centre.
Lewis is a cost centre.
Orkney is a profit centre.
Shetland is an investment centre.
Which divisions may use return on capital employed (ROCE) as a performance measure?
A. Orkney and Lewis.
B. Shetland and Orkney.
C. Lewis and Aaron.
D. Aaron and Shetland.
Q 19 Data relates to the following four divisions:
Number of computers sold by each sales person

Sales person Strada Maxl Shilling Zebra
Alan 13 15 25 10
Bertha 12 20 15 15
Colin 14 20 20 20
Delia 15 15 15 15
The sales price for each type of computer is $1,000.
Commission is paid on computer sales as follows:

Strada 8% x the selling price
Maxl 12% x the selling price
Shilling 16% x the selling price
Zebra 24% x the selling price
How much commission will Delia earn for selling Strada and Zebra computers?
A. $7,200
B. $1,200
C. $3,600
D. $4,800
Q 20 The following information is available for product X.
Total fixed cost $6,000
Variable cost $100 per unit
Selling price $200 per unit

Units sold 100 units
What is the profit to sales ratio for product X?
A. 80%
B. 40%
C. 50%
D. 20%
Q 21 A law firm provides a range of services to clients, who are mixture of business, government and private
clients. It has offices in three cities in different parts of the country. The firm’s senior partners are reviewing
the range of services the firm provides, with a view to specializing more in the future.
How might the firm best analyse its profitability for its purpose?
A. Profitability of each office.
B. Profitability of each type of service provided.
C. Profitability of each type of client.
D. Profitability of each employee.
Q 22 The following information is related to an investment centre for a period:
Sales revenue $160,000
Variable cost $96,000
Fixed cost $52,000
Cost of capital 10%
Which of the following is correct and is the most appropriate measure of the performance of the investment centre
general manager in the period?
A. Contribution/sales margin of 40 %
B. Net profit of $12,000
C. Residual income of $ 4,000
D. Return on capital employed of 5%
Q 23 Five retail outlets generate the sale revenue of Ahmed Limited. The administration department at head office
purchases all of the paper work produced by the retail outlets:
What is the manager of the administration department responsible for?

A. Costs only
B. Sales and costs
C. Sales and profits
D. Profits only
Q 24 Which is the best description of responsibility accounting?
A. Employees will be held responsible for all decisions they make
B. Managers delegate responsibility for performance to employees
C. Directors delegate responsibility for performance to manager s
D. Managers bear responsibility for the revenues and costs of their area of the business

Q 25 The following statements relate to responsibility accounting:

1. Managers are held responsible for all costs incurred by their cost centre
2. Shared costs should be apportioned between the cost centres that incur them
3. Cost Centre costs will be collected by allocating a cost code to the cost.
Which of the statements above are correct?
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. All three
Q 26 A manager in a division has his performance measured on the basis of the amount of profit the division
makes in relation to the capital invested in the division.
Which of the following is the manager responsible for?
A. A cost centre
B. A revenue centre
C. A profit centre
D. An investment centre
Q 27 Which of the following would not be a measure of productivity in a manufacturing organization?
A. Cost per unit of production
B. Production per employee
C. Production per hour
D. Units produced per kilogram of materials
Q 28 You are given the following information about a business.
Gross profit margin 30%
Gross profit $240,000
Non-manufacturing expenses $106,000
What is the operating profit margin (to two decimal places)?
A. 4.72%
B. 16.75%
C. 33.97%
D. 55.83%
Q 29 Which of the following is the best description of residual income?
A. Profits after interest and tax but before depreciation
B. Profit before interest, tax and depreciation
C. Profit before tax less a national interest charge
D. Profit after tax, interest and depreciation
Q 30 A manager has responsibility for both costs incurred and revenues earned by his area of the business
This means that the manager is responsible for which one of the following?
A. Cost centre
B. Revenue centre
C. Profit centre
D. An investment centre

Q 31 Performance ratios calculated for a company for a month were:

Production efficiency ratio 109.8%
Production volume ratio 112.0%
What was the production capacity ratio?
A. 125.5%
B. 102.0%
C. 98.0%
D. 123.0%
Q 32 A company planned to produce 10,400 units in a standard allowed time of 4,160 hours.11,230 units were
produced and the actual time taken was 4,600 hours.
What was the efficiency ratio (to the nearest whole number)?
A. 111%
B. 108%
C. 102%
D. 98%
Q 33 The standard time for the manufacture of a product is 4 hour per unit.
For recent period the following figures applied:
Budget output 2,500 units
Actual output 2,200 units
Actual hour worked 7,400
What was the activity (volume) ratio?
A. 118.9%
B. 74.0%
C. 88.0%
D. 135.1%
Q 34 Performance ratio calculated for a company for a month were:
What was the production capacity ratio?
A. 112.2%
B. 101.8%
C. 104.1%
D. 98.2%

Chapter 11
Cost Codes
Coding
For elements of cost and income to be correctly analysed, classified and recorded they must initially be correctly coded for
entry into the accounting records.
We have discussed the various types of income and expenditure, and the importance of ensuring that these items are
recorded accurately so as to ensure accurate management information. We will now look at the practical aspects of
ensuring this. In many organisations, income and expenditure items are coded before they are included in the accounting
records. Coded means giving something a code.
What exactly is a code?

A code is a system of words, letters, figures or symbols used to represent others.
Features of a good coding system

A good coding system will possess the both of the following features:
 Items each have a unique code

 Codes are uniform in structure and length
Types of code
Here are some examples of codes.
Sequential (or progressive) codes

Numbers are given to items in ordinary numerical sequence, so that there is no obvious connection between an item and
its code. For example:
000042 4 cm nails
000043 Office stapler
000044 Hand wrench
Block (or group classification) codes

These are an improvement on simple sequences codes, in that a digit (often the first one) indicates the classification of an
item. For example:
4NNNNN Nails
5NNNNN Screws
6NNNNN Bolts
(Note. 'N' stands for another digit; 'NNNNN' indicates there are five further digits in the code.)

Faceted codes
These are a refinement of block codes, in that each digit of the code gives information about an item. For example:
(i) The first digit:
1 Nails
2 Screws
3 Bolts
(ii) The second digit:
1 Steel
2 Brass
3 Copper
(iii) The third digit:
1 50mm
2 60mm
3 75mm
A 60mm steel screw would have a code of 212.
Mnemonic codes
Meaning of mnemonic is a learning technique to aid the memory. Under this type of coding the code means something, it
may be an abbreviation of the object being coded. A well-known example of this type of code is the three letter coding
used for airports. For example:
LAX Los Angeles
SIN Singapore
CAI Cairo
LHR London Heathrow
Hierarchical codes
This is a type of faceted code where each digit represents a classification, and each digit further to the right represents a
smaller subset than those to the left. For example:
3 = Screws 32 = Round headed screws
31 = Flat headed screws 322 = Steel (round headed) screws and so on

Coding System
A coding system does not have to be structured entirely on any one of the above systems. It can mix the various features
according to the items which need to be coded.
Example: numeric codes

Type of account Code range
Non-current asset 1000 – 1999
Current asset 2000 – 2999
Current liability 3000 – 3999
Revenue 4000 – 4999
Long-term liability 5000 – 5999
Capital 6000 – 6999
Within each section, the codes can be broken down into smaller sections:
Fixtures and fittings 1000 – 1099
Land and buildings 1100 – 1199
Plant and machinery 1200 – 1299
Motor vehicles 1300 – 1399
And so on.
Gaps between the numbers used give scope for breaking the categories down further (for example, there could be a
separate account for each building) and for adding new categories if necessary.
This is an example of a block coding system.
Some types of account require more detail. For example, each customer needs a separate account, although in the
statement of financial position the total 'receivables' will be shown. Suppliers (payables) also need an account each and a
total for the statement of financial position.
Alphabetical codes, using part of the company or person's name, are common but, because names can be duplicated, an
additional code may be necessary.
Example: alphabetical codes

Customer Code
J Miller Co MIL 010
M Miller MIL 015
A Milton MIL 025

Some computer systems save time for operators by offering a 'menu' of accounts when part of the name is typed in.
Some codes can help users to recognise the items they describe. For example, a shoe shop could code their inventory by
type of shoe, colour, size, style and male or female. A pair of red women's sandals, size 5, style 19 could then become:
Shoe type Colour Size Style Male/Female
SA R 5 19 F
BO B 8 11 M
And the second item would be men's brown boots, size 8, style 11.
We have already stressed the importance of coding costs and revenues correctly for management information (and
financial accounting) purposes. The key to achieving this in any organisation is an understanding of the coding list and any
related guidance in the policy manual.
We have already explained that correct coding requires you to have a good understanding of the organisation as well as
the coding list. You need to know the following.
 The main activities of the organization

 The main sources of income
 The main items of expenditure
 Details of the organisational structure
In some cases, you may need to ask for help from other people in order to code transactions correctly.
An organisation chart can help to make sense of the coding structure. Here is a simple one for an accounting firm divided
into departments.
Coding errors
Coding errors can happen in a variety of ways, such as errors in keying in the original data and applying the wrong code
(because either the transaction or the coding structure have not been understood).
When management information is produced, large errors are often obvious. For example, a doubling of sales revenue in
one month is rather unlikely unless there has been a sales campaign in that month. It is more likely that a decimal point
has been misplaced in a figure or another form of income has been incorrectly coded to sales revenue.
The advantages of a coding system

(a) A code is usually briefer than a description, thereby saving clerical time in a manual system and storage space in a
computerised system.
(b) A code is more precise than a description and therefore reduces ambiguity.
(c) Coding facilitates data processing.

Exercise
Q 1 Hockey skill operates form three main sites. In analysis its cost (overheads) it uses a nine digit coding
system. A sample from the coding manual shows:
Sites Expenditure type Function
Whitby 100 Rent 410 Purchasing 600
Scraborough 200 Power 420 Finance 610
York 300 Heat and light 430 Production 620
Travel costs 500 Sales 630
Telephone and postage 520
The order of coding is: sit/expenditure/function
An invoice for the Whitby site for power would be coded as:
A. 100/420/600
B. 100/420/620
C. 100/420/610
D. 100/430/610
Q 2 In accounting systems, data is usually organized using codes.
Which of the following statements about codes is incorrect?
A. Using codes helps to improve the speed and accuracy of data processing
B. Using codes allows more data validation checks to be carried out
C. A hierarchical code structure makes it easier to find item on a code list, since similar items are
grouped
D. Codes in accounting reduce the need for accountants to understand the principles of accounting
Q 3 A firm uses a unique code to identify each customer and customer account. The code consists of the first
three letter of the customer’s name, following by four digits.
Which one of the following will appear first, when the customers are stored into descending order?
A. TRO1100
B. TRO1214
C. TOR1213
D. TOR1102
Q 4 Inventory codes used by an organization are eight-digit numerical codes.
Which of the following measures inn most likely to prevent errors with the input of the inventory code number
for each inventory transaction?
A. Existence check
B. Dual input of the inventory code
C. Verification check
D. Check digit check
Q 5 A firm uses a unique code to identify each customer. The first four letter of each name are followed by
four digits.
Which one of the following will appear first when customers are stored into descending order?
A. ADAM0001
B. ADAA0099
C. ADDA0100
D. ABAB099

Q 6 The coding of product is done in the following format:

Production/type of expense/department
The following info is given:
Wages 012
Salaries 013
Product A 514
Product B 513
Dept. C 214
Dept. D 213
How will the wages relating to product A in department C be coded?
A. 012-514-214
B. 514-012-214
C. 214-514-012
D. 514-214-012
Data for question 7 and 8
The overhead expenses of Parkino Fences plc, a large public company, is coded using a 7-digit coding
system, as follows.
Location Code# Type of expense Code # Function Code #
London 10 Rent 410 Buying 21
Birmingham 11 Machinery department 431 Production 22
Cardiff 12 Factory depreciation 432 Marketing 23
Glasgow 16 Travel 510 Finance 24
Manchester 17 Entertainment 511
Bristol 18 Subsistence 512
The coding for travelling expenses of salesman from the Bristol office is 1823510.
Q 7 The coding for the depreciation cost of the factory in Cardiff is:
A. 1221431
B. 1222431
C. 1221432
D. 1222432
Q 8 The coding for hotel expenses incurred by the accountant of the Manchester office on a recent visit to
head office in London is:
A. 1024512
B. 1724510
C. 1724511

Q 9 Consider the following statements.

1) When costs are coded is the sales tax inclusive amount that must be coded.
2) An alphanumeric code is one in which both letters and number appear
Which of the following is correct with regard to the above statements?

D. Statement 1 is incorrect but statement 2 is correct
Q 10 The fixed assets of a business are coded within the numerical range of 3000 to 3050.
The third digit in the code represents the type of non-current asset as follows.
1) Land and building
2) Plant and machinery
3) Motor vehicles
4) Fixtures and fittings
5) Office equipment
The final digit in the code represents the department of the organization where the non-current asset is used
as follows.
1) Factory
2) Stores
3) Warehouse
4) Accounts
5) General administration
What would be the code given to the purchase of a new desk for the chief accountant?
A. 3045
B. 3054
C. 3044
D. 3055
Q 11 What is the purpose of a coding structure?
A. To reduce the amount of human error
B. To share production costs between products
C. To avoid given managers too much information
D. To help place information into categories
Q 12 A computer coding structure is useful in:
A. Cost and management accounting
B. Financial accounting
C. Both cost and management accounting and financial accounting
D. Neither cost and management accounting or financial accounting

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Management Information MA1

Masters’ Academy of Professional Studies +923215040978 Page 2

Sub-departments of marketing might be selling, distribution and warehousing.

Many sales departments are organised territorially.

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When this is the case, the administration function is said to be centralised.

Advantages of a centralised administration office

Advantages of a decentralised administration office.

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Main types of transactions of a business

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Purchasing non-current assets

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QUESTION Business personnel

Control over transactions

authorisation of transactions in place.

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Double entry bookkeeping – basic principles

Cost ledger accounting

For primary books refer to FA1 knowledge

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Computerised accounting systems

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Some delay in processing the transactions must therefore be acceptable.

Example: batch processing of receivables ledger application

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The main stages of processing are as follows.

Real-time, online processing

Most modern accounting software packages use real-time processing.

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 Record the purchase in the general ledger accounts

 Quicker than manual systems

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Masters’ Academy of Professional Studies +923215040978 Page 14

Q 8 What is the main purpose of prime entry records?

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B. Staff appraisal and training

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Q 23 Which of the following statement is correct?

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Purpose of Management information

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Reports for management

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 Year-to-date (cumulative information)

Methods of collecting Primary Data:

Qualities of Good Management Information:

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A Authoritative The source of the information should be reputable and reliable.

T Timely The information should be available when it is needed.

Financial Accounting Vs. Management Accounting:

Financial accounts Management accounts

The format of published financial accounts The format of management accounts

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Cost accounting vs Management accounting

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to managers to

Scope Concerned with ascertainment, Impart and effect aspect of costs.

Specific Procedure Yes No

Interdependency Can be installed without Cannot be installed without cost

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