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Q.1. Ans.

Discuss the concept and nature of Managerial & Cost Accounting.

COST ACCOUNTING VERSUS MANAGEMENT ACCOUNTING The term management accounting, as defined by the NAA in SMA Statement No. 1A, is used in its broadest sense and better relates to the contents of this book. The NAA defines management accounting as the process of: Identification The recognition and evaluation of business transactions and other economic events for appropriate accounting action. Measurement The quantification, including estimates, of business transactions or other economic events that have occurred or may occur. Accumulation The disciplined and consistent approach to recording and classifying appropriate business transactions and other economic events. Analysis The determination of the reasons for, and the relationships of, the reported activity with other economic events and circumstances. Preparation and Interpretation The meaningful coordination of accounting and/or planning data to satisfy a need for information presented in a logical format, and, if appropriate, including the conclusions drawn from those data. Communication The reporting of pertinent information to management and others for internal and external uses. Management accounting is used by management to: Plan To gain an understanding of expected business transactions and other economic events and their impact on the organization. Evaluate To judge the implications of various past and/or future events. Control resources. Assure accountability To implement the system of reporting that is closely aligned to organizational responsibilities and that contributes to the effective measurement of management performance. Q.2. Ans. What is cost classification? Explain with example. Cost may be classified according to their relationship to production. This classification is closely To ensure the integrity of financial information concerning an organizations activities or its

related to the cost elements of a product (direct materials, direct labor, and factory overhead) and the major objectives of planning and control. The two categories, on the basis of their relationship to production, are prime costs and conversion costs. Prime costs. production. Prime costs are direct materials and direct labor. Prime costs are directly related to

Conversion costs.

These are costs concerned with transforming direct materials into finished products.

Conversion costs are direct labor and factory overhead. Note that direct labor is included in both categories. This does not result in double counting because this classification is used for planning and control, not for cost accumulation. For example, if the costs presented were classified according to their relationship to production, prime costs and conversion costs would be computed as follows: Prime Costs: Direct materials .$260,000 Direct labor 540,000 Total ..$800,000 Conversion Costs: Direct Labor $540,000 Factory overhead 142.800 Total . $682,800 Q.3.Cost Accumulation System. Ans. The accumulation and classification of routine product cost data are very important and timeconsuming tasks. Cost accumulation in general is the organized collection of cost data via a set of procedures or systems. Cost classification is the grouping of all manufacturing costs into various categories in order to meet the needs of management. A figure indicating the total cost of production provides little useful information about a companys operations, since the volume of production (and therefore cost) varies from period to period. Thus, some common denominator, such as unit costs, must be available in order to compare various volumes and costs. Unit cost figures can be readily computed by dividing the total cost of goods manufactured by the number of units produced. Unit costs are stated in the same terms of measurement used for units of output, such as cost per ton, per gallon, per foot, per assembly, and so on. COST ACCUMULATION: PERIODIC AND PERPETUAL SYSTEMS A periodic cost accumulation system provides only limited product cost information during a period and requires quarterly or year-end adjustments to arrive at the cost of goods manufactured. In most cases, the additional ledger accounts needed are simply added to a financial accounting system. Periodic physical inventories are taken to adjust inventory accounts to arrive at the cost of goods manufactured. A periodic cost accumulation system is not considered a complete cost accumulation system since the costs of raw materials, work-in-progress, and finished goods can only be determined after physical inventories are taken. Because of this limitation, periodic cost accumulation systems are generally used only by small manufacturing companies.

A perpetual cost accumulation system is a vehicle for accumulating product cost data, through the three inventory accounts, that provide continuous information about raw materials, work-in-progress, finished goods, cost of goods manufactured, and cost of goods sold. Such cost systems are usually very extensive and are used by most medium and large manufacturing companies. PERIODIC COST ACCUMULATION SYSTEMS The first step in comprehending a periodic cost accumulation system is to understand the flow of costs as goods pass through the various stages of production. The flow of costs in a manufacturing company, under a periodic cost accumulation system, is shown in Figure. The cost of goods put into production (direct materials + direct labour + factory overhead) plus the cost of work-in-process inventory is subtracted from the cost of goods in process during the period. The cost of goods manufactured plus beginning finished goods inventory equals the cost of goods available for sale. When the ending finished goods inventory is deducted from this figure, the cost goods sold results. The total operating costs can now be computed by adding selling, general, and administrative expenses to the cost of goods sold. Q.4.(a) Discuss Opportunity Cost. Ans. Where a decision to pursue one alternative is made, the benefits of other options are foregone. Benefits lost from rejecting the next best alternative are the opportunity costs of the chosen action. Since opportunity costs are not actually incurred, they are not recorded in the accounting records. They are, however, relevant costs for decision-making purposes and must be considered in evaluating a proposed alternative. (b) Standard and Budgeted Costs Standard costs are those which should be incurred in a particular production process under normal conditions. Standard costing is usually concerned with per unit costs for direct materials, direct labor, and factory overhead; it serves the same purpose as a budget. (c) Controllable and Non Controllable Costs. Controllable costs are those which may be directly influenced by unit managers in a given time period. Noncontrollable costs are those costs which are not directly administered at a given level of management authority.

(d) Relevant and Irrelevant Costs Relevant costs are expected future costs that differ among alternative courses of action and may be eliminated if some economic activity is changed or deleted. Irrelevant costs are unaffected by managements actions. Sunk costs are an example of irrelevant costs. Sunk costs are past costs that are now irrevocable, such as depreciation on machinery. When confronted with a choice, they are not relevant and should not be considered in a decision-making analysis, except for possible tax effects upon their disposition and painful lessons to be learned from past mistakes. (e) Shutdown Costs In the short run, it is advantageous for the firm to remain open as long as sufficient sales revenue can be generated to cover variable costs and contribute to the recovery of fixed costs. Q.5. Discuss Period Cost & Product Cost. Ans. Product Cost These are costs directly and indirectly identifiable with the product. They are direct materials, direct labor, and factory overhead. These costs provide no benefit until the product is sold and are, therefore, inventoried upon completion of the product. When the products are sold, the total product costs are recorded as an expense, called the cost of goods sold. Cost of goods sold is matched against revenue for the period in which the products are sold. Period Costs Those costs neither directly nor indirectly related to the product are not inventoried. Period costs are charged off immediately because no relationship between cost and revenue can be determined. The following are examples period costs (administrative expense), and interest incurred on corporate bonds (financing expense). Q.6. Ans. Explain the major difference between managerial and financial accounting. Financial is largely concerned with financial statements for external use by those who supply funds

to the firm and by other persons who may have vested interest in the financial operations of the firm. The suppliers of funds include stockholders (the owners of the firm) and creditors (those who supply debt). Investors and those who help digest information for them, financial analysts, are also interested in financial statements. Cost or managerial accounting is primarily concerned with the accumulation and analysis of information relevant for internal use by managers of planning, controlling, and decision making. The next two sections present some definitions of cost accounting as set forth by the National Association of Accountants, but the

key thing to remember is that the financial measures produced may take any form that management considers relevant for internal purposes. Historical information is often used in cost accounting systems, and estimates of future costs or benefits are often included as well. However, the level of detail about particular product lines and divisions is dictated by the needs of management. Q.7. Ans. How the variable and fixed cost per unit will change as the level of activity (or cost driver) will Total fixed costs do not change as production levels change within the relevant range; therefore, the

increase? Why? level of production is not a factor in determining total fixed costs. Total variable costs, on the other hand, vary in direct proportion to change in the level of production; therefore, the level of production is a factor in determining total variable cost. Estimated total variable factory overhead equals the variable factory overhead cost per unit multiplied by the estimated level of production. Hence, the level of production for the next period must first be determined in order to estimate the total variable portion of factory overhead costs. Q.8. Explain Job-order & process costing. Ans. Job Order Cost Accumulation System A job order cost accumulation system is most suitable where a single product or batch of products is manufactured according to a customers specifications, that is, each job is custom made, with the agreedupon selling price closely tied to estimated cost. Examples of types of companies which might use job order costing are printing companies and ship-building firms. Under a job order cost system, the three basic elements of a products cost-direct materials, direct labor, and factory overhead are accumulated according to identifiable jobs. Individual work-in-process inventory accounts are set up for each job and are charged with the cost incurred in the production of the specifically ordered unit(s). The unit cost for each job is computed by dividing the total number of units in the job into the total cost accumulated in that jobs work-in-process inventory account upon its completion and prior to its transfer to finished goods inventory. Job cost sheets are set up as the job begins and stay active until goods are completed and transferred to finished goods. The job cost sheet is then pulled from the work-inprocess subsidiary ledger, processed further, and filed under completed jobs. Selling and administrative expenses are not considered part of the cost of producing the job and are shown separately on the job cost sheet and income statement.

Q.9. Ans.

Present the flow of costs under periodic and perpetual cost accumulation systems. PERIODIC COST ACCUMULATION SYSTEMS

The first step in comprehending a periodic cost accumulation system is to understand the flow of costs as goods pass through the various stages of production. The flow of costs in a manufacturing company, under a periodic cost accumulation system, is shown in Figure. The cost of goods put into production (direct materials + direct labor + factory overhead) plus the cost of work-in-process inventory at the beginning of the period equals the cost of goods in process during the period. In order to determine the cost of goods manufactured, the cost of ending work-in-process inventory is subtracted from the cost of goods in process during the period. The cost of goods manufactured plus beginning finished goods inventory equals the cost of goods available for sale. When the ending finished goods inventory is deducted from this figure, the cost of goods sold results. The total operating costs can now be computed by adding selling, general, and administrative expenses to the cost of goods sold. For example, assume the following information for a period: PERPETUAL COST ACCUMULATION SYSTEM Perpetual cost accumulation systems are designed to provide relevant information to management on a timely basis to aid in planning and control decisions. The major objective in such systems, as was the case with periodic cost accumulation systems, is the accumulation of total costs and the computation of unit costs. In a perpetual cost accumulation system, the cost of direct materials, direct labor, and factory overhead must first flow through work-in-process inventory in order to reach finished goods inventory. The total costs transferred from work-in-process inventory to finished goods inventory during the period equal to cost of goods manufactured. The ending work-in-process inventory is the balance of un-finished production at the end of the period. As goods are sold, the cost of the goods sold is transferred from the asset account Finished Goods Inventory to the expense account Cost of Goods Sold. The ending finished inventory is the balance of unsold production at the end of the period. The total expenses equal the cost of goods sold plus selling, general, and administrative expenses. Q.10. What are the five bases commonly used to compute the factory overhead application rate, and when is each one appropriate to use? Ans. These bases are commonly used to compute the factory overhead application rate: (1) units of production, (2) direct materials cost, (3) direct labor cost, (4) direct labor hours, and (5) machine hours.

UNITS OF PRODUCTION This method is very simple, since data on the units produced are readily available for applying factory overhead. The formula is as follows: Estimated factory overhead costs Estimated units of production = Factory overhead application rate per unit of production This method applies factory overhead equally to each unit produced and is appropriate when a company or department manufactures only one product. DIRECT MATERIALS COST This method is suitable when it can be determined that a direct relationship exists between factory overhead cost and direct materials cost. When direct materials are a very large part of total cost, it may be inferred that the factory overhead costs are directly related to direct materials. The formula is as follows: Estimated factory overhead costs Estimated direct materials cost x 100 = Percentage of direct materials cost One problem in using direct materials cost as a base where more than one product is manufactured is that different product require varying quantities and types of direct materials with different acquisition costs. Therefore, different factory overhead application rates should be determined for each product. DIRECT LABOR COST This is the most widely used base because labor costs are generally closely related to factory overhead cost, and payroll data are readily available. It therefore meets our objectives of having a direct relationship to factory overhead cost, being simple to compute and apply, and requiring little, if any, additional cost to compute. Thus this method is appropriate when a direct relationship exists between direct labor cost and factory overhead. (There are, however, situations where there is little relationship between direct labor costs and factory overhead and this method would not be appropriate. For example, factory overhead costs may be composed largely of depreciation and equipment-related costs). The formula is as follows Estimated factory overhead costs Estimated direct labor cost direct labor cost DIRECT LABOR HOURS This method is appropriate when there is a direct relationship between factory overhead costs and direct labor hours, and when there is a significant disparity in hourly wage rates. Timekeeping records must be accumulated to provide the data necessary for applying this rate. The formula is as follows:

x 100 = Percentage of

Estimated factory overhead costs = Estimated direct labor hours = Factory overhead application rate per direct labor hour This method, like the direct labor cost method, would be inappropriate if factory overhead costs were composed of costs unrelated to labor activity. MACHINE HOURS This method uses the time required for machines to perform similar operations as a base in computer the factory overhead application rate. This method is appropriate when a direct relationship exists between factory overhead costs and machine hours. This generally occurs in companies or departments that are largely automated so that the majority of factory overhead costs consist of depreciation on factory equipment and other equipment-related costs. The formula is as follows: Estimated factory overhead costs = Estimated machine hours = Factory overhead application rate per machine hour The disadvantages of this method are the additional cost and time involved in summarizing total machine hours per unit. Since every company is different, the decision regarding which base is appropriate for a particular manufacturing operation must be made by management after careful analysis. Q.11. What is breakeven point (BEP)? In choosing between two production processes. Why will management not necessarily select the process with the lower BEP? Ans. A problem faced by management is selecting from among alternative production processes which have different fixed and variable costs. For example, management may be considering two alternative production processes. The first has a high fixed cost but low variable cost per unit; the other has a low fixed cost but a high variable cost per unit. Which is the best production process that should be adopted by management? The tools presented in this chapter can be used to evaluate which production process should be adopted. To illustrate how, assume that the two production processes management is considering have the following cost structure: PROCESS A PROCESS B Total fixed cost $500,000 20 10 $2,500,000 Variable cost per unit

Regardless of the production process selected, management expects to sell each unit for $30. Further, the production capacity will be the same for both production processes: 6 million units. First, management

should determine the break-even point for process A and process B. For process A, the break-even point is 50,000 units, as shown below: Break-even point (in units) Contribution margin per unit = $500,000 $30 - $20 = 50,000 units For process B, the break-even point is 125,000 units, as shown below: Break-even point (in units) Contribution margin per unit = 2,500,000 $30 - $10 = 125,000 Which is the best production system? Is it the one which has the lower break-even point? Not necessarily. The answer depends on what management expects the level of sales will, the probability of achieving that level of sales, and the volatility of sales. For example, suppose that management expects that sales will be 60,000. With process A, a profit will be realized, but with process B, a loss will be sustained. In fact, for any level of sales between 50,001 and 124,999 units, the selection of process A will result in a profit while process B will result in a loss. At any level below 50,000, there will be a loss regardless of the production process selected; however, the loss will be greater with process B. If sales are expected to be greater than 125,000, both production processes will result in a profit. Which will produce the greatest profit? Management must determine the point at which sales will be the same for both production processes A and B. Since unit sales will be same regardless of the production process selected, the level of sales that will produce the same profit is that level of sales at which the total costs of both production processes are equal. Solving for this point algebraically, let the subscripts A and B denote the costs associated with process A and process B, respectively. Then the point at which the profit from both production processes will be equal is as follows: TCA = TCB Since total cost is equal to total variable costs plus total fixed costs, the above equation can be written as V A . Q + FA = V B . Q + FB Solving this equation for Q, we have Sales at which both production processes = FB FA

= Total fixed costs.

= Total fixed costs

produce same profit (in units)


In this example, the number of units that must be sold in order to produce the same level of profit is 200,000 units, as shown below: Sales at which both production process $20 - $10 produce processes produce same profit (in units) = 200,000 units The following simple income statement verifies that 200,000 units will produce the same level of profits: Sales (total revenue) (200,000 x $30) Total variable costs 200,000 x $20 200,000 x $10 Total fixed costs Profit PROCESS A $ 6,000,000 (4,000,000) (500,000) $ 1,500,000 (2,000,000) (2,500,000) $ 1,500,000 PROCESS B $ 6,000,000 = $2,500,000 - $500,000

Therefore, for sales between 125,000 and 199,999 units, process A will produce the greater profit. If sales are expected to exceed 200,000 units, process B will generate a greater profit. The relationship between sales and profit for both production processes is shown in Table. The best production process depends on the expected level of sales. For example, suppose that management expects that sales will be 250,000 units. The profit under process A and process B will be $2,000,000 and $2,500,000, respectively, as shown below: Profit at 250,000 units = $30(250,000) - $20(250,000) - $500,000 for process A for process A = $2,000,000 Profit at for process B = = $30(250,000) $2,500,000 $2,500,000 250,000 units - $10(250,000) -

Although there is a greater profit with process B if actual sales are 250,000 units, there is also greater risk. The margin of safety is 80% and 50% for process A and process B, respectively, as shown below: Margin of safety for process A = Expected sales Break-even sales for process A / Expected sales = 250,000 50,000 250,000 = .80 or 80% =

Margin of safety for process B

Expected sales Break-even sales for process B / Expected sales = 250,000 125,000 250,000 = .50 or 50%

Consequently, unit sales can decline by as much as 80% and the firm will still break even under process A; however, unit sales can only fall by 50% under process B before a loss will be realized. The best process will depend not only on the expected level of sales, but also on the probability that different levels of sales may be realized. Q.12. For each procedure identifies the steps in the manufacturing cycle in which it occurs:

Procurement, Production, Warehousing, or Selling. (a) Materials are requisitioned and transferred to the factory. (b) An order is sent to a supplier to obtain more raw materials. (c) A customers order is received and filled. (d) The weekly payroll is recorded. (e) Finished goods are placed in the appropriate storage bins. (f) New employees are interviewed and hired by the personnel department. (g) Finished goods are shipped to the customer. (h) Manufacturing overhead coast are estimated and charged to the product. (i) A shipment of raw material arrives and is unpacked. ANS: (a) Materials are requisitioned and transferred to the factory. When a job is started the necessary materials are issued to the factory on the basis of materials requisitions. The requisition beard the job order number and specifics the type and quantity of materials required. Material Requisition. Material requisition is a written order to the storekeeper to deliver materials to the place designated. Material requisition is the basic from to with draw materials from the store. A copy requisition is sent to the cost department where the requisition are totaled sorted by job numbers and entered in the materials section of the cost sheet for the jobs indicated. When materials are issued to factory a journal entry is also necessary which is: Work in process Materials

(b) An order is sent to a supplier to obtain more raw materials.


If a department needs row materials, a requisition should be sent to the purchasing department in the usual manner and a purchase order is sent to the suppler. The purchase order singed by the purchasing agent or other official is a written authorization to a supplier to supply the specific quantities of described materials at agreed terms and at a designated time and place. As a matter of record and for accounting a purchase order should issued for every purchase of materials, supplies or equipment. The purchase order gives the vender a complete description of the materials and services desired the terms, the prices and the shipping instruction. The original and acknowledgement copies of the purchase order or sent to the vender other copies are distributed to the department in the company receiving depart, material ledger and marketing depart. The vender is asked to sign the acknowledgment copy and return to purchaser, indicating that the order was received and will be delivered according to the specification enumerated in the purchase order. (c) A customers order is received and filled. When a customers order is received, it is send to selling department and acknowledgment is signed by a responsible official which includes to complete description of the gods desired the terms, the parties and the shipping instruction. When finished goods are delivered to customers, sales invoices are prepared and the sales and the cost of goods sold are recorded as following assuring total RS 50000 and the total cost of goods sold is RS 40000 Cost of goods sold Finished goods 40000 40000

(d) The weekly payroll is recorded. Payroll data are processed in two ways. Computing and preparing of the pay roll. Distributing the pay roll to jobs, processing and department. Computing and preparing of the pay roll. The company payroll is prepared from the clock card and the computed payroll is recorded in a payroll journal. The record must show total wages, deduction and net payroll. In mast instances employees are paid by check. The checks are drawn against a special payroll account. When the payroll fund is deposited into bank, payroll department certifies the amount and required for a particular data, a voucher is drown for the specified amount a check is drown against regular deposit account and is deposited in the payroll fund. For each employee, the paymaster prepares a check drown Payroll distribution. against the special payroll A / C.


The individual time ticket shows the time spent by the employees of each department time ticket are sorted by jobs, department and types of indirect labor to permit the distribution of total payroll to work in process and to the departmental expenses analysis sheet controlled by the financial officer. This distribution amount must be agreed with the total amount recorded in the payroll account. (e) Finished goods are placed in the appropriate storage bins. Finished goods together with a copy of the receiving report are forwarded to storage from the inspection or testing or receiving department, the store keeper and assistant are responsible for safeguarding the finished goods which means the when work completed the cost of work in process is transferred to finished goods and the fallowing entry is passed. Finished goods WIP 3000 3000

Finished goods are then placed in the appropriate storage bins the store keeper and assistant are responsible for safeguarding the finished goods which means that the finished goods are stored in proper storage bins that they are kept safely unit they sold to any customer. Finished goods are stored according to Finished account number. The quantity nature and size are kept into consideration while storing the F.G. (f) New employees are interviewed and hired by the personnel department. After hiring an employee the following are to be taken. During appointment acknowledgment of term and condition of service and rules and regulation of the organization is very essential. Submitting the joining report. The hired employee has to submit the joining report to the responsible officer the office where be has been appointed in a past. Training of the new employee. After joining an office the employee will be given training for doing his job in a best way. If he is appointed a higher post he will examine the work and the procedure of doing works in different department. It may be possible the he is allowed to work in each department for a period of a week or a month.


(g) Finished goods are shipped to the customer. When finished goods are delivered or shipped to customer, sales invoices are prepared, and the sales and the cost of goods sold are recorded as following Assuming total sales of $ 70,000 and total cost of goods sold of $ 52,300: Account receivable Sales Cost of goods sold Finished goods 70,000 70,000 52,300 52,300

If the job in this illustration had been produced for a specific customer the sale would be recorded as above at the same time that the completed jobs cost would be debited directly to cost of goods sold as follows: Cost of goods sold Work in process 62,180 62,180

(h) Manufacturing overhead coast are estimated and charged to the product. The materials and labor expended can be easily charged to the related jobs. But it is very difficult to the determine the amount of F/O because there are some costs are fixed and some are variables .to overcome this difficulty, the actual over hade costs may be charged to a job using a rate based on direct labor hours, direct labor costs machine hours or some other factors which exhibits a relationship to the F/O. Many of F/O cost may not be known until the end of a fiscal period: in order to control factory over head cost. Predetermined over head cost rate is used which based on the estimated F/O/H. For example. The estimated direct labor 75000 and F/O leads to F/O. at the end the applied F/O/H account is closed by the following entry applied F/O 13200. F/O 13200 (i) A shipment of raw material arrives and is unpacked. The receiving of row materials and company are the function of receiving department. The functions of receiving department are to On load and unpack incoming materials. Check quantities received against shippers packing list. Identify the goods received with the descriptions on the purchase order. Prepare a receiving report. Notify the purchasing department of discrepancies discovered. Arrange for inspection when necessary. Notify the traffic departs and purchasing departs of any damage in transit. Route the accepted materially to the appropriate factory lection.

Q.13. Management of company that manufactures small appliances is trying to decide whether to install a job order or process costing system. The manufacturing vice president has stated that job order costing gives them the best control because it is possible to assign costs to specific lots of goods. The controller, however, has stated that job order costing would require too much record keeping. Is there another costing system that might meet the manufacturing vice presidents control objective? Explain. ANS: A process costing method is used for Indus trick producing chemical, petroleum, textile, and flour, pharmaceutical, shoos and coal. This type of costing is also used by firms manufacturing such things methods is the assembly type industry which manufactures such things as type writers, automobiles. Airplanes and house hold electric appliances. Finally certain service industries, such assgas, water, and heat, cost their products by using process costing methods. In fact process costing procedure are often termed continuous or mass production cost accounting procedure. Characteristics and process of costing. The characteristics of process costing are: A coast of production report is used to collect, summarize, and compute total and unit cost. Production is accumulated and reported by departments. Costs are posted to departmental work in process accounts. Production in process at the end of a period is restated in terms of completed units. Total costs charged to a department are divided by total computed production of the department in order to determine a unit cost for a specific period. Costs of completed units of a department are transferred to the next processing department in order to arrive at the total costs of the finished products during a period. At the same time, costs are assigned to units still in process. Characteristics and procedure. Accumulate material, labor, and factory over head costs by departments. Determine a unit cost for each department. Transfer costs from one department. Assign coast to the inventory of work still in process. If accurate unit and inventory costs are to be established by process costing procedure, costs of a period must be identified with units produced in the same period. Q.14. What methods, document, and approvals are used to control materials inventories? ANS: The more common methods of costing materials issued and inventories are: (1) First-in, first out (FIFO) (2) Average cost (3) Last- in, first out (LIFO)

(4) Other methods-such as market price at date of issue or last purchase price, and standard cost. (1) First-in, first out (FIFO) The method assumes that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost those same units when issued. However (FIFO) costing may be used even though physical withdrawal is in a different order. Advantages claimed for the (FIFO) costing method are: Materials used are drowning from the cost records in a logical and systematic manner. Movement of materials in a continuous, orderly, single-LIFO manner represents a condition necessary to and consistent with efficient materials control, particularly for materials subject to deterioration, decay and quality or style changes. The (FIFO) method is recommended whenever The size and cost of materials units are large, Materials are easily identified as belonging to a particular purchased lot, and, Note more than two or three different receipts of the materials are on a materials card at one time. (2) Average cost method. Average costing may be used even though the physical withdrawal is in an identifiable order. If tend to be made up of numerous small items low in units cost and especially if price are subject to frequent change, average costing is advantages because. It is a realistic costing method useful to management in analyzing operating results and appraising future production. It minimizes the effect of unusually high or low materials price, there by making possible more stable cost estimates for future work. It is a practical and less expensive perpetual inventory system. (3) Last- in, First- out (LIFO) The Last- in, First- out (LIFO) method of costing materials issued is based on the premise that materials units issued should carry the cost of the most recent purchase, although the physical flow may actually be different. The method assumes that the most recent cost (the approximate cost of replace the consumed units) is most significant in matching cost with revenue in the income determination process. Under LIFO procedure the objective is to change the cost of current purchases to work in process, or other operating expenses and to leave the oldest costs in the inventory. (4) Other methods-such as market price at date of issue or last purchase price, and standard cost. (Market price at date of issue or last purchase price).


This procedure substitute replacement cost for experienced or consumed cost and has the virtue of charging materials into production at a current and significant cost. This method of materials costing and that of using the last purchases price are often used for small, low priced items. Standard cost. This method charges issued materials at predetermined or estimated cost reflecting a normal or an expected future cost. Receipt and issued of materials recorded in quantities only on the material ledger card or in the computer data bank, there by simplifying the record keeping and reducing clerical or data processing cost. To plan manufacturing requirement, every stock item or class of items must be analyzed periodically to: Fore cast demand for the next month, quarter, or year. Determine acquisition lead time. Plan usage during the lead time. Establish quantity on hand. Place units on order. Determine reserve or safety stock requirement. Q.15. Why is control of materials important from a managerial-planning perspective? ANS: Materials managers are constantly confronted with the following problems and requirement: Inventories account for a large portion of the working capital requirements of many businesses. This makes materials and / or inventory management a major problem requiring constant attention by all three management levels. At present, the problem of materials management has become even more acute due to market conditions and inflation. Effective materials management and materials control is found in an organization in which individual have been vested with responsibility for, and authority over, the various details of procuring, maintaining, and disposing of inventory. Such a person or persons must have the ability to obtain, coordinate, and evaluate the necessary facts and to take action when and where needed. Q.16. Elimination of inventories though a JIT system is believed to result in a number of different types of cost saving. Itemize the types of saving from a JIT system. ANS: Manufacturing processes are increasingly being based on the receipt of row materials from suppliers justin- time for their used on the plant floor. When firms row materials can be handled in this immediate use mode, traditional storeroom receipt, storage, and issuance procedure are abbreviated. Storage, except for brief periods directly on the plant floor, is eliminated. Receipt and issuing documentation can be combined.


As result, there is a saving in paperwork and, more importantly, a saving in inventory investment, storage, and handling costs. Q.17. What is the difference between accounting for costs under a JIT system and under a traditional process costing system? ANS: Process costing. A cost of production report is used to collect summarized and compute total and unit cost. Production is accumulated and reported by department. Costs are posted to departmental work in process account. Production is a process at the end of period is restated in terms of complete unit. Total cost charged to a department is divided by total computed production of the department in order to determine a unit cost for a specific period. J . I . T. The saving that can result from a minimum inventory investment & associated carrying cost has led to increasing attention to J. I T. Inventory system. Such a procedure calls for heightened coordination with suppliers so that materials arrive immediately prior to then use. J. I. T. authorization for a part to be made at a work station is generated by a requirement for a part at the next work station in the production lines. As parts are used in final assembly the need for production of their replacement is authorized. The process is repeated at all proceeding work stations thus pulling parts through the production system as they are needed and eventually pulling row materials & purchased parts from suppliers. J. I. T pertains to row materials inventory as well as to work in procen inventory between interacting work cents. J. I. T. places a new emphasis on the desirability of minimum inventory levels and improving integrated manufacturing process rather than focusing on individual materials or operations use of other materials planning and control tools such as EOQ and safety stock calculation. Q.18. What operating conditions are necessary for a company to make use of a JIT system? ANS: A successful just-in-time system requires a change in manufacturing processes to accommodate this new inventory philosophy. What is involved is process management, not merely inventory management. The fundamental objective of JIT is to produce and deliver what is needed, when it is needed, at all stages of the production processjust in time to be fabricate, sub assembled, assembled, and shipped to the customer. Although in practice there are no such plants, JIT is an ideal and therefore a worthy goal. The benefits are low inventory, high manufacturing cycle rates, high output per employee, minimum floor space requirements, minimum indirect labor, and perfect in-process control. An associated requirement of a

successful JIT operation is the pursuit of perfect quality in order to reduce, to an absolute minimum, delays caused by defective product units. Q.19. THE NATURE OF COST ACCOUNTING In the planning phase cost accounting deals with the future. It helps management the budget the future of predetermined materials cost wages and salaries and the other cost of manufacturing and marketing products. These cost might be used to assist in setting price and disclosing the profit that will the result considering competition and other economics conditions. Cost information is also provide to add management with the problem such as capital expenditure decision expansion facilities for increased sales or production nake-or-buy decision or purchase-or-less decision. In the control phase cost accounting deals with the present accounting current results with predetermined standards and budget cost control to be effective depends up on proper cost planning for each activity function and condition. Via the cost accounting media management is informed frequently of those operating functions that fail to contribute their share to the total profit or that perform inefficiently thereby leading to profit erosion. Periodically generally and the end of the fiscal period cost accounting deal with the past cost of the purpose of the profit determination and thereby with the allocation of historical cost to period of time. At this point cost accounting procedure is particularly concerned with the application manufacturing cost to units of product to be capitalized in the ending inventory and transferred to cost of goods sold as shipments are made. More especially cost accounting is charged with the task of :

Establishing cost methods and procedure that permit the control and if possible reduction or

improvement of costs. 2. Aiding participating in the creation and execution of the plans and budgets. 3. Creating inventory values for costing and pricing and described by law and at times controlling physical quantities. 4. Determine company cost and profit for an annual or shorter accounting period in total or by segment as determined by management or required by government regulations. 5. Providing management with cost information in connection with problems that involve a choice from among two or more alternative courses that is decision making. The decision may be to enter a new market develop the cost for a new product discontinue a product line buy or lease equipment or take other action to increase profits to solve problems. Q.20. SCOPE OF ACCOUNTING. Non manufacturing activities of manufacturing firms wholesale and retails business banks and other financial enterprises insurance companies transpiration companies railroad airlines shipping companies bus

companies school colleges and universities hospitals governmental units or local states or federal level churches and wale fare organization all should employ cost accounting in order to operate efficiently. Q.21. THE COST DEPARTMENT. The cost department must not only record but also analyze all cost of manufacturing marketing administration for use by management in planning and control. It must in addition issue significant control reports other decision making data executive superintendent and department heads who assists in controlling and improving costs and operations. Q.22. RELATIONSHIP OF THE COST DEPARTMENT TO OTHER DEPARTMENTS. Likewise the schedule producing and inspecting of jobs and products by manufacturing department are measured for efficiency in terms of the cost incurred. The personal department interview screen and select employees, of various job classifications. It keeps workers personnel records and is interested in keeping efficient and satisfied employees. The wage rates and the methods of remuneration agreed upon with the employee from basis from the computation of the payroll. Q.23. SOURCE OF COST ACCOUNTING DATA. In addition to invoices and documents supporting transaction of materials purchased consumed or transferred between department the account requires reports of time studies record of worker actual time bills of material and lists of operating and planning schedules. Capacity studies machine tools requirement and statistics regarding floor space machine capacities and power rating or power consumption constitute additional source data required. The accountants dependence upon information furnished by outsider necessitates source data are accurate reliable and available at the proper time. Q.24. PLANING AND CONTROL MODELS. The ever increasing use of standard cost provides a necessary measure of what cost should be. These standard cost permit an early preparation and presentation of short-run cost reports to operating management and summary statement to executive and middle management highlighting deviations from the planed goals. Reports comparing actual results with planed or budget figures based on standard cost bring to management only information the regarding the profits already made but also those that should have been made. Standard cost should ideally be integrally part of the budget in its preparation was its use a control device. The return on capital employed ratio has been illustrated in connection with the analysis of the financial statements. Break even analysis offer another method that permit management to judge the overall plan on a pragmatic and convenient basis. To calculate the break-even point it is first necessary to observe the


behavior of cost as to their fixed or variable nature. For the present it suffices to say that direct materials and direct labor are fundamentally considered variable costs. Q.24. GOVERMENTAL AND PRIVATE ORGANIZATIONS INFLUENCING GENERAL AND COST ACCOUNTING PRINCIPLES AND PRACTICE. The internal reporting and assistance phase is by the nature the realm and prerogative of the company management team. Closely allied with the internal reports of the external reports basically the financially statement consisting of the balance sheet income sued to outsider have received greater attention and have been substantially influenced by many groups and organization in recent year. In the public sector financially or external reporting has been influenced significantly by the Securities and exchange commission (SEC) the internal the cost accounting standards board (CASB) which is discussed in chapter 3. Further more federal state and local governments prescribe certain accounting related regulation the must be observed that often embodied and the accounting system. In the private sector professional organization include the American institute of certified public accountants (AICPA)which sponsored the formation of the financial accounting standards board (FASB); the national association of accountant (NAA) the American accounting association and the financial executive institute (FEI) research and pronouncement by these groups contribute to the development improvement and revision of both financial and cost accounting theory and practice. Q.25. THE CONCEPT COST It is not easy to define or explain the term cost leaving no doubt concerning its meaning. The committee on cost concept and standards of the American accounting association Wrote: cost is a forgoing measured in monitory terms incurred or potentially to be incurred to achieve a specific objective In A Tentative set of board accounting principles from business enterprises cost is defined as an exchange price a forgoing a sacrifice made to secure benefit. Q.26. USESS OF COST DATA. The collection of presentation and analysis of cost data should serve the following essential or user aims: 1. Planning profit by means of budgets 2. Controlling cost via responsibility accounting. 3. Measuring annual or periodic profit including inventory costing. 4. Assisting in establishing selling prices and pricing policy. 5. Furnishing relevant cost data for analytical process for decision making.

Budget materials cost of quantity and labor costs and predetermined quantities of time required to manufacture each product are basic of these cost elements. These cost pull all factory of overhead and no manufacturing cost that fluctuate with activity must be determined first in order to establish the profit base for the budget sales. Some operating cost very directly in relationship to volume other costs and expense items either are wholly or partially fixed in character. The final budget should represent a conservative operating forecast including all the costs. Fixing responsibility for the control cost of requires the establishment of definite lines authority. The organization chart present the organization structure the following these lines authority allow the assignment cost control responsibility to specific individuals. These individual should also have a had a hand in determine the planed or budget cost under their control. Not only cost but also sales revenue and profits are made the responsibility the certain managers. Cost and revenue responsibility becomes profit responsibility. The longer the period the greater the accuracy of the manufacturing process. A company financial statements reflect the result of separating the cost applicable to units sold from the cost applicable to the units inventories. The separation procedure has always been a distinctive feature of cost accounting. The cost reported thereby are historical or past cost short-run interim or periodic detail reports are especially useful for purposes internal control and for the solution of particular managerial problems. Variable manufacturing cost are assigned first to the unit manufacture and the matched with units sold variable manufacturing costs typically are matched with the initially with the unit sold. Fixed capacity cost are required an arbitrary location to the unit and consequently lead to the possibility of three alternative matching processes. 1. To match fixed capacity cost assigned to each period in total with revenue in that period (direct costing). 2. To match manufacturing fixed (capacity)costs on a product unit bases And to match all over the fixed cost in total each period (absorption costing the generally accepted method). 3. To match all fixed capacity costs manufacturing as well as no manufacturing on a long-run sales unit basis. Q.27. CLASSIFICATION OF COSTS. Cost classification are needed for the development of the cost data that are useful to management with regard to the five purposes or aims described on pages 40-43. therefore cost are classified: 1. By the nature of the item (a natural classification). 2. With respect to the accounting period to which they apply. 3. By their tendency to vary with volume or activity.

4. By their relation to the product. 5. By their relation to manufacture departments. 6. According to their nature as common and/or joint costs. 7. For planning and control. 8. For analytical process. The process of classifying cost and expense can begin with total cost which may be considered as all costs or deductions from sales revenue before income tax. In a manufacturing concern total operating cost in divided into (1) manufacturing cost and (2) commercial expenses. Manufacturing cost often name production cost or factory cost is the head during the accounting period the part of manufacturing past represent work completed is transferred to finished goods while incomplete works remain in work in process. Expenditure can be divided in to two broad classes: (1) capital expenditure and (2) revenue expenditure. A capital expenditure is intended to benefit future periods is classified as an asset; a revenue expenditure benefit the current period as is termed is expense. An expenditure classified originally as assets will ultimately flow into the expense stream when the assets is either consumed or charged off. Q.28. COSTS OF PLANING AND CONTROL. Budget. In many companies predetermination or estimating factory overhead constitutes the initial step toward the budget program. When all phases of a business sales engineering manufacturing marketing administration have been coordinated into through out budget program the budget becomes the written expression of management plan for the future. No person intimately connected with the affairs of a company which budgeting can be unaffected or disinterested. The budget will not only help promote coordination of people classification of policy crystallization of plants but the successful will create greater internal harmony and unanimity of purpose among mangers or workers. These deviation and measurement are similar to budget comparison that they compare that they actual with predetermined data. The deviation measurement and budget comparisons are also likes in that both relate to the idea of responsibility accounting. It should be noted however that standards with their variance analysis go beyond the mere comparative level.


Q.29. COST FOR ANALYTICAL PROCESS. Different types of cost involves varying kinds of consideration in managerial analysis for decision making. For example, deferential and out of pocket cost are types of costs which attempt to envision and evaluate future condition in the light of the current situation. The rapid rise and growth of business units into large scale enterprise caused cost accounting to develop as a separate yet integral division of the accounting function. Cost accounting should be regarding as the first step in distinguish a major part of accounting as managerial accounting. It institutes the concept of cost planning and cost control both of which are essential to managing successfully the multiple division in the interest of a modern organization. Cost accounting importance necessitates the establishments of that type of cost system which best fulfills the needs management. Q.30. THE COST ACCOUNTING SYSTEM DESIGN AND OPERATION. A successful system is tailored to give the blend of sophistication and simplicity that is most efficient and economical for a specific organization. In recognition of these facts this chapter is divided into six pats: 1. Fundamental of cost accounting information system. 2. Chart of accounts. 3. Data processing by means of the journal voucher control system. 4. The manufacturing cost accounting cycle. 5. The factory ledger. 6. The electronic data processing information system. Q.31. FUNDAMENTAL OF A COST ACCOUNTING INFORMATION SYSTEM. The cost accounting system with its operating accounts must corresponds to the organizational division of authority so that the individual manger can be held accountable for the cost of incurred in each department. The concept of authority and responsibility and closely allied with the accountability which recognized the need of measuring a mangers discharge of responsibilities. The organization charts on pages 6 and 7 depict and authority the responsibility relationship between mangers superintendent and department heads who are responsible for: 1. Providing detailed information needed by the accounting department in order to install a successful system. 2. Incurring expenditure for material labor and other costs which the accountant must segregate and report to those in charge. While details for analyzing and reporting may be different for the different business each system should be perfected in manner hat will: 1. 2. Aid in planning the future and controlling the present. Provide a means of costing inventories.

3. 4. 5. 6.

Computer the cost of sales Measure the efficiency of employees material and machines. Aid in establishing selling prices. furnish data for various other analytical processes.