ACC512 Management Accounting for Costs & Control pdf

ACC512
Management Accounting for Costs & Control
FACULTY OF COMMERCE

Section 2 Study Guide




















Management Accounting for Costs & Control

ACC512 Section 2 Study Guide
Faculty of Commerce


Written and compiled by
Vic Fatseas
John Williams
















Educational designer
Janet Smith

Learning media processing officer
Jennifer Sims

Produced by Learning Materials Centre, Charles Sturt University, Albury - Bathurst - Wagga
-
Wagga, New South Wales, Australia.

First edition Spring 1990
Second edition Spring 1991
Reprinted 1992
Revised 1993, 1994, 1995, June 1998, June 2000, June 2001, June 2002
Reprinted May 2003, May 2004


















Printed at Charles Sturt University

 Charles Sturt University

Previously published material in this book is copied on behalf of Charles Sturt University pursuant
to Part VB of the Commonwealth Copyright Act 1968.
ii

Contents


Page
Module 1: Management accounting functions 1
Module 2: Product costing: Materials, labour and overhead 7
Module 3: Product costing: Overhead cost pools, cost drivers and
allocation rates 14
Module 4: Product costing: Job costing 21
Module 5: Product costing: Process costing 26
Module 6: Product costing: 32
Module 7: Product costing: Standard cost systems 38
Module 8: Alternative product costing systems: Variable costing
and JIT costing 43
Module 9: Control systems: Budgeting and feedforward control 49
Module 10: Control systems: Flexible budgets and standard cost
variances 54
Module 11: Organisation structure, responsibility accounting and
accounting controls 59
Module 12: Performance measurement: Accounting controls and
nonfinancial measures 63


iii

iv

Module1:

Management accounting functions
Product costing: Terms and cost flows



References

The references for this module are:

FBW (Fatseas, Bisman, Williams) (2001) Management accounting for costing and
control: Chapters 1 and 2.


Introduction

In this module we begin by attempting to identify the field of management
accounting. Management accounting is primarily concerned with providing
information to assist managers in running a business. Management accounting
work is driven by three demands:

• the need for compliance (with external regulatory and reporting
requirements)

• the need for control (of operations and people to achieve objectives)

• the need for competitive support (to the management team to enhance
organisational competitiveness).

Also in this module we identify the purposes of product costing and learn which
costs incurred in a business are treated as product costs. We distinguish between
the cost flows of retailers and manufacturers, and learn how to construct a
Manufacturing Statement to determine the Cost of Goods Manufactured.

Note that the term product is used broadly to encompass both goods and services.


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Section 2 Study Guide

Objectives

At the end of this module you should

• have an appreciation for the scope of management accounting and what
drives the work of management accountants;

• know the purposes of product costing;

• understand and remember the terminology associated with concepts of cost,
and what cost elements constitute product cost;

• understand the general ledger flows of manufacturing costs, and be able to
construct a manufacturing statement both manually and using a spreadsheet.

Self-test questions

When you have studied the references for this module you should attempt the
following questions, the solutions to which are provided in the Answers to Self-
test Questions booklet.


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Section 2 Study Guide

i. True/False

For each of the following statements write T or F:

1 Management accountants consider shareholders to be the primary users of
accounting information.

2 The value chain includes the following functions: research and
development; design of products, services and processes; production;
marketing; distribution; customer service; management satisfaction.

3 Managers receive reports on cost planning and controls. These reports are
considered to be for internal use only.

4 Cost accumulation to determine the cost of goods sold and the cost of
unsold inventories is an example of the compliance function of management
accounting work.

5 Cost is defined by accountants as the value of resources consumed to
achieve an objective.

6 Indirect costs cannot be economically traced to the cost object.

7 Judicious selection of particular cost drivers results in decreases in overall
costs.

8 Prime cost is equal to the sum of the costs of direct materials and direct
labour.

9 Factory rent is regarded as a period cost.

10 Cost of goods sold is equal to cost of goods manufactured plus closing
inventory of finished goods minus opening inventory of finished goods.


ii: Multiple choice

For each of the following questions identify the correct alternative:

1. The value of an asset given up to acquire other assets is

A an expense
B a cost
C a loss
D an investment
E a prepayment

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Section 2 Study Guide

2. The value of assets given up to generate revenue is

A an expense
B a cost
C a loss
D an investment
E a prepayment

3. Direct labour cost plus direct materials cost is referred to as

A prime cost
B conversion cost
C overhead cost
D product cost
E period cost

Use the following information to answer questions 4 and 5:

A firm’s quarterly income statement is as follows:

Sales
Less Variable Expenses: $1600
Direct material $280
Direct labour 300
Overhead 60
Administrative expenses 30
Selling expenses 70
740

Contribution Margin 860
Less Fixed Expenses:
Overhead 180
Administrative expenses 440
Selling expenses 100
720
Profit before Tax $140



4. The total period cost is

A $60
B $600
C $640
D $720
E $880

5. Conversion costs are

A $240
B $380
C $540
D $580
E $620
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6. Sales commissions are an example of

A variable manufacturing costs
B fixed manufacturing costs
C direct costs
D period costs
E none of the above

7. Which of the following items is not a manufacturing cost?

A direct labour
B overhead
C direct materials
D indirect materials
E office manager’s salary

Use the following information for questions 8, 9 and 10:

Direct materials were 30% of the year’s manufacturing costs incurred. Opening
work in process was 125% of closing work in process. Conversion costs were
$56 000. The cost of direct labour was $30 000 and the cost of goods
manufactured was $90 000.

8. Direct materials cost was

A $16 800
B $24 000
C $27 000
D $63 000
E none of the above

9. The cost of overhead was

A $40 000
B $32 000
C $26 000
D the same as the cost of direct materials
E none of the above

10. The cost of closing work in process was

A $50 000
B $40 000
C $32 000
D $26 000
E none of the above


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Section 2 Study Guide

iii. Textbook questions

Now attempt the following questions from FBW: Chapter 2: 2-1, 2-2, 2-3, 2-9.

For further explanation of these concepts refer, as appropriate, to the relevant
pages of Hilton’s text and/or the readings. Refer to the Hilton pages listed in the
Study Schedule and use the index at the back of the text. Also note that this text
has a web site with supplementary materials including Powerpoint presentations
and supplementary quizzes. The Subject Outline gives the URL for the web site.
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Section 2 Study Guide

Module 2:

Product costing: Materials, labour and overhead



References

The reference for this module is:

FBW: Chapter 3, pages 36-48


Introduction

In Module 1 we learned that product costs represent the costs of resources
consumed in production, and that these may be classified into three main cost
elements: direct materials, direct labour, and overhead. In Module 2 we are
concerned with how a product costing system traces and/or allocates the costs of
resources consumed in the production process to arrive at the cost of a single unit
of production (or the cost of a service rendered by a service organisation). As well
as attaching costs to products or services, we are also concerned with control
processes to ensure that materials purchased by firms are fully accounted for, that
labour is productive and economical, and that overhead costs are kept under
control.


Objectives

At the end of this module you should be able to

• appreciate general control procedures used in respect of materials, labour
and overhead;
• record in the general ledger the flow of materials through the stages of
acquisition, storage and usage;
• record in the general ledger payments to employees for time worked or leave
taken, and to segregate that portion of these expenses which represent direct
labour costs and charge them to products or services;
• record in the general ledger the incurrence of overhead costs and to allocate
them to products or services;
• appreciate the difference between using actual overhead rates and
predetermined overhead rates for product costing;
• understand why the use of different capacity measures leads to different
predetermined overhead rates and hence different product costs.

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Section 2 Study Guide

Self-test questions

When you have studied the references for this module you should attempt the
following questions, the solutions to which are provided in the Answers to Self-
test Questions booklet.


i. Completion statements

Complete the following statements by filling in the blanks:

1. The three main elements of product cost are _______________,
_______________ and _______________.

2. A product costing system traces the flow of materials through three stages:
_______________, _______________ and _______________.

3. Control of materials is exercised through the use of _______________
_______________ _______________ which form a subsidiary ledger for
the _______________ _______________ account.

4. The document authorising the issue of materials is a _______________
_______________.

5. The balance of the Accrued Payroll account should equal wages
_______________ but _______________.

6. The activity base used for allocating overhead is also referred to as a cost
______________.

7. Overhead costs incurred are debited to an _______________
_______________ account.

8. Overhead costs allocated to work in process are credited to an
_______________ _______________ account.

9. The difference between overhead cost incurred and overhead allocated is
called a _______________.

10. Overhead variances are usually disposed of either by being transferred to
__________ _____ __________ __________ account, or by being prorated

to __________ _____ __________ account, _______________
_______________ account and __________ _____ __________
__________ account.


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Section 2 Study Guide

ii. Multiple choice

For each of the following questions identify the correct alternative:

1. A correct journal entry for the return to the store of direct materials
previously issued to production would be

A Dr Materials Control; Cr Overhead
B Dr Materials Control; Cr Work in Process
C Dr Purchases Returns; Cr Work in Process
D Dr Work in Process; Cr Materials Control
E none of the above

2. On 1 September the Materials Control account balance was $25 000. The
balance on 30 September was $15 000. Raw materials purchased in
September were $100 000.

The journal entry to record the raw (direct) materials placed in production
during September is

A Dr Materials Control $110 000; Cr A/cs Payable $110 000
B Dr Materials Control $100 000; Cr A/cs Payable $100 000

C Dr Work in Process $100 000; Cr A/cs Payable $100 000
D Dr Materials Control $110 000; Cr Work in Process $110 000
E none of the above

3. The issue of indirect materials would usually be recorded in the general
ledger as an increase in

A Materials Control
B Work in Process
C Overhead Control
D Overhead Allocated
E none of the above

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Section 2 Study Guide

4. Salaries and wages payable to production employees amounted to $7000 on
1 June and $5000 on 30 June. Salaries and wages paid to production
employees during June totalled $23 000. June’s direct labour totalled
$17 000.

The journal entry recording wages earned by production employees during
June is

A Work in Process $15 000
Overhead Control 8 000
Accrued Payroll $23 000

B Work in Process $17 000
Overhead Control 4 000

Accrued Payroll $21 000

C Work in Process $15 000
Overhead Control 10 000
Accrued Payroll $25 000

D Bank $5 000
Work in Process 17 000
Overhead Control 1 000
Accrued Payroll $23 000

E none of the above

Questions 5 and 6 relate to the following data.

The Stable Company operates the year-round with a gross payroll of $12 000 per
day. The firm works five days per week, Monday to Friday inclusive. The payroll
period covers Wednesday to Tuesday inclusive and the payroll for the week is
paid on the Friday immediately following the last day of the pay week.
Withholdings for PAYE Taxes amount to $18 000 per week. There are no other
deductions from employees’ earnings.

Gross payroll consists of $5500 direct labour, $3500 indirect factory labour,
$2000 selling expenses and $1000 general and administrative expenses each day.
The general-journal entry to record the total of the payroll cost incurred each
month is made on the last day of the month.

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Section 2 Study Guide

Use the following calendar as a guide to answer the following two questions:


AUGUST
Sun M Tu W Th F Sa
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30 31


5. What is the balance in the Accrued Payroll account as at the end of the
month of August?

A Nil
B $24 000
C $36 000
D $48 000
E $12 000

6. What is the total amount credited to the accrued payroll account during the
month of August?

A $260 400
B $372 000
C $240 000
D $264 000
E $312 000

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Section 2 Study Guide

7. Dave is a stainless steel welder in a small engineering shop. His hourly rate
is $8.00 for a 35 hour week. Overtime is paid at time and a half. During the
first week of March Dave worked a total of 40 hours. His time sheet
indicates the hours spent on a number of jobs and a total of 3 hours idle
time. It also reveals that 2 hours of overtime were spent on Job 93, for
which the customer had specifically requested completion within two days
of placing the order.

The amount of Dave’s wages charged as direct labour to jobs during the
week was:

A $296
B $340
C $328
D $304
E $280

Questions 8 and 9 relate to the following data:

The Hooyoo Company uses a predetermined rate based on normal capacity for
allocating factory overhead to production. The normal capacity of the company’s
manufacturing operations is 200 000 direct labour hours per annum. The
behaviour of factory overhead costs has been studied and is estimated to be
$360 000 of fixed factory overhead per annum and $5.40 of variable overhead per
direct labour hour worked.

During the year ended 31 December production consumed 190 000 direct labour

hours and total factory overhead costs incurred were $1 375 000.

8. What was the predetermined total overhead rate per direct labour hour for
the year ended 31 December (correct to four decimal places)?

A $7.2947
B $5.4000
C $7.2000
D $7.2368
E $6.8750

9. What was the amount of under- or over-allocated factory overhead for the
year ended 31 December?

A $11 000 underallocated
B $11 000 overallocated
C $7 000 underallocated
D $7 000 overallocated
E none of the above

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Section 2 Study Guide

10. Mr. C. Bloggs runs a small business which manufactures gadgets for a
famous cartoon character. He is attempting to calculate his total
manufacturing overhead for the month of August, but is unsure exactly what
it is. He maintains an inventory of manufacturing supplies which he valued
at $600 at the start of August, and he estimates that he has $400 left at the
end of August. (All manufacturing supplies are purchased from the
Manufacturing Supply Co. and are paid for at the time of purchase.) The

factory occupies approximately 25% of the floorspace of his premises, the
rest being office space. Bloggs estimates that the machine in his factory
uses 50% of his total power bill, and he remembers that, at the beginning of
August, he still owed Southern Mitchell Electricity $150 from July.
Nothing is owing to SME at the end of August. The factory is fully
automated, but he does employ one person (Joe) to clean the machine,
sweep the floors and generally do odd jobs around the factory. Joe was
owed $50 at the end of July, and $75 at the end of August. The machine is
depreciated at the rate of $600 per annum.

Payments for August: Cheque No. Amount Payee

200 $1000 Manufacturing Supply Co.
201 $ 600 Rent - August
202 $ 450 SME - Electricity
203 $ 450 Wages - Joe

The actual manufacturing overhead for August was:

A $2025
B $1975
C $2400
D $2625
E $2550


iii. Textbook questions

Now attempt the following questions from your textbook:

FBW : Chapter 3: 3-1, 3-2, 3-5, 3-8, 3-13, 3-16, 3-22, 3-26.

For further explanation of these concepts refer, as appropriate, to the relevant
pages of Hilton’s text and/or the readings. Refer to the Hilton pages listed in the
Study Schedule and use the index at the back of the text. Also note that this text
has a web site with supplementary materials including Powerpoint presentations
and supplementary quizzes. The Subject Outline gives the URL for the web site.

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Section 2 Study Guide

Module 3:

Product costing: Overhead cost pools, cost drivers
and allocation rates
Activity based costing



References

The reference for this module is:

FBW: Chapter 3, pages 49-63


Introduction

In Module 2 we looked at how a product costing system traces the cost of direct
materials and direct labour to units of product. You also were introduced to the

allocation to products of indirect costs, that is overhead costs. We compared the
use of actual overhead rates (called actual costing) with that of predetermined
overhead rates (called normal costing).

In this module we extend our study of the complex topic of overhead allocation,
using predetermined rates. We begin by comparing the simple case of one cost
pool and one allocation rate (called a plantwide rate) with multiple cost pools and
allocation rates. Such multiple rates are called departmental rates when costs are
pooled by departments. You will learn that multiple cost drivers and cost pools
may be simplified under certain circumstances when cost driver consumption by
products is correlated.

Overhead allocation is further complicated by the need to allocate support centre
costs (which by definition are overhead costs) to production centres before further
allocating to products. Three common methods are illustrated: the direct method,
the step (down) method and the reciprocal services method.

Finally, activity based costing (ABC) is introduced as a further refinement to the
topic of overhead allocation. The aim of ABC is to try to more directly trace
overhead costs to products. You will see how the use of ABC overcomes the
problem of product cost subsidisation resulting from traditional allocation
methods, and thus produces product costs which are more relevant for strategic
decisions such as product pricing, product mix etc.


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Section 2 Study Guide

Objectives

At the end of this module you should be able to

• calculate and use plantwide and departmental overhead allocation rates;

• recognise correlation in cost driver consumption and hence be able to
simplify allocation procedures;

• allocate support service centre costs to production cost centres using the
direct, step and reciprocal services methods;

• employ the techniques of ABC to cost products or services.


Self-test questions

When you have studied the references for this module you should attempt the
following questions, the solutions to which are provided in the Answers to Self-
test Questions booklet.


i. Multiple choice

For each of the following questions identify the correct alternative:

1. A firm has two service departments S1 and S2 and two production
departments P1 and P2. The primary allocation of expenses and the
proportions to be used for calculations are shown below:-

S1 S2 P1 P2
Primary allocation of

expenses

$8 000

$12 000

$30 000

$50 000
Allocation
percentages:

S1
TO
S2

P1

P2
FROM S1 - 40% 30% 30%
S2 20% - 50% 30%

What is the total cost of the production departments P1 and P2 respectively,
using the step method of service department allocation? Assume S1 is
allocated first.

A $41 200; $58 800
B $40 800; $59 200
C $41 900; $58 100
D $41 600; $59 400

E $59 200; $40 800

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Section 2 Study Guide

Questions 2 and 3 relate to the following information:

The Complex Company has 5 departments in its factory of which P1 and P2 are
the only producing departments. Department P1 produces a single product P1 and
department P2 produces a single product P2. The current costs of each
department are:

Service Department A $20 000
B $40 000
C $20 000
Production Department P1 $70 000
P2 $70 000

The distribution and consumption of services is given in the following table:

Service provided to:
A B C P1 P2
Service provided by
A

-

30%

-

35%

35%
B 40% - - 40% 20%
C 10% 10% - 50% 30%

2. Assuming management decides to allocate service department costs on the
basis of the direct method, the total costs incurred by department P1 after
allocation would be (to the nearest dollar):

A $110 000
B $117 523
C $116 200
D $103 800
E $119 167

3. Assuming management decides to allocate service department costs on the
basis of the reciprocal method, total cost of Service Department A after
solving the simultaneous equations and before allocation would be (to the
nearest dollar):

A $37 431
B $20 000
C $38 800
D $44 091
E $50 000

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Section 2 Study Guide

4. Horncusker Products has two production departments, P1 and P2, and no
service departments. The amount of time a production job spends in P1 and
P2 depends on the size of the job and its technical specifications.

The following information is available about the overhead and direct labour
costs in P1 and P2 for the year ended 31 December:

P1 P2 Total
Departmental overhead
cost
$24 000 $75 000 $99 000
Direct labour cost 20 000 30 000 50 000


There was no opening inventory of finished goods or work in process at the
beginning of the year (1 January). During the year the following jobs were
started and completed, incurring direct labour costs as follows:

Job
906 907 908 Total
Direct labour cost: $10 000 $10 000 $ 0 $20 000
P2 0 15 000 15 000 30 000
Total $10 000
$25 000 $15 000 $50 000

Jobs 906 and 907 were sold during the year. Job 908 was still in finished
goods inventory at 31 December. There was no inventory of partly finished
jobs in work in process at 31 December.

Overhead is allocated to production on the basis of direct labour cost.

The cost of goods sold for the year using an actual plant-wide rate per direct
labour dollar for applying overhead would be higher (or lower) than that
using actual departmental rates for P1 and P2 for applying overhead as
follows:

A $7 800 higher
B $7 800 lower
C $29 700 higher
D $29 700 lower
E Nil i.e. the same for both methods

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Section 2 Study Guide

Questions 5 and 6 refer to the following information.

Greenies Ltd. has built a successful business manufacturing artificial flowers and
trees. The firm has two production departments, Component Manufacture and
Assembly, and two service departments, the Staff Cafeteria and the Materials
Handling Department. The current costs of these departments are:

Component
Manufacture
$

Assembly
$

Cafeteria
$
Material
Handling
$
Direct labour and
materials
400 000 300 000 2 000 6 000
Indirect costs 200 000 160 000 1 000 2 700
Total 600 000
460 000 3 000 8 700

The services of the Cafeteria are distributed according to the number of employees
in the other departments - Materials Handling has 6 employees, Component
Manufacture 30 employees and Assembly 24 employees. The services of the
Materials Handling Department are distributed as follows: 20% to the Cafeteria
and the remainder evenly between Component Manufacture and Assembly.

5. Assuming management uses the step method to distribute service
department costs to the production departments and allocates the Cafeteria
first, the total indirect cost in Assembly is:

A $165 550
B $171 350
C $165 700
D $186 000
E $176 500

6. Assuming management uses the direct method to distribute service
department costs to production departments, allocated service department

costs to Component Manufacture and Assembly are respectively (to the
nearest dollar):

A $5050; $5650
B $1906; $1794
C $4461; $4239
D $6017; $5683
E none of the above

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Section 2 Study Guide

Questions 7 and 8 refer to the following information.

K-tel manufactures knife sharpeners. Traditionally, a plantwide rate of $200 per
direct labour hour has been used to allocate overhead to its products. The
accountant believes it is time to find a better method of cost allocation and has
established the following relationships between activities and overhead:

Activity Cost Driver Allocation Rate
Material handling Number of parts $2 per part
Assembly Labour hours $20 per hour
Inspection Inspection time $3 per minute

7. What is the overhead cost per unit from a batch of 1000 sharpeners using the
traditional method? The batch requires 2000 parts, 20 direct labour hours
and 30 minutes of inspection time.

A $4.00
B $4.90

C $4000.00
D $4490.00
E none of the above

8. What is the overhead cost per unit from a batch of 100 sharpeners using the
ABC method? The batch requires 200 parts, 12 direct labour hours and 5
minutes of inspection time.

A $4.00
B $6.55
C $24.00
D $655.00
E none of the above

9. The use of separate overhead cost rates for activities within departments
generally may be more effective when

A different activities have different cost drivers

B different products have different cost pools

C different activities have different cost drivers and products differ in
their consumption of activities

D products do not differ in their consumption of activities

E none of the above

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