cost accounting material, Exercises of Cost Management

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ACKNOWLEDGEMENT

We gratefully acknowledge permission to quote from past examination papers of the following bodies: Kenya Accounts and Secretaries National Examination Board (KASNEB); Chartered Institute of Management Accountants (CIMA); Chartered Association of Certified Accountants (ACCA)

CONTENTS

• 1 ACKNOWLEDGEMENT...................................
• 2 Instruction for Students.................................
• 4 CONTENTS......................................................
• 5 Costing Course Description............................
• 6 Costing Index..................................................
  • 6.1 NATURE AND PURPOSE OF COST ACCOUNTING.
• 8 LESSON TWO..................................................
  • 8.1 COST CLASSIFICATION AND ESTIMATION........
• 8.1.1 Illustration....................................................................................................
• 8.1.2 Required.......................................................................................................
• 8.1.2.1 Where a is fixed cost, x1,x2,xn are cost drivers x1,x2,x3 upto xn..............
• 9 LESSON THREE..............................................
  • 9.1 COST ACCUMULATION........................................
• 9.1.1 EOQ is at the point where holding cost is equal to ordering costs..............
• 1 (Quantity of old stocks + Quantity of New Stocks)............
• 2.1 Overhead cost allocation and apportionment statement..............................
• 1 LESSON FOUR................................................
  • 1.1 COST BOOK-KEEPING..........................................
• 3 LESSON FIVE..................................................
  • 3.1 INFORMATION FOR DECISION MAKING............
• 3.1.
• 3.1.2 Cost of sales.................................................................................................
• 3.1.3 Period costs..................................................................................................
• 3.1.
• 3.1.
• 4 LESSON SIX....................................................
  • 4.1 COSTING SYSTEMS..............................................
• 5 LESSON SEVEN...............................................
  • 5.1 BUDGETARY PLANNING AND CONTROL............
• 6.1 Fixed Assets.................................................................................................
• 7 LESSON EIGHT...............................................
  • 7.1 STANDARD COSTING...........................................
• 8 LESSON NINE.................................................
  • 8.1 REVSION AID........................................................
• 12.1 Assembly.....................................................................................................
• 12.1.1 Sh.0.9/Prime cost........................................................................................
• 12.3 Finishing......................................................................................................
• 12.3.
• 12.3.2 418,500........................................................................................................
• 12.3.
• 12.3.4 418,500 1,674,000......................................................................................
• 12.3.
• 12.3.6 = Sh.0.25/accumulated cost.........................................................................
• 12.4 Assembly.....................................................................................................
• 12.5 Finishing......................................................................................................
• 12.5.1 1,387,000.....................................................................................................
• 12.5.2 875,500........................................................................................................
• 12.6 Assembly.....................................................................................................
• 12.7 Finishing......................................................................................................
• 12.8 Machines......................................................................................................
• 12.9 A..................................................................................................................
• 12.10 B...................................................................................................................
• 12.11 Machines......................................................................................................
• 12.12 A..................................................................................................................
• 12.13 B...................................................................................................................
• 12.15 Range (units)................................................................................................
• 12.16 Products.......................................................................................................
• 12.17 Sh.................................................................................................................
• 12.18 Sh.................................................................................................................
• 12.20 Sales.............................................................................................................
• 12.21 July...............................................................................................................
• 12.22 August..........................................................................................................
• 12.23 September....................................................................................................
• 12.24 October........................................................................................................
• 12.25 November....................................................................................................
• 12.26 December.....................................................................................................

Costing Course Description

The course aims at developing the candidates understanding and application of costing and budgeting concepts and techniques to organisations.

According to the syllabus you should be able to determine the costs of various products and services , prepare budgets for various purposes and evaluate the performance of organisations as well as decision making techniques trhough analytical techniques.

The core areas of the syllabus are cost accumulation and decision making. There will always be exam questions on this core area so the student is advised to practice as many questions as possible.

The student has continuous opportunity to test his understanding by completing the reinforcing questions and checking his answers with those given in the revision section.

Ensure that you do all the questions because costing is learnt by doing.

Recommended Study Texts:

Cost and Management Accounting : G. Brown

Costing Index

Lesson One Introduction Reinforcing Questions

Lesson Two Cost estimation and forecasting Reinforcing Questions Comprehensive Assignment 1

Lesson Three Cost accumulation, Accounting for materials, labor and overheads Reinforcing Questions

Lesson Four Book keeping entries: Integrated and interlocking systems Reinforcing Questions Comprehensive Assignment 2

Lesson Five Decision-making Reinforcing Questions

Lesson Six Costing Methods; Job costing, contract costing and Process cositng Reinforcing Questions Comprehensive Assignment 3

Lesson Seven Budgets Reinforcing Questions Comprehensive Lesson Assignment 4

Lesson Eight Standard Costing

Lesson Nine KASNEB Syllabus. Model answers to reinforcing questions. Selected past papers with model answers. Work through model; answers ensuring they are understood. On completion submit final assignment to Strathmore University.

FINAL ASSIGNMENT

Mock Examination

1. NATURE AND PURPOSE OF COST ACCOUNTING

The Nature of Cost Accounting

Cost accounting has been defined by many accounting scholars in various forums. There is no one watertight definition of cost accounting, but the various definitions all point to certain common aspects about the subject. Below are some definitions by certain authorities :

“That part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability or social use of funds” (Chartered Institute of Management Accountants - CIMA) “That which identities, defines, measures, reports and analyses the various elements of direct and indirect costs associated with producing and marketing goods and services. Cost accounting also measures performance, product quality and productivity” (Letricia Gayle Rayburn) “A systematic process of collecting, summarizing and recording data regarding the various resources and activities in a firm so as to calculate the basis of production costs used in financial accounting or making other relevant decisions in a firm (Horngren C.T)

Cost accounting is broad and extends beyond calculating production costs for inventory valuation, which government- reporting requirements largely dictate. However accountants do not allow external reporting requirements to determine how they measure and control internal organizations activities. In fact, cost accounting focus is shifting from inventory valuation for financial reporting to costing for decision making.

The main objective of cost accounting is communicating financial information to management for planning, evaluating and controlling performance, and also to assist management to make more informed decisions. Its data is used by managers to guide their decisions.

Cost Accounting and other Accounting Subjects:

Accounting can be described as a specialized information system that is used for purposes of decision making by the management of the organization and other users such as tax authorities, investors, creditors and the general public. Accounting is broadly divided into two:

i. Financial Accounting

ii. Management Accounting

Financial Accounting:

This is the analysis, classification, and recording of financial transactions and the ascertainment of how such information will be reported to the various users. It involves the development of general-purpose financial statements largely for external reporting. These statements are developed in accordance with standards imposed by the public (through the professional accounting bodies such as the Institute of Certified Public Accountants of Kenya – ICPAK and the International Accounting Standards Board – IASB) as well as the requirements of the Companies Act Chapter 486.

Management Accounting:

This is the part of accounting that provides special-purpose statements and reports to management and other persons inside the organization. The information generated by management accounting is therefore for internal uses and is not guided by any standards or legal requirements. Management Accounting, unlike financial accounting, is proactive i.e. it is future-oriented. It is required in making decisions that affect the organization.

In a nutshell, cost accounting enables a business to not only find out what various jobs or processes have cost, but also what they should have cost. It indicates where losses are occurring before the work is finished and therefore corrective action can be undertaken.

From the foregoing discussion, it is then clear that cost accounting is very closely related to other accounting subjects especially management accounting. In fact, most people make no distinction between management accounting and cost accounting, as the dividing line between the two is slimmer than thin!

The relationship of cost accounting and other accounting disciplines

1.21 Relationship between cost accounting and management accounting

Referring to CIMA’s definition of cost accounting, we can see that cost accounting is a part of management accounting.

CIMA defines management accounting as “provision of information required by the management for such purposes as formulation of

comparing the revenue and expenses of the business for a specific period. Cost and management accounting will focus analysis by segments of the business in order to allow examination by job, process, product or service.

d) To what extent does the analysis of information

incorporate non-monetary measures?

In financial accounting the monetary base is predominant. Non-monetary measures are used in the interpretation of accounting statements. For example expressing net profit as a percentage of sales revenue. In cost and management accounting there will be greater use of non monetary measures. Quantitative information may be useful in areas such ass material losses (kilos or as a percentage input), machine efficiency (as a percentage of a predetermined standard).

e) To what extent is the emphasis on future trends?

In financial accounting there is the statutory requirement for provision of historical data from which accounting statements may be prepared.

Such statements may be used in the forecasting of future trends for use by potential investors or investment analysts Cost and management accounting will tend to focus more on the future although analysis of historical information will be used. For example budgeting will focus on future plans but to some extent will use past performance as a guide to the structure of such plans

f) What Degree of accuracy is required in the

information analysis?

Basic financial accounting records must record transactions involving cash to the nearest cent. There will be an element of judgment however in areas such as provision for depreciation of fixed assets or valuation of stock and debtors. Cost and management accounting information will tend to be as accurate as required in a given situation e.g. Management Reports may summarize figures to the nearest thousand shilling whereas the labour cost per product may be expressed to four decimal places.

g) Is accounting a means to an end or an end in itself?

Financial accounting is an end in itself in so far as it fulfils the statutory requirements in relation to accounting records and the publication of financial accounting statements. It is also a means to an end in that it provides an overview of the business which may be interpreted by the various users of

b) Cost Units

It is the quantitative unit of the product or service in relation to which costs are ascertained. The cost unit will be determined by the nature of the business enterprise. It may be

• An individual job, batch or contract
• A unit of production expressed as a relevant quantity
• A service is provided to the customer

c) Cost Accountant

Is a member of chief accounting officers department. He is responsible for collecting product costs and preparing accurate and timely reports to evaluate and control company operations. Cost accountants assemble, classify and summarize financial and economic data on the production and pricing of goods and services

d) Cost Analysis

Is an activity that uses engineering, time and motion studies, timekeepers records and planning schedules from production supervisors. Cost analysis techniques include break even analysis, comparative cost analysis, capital expenditure analysis and budgeting techniques. After determining what is actually happening, accountants should identify available alternatives. Professional judgment is then needed to apply and interpret the results of each costing technique.

e) Cost benefit approach

Is the primary criterion for choosing among alternative accounting approaches. In a company, there is a direct relationship between the amount of time and the funds management is willing to spend on cost analysis and the degree of reliability desired. If a company wants detailed records with a high degree of accuracy, managers should provide additional time and money for compiling and maintaining cost information. Managers should only use cost analysis and control techniques when anticipated benefits in helping achieve management goals exceed the cost.

Purpose of Cost Accounting Information

Cost accounting is utilized for a number of purposes, some of which are briefly described in the following points :

a) Accounting for costs

This may be seen as a record keeping or score keeping role. Information must be gathered and analyzed in a manner which will help in planning, control and decision making

b) Planning and Budgeting

This involves the quantification of plans for the future operations of the enterprise; such plans may for the long or short term, for the enterprise as a whole or for the individual aspects of the enterprise.

c) The control of the operations of the enterprise

Control may be assisted by the comparison of actual cost information with that included in the plan. Any differences between planned and actual events can be investigated and corrective action implemented as appropriate

d) Decision Making

Cost accounting information assists in the making of decisions about the future operations of the enterprise; such decisions making may be assisted by the information from cost techniques and cost-volume – profit analysis.

e) Resource allocation decisions

For example product pricing in determining whether to accept or reject jobs: This is based on cost and revenue implications of the relevant decisions

f) Performance evaluation

Cost accounting information is used to measure and evaluate actual performance so as to make a decision of the degree of optimality or efficiency of resource utilization.

The role of a cost accounting department in an organization

As part of their jobs, cost accountants interpret results, report them to management and provide analysis that assist decision-making in the following departments:

a) Manufacturing

Cost accountants work closely with production personnel to measure and report manufacturing costs. The efficiency of the production departments in scheduling and transforming materials into finished units is evaluated for improvements.

b) Engineering

Cost accountants and engineers translate specifications for new products into estimated costs; by comparing estimated

Role of Cost Accounting In business management

A system is a set of interdependent parts which together form a unitary whole that performs some functions. A number of sub systems make up the whole. In this context of the organization, a management information system may be seen as the overall system with a number of sub systems including the cost and management accounting system that provide the information to management for purposes of planning, organizing, directing and controlling the organization’s activities so as to achieve corporate goals including profit maximization.

Information must be collected, processed and communicated in an organized manner if the objectives of the enterprise are to be efficiently implemented and alternative strategies for their implementations examined, so as to select the best strategy.

Information may be non mutually exclusive in nature. This means that information gathered as part of the management information system may be used in two or more subsystems for differing purposes. An example of this information is with regard to the amount and location of work in progress: (work in progress refers to partly completed units of products where a product passes through a number of operations and processes before being passed into finished goods store or to the customer). Work in progress information may be used by:

a) Production planning department in order to monitor the

progress of parts of an order through the production process and to instigate action to speed up the completion of slow moving parts of the order

b) Quality control department in comparing one batch of

product with another in highlighting the incidence of process losses and their location

c) Cost management department in the quantification and

valuation of actual loses as compared to the level originally allowed for in the business plan

d) Financial accounting department in the valuation of work

in progress for balance sheet purposes and for purposes of determining the cost of sales in the income statement.

Business Management involves planning, organizing, staffing, directing and controlling an organization’s activities so as to meet a specified objective, usually profit maximization. The function of managing a business’s activities is entrusted to the managers of the

business. For the managers to maximize profits, they must minimize the entire business’s cots. They therefore need to track all costs as they are incurred and recovered via the organization’s activities. To get this information as it happens (LIVE), they need an effective an efficient ‘information system’ referred to as cost accounting. It will therefore be appreciated that if an organization’s cost accounting information system fails, the managers cannot manage it efficiently and effectively.

Design and Operation of Cost and Management Accounting Systems A number of features must be taken into account before finalizing the design of a cost and management accounting system. These are

a) Nature of the business enterprise

b) The accounting techniques and methods which will be of use

c) Volume and type of information which will be needed

d) The method of recording, processing and communicating

information.

1. 7.1 The relationship between the nature of the Business Enterprise and Cost Accounting

Cost accounting, as will be mentioned later, adopts a cost center approach to accounting for costs. A cost center is any entity in the organization with respect to which costs can be identified and accumulated; it could be a physical entity such as a product, a geographical entity such as a division or region, or it could be conceptual entity such as a department.

The relationship between cost accounting and the nature of the business stems from the fact that the accumulation of costs into cost centers is fully dependent on the nature of the business enterprise. What is a cost center in one business enterprise may not be a cost center in another business enterprise.

The business enterprise may be such that

a) Individual orders are received from customers for work which is

undertaken according to the specific requests of the customer (specific order costing)

b) Output is the result of a series of continuous operation or

processes (process costing)