EXCEL PROFESSIONAL INSTITUTE 2.2 MANAGEMENT ACCOUNTING LECTURES 2 HOLY KPORTORGBI

Transcription

1 EXCEL PROFESSIONAL INSTITUTE 2.2 MANAGEMENT ACCOUNTING LECTURES 2 HOLY KPORTORGBI

2 Requirements CA Textbook Excel 2.2 Management Revision Kit Punctuality in class Weekly assignments Mocks Common mistakes that candidates make- page v of our revision kit

3 Q1. a) Investment Appraisal Lecture 10 &11 i. Types of Investment and Capital Expenditure ii. Objectives of Investment appraisal iii. Investment Appraisal Techniques iv. Capital Rationing v. Adjusting for Risk, Inflation and Taxation in Investment Appraisal vi. Specific Investment Decision (Lease or Buy, Asset Replacement) (10 marks) b) Performance Measurement Systems, Measurements & Control i. Performance Management Information Systems ii. Sources of management information and management reporting Lecture 1 iii. Scope of performance management & divisional performance appraisal. Lecture 12 iv. Transfer pricing Lecture 12 v. Performance analysis in not-for-profit organisations and public sector. Lecture 12 Vi External considerations & Behavioural aspects. Lecture 12 (15 marks)

4 Question 2 a) Nature, Purpose & Sources of Management Information i. Accounting for management Lecture 1 ii. Sources of data, cost classification and presentation of information. Lecture 1 (5marks) b) Budgeting & Budgetary Control Lecture 7 i. The concept of budgeting, objectives, types, administration and stages of budgeting process. ii. Preparation and analysis of Cash, Functional and Master Budgets. iii. Behavioural aspects of Budget. (15 marks) QUESTION 3 (25 marks) Cost accounting Techniques i. Accounting for material, labour & Overheads Lecture 2 ii. Absorption & Marginal costing, Job costing, Batch costing, Service costing, and Contract and Process costing. Lecture 2, & 3 (15 marks) b) Specialized cost & Management Accounting Techniques- Lecture 4 Activity Based Costing Target Costing Life cycles costing Throughput accounting (10 marks)

5 QUESTION FOUR (15 marks) a) Decision making techniques i. Relevant Costs Lecture 6 ii. Cost Volume Analysis Lecture 5 iii. Limiting factors Lecture 5 iv. Pricing Decisions Lecture 5 v. Make or buy decision, outsourcing, split or further processing, special order acceptance decisions. Lecture 6 vi. Dealing with risk and uncertainty in decision making (Profitability & Expected Values) Lecture 6 QUESTION FIVE (15 marks) a) Standard Costing & Variance Analysis Lecture 8 & 9 i. Nature, scope & objectives of standard costing, behavioural aspects of standard costing. ii. iii. iv. Types of standards and standard setting process. Basic variances, mix and yield variances, causes and analysis of variance. Operating Statements (Reconciliation of budgeted results with actual results using variances. v. Productivity, efficiency and capacity ratios.

6 LECTURE 2 COSTING AND COSTING METHODS Costing and Costing Methods Accounting for Direct Cost Accounting for Overheads Costing Methods

7 Direct cost is made up of Direct cost of material Direct cost of labour Direct expenses

8 Materials refers to inventory of raw materials, work-in progress goods and completely finished goods that are considered to be the portion of a business assets that are ready or will be ready for sale. We consider two areas namely: Inventory management Inventory valuation

9 Inventory management includes functions of inventory ordering and purchasing, receiving goods into store, storing and issuing inventory and controlling levels of inventory. Documents used to record inventory movement includes mostly bin card (showing the level of inventory) and stores ledger accounts (showing both the level, value and unit cost of inventory) and others like materials transfer notes, materials return notes, material requisition notes and others

10 Inventory control levels can be calculated in order to maintain inventories at the optimum level so that the total inventory costs is minimized. The three critical control levels are: Reorder level = maximum usage * maximum lead time Minimum level= reorder level (average usage * average lead time) Maximum level = reorder level + reorder quantity (minimum usage * minimum lead time)

11 Total inventory cost is minimised when inventory holding cost is at equilibrium with ordering cost. This point of equilibrium is known as Economic order quantity (EOQ). Inventory costs is made up of purchase costs, holding costs, ordering costs and costs of running out of inventory. EOQ = Where C o = cost of ordering D = Annual demand C h = Holding cost The economic order quantity (EOQ) is an attempt to minimize inventory costs Inventory costs

12 Annual demand for an item of inventory is 45 units. The item costs GHS200 a unit to purchase, the holding cost for one unit for one year is 15% of the unit cost and ordering costs are GHS300 an order. The supplier offers 3% discount for orders of 60units or more, and a discount of 5% for orders of 90units or more Required: How many units should the organisation order on each reordering time?

13 Inventories are valued at lower of cost and net realizable value. Methods used in valuing inventory includes; Fist-in-First-Out (FIFO): assumes that materials are issued out of inventory in the order in which they were delivered into inventory Last in-last-out (LIFO): assumes that materials are issued out of inventory in the reverse order to which they were delivered Weighted average: pricing method calculates weighted average price for all units in inventory, issues are priced at average cost. A new weighted average is calculated when there is a new delivery

14 Labour cost represent both direct labour and indirect labour cost Key issues here relate to: labour remuneration labour efficiency and labour turn-over. Labour cost includes the total amount of financial benefits given to all workers for their time and effort used in producing goods and services.

15 Labour efficiency can be illustrated with the relationship between: Production: being the quantity or volume of output produced and Productivity: being a measure of the efficiency with which output has been produced. There are two basic methods for labour remuneration: Time rate and Piece rate In addition to these two, there may be bonus incentive schemes, high day rate schemes and overtime premiums which are instituted to incentivize workers

16 Labour turnover is the rate at which employees who leave a company are replaced Labour turnover is given by = (replacements/average number of employees in period)*100 Cost of labour turnover can be categorised into: preventive cost: cost incurred in order to prevent employees from leaving replacement costs: cost are incurred as a result of hiring new employees and they include cost of selection and placement, inefficiency on new employee, cost of training, etc. Labour turnover will be reduced by paying satisfactory wages, offering satisfactory hours and conditions of work and creating a good informal relationship between members of the workforce.

17 Overhead is the cost incurred in the course of making a product, providing a service or running a department but which cannot be traced directly and in full to the product, service or the department. Accounting for overheads comes in three levels: Overhead allocation: attributing overheads wholly to specific cost centres that incurred the overheads Overhead apportionment: This is a procedure whereby indirect costs are spread fairly between cost centres and Overhead absorption: This is to calculate a rate at which overhead cost are included in a unit cost of a product

18 Overhead Absorption Rate (OAR) is used to absorb the total cost of overheads to the unit cost of a product or service The aim of OAR is to determine a base absorbing overhead OAR is determined as: Budgeted overhead/ Budgeted Activity base Since OAR are based on estimates, over-absorption or under absorption arise when these estimates differ from actual results. Where actual overhead expenditure differs from the budgeted overhead, the variance is called expenditure variance. Where budgeted activity base differ from actual activity base, the resulting variance is known as volume variance.

19 Araba Bakery has three production departments (A, B and C) and two service centres (Y and Z). The following overhead cost information were provided for the year 2016 Overhead cost Allocated and Apportioned Dept. A Dept B Dept C Servi ce Y Service Z 50,000 85,000 60,000 26,000 40,000 Direct Labour Hours 11,250 Machine Hours 4,200 5,280 Basis of Reapportioning Service Y cost 20% 30% 20% 30% Basis of Reapportioning Service Z cost 30% 20% 20% 30%

20 A predetermined overhead absorption rate is established for each production department each year. Actual overhead data for the last month in 2016 indicated the following: Dept A Dept B Dept C Overhead cost Allocated and Apportioned 4,410 7,190 5,610 Direct Labour Hours 985 Machine Hours

21 Required Calculate, from the data provided, an appropriate predetermined overhead absorption rate for each production centre for the year Calculate the amount for under/over absorption for the month of December 2016 for each production department and for Araba Bakery as a whole.

22 Costing methods are designed to suit the way goods are processed or manufactured or the way services are rendered. Job costing: is a costing method applied where work is undertaken base on customers special requirements and each order is of comparatively short duration Batch costing is used to cost products produced in batches ( a group of similar articles which maintains its identity during one or more stages of production and is treated as a cost unit) Service costing: which is used by companies operating in the service industry

23 Companies can also use service costing to charge the cost of service departments to the production departments A service is different from a product with the following characteristics: Simultaneity is such that the production of service and its consumption is done at the same time. Heterogeneity/variability of service means that service will vary each time, thus the standard of service rendered at a time will not be consistent every time. Intangibility meaning service in itself cannot be felt and touched. Perishability meaning service cannot be stored since is simultaneous.

24 The main problem with service costing is the difficulty in defining a realistic cost unit that represent a suitable measure of service provided. A composite cost unit is deemed more appropriate, e.g. a hotel may use bed-night as an appropriate unit of cost. Contract costing is a form of job costing which applies where the job is on a large scale and for a long duration. A contract is a cost unit which is charged with direct cost of production and an apportionment of head office overheads. The work under contract costing is usually constructional and in general the method is similar to job costing.

25 This is a costing method where it is not possible to identify separate units of production or jobs, usually because of the continuous nature of the production process involved Process costing has the following are the features: The output of one process is the input to the next process until the finished product is made The continuous nature of production in many process means there will be closing work in progress which need to be valued There is often a loss in process due to spoilage, wastage, evaporation and so on Output from production may be a single product, but there may also be a by-product and/ joint product.

26 Dealing with simple process is accounts involves: First determining the output and losses expected output Secondly, calculate normal loss, abnormal loss or gain. Thirdly, calculate equivalent unit if there are closing/opening WIP, compute cost per unit of output, losses and WIP Finally, complete account If a loss occurs in process and is of a certain expected level of loss, it is termed as a normal loss and it is not given a cost. If the loss is the extra loss resulting when the actual loss is greater than the normal loss expected (abnormal loss), it is given a cost.

27 If there is a gain, i.e. the actual loss is lower than the expected normal loss (abnormal gain), then it is given a negative cost Scrap value of normal loss is usually deducted from the costs of materials Scrap value of abnormal loss /gain is usually set off against its cost in their account When a normal loss has a disposal cost, the cost increases the cost of materials in valuing good output, abnormal loss/gain. When there is a disposal cost for abnormal loss/gain, the cost is transferred to the abnormal loss/gain account which is later transferred to income statement Valuation of closing inventory are done using either FIFO or weighted average method.

28 The following information relates to process 3 of a 3-stage production process for the month of May, 2018 Opening inventory 300 units completed as; % GHS Materials from process Added materials Labour Production overhead

29 In May 2018, a further 1,800 units were transferred from process 2 at a valuation of GHS27,000. Added material amounted to GHS6,600, and direct labour to GHS3,270 Production overhead is absorbed at the rate of 150% of direct labour cost. Closing inventory at 31 January, 2018 amounted to 450 units completed as: % Process 2 materials 100 Added material 60 Labour and overhead 50 Required: Use FIFO to closing inventory and prepare process 3 account.

30 Joint products are two or more products separated in a process, each of which has relatively significant value. The point of separation is called the split-off point Total cost of the products at split off point has to be apportioned among the joint products in a logical manner Three methods of apportionment are used: o Volume-based apportionment: This is desirable if items command value relative to their volume o Value-based apportionment: This is desirable when market price of processed joint products do not reflect their value : or o A hybrid of volume and value: This is used when ultimate value of joint products is both volume and value determined.

31 At the split off point, a decision has to be made: To sell the product at the split off point or To process further In making this decision, the organisation consider marginal cost of processing further with marginal revenue from processing further

32 Pinto company Limited processes materials into finished products. After process one, two main products PEF and CEF are turned out. The production processes allow for 10% normal loss at process one and 5% for each product if it is to be processed further. The scrap at process one can be sold for GH 6.60 per unit. The standard prices of the products are as follows; PEF to be sold at split off point GH 17 per unit but can be sold for GH 28 per unit after further processing. A unit of CEF can also be sold for GH 16 at split off point or GH 25 after further processing. Further processing costs are; PEF; direct cost materials GH 4 per unit and conversion GH 3.50 per unit.

33 The materials and conversion costs per unit for CEF are GH 5 and GH 4 respectively In the month of August ,000 units were processed through process one at the following costs; direct materials GH 40,000, conversion GH 32,000. The output at the end of process one were 3,000 units for PEF and 2,000 units for CEF Required: Advise management which of the products should be processed further and which should be sold at split off point if volume is used to share common cost.