MGT402 Handouts

Cost & Management Accounting – MGT402

TABLE OF CONTENTS · Lecture · Topic · Page #

1.

2.

3. FINANCIAL STATEMENTS .................................................................................................10

4. FINANCIAL STATEMENTS (Contd.) .................................................................................16

5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS ...........................24

6. PREPARATION OF FINANCIAL STATEMENTS (Contd.) .........................................30

7. MATERIAL .................................................................................................................................35

8. CONTROL OVER MATERIAL ............................................................................................38

9. CONTROL OVER MATERIAL (Contd.) .............................................................................44

10. ACCOUNTING FOR LOSSES ..............................................................................................53

11. LABOR .........................................................................................................................................61

12. PAYROLL AND INCENTIVES ............................................................................................71

13. PIECE RATE BASE PREMIUM PLANS .............................................................................80

14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY

OVERHEAD COST .................................................................................................................85

15. ALLOCATION AND APPORTIONMENT OF FOH COST ........................................90

16.

17. FACTORY OVERHEAD COST (Contd.) ......................................................................... 101

18. COST ACCOUNTING SYSTEM ........................................................................................ 113

19. PROCESS COSTING SYSTEM .......................................................................................... 119

20. PROCESS COSTING SYSTEM (Contd.) .......................................................................... 124

21. PROCESS COSTING SYSTEM (Contd.) .......................................................................... 126

22. PROCESS COSTING SYSTEM (Contd.) .......................................................................... 129

23. PROCESS COSTING SYSTEM (Contd.) .......................................................................... 135

24. PROCESS COSTING SYSTEM (Contd.) .......................................................................... 138

25. COSTING/VALUATION OF JOINT AND BY PRODUCTS .................................... 142

26. COSTING/VALUATION OF JOINT AND BY PRODUCTS (Contd.) .................... 146

27. MARGINAL AND ABSORPTION COSTING ............................................................... 152

28. MARGINAL AND ABSORPTION COSTING (Contd.) ............................................... 155

29. COST – VOLUME – PROFIT ANALYSIS ....................................................................... 165

30. COST – VOLUME – PROFIT ANALYSIS (Contd.) ....................................................... 169

31. BREAK EVEN ANALYSIS – MARGIN OF SAFETY .................................................. 173

32. BREAKEVEN ANALYSIS – CHARTS AND GRAPHS ............................................... 179

33. WHAT IS A BUDGET? ......................................................................................................... 184

34. PRODUCTION & SALES BUDGET ................................................................................ 188

35. PRODUCTION COST BUDGET ...................................................................................... 191

36. DIRECT LABOUR AND FACTORY OVERHEAD BUDGET ................................. 194

37. OPERATING EXPENSE BUDGET AND BUDGETED INCOME STATEMENT197

38. CASH BUDGET ..................................................................................................................... 199

39. COMPLEX CASH BUDGET & FLEXIBLE BUDGET ................................................ 202

40. FLEXIBLE & ZERO-BASE BUDGETING .................................................................... 209

41. DECISION MAKING IN MANAGEMENT ACCOUNTING ................................... 215

42. DECISION MAKING (Contd.) ........................................................................................... 218

43. DECISION MAKING (Contd.) ........................................................................................... 223

44. DECISION MAKING (Contd.) ........................................................................................... 230

45. DECISION MAKING (Contd.) ........................................................................................... 236

LESSON 01 · INTRODUCTION · Cost Accounting

Cost Accounting is an expanded phase of financial accounting which provides management

promptly with the cost of producing and/or selling each product and rendering a particular service.

Management Accounting

Management accounting is application of professional knowledge and skill in the preparation and

presentation of financial information in such a way as to assist management in decision making and

in the planning and control of operations of the entity.

Objectives

Objective of cost accounting is computation of cost per unit, whereas the objective of management

accounting is to provide information to the management for decision making purposes.

Users of Cost Accounting

Users of cost & management accounting are the decision makers and the managers of the

entity/organization for which all this exercise is undertaken.

Uses of Cost and Management Accounting

1. It determines total cost of production and cost of sales

2. It determines appropriate selling price

3. It discloses the profitable products, areas and activity/capacity levels

4. It is used to decide whether to manufacture or purchase from outside

5. It helps in planning and controlling the cost of production

Elements of Cost

Any product that is manufactured is the result of consumption of some resources. The

management, for its planning and controlling functions, must know the cost of using these

resources. The constituent elements of cost are broadly classified into three distinct elements:

Direct Material Cost

Other Production Cost

a) Direct Cost

b) Indirect Cost

COST CLASSIFICATION

Elements of cost (Direct Material, Direct Labor, Other Production costs) can be classified as direct

cost or indirect cost.

Direct Cost

A direct cost is a cost that can be traced in full to the product or service for which cost is being

determined. Direct cost can be economically identified with a specific saleable product or service

(cost unit).

a) Direct material costs are the costs of materials that are known to have been used in producing

and selling a product or rendering a service.

b) Direct labor costs are the specific costs of the workforce used to produce a product or

rendering a service. c) Other direct production costs are those expenses that have been incurred in full as a direct

consequence of producing a product, or rendering a service.

Indirect Cost/Overhead Cost

An indirect cost or overhead cost is a cost that is incurred in the course of producing product or

rendering service, but which cannot be traced in the product or service in full.

Expenditure incurred on labor, material or other services which cannot be economically identified

with a specific cost product or service (cost unit).

Wages of supervisor, cleaning material and workshop insurance etc.

Mater · Labor · Other · Total

Direct Direct Direct Prime Cost

Indirect Indirect Indirect Factory

1. Prime Cost

Direct Material

+Direct Labor

+Other direct production cost

Prime cost.

2. Total Production Cost

Prime Cost

Total production cost.

3. Conversion Cost

Conversion cost.

COST BEHAVIOR

Cost behavior is the way in which total production cost is affected by fluctuations in the activity

(production) level.

Activity level

The activity level refers to the amount of work done, or the number of events that have occurred.

Depending on circumstances, the level of activity may refer to the volume of production in a

period, the number of items sold, the value of items sold, the number of invoices issued, the

number of invoices received, the number or units of electricity consumed, the labor turnover etc.

Basic principle

The basic principle of cost behavior is that as the level of activity rises, costs will usually rise. For

example; it will cost more to produce 500 units of output than it will cost to produce 100 units; it

will usually cost more to travel 10 km than to travel 2 km. Although the principle is based on the

common sense, but the cost accountant has to determine, for each cost elements, whether which

cost rises by how much by the change in activity level.

Division of cost by its behavior

Basically, the cost of production has two behaviors:

1. Fixed Cost
2. Variable Cost