MGT402 Handouts Set 2 by VUBuddy

MGT402 - COST & MANAGEMENT ACCOUNTING

Lesson No.

TOPICS

Page No.

Financial Statements…………………………………………………… Financial Statements (Continued) .…………………………………....... Problems in Preparation of Financial Statements………………………. Preparation of Financial Statements (Contd.)………………………….. Material ……………………………………………………………….. Control Over Material……………... …………………………………. Economic Ordering Quantity……………………. …………………… Accounting for Losses……………... …………………………………. Labor…………………………………………... ……………………... Payroll and Incentives ………………………………………………… Piece Rate Base Premium Plans………….. …………………………… Labor Turnover And labor Efficiency Ratios & Factory Overheads…... Allocation and Apportionment of FOH Cost…………………………. Factory Overhead Cost (Apportionment & Variance Analysis)………... Factory Overhead Cost (Contd.)……………………………………….. Job Order Costing System……… …………………...……………….. Process Costing System (An Introduction)……………………………. Process Costing System (Practice Question)…………………………... Process Costing system (Practice Question Contd.)……………………. Process Costing System (Practice Question Contd.)…………………… Process Costing System (Opening Balance of Work in Process)………. Process Costing System (Opening Balance of Work in Process (Contd.). Costing/Valuation of Joint and By Products………………....………… Costing/Valuation of Joint and By Products (Contd.)…………………. Marginal and Absorption Costing (Product Costing Systems)…………. Marginal and Absorption Costing Contd. (Product Costing Systems)….. Cost – Volume – Profit Analysis (Contribution Margin Approach)…… Cost – Volume – Profit Analysis (Break-Even Approach)…………....... Breakeven Analysis – Margin of Safety………………………………… Breakeven Analysis – Charts and Graphs……………………………… What is a Budget………………………………………………………. Production & Sales Budget…………………………………………….. Production Cost Budget …………………………………… Direct Labour and Factory overhead B d Operating Expense Budget and Budgeted Income Statement ………… Cash Budget……………………………………………………......

LESSON# 1 · 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 for 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: 1 Direct Material Cost

Q3. Other Production Cost

1. Direct Cost
2. 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. Costs that 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, workshop insurance.

Material Cost Labor Cost Other Production Cost

Total Production Cost

Direct Direct Direct

Prime Cost

Indirect Indirect Indirect

Factory Overhead Cost

1. Prime Cost

Direct Material +Direct Labor +Other direct production cost Prime cost .

2. Total Production Cost

Prime Cost +Factory overhead cost Total production cost .

3. Conversion Cost

+Factory overhead 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. etc.

Basic principle

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