Assignment 1st_568_Cost Management Accounting

Department of Business AdministrationBlock No. 13, Sector H-8,Allama Iqbal Open University, Islamabad.

Cost & Management Accounting (568)Assignment No. 01

Submitted to:Dr. Amir Hussain ShahDepartment of Commerce, Block 13, Allama Iqbal Open University (AIOU)Sector H-8, ISLAMABAD(0300-970 4138)

Submitted by:Muhammad Hammad Manzoor

MBA (HRM) – 2nd Semester Roll No. 508195394

508, 5th Floor, Continental Trade Centre (CTC) Block – 08, Clifton, KARACHI

(0321-584 2326, 0322-555 5901)

Cost & Management Accounting (568)

Q. No. 01(a) Accountant of M/S ABC industries submitted the following income statement at the end of its 1st financial year ended the December 31, 1983.

Sales 7000 Units @ Rs. 5/- Rs. 35000/-Cost of Goods sold

Direct Materials Rs. 10000/-Direct Labor Rs. 7500/-Factory overhead Rs. 5000/-

Total Rs. 22500/-Less Finished goods Inventory Rs. 6750/-Rs.

15750/-(3000 units @ Rs. 2.25)

Gross Profit Rs. 19250/-Less selling & administration expenses Rs.

18000/-Net Profit Rs. 1250/-

Disturbed by low profit, M.D of the industries asked you to check the statement. Your examination revealed that the following manufacturing cost were included in selling & administrative expenses:

Heat light & Power Rs. 500/-Salary of foreman Rs. 4000/-Tax on Factory Building Rs. 400/-Depreciation of Machinery Rs. 2600/-

There was no ending inventory of work in process. You are required to prepare a revised income statement and explain the reasons of variation with the help of working notes.

2By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)


Solution:

Sales:700 Units @ Rs. 5 / - Unit Rs. 35,000

Less:Cost of Goods SoldDirect Material: 10, 000Direct Labor: 7,500Foreman Salary: 4000Factory Overhead:

Heat, Light & Power: 500Tax on Factory Building: 400Depreciation of Machinery: 2600

Other Overhead: 5000Factory Overhead (500+400+2600+5000): 8500

Less:Finished Goods Inventory(3000 units @ Rs. 3.00/-) W-2 9000

Less:Cost of Goods Sold: 21000Gross Profit: 14000

Less:Selling & Admin Expenses:(18000 – 7500) W-3 10500

Net Profit: W-4 3500



WORKING NOTE:Working No: 01

Manufacturing cost of Rs. 7500 were wrongly included in selling & admin expenses. Now we will add this amount or this manufacturing cost in factory over head.

The costs are as under:

Total Amount is : Rs. 7500/-

Working No: 02(For Finding Per Unit Cost)

Old per unit cost = CGM / ProductsCGM= 22500/-

Product = 7000 Sales + 3000 Finished Goods = 10, 000= 22500 10000= 2.25 Rs (Which is Given)

Old Given = 2.25 Rs.

New Per Unit Cost =30000Products =10000

= 30000 = 3 Rs. Per unit cost (which is New) 10000


Head Light & Power: Rs. 500/-Salary of Foreman Rs. 4000/-Tax on Factory Building Rs. 400/-Depreciation of Machinery Rs. 2600/-


Now New Per Unit Cost will be. Rs. 3/-

We can check it through this method:Old Per Unit Cost – New per unit Cost

2.25 – 3.00= .75

3000 x .75 = 2250

This all working show that the profit with effect the closing inventory and the manufacturing cost will also affect the closing inventory. If manufacturing cost will rises then closing inventory of finished good will do rise. If manufacturing cost will be less than the closing inventory of finished goods will also be less.

Working No: 03Manufacturing cost of Rs. 7500/- were wrongly included in selling and administration expenses. But this amount is part of FOH. That’s why we will deduct this amount of selling & admin expeses. These manufacturing cost are as under:

Heat Light & Power Rs. 500/-

Tax on Factory Building Rs. 400/-

Depreciation of Machinery Rs. 2600/-

Total Rs. 3500/-

Selling & Admin Expense 18000Manufacturing Cost 7500

10500Working No: 04Before revised income statement profit was Rs. 1250 but after checking & examine of income statement profit is Rs. 3500/-

Reason:Due to less cost of inventory over profit reduced & due to rise cost of inventory over profit increased.





Q. No. 02(a) What edges activity based costing has on other traditional costing systems?

Answer:

Activity Based Costing:

Activity-Based Costing (ABC) is an Information System developed in the 1980s to overcome some of the limitations of traditional cost accounting and to enhance its usefulness to strategic decision-making.

An ABC/M system can serve as a useful information system to support effective operations decision-making processes.

Gupta proposed a conceptual framework, Operations Hexagon, to discuss the managerial implications of an ABC/M system for various operations management decisions related to product planning and design, quality management and control, inventory management, capacity management and work force management.

By viewing an ABC system as an enabler to improve the operations decision-making, they demonstrate that these systems enable an operations manager to enhance the quality of the decision-making process.

“Operational Hexagon”





Under the methods of costing, the cost data is collected for various activities separately i.e. production, purchase sales further it could be based even on item to item base.

Absorption Base Costing:

Under this method of costing the applied rate of factory overhead is applied, actual FOH is calculated and the difference of actual and applied FOH is adjusted to the cost of goods sold.

The difference between two is in absorption the difference of actual and applied FOH is charged or adjusted against cost of sales while in activity based costing the variances are adjusted with respective activity to which it relate i.e. material, labor, production, sales, admin and so on.

Why it was develop:

The main object for development of this system is to identify the fault and fixation of liability to respective person or department who is responsible for that act-while in absorption costing it was difficult to locate the deficiency and thus to fix the liability as all the variance were charged under one head.



Q. No. 02(B) Are the projected financial statements helpful in decision making. Discuss in detail?

Answer:

Decision Making Process:

1. The nature of decisions and the decision-making processDecisions have to be made by all individuals every day. Decision making arises because of the need to choose between alternatives. Careful consideration must begiven to all information available at the time because of the long-term consequences a decision made now will have. There are four main steps in the decision-making process:

(1) Identify each situation in which a decision is needed and determine the goals we wish to achieve.(2) Identify the relevant information needed to determine possible available alternatives.(3) Identify and obtain information needed to assess the consequences or outcomes of the alternatives.(4) Choose a course of action which will achieve the goals established in step 1.

2. The wide range of economic decisions made in the marketplaceUsually, decision making involves the use of scarce economic resources which are traded in the marketplace at a price. However, many factors apart from the monetary impact, such as personal taste, social factors, environmental factors, religious and/or moral factors, and government policy, must be considered.

Economic decisions usually involve an inwards or outwards flow of money or monetary equivalents. Economic decisions are made in many different markets, be they retail, wholesale, the stock market, local or international. Hence, if decision makers are to make informed decisions then some knowledge of accounting measurement systems, concepts and standards is desirable.

3. The nature of accounting and its main functions



Accounting is a service activity. It uses words and symbols to communicate financial information useful for decision making. The terminology and symbols used have developed from the earliest known accounting records. As a profession, accounting has evolved in response to society’s need for economic information to help people make economic decisions. Accounting is often called the ‘language of business’. To be effective, the recipient must understand the message that the sender intends to convey. You must learn the meaning of the words and symbols used by accountants. Many people with little knowledge of accounting must interpret accounting data.

Accounting has been defined as the process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions. The primary purpose of accounting is to help persons make economic decisions. In our society resources must be allocated among and within all kinds of entities. Accounting information provides the basis for making decisions about resource allocation. To be useful, data must be identified, measured, recorded, classified, summarised and communicated to potential users.

These are the critical elements of accounting. Accounting information is financial information about economic activities. All economic entities (e.g. businesses, government agencies, families, charitable entities) need such information because it is used for making economic decisions about those entities. An economic event of an entity is referred to as a transaction.

Transactions are of two types: external and internal. Computers have had a significant impact on the accounting process and hence the recording process is much more efficient and reliable.

4. The potential users of accounting informationThe ultimate objective of accounting is to provide information in reports which can be used by internal and external decision makers. The preparation of this information for users (decision makers) outside the entity is called financial accounting. Such users might be investors, or creditors of the entity. The preparation of information for use by decision makers inside the entity to plan and control operations is called management accounting. Inside users means management. Management uses the same financial statements as outside decision makers, plus internal reports and summaries prepared specifically for it.



Accounting reports can be special-purpose reports to meet the needs of a specific user group, or general-purpose reports for the general use of external users.

5. Using information to make simple economic decisionsEconomic decisions are made every day. Take the example from the text. A business opportunity is identified which will satisfy the ambitions of the entrepreneur. Some research reveals that there is an opening for such a business.Factors considered in the planning stage are investment needs, financing, estimates of operating costs and how much to charge for services, finally culminating in the decision to proceed with the business.

Role of Projected financial statements:

Projected Financial Statements are an important tool in determining the overall performance of a company. Projected financial statements have the balance sheet, income statement and cash flow statements to indicate the company performance.

The Balance Sheet shows your assets, liabilities and equity at a particular point in time. It is basically a snapshot of your financial position. The basic accounting formula is assets equal liabilities plus owner’s equity. The asset section of the balance sheet should be presented in order of liquidity starting with the most liquid assets such as cash, accounts receivable and inventory. The liabilities section should be presented in order of maturity starting with liabilities that are payable over the next year such as a demand note payable and accounts payable.

The Income Statement captures profit performance, demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital. This is often expressed in terms of sales volume, or compared to industry benchmarks.

The Statement of Cash Flows is the most critical forecast since it reflects viability rather than profitability. It can also be the most uncertain statement as projections extend into the future. Therefore, monthly cash flow is a key statement since it enables calculation of "coverage" at any given point.



Preparing projected financial statements can be very time consuming and it requires a careful analysis of the company's past and present financial health. Projected financial statements project or forecast a company's performance in the near future.

Preparing projected financial statements require careful analysis:

Prior to preparing projected financial statements, an analyst studies the financial history of the company. There may be some drawbacks, which the company may have encountered down the years. To eradicate such hurdles and for the betterment of the company's financial status, an analysis is conducted.

Factors considered for analysis of the financial health of the company: An analyst uses the following points to evaluate the position of the company:

Whether the company's operational activities are up to the mark If the company is well equipped financially Condition of the market- if the market is in the process of growth, is at

equilibrium or shriveling up. The status of the company in relation to the other companies in the

industry. Strengths, weaknesses prevailing in the management of the company,

type of product produced by the company, economic cycle of the company, accompanying hazards in the production of goods,

Role of the management's performance in company growth Risks associated with operational activities Company's past performance records.

By carefully studying the various trends in the company's past performances, the analyst tries to predict the company's performance in future. Even if the financial health of a company has remained fairly stable over the years and the projected financial statements forecast a still better growth trend in the financial statement, any unforeseen event may change the course, in the projected financial statement. The unforeseen events may occur in any part of the globe thereby impacting global economy in an adverse manner. An analyst keeps provision for such events and prepares details of a



contingency fund, which can be made use of, if the above mentioned circumstances are encountered by any company.



Q. No. 03(a) During the first week of April the workman Mr. Khalid manufactured 300 articles. He receives wages for a guaranteed 48 hours week at rate of Rs. 4/- per hour, the estimated time to produce one article is 10 minutes and under incentive scheme the time allowed is increased by 20%. Calculate his gross wages according to:

Piece work with guaranteed weekly wages Rowan premium planHalsey premium plan

Solution:

Calculation of Gross Wage under Price Work Plan:

Standard Time to Produce One Article = 10 MinutesStandard Production for one hour = 60 / 10 = 6 ArticlesStandard Production for 48 HoursOr One Week =98 x 6 = 588 ArticleActual production for a week = 300 Articles

Price Rate = Wage per hour / Standard production per hour

Wage Per Hour = Rs. 4Standard Production per Hour = 6Price Rate= 4/6 =Gross Wages = Actual Production x Rate per priceGross Wages of Mr. Khalid = 300 x 0.67 = 200

So Gross Wages of Mr. Khalid = Rs. 200.

Explanatory Note:Actual Production of Mr. Khalid is above standard production so he will be paid under price work system.



Calculation of Gross Wages under Premium Plan:

Time allowed for one Article = (10+10x20/100) = 12Minutes

Time allowed for 300 Articles = 12 x 300 = 3600

Time allowed for 300 Articles = 3600 / 60 = 60 Hours

Time Taken = 48 Hours

Times Saves = 60 – 48 = 12 Hours

Basic Rate Per House = Rs. 4.

Basic Wages:

Time Takenx Rate per hour48 x 4 = 192

Add Bonus:Time Saved / Time allowed x time take x rate12 / 60x48x4 = 38.4

Total Gross Wages = Basic Wages + Basic Bonus192 + 38.4 = 230.4



Calculation of Gross Wages under Hasley Premium Plan:

Time allowed for one Article = (10+10x20/100) = 12Minutes

Time allowed for 300 Articles = 12 x 300 = 3600

Time allowed for 300 Articles = 3600 / 60 = 60 Hours

Time Taken = 48 Hours

Times Saves = 60 – 48 = 12 Hours

Basic Rate Per House = Rs. 4.

Basic Wages:

Time Takenx Rate per hour48 x 4 = 192

Add Bonus:Time Saved x rate 1/212 / 4 x 1/2 = 24

Total Gross Wages = Basic Wages + Basic Bonus192 + 24 = 216



Q. No. 03(b) What are the causes & effects of labour turnover & what remedies are available to this problem.

Answer)-

Labour / Employees’ turnover is a much studied phenomenon Shaw et al. (1998).But there is no standard reason why people leave organization. Employee turnover is the rotation of workers around the labour market; between firms, jobs and occupations; and between the states of employment and unemployment Abassi et al. (2000). The term “turnover” is defined by Price (1977) as: the ratio of the number of organizational members who have left during the period being considered divided by the averagenumber of people in that organization during the period. Frequently, managers refer to turnover as the entire process associated with filling a vacancy: Each time a position is vacated, either voluntarily or involuntarily, a new employee must be hired and trained. This replacement cycle is known as turnover Woods, (1995).

This term is also often utilized in efforts to measure relationships of employees in an organization as they leave, regardless of reason. “Unfolding model” of voluntary turnover represents a divergence from traditional thinking (Hom and Griffeth, 1995) by focusing more on the decisional aspect of employee turnover, in other words, showing instances of voluntary turnover as decisions to quit. Indeed, the model is based on a theory of decision making, image theory Beach, (1990). The image theory describes the process of how individuals process information during decision making.

Sources of employee turnover

Job related factorsMost researchers (Bluedorn, 1982; Kalliath and Beck, 2001; Kramer et al., 1995; Peters et al., 1981; Saks, 1996) have attempted to answer the question of what determines people's intention to quit by investigating possible antecedents of employees’ intentions to quit. To date, there has been little consistency in findings, which is partly due to the diversity of employed included by the researchers and the lack of consistency in their findings.



Therefore, there are several reasons why people quit from one organisation to another or why people leave organisation. The experience of job related stress (jobstress), the range factors that lead to job related stress (stressors), lack of commitment in the organisation; and job dissatisfaction make employees to quit Firth et al. (2004). This clearly indicates that these are individual decisions which make one to quit. They are other factors like personal agency refers to concepts such as a sense of powerlessness, locus of control and personal control.

Locus control refers to the extent to which people believe that the external factors such as chance and powerful others are in control of the events which influence theirlives Firth et al. (2004). Manu et al. (2004) argue that employees quit from organization due economic reasons.

Using economic model they showed that people quit from organization due to economic reasons and these can be used to predict the labour turnover in the market. Good local labour market conditions improve organizational stability Schervish (1983). Large organizations can provide employees with better chances for advancement and higher wages and hence ensure organizational attachment (Idson and Feaster 1990). Trevor (2001) argues that local unemployment rates interact with job satisfaction to predict turnover in the market.

Role stressors also lead to employees’ turnover. Role ambiguity refers to the difference between what people expect of us on the job and what we feel we should do. This causes uncertainty about what our role should be. It can be a result of misunderstanding what is expected, how to meet the expectations, or the employee thinking the job should be different Kahn et al.

Muchinsky, 1990. Insufficient information on how to perform the job adequately, unclear expectations of peers and supervisors, ambiguity of performance evaluation methods, extensive job pressures, and lack of consensus on job functions or duties may cause employees to feel less involved and less satisfied with their jobs and careers, less committed to their organizations, and eventually display a propensity to leave the organisation (Tor et al., 1997). If roles of employees are not clearly spelled



out by management/ supervisors, this would accelerate the degree of employees quitting their jobs due to lack of role clarity.

Voluntarily vs. involuntary turnoverThere are some factors that are, in part, beyond the control of management, such as the death or incapacity of a member of staff. Other factors have been classed asinvoluntary turnover in the past such as the need to provide care for children or aged relatives. Today such factors should not be seen as involuntary turnover as both government regulation and company policies create the chance for such staff to come back to work, or to continue to work on a more flexible basis Simon et al.(2007).

Organizational factorsOrganisational instability has been shown to have a high degree of high turnover. Indications are that employees are more likely to stay when there is a predictable work environment and vice versa (Zuber, 2001). In organizations where there was a high level of inefficiency there was also a high level of staff turnover (Alexander et al., 1994). Therefore, in situations where organizations are not stable employees tend to quit and look for stable organisations because with stable organisations theywould be able to predict their career advancement.

The imposition of a quantitative approach to managing the employees led to disenchantment of staff and hence it leads to labour turnover. Therefore management should not use quantitative approach in managing its employees.

Adopting a cost oriented approach to employment costs increases labour turnover Simon et al. (2007). All these approaches should be avoided if managers want to minimize employee turnover an increase organisational competitiveness in this environment of globalization.

Employees have a strong need to be informed. Organisation with strong communication systems enjoyed lower turnover of staff (Labov, 1997). Employees feel comfortable to stay longer, in positions where they are involved in some level of the decision-making process. That is employees should fully understand about issues that affect their working atmosphere (Magner et al. (1996). But in the absence openness’ in sharing information,



employee empowerment the chances of continuity of employees are minimal. Costly et al. (1987) points out that a high labour turnover may mean poor personnel policies, poor recruitment policies, poor supervisory practices, poor grievance procedures, or lack of motivation. All these factors contribute to high employee turnover in the sense that there is no proper management practices and policies on personnel matters hence employees are notrecruited scientifically, promotion of employees are not based on spelled out policies, no grievance procedures in place and thus employees decides to quit.

Effects of employee turnoverEmployee turnover is expensive from the view of the organisation. Voluntary quits which represents an exodus of human capital investment from organisations Fair (1992) and the subsequent replacement process entails manifold costs to the organisations. These replacement costs include for example, search of the external labour market for a possible substitute, selection between competing substitutes, induction of the chosen substitute, and formal and informal training of the substitute until he or she attains performance levels equivalent to the individual who quit John (2000). Addition to these replacement costs, output would be affected to some extend or output would be maintained at the cost of overtime payment.

The reason so much attention has been paid to the issue of turnover is because turnover has some significant effects on organisations (DeMicco and Giridharan, 1987; Dyke and Strick, 1990; Cantrell and Saranakhsh, 1991; Denvir and Mcmahon, 1992).Many researchers argue that high turnover rates might have negative effects on the profitability of organisations if not managed properly (Hogan, 1992; Wasmuth and Davis, 1993; Barrows, 1990). Hogan 1992, nearly twenty years ago the direct and indirect cost of a single line employee quitting was between $ 1400 and $4000. Turnover has many hidden or invisible costs Philips (1990) and these invisible costsare result of incoming employees, co-workers closely associated with incoming employees, co-workers closely associated with departing employees and position being filled while vacant. And all these affect the profitability of the organisation. On the other hand turnover affects on customer service and satisfaction Kemal et al. (2002).



Catherine (2002) argue that turnover include other costs, such as lost productivity, lost sales, and management’s time, estimate the turnover costs of an hourly employee to be $3,000 to $10,000 each. This clearly demonstrates that turnover affects the profitability of the organization and if it’s not managed properly it would have the negative effect on the profit.

Strategies to minimize employee turnoverStrategies on how to minimize employee turnover, confronted with problems of employee turnover, management has several policy options viz. changing (or improving existing) policies towards recruitment, selection, induction, training, job design and wage payment. Policy choice, however, must be appropriate to the precise diagnosis of the problem. Employee turnover attributable to poor selection procedures, for example, is unlikely to improve were the policy modification to focus exclusively on the induction process. Equally, employee turnover attributable to wage rates which produce earnings that are not competitive with other firms in the local labour market is unlikely to decrease were the policy adjustment merely to enhance the organization’s provision of on-thejob training opportunities. Given that there is increase in direct and indirect costs of labour turnover, therefore, management are frequently exhorted to identify the reasons why people leave organization’s so that appropriate action is taken by the management. Extensive research has shown that the following categories of human capital management factors provides a core set of measures that senior management can use to increase the effectiveness of their investment in people and improve overall corporate performance of business:Employee engagement, the organization’s capacity to engage, retain, and optimize the value of its employees hinges on how well jobs are designed, how employees'time is used, and the commitment and support that is shown to employees by the management would motivate employees to stay in organization’s Knowledge accessibility, the extent of the organization’s “collaborativeness” and its capacity for making knowledge and ideas widely available to employees, would make employees to stay in the organisation. Sharing of information should be made at all levels of management.

This accessibility of information would lead to strong performance from the employees and creating strong corporate culture Meaghan et al. (2002). Therefore;



information accessibility would make employees feel that they are appreciated for their effort and chance of leaving the organisation are minimal. Workforce optimization, the organisation’s success in optimizing the performance of the employees by establishing essential processes for getting work done, providing good working conditions, establishing accountability and making good hiring choices could retain employees in their organisation. The importance of gaining better understanding of the factors related to recruitment, motivation and retention of employees is further underscored by rising personnel costs and high rates of employee turnover (Badawy, 1988; Basta and Johnson, 1989; Garden, 1989; Parden, 1981; Sherman, 1986). With increased competitiveness on globalizations, managers inmany organizations are experiencing greater pressure from top management to improve recruitment, selection, training, and retention of good employees and in the long run would encourage employees to stay in organisations.

Job involvement describes an individual’s ego involvement with work and indicates the extent to which an individual identifies psychologically with his/her job (Kanungo, 1982). Involvement in terms of internalizing values about the goodness or the importance of work made employees not to quit their jobs and these involvements are related to task characteristics. Workers who have a greater variety of tasks tend stay in the job. Task characteristics have been found to be potential determinants of turnover among employees (Couger, 1988; Couger and Kawasaki, 1980; Garden, 1989; Goldstein and Rockart, 1984). These include the five core job characteristics identified by Hackman and Oldham (1975, 1980): skill variety, which refers to the opportunity to utilize a variety of valued skills and talents on the job; task identity, or the extent to which a job requires completion of a whole and identifiable piece of work - that is, doing a job from beginning to end, with visible results; task significance, which reflects the extent to which the job has a substantial impact on the lives or work of other people, whether within or outside the organisation; job autonomy, or the extent to which the job provides freedom, independence, and discretion in scheduling work and determining procedures that the job provides; and job feedback, which refers to the extent to which the job provides information about the effectiveness of one’s performance (Tor et al., 1997).Involvement would influence job satisfaction and increase organizational commitment of the employees. Employees who are more involved in their jobs are more satisfied with their jobs and more committed to their



organization (Blau and Boal, 1989; Brooke and Price, 1989; Brooke et al., 1988; Kanungo, 1982). Job involvement has also been found to be negatively related to turnover intentions (Blat and Boal, 1989). Job satisfaction, career satisfaction, and organisational commitment reflect a positive attitude towards the organization, thus having a direct influence on employee turnover intentions. Job satisfaction, job involvement and organisational commitment are considered to be related but distinguishable attitudes (Brooke and Price, 1989). Satisfaction represents an affective response to specific aspects of the job or career and denotes the pleasurable or positive emotional state resulting from an appraisal of one’s job or career (Locke, 1976; Porter et al., 1974; Williams and Hazer, 1986).

Organisational commitment is an affective response to the whole organisation and the degree of attachment or loyalty employees feel towards the organisation. Jobinvolvement represents the extent to which employees are absorbed in or preoccupied with their jobs and the extent to which an individual identifies with his/her job (Brooke et al., 1988).The degree of commitment and loyalty can be achieved if management they enrich the jobs, empower and compensate employees properly.

Empowerment of employees could help to enhance the continuity of employees in organisations. Empowered employees where managers supervise more people thanin a traditional hierarchy and delegate more decisions to their subordinates (Malone, 1997). Managers act like coaches and help employees solve problems. Employees,he concludes, have increased responsibility. Superiors empowering subordinates by delegating responsibilities to them leads to subordinates who are more satisfiedwith their leaders and consider them to be fair and in turn to perform up to

the superior’s expectations (Keller and Dansereau, 1995). All these makes employees to be committed to the organization and chances of quitting are minimal.



Question. No. 04 (a) Cost accountant of a manufacturing

company computed the following factory overhead variances at the

end of a period.Spending variance Rs. 1000/-

favourableIdle capacity variance Rs. 1500/- unfavourableTotal estimated F.O.H for capacity attained was Rs. 10000/-Required:

a. Factory overhead appliedb. Actual F.O.H incurred

Solution:

A)- Calculation of Applied Factory Overhead:

Method – 1

Formula:Idle capacity variance = Estimated FOH for capacity attained – FOH applied

Idle capacity Variance = Rs. 1500Estimated FOH for Capacity attained 10000By putting the values:

1500 = 10000 - FOH appliedFOH Applied = 10000 - 1500FOH Applied = 8500

Method – 2

Applied FOH = 8500Estimated FOH = 10000



Idle Capacity Variance = 10000 - 8500= 1500



B)- Calculation of Actual Factory Overhead:

Method – 1

Formula:Spending variance = Estimated FOH for capacity attained – Actual FOH

Spending Variance = 1000Estimated FOH for Capacity attained 10000By putting the values:

1000 = 10000 - Actual FOHActual FOH = 10000 - 1000Actual FOH = 9000

Method – 2

Actual FOH = 9000Estimated FOH = 10000Spending Variance = 10000 - 9000

= 1000



Question. No. 04 (b) The average daily requirement of ironsheet is 50 sheets. The maximum monthly requirement of

iron sheetdo it exceed 2500 sheets and minimum requirement

during any monthis not likely to fall below 1000 sheets. The time required

to securedelivery from the supplier is usually 15 days. Economic

orderquantity is 1200 sheets.

Required:Determine minimum and maximum limits & also the order

level. Ifthree days are sufficient to receive emergency supply,

determine thedanger level as well.

Solution:

Input Data:Average Requirement = 50 Sheets / day

=1500 sheets / months (50 x 30=1500) Maximum Requirement =2500 Sheets / Month

2500 / 3083.33

Minimum Requirement =1000 sheets / Month1000 / 30

33.33EOQ = 1200 sheetsEmergency Time = 3 days



Required

1. Order Level2. Danger Level3. Minimum Level4. Maximum Level



Solution:1- Order Level Maximum Usage during lead timeOder level = Max consumption x Maximum lead time

= 83.33 x 15 = 1250 Sheets

2- Danger Level Average Consumption during lead time to get urgent supplies:-Average Consumption x Emergency time

= 50 x 3 = 150 Sheets / day

3- Minimum Level Minimum Level = Order Point – Average Usage during lead timeOrder Level – Average Requirement x Average Load Time

=1250-50(15) = 1250-750 Sheets

= 500 Sheets

4- Maximum Limits Maximum Inventory Level = Order Point – (Minimum usage during lead time) + EOQ

Order Level – (minimum requirement x min Time)+EOQ =1250-(33.33 x 1500)+1200

= 1250-500+1200 = 1950



Question. No. 05 (a) Ahsan Corporation reported the following data for its department 2.

Received in from department 27500 UnitsTransferred out to department 19750 UnitsIn process (1/3 Lab & O/H) 5250 Units

All mat were put in process in department 1. Costing department collected the following figures form department 2.

Unit cost of units received in Rs. 1.80Lab cost in department 2 Rs. 27520Applied F.O.H Rs. 15480

Required:A cost of production report for department 2.

Solution:

Quantity Schedule: UnitsUnits

Units Received from Dept. 127500

Units Transferred Out 19750Units in Process 5250Units loss in process Dept. 2 2500

27500

I. Cost. U. Cost.

Rs. Rs.

Cost Charged to Dept. 2Cost from preceding deptt. 1 49500 1.80Cost added by department



Labor Cost in Deptt. 2 27520 1.28FOH applied 15480 0.72Total Cost Added by Department 43000 3.80Adjusted lost units 0.18Total Cost to be accounted for 92500 3.98

Cost accounted for as follows:

Cost Transferred to deptt No. 319750 x 3.98 78605



Work in process ending inventoryAdjusted cost from proceeding department(5250 Units x 1.98 Rs) 10395Labor (5250 x 1/3 x 1.28) 2240FOH (5250 x 1/3 x 0.72) 1260 13985

Total Cost Accounted for92500

Computation ExplainedUnits Transferred + Still in process x stage of completions19750 Units + (5250 x 1/3)19750 Units + 1750 UnitsUnits Produced = 21500

Unit CostLabor = Total Cost / Unit ProducedLabor = 27520 / 21500 = 1.28

FOH = Total Cost / Unit ProducedFOH = 15480 / 21500 = 0.72

Adjustment for Normal LossUnit Cost after AdjustmentRs. 49500 / 25000 Units = Rs. 1.98

Unit Cost before AdjustmentRs. 49500 / 27500 Units = Rs. 1. 80

Adjustment per unit (Normal Loss)1.98 – 1.80 = .18

Working:49500 / 27500 = 1.80



Question. No. 05 (b) Distinguish between Job order costing & Process costing?

Answer)-

JOB ORDER COSTING VS PROCESS COSTING

Job Order Costing. Used by manufacturers who make special orders, customized products, or standard products produced in batches.

Process Costing. Used by manufacturers who mass produce large quantities of identical units in a continuous flow.

SIMILARITIES IN JOB ORDER AND PROCESS COSTING

Both systems determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhad costs.

Both systems allocate overhead using a predetermined overhead rate(s).

Both systems maintain perpetual inventory records with subsidiary ledgers for materials, work in process, and finished goods.

DIFFERENCES IN JOB ORDER AND PROCESS COSTING

Job Order:Costs are accumulated by job.

Cost to Make One Unit = Cost of the JobNo. of Units in the Job

Process Costing:Costs are accumulated by department for a timeperiod (for example, one month).

Department’s CostCost to Make One Unit = for the Month

in One Department No. of Units Produced during the Month



To find the total unit cost, add the unit costs incurred in each department.



FLOW OF COSTS IN A PROCESS COST SYSTEM

Assume that Advanced Technologies, a computer manufacturer, makes its product in three departments: Assembly, Testing, and Packing. Materials and component parts are added in the Assembly Department. Packing materials are added in the Packing Department.

PROCESS COSTING DEMONSTRATION PROBLEMADVANCED TECHNOLOGIES .ASSEMBLY DEPARTMENT

Advanced Technologies produces notebook computers in three departments:Assembly, Testing, and Packing. Prior to the start of the production process, all the materials and component parts needed to assemble a computer are placed into a .kit.. Manufacturing begins when the Assembly Department receives a kit and begins putting the computer together. Therefore, all materials are added at the beginningof work in the Assembly Department. Conversion costs are added evenly throughout the assembly process.



Assume that the Assembly Department of Advanced Technologies began April with 800 units in its work in process inventory. Assembly on these units was 3/4 complete at the beginning of the month. During the month, 3,000 units were started in the Assembly Department. At the end of the month, 300 of the units started were still in process; assembly on these units was 2/3 complete.

The costs associated with production in assembly during April were as follows:

Cost of units in beginning work in process inventory $228,000Cost of materials used in April 630,000Cost of direct labor and overhead for April 527,000

PROCESS COSTING PRACTICE PROBLEMADVANCED TECHNOLOGIES. TESTING DEPARTMENT

Advanced Technologies. Testing Department receives completed computers from the Assembly Department. These computers are run through several diagnostic tests to ensure they work properly.

The Testing Department began the month of April with 100 units in work in process. Testing on these units was 40% complete. During the month, 3,500 units were transferred in from assembly. There were 500 units in Testing ending work in process, which were 20% complete.

The costs associated with production in the Testing Department during April were as follows:

Cost of units in beginning work in process inventory $ 40,000Direct materials (transferred in from assembly) 1,288,000Cost of direct labor and overhead for April 158,000

SOLUTION :

STEP 1: Determine the units to be assigned costs.



STEP 2: Calculate equivalent units of production.

STEP 3: Determine the cost per equivalent unit. $1,288,000

STEP 4: Allocate costs to transferred and partially completed units.




M. Hammad Manzoor

508195394

# 508, 5th Floor, CTC

Continental Trade Centre, Block-08

Clifton - 08, KARACHI. (0321-584 2326)

Cost & Management Accounting

56801

Dr. Amir Hussain Shah

Block No. 13,

Commerce Department, AIOU, H-8

ISLAMABAD. (0300-970 4138)

Assignment 1st_568_Cost Management Accounting

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