LECTURE NOTE ON INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING (ACC 212) BY AUSTIN O. AMUGHORO 1
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LECTURE NOTE
ON
INTRODUCTION TO COST
AND
MANAGEMENT ACCOUNTING
(ACC 212)
BY
AUSTIN O. AMUGHORO
1
Course objectives
= Students should be able to differentiate between cost and management accounting
= Students should be able to prepare cost information for various types of business
= Students must be able to explain various cost concepts as well as classification
= Students must be able to explain the break even analysis.
COURSE OUTLINE
1. Nature, scope and functions of cost and management accounting.2. Principles underlying the preparation and presentation of cost
accounting for various types of Business.3. The different meaning of cost. Historical cost standard cost,
marginal cost, average cost, cost units and cost centres.4. Elements of marginal costing standard, costing and Budgetary
Control.5. The Element of cost and Classification of cost.6. Cost Accounting for material, Labour and Overhead and Equipment
Job and Process of cost Accounting7. Double Account for Cost control.8. Nature and Uses of Accounting Ratios.9. Elementary Breakeven Analysis, Current Problems and Issues.
LECTURE 1
NATURE, SCOPE AND FUNCTIONS OF COST AND MANAGEMENTACCOUNTING
There is no clear different between Cost Accounting andManagement Accounting as both are sometime used interchangeably.
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They serve both purpose to service management in making decisions,planning, control and ensure that standards and budgets are adequatelymaintained.
What is Cost? According to the institute of Cost and ManagementAccountant (ICMA) cost is the amount of expenditure actual or notionalincurred on or attributable to a specified thing or activity.
Glauter and Underwood defined Cost as essentially moneymeasurement of the sacrifices which an organization has to make inorder to achieve its objectives.
Based on this, we can say to conclude that the base objectives ofcosting are the provision of incurred cost per stock valuation, decisionmaking and cost control.
What is Cost Accounting? Cost Accounting is that part ofmanagement account which establishes budgets and standards cost andactual cost of operations process department or product and analysis ofvariance profitability or social use of funds.
It is the application of costing and cost accounting principlesmethods and techniques to the science art and practices of cost controland the ascertainment of profitability. It includes the presentation ofinformation derived therefore for the purpose of management decisionmaking. (ICMA).
What is Management Accounting? Management Accountingrepresent the application of professional skills and knowledge in theareas of cost analysis or cost accounting towards solving managerialproblems.
According to the opinion of Management Accounting PracticeCommittee of the National Association in the United States. Managementaccounting represents the process of identifying, measurement,accumulation, analysis, preparation, interpretation and communicationof financial information by management to plan, evaluate and controlwithin an organization and to ensure appropriate use and accountabilityfor its resources. It basically entails an integral part of management
3
concerned with identifying, presenting and interpreting information usedfor:
1. Formulating strategy2. Planning and controlling activities3. Decision making4. Optimizing the use of resources.
COST ACCOUNTING FUNCTIONS
Cost Accounting performs basically the same roles as managementaccounting as seen from the definition of cost accounting.
Apart from assisting management in planning and controlling, costaccounting plays the following roles which include:
1. Material pricing and stock valuation2. Provision of data for budget preparation3. Cost and benefit analysis which aids management in choosing
between alternatives.4. Comparism of actual cost with budgeted cost to determine extent of
deviation from the set standard.5. Analysis of variance to determine the causes of the deviation.6. Collection accumulation, analysis, summarization and presentation
of cost data in a manner required to assist management for internaldecision making.
4
LECTURE 2
THE DIFFERENT MEANING OF COST
DEFINITION OF TERMS
1. Different Meaning of CostA. Cost is defined by (ICMA) as the amount of expenditure (actual or
notional) incurred on or attributable to a specific thing or activity.B. Glauter and Underwood defined cost as essentially money
measurement of the sacrifices which an organization has make inorder to achieve it objectives.
C. Accountants’ definition of Cost: Accountant defined cost as aresource sacrificed or forgone to achieve a specific objective. It isusually measured as the monetary amount that must be paid toacquire goods and services.
2. Historical Cost: The historical cost concept holds that cost is theappropriate basis for initial accounting recognition of all assetsacquisition services rendered or received expenses incurred,creditors and owners interest e.t.c.
3. Standard Cost: A predetermined cost which is calculated frommanagement standards of efficient operation and the relevant
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necessary expenditure. It may be used as a basis for price fixingand for cost control through variance analysis.
4. Marginal Cost: The amount of any given volume of output bywhich aggregate cost are changed if the volume of output isincreases or decreased by one unit.
5. Cost Units: A quantitative unit of product or service in relation towhich costs are ascertained. Cost is an amalgamation of quantityand price. The cost unit is the unit by which the quantity of theproduct is measured with reference to price. E.g ton, litres,kilograms, e.t.c.
6. Cost Centres: A location function or item of equipment in respectof which costs may be ascertained and related cost units for controlpurpose.
7. Unit Cost: The price or cost per unit of the quantity of product oritem being costed. E.g N10 per Kg, N100 per litre, e.t.c.
8. Cost Allocation: The charging of discrete identifiable items of costto cost centre or cost units.
9. Cost Apportionment: The division of cost among two or more costcentres in proportion to the estimated benefits received using aproxy. E.g Square feet.
6
LECTURE 3
STANDARD COSTING AND BUDGETARY CONTROL
The costing concept of standard has been variously defined as:
A. A measure of comparism for quantity and quantitative valuesB. A normal reference point for evaluation of performanceC. A criterion for comparison D. A measure of desired performanceE. A predetermined criterion for evaluating performance.
All of the above print out to one meaning which is a predeterminedunit of evaluation of performance.
The standard may be expressed in units of output labour, hours,machine hours or monetary value as the circumstances warrants. Thissystem of costing is usually very applicable in the manufacturingindustries.
Variance: This is the different between standard performance and actualperformance. It can either be favourable or unfavourable also known asadverse.
7
A favourable variance occurs when the actual cost is less thanstandard. On the other hand, the variance is unfavourable when actualcost is more than the standard.
Differences between Standard Costing and Budgetary Control
1. Budgetary control relates to all aspects of the business, standardcosting relates only to the manufacturing costs.
2. Standard cost involves unit cost, budgetary control involves totalcost.
3. Standard costing emphasizes on reduction of costs, budgetarycontrol lays emphasis on ensuring that the company work up to itsplanned level of activity.
4. Standard costing is a more effective cost control technique beingapplied daily, hourly on material labour and overhead. As they areincurred, on the other hand budgetary controls applies its controlfunctions on a total and periodical basis, weekly, monthly andyearly.
Uses of Standard Costing
1. Performance evaluation and cost control2. Management by exception3. Cost reduction4. Planning and decision making5. Simplification of costing procedures6. Optimization of resources.
Variance Computation and Analysis
1. Material price variance formular Actual Quantity (Standard price – Actual price)
2. Labour Rate/Price Variance Actual Hour (Actual Rate – Standard Rate)
3. Material usage varianceStandard price (Actual Quantity – Standard Quantity)
4. Material cost variance(Standard Quantity x Standard price) – (Actual Quantity x Actualprice)
8
Illustration 1
The following data relates to the record of Ebony Ltd.
Standards are:
2Kg of material are used for every unit of output Standard price of material per Kg = N2.00
Actuals are:
Production = 1000 units 1,900Kg of raw materials were used Price of raw material = N2.20 per Kg.
Required: Calculate the three basic material variance in relation to theabove.
Solution:
Material price variance AQ (SP – AP)
1900kg x (N2.00 – N2.20)
1900 x (N0.20)
= N380 Unfavourable/adverse
Material usage variance SP (SQ – AQ)
SQ = 2P x Production = 2 x 1000kg = 2000kg
N2.00 (2000kg – 1900kg)
N2.00 x 1000kg
= N200 Favourable
Material Cost Variance = Price variance + Usage Variance
= N(380 + N200 favourable = N180 Unfavourable
Labour Variance
Standard
9
Direct Labour hour N28 for 2.80hours
Actual
Direct Labour 13,200 for 1200hours worked
AH (SR – AR)
1200(10 – 11) 1200 Adverse
Direct Labour Price Variance
AH (SR – AR) = 13,200 (10 – 11)
10(1200 – 13200)
10(1200) = 12,000 Adverse
Note that, Standard Labour hour = SR x Actual Labour
10 x 1200 = 12,000
Standard Rate = N 282.8 hours = N10.00
Marginal Costing
Marginal costing can be defined as the accounting system in whichvariable cost are charged to cost units and fixed costs of the period arewritten off in full against the aggregate contributions.
For any product, the different between the sales value and variable costis known as its contribution towards:
1. The general fixed cost of the business2. The overall net profit
FORMATN N
Sales RevenueLess variable product cost *Opening stock *Direct material *Direct wages *
10
Direct Expenses *Variable production overhead *
*Less closing stock (*)Add variable non production cost *Selling/distribution *Administrative *Other cost *Contribution * *
* *Less period cost *Fixed production cost *Fixed non production cost * *Net Income before taxes *Less income taxes (*)Net income after taxes *
LECTURE 4
THE ELEMENT AND CLASSIFICATION OF COST
There are three elements of cost which are material, labour and
overhead. There are the key areas which are used in determining the
actual cost of goods bought or services rendered.
Classification of Cost
This may be defined as the logical grouping of the various categories of
cost items according to a particular parameter, yardstick or basis. Cost
may therefore be classified according to:
1. Behaviour2. Nature3. Degree of control4. Functions5. Responsibilities centres6. Economic characteristics.
Behavioural Pattern of Cost
11
1. Variable Cost: Items of cost which tends to vary in direct proportion
to changes in the volume of output of cost centres to which they
relate. E.g material cost.
Cost
TVC
0 Output
2. Fixed Cost: A cost which is incurred for a period and which certain
output and turn over limits. It tends to be unattracted by
fluctuations in the level of activities. E.g wages of supervisors,
storekeepers in a factory.
Cost
TFC
Activity
Nature Classification
This may be described as a situation where the physical feature or
characteristics of the cost items are used in its classification.
1. Material cost2. Labour cost3. Overhead cost
Functional Classification
12
The cost centre structure of the business normally reflects the delegation
of responsibilities within a limited number of main functional areas of
the business, each of which will be under the control of senior manager.
1. Production cost2. Marketing cost3. Administrative cost
Controllability Classification
The degree of influence that an operating manager is able to exert on a
particular item of cost can be used as a basis of cost classification.
1. Controllable cost: Item of cost that an operating manager can
control or manipulate.2. Non controllable cost: By their nature, these categories of cost
items are not within the influence or control of the operating
manager.
Economic Characteristics Classification
In this case, cost items are classified based on their impact on a
particular decision to be taken.
1. Opportunity cost2. Incremental cost3. Avoidable cost4. Relevant cost5. Sunk cost
Responsibility Classification: Cost items may also be classified
according to the specific responsibility centre in which cost is incurred
under this classification responsibility centres are identified as follows:
1. Cost centre2. Profit centres3. Investment centres
Other Classes of Cost
13
1. Period cost: Period costs are all cost in the income statement other
than cost of goods sold.2. Inventoriable cost: These are all cost of a product that are regarded
as an asset when they are incurred and then as cost of goods sold
when the product is sold.
LECTURE 5
MATERIAL CONTROL AND PRICING
The purchase department receives and processes purchase
requisitions from the storekeeper, the production department, the plant
engineer and other heads of departments
Bin card: Bin cards are designed to record the physical movement
of materials in and out of the store. The important contents of the bin
card are:
Material description, code number, location, date, receipt, quantity,
issue quantity, balance and signature column.
Other important documentation into material administrations are:
Material issue note Material requisition note Material transfer note Material return note
Stock Control
Stock control includes all the techniques used by store managers to
ensure that materials are available when they are required, in the
14
required quantity price and quality without the risk of stock out or
overstocking.
Inventory Control Level
1. Maximum stock level 2. Minimum stock level3. Reorder level4. Reorder quantity5. Average stock level
Calculation of Control Levels
1. Reorder level = Maximum usage x maximum lead time2. Minimum stock level = Reorder level – (Average usage in lead time)3. Maximum stock level = Reorder level + EOQ – Minimum usage in
minimum lead time
Note that EOQ = Economic Reorder quantity or Economic order
quantity.
Illustration 1: Given the data below calculate the necessary control
levels.
Reorder Quantity 900 units
Lead time 10 – 14 days
Minimum usage 30 units per day
Maximum usage 65 units per day
Average consumption 50 units
EOQ = 2000 units
Solution
1. Reorder level = 65 x 14 = 910 units2. Minimum stock level = 910 – (50 x 12)
= 910 – 600
= 310 units
3. Maximum stock level = 910 + 2000 – (30 x 10)
15
= 2910 – 300 = 2610 units
4. Average stock carriedMinimum level + (Reorder quantity)
2 310 + 900/2 310 + 450 = 760 units
Economic Reorder Quantity
This is the amount of material to be ordered at one time at least cost. The
formular = EOQ = √2x 700 x 6000
1.2
= √7,000,000
= 2646 units
Material Pricing and Issue
Materials are purchased at different prices and held in stores awaiting
issues to production. There are a number of methods a company can
adopt by issue of materials to production department. The important
thing is that whichever that is used management should be consistent in
its application.
FIFO (First in first out): This method is based on the assumption that
the first stock item to come into the store is the first item to be issued
out. It ensures the issue of stock at actual price avoiding unrealized
profits or losses.
LIFO: By contrast LIFO meaning last in first out assumes that the last
stock to come into the store is the first item to be issue out. LIFO price
refers to the price paid for the material last taken into stock from which
the material to be price could have been drawn. Its major merit is that it
16
gives most current cost of product thereby ensuring the use of the
matching concept to yield realistic profits.
Other methods of pricing materials are:
1. Standard price2. Simple Average3. Weighted Average4. Base Stock.
ILLUSTRATION 1:
Wale Cole & Co. Ltd materials transactions and usage in April 1999 were
as follows:
April 1 Balance 40 units at N2.50 each.April 3 Purchased 200 units at N2.70 each.April 7 Purchased 60 units at N3.00 eachApril 12 issues 100 units for production.April 22 Purchased 240 units at N4.00 each.April 30 issued 80 units for production.You are required to calculate:
1. Cost of materials used.2. Value of inventory at the end of the month, using the following.a. LIFOb. FIFO
Solution LIFO
Date Qty
UnitPrice(N)
Value
(N)
Qty
UnitPrice(N)
Value
(N)
Qty
UnitPrice(N)
Value
(N)April 1 40 2.50 100April 3 20
02.70 540 24
0640
April 7 60 3.00 180 300
820
April12
6040
3.002.70
180 200
532
April22
240
4.00 960 440
1492
April 80 4.00 320 36 1172
17
30 0
The cost material used 608The cost of inventory at the month end is 1172
FIFODate Qt
yUnitPrice(N)
Value
(N)
Qty
UnitPrice(N)
Value
(N)
Qty
UnitPrice(N)
Value
(N)April 1 40 2.50 100April 3 20
02.70 540 24
0640
April 7 60 3.00 180 300
820
April12
4060
2.502.70
100162
200
558
April22
240
4.00 960 440
1518
April30
80 2.70 216 360
1302
Cost of material used N478The value of inventory at the end of the month is N1,302
Overhead Costing/Apportionment Overhead costs are first and simply allocated i.e attributed directly to thecost centre and service unit that incurred them. The sharing orapportionment of factory overhead to products starts with theestablishment or recognition of cost accumulation centres otherwiserefers to as overhead cost centres. Some examples of overhead costs areindirect labour, indirect materials, cost of fuel, rent, insurance, rate,factory light, security, research, general supervision, e.t.c.
Bases of Apportionment1. Space related bases2. Value related bases3. Activity related basis 4. Material related basis5. Labour related basis.
ILLUSTRATION
18
O Ben Developers Nig. Ltd, Onitsha has four cost centres A, B, C and Das production departments and E as service department. The estimatedcosts of factory overhead are as follows:
NRents 2,000Repair 1,200Depreciation 900Light 200Supervision 3,000Insurance of stock 1,000Employees insurance 300Power 1,800The following data are available.Cost Centres
A B C DCost sq.meter
150 110 90 50
No. of workers 24 16 12 8Total wages N8,00
0N6,00
0N4,00
0N2,00
0Value of plant 24,000 18,000 12,000 6,000Value of stock 15,000 9,000 6,000 Required: An equitable primary apportionment of the estimated overheadamong the cost centres.
SolutionCost Centre
Overhead Bases Total AN
BN
CN
DN
Rent Areas 2,000 750 550 450 250Repairs Plant 1,200 480 380 240 120Depreciation Plant 900 360 270 180 90Light Area 200 75 55 45 25Supervision Works 3,000 1,200 800 600 400Insurance ofstock
Stock 1,000 500 300 200
Insurance Workers
300 120 80 60 40
Power plant Plant 1,800 720 540 360 18010,40 4,20 2,95 2,13 1,10
19
0 5 5 5 5
Job CostingThis is the techniques used in organization which undertake work onspecific jobs, orders or contracts that can be identified all through thevarious level or stages of production. The main objective of job costing isto attribute all related costs to the job for which they were incurred, witha view to;
A. Establish the profit or loss on each jobB. Providing a valuation of work in progress.
Job Cost Sheet/AccountThe Job Cost Account records the complete breakdown of direct cost ofmaterial, labour and expenses and factory overhead for the wholemanufacturing order. This cost data compilation is gradually done as thework progresses. The design of a job cost sheet is basically depends onthe amount of elaborate information required by the management of thebusiness.
FORMAT OF A JOB COST SHEETJob Cost Sheet
Customer’s Ref:_______ Commenced________ Order No_________Specification:_________ Finished___________ Quantity__________
Date: Details Unit CostN K
Amount N K
Direct material:Total materials
**
**
* * *Direct Labour:Total Direct labour
**
**
Direct Expenses: * *
20
Total Direct Expenses * * * * *Product overhead I U
**
**
* * *
Total of production O/hProduction costAdministrative overheadSelling overhead
**
**
* * *
TotalAdmin/Selling/Distrit
* * *
Total cost ***** * *
Summary of Estimate No:____________ Date:_______________Direct
MaterialN
Directlabour
N
DirectExpense
sN
ProductO/h
N
Selling/DistN
TotalEstimat
eN
** ** ** ** ** **Profit **
Sellingprice
**
ILLUSTRATION 1For some years the Skinner Industries Ltd. absorbed overhead by meansof a blanket overhead rate based on the direct labour used. As from 1st
April 1999, it decides to employ separate rates for the three mainproduction units material handling machine and assembly the estimatedof cost and output upon which overhead absorption rates arepredetermined remain unchanged as are the rate of absorption ofmarketing costs.Before 1st AprilN1.00 per direct labour hourMarketing overhead 20 percent of production cost 1st April and AfterProduction overhead.Material handling 5 percent of direct material costMachining N1.50 per machine hour
21
Assembly N0.60 percent labour hour.Marketing overhead 20 percent of production costDirect cost of job PUL 800 have beenDirect material cost 800Direct wages
Machinery 200 hours at N1.20 240Assembly 100 hours at N0.80 80
1,120The contract price of the job is N1,792 and it requires 184 machinehours to complete.You are required to show the job cost sheet for job PUL 800
(a) As it would appear if the job has been completed fully in the month ofMarch and
(b) As it would appear if the job were completed fully in the month of April.
Solution Customer Ref:_______ Commenced: March 1999 Order No: PUC 800Description:__________ Finished March 1999 Quantity______________
Date Details Units costN K
Amount(N)
March Direct material cost 800Direct wages:Machinery 200 hoursAssembly 100 hours
10
2080
24080
Production O/h 300 hoursProduction cost 1 0
1120 300
Marketing O/h 20% of 1420Total cost
1420 284
Profit 1704 88
Selling price 1792
Job Cost SheetCustomer Ref:_______ Commenced: March 1999 Order No: PUC 800Description:__________ Finished March 1999 Quantity__________
Date Details Units costN K
Amount(N)
March Direct material cost 800Direct wages:Machinery 200 hoursAssembly 100 hours
10
2080
24080
Production Overhead
22
Material handling 5% of N800Machining 184 hoursAssembly 100 hours
10
6080
40270 80
Production costMarketing O/h 20% of N1496
1496 299
Total costLoss
1795 (3)
Selling price 1792
Process CostingProcess Costing is a costing method used to ascertain the cost of aproduct at each:
a. Production processb. Production operationc. Stage of manufacture.
Features/Conditions1. The product shall be produced in one single process.2. The output of one process becomes the input of another.3. One simultaneous production may result in more than one product e.g
joint product – main & byproduct.
Areas of Applications1. Chemical processing2. Food processing3. Factice4. Canning factories5. Paint making, e.t.c
ILLUSTRATION 1The following are extracted from the books of Lady T.N Ltd in the monthof January 1992. Production units for the month 30,000 units.Direct materials consumed NDirect labour 30,000Overheads 20,000Factory cost 10,000
23
60,000Cost per units N 60,000
30,000 = N2.00 per unit.
Process Loss, Scrap and WastageWaste: It is the either a valueless or a residue or a material lost in theproduction process and which has no value. It is part of normal loss.Scrap: Scrap on the other hand is an incidental residue arising fromproduction process in small quantity and loss value.Process losses: These may occur due to the operating method and or theinefficiency in operation. It can either be normal loss which cost isabsorbed by good production or abnormal lost which are reportedseparately as exceptional case.
ILLUSTRATION IIO. Odo Ltd has the following cost records:* Subject of manufacture is XYZ product.* 1000 units of materials at 20k per unit were supplied to the 1st process.
* Direct labour of N50 and production overhead of N25 can be sold atscrap at 10k per unit.
* The production process yielded 850 units.Required: Prepare process 1 Account and show your working.
Solution
Units CPU Amount
Units
CPU Amount
Direct Material
1000 0.20
200 NormalLoss
100 0.05
5
Direct 50 Abnormal 50 0.3 15
24
labour Loss 0Production O/h
25 TransfertoNext
850 0.30
255
1000 275 1000 275 Estimated lossNormal 10% x 1000 = 10050% can be sold as scrap at 10k 50 x 0.10 = N5Cost per unit = N 5.00 = 0.05 or 5k
100Abnormal lossEstimated production = 900 unitsActual production = 850 unitsCost of normal production = N275 – N5 = N270Cost of normal production per unit = 270 = N0.30 or 30k
900Cost of abnormal loss N0.30 x 50 units N 15
Note: Cost of abnormal loss = Cost Normal production x Abnormal loss units
Normal production unitsCost of normal production = Factory cost – Normal loss) Scrap
Abnormal gainSometimes abnormal gains results from such favorable factors asincreased in efficiency, high quality material, e.t.c. Its value will becomputed debited to process account and credited to abnormal gainaccount.
ILLUSTRATION IIISam Ltd Manufacturers product P 1200 units of materials at 20k were supplied to the first process in
period T labour cost amounted to N60 and production overheadN30. The normal process loss is estimated at 10% of which half canbe realized as scrap at 10k per unit.
Actual production were 1,120 units
25
Required to prepare:Process Account and Abnormal Gain Account, show your working.
SolutionUnits CPU Amoun
tUnit
sCPU Amoun
tDirect Material
1200 0.20
240 NormalLoss
120 0.05
6
Directlabour
60 TransfertoProcess II
1120 0.30
336
Production O/h
30
Abnormalgain
40 0.30
12
1240 342 1240 342
WorkingsNormal loss = 10% x 1200 units = 120 units.One half sold as scrap = 60 units x N0.10 = N6Abnormal gainEstimated production 1080 unitsActual product 1120 unitsAbnormal gain 40 unitsCost of normal production N330 – N6 = N324Cost of factory cost – Normal loss(240 + 60 + 30) – (6)Cost per normal production units 324 = N0.30 or 30k
1080
Cost Volume Profit AnalysisThe cost – Volume profit referred to as CUP for short or marginal costingis a profit planning techniques used in studying the relationshipbetween:
1. Volume and cost2. Prices and profits: It is a method of determining how changes in
variable like unit variable cost, unit sales price, total price cost perperiod, sales volume and sales wix will affect profit.
26
Breakeven AnalysisBreakeven analysis is a major tool in the set of tools used in determiningthe best combination of resources it achieves the objective of anorganization. It also refers to be system of analysis of cost into fixed andvariable elements to determine the likely profit at any level of activity.The are two method in BEP Analysis:
1. Formular Approach2. Chart or Graphical Approach
The Formular Approach1. BEP (Units) = Fixed Cost
Contribution per unitsWhere contribution = Sales {SP} – Variable cost {VC per unit}
2. BEP (Sales) = Fixed cost Contribution margin ratio {CMR = SP – VC
SPOr
BEP units x Selling priceOr
Fixed cost x Selling price per unit Contribution per unit
3. The level of sales in units required to achieve a predeterminedprofit before tax (PBT)Unit required (PBT) = Fixed cost + PBT
Contribution per unit
Sales level to achieve a predetermined profit after tax.(PBT) unit required (PAT) = Fixed cost + PAT
1 – tax rateContribution per unit
Sales value N Fixed cost + Profit after tax Contribution margin ratio
3. Level of sales in targeted profit = Fixed cost + Targeted profit x Selling price/unitContribution per unit
27
Assumption of Breakdown Analysis1. It is assumed there will be no uncertainty2. All other variable cost remain constant3. All cost can be divided into fixed cost and variable cost4. There are no stock level changes5. It apply to the relevant level of activity6. Profit are calculated on variable costing basis7. The only factor affecting revenue and cost is activity level.
ILLUSTRATION 1Beta Nig. Ltd has the following information relating to the businessdealings as provided by the Cost Accountant.Variable cost
Inventory cost – N40 Selling price = N50Sales commission – N 3
N 43Fixed costRent N48,000Showroom N172,000Utilities N52,000Other charges N 25,000
N 300,000
It is the company policy to work with a targeted profit of N190,000. Withefficiency in management, there was a reduction in fixed cost amountingto N10,000. Calculate:a. BEP (Units)b. BEP (Sales)c. Required sales level at a targeted profit of N190,000.d. New BEP (Units) as a result of reduction in fixed cost.
Solutiona. BEP (units) = Fixed cost
Contribution per unitsContribution = Sales (SP) – Variable cost (VC per unit)
N 300,000 = N 300,00050,000 – 43,000 7
= 42,857 units
28
b. BEP (Sales)(N) = BEP units x Selling price = 42,875 x N50 = N2,142,875
c. (BEP) at a targeted profits of N190,000Fixed Cost + Targeted profitContribution margin/units
N 300,000 + 190,000 7
= 70,000 units
d. BEP (Sales) (N) 70,000 x 50 = N3,500,000
BEP (units) reduced fixed costFixed cost = N300,000 – N10,000 = N290,000BEP (Units) = 290,000
7= 41,429 units
Recommended Texts
1 Cost and Management Accounting by Pius V.C Okoye
2 Costing by Tery Lucy
3 Management Accounting 4th edition, by Adeniyi A. Adeniyi
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