Management Information

Management Accounting 1 (MA1)

Course Notes
For exams from 1 September 2022 to 31 August 2023

ISBN: 1781 4728 0023 5

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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written
permission of BPP Learning Media Ltd.

The contents of this book are intended as a guide and not professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty
that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this book.

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 MA1 Management Information
Study Programme
Page
Introduction to the exam and the course ................................................................................................................. 4
Skills bank ............................................................................................................................................................... 9

1 Business organisation and accounting ......................................................................................................... 21

2 Introduction to management Information...................................................................................................... 33
3 Cost units, cost classification and profit reporting ........................................................................................ 45
4 Management responsibility and performance measurement........................................................................ 61
5 Source documents and coding..................................................................................................................... 73
Checkpoint 1 Additional study guidance 91

6 Accounting for material and labour costs ..................................................................................................... 97

7 Overhead costs .......................................................................................................................................... 113
8 Job, batch and process costing.................................................................................................................. 129
Checkpoint 2 Additional study guidance 143

9 The basics of using spreadsheets.............................................................................................................. 147

10 Using spreadsheets to present information ................................................................................................ 157
Checkpoint 3 Additional study guidance 169

11 Answers to lecture examples...................................................................................................................... 173

12 Appendix A: Chapter summaries …………………………………………………........................................... 195

Prepare for and book your Computer Based Exam (CBE)

You should plan to sit your CBE within a few weeks of finishing all phases of the study programme whilst your
knowledge is still fresh. In preparation use the Learning Media Practice & Revision Kit to test yourself on as
many questions as you can, revising from the Course Notes and Passcards any areas of the syllabus that cause
you problems.

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 INTRODUCTION

Introduction to MA1 Management Information

Overall aim of the syllabus
To develop knowledge and understanding of providing basic management information in an organisation to
support management in planning and decision making.

Rationale
The syllabus for MA1 Management Information introduces candidates to basic costing principles and techniques
and the tools with which to use these principles and techniques. The syllabus starts by introducing business
organisations and the specific role of management accountant within the organisation. The next section deals
with cost classification followed by the identification of sources of information and coding, to ensure that cost
information is properly classified. The syllabus then introduces basic techniques for recording costs followed by
how to provide information.
It finally introduces candidates to spreadsheets as an important tool in supporting cost and management
accounting.

The syllabus
The broad syllabus headings are:

The nature and purpose of cost and

management accounting (A)

Source documents and coding

(B)

Cost classification and measurement

(C)

Spreadsheets
(E)

Recording costs
(D)

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 INTRODUCTION

Main capabilities
On successful completion of this exam, candidates should be able to:
A Explain the nature and purpose of cost and management accounting
B Identify source documents in a costing systems and correctly code data
C Classify costs by nature, behaviour and purpose
D Record costs for material, labour and expenses
E Use the spreadsheet system in Microsoft Excel

Links with other modules

Management Information is the first of the management accounting modules in the Foundations in Accountancy
qualification. It is assumed knowledge for exam MA2 Managing Costs and Finance and FMA/MA Management
Accounting.

Assessment method and format of the exam

The assessment will be a two hour computer-based exam and all questions are compulsory.
Questions will assess all parts of the syllabus and will contain both computational and non-computational
elements.
The exam comprises 50 multiple choice questions worth two marks each.
The pass mark is 50%.

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 INTRODUCTION

Taught phase aims

Achieving ACCA's study guide outcomes

A The nature and purpose of cost and management accounting

A1 Nature of business organisation and the accounting systems
A2 Nature and purpose of management information

B Source documents and coding

B1 Sources of information
B2 Coding system

C Cost classification and measurement

C1 Cost classification and behaviour
C2 Cost units, cost centres, profit centres and investment centres

D Recording costs
D1 Accounting for materials
D2 Accounting for labour
D3 Accounting for other expenses
D4 Accounting for product costs

E The spreadsheet system

E1 Spreadsheets overview
E2 Creating and using spreadsheets
E3 Presenting and printing spreadsheet data/information

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 INTRODUCTION

Analysis of the specimen paper

Please note that the ACCA will not publish past exam papers. The analysis of the specimen paper should
therefore be used as a guide to both the areas that will be examined and the mix between narrative and
computational questions.

Computational
Narrative
The nature and purpose of cost and management accounting
Nature of business organisation and the accounting systems 4 1
Nature and purpose of management information 3

Source documents and coding

Source of information 1
Coding system 1

Cost classification and measurement

Cost classification and behaviour 4
Cost units, cost centres, profit centres, and investment centres 2 3

Recording costs
Accounting for materials 2 2
Accounting for labour 2 3
Accounting for other expenses 1 2
Accounting for product costs 1 4

Providing information
Information for comparison 2 1
Reporting management information 3

The spreadsheet system

Spreadsheet system overview 3
Using computer spreadsheets 3
Presenting information in spreadsheets 2

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 INTRODUCTION

Key to icons
Section reference in the Interactive Text
Further reading is needed on this area to consolidate your knowledge.

Formula to learn

Formula given in exam

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 Skills bank

This section explains and demonstrates the key skills

required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this paper.

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 SKILLS BANK

Key skills required to pass

Our experience of preparing students for this type of exam suggests that to pass this paper you will need to
develop a number of key skills.

1 Learning and 2 Logical

applying the approaches to
syllabus theory objective test
questions

3 Effective use
of your time in
the exam

Each of these key skills is analysed on the following pages.

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 SKILLS BANK

Skill 1 – Learning and applying the syllabus theory

1 What do I need to know to do well in the exam?

Management Information is a broad syllabus that is examined by multiple choice questions. This means that you
need a broad and yet quite detailed knowledge of the syllabus as well as an understanding of the concepts and
techniques involved.
The type of knowledge that you have to acquire includes the following:
Theoretical knowledge – the fundamental definitions and basic thinking behind different management
accounting techniques. These will often be tested in narrative questions.
Practical knowledge – the application of techniques to ‘real life’ situations. These will often be tested in
numerical questions.
In this section we will look at approaches that you can take to help you learn the key elements of the knowledge
in the syllabus, and develop your application skills.

2 Learning the theory

In the exam you will encounter questions that test your knowledge of key management accounting theory. These
are the types of questions where there isn’t really anything to work out, you just need to have the facts stored in
your memory. Therefore you need to do the following to help you learn the theory:
1 For each new topic or technique, make sure you learn a short definition that contains the key elements of
what it’s all about.
2 Add some further notes that include the most important bits of detail for each topic or technique. This
should include formulae for numerical techniques. You may like to use the overview diagrams in the notes
as a base.
Doing this will set you on your way to achieving the breadth of knowledge you need across the syllabus. It will
also give you an excellent foundation on which to begin to apply your knowledge in the wide range of questions
you’ll see in the exam.

3 Application
Being able to apply your fundamental syllabus knowledge to the situations presented in exam questions is the
skill that will make the difference between passing and failing the exam.
During your studies, you must gradually build up your exposure to exam style questions so that you can become
‘flexible’ and able to deal with whatever questions you see in your exam.
Don’t be discouraged if you struggle with application questions on a particular topic – just take this as an
indication that there are still a few gaps in your knowledge of the theory. You can then pinpoint exactly where you
need to review your notes before continuing with more question practice. This really is an excellent way to
prepare for the exam.
Two example questions are included below – they both require application of knowledge to the situation you are
given in the question:

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A company uses an overhead absorption rate of $3.50 per machine hour,

based on 32,000 budgeted machine hours for the period. During the same
period the actual total overhead expenditure amounted to $108,875 and
30,000 machine hours were recorded on actual production.

By how much was the total overhead under or over absorbed for the
Application

period?

A Under absorbed by $3,875

B Under absorbed by $7,000

C Over absorbed by $3,875

D Over absorbed by $7,000

This question needs you to think of what you know about the use of an overhead absorption rate (OAR) to deal
with overheads in an absorption costing environment (ie the theory). To get the correct answer you must then
apply this to the situation you are given.
There are a large number of ways that the examiner can test your ability to apply your knowledge of OARs in
situations like these – you need to (a) understand the theory and (b) practise applying it until you are able to cope
with a wide range of possible exam questions.
The following example also requires you to apply your knowledge, this time of cost classification, but in a purely
narrative format, without any calculations:

A manufacturing organisation incurs costs relating to the following:

(1) Commission payable to salespersons
(2) Inspecting all products
(3) Packing the products at the end of the manufacturing process prior
to moving them to the warehouse
Application

Which of these costs are classified as production costs?

A (1) and (2) only

B (1) and (3) only

C (2) and (3) only

D (1), (2) and (3)

In this question you need to compare the situations you are given in (1), (2) and (3) to what you know about the
definition of production costs, and decide which ones fit with your definition and which ones don’t.
We’ll return to this type of question in the next section and consider how to approach multiple choice options
such as these.

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Skills practice
Learn the content of the syllabus actively and then practise applying it by:
1 Reading your notes
2 Making condensed versions of your notes either as separate lists or use the overview
diagrams
3 Recording a basic definition and key points for each new topic or technique
4 Practising as many questions as you can, and using them to identify any weaknesses in your
knowledge

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Skill 2 – Logical approaches to multiple choice questions

For multiple choice questions, there are some established approaches that you can follow to help you
maximise your marks. These are discussed in more detail below.

1 What to do if you know the answer to a multiple choice question

If you know the answer to a question you should:
1 Locate the correct answer
2 Check the other answers
3 Read the question again – be very careful with questions that contain negatives, like ‘which of the
following is NOT…’
4 Confirm that you have the correct answer
This systematic check will ensure that you do not throw away marks when you really do know the answer.

2 What to do if more than one multiple choice answer appears plausible

Sometimes more than one option can seem to answer the question. In this case you have to select the most
correct answer. The approach adopted above is useful here too but this time you have to think through the
alternatives a bit more.

Which of the following states the responsibility of the manager of an

investment centre?

A Responsibility for costs and revenues but not investments

B Responsibility for revenues, costs and investments

C Responsibility for investments only

D Responsibility for profits only

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If you don’t know the answer you can adopt a three-step approach as follows:

STEP Eliminate the incorrect answer(s)

1 You may remember that an investment centre is one where the manager has responsibility for
investments, and answer A says 'not investments' and D says 'profits only' so these can be
eliminated.

STEP Assess the remaining answers

2 You know that an investment centre manager has responsibility for investments.
However, both B and C still seem plausible; so...

STEP Read the question again…

3 Although both the remaining answers refer to investments, you have to decide whether the
answer is investments only or costs, revenues and investments. Is it likely that a manager would
be responsible for investments alone without regard for the profit (ie costs and revenues)?
Probably not.
The most likely answer therefore seems to be B.

This systematic approach helps you to break a question down and work through to find the correct answer
logically.

3 What to do if you still don’t know the answer to a multiple choice

question
If you have been through the above steps and cannot identify a preferred answer then you have to guess!

 What you SHOULD NOT do

Two main things to avoid:
1 Waste time – the question is only a small number of marks so time spent dithering over a multiple choice
question could leave you with insufficient time for the rest of the paper.
2 Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the marks if you don’t offer an answer is zero!

 What you SHOULD do

Having used the three-step approach – Eliminate, Assess, Read the question – to narrow down your possible
answers go with the one that feels right. And move on.

If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.

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4 Multiple choice numerical questions – beware the ‘distracters’

The general approaches described above apply equally to narrative and numerical questions but there is a
further important consideration that relates to numerical questions where calculations are involved.
The majority of numerical questions will have four possible answers – one correct answer and three incorrect
answers. The incorrect answers are known as ‘distracters’ and they are not random numbers! – the examining
team goes to great lengths to produce distracters that represent the answers that students will arrive at if they go
slightly wrong in their calculations. You need to develop a sound technique that means you do not fall into this
trap!

 What you SHOULD do

You must concentrate and read numerical questions carefully to ensure that you do not miss vital information.
If the answer you arrive at is amongst the available options, just take a moment to check that you’ve answered
the question properly, and have not fallen for one of the distracters.
If your answer is not amongst the available options then you must have gone wrong somewhere. Read the
question again carefully and see if you have missed anything, or if there are any clues that will allow you to
eliminate any wrong answers. Remember to guess if all else fails!

Skills practice
1 Practise as many multiple choice questions as possible.
2 If you don’t know the answer to a question – don’t just go to the answer at the back or just
guess – use the three-step approach described above.

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Skill 3 – Effective use of your time in the exam

It is important that you use your time wisely in the exam itself.

1 Before the exam

In order to start the exam in the best frame of mind, you should ensure that you are practically prepared.

STEP Before the exam

1 Make sure that you are registered with the ACCA and that your exam centre has your exam
booking. This is important because you cannot sit the exam if you are not a registered student.

STEP At the beginning of the exam

2 You want to make the start of the exam as stress free as possible so ensure you have the
following available:
 Photo identification and your exam attendance docket
 Pens and a calculator

2 Exam approach

 What you SHOULD NOT do

Panic! For many questions you will get the answer straight away and so you are likely to have a bit more time to
think about some of the others. The examining team has commented that a number of students struggle with the
exam because they rush through the questions to avoid running out of time, and make mistakes as a result.

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 What you SHOULD do

It is important to start the exam positively and keep focused to maximise the use of your time.

STEP Work through questions systematically

3 Start at Question 1 and begin answering from there working through questions in order.
If you find a question that you don’t know the answer to and want to come back to it later then go
onto the next question.

STEP Monitor your time

4 Do a quick check after each half hour to assess how well you are managing your time.
It may be necessary to move on more quickly from questions that you are struggling with so you get a
chance to make a considered attempt at all of the questions.

STEP Check your answers before the end of the exam

5 Having gone through the exam once you should:

1 Go back to any unanswered questions and make your best attempt at an answer.
2 Go through the exam a second time checking you are happy with all the options you have
selected.

If you have taken this logical and systematic approach you should have given yourself the best chance of doing
well in the exam.

Skills practice
1 Always check your answers before looking at the solutions in the back of the book.
2 Practise exams to time (2 hours) towards the end of your revision phase.

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 Business organisation
and accounting

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Describe the organisation, and main functions, of an office as a centre for information A1 (a)
and administration.
Describe the function and use of a manual of policies, procedures and best practices. A1 (b)
Identify the main types of transactions undertaken by a business and the key people A1 (c)
involved in initiating, processing and completing transactions.
Explain the need for effective control over transactions. A1 (d)
Explain and illustrate the principles and practice of double entry bookkeeping. A1 (e)
Describe and illustrate the use of ledgers and prime entry records in both integrated A1 (f)
and interlocking accounting systems.
Identify the key features, functions and benefits of a computerised accounting A1 (g)
system.

Exam context
Questions on this area are likely to be narrative. They are likely to address areas such as the functions of
a business department and controls required over business transactions. No matter what the sector or
size of an entity, it would need to ensure it has an efficient and effective system of administration and
accounting.

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 1: BUSINESS ORGANISATION AND ACCOUNTING

Overview

Business organisation and

accounting

Computerised Cost ledger Policy manual Functions

accounting systems accounting

Integrated system Interlocking system

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1 Office organisation and functions

1.1 The office in an organisation is a centre for information and administration.

1.2 There are a number of areas or functions to be administered and managed within a
business.

Lecture example 1
Required
What are the main functions you would expect to see in an organisation?

Solution

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Lecture example 2
Required
What are the key responsibilities of each of the functions identified in Lecture example 1?

Solution

(a) Purchasing

(b) Human resources

(c) General administration

(d) Finance

(e) Selling and marketing

(f) Stores

2 Policy manual
2.1 Larger organisations use policy manuals to detail the correct procedures and practices to be
followed by all of the various functions of the business.

2.2 This helps management control the operations of the business by setting out how
employees should go about their daily work and best practices.

2.3 All employees should read the areas of the policy manual relevant to their function and keep
the manual available for easy reference.

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Lecture example 3
Required
Suggest three sets of procedures that you may find in a policy manual.

Solution

3 Main types of transactions of a business and control

over transactions
3.1 The main types of transactions that most businesses enter into are sales, purchases, paying
expenses, paying employees and purchasing non-current assets.

3.2 In order for management to control the transactions of the business there must be a system
of authorisation of transactions in place.

3.3 In particular, this means that management must have control over the following areas:
 Sales on credit to new customers
 Purchases of non-current assets
 Payment of wages

4 Double entry bookkeeping

4.1 The basic principle is that for every debit entry there must be an equal and opposite credit
entry.
4.2 Debit entries in ledger accounts increase expenses or assets and decrease income or
liabilities.

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4.3 Credit entries in ledger accounts increase income and liabilities and decrease expenses and
assets.

4.4 The owner of a business is treated as a separate entity to the business itself and the amount
that the owner puts into the business is known as capital.

4.5 The accounting equation will always be:

Assets − Liabilities = Capital + Profit − Drawings

5 Cost ledger accounting

5.1 Individual transactions are recorded initially in books of prime entry. The main types of
transactions and their related book of prime entry are:
Sales invoices sent out – sales day book
Credit notes sent out – sales returns day book
Purchase invoices received – purchase day book
Credit notes received – purchase returns day book
Cash/cheque receipts – cash received book
Cash/cheque payments – cash payments book
Petty cash receipts/payments – petty cash book

5.2 Only the totals of the books of prime entry are posted to the ledger accounts, not every
individual transaction.

5.3 Costs relating to the purchase and/or production of products for sale by a company are
recorded in the cost ledger, for example purchases of materials, production staff labour cost
and depreciation of equipment.
5.4 All other non-production costs will be recorded in the financial ledger, eg interest, sales and
marketing costs and accountant's salary.

5.5 There are two possible systems of ledger accounts that a company can use:
(a) Integrated system – combines the cost accounting and financial accounting in one
system of ledger accounts.
(b) Interlocking system – separate ledgers are kept for the cost accounting function (the
cost ledger) and the financial function (the financial ledger). This is a more time
consuming system than the integrated ledger and requires a regular reconciliation
between the cost and financial ledger.

6 Computerised accounting systems

6.1 Accounting using a computerised system involves inputting data, processing it according to
accounting rules contained in the software, and producing output (reports).

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Lecture example 4
Required
Provide an example of each of the following which are found within an accounting system.

Solution
(a) A data file

(b) A record – one definable unit of business information (a collection of records with similar
characteristics make up a file)

(c) Fields – an item of data relating to a record (several fields make up a record)

6.2 Batch processing involves transactions being grouped and stored before being processed
at regular intervals, eg daily, weekly or monthly. Data is not input as soon as it is received
and the system will not always be up-to-date.
6.3 Real-time online processing involves transactions being input and processed immediately,
in 'real time'.

Lecture example 5
Required
Would batch or real-time processing be most appropriate for the following systems?

Solution
(a) Theatre ticket agency

(b) Payroll processing for salaried staff

(c) Sales in a department store

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6.4 Advantages of a computerised accounting system are:

 Speed
 Generally more accurate
 Large numbers of transactions can be posted according to programmed rules
 A variety of reports and analyses can be produced for management

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Overview summary

Business organisation and

accounting

Computerised Cost ledger Policy manual Functions

accounting systems accounting

Practices and procedures Purchasing

 Batch processing
 Real-time online  Quantity
processing  Quality
 Price
Personnel
 Training
 Staff welfare
Integrated system Interlocking system
Finance
 Raising money
Combined cost and financial Separate ledgers for cost and  Recording
accounting system financial accounting  Providing
information
Marketing
 Price
 Promotion
 Product
 Place
Stores
 Despatch
 Recording

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Chapter 1 Questions
1 Which of the following statements is correct?
 An interlocking system is a single system for cost and financial accounting
 Regular reconciliations are required for an integrated system
 In an integrated system there are separate ledgers for cost and financial accounting
 An integrated system combines the cost and financial accounting functions into one
system of ledgers
2 All customers' telephone numbers are held on a computer system.
What is the telephone number an example of?
 A database
 A field
 A file
 A record
3 Batch processing would be most appropriate for which type of transaction?
 Payroll of salaried staff
 Airline ticket sales by a travel agent
 Sales at a supermarket checkout
 Credit card payments
4 Which of the following is NOT a function of the finance department?
 Recording customers payments
 Receiving and recording suppliers invoices
 Taking customer sales orders
 Setting new customer credit limits
5 Which of the following personnel would NOT be involved in the sale of goods?
 Sales person
 Store manager
 Accountant
 Purchasing manager

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Chapter 1 Answers
1 The correct answer is: An integrated system combines the cost and financial accounting
functions into one system of ledgers

An interlocking system has separate ledgers for cost and financial accounting, and requires
regular reconciliation between the two.

2 The correct answer is: A field

A database contains files (eg sales ledger). Each file is made up of many records
(eg customer accounts). Each record consists of fields – items of data relating to that record
(eg customer phone numbers, addresses).

3 The correct answer is: Payroll of salaried staff

All other transactions require up-to-date information and therefore real-time processing.

4 The correct answer is: Taking customer sales orders

Sales orders are taken by the sales and marketing function.

5 The correct answer is: Purchasing manager

The sales person will take the order, the stores manager will despatch the goods and the
accountant will raise the invoice and ensure it gets paid.

END OF CHAPTER

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 Introduction to
management information

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
State the purpose of management information. A2 (a)
Compare cost and management accounting with external financial reporting. A2 (b)
Distinguish between data and information. A2 (c)
Describe the features of useful management information. A2 (d)
Describe and identify sources and categories of information. A2 (e)
Explain the limitations of cost and management accounting information. A2 (f)
Describe the role of a trainee accountant in a cost and management accounting A2 (g)
system.

Exam context
The main aim of this chapter is to introduce you to management information and explain why it is needed.
Questions on this chapter are likely to be narrative in nature.

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 2: INTRODUCTION TO MANAGEMENT INFORMATION

Overview

Introduction to management
information

Information and data Uses Demand and sources Limitations of cost

of information accounting

Accounting systems

Management Financial accounting

accounting

Vs

Purpose

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 2: INTRODUCTION TO MANAGEMENT INFORMATION

1 The purpose of management information

Management Information is used to help managers to manage resources efficiently and effectively,
by planning and controlling operations and by allowing informed decision making.

Lecture example 1 Brainstorming question

Management information is needed for a wide variety of purposes. These are also the three main
roles of management in an organisation.
Required
How does good information help managers in:
(a) Planning?

(b) Controlling?

(c) Decision making?

1.1 Management need to make decisions about how the business is operated, which range
from:
 Short-term decisions which are usually day-to-day decisions or decisions that are
temporary and may be replaced by a more strategic plan at a later stage.
 Medium-term decisions which are usually decisions that affect the operations of a
business for the coming months.
 Long-term decisions which are made to try and achieve the overall objectives of a
company for the future. Such decisions are structured and formally planned and
require detailed information.

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 2: INTRODUCTION TO MANAGEMENT INFORMATION

2 Cost and management accounting and financial

accounting

Lecture example 2 Brainstorming question

Required
Complete the following table:
Financial accounting Management accounting
Legal requirement

Users

Precision

Rules

Reporting:

Scope

Frequency

Format

2.1 Thus it is useful to think of the two accounting types as:

 Financial accounting: recording and reporting historical data
 Management accounting: deciding where the company wants to go and ensuring that
it gets there

2.2 It is important to realise, however, that the information management requires will come from
the same source as the information in the ledger accounts – it is simply classified and
collected in a different manner.

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3 Data and information

3.1 Data is a scientific term for facts, figures and measurements. Data are the raw materials for
data processing.

3.2 Examples of data include:

 Hours of study for an exam
 Visitor numbers to Paris in a year

3.3 Information is data that has been processed in some way to make it meaningful to the
person who receives it. Information is anything that is communicated.

Lecture example 3 Brainstorming exercise

Good information should be:

4 Demand for information

4.1 There is a constant demand for information within the organisation, and also from outside.

Internal demand
4.2 Internal demand comes from every member of the organisation, and management, for:
(a) Records of past and current transactions and trends
(b) Routine information
(c) Information about performance to compare with plans, budgets and forecasts

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External demand
4.3 There is also external demand for information from various sources:
(a) Customers, suppliers or sub-contractors.
(b) Parties interested in the financial performance of the organisation such as
shareholders, investors and creditors, who require information on the financial
position of the organisation.
(c) Agencies such as trade associations require information for surveys.
Tax authorities require the submission of corporation tax and sales tax returns.
(d) Regulatory bodies (Health and Safety Executive, Training Commission, trade unions)
have powers to require financial or non-financial information from organisations.
(e) Grant-awarding agencies require information to support grant applications.

5 Sources of information
Internal sources
5.1 A lot of data is gathered by an organisation in the course of its business. It will appear on the
various documents used by the firm: invoices, orders, delivery notes, etc.

External sources
5.2 Obtaining information from outside the organisation might be formally delegated to particular
individuals, eg the tax or legal expert, the Market Research manager; it might also be
'informal'.

5.3 Informal gathering of information from outside sources goes on all the time because
employees of an organisation learn what is going on from newspapers, television,
experience or other people.

5.4 Various publications – specific trade journals or more general magazines can also be helpful
in judging trends and setting standards.

5.5 Alternatively, a business can employ a research organisation such as Gallup to carry out an
investigation into market trends or other matters of interest.

5.6 The internet is now a very useful source of information.

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6 Types of data
Primary data
6.1 Primary data are data collected expressly for the purposes of the research being
undertaken. Care must be taken to ensure the collection is unbiased. Methods used include:
(a) Personal investigation
(b) Teams of investigators
(c) Questionnaires

7 Limitations of cost and management accounting

information
7.1 For cost and management accounting information to be useful, it must have certain
characteristics. If these are not present then the usefulness of such information will be
limited.

7.2 For example, the underlying figures in management reports need to be reliable, in an
appropriate understandable format, complete, understandable and at the right place at the
right time. Note that the information does not necessarily need to be nearest cent.

7.3 There may also be some useful non-financial factors to consider that may not be included in
the information provided thereby reducing the effectiveness of the cost and management
information.

7.4 Another limitation is the difficulty in establishing the relevance of different costs for particular
decisions.

8 Role of the trainee accountant in a cost and

management accounting system
8.1 Because the trainee accountant may have access to a large amount of information,
questions that the trainee accountant may provide answers to include:
 Revenues earned to date
 Cost of goods or services provided
 Profitability of goods or services provided
 Value of inventory

8.2 The role of the trainee accountant in a cost accounting system is therefore fairly varied and
a vital tool for the organisation.

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Overview summary

Introduction to management
information

Demand and sources Limitations of

Information and data Uses
of information cost accounting

 Accurate  Planning  Internal  Reliability

 Cost effective  Control  External  Format
 Complete  Decision making  Primary  Understandable
 User focused  Secondary  Complete
 Relevant  Timeliness
 Appropriately
communicated
 Timely
 Easy to use
Accounting systems

Management Financial accounting

accounting

Vs

 Legal requirement
 Users
 Precision
 Rules
 Reporting
Purpose Purpose

 Planning  Statement of profit or loss

 Control  Statement of financial
 Decision making position
 Statement of cash flows

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Chapter 2 Questions
1 Which of the following is NOT necessarily a quality of good information?
 Relevance
 Timeliness
 Brevity
 Clarity

2 Which of the following is NOT a characteristic of good management information?

 Reliability
 Relevance
 Timely
 Comprehensive

3 Which of the following statements regarding management and financial accounting is

correct?
 Management accounting provides information for external users, financial accounting
provides information for internal users.
 Management accounts must comply with generally accepted accounting principles.
 Management accounts must be produced each year.
 Management accounts can be produced for individual divisions of the business as
well as the company as a whole.
4 Which of the following sources of information are external to a company?
 Supplier's price list
 List of amount owed by each customer
 Cost report for division X
 Product price list

5 Which of the following represents information rather than data?

 A batch of processed invoices for one day
 A report comparing monthly sales of a product with the previous year
 A report of stock codes
 Completed customer satisfaction questionnaires

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Chapter 2 Answers
1 The correct answer is: Brevity

Information should be complete, and include all the information the user needs to make the
decision.

2 The correct answer is: Comprehensive

Information should be complete, and include all the information the user needs to make their
decision.
Providing comprehensive data may result in information being provided to the user that isn't
relevant to their needs. If too much information is provided the user may not be able to find
all of the information they need.
Reliability, relevance and timeliness are all characteristics of good information.

3 The correct answer is: Management accounts can be produced for individual divisions of the
business as well as the company as a whole

Management accounting is for internal users, financial accounting provides information for
primarily external users.
There are no rules that the preparation of management accounting information must follow
(although there are accepted techniques that companies generally use).
Management information is produced as frequently as management decide is useful for the
business. There are no set timescales.

4 The correct answer is: Supplier's price list

Only the supplier's price list is produced by a party external to the company. The second,
third and fourth options are produced by the company, ie are an internal source of
information.

5 The correct answer is: A report comparing monthly sales of a product with the previous year

The first, third and fourth options are unprocessed facts and figures. Only the second option
is information as the sales data has been processed into a report that is meaningful to the
user.

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END OF CHAPTER

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 Cost units, cost
classification and profit
reporting

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Define cost classification and describe the variety of cost classifications used for C1 (a)
different purposes in a cost accounting system, including by responsibility, function,
behaviour, direct/indirect.
Describe and illustrate the nature of variable, fixed, stepped fixed and mixed (semi- C1 (b)
variable) costs.
Describe and illustrate the classification of material and labour costs. C1 (c)
Prepare, and explain the nature and purpose of, profit statements in absorption and C1 (d)
marginal costing formats.
Calculate the cost and profit of a product or service. C1 (e)
Explain and illustrate the concept of cost units. C2 (a)

Exam context
This chapter looks at the types of costs that are incurred by an organisation in the manufacture of goods
and the different ways these costs can be classified. You are likely to see a few questions, predominantly
narrative, in your exam from this chapter.

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Overview

Cost units, cost classification and

profit reporting

Cost unit

Cost behaviour

Classification by function

Production costs Non-production costs

Materials Materials

Labour Further Labour

classification by
nature

Overheads
Overheads

Direct cost Indirect cost Marginal costing

Absorption costing

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1 Introduction to cost classification

1.1 To enable management to plan, control and make decisions about their organisation, they
need to understand the costs their organisation incurs. To help them do this they can
classify the costs in a number of ways.

1.2 Cost classification is the arrangement of cost items into logical groups. For example: by their
nature (materials, wages etc); or function (administration, production etc).

1.3 The eventual aim is to determine the cost of producing a product/service.

Lecture example 1
Cost unit
A cost unit is a unit of product or service which has costs attached to it.
The cost unit should be appropriate to the type of business. For example:

Solution

Business Appropriate cost unit

Car manufacturer

Builder

Management consultant

Types of costs/expenses – functional costs

1.4
$
Production/manufacturing costs X
Administration costs X
Selling and distribution costs X
Total expenses X
Only the production costs will be relevant in costing.

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Lecture example 2
Direct costs
Direct costs are those costs which can be specifically identified with and allocated to a cost unit.
For example:
Total direct costs = Prime cost
Required

Provide some examples of direct costs.

Solution

Lecture example 3
Indirect production costs
Indirect production costs are those costs which are incurred in the course of making a
product/service but which cannot be identified with a particular cost unit.
Total indirect costs = Overheads
Total production cost = Prime cost + Overheads
Required
Provide some examples of indirect costs.

Solution

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Lecture example 4
Non-production costs
Other costs required to run the business.
Total costs = Total production costs + Non-production costs
Required
Provide some examples of non-production costs.

Solution

Lecture example 5
Required
Think about the costs of making a chocolate bar.

Solution
(a) Production costs:
(i) Direct costs

(ii) Indirect costs/overheads

(b) Non-production costs

Note. Classification will depend on circumstances, there are no hard and fast rules.

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2 Introduction to cost behaviour with output

Introduction
2.1 A business needs to know how costs behave with output so that predictions of costs can be
made.
2.2 It is expected that costs will increase as production increases (ie as output increases) but
the exact way costs behave with output may vary.

Lecture example 6
Types of cost behaviour
Required
Complete the graphs by drawing lines to show the cost behaviour
(a) Fixed cost
Total $
cost

Output (units)
(b) Variable cost
Total $
cost

Output (units)
(c) Mixed (semi-variable) cost
Total $
cost

Output (units)
(d) Stepped cost
Total $
cost

Output (units)

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3 Why record cost information?

Lecture example 7
It may seem more trouble than it's worth given all the possible classifications but there are
important reasons why costs need to be classified and recorded.
Required
Give five reasons why costs need to be classified and recorded. What are they?

Solution
(a)

(b)

(c)

(d)

(e)

Behaviour of manufacturing costs

3.1 With the linear assumption all costs can be categorised as either fixed or variable. This fits
together with previous definitions:
 Direct costs: By their nature direct costs will be variable costs.
 Indirect costs/overheads: Overheads can be fixed or variable.
Fixed Variable
Direct costs X 
Production overheads  
Non-manufacturing costs  

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3.2 Cost card

Q Price $ Value $
Direct material:
5 mm board 0.2 m2 4.60 per m2 0.920
4 cm diam. Wheels 4 18.20 per 100 0.728
Subtotal 1.648

Time Rate per hour Value $

Direct Labour:
Cutter 1.5 mins 7.50 per hour 0.1875
Assembler 3 mins 6.80 per hour 0.340
Painter 4 mins 8.20 per hour 0.547
Packer 30 secs 5.00 per hour 0.042
Subtotal: 1.117
Total direct cost (or prime cost) 2.765

Time Rate $ (OAR) Value $

Production O/H:
Cutting 1.5 mins 1.45 per hour 0.036
Assembly 3 mins 3.41 per hour 0.170
Finishing 4.5 mins 1.25 per hour 0.094
Subtotal 0.300

Total manufacturing cost or factory cost or production cost 3.065

Non-manufacturing O/H:
Administration/selling/distribution 0.10

Total cost 3.165

4 Marginal costing compared to absorption costing

4.1 Two different costing methods that we need to be aware of for the exam are absorption
costing and marginal costing. The profits calculated under absorption costing and marginal
costing differ due to inventory valuation under the two alternatives.

4.2 Using absorption costing, inventory is valued at full production cost:

Direct materials X
Direct labour X
Direct expenses X
Prime cost X
Variable overheads X
Fixed overheads X
Full product cost XX

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4.3 Under marginal costing, inventory is valued at marginal cost, ie all variable production costs
excluding fixed overheads.
Prime cost X
Variable overheads X
Marginal cost of production XX

Lecture example 8 Preparation question

The following information relates to the manufacture of product D during the month of December
20X6:
Direct materials per unit $12
Direct labour per unit $13.50
Total variable overheads $88,000
Total fixed overheads $110,000
Number of units produced 11,000
Required
Calculate the cost per unit of product D under:
(i) Variable (marginal) costing
(ii) Full absorption costing

Solution

(i) Variable (marginal) costing

Direct materials
Direct labour
Variable overheads per unit

Total variable (marginal cost)

(ii) Full absorption costing

Total variable cost
Add overhead absorption rate

Full product cost

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4.4 Marginal costing treats all fixed costs as period costs. The fixed costs are not included when
calculating product costs.
4.5 Only variable costs are therefore charged as a cost of sale. Instead of profit, a figure known
as contribution is calculated:
$
Sales revenue X
Less all variable costs (X)
Contribution to fixed cost and profit X

4.6 If we sell one extra unit we will:

 Generate additional revenue for one extra unit
 Incur variable costs of one extra unit; and
 Increase profit by the contribution (SP – VC) of that one extra unit
 Incur no impact on fixed overheads

Thus for decision making marginal costing is particularly relevant. If fixed costs do not
change as a result of a decision, they are not relevant. Therefore a costing method is
required which ignores fixed overheads.

4.7 As fixed costs do not rise or fall in line with production levels, marginal costing ignores them
when calculating the contribution each product generates.

4.8 Fixed costs are treated as period costs which means they are charged in full to the
statement of profit or loss account for the period in which they are incurred.

4.9 Marginal costing is used when making decisions.

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Lecture example 9 Test standard

CPL is considering what the effect would be of costing its products under marginal costing (MC)
principles, instead of under full absorption costing (AC) principles that it currently follows.
The following information relates to one of the company's products:
Selling price per unit $12
Prime cost per unit $4
Variable product cost per unit $3
Budgeted fixed production overhead $30,000 per month
Budgeted production 15,000 units per month
Budgeted sales 12,000 units per month
Opening inventory 2,000 units

Required
(a) Calculate the contribution per unit (on a MC basis). $
Workings

(b) Calculate the profit per unit (on an AC basis) $

Workings

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(c) Complete the table below to produce a statement of profit or loss for the product for the
month under MC principles.

$ $
Sales
Opening inventory
Purchases
Closing inventory
Cost of sales (MC basis)
Contribution
Fixed costs
Profit
(d) Complete the table below to produce a statement of profit or loss for the product for the
month under AC principles.

$ $
Sales
Opening inventory
Purchases
Closing inventory
Cost of sales (AC basis)
Profit
(e) Briefly explain why the two profit figures differ.

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Overview summary

Cost units, cost classification and

profit reporting

Unit of production
or service in
Cost unit Terminology for costing Finding the cost of one unit
relation to which
 Profitability
costs may be
ascertained  Selling price
 Inventory valuation
Cost behaviour

 Fixed Classification by function

 Variable
 Semi-variable
 Stepped Arrange costs into logical
groups for analysis

Production costs Non-production costs

 Associated with the  All other costs in a business

production of goods and
services

Materials Materials

 Cost of material used in  Cost of material used

production elsewhere in business

Labour Further Labour

classification by
nature
 Cost of workforce used in  Cost of workforce used
production elsewhere in business

Overheads
Overheads
 Cost of overhead required
to support production  Cost of overhead required
to support function

Marginal costing
Direct cost Indirect cost
 Inventory valued at variable
cost of production
 Directly traced to product  Incurred as a result of
making a product but not Absorption costing
directly traceable
 Inventory valued at full
production cost
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Chapter 3 Questions
1 Which of the following costs is most likely to be a mixed cost?
 Rent
 Materials
 Production staff labour
 Telephone bill

2 A cost unit is:

 The cost per hour of operating a machine
 The cost per unit of electricity consumed
 The unit of product or service in relation to which costs are ascertained
 A measure of work output in a standard hour

3 Which of the following might be an appropriate cost unit within the accounts payable
department of a company?
(i) Postage cost
(ii) Invoice processed
(iii) Supplier account
 Item (i) only
 Item (ii) only
 Item (iii) only
 Item (ii) and (iii) only

4 Which of the following are direct expenses?

(i) The cost of special designs, drawings or layouts
(ii) The hire of tools or equipment for a particular job
(iii) Salesman's wages
(iv) Rent, rates and insurance of a factory
 (i) and (ii)
 (i) and (iii)
 (i) and (iv)
 (iii) and (iv)

5 A company employs three drivers to deliver goods to its customers. The salaries paid to
these drivers are:
 A part of prime cost
 A direct production expense
 A production overhead
 A selling and distribution overhead

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Chapter 3 Answers
1 The correct answer is: Telephone bill

Rent is generally a fixed cost, ie it does not change with production output.
Materials and production staff labour cost are generally variable costs as they vary directly
with output.
A telephone bill is generally a mixed cost, with the line rental being a fixed cost and the call
charge increasing with usage (ie being a variable cost).

2 The correct answer is: The unit of product or service in relation to which costs are
ascertained

The first and second options are examples of cost units for which costs have been
ascertained.
The fourth option is an example of a particular cost unit which may be used for control
purposes.

3 The correct answer is: Item (ii) and (iii) only

It would be appropriate to use the cost per invoice processed and the cost per supplier
account for control purposes. Therefore items (ii) and (iii) are suitable cost units.
Postage costs, item (i), is an expense of the department, therefore is not a suitable cost unit.

4 The correct answer is: (i) and (ii)

Special designs, and the hire of tools etc for a particular job can be traced to a specific cost
unit. Therefore they are direct expenses and the correct answer is (i) and (ii).
Item (iii) is a selling and distribution overhead and item (iv) describes production overheads.

5 The correct answer is: A selling and distribution overhead

The deliveries occur after a sale is made, therefore driver's wages are a selling and
distribution overhead.
The other three options are all part of total production cost, incurred before an item is sold.

END OF CHAPTER
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 Management responsibility
and performance
measurement

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Explain and illustrate the concept of cost centres. C2 (b)
Explain and illustrate the concept of profit centres. C2 (c)
Explain and illustrate the concept of investment centres. C2 (d)
Describe performance measures appropriate to cost, profit and investment centres C2 (e)
(cost/profit per unit/% of sales; efficiency, capacity utilisation and production volume
ratios; ROCE/RI, asset turnover).
Apply performance measures appropriate to cost, profit and investment centres. C2 (f)

Exam context
The next section of the notes starts to look at measurement of management performance. In order to
control the activities of the business, management needs to monitor how each particular section of the
business is doing. The performance measures that should be used will depend on how the business is
organised and this will be considered in this chapter. It is important to note that the result of the analysis
will affect the remuneration of the manager.
You are likely to see quite a few questions on this area in the exam – both numerical and discursive.

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Overview

Management responsibility and

performance measurement

Cost centre Profit centre Investment centre Efficiency, capacity

and volume ratios

ROI

RI

Asset turnover

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1 Introduction
1.1 The managers of a business need to monitor how their particular section of the business is
performing to help them plan, control and make decisions about the areas under their
responsibility.

1.2 The performance measures used will depend upon the way in which the business is
organised.

2 Cost centres
2.1 A cost centre is a convenient place, object, person or activity for which costs are separately
collected for further analysis.

2.2 The manager of a cost centre only has control over costs – for example, the manager of the
stores warehouse or production line in a company controls costs but has no influence on
revenues earned by the company.

2.3 The performance of a cost centre may be measured in terms of total actual costs compared
to budget or by using one of the following ratios:
 Cost per unit produced
 Hours per unit produced
 Selling costs per $ of sales
 Transport costs per tonne/km

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Lecture example 1
A company has four cost centres A, B, C and D. The following costs and units produced have been
recorded for each of these four centres:
A B C D
Production costs 125,400 226,000 312,000 126,000
Units produced 13,000 24,500 32,120 9,600
Required
Determine which of the cost centres had the best performance in the period based on the cost per
unit performance measure.

Solution

3 Profit centres
3.1 A profit centre is a convenient place for collecting cost and income information for further
analysis.

3.2 A manager of a profit centre has influence over, and responsibility for, both revenues and
costs.

3.3 A profit centre may be a division of a company, a product, a brand or a service.

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3.4 The performance of a profit centre may be measured by:

 Profit margin (also called profit to sales ratio)
 Gross profit margin
 Cost/sales margin

Lecture example 2
A company has recorded the following cost and income information for one of its profit centres,
division 123.
Division 123
$
Sales 40,000
Cost of sales 18,000
22,000
Selling expenses 5,000
Administrative expenses 6,000
Profit 11,000
Required
(a) The profit margin of division 123 is:
 27.5%
 45%
 50%
 55%

(b) The gross profit margin of division 123 is:

 27.5%
 45%
 50%
 55%

(c) The selling costs to sales and administrative costs to sales ratios for division 123 are:
Selling Administrative
costs/sales costs/sales
 27.5% 27.5%
 12.5% 15.0%
 45.5% 54.5%
 27.7% 27.3%

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4 Investment centres
4.1 Investment centres are used where a manager is responsible for profit in relation to capital
invested in his area.

4.2 Investment centres collect information on costs, revenues, profits and profits in relation to
the value of non-current assets and working capital.

4.3 The performance of an investment centre may be measured by:

 Return on investment (also called return on capital employed (ROCE))
 Residual income
 Asset turnover
In addition to all of the performance measures used by cost and profit centres.

Profit
4.4 Return on investment (ROI) =  100
Capital employed
ROI shows how much profit has been earned in relation to the amount of resources
invested.

4.5 Residual income (RI) = pre-tax profits less a NOTIONAL interest charge for invested capital.

Sales
4.6 Asset turnover   100%
Capitalemployed

Lecture example 3
Two divisions L and M have the following results:
L M
$ $
Sales 100,000 200,000
Profits 33,000 62,000
Capital employed 270,000 387,000
The company makes a notional interest charge of 14% of the amount invested in each division
each year.
Required
Which of the following statements are true?
 Division M has a greater return on investment than division L
 Division M has a greater residual income than division L
 Division M has a greater return on investment and residual income than division L
 None of the above

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Solution

5 Efficiency, capacity utilisation and production

volume ratios
5.1 Ways of measuring labour performance or activity include the following:

Standard hours to make output

Labour efficiency ratio (or productivity ratio) =  100%
Actual hours taken

Actual hours worked

Capacity utilisation ratio =  100%
Hours budgeted

Standard hours to make output

Production volume ratio =  100%
Hours budgeted

5.2 These three ratios are related to each other as follows:

Production volume ratio = Efficiency ratio  Capacity ratio

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Lecture example 4 Past exam question

Barnes Co budgeted to make 12,000 standard units of output during a budget period of 36,000
hours (each unit should take three hours each).
During the period, the company actually made 14,000 units which took 40,000 hours.
Required
Calculate the following labour ratios to the nearest whole number:
(i) Efficiency
(ii) Capacity utilisation
(iii) Production volume

Solution
(i)

(ii)

(iii)

Workings

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Overview summary

Management responsibility and

performance measurement

Cost centre Profit centre Investment centre Efficiency, capacity

and volume ratios

 Costs  Costs
 Costs
 Revenues
 Revenues
 Investments

Profit ROI
%
Capital employed

Profit − Notional interest RI

Sales
% Asset turnover
Capital employed

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Chapter 4 Questions
The following information relates to Questions 1 and 2:
A division has made a profit of $15,000 and has capital employed of $130,000. The company
charges notional interest on all capital employed by each division at 11%.
1 What is the division's return on investment?
 11%
 11.5%
 $1,650
 $700

2 What is the division's residual income?

 11%
 11.5%
 $1,650
 $700

3 A company has the following results for its product Wanabee during 2003:
$
Sales 10,000
Cost of sales (3,000)
7,000
Selling and admin costs (4,000)
Profit 3,000
What is the gross profit percentage?
 30%
 42.9%
 70%
 57.1%

4 The manager of a profit centre would be interested in which of the following reports?
1 Revenue and profitability by product
2 Total costs analysed by function (eg production, selling, administration).
3 Analysis of non-current asset spend
 1 only
 2 only
 1 and 2 only
 1, 2 and 3

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5 The restaurant profit centre manager for a hotel has been given responsibility for increasing
the usage of the hotel restaurant by residents. Which of the following reports will the hotel
manager be interested in to see if they have achieved their objective?
 A report showing daily occupancy rates of the hotel
 A report showing daily occupancy of the restaurant
 A report showing the total food sales in the month by the hotel
 A report showing the utilisation of the hotel restaurant per room occupied

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Chapter 4 Answers
1 The correct answer is: 11.5%

Profit
ROI =  100%
Capital employed
15,000
=  100%
130,000
= 11.5%

2 The correct answer is: $700

RI = Profit – Notional interest

= 15,000 – 11%  130,000
= $700

3 The correct answer is: 70%

Gross profit
Gross profit percentage =  100%
Sales
7,000
=  100%
10,000
= 70%
[Note: Gross profit = Sales – Cost of sales]

4 The correct answer is: 1 and 2 only

Only the manager of an investment centre would be interested in an analysis of non-current

asset spend.

5 The correct answer is: A report showing the utilisation of the hotel restaurant per room
occupied

This report matches the restaurant manager's objective to increase usage of the hotel's
restaurant by hotel residents.

END OF CHAPTER

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 Source documents and
coding

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Describe the material control cycle (including the concept and calculation of ‘free’ B1 (a)
inventory, but excluding control levels and EOQ) and the documentation necessary to
order, receive, store and issue materials.
Describe the procedures and documentation to ensure the correct authorisation, B1 (b)
analysis and recording of direct and indirect material costs.
Describe the procedures and documentation to ensure the correct authorisation, B1 (c)
coding, analysis and recording of direct and indirect labour and expenses.
Describe the procedures and documentation to ensure the correct analysis and B1 (d)
recording of sales.
Explain and illustrate the use of codes in categorising and processing transactions. B2 (a)
Explain and illustrate different methods of coding data (including sequential, B2 (b)
hierarchical, block, faceted and mnemonic).
Identify and correct errors in coding of revenue and expenses. B2 (c)
Distinguish different types of material (raw material, work in progress and finished D1 (a)
goods).
Calculate material requirements making allowance for sales and product / material D1 (c)
inventory changes (control levels and EOQ are excluded).

Exam context
In order to ensure costs are accounted for correctly, first the business must make sure that they have
been adequately coded. There are likely to be a couple of questions on this area in the exam, either
narrative or computational. We will also consider source documents that are required to record and code
material and labour costs.

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Overview

Source documents and coding

Types Problems Materials

Categories Buying materials Control of inventory

Locating inventory Issuing materials Ordering inventory

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1 The coding list

Codes
1.1 A code is a system of words, letters, figures or symbols used to represent others.

1.2 Codes are commonly used for entering information into computer systems.

Accounting records

Lecture example 1 Brainstorming question

The majority of organisations use coding and computers to record their accounting transactions as
they provide a series of advantages. List three advantages of coding.

Solution


1.3 A coding list for accounting transactions should be designed so that it is possible to collect
and produce information for both management and financial accounting purposes. This
helps to avoid the need to enter the same information into the computer more than once.

1.4 When data is entered into the computer system it is allocated with a specific code from a
prepared list of accounts.
Costs incurred by a business should be analysed into materials, labour or expenses and
coded to the correct cost centre.

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Types of code
1.5 Codes can be alphabetical or numerical.
(a) Sequential (or progressive) codes
00435 Wood
00436 Nails
(b) Block (or group classification codes)
7 WWWW Wood
8 WWWW Nails

(c) Faceted codes

First digit 1 Nails
2 Screws
3 Word

Second digit 1 White

2 Black
3 Red etc
(d) Mnemonic codes
LHR London Heathrow
(e) Hierarchical codes
3 Screws
31 Round screws

1.6 The complexity of the coding system is dependent upon the size and nature of the
organisation. It is important to have a good understanding of the organisation when drawing
up the coding list. It may be necessary to ask for help. The information required includes:
 Details of the organisational structure
 The main activities of the organisation
 The main sources of income
 The main sources of expenditure

2 Problems with coding

2.1 Management information reports should make apparent any significant items of income
and expenditure which have been coded incorrectly. For example, if sales in one month
are ten times their usual size it is likely to be due to a coding error.

2.2 A significant problem with coding is the potential to enter the data incorrectly into the
computer system.

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2.3 Problems with coding can also arise as some costs relate to more than one cost centre.
For example, one electricity bill may be received for the electricity used by all of the
departments in the company. In this situation, the electricity cost needs to be apportioned
across all of the departments on a basis that reflects, as fairly as possible, how much
electricity each department has used.

2.4 Other people may need to help with coding transactions, providing missing information and
correcting errors.

Lecture example 2 Test standard

You have just started a new job as an accountant for Medieval Castle, a business which splits its
activities into four main profit centres with the following code prefixes.
T: Guided tours
C: Café
R: Retail shops
G: Garden walks
For costs which relate to all four profit centres the prefix X is used, these costs are allocated
between the profit centres at a later date.
The above prefixes are followed by a numerical code, which describes the type of revenue or
expense involved. The numerical codes are summarised as follows:
01 Phone
02 Labour
03 Goods for resale
04 Heat and light
05 Staff clothing and equipment
06 Rental costs
Required
Complete the table by coding the following invoices so that they can be correctly entered onto the
computer system:
No. Invoice Invoice amount Code
$
123 Retail staff salaries 20,000
124 Costumes for tour guides 489
125 Garden forks 150
126 Electricity bill for Medieval Castle 3,598
127 Rental of café building 1,843
128 Retail shop telephone bill 317
129 Gardening clothes 271
130 Miniature castles for resale 52
131 Payroll costs 2,000
132 Walking sticks for sale to walkers 229
133 Tea, coffee and fresh cream cakes 99

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3 Materials
3.1 Materials are an important component of any production process and often make up a
significant proportion of costs.

Types of material
3.2 Materials breakdown into three major categories for costing purposes:
(a) Raw materials – goods purchased for incorporation into products for sale.
(b) Work in progress – the stages in between at which the purchased goods are being
made ready for sale.
(c) Finished goods – manufactured goods ready for sale or despatch.

4 Buying materials
4.1 The process of buying materials is straightforward. It can be illustrated using the following
diagram:

Purchase Stores/production
requisition

Identify supplier
Purchasing/buying
dept

Order goods

Receive goods Stores

Pay for goods Accounts

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Documentation
4.2 Documentation is vital if all the above departments are to maintain contact with each other,
and to ensure mix-ups cannot occur.

4.3 The initial procedure will be:

(a) A department requiring goods will complete a purchase requisition form asking the
purchasing department to carry out the necessary transaction. An example is given
below.

PURCHASE REQUISITION REQ. No.

Department Date:
Suggested Supplier:
Requested by:
Latest date required:

Quantity Description/code Estimated Cost

Unit $

Authorised signature:

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(b) An order form is then completed by the purchasing department. An order form should
be sent even if the order is made by telephone, to confirm that the order is legitimate.
An example is given below.

Purchase Order/Confirmation Albert Hall Instruments

Southern Cross Trading Estate
Bognor Regis
West Sussex

Our Order Ref: Date:

To

(Address) Please deliver to the above address

Ordered by:
Passed and checked by:
Total Order Value $

REF QUANTITY DESCRIPTION UNIT COST TOTAL

Subtotal

Sales tax
(@ 20%)

Total

The purchase order is important because it provides a check that goods received are
as ordered.

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(c) Once the goods have been delivered they should be inspected. A goods received
note (GRN) will be completed on the basis of the physical check, counting items
received and seeing that they are not damaged.

GOODS RECEIVED NOTE WAREHOUSE COPY

DATE: 7 March 20X5 TIME: 2.00 pm No 5565

ORDER NO:
SUPPLIERS ADVICE NOTE NO: WAREHOUSE A

QUANTITY CAT NO DESCRIPTION

16 SR 424 Granular salt, 25kg

bags

RECEIVED IN GOOD CONDITION: J.P. (INITIALS)

A copy of the GRN is sent to purchasing to be matched with the purchase order. Any
discrepancies can be investigated.
A copy is also sent to accounts so that it can be matched with the invoice when
received, to ensure we only pay for goods we have actually received.

5 Inventory control
5.1 The goods received note will also be used as the basis of updating the inventory records, so
that the amount of each item of inventory held at any time is known. This helps the business
to identify any inventory items which need reordering.

Locating inventory
5.2 The warehouse should be set out in an orderly and logical manner with items easy to find.

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5.3 For each item of inventory an inventory record card should be set up and kept in the costing
department.

Inventory Record Card

Control Qualities

Material/Item Description ............................................. Maximum Level .................................................

Material/Item Code ............................................. Minimum Level ..................................................
Stores Location Ref ............................................. Re-Order Level....................................................
Special Requirements ............................................. Re-Order Quantity .............................................

Receipts Issues Physical Allocations Orders Free Inventory

Inventory Balance
Date Ref Qty Price Date Ref Qty Price Date Ref Qty Date Ref Qty

Allocations means inventory to be given out (eg to a job).

Orders means those which have been placed and the company is waiting for delivery.
Free inventory balance = Physical inventory + Outstanding orders – Allocations
5.4 A bin card is kept with actual inventory in the warehouse and is updated whenever items
are removed or added. It does not have to be a bin as such but can be a shelf or area of
floor space.

BIN CARD
Description ................................................................. Bin No: ..........................................................
................................................................. Code No: .......................................................
Normal Quantity to order ................................................... Maximum: .....................................................
................................................................. Minimum: ......................................................
................................................................. Re-Order Level: ............................................

Receipts Issues Balance Remarks

G.R.N. Req.
Date Quantity Date Quantity Quantity
No No.

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Issuing materials
5.5 Items are issued from stores to production using a materials requisition note (also
sometimes called a stores requisition).

MATERIALS REQUISITION

Material Required for: No.

(Job or Overhead Account)
Department: Date:

Quantity Description Code Weight Rate $ Notes

No.

Supervisor:

5.6 The material requisition note is also used to update the inventory records.

5.7 If the amount required is set too high then the extra is put back into stores using a materials
returned note.

5.8 Alternatively, excess inventory may be transferred to another department/process using a

materials transfer note.

6 Ordering inventory
6.1 We've seen that from time to time a manager will decide that an order for more inventory
needs to be placed. They will need to determine how many units of inventory to order. This
is usually determined by the future plans for sales and production.

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Lecture example 3
Potter plc buys and sells Alphas. At the beginning of February the stores manager realises that
there are only 30 Alphas in inventory.
The sales manager notifies her that sales of 290 Alphas are planned for February.
The stores manager would like to have 50 Alphas left in inventory at the end of February.
Required
How many Alphas should the store manager order?
 270 units
 290 units
 310 units
 340 units

Solution

Lecture example 4
Harry Co makes Betas. Each Beta needs 5 kg of material Gamma. At the end of July the stores
manager needs to order more Gamma as inventory levels are currently at 120 kg.
The production manager has notified the stores manager that in August they plan to make 300
Betas.
The stores manager wants to reduce inventory of Gamma to 75 kg by the end of August as a new,
better material will be available in September.
Required
How many kg of Gamma should the store manager order?
 1,455 kg
 1,500 kg
 1,545 kg
 1,575 kg

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Solution

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Overview summary

Source documents and coding

Types Problems Materials

 Sequential  Incorrect data entered

 Block  Incorrect cost centre allocation
 Faceted  Missing information
 Mnemonic
 Hierarchical

Categories Buying materials Control of inventory

 Raw materials  Purchase requisition

 Work in progress  Purchase order
 Finished goods  Goods received note

Locating inventory Issuing materials Ordering inventory

 Inventory record card  Materials requisition note

 Bin card  Materials returned note
 Materials transfer note

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Chapter 5 Questions
1 What is the purpose of a materials requisition note?
 It is sent to the supplier with details of the materials required to be delivered
 It authorises the issue from store of a specified quantity of materials
 It authorises the purchasing department to order further materials from the supplier
 It records the transfer of materials from one department to another

2 Which of the following functions are fulfilled by a goods received note (GRN)?
(i) It provides information to update inventory records on receipts of goods
(ii) It provides information to check the quantity on the supplier's invoice
(iii) It provides information to check the price on the supplier's invoice
 (i) and (ii) only
 (i) and (iii) only
 (ii) and (iii) only
 All of them

3 There are 27,500 units of Part Number X53 on order with the suppliers and 16,250 units
outstanding on existing customers' orders.
If the free inventory is 13,000 units, what is the physical inventory?
 1,750
 3,250
 24,450
 29,250

4 Each unit of product R requires 2 kg of material S. 2,000 units of product R will be made
next month. The company currently has 400 kg of material S and would like to end next
month with 600 kg of S.
How many kg of material S does the company need to buy?
 3,600 kg
 3,800 kg
 4,000 kg
 4,200 kg

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5 Company Eyecare buys and sells frames and lenses for glasses. Eyecare code their
transactions using the following coding system:

Transaction type Frame type Lens type

1. Sales 01 Designer 001 Prescription
2. Purchase 02 Standard 002 Bifocal
3. Expenses 003 Varifocal
How would Eyecare code a purchase invoice for a set of designer frames with bifocal
lenses?
 201002
 212
 213
 122

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Chapter 5 Answers
1 The correct answer is: It authorises the issue from store of a specified quantity of materials

A materials requisition note is raised when a cost centre or job requires material, to
authorise the issue of materials from store and record the cost centre or job to be charged.
The first option describes a purchase order. The third option describes a purchase
requisition and the fourth option describes a material transfer note.

2 The correct answer is: (i) and (ii) only

Among other things, the GRN is used to update the inventory records and to check that the
quantity invoiced by the supplier was actually received. The GRN does not usually contain
price information. Therefore the correct answer is (i) and (ii) only.

3 The correct answer is: 1,750

Free inventory balance = units in inventory + units on order from suppliers – units
outstanding on customer's orders.
13,000 = units in inventory + 27,500 – 16,250
 units in inventory = 13,000 – 27,500 + 16,250
= 1,750
4 The correct answer is: 4,200 kg
kg
Amount of S required in production (2,000  2 kg) 4,000
Add closing inventory of S 600
Less opening inventory of S (400)
Order quantity 4,200

5 The correct answer is: 212

1st digit 2nd digit 3rd digit
Purchases Frame type Lens type
2 01 002
ie code 212

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END OF CHAPTER

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 CHECKPOINT 1

Checkpoint 1 – Progress review

To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

It will help your learning if you take some time to reflect on the knowledge and skills covered during Stage 1.
Take some time to reflect on the knowledge and skills you covered during Stage 1. If you feel you need further
clarification on any of the key areas listed below you can use the online lecture for the relevant chapter.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time commitments)
on how to focus your review on the key learning points in your notes.

Key messages from Stage 1

Key knowledge
 The aim of costing is to determine the cost of producing one unit of output, ie a cost unit.
 Classification of costs and cost behaviour needs to be understood to be able to fulfil this aim.
 The procedure for purchase of raw materials and different methods of valuation of closing inventory are
key areas for this unit.
 Being able to classify, calculate and code cost information for material, labour and expenses and
understanding the importance of coding this information correctly, results in good management
information.

Key skills
You need to be able to attempt the quick questions that require ticking the correct box, true and false type
questions and be able to perform appropriate calculations for performance measurement.

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 CHECKPOINT 1

Checkpoint 1 – Study support

Chapter 1 – Business organisation and accounting 25 mins

Key areas
 Identify main types of transactions undertaken by a business and the key personnel
involved
 Illustrate the principles and practice of double entry book-keeping
 Identify key features and benefits of a computerised accounting system

Course Notes
 Review Lecture examples 1 and 2 and also Section 6 on computerised accounting 5 mins
systems

Text
 Read Section 4 on control over transactions and Section 5 on basic principles of double 10 mins
entry bookkeeping

Practice & Revision Kit

Attempt Questions 1.4, 1.5, 1.12, 1.14 and 1.16 10 mins

Chapter 2 – Introduction to management information 30 mins

Key areas
 Awareness of the relationship between management and financial accounting
 State the purpose of management information

Course Notes
 Review Lecture examples 2 and 3 10 mins

Text
 Read Sections 6 and 7 of the Interactive Text 15 mins

Practice & Revision Kit

Attempt Questions 2.2–2.6 and 2.9–2.13 5 mins

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 CHECKPOINT 1

Chapter 3 – Cost units, cost classification and profit

40 mins
reporting
Key areas
 To recognise the appropriate classification and elements of cost
 Describe and illustrate the nature of fixed, variable and mixed costs
 Prepare and explain the nature of profit statements under absorption and marginal
costing formats
Course Notes
 Spend some time reviewing Section 4 especially Lecture examples 8 and 9 20 mins

Text
 Review Examples 8.1 to 8.3 5 mins

Practice & Revision Kit

Practise Questions 3.1–3.8, 3.17–3.18 and 3.22–23 15 mins

Chapter 4 – Management responsibility & performance

40 mins
measurement
Key areas
 Explain and illustrate the concept of cost, profit and investment centres
 Apply performance measures appropriate to cost, profit and investment centres
Course Notes
 Review and learn formulae in Sections 4 and 5 20 mins

Text
 Review Section 2.3 on ROCE, RI and asset turnover 5 mins

Practice & Revision Kit

Attempt Questions 4.7–4.12 and 4.16–4.18 15 mins

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 CHECKPOINT 1

Chapter 5 – Source documents and coding 30 mins

Key areas
 Describe the material control cycle and the documentation necessary to order, receive,
store and issue materials
 Explain and illustrate the use of codes in categorising and processing transactions

Course Notes
 Review Sections 4 and 5 on documentation and inventory control 15 mins

Text
 Review Section 1.2 on types of code 5 mins

Practice & Revision Kit

Attempt Questions 5.3–5.5 and 5.13–5.14 10 mins

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 CHECKPOINT 1

Checkpoint 1 – Real-world examples

BPP article
Slicing the cake: calculation of proportions of a total
Students often have trouble with dealing with sharing out proportions of a total when they are given the
information like this: 'There are rent costs of $50,000 and floor space in department A is 360 m², department B is
450 m² and department C is 90 m²' and yet the same students have no trouble if they are told to share 40%, 50%
and 10% or as a fraction.
If this is you there is a simple method to deal with this.
Anyone who's seen the show will know that in Who Wants to be a Millionaire? there is an option to go 50:50.
This gives contestants one right answer and one wrong answer to choose from. So why don’t they call it the half
a chance lifeline? Well probably because it doesn’t sound as good! But it actually means the same thing.
How do we check this? Simply add the numbers in the ratio together (50 + 50 = 100) and divide the first number
by the total to get the share as a fraction:
50/100 or ½.
The same applies in more complicated circumstances.
Suppose a class is going to share out a cake. The ratio that will be used is:
1:3:2:6.
Following the same method adding up all the numbers gives us a total of 12. The first person then gets ½, the
second 3/12 (or ¼), the third 2/12 or a sixth and finally the last person gets 6/12 or half the cake!
While the ACCA is unlikely to start testing your ability to share out cakes you should find this helpful in
apportioning costs.

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 CHECKPOINT 1

END OF CHECKPOINT

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 Accounting for material
and labour costs

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Describe and illustrate the accounting for material costs. D1 (b)
Explain and illustrate different methods used to price materials issued from inventory D1 (d)
(FIFO, LIFO and periodic and cumulative weighted average costs).
Describe and illustrate the accounting for labour costs (including overtime premiums D2 (a)
and idle time).
Prepare an analysis of gross and net earnings. D2 (b)
Explain and illustrate labour remuneration methods. D2 (c)
Calculate the effect of changes in remuneration methods and changes in productivity D2 (d)
on unit labour costs.

Exam context
The next section of the notes starts to focus on the cost accounting part of the syllabus and initially we
look at the elements of business costs, material and labour. This chapter is likely to feature quite heavily
in the exam and you can expect to see up to eight questions from these areas.

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Overview

Accounting for material and labour

costs

Inventory
Labour costs
issue/valuation

FIFO
Time-based Piecework Gross pay and
systems systems deductions

LIFO

Cumulative
weighted
average

Periodic
weighted
average

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1 Accounting for material and labour costs

1.1 Let's consider how a single purchase of materials works through into the final accounts. The
relevant double entries are as follows:
$ $
(a) DEBIT Materials X
CREDIT Cash (or payables) X
being the purchase of materials which are put into raw materials inventory.
(b) DEBIT Work in progress X
CREDIT Materials X
being the issue of materials to production for use in work in progress.
(c) DEBIT Finished goods X
CREDIT Work in progress X
being the transfer of units that are now finished to finished goods inventory.
(d) DEBIT Cost of sales X
CREDIT Finished goods X
being the taking of units out of finished goods inventory and selling them.
(e) DEBIT Statement of profit or loss account X
CREDIT Cost of sales X
being the closing off of ledger accounts and the drawing up of financial statements. This
entry would be made at the end of a period.

1.2 The process of accounting for labour is similar.

2 Methods of inventory valuation

2.1 Methods
(a) FIFO – First in first out method
(b) LIFO – Last in first out method
(c) Cumulative weighted average method
(d) Periodic weighted average method

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Lecture example 1 Test standard

The inventory record card for fountain pens needs to be completed for the following transactions:
1 March
(Opening inventory) : 100 units bought at $2 each
2 March : bought 300 units at $2.10 each
5 March : sold 50 units for $5 per unit
17 March : bought 100 units at $2.30 each
20 March : sold 150 units for $5 per unit
Required
(a) Calculate the value of closing inventory at the end of March using, FIFO, LIFO and
cumulative weighted average methods by completing the tables below.
FIFO method
Receipts Issues Balance
Date Quantity Cost per Total Quantity Cost per Total Quantity Total
unit cost unit cost cost
$ $ $ $ $
1 Mar

2 Mar

5 Mar

17 Mar

20 Mar

LIFO method
Receipts Issues Balance
Date Quantity Cost per Total Quantity Cost per Total Quantity Total
unit cost unit cost cost
$ $ $ $ $
1 Mar

2 Mar

5 Mar

17 Mar

20 Mar

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Cumulative weighted average method

Receipts Issues Balance
Date Quantity Cost per Total Quantity Cost per Total Quantity Total
unit cost unit cost cost
$ $ $ $ $
1 Mar

2 Mar

5 Mar

17 Mar

20 Mar

(b) Calculate the gross profit for March using:

FIFO LIFO Average

Sales Sales Sales

Less: Cost of sales Less: Cost of sales Less: Cost of sales

Gross profit Gross profit Gross profit

(c) International Accounting Standards (IAS) disallows the use of for

accounting purposes.
(d) If prices are rising, the method of inventory valuation will give the
highest closing inventory value and will give the highest gross profit.

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Lecture example 2 Test standard

Required

Identify the correct inventory valuation method from the characteristic given by putting a tick in the
relevant column in the table below.

FIFO LIFO Cumulative

weighted
average
 Costs issues of inventory at the most recent
purchase price
 Costs issues of inventory at the oldest purchase
price
 Values closing inventory at the most recent
purchase price
 Closing inventory is valued at the average of the
cost of purchases

Lecture example 3 Test standard

Spic Co provides you with the information about the inventory movements of Component C.

INVENTORY RECORD CARD FOR STEEL COMPONENT C

Receipts Issues Balance
Date Quantity Cost per Total cost Quantity Cost per kg Total cost Quantity Balance
2009 kg kg ($) ($) kg ($) ($) kg $
1 June 25,000 50,000
9 June 30,000 2.30 69,000 55,000 119,000
12 June 40,000 25,000  2 84,500 15,000 34,500
15,000  $2.30
18 June 20,000 2.50 50,000 35,000 84,500
27 June 10,000

The issue of Component C on 12 June was for the production of Product P1. The issue of C on
27 June was for the production of Product P2.
The following cost accounting codes are used:

Code Description
300 Inventory of Component C
400 Work-in-progress Product P1
405 Work-in-progress Product P2
600 Payables control

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Required
Identify the inventory issue method being used for valuing issues to production and complete the
inventory record card.
Complete the journal below to record separately the four cost accounting entries in respect of the
two receipts and two issues during the month of June.
Journal
Code Debit ($) Credit ($)
9 June
9 June
12 June
12 June

18 June
18 June

27 June
27 June

3 Labour costs
3.1 Labour costs are an important element of total costs. Labour costs include wages (usually
weekly) and salaries (usually monthly) paid to employees.

4 Documents for labour costs

4.1 Records showing how each individual's pay has been calculated are known as payslips.
Records of total labour costs paid to employees are known as payroll.

Basic pay
4.2 Decided by senior management set out in contract of employment and then maintained on
an employee record card.

Time records
4.3 Attendance records can be simple, ie just showing absence due to sickness, holidays or for
some other reason.
4.4 They can be more complex using clock cards to record time in and time out.

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Detailed analysis of time

4.5 This is the breakdown of hours spent at work and depends upon type of process:
(a) Continuous production
(b) Job costing – in this case might be:
(i) Daily time sheets
(ii) Weekly time sheets
(iii) Job cards
(iv) Route cards

Idle time
4.6 This is a cost to the company as employees will still be paid. It may be recorded separately
on time sheets or separate idle time cards may be produced.

Measurement by output
4.7 Pieceworkers are paid for what they produce recorded on a piecework ticket or an operation
card. It may record total units produced and number of rejects.

OPERATION CARD
Operator's Name ............................ Total Batch Quantity ......................................
Clock No. ........................................ Start Time ...................................................
Pay Week No. ................................Date …………………. Stop Time .....................................................

Part No. .......................................... Works Order No. ..........................................

Operation ........................................ Special Instructions ......................................

Quantity Produced No. Rejected Good Production Rate $

Inspector ........................................................................... Operative .......................................................

Foreman ........................................................................... Date ..............................................................

PRODUCTION CANNOT BE CLAIMED WITHOUT A PROPERLY SIGNED CARD

5 Remuneration methods
5.1 Employees may be paid based on the number of hours they work, from which the direct cost
of production is calculated.
Gross pay
Number of units produced

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Lecture example 4
A company pays its employees a basic rate of $6 per hour. A standard working week is 35 hours.
In week 39, an employee works 42 hours for the company producing 56 units of product X. The
company pays overtime at time and a half.
Required
(a) Calculate the gross pay earned by the employee in week 39.
(b) Calculate the unit labour cost for this employee.

Solution

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5.2 Employees may also be paid based on how many units they make, using a piecework
system.

Lecture example 5
The company in the previous example changes its remuneration method to a piecework system in
an attempt to improve productivity.
Each employee will be paid $4 for the first 40 units produced and $4.50 for any units produced
over and above 40.
Required
(a) Calculate the gross pay for the employee in week 39 who produced 56 units under the
piecework system.
(b) Calculate the unit labour cost for this employee using the piecework system.

Solution

6 Gross pay and deductions

6.1 Before an employer pays an employee's wages or salary they will deduct from the gross pay
amount:
 Income tax (eg pay-as-you-earn PAYE)
 Employee's social security contributions (eg national insurance)
The employer will pay these amounts to the tax authorities on behalf of the employee.

6.2 They may also deduct some other voluntary amounts at the request of the employee, for
example for pension contributions or social club contributions.

6.3 In addition to the gross pay of the employee, the employer must also pay Employer's social
security contributions for each employee.

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Lecture example 6
A company has the following payroll information for December:
$
Cash paid to employees 300,000
Income tax deductions 84,620
Employee's social security contributions 26,930
Employer's social security contributions 38,465
Pension fund deductions 22,000
Required
(a) Calculate the gross pay of the employees for December.
(b) Calculate the total labour cost for December.

Solution

7 Accounting for labour costs

7.1 A business must classify its labour costs as either direct or indirect labour costs.

7.2 In general, labour costs of production workers are classified as direct costs and labour costs
of all other workers are indirect costs.

7.3 The exceptions to this are:

 Overtime premium paid to production workers where the overtime has not been
specifically requested by a customer
 Idle time costs of production workers
Both are treated as indirect costs.

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Lecture example 7
In the week commencing 14 April a manufacturing company incurred the following labour costs:
Production workers 600 hours @ $7 per hour
(45 hours were idle time)
Other workers 300 hours @ $10 per hour
Production workers overtime hours 50 hours at the basic rate plus 50%
Other workers overtime hours 10 hours at the basic rate plus 50%
All overtime was for general production requirements.
Required
Calculate the total direct and the total indirect labour costs for the week commencing 14 April.
Solution

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Overview summary

Accounting for material and labour

costs

Inventory
issue/valuation Labour costs

FIFO
Time-based Piecework Gross pay and
 First goods issued systems systems deductions
are those purchased
first
 Hourly wage rate =  Wages on number  Deduct income tax
direct cost of units produced and national
 Overtime premium = insurance
LIFO contributions
an indirect cost
unless specifically
requested
 First goods issued
are those purchased
last

Cumulative
weighted
average

Periodic
weighted
average

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Chapter 6 Questions
1 An employee is paid under the following piecework system.
Production Rate
$
0–100 units 3.50
101–200 units 4.00
201–300 units 4.50
301 + units 5.00
What is the employee's gross pay in a week where they produce 269 units?
 $941.50
 $1,060.50
 $1,210.50
 $1,345.00

2 A company has incurred the following labour costs in March:

Direct production workers 1,500 hours
(20 of these hours were in overtime to meet general production requirements and direct
production workers were idle for 100 hours during the month due to a machine breakdown)
Other workers 400 hours
(40 of these hours were in overtime to meet general production requirements)
All staff are paid $6 per hour and all overtime is paid at basic rate plus 50%.
What is the total indirect labour cost for March?
 $660
 $2,520
 $3,180
 $3,420
The following options relate to Questions 3 and 4:
(i) Net pay
(ii) Employee's social security contributions
(iii) Pension deductions
(iv) Employer's social security contributions
(v) Income tax

3 Which of the above are included in gross pay?

 (i), (iii) and (v)
 (i), (ii), (iv) and (v)
 (i), (ii), (iii) and (v)
 All of the above

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4 Which of the above are included in total labour cost?

 (i), (iii) and (v)
 (i), (ii), (iv) and (v)
 (i), (ii), (iii) and (v)
 (i), (ii), (iii), (iv) and (v)

5 A company pays its staff a basic rate of $10 per hour, with overtime at basic rate plus 25%.
If the company's employees worked 1,200 hours including 100 hours of overtime, producing
5,500 units, what is the labour cost per unit?
 $2.18
 $2.23
 $2.27
 $2.41

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Chapter 6 Answers
1 The correct answer is: $1,060.50
$
First 100 units 100  $3.50 350.00
101–200 units 100  $4.00 400.00
201–269 units 69  $4.50 310.50
Gross pay 1,060.50

2 The correct answer is: $3,180

$
Direct production workers overtime premium (20 hours  $6  50%) 60
Direct production workers idle time (100 hours  $6) 600
Other workers ([400 – 40]  $6) 2,160
Other workers overtime (40  $6  150%) 360
Indirect labour cost 3,180

3 The correct answer is: (i), (ii), (iii) and (v)

Gross pay is made up of the cash of an employee receives (the net pay) and deductions
(employee's social security contributions, pension deductions and income tax).

4 The correct answer is: (i), (ii), (iii), (iv) and (v)

In addition to an employee's gross pay the employer has to pay employer's social security
contributions for each employee.

5 The correct answer is: $2.23

$$
Basic rate: 1,200 hours  $10 12,000
Overtime: 100 hours  ($10  25%) 250
Total labour cost 12,250
 number of units  5,500
Labour cost per unit 2.23

END OF CHAPTER

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 Overhead costs

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Explain the process of charging indirect costs to cost centres and cost units and D3 (a)
illustrate the process of cost apportionment for indirect costs (excluding reciprocal
service).
Explain and illustrate the process of cost absorption for indirect costs including the D3 (b)
analysis and interpretation of over/under-absorption.

Exam context
This chapter continues with the costing theme and focuses more on a very important cost for
organisations, namely overheads. You are likely to see fairly detailed questions on this chapter within the
exam and knowledge of absorption costing is fundamental and will be needed again for your later
studies. Both narrative and computational questions are likely to feature from this chapter in your exam.

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Overview

Overheads and absorption

costing

Types of overhead Predetermined OAR

Allocating overheads to units to Calculating a profit or loss

find the full production cost using absorption costing

Three-step approach to
absorption costing

Allocating non-production
overheads to a product

(1) Allocate and (2) Reapportion (3) Absorb

apportion

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1 Overhead costs
1.1 We have looked at material costs, labour costs and the idea of finding costs per unit of
production. One further cost management needs to consider in their cost per unit is
overheads.
1.2 Overheads are the costs that are not identified with specific cost units. Therefore some
method must be used to charge a share of total production overheads to each cost unit. This
method is called absorption costing.
1.3 Management can then use this total production cost per unit for many reasons, such as:
Pricing (cost + % mark-up)
Inventory valuation (for the statement of profit or loss and statement of financial position)
Profitability analysis

Absorption costing
1.4 Absorption costing is a product costing/Inventory valuation method which includes all
production costs in the valuation and is required by IAS 2 for external reporting purposes:
Standard cost card for a unit of production
$/unit
Direct materials X
Direct labour X
Prime cost X
Production overheads X
Product cost X

Prime cost
1.5 The direct costs of a cost unit are usually straightforward to ascertain since by definition they
are identified with a cost unit.
Direct materials: x kg of material at $y per kg
Direct labour: a hours of labour at $b per hour

Overheads
1.6 The remainder of this chapter will look at how we find the production overhead cost per unit.

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2 Service and production cost centres

Lecture example 1
Required
We need to distinguish between factory cost centres that are:
(a) Production cost centres, through which cost units actually flow such as:

(b) Service cost centres, which support/service the production cost centres such as:

3 Absorption costing steps

Method
3.1 To get the full absorbed production cost there are four steps:
(a) ALLOCATE direct costs to cost units
(b) ALLOCATE AND APPORTION production overheads to cost centres
(c) REAPPORTION overheads in service cost centres to production cost centres
(d) ABSORB overheads into cost units

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Diagram
3.2

(c)

4 Allocation and apportionment to cost centres

4.1 The first stage in valuing the overhead cost of a cost unit is to allocate and apportion
overheads between the cost centres. There are no set rules, just pick a basis which would
seem to reflect most fairly the way in which overheads are incurred.

Terminology
4.2 Allocation – Whole cost items are charged to a cost centre.
Apportionment – Cost items are divided between several cost centres.

Lecture example 2
Required:
How should we apportion the following overheads?
Overhead Basis
Rent/rates
Depreciation of equipment
Staff welfare
Heat, light
Insurance of equipment
Stores costs

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Lecture example 3
A company has incurred the following overhead costs for a period:
$
Factory rent 20,000
Factory heat 5,000
Processing dept – supervisor 15,000
Packing dept – supervisor 10,000
Depreciation of equipment 7,000
Factory canteen expenses 18,000
Welfare costs of factory employees 5,000
80,000
Suitable cost centres in the company:
Processing department
Packing department
Canteen
Processing dept Packing dept Canteen
Cubic space 50,000 m³ 25,000 m³ 5,000 m³
Carrying value of equipment $300,000 $300,000 $100,000
Number of employees 50 40 10
Required
Allocate and apportion the overhead costs incurred to the three cost centres using the most
suitable basis.

Solution

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5 Reapportionment of service cost centre costs

5.1 Only production departments manufacture units. It is necessary to have all the overheads
charged to production departments.

Lecture example 4
Required
Using the following data, reapportion the overheads of stores and maintenance to production
departments X and Y.
Production Service centre
X Y Stores Maintenance
$ $ $ $
Allocated overheads 70,000 30,000 20,000 15,000

Estimated work done by the

service centres for other
departments:
stores 50% 50% – –
maintenance 60% 40% – –

Solution

6 Absorption of overheads into production (cost units)

Bases
6.1 All of the production overhead costs have now been apportioned to the production cost
centres. We now need to charge these to the cost units passing through the production cost
centres. This is termed absorption. We are going to absorb an element of total production
overhead into each cost unit.

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There are several possible bases for absorption, the most common being:
(a) Per unit
(b) Per labour hour
(c) Per machine hour
(d) % of direct labour cost
Budgeted production overhead
OAR (overhead absorption rate) =
Budgeted activity level

Lecture example 5
Choosing the basis
Ideally, the basis chosen should be the one which most accurately reflects the way in which the
overheads are in fact being incurred:
Required:
Give an example of when each of the following basis should be used

Solution
Basis
(a) Per unit

(b) Per labour hour

(c) Per machine hour

(d) % of direct labour cost

Lecture example 6
Calculating absorption rates
Stars Co has two production departments, Mixing and Stirring, in which it makes a variety of
products. Budgeted overheads are $10,000 and $15,000 respectively, and the following budgeted
information has also been collected:
Mixing Stirring
Direct labour hours 20,000 5,000
Direct machine hours 2,000 60,000
Number of units 10,000 10,000
Required
Calculate appropriate overhead absorption rates for both Mixing and Stirring departments.

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Solution

6.2 Production overheads normally accrue (or increase) on a time basis. Hence time-based
methods (eg labour hours or machine hours) are more appropriate, rather then a basis of %
of direct labour cost.

Lecture example 7
Completing a cost card
Stars Co makes a product, Jupiter, that needs $2.50 of materials for each unit. Mixing staff are
paid $6 per hour and stirring staff $10 per hour. A Jupiter spends the following time in Stars Co's
two production departments:
Mixing Stirring
Labour hours 1 hour ¼ hour
Machine hours 5 minutes 2 hours
Required
Using the OARs calculated in Lecture example 6 draw up the cost card for a Jupiter.

Solution

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Under- or over-absorption of fixed overheads

Budgeted overhdead
Predetermined OAR =
Budgeted production activity
During the year businesses record the overheads:
Overhead absorbed = Actual activity x predetermined OAR
At the end of the year actual overhead costs are known, it is likely that:
Overhead absorbed ≠ Actual overhead
We only want the actual expense to appear in our year-end accounts, so we have to adjust:
Actual overhead X
Overhead absorbed (actual activity  OAR) (X)
Under/over absorption X
 Under-absorption means we have too little expense so need to top up – Debit to statement
of profit or loss
 Over-absorption mean we have too much expense so need to reduce it – Credit to
statement of profit or loss

Lecture example 8
Super Co had the following budgeted and actual figures for unit of production and overheads:
Budget Actual
Units of production 20,000 24,000
Overheads $100,000 $117,000
Required
Complete the following calculations:

Solution

Predetermined OAR:

Overhead absorbed for the period:

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Under/over-absorption:

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Overview summary

Overheads and absorption

costing

Calculating the cost per unit

 Pricing
 Inventory valuation
 Profitability analysis

Types of overhead Predetermined OAR

 OAR calculated at the start of the

year based on budgeted figures
Production Non-production

Allocating overheads to units to Calculating a profit or loss

find the full production cost using absorption costing

(See Chapter 3)

 Predetermined OAR used to

Three-step approach to estimate overheads during the year
absorption costing to calculate a profit or loss figure.

 Getting the production overhead cost

into the cost card
Allocating non-production
overheads to a product

 Can be done for internal reporting

purposes

(1) Allocate and (2) Reapportion (3) Absorb

apportion

 Overheads from service cost  Overheads from production cost

 Overheads to cost centres on
centres to production cost centres to individual units using:
some fair basis:
centres on some fair basis Budgeted overhead
– Production cost centres OAR =
Budgeted activity
– Service cost centres
(1) Calculate OAR using
appropriate activity
(2) Calculate the activity for a
single unit and apply OAR

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Chapter 7 Questions
1 What would be the most appropriate basis for apportioning heat and light costs to cost
centres within a factory?
 Floor space occupied by each cost centre
 Number of radiators in each cost centre
 Labour hours worked in each cost centre
 Volume of space occupied by each cost centre

2 A company has the following overheads for the year:

$
Rent and rates 20,000
Depreciation of equipment 10,000
Supervisor salary – Assembly 15,000
– Painting 20,000
It has also collected together the following information about its cost centres:
Assembly Painting
Floor space occupied (m2) 3,000 2,000
Carrying value of equipment ($) 1,500 1,000
Number of employees 50 35
What will the total overheads allocated and apportioned to the Painting department be?
 $32,000
 $33,000
 $20,000
 $35,000

3 A company has allocated and apportioned its overheads to its cost centres, with the
following result:
Assembly Finishing Stores
Overheads 30,000 45,000 15,000
It has also collected together the following information:
Assembly Finishing
Number of stores requisitions 11,000 19,000
Number of employees 30 60
The total overheads in Assembly after reapportioning the stores overheads is:
 $5,000
 $5,500
 $35,000
 $35,500

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4 Which would be the most appropriate activity level to absorb the processing departments
overheads, given the following information?
Processing Finishing
Machine hours 30,000 5,000
Labour hours 6,000 50,000
Three different products are made through the processing and finishing departments.
 Units
 Machine hours
 Labour hours
 Labour cost

5 A company has budgeted overheads of $75,000 and has budgeted 37,500 labour hours for
the coming year to make 7,500 units.
What is the overhead absorption rate using a labour hour basis?
 $0.10
 $0.50
 $2
 $10

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Chapter 7 Answers
1 The correct answer is: Volume of space occupied by each cost centre

Floor space occupied could be used, but what will drive the level of heat and light costs
incurred by each cost centre will be the volume of space they occupy which need heat and
light rather than just the floor space. Therefore, volume of space occupied is the most
appropriate basis.

2 The correct answer is: $32,000

Assembly Painting Total
Rent and rates (3:2) 12,000 8,000 20,000
Depreciation (1.5:1) 6,000 4,000 10,000
Supervisor salary 15,000 20,000 35,000
33,000 32,000 65,000

3 The correct answer is: $35,500

Assembly Finishing Stores
Overheads 30,000 45,000 15,000
Reapportion stores (11:19)
11
Assembly =  1 5,000 5,500 (15,000)
11 + 19
19
Finishing =  1 5,000 9,500
11 + 19

35,500 54,500 –

4 The correct answer is: Machine hours

Processing is a machine-intensive process and so a machine hours basis for absorption will
be most appropriate.
The units are not identical so the first option is not the most appropriate.
Overheads normally increase on a time basis and therefore an hours basis is more
appropriate than the cost basis suggested in the fourth option.

5 The correct answer is: $2

Budgeted overheads
Overhead absorption rate =
Budgeted labour hour
75,000
=
37,500
= $2 per labour hour

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END OF CHAPTER

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 Job, batch and process
costing

Syllabus guide detailed outcomes

Having studied this chapter you will cover:
Syllabus
reference no.
Job costing D4 (a)
(i) Describe the characteristics of job costing.
(ii) Calculate unit costs using job costing.
Batch costing D4 (b)
(i) Describe the characteristics of batch costing.
(ii) Calculate unit costs using batch costing.
Process costing D4 (c)
(i) Describe the characteristics of process costing.
(ii) Calculate unit costs using process costing (Note: split of losses into normal and
abnormal is excluded).
(iii) Describe and illustrate the concept of equivalent units for closing work in
progress.
(iv) Calculate unit costs where there is closing work-in-progress.
(v) Allocate process costs between finished output and work-in-progress.
(vi) Prepare process accounts.

Exam context
Three important costing systems are looked at in this chapter but for your exam the most examinable one
is likely to be process costing so make sure you focus attention on this area. These costing systems
collect costs to suit the way that goods are processed or manufactured or the way that services are
provided. The majority of questions from this chapter are likely to be computational.

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Overview

Job, batch and process costing

Job and batch Process costing

Cost card Cost per unit

Losses

Normal losses

Subsequent
processes

Closing WIP

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1 What is a job?
1.1 It is a cost unit that consists of a single order or contract carried out to the special
requirements of the customer.

1.2 Jobs differ and it is necessary to keep a separate record of each job and the costs incurred
on that job.

Lecture example 1 Brain storming exercise

Required
List three examples of businesses that use job costing.

Solution
1

2 Collection of job costs

2.1 Material requisitions are sent to stores requesting necessary material.

2.2 The material requisition is used to cost materials allocated to a job. This is recorded on a
job cost sheet or job cost card.

Labour costs
2.3 A job card or job ticket is completed by the employee recording start and finish times and
then passed on to the employee who undertakes the next function and so on.

2.4 Direct labour is recorded on the job cost card.

2.5 Remember that where overtime is done at the specific request of the customer, it is treated
as a direct cost. For job costing, it will be included on the job card.

Expenses
2.6 Direct expenses are recorded on the job cost card.

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Overheads
2.7 Once direct costs have been recorded on the cost card, the job needs to be charged with
overheads.

2.8 Overheads are absorbed using predetermined overhead absorption rates. A job may pick up
overheads from several departments.

Lecture example 2 Brainstorming exercise

Required
Explain why it is important that overheads are included in the price quoted to a customer for a job.

Solution

Lecture example 3 Test standard question

The following information is available for job 4321, which is being produced at the request of a
customer:

Department Department Department

A B C
Materials consumed $4,000 $1,000 $1,500
Direct labour: $6 $8 $5
wage rate per hour
Direct labour hours 300 200 400
In accordance with company policy, the following are chargeable to jobs:
Fixed production overheads $5 per labour hour
Fixed administration overhead 80% of total production cost
Profit margin 20% margin on selling price
Required
Calculate the total cost and selling price of job 4321.

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Solution
Job 4321
$ $
Direct materials: department A
B
C

Direct labour: department A

B
C

Fixed production overhead:

Total production cost
Fixed administration overhead:
Total cost
Profit
Selling price

Lecture example 4 Test standard

Splodge Co has been asked to undertake a particular job for a customer. The relevant information
is as follows:
 4 kg of bricks will be used @ $5 per kg.
 Louis will need to work 2 hours and is paid $4 per hour.
 Ben will need to work 3 hours and is paid $3.50 per hour.
 Overtime is to be done if necessary as the customer wants the job completed ASAP
 Overtime is paid at triple time.
 Due to unforeseen complexities, Louis had to stay late on Tuesday and work 2 hours' overtime
to finish the job.
 Due to Ben’s cold he had to redo his work on Wednesday morning as he hadn’t done it properly
the first time.
 Ben had to use 1 kg extra of bricks to rework the job.
 Ben doesn’t normally have to rework his tasks.
Required
Complete the job card on the next page.

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Solution
Job 08/10/04 No 111 $
Materials – Bricks
Issued
Issued for rework
Labour
 Louis
Basic hours
Overtime premium
 Ben
Basic hours
Reworked hours
Total Direct Cost
Overheads ($200 per job)
Total Job Cost

3 Batch costing
3.1 A batch is a cost unit that consists of a separately, readily identifiable group of units.
The costing is the same as for a job.

4 Process costing – general principles

4.1 Process costing is a method of costing goods or services that are identical but not
separately identifiable until the end of the production process due to the continuous nature
of the process. Process costing involves spreading the total costs in a 'fair' way across the
output.

5 No losses
5.1 In the simplest process costing situation there are no losses and no work in progress.
Therefore the total cost is spread across the output:
Total process costs
Cost per unit of output =
Input units

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Lecture example 5 Preparation question

Input to Process I during a period was 1,000 units of raw materials, cost $40,000. Other costs
were: labour – $50,000, overheads – $20,000. All output was transferred to Process II.
Required
Calculate the cost per unit of output and complete the process account.

Solution
Cost per unit =
PROCESS I
Units $ Units $

6 Normal loss
6.1 In some processes there is a level of spoilage normally expected. Because it is expected
costs are not applied to these lost units. Normally the exam will give a normal loss figure as
a proportion or percentage of input. Any scrap value arising from selling the normal loss can
be used to reduce the process cost, and the normal loss is valued at this scrap value. The
net costs are then spread over the 'good' units output.

Total process  Scrap proceeds normal loss

6.2 Cost per 'good' unit =
Input units  normal loss units

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Lecture example 6 Preparation question

Input and costs are the same as in Lecture example 1.

Losses normally account for 10% input.
Output was 900 units.
Required
Calculate the cost per unit of output and complete the process and scrap accounts assuming all
scrapped units have a scrap value of $20 each.

Solution
Cost per unit =

PROCESS I
Units $ Units $
Raw materials 1,000 40,000 Normal loss
Labour 50,000 To Process II
Overheads 20,000

SCRAP ACCOUNT
Units $ Units $

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Lecture example 7 Test standard

A company produces product T within a single production process. During the month of October
20X6 the input into the process was 1,200 litres at a cost of $12,000. There were no opening or
closing inventory and all output was fully complete.
The table below shows the actual process results for the month:

Input (litres) Output Normal loss Abnormal loss Abnormal Scrap value
(litres) (litres) (litres) gains (litres) of all losses
($ per litre)
1,200 1,000 200 0 0 $5
Required
(a) Calculate the cost per litre of output
(b) Complete the entries in the product T process account below:
Description Litres Unit Total Description Litres Unit Total
cost cost cost cost
($) ($) ($) ($)
Input to Normal
process loss

Output
from
process

7 Subsequent processes
7.1 The output from one process may undergo further processing in a subsequent process. The
output then becomes the input of the next process.

8 Terminology
8.1 Labour and overhead costs together may be called conversion costs.

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9 Closing WIP
9.1 At the end of the accounting period we may have two types of output from a process:
(a) Fully completed good output
(b) Output that is incomplete
This partially completed output is known as work-in-progress (WIP).

9.2 To spread the cost fairly between units we use a measure called equivalent units. This will
calculate how many finished units the WIP equates to in terms of materials and labour input.
For example, two shirts each 50% complete have had the same amount of fabric and labour
input as one finished shirt, so in this case the two works in progress are equivalent to one
unit.

9.3 The number of equivalent units for each cost type are then used to calculate the cost per
equivalent unit. This then allows a value to be given to the finished goods and the WIP in the
process account.

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Lecture example 8 Technique demonstration

The following are introduced into Process I.

Raw materials 1,500 units $12,975
Labour $9,576
Overheads $3,156
Closing WIP: 50 units – completed as below
Raw materials 100% complete
Labour 60% complete
Overheads 30% complete
There are no losses in this process. Finished output is 1,450 units.

Solution
Required
(i) Complete the process account.
PROCESS I
Units $ Units $
Raw materials To Process II

Labour Closing WIP c/d

Overheads Rounding
(ii) Complete the statement of equivalent units.
Total Materials Labour Overheads
Finished output
Closing WIP

(iii) The cost per equivalent unit is:

Cost  Equivalent units $
Materials

Labour

Overheads

Finished unit total cost

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(iv) The value of finished goods is:

Finished goods (units)  Cost per finished unit =

The value of closing WIP is:

Cost item Equivalent units $

Materials

Labour

Overheads

Lecture example 9 Test standard

During the month of June the following inputs were made to a process:
$
Materials 15,575
Labour and overheads 8,480
The output from the process for the month consisted of 4,000 completed units and 600 units of
closing work in progress. The closing work in progress was 75% complete as to material input but
only 40% complete as to labour and overheads.
What is the value of the completed units and the closing work in progress?

Solution
Materials Labour/overheads
Proportion Equivalent Proportion Equivalent
Units complete units complete units
Completed units
Closing work in progress
Total equivalent units
Cost per equivalent unit
Valuation
$
Completed units
Materials
Labour/overheads

Closing work in progress

Materials
Labour/overheads

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Overview summary

Job, batch and process costing

Job and batch Process costing

 Job = single contract

 Batch = lots of identical items
Process costs – scrap proceeds normal loss
Cost per unit =
Units input – normal loss units

Cost card

Direct materials X Losses

Direct labour X
Prime cost X
Overheads X
Total cost X
Normal losses

Subsequent
processes

Closing WIP

 Equivalent units

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END OF CHAPTER

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 CHECKPOINT 2

Checkpoint 2 – Progress review

To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

It will help your learning if you take some time to reflect on the knowledge and skills covered during Stage 2.
If you feel you need further clarification on any of the key areas listed below you can use the online lecture for
the relevant chapter.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time commitments)
on how to focus your review on the key learning points in your notes.

Key messages from Stage 2

Key knowledge
You must understand:
How to account for overhead costs
What process costing is
The formulas for cost per ‘good’ unit
Why there might be closing work in progress
What job costing is
What batch costing is
What service costing is.

Key skills
You must be able to:
Calculate a full cost per unit using absorption costing
Calculate process cost per unit of output
Value output, losses and work in progress
Calculate job cost card
Identify situations when job, batch or service costing can be used

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Checkpoint 2 – Study support

Chapter 6 – Accounting for material and labour costs 50 mins

Key areas
 Applying and explaining FIFO, LIFO, periodic and cumulative weighted average
methods of pricing material issues
 Accounting for labour costs
Course Notes
 Rework Lecture example 1 to ensure you can calculate closing stock and gross profit 10 mins

Text
 Review Example 3.2.1 to understand the different inventory valuation methods. 15 mins

Practice & Revision Kit

Attempt Questions 6.1–6.3, 6.7–6.8, 6.18–6.22 and 6.26–6.30 25 mins

Chapter 7 – Overhead costs 35 mins

Key areas
 Allocation, apportionment, reapportionment and absorption of overheads

Course Notes
 Review Section 3, making sure you understand all the relevant terms 15 mins
 Section 6 and Lecture examples 5–7 should be reworked

Text
 Review Sections 4.4–4.6 of the Interactive Text 10 mins

Practice & Revision Kit

Attempt Questions 7.8–7.11 and 7.15–7.16 10 mins

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Chapter 8 – Job, batch and process costing 30 mins

Key areas
 Calculate unit costs using job, batch and process costing
 Describe the characteristics of job, batch and process costing
 Describe and illustrate the concept of equivalent units and work in progress

Course Notes
 Review Lecture examples 8 and 9 10 mins

Text
 Review Section 6 5 mins
Practice & Revision Kit
Attempt Questions 8.5–8.7, 8.17–8.20 and 8.23–8.25 15 mins

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END OF CHECKPOINT

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 The basics of using
spreadsheets

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Explain the purposes of a spreadsheet. E1 (a)
Explain the components of a blank spreadsheet screen E1 (b)
Describe methods to use/activate spreadsheet features E1 (c)
Describe methods of selecting ranges of cells E1 (d)
Explain the role of spreadsheets in management accounting E1 (e)
Explain how to enter values, text and dates including automatically filling a range of E2 (b)
cells and capturing data from another source.
Identify and use formulae incorporating common arithmetic operators, use of E2 (c)
brackets, absolute/relative cell references and simple functions (Sum, Average,
Round, IF).
Describe how to move/copy and paste data and formulae. E2 (e)
Describe, and select as appropriate, ways to edit data in a cell including the Find and E2 (f)
Replace feature.
Explain the causes of common error messages and how errors are corrected. E2 (g)
Describe how to save, password protect and open spreadsheets. E2 (h)
Describe features which can be applied to rows and columns (changing height/width, E3 (b)
inserting, deleting and hiding).
Describe and illustrate the appropriate use of adding comments to a cell. E3 (f)

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Exam context
The final two chapters are concerned with the spreadsheet system part of the syllabus. Much of the
information used for management control today is analysed or presented using spreadsheet software.
This chapter covers the basics of using spreadsheets. You would expect to see a question on identifying
the correct formula for a cell.

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Overview

The basics of using spreadsheets

What is a spreadsheet? Features and functions

Formulae

How are spreadsheets used

in business?

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1 Introduction
1.1 Spreadsheets are the basic tool of accountants to record and manipulate management
information.
This chapter is intended only as a summary and we strongly recommend that you walk
through Chapter 9 and 10 of the Interactive Text with MS Excel open on a computer to
ensure you are familiar with the basic functions of a spreadsheet.

Definition
1.2 A spreadsheet is an electronic piece of paper divided into rows and columns. The
intersection of a row and a column is known as a cell. Cells can be used to hold numerical
data. Data can be processed by defining a relationship between cells, to derive output.

1.3 Some common applications of spreadsheets by management accountants are:

(a) Preparation of management accounts
(b) Cash flow analysis, budgeting and forecasting
(c) Account reconciliation
(d) Revenue and cost analysis
(e) Comparison and variance analysis
(f) Sorting, filtering, categorising large volumes of data

Why use spreadsheets?

1.4 Spreadsheets make the calculation and manipulation of data easier and quicker.

2 Features and functions

2.1 Cell contents can include:
(a) Text – Words, abbreviations, descriptions, references, key words, decision summary
(b) Values – A number which can be used as part of a calculation
(c) Formulae – A definition of a mathematical relationship between cells. For example, if
we multiply the contents of two cells A1 and B1, the formula required is A1  B1.

2.2 The formula bar allows you to see and edit contents of the active cells. It also shows the
'cell address', which is the location of the current highlighted cell.

Formulae
2.3 Do not forget the equals sign at the beginning of formulae.

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Lecture example 1 Preparation question

Required

Provide the required formulae for the following spreadsheet computations given the following:
A B C
1 Sales value
2 January 150
3 February 120
4 March 100
5 Total
6 Sales tax
7 Gross Sales

(a) In cell B5 calculate total sales value (150 + 120 + 100). Formula

(b) In cell B6 calculate the sales tax payable at a rate of 20% on the sum calculated in B5.
Formula

(c) Calculate the gross sales value to invoice in Cell B7. Formula

2.4 When copying a formula we sometimes want one of the cell references to remain the same.
By using $ (absolute cell referencing) we can do this.
The following sales tax calculation uses absolute cell referencing. A $ sign either side of the
column letter anchors the formula to this cell. The formula can now be copied.
A B C D
1
2 Sales tax 0.20
3
Price (incl
4 Price (excl tax) Sales tax tax)
5 12 = B5+C5
6 15.5 = B6+C6
7 35 = B7+C7

Lecture example 2 Exam standard question worth 2 marks

What formula will be typed into C5 to calculate the sales tax (using absolute cell referencing)?

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Rounding
2.5 Simple rounding uses the following formula:
=ROUND(cell ref, decimal places required)
eg =ROUND(C4,2) This will round everything in cell C4 to 2 decimal places

Formulae with conditions

2.6 Statements used in conditional formulae have the following structure:
=IF (logical_test, value_if_true, value_if_false)
For example:
= IF (A5>500,"HURRAY", "MORE SALES PLEASE")
Note the following symbols which can be used in formulae with conditions:
< less than
<= less than or equal to
= equal to
> greater than
>= greater than or equal to
<> not equal to

Lecture example 3 Exam standard question worth 2 marks

Required
Given that cell C4 contains the monthly sales revenue, devise the conditional formula to prompt
the payment of a bonus. Bonuses are paid if monthly revenues are equal to or exceed $200,000.

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Overview summary

The basics of using spreadsheets

What is a spreadsheet? Features and functions

 An electronic piece of paper divided

into rows and columns
Formulae

 Absolute cell referencing

 Rounding
 Conditions
How are spreadsheets used
in business?

 Management accounts
 Cash flow forecasts
 Account reconciliation
 Revenue and cost analysis
 Comparison and variance analysis
 Sorting, filtering, categorising

Chapters 9 and 10 are strictly summaries; we

strongly recommend that you walk through
Chapters 9 and 10 of the Interactive Text with
MS Excel open on a computer to ensure you
are familiar with the basic functions of a
spreadsheet.

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Chapter 9 Questions
The following information relates to Questions 1 to 3
A B C D
1 Unit selling price $50 Unit variable cost $30
2
3 Sales volumes
4 Quarter 1 1,000
5 Quarter 2 1,500
6 Quarter 3 2,000
7 Quarter 4 2,100
8
Sales revenue Variable costs Contribution
9 Sales budgets
10 Quarter 1 50,000 30,000 20,000
11 Quarter 2
12 Quarter 3
13 Quarter 4

1 The cell B10 shows the sales revenue in $ for quarter 1. Which of the following would be a
suitable formula for this cell that could then be copied through to cells B11–B13?
 = B1*B4
 = $B$4*B1
 = $B$1/*B4
 = $B$1*$B4 (2 marks)

2 The cell C10 shows the total variable costs for quarter 1. Which of the following would be a
suitable formula for this cell that could then be copied down through to cells C11–13?
 = $B4*D1
 = $D$1*$B4
 = D1* B4
 = D1*$B$4 (2 marks)

3 The cell D10 shows the contribution in quarter 1. Which of the following would be a suitable
formula for this cell that could then be copied down through to cells D11–13?
 = B10 – C$10
 = $B$10 – $C$10
 = $B10 – $C10
 = B$10 – C10 (2 marks)

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4 The formula bar displays:

 The formula in the active cell and no other information
 The location of the active cell and the formula in the active cell
 The formula in the active cell and the result of the formula (1 mark)

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Chapter 9 Answers
1 The correct answer is: = $B$1*$B4

2 The correct answer is: = $D$1*$B4

3 The correct answer is: = $B10 – $C10

4 The correct answer is: The location of the active cell and the formula in the active cell

END OF CHAPTER

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 Using spreadsheets to
present information

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
Syllabus
reference no.
Describe advantages and limitations of spreadsheets. E1 (f)
Explain factors which influence spreadsheet design and the features of a well- E2 (a)
structured worksheet/workbook.
Identify and use formulae in a workbook containing multiple worksheets and link cells E2 (d)
from different workbooks.
Describe and illustrate appropriate formatting features for the display of numbers, E3 (a)
text, cell borders and patterns and for cell/worksheet protection.
Describe features which affect the on-screen view and can be particularly useful E3 (c)
when working with large worksheets/workbooks.
Use Sort and Filter to manipulate data. E3 (d)
Describe how charts (line, column, bar, pie, scatter, area) can be created from E3 (e)
spreadsheet data and interpret the data shown.
Describe how to select the output to be printed. E3 (g)
Select the combination of page layout/set-up options to achieve an effective, user- E3 (h)
friendly printed output, especially for worksheets containing large amounts of data.

Exam context
The questions from this chapter will be narrative and although you will not see questions asking you to
prepare chart or graphs in the exam, you could quite easily be asked how you could prepare one.

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Overview

Using spreadsheets to present

information

Advantages Disadvantages Presentation of data Formatting data

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1 Presentation of data
1.1 The data in a spreadsheet could be used to generate a single linear graph as shown below.

A B
Single Linear Graph
1
2 Data for y=2x+10 35
3 X values Y values
30
4 1 12
25
5 2 14
20
6 3 16 y=2x+10
7 4 18 15

8 5 20 10
9 6 22 5
10 7 24 0
11 8 26 1 2 3 4 5 6 7 8 9 10
12 9 28 x values
13 10 30

The chart wizard provides a tool to simplify the process of chart construction.
In chart wizard having selected the information you want to chart in the spreadsheet, you
can choose the type of chart you want.

1.2 Both charts have been created using the line graph option. The data series have been
clearly labelled and a suitable title added to the chart.

A B C
Multiple Linear Equations
1 Multiple equations
3 X values y=10+2x y=x+20 35
4 1 12 21
30
5 2 14 22
25
6 3 16 23
20 y=2x+10
7 4 18 24
15 y=x+20
8 5 20 25
10
9 6 22 26
5
10 7 24 27
11 8 26 28 0
1 2 3 4 5 6 7 8 9 10
12 9 28 29
x values
13 10 30 30

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1.3 Chart wizard can also create many kinds of bar or pie charts.

2 Other aspects of spreadsheets

2.1 Excel can work as a multi spreadsheet tool, linking spreadsheets together, these are
sometimes referred as three dimensional spreadsheets.
For example producing a profit forecast for two regions each could be done on a separate
spreadsheet and the two could be consolidated together on a final page.

2.2 A macro is an automated process that may be written by recording key strokes and mouse
clicks. They can be useful when a particular process needs to be carried out numerous
times.
Macros can be very complex. However, there some basic macros that are useful, often with
a keyboard shortcut being allocated to the particular function.

3 Excel graphs and charts

3.1 Creating a chart
 Select the cells that contain the data needed for the chart.

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 From the menu bar select Insert – Chart. This will take you to a chart wizard which
will prompt you for a number of different entries.
 Select the Chart Type and then click the Next button.
 If you are happy with the look of the chart select Next again.
 Step 3 of the wizard will prompt you for the Chart Title, a label for the X and Y axis.

 Step 4 will ask you for a location for the chart. You can select the existing worksheet
or a new worksheet.

3.2 Changing the chart type

 Activate the current Chart by hovering over it and making a left click on the mouse/
touch pad. From the menu bar select Chart – Chart Type and select the type you
would like to change it to. Press ok.
 All the options for managing the chart can be found in Chart – Chart Options.

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4 Formatting data
Excel has many formatting features to change the way text and numbers are displayed in the cells.

4.1 Creating a custom format:

 Select the cells to which you want to apply the format.
 From the menu bar select Format – Cells.

 Select the Custom category.

 Choose the format closest to what you have in mind.
 Press OK.

4.2 Modifying the font/size/colour of the characters

 Select the cells or characters concerned then choose the font, size an colour from the
list boxes on the Formatting toolbar.

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4.3 Formatting characters

 Select the cells or characters concerned then activate the attribute (s) you want to
apply.
 From the menu bar select Format – Cells and the Font tab.

4.4 Borders and underlining

 Select the cells concerned. Then choose a border from the palette on the Formatting
toolbar:

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4.5 Aligning cell contents

 Select the cells concerned, and then from the menu bar select Format – Cells and
Alignment Tab.

 Here you can align across columns and position the text or number in the row, either
at the top, middle or bottom.
 You can also align the contents of the cell to a particular angle by moving the line in
the orientation box clockwise or anti clockwise around the semi circle.

5 Managing lists and advanced Excel functions

Excel provides you with convenient features to help you manage and analyse lists of related
data.
These include but are not limited to:
 Sort
 Filter

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5.1 Sorting data

 Select a cell within the range of data you want to sort and from the menu bar select
Data – Sort.

 You will then have the option to choose the column heading that you would like to sort
from.
 You can either sort in ascending or descending order.

5.2 Filtering data

 Filters allow you to view only the data meeting the criteria you choose to filter for. For
example, you could filter by country to view only those individuals from a specific
country.
 Select a cell within the range of data you want to Filter and From the menu bar select
Data – Auto Filter.

 From any column heading you can click on the drop down arrow and filter the data as
required.

6 Advantages and disadvantages of spreadsheets

Advantages Disadvantages
Excel is easy to learn Garbage In = Garbage Out.
Spreadsheet usefulness is limited to flaws
in the original design
Excel is easy to use Formulae/information in cells can be hidden
and therefore it can be difficult to follow
complex calculations
Spreadsheets enable fast and easy Spreadsheet format can provide credence
calculation and manipulation of large to presented data even if it is flawed
volumes of data

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Enables the analysis, reporting and sharing Research has demonstrated that a high
of financial information in prescribed proportion of large models contain material
formats flaws
Enables 'What-If' or sensitivity analysis to A database may be more useful for large
be performed very quickly volumes of data
Electronic data can be downloaded directly Spreadsheets can easily be corrupted and
into a spreadsheet it is difficult to find errors in large models

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Overview summary

Using spreadsheets to present

information

Advantages Disadvantages Presentation of data Formatting data

 Easy to use/learn  Original design  Chart wizard  Font size/colour

 Fast calculations  Formula for complex  Bar/pie chart  Characters
 Large volume calculations  Excel graphs and charts  Borders and underlining
 Analysing/sharing/reporting  Errors/flows  Alignment
information  Corruption  Filtering
 Scenario planning  Sorting
 Linking spreadsheets

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END OF CHAPTER

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Checkpoint 3 – Progress review

To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

It will help your learning if you take some time to reflect on the knowledge and skills covered during
Stage 3.
If you feel you need further clarification on any of the key areas listed below you can use the
online lecture for the relevant chapter.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time
commitments) on how to focus your review on the key learning points in your notes.

Key messages from Stage 3

Key skills
One of the key competencies you require is to use information and communication technology.
The areas covered in Stage 3 will help you to demonstrate this competence.

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Checkpoint 3 – Study support

Chapter 9 – The basics of using spreadsheets 40 mins

Key areas
 Role and features of spreadsheets
 Basic formulae
Course Notes
 Attempt questions at the end of the chapter 10 mins

Text
 Review Section 4 and attempt the quick quiz at the end of the chapter 20 mins

Practice & Revision Kit

Attempt Questions 9.1–9.5 and 9.21–9.35 10 mins

Chapter 10 – Using spreadsheets to present information 40 mins

Key areas
 Describe the advantages and disadvantages of spreadsheets
 Describe and illustrate formatting tools and linking and combining data
sources
Course Notes
 Review Section 4 10 mins

Text
 Review Sections 2 and 4. Attempt the quick quiz at the end of the chapter 20 mins
Practice & Revision Kit
Attempt Questions 10.1–10.10 10 mins

END OF CHECKPOINT

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 Answers to
Lecture examples

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Chapter 1
Answer to Lecture example 1
Purchasing
Human resources
General administration
Finance
Selling and marketing
Stores

Answer to Lecture example 2

(a) Purchasing
 Ordering required raw materials or finished goods for resale
 Negotiating with suppliers for the best overall deal in terms of price, service,
delivery time and quality
 Negotiating discounts with suppliers
 Ensuring only necessary purchases are made by the business
(b) Human resources
 Hiring and firing staff
 Training
 Staff welfare
 Staff appraisals and promotions/pay rises
(c) General administration
 Secretarial support
 Dealing with telephone queries
 Renting and maintenance of properties
(d) Finance
 Raising invoices to customers
 Setting credit limits for new customers
 Recording and paying invoices from suppliers
 Receiving and recording cash from customers
 Purchasing non-current assets
 Paying employees
 Managing cash balances
 Producing management information regarding the performance of the company
(e) Selling and marketing
 Meeting clients and winning new orders
 Recording sales orders
 Advertising and marketing
 Management of sales personnel

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(f) Stores
 Despatching customer orders
 Identifying when inventory are low and initiating purchase requisition
 Receive and record purchases

Answer to Lecture example 3

 Authorisation policies for the purchase of non-current assets
 Procedures for choosing new suppliers
 Procedures for accepting new credit customers
 Procedures for processing documents
 Authorisation policies for payments

Answer to Lecture example 4

(a) Sales ledger
(b) One customer account
(c) Customer account number
Customer name
Credit limit
Customer address

Answer to Lecture example 5

(a) Real-time, as up-to-date records are required so that the same ticket isn't sold twice.
(b) Batch, up-to-date records of the salary due are not required until the end of the month
when payment is to be made.
(c) Real-time, so that inventory records are updated immediately.

Chapter 2
Answer to Lecture example 1
(a) Planning Management needs to:
Decide company's objectives and how they can be achieved;
Plan resources required, how they will be obtained and how
they will be used. These plans are produced as BUDGETS.
(b) Controlling To ensure that once a plan of action has been put into
operation, it is achieving the business' objectives, VARIANCES
are used for controlling actual costs when compared to
budgeted costs.
(c) Decision making To make a choice between alternatives, enough information is
required to ensure that an informed decision is made.

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Answer to Lecture example 2

Financial accounting Management accounting
Legal requirement  
Users External and internal Internal
Precision True and fair As accurate as possible,
used to make decisions.
Rules Generally accepted No hard and fast rules,
accounting practices accepted techniques.
Reporting – Scope Whole organisations Segments/divisions etc
– Frequency Annual As required
– Format Governed by Companies Act No set format

Answer to Lecture example 3

Good information should be:
Accurate
Cost effective
Complete
User focused
Relevant
Appropriately communicated
Timely
Easy to use

Chapter 3
Answer to Lecture example 1
Car manufacturer One car
Builder One house/roof/office
Management consultant One hour/job/visit

Answer to Lecture example 2

Direct costs include direct materials and direct labour.

Answer to Lecture example 3

Overhead costs include supervisor salaries, rent, rates, light and heat, cleaning and
maintenance.

Answer to Lecture example 4

Non-production costs would include selling and distribution and administration costs.

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Answer to Lecture example 5

Direct costs – chocolate, toffee/filling, production line wages, cost of wrapper
Indirect costs/overheads – factory supervisor salary, rent and rates of factory, depreciation
of equipment
Non-production costs – advertising and marketing, distribution of chocolate bars to
customers, head office administration

Answer to Lecture example 6

(a) Fixed cost
Total
cost
$

FC

Output (units)
(b) Variable cost
Total VC
cost
$

Output (units)
(c) Mixed (semi-variable) cost
Total
cost
$ Variable costs

Fixed cost

Output (units)

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(d) Stepped cost

Total
cost
$

Output (units)

Answer to Lecture example 7

(a) To help set selling prices
(b) To aid decision making
(c) To help with planning and budgeting
(d) As a means of controlling costs
(e) For inclusion in reports to various parties

Answer to Lecture example 8

(i) Variable (marginal) costing
Direct materials $12.00
Direct labour $13.50
Variable overheads per unit =
$88,000/11,000 units $8.00
Total variable (marginal cost) $33.50
(ii) Full absorption costing
Total variable cost $33.50
Add: Overhead absorption rate
$110,000/11,000 units $10.00
Full product cost $43.50

Answer to Lecture example 9

(a)
$
Selling price/unit 12
Prime cost/unit 4
Variable production cost/unit 3
Marginal cost (MC)/unit 7
= Contribution/unit 5

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(b)
$
Selling price/unit 12
Marginal cost/unit 7
Fixed production cost/unit 2 (30,000/15,000 units)
AC cost/unit 9
= Profit/unit 3
(c)
$ $
Sales (12,000 units at $12) 144,000
Opening inventory (2,000 units at $7) 14,000
Variable production costs 105,000
(15,000 units at $7)
Closing inventory (5,000 units at $7) (35,000)
Cost of sales (MC basis) 84,000
Contribution 60,000
Fixed costs (30,000)
Profit 30,000
(d)
$ $
Sales (12,000 units at $12) 144,000
Opening inventory (2,000 units at $9) 18,000
Production costs 135,000
(15,000 units at $9)
Closing inventory (5,000 units at $9) (45,000)
Cost of sales (AC basis) (108,000)
Profit 36,000
(e) The two profit figures differ by $6,000 because under AC the increase in inventory
during the months ($27,000) is higher than the increase under MC ($21,000). This is
because $6,000 of fixed cost has been carried forward on the statement of financial
position as an asset under AC principles, but written off against profit under MC
principles.

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Chapter 4
Answer to Lecture example 1
Total costs
Cost per unit =
Production units
$125,400
A = $9.65 per unit
13,000
$226,000
B = $9.22 per unit
24,500
$312,000
C = $9.71 per unit
32,120
$126,000
D = $13.13 per unit Cost centre B has the best performance.
9,600

Answer to Lecture example 2

(a) The correct answer is 27.5%
Profit
Profit margin =  100%
Sales
11,000
=  100%
40,000
= 27.5%
(b) The correct answer is 55%
Gross profit = Sales – Cost of sales = $22,000
Gross profit
Gross profit margin =  100%
Sales
= 55%
(c) The correct answers are: Selling costs/sales: 12.5% Admin costs/sales: 15%
Selling costs
Selling costs/sales ratio =  100%
Sales
5,000
=  100%
40,000
= 12.5%

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Administration costs/sales ratio

Administration costs
=  100%
Sales
6,000
=  100%
40,000
= 15%

Answer to Lecture example 3

The correct answer is: Division M has a greater return on investment and residual income than
division L
Division L
Profits 33,000
ROI =  100% =  100% = 12%
Capital employed 270,000
RI = Profits – Notional interest charge
= 33,000 – 14%  270,000
= $(4,800)
Division M
Profits 62,000
ROI =  100% =  100% = 16%
Capital employed 387,000
RI = Profits – Notional interest charge
= 62,000 – 14%  387,000
= $7,820

Answer to Lecture example 4

(14,000  3) hours
(i) Efficiency ratio =  100% = 105%
40,000 hours
40,000 hours
(ii) Capacity ratio =  100% = 111%
36,000 hours
(14,000  3) hours
(iii) Activity ratio =  100% = 117%
36,000 hours
E  C = A, ie 105%  111% = 117%
The activity ratio of 117% (more output than budgeted and more standard hours produced
than budgeted), is explained by the 111% capacity working, and by good efficiency of 105%.

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Chapter 5
Answer to Lecture example 1
 Record and retrieve information quickly and easily
 Automatically accurate and have built in checking facilities
 Capable of sorting information in many different ways and printing off detailed reports
as required

Answer to Lecture example 2

Medieval Castle
123 Code R02 Retail shops Labour
124 Code T05 Guided Tours Staff clothing and equipment
125 Code G05 Garden walks Staff clothing and equipment
126 Code X04 General overhead Heat and light
127 Code C06 Café Rental costs
128 Code R01 Retail shop Phone and fax
129 Code G05 Garden walks Staff clothing and equipment
130 Code R03 Retail shop Goods for resale
131 Code X02 General overhead Labour
132 Code G03 Garden walks Goods for resale (also acceptable to code as
R03
133 Code C03 Café Goods for resale

Answer to Lecture example 3

The correct answer is: 310 units
Units

Budgeted sales 290

Add closing inventory required at end February
50

Less opening inventory held at beginning February

(30)
Order quantity 310

Answer to Lecture example 4

The correct answer is: 1,455 kg
kg

Gamma required for production (300  5) 1,500

Add closing inventory required at end August 75

Less opening inventory held at beginning August (120)

Order quantity 1,455

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Chapter 6
Answer to Lecture example 1
(a) FIFO
Units Cost Value
1 March 100 2 200
2 March 300 2.10 630
5 March (50) (2) (100)
17 March 100 2.30 230
20 March (50) (2) (100)
(100) (2.10) (210)
300 650
LIFO
Units Cost Value
1 March 100 2 200
2 March 300 2.10 630
5 March (50) (2.10) (105)
17 March 100 2.30 230
20 March (100) (2.30) (230)
(50) (2.10) (105)
300 620
AVCO
Units Cost Value
1 March 100 200
2 March 300 630
5 March 400 2.075 830
(50) (2.075) (103.75)
17 March 100 230
450 2.125 956.25
20 March 150 (2.125) (318.75)
300 637.50
(b)
FIFO LIFO AVCO
Sales (50  5) 250 250 250
(150  5) 750 750 750
1,000 1,000 1,000
Less Cost of sales (410) (440) (422.50)
FIFO: 100 + 100 + 210
LIFO: 105 + 230 + 105
AVCO: 103.75 + 318.75

590 560 577.50

(c) LIFO
(d) FIFO = Highest closing inventory
FIFO = Highest gross profit

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Answer to Lecture example 2

FIFO LIFO AVCO
 Costs issues of inventory at the most recent 
purchase price
 Costs issues of inventory at the oldest purchase 
price
 Values closing inventory at the most recent 
purchase price
 Closing inventory is valued at the average of the 
cost of purchases

Answer to Lecture example 3

FIFO
Journal
Code Debit ($) Credit ($)
9 June 300 69,000
9 June 600 69,000

12 June 400 84,500

12 June 300 84,500

18 June 300 50,000

18 June 600 50,000

27 June 405 23,000

27 June 300 23,000

Answer to Lecture example 4

(a)
$
Basic pay 42 hours  $6 252
Overtime premium (42 – 35 hours)  ($6  0.5) 21
Gross pay for week 39 273
Gross pay
(b) Unit labour cost =
Number of units produced
273
=
56
= $4.88/unit

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Answer to Lecture example 5

(a)
$
First 40 units 40  $4 160
Remaining 16 units 16  $4.50 72

Gross pay for week 39 232

Gross pay
(b) Unit labour cost =
Number of units produced
232
=
56
= $4.14/unit

Answer to Lecture example 6

(a)
$
Cash paid to employees (net pay) 300,000
Income tax deductions 84,620
Employee's social security contributions 26,930
Pension fund deductions 22,000
Gross pay 433,550
(b)
$
Gross pay 433,550
Employer's social security contributions 38,465
Total labour cost 472,015

Answer to Lecture example 7

Direct labour cost
$
Production workers' basic active hours (600 – 45 + 50)  $7 4,235
Indirect labour cost
$
Direct production workers' overtime premium
50 hours  ($7  0.5) 175
Direct production workers' idle time (45  $7) 315
Other workers (300  $10) 3,000
Other workers' overtime (10  [$10  1.5]) 150
3,640

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Chapter 7
Answer to Lecture example 1
(a) Spraying dept, Cutting dept, Assembly dept, Finishing dept
(b) Stores, Maintenance dept, Inspection dept, Canteen

Answer to Lecture example 2

Basis
– Floor area
– Carrying value or cost of equipment
– Number of employees
– Volume of space occupied/floor area
– Value of equipment insured
– Number of store requisitions

Answer to Lecture example 3

Allocation and apportionment
Processing Packing Canteen
department department
$ $ $
Canteen – – 18,000
Supervisor A 15,000 – –
Supervisor B – 10,000 –
Rent (50:25:5) 12,500 6,250 1,250
Heat (50:25:5) 3,125 1,563 312
Depreciation (3:3:1) 3,000 3,000 1,000
Welfare (5:4:1) 2,500 2,000 500
36,125 22,813 21,062

Answer to Lecture example 4

Reapportionment
Production depts Service depts
X Y Stores Maintenance
$ $ $ $
Overheads 70,000 30,000 20,000 15,000
Stores (50:50) 10,000 10,000 (20,000) –
Maintenance (60:40) 9,000 6,000 – (15,000)
89,000 46,000 Nil Nil

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Answer to Lecture example 5

(a) Use when units are identical
(b) When the production process is labour intensive
(c) When the production process is machine intensive
(d) When labour cost constitutes a major part of direct production costs or the question
specifically asks you to use this as the basis

Answer to Lecture example 6

As units are not identical the units basis of absorption is not appropriate.
Mixing department is labour intensive therefore a suitable
$10,000
OAR =  50c per labour hour
20,000 labour hours
Stirring department is machine intensive therefore a suitable
$15,000
OAR =  25c per machine hour
60,000 machine hours

Answer to Lecture example 7

Jupiter
cost per unit
$
Direct materials 2.50
Labour Mixing 1 hour  $6 6.00
Stirring ¼ hour  $10 2.50
Overheads Mixing 1 hour  50c 0.50
Stirring 2 hours  25c 0.50
Unit production cost 12.00
Under- or over-absorption of fixed overheads
Budgeted overhead
Predetermined OAR =
Budgeted production activity
During the year businesses record the overheads:
Overhead absorbed = Actual activity  pre-determined OAR
goes to I/S eg labour HRS; depends what basis you called the OAR.
At the end of the year actual overhead costs are known, it likely that:
Overhead absorbed ≠ Actual overhead
eg now we know the electricity bill for the factory.
We only want the actual expense to appear in our year end accounts, so we have to adjust:
Actual overhead X
Overhead absorbed (actual activity  OAR) (X)
Under (over)-absorption X

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 Under-absorption means we have too little expense so need to top up – Debit to

statement of profit or loss
 Over-absorption means we have too much expense so need to reduce it – Credit to
statement of profit or loss

Answer to Lecture example 8

Predetermined OAR:
Budgeted OH 100,000
  $5 / unit
Budgeted activity 20,000

Overhead absorbed for the period:

Actual activity  OAR = 24,000  $5 = $120,000

currently in statement of profit or loss

Under/over absorption:
Actual OH 117,000
Absorbed OH (120,000)
Over absorption (3,000) need credit to statement of profit or loss to reduce
expense.

Chapter 8
Answer to Lecture example 1
Builders
Electricians
Plumbers

Answer to Lecture example 2

If the overheads of the business are not included in the job quote then the overheads will
never be covered by the income from jobs. Only by including the overheads before any
profit element is added can the business be sure of earning enough to cover its overheads
as well as the direct costs.

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Answer to Lecture example 3

Job 4321
$ $
Direct materials: department A 4,000
B 1,000
C 1,500
6,500
Direct labour: department A 1,800
B 1,600
C 2,000
5,400
Fixed production overhead: 900 hours  $5 4,500
Total production cost 16,400
Fixed administration overhead: 80%  $16,400 13,120
Total cost 29,520
Profit: 20/80  $29,520 7,380
Selling price 36,900

Answer to Lecture example 4

Job 08/10/X4 no 111 $
Materials – Bricks
– Issued 4 kg @ $5 20.00
– Issued for rework 1 kg @ $5 5.00

Labour
– Louis basic hours 4 hours @ $4 16.00
– Louis O/T premium 2 hours @ $8 16.00
– Ben basic hours 3 hours @ $3.50 10.50
– Ben reworked hours 3 hours @ $3.50 10.50

Total direct cost 78.00

Overheads $200 per job 200.00
Total job cost 278.00

Answer to Lecture example 5

Total process costs $110,000 $110/unit
Cost/unit = = =
Output units 1,000
PROCESS I
Units $ Units $
Raw materials 1,000 40,000 To Process II 1,000 110,000
Labour 50,000
Overheads 20,000
1,000 110,000 1,000 110,000

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Answer to Lecture example 6

Total process costs – Scrap value normal loss
Cost/unit =
Units input – Normal loss units
110,000 – 2,000 $120/unit
= =
1,000 – 100
PROCESS 1
Units $ Units $
Raw materials 1,000 40,000 Normal loss 100 2,000
Labour 50,000 To Process II 900 108,000
Overheads 20,000
1,000 110,000 1,000 110,000

SCRAP ACCOUNT
Units $ Units $
Process 1
– Normal loss 100 2,000
Cash 100 2,000

Answer to Lecture example 7

Task 1
The cost per litre of output:
Input cost – scrap value of normal loss $12,000 – (200  $5)
= = $11
Expected output 1,000 litres
Task 2
The entries in the product T process account:
Unit Total Unit Total
Description Litres cost cost Description Litres cost cost
$ $ $ $
Input to Normal loss 200 5 1,000
process 1,200 10 12,000 Output from
process 1,000 11 11,000
12,000 12,000

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Answer to Lecture example 8

(i)
PROCESS I
Units $ Units $
Raw Materials 1,500 12,975 To Process II 1,450 25,042
Labour 9,576 Closing WIP 50 659
Overheads 3,156 Rounding 6
1,500 25,707 1,500 25,707

(ii) Statement of equivalent units:

Total Materials Labour Overheads
Finished output 1,450 1,450 1,450 1,450
Closing WIP 50 50 30 15
1,500 1,500 1,480 1,465
(iii) Cost per equivalent unit:
 $
Materials $12,975  1,500 = 8.65
Labour $9,576  1,480 = 6.47
Overheads $3,156  1,465 = 2.15
17.27
(iv) Valuations:
$
Finished goods (1,450 × $17.27) 25,042

Closing WIP $
Materials (50  $8.65) 433
Labour (30  $6.47) 194
Overheads (15  $2.15) 32
659

Answer to Lecture example 9

Materials Labour/overheads
Proportion Equivalent Proportion Equivalent
Units complete units complete units
Completed units 4,000 100% 4,000 100% 4,000
Closing work in progress 600 75% 450 40% 240
Total equivalent units 4,450 4,240
$15,575 $8,480
Cost per equivalent unit
4,450 4,240
= $3.50 per EU = $2 per EU

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Valuation:
$
Completed units
Materials (4,000  $3.50) 14,000
Labour/overheads (4,000  $2) 8,000
22,000
Closing work in progress
Materials (450  $3.50) 1,575
Labour/overheads (240  $2) 480
2,055

Chapter 9
Answer to Lecture example 1
(a) = B2 + B3 + B4 or = SUM(B2 : B4)
(b) = B5* 0.2
(c) = B5 + B6 or = B5* 1.2

Answer to Lecture example 2

Absolute cell referencing: = B5*$C$2

Answer to Lecture example 3

= IF (C4>=200000, 'BONUS', 'NO BONUS')

Chapter 10
No Lecture examples

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 APPENDIX A

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 Appendix A

Chapter 1 – Overview summary

Business organisation and

accounting

Computerised Cost ledger Policy manual Functions

accounting systems accounting

Practices and procedures Purchasing

 Batch processing
 Real-time online  Quantity
processing  Quality
 Price
Personnel
 Training
Integrated system Interlocking system  Staff welfare
Finance
 Raising money
Combined cost and financial Separate ledgers for cost and  Recording
accounting system financial accounting  Providing
information
Marketing
 Price
 Promotion
 Product
 Place
Stores
 Despatch
 Recording

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Chapter 2 – Overview summary

Introduction to management
information

Information and data Demand and sources Limitations of

Uses
of information cost accounting

 Accurate  Planning  Internal  Reliability

 Cost effective  Control  External  Format
 Complete  Decision making  Primary  Understandable
 User focused  Secondary  Complete
 Relevant  Timeliness
 Appropriately
communicated
 Timely
 Easy to use
Accounting systems

Management Financial accounting

accounting

Vs

 Legal requirement
 Users
 Precision
 Rules
 Reporting
Purpose Purpose

 Planning  Statement of profit or loss

 Control  Statement of financial
 Decision making position
 Statement of cash flows

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Chapter 3 – Overview summary

Cost units, cost classification and

profit reporting

Unit of production
or service in
Terminology for Costing Finding the cost of one unit
relation to which Cost unit
 Profitability
costs may be
ascertained  Selling price
 Inventory valuation

Cost behaviour

 Fixed Classification by function

 Variable
 Semi-variable
 Stepped Arrange costs into logical
groups for analysis

Production costs Non-production costs

 Associated with the  All other costs in a business

production of goods and
services

Materials Materials

 Cost of material used in  Cost of material used

production elsewhere in business

Further Labour
Labour
classification by
nature
 Cost of workforce used in  Cost of workforce used
production elsewhere in business

Overheads
Overheads
 Cost of overhead required
to support production  Cost of overhead required
to support function

Marginal costing
Direct cost Indirect cost  Stock valued at variable cost of
production
 Directly traced to product  Incurred as a result of
making a product but not Absorption costing
directly traceable
 Stock valued at full production
cost
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Chapter 4 – Overview summary

Management responsibility and

performance measurement

Efficiency, capacity
Cost centre Profit centre Investment centre
and volume ratios

 Costs  Costs
 Costs
 Revenues
 Revenues
 Investments

Profit
% ROI
Capital employed

Profit − Notional interest RI

Sales
% Asset turnover
Capital employed

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Chapter 5 – Overview summary

Source documents and coding

Types Problems Materials

 Sequential  Incorrect data entered

 Block  Incorrect cost centre allocation
 Faceted  Missing information
 Mnemonic
 Hierarchical

Categories Buying materials Control of inventory

 Raw materials  Purchase requisition

 Work in progress  Purchase order
 Finished goods  Goods received note

Locating inventory Issuing materials Ordering inventory

 Inventory record card  Materials requisition note

 Bin card  Materials returned note
 Materials transfer note

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Chapter 6 – Overview summary

Accounting for material and labour

costs

Inventory
issue/valuation Labour costs

FIFO
Time-based Piecework Gross pay and
 First goods issued systems systems deductions
are those purchased
first
 Hourly wage rate =  Wages on number  Deduct income tax
direct cost of units produced and national
 Overtime premium = insurance
LIFO contributions
an indirect cost
unless: specifically
requested
 First goods issued
are those purchased
last

Cumulative
weighted
average

Periodic
weighted
average

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Chapter 7 – Overview summary

Overheads and absorption

costing

Calculating the cost per unit

 Pricing
 Inventory valuation
 Profitability analysis

Types of overhead Predetermined OAR

 OAR calculated at the start of the

year based on budgeted figures
Production Non-production

Allocating overheads to units to

Calculating a profit or loss
find the full production cost
using absorption costing

(See Chapter 3)

 Predetermined OAR used to

Three-step approach to estimate overheads during the year
absorption costing to calculate a profit or loss figure.

 Getting the production overhead cost

into the cost card
Allocating non-production
overheads to a product

 Can be done for internal reporting

purposes

(1) Allocate and (2) Reapportion (3) Absorb

apportion
 Overheads from service cost  Overheads from production cost
 Overheads to cost centres on
centres to production cost centres to individual units using:
some fair basis
centres on some fair basis Budgeted overhead
– Production cost centres OAR =
Budgeted activity
– Service cost centres
(1) Calculate OAR using
appropriate activity
(2) Calculate the activity for a
single unit and apply OAR

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Chapter 8 – Overview summary

Job, batch and process costing

Job and batch Process costing

 Job = single contract

 Batch = lots of identical items
Process costs – Scrap proceeds normal loss
Cost per unit =
Units input – Normal loss units

Cost card

Direct materials x Losses

Direct labour x
Prime cost x
Overheads x
Total cost x
Normal losses

Subsequent
processes

Closing WIP

 Equivalent units

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 Appendix A

Chapter 9 – Overview summary

The basics of using spreadsheets

What is a spreadsheet? Features and functions

 An electronic piece of paper divided

into rows and columns
Formulae

 Absolute cell referencing

 Rounding
 Conditions
How are spreadsheets used
in business?

 Management accounts
 Cash flow forecasts
 Account reconciliation
 Revenue and cost analysis
 Comparison and variance analysis
 Sorting, filtering, categorising

Chapters 9 and 10 are strictly summaries, we

strongly recommend that you walk through
Chapters 9 and 10 of the Interactive Text with
MS Excel open on a computer to ensure you
are familiar with the basic functions of a
spreadsheet.

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Chapter 10 – Overview summary

Using spreadsheets to present

information

Advantages Disadvantages Presentation of data Formatting data

 Easy to use/learn  Original design  Chart wizard  Font size/colour

 Fast calculations  Formula for complex  Bar/pie chart  Characters
 Large volume calculations  Excel graphs and charts  Borders and underlining
 Analysing/sharing/reporting  Errors/flows  Alignment
information  Corruption  Filtering
 Scenario planning  Sorting
 Linking spreadsheets

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 Notes

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 Notes

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