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Md. AKH Hasif Sowdagar, ACMA, ACA The Institute of Chartered Accountants of Bangladesh
1 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
25%
MAKHHS
Budgeting and forecasting Muck Test Performance management Management decision making
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SA
2 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
The cost accountant: The cost accountant or a person having access to cost information should be able to provide the following information: the cost of goods produced or services provided last period; the cost of operating a department last month; revenue were earned last week. Cost Accounting: Cost Accounting identifies, defines, measures, reports and analyzes the various elements of direct and indirect costs associated with producing and marketing goods and services. Originally cost accounting dealt with ways of accumulating historical costs and of charging these costs to units of output, or to department, in order to establish inventory valuations, profits or losses and balance sheet items. So cost accounting has been extended in to planning, control and decision making.
3 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
4 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Total direct cost can be described as Prime Cost. Prime Cost = Total direct cost = direct material cost + direct labour cost + other direct expenses. Indirect Cost and Overhead: A cost that is incurred which can not be traced directly. Example of indirect cost: cost of supervisor wage on a production line, cleaning material and building insurance for a factory. These cost can not be traced directly. Total Expenditure: Material Cost + Labour cost + Expenses Total cost = = = = Direct material cost + Indirect material cost + + Direct labour cost + Indirect labour cost + + Direct expenses + Indirect expenses Direct cost/prime cost + Indirect cost/overhead
5 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Cost
Volume output (level of activity) Example of Fixed Cost: The salary of the managing director (per month or per annum) The rent of a factory building (per month or per annum) Straight line depreciation of a machine (per month or per annum) Variable Costs: A variable cost is a cost that increases or decreases as the level of activity increases or decreases.
Cost
6 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Volume output
Semi-variable Costs (or semi-fixed costs or mixed costs): Semi-variable, semi-fixed or mixed costs that are part-fixed and part-variable and are therefore partly affected by changes in the level of activity.
Cost
Variable part
Fixed part Volume output Example of Variable Cost: Electricity and gas bills. There is a standing basic fixed charge plus a charge per unit of consumption. Sales representatives salary. The sales representative may earn a basic monthly amount plus a commission based on the value of sales made. Cost Behavior and Total and Unit Costs: If the variable cost of producing a unit is Tk.5 per unit then it will remain at that cost per unit no matter how many units are produced (within the relevant range). However, if the businesss fixed costs are Tk.5,000 then the fixed cost per unit will decrease the more units are produced: for example, one unit will have fixed costs of Tk.5,000 per units; 2,500 units are produced the fixed cost per unit will be Tk.2; 5,000 units are produced the fixed cost per unit will be only Tk.1. Thus as the level of activity increases the total costs per units (fixed cost plus variable cost) will decrease. The Relevant Range: The relevant range is the range of activity levels within which assumed cost behavior patterns occur. For example, a fixed cost is only fixed for levels of activity within the relevant range, after which it could step up.
7 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
8 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Lecture # 02 - Chapter-2 Calculating Unit Costs (Part I) 13 January 2010 Exam Requirement: The context of much of this chapter provides scope for a range of numerical questions. However, you should also be prepared to deal with narrative questions that examine your understanding of the implications of the techniques you are using. Main Focus of this chapter: This chapter is related to the numerical questions. Classify costs as direct or indirect Calculate the prime cost of a cost unit Calculate the price of materials and the value of inventory using FIFO LIFO Average Pricing Method
Topic List: Chapter-2
LECTURE # 02
2 Inventory Valuation
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 Valuing inventory in Financial Accounts Charging units of inventory to cost of production or cost of sales Example: Inventory Valuation Pricing methods of Inventory Valuation FIFO (First In First Out) Advantages and Disadvantages of the FIFO Method LIFO (Last In First Out) Advantages and Disadvantages of the LIFO Method Cumulative Weighted Average Pricing Advantages and Disadvantages of Cumulative Weighted Average Pricing Periodic Weighted Average Pricing Inventory Valuation and Profitability Profit Differences
Direct Material Cost: Direct Material Cost is all material becoming part of the cost unit. Direct material costs are charged to the cost unit as part of the prime cost. Examples of direct material are as follows: Components parts or other material purchased for a particular product, service, job, order or process. Primary packing materials like carton or boxes.
9 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
LECTURE # 03
Direct Wages or Direct Labour Costs: Direct wages are all wages paid for labour (either as basic or as overtime) that can be identified with the unit cost. Direct wages costs are charged to the cost unit as part of the prime cost. Examples of group of labour receiving payment as direct wage are as follows: Workers engaged in altering the condition, confirmation or composition of the product. Inspectors, analysts and testers specifically required for such production. Direct Expenses: Direct expenses are any expenses that are incurred on a specific cost unit other than direct material cost and direct wages. Direct expenses are charged to the product as part of the prime cost. Examples of direct expenses are as follows: The cost of special designs, drawings or layouts of a particular job. The hire of tools or equipment for a particular job. Indirect Costs: Indirect costs or overheads are those cost that cannot be traced in full to a specific cost unit. For Example, a garage carries out a repair job on a customers car. Direct and Indirect costs: some further points: Some misconceptions about direct and indirect costs: Direct costs are not necessarily bigger in size than indirect costs. Indirect costs are not less important than direct costs. It is easy to confuse fixed and variable costs with direct and indirect costs. Valuing inventory in Financial Accounts: For financial accounting purposes, inventories are valued at the lower of cost and net realizable cost. In practice, inventories will be valued at cost in the stores records throughout the course of an accounting period. Only when the period ends will the value of inventory in hand be reconsidered so that items with a net realizable value below heir original cost will be revalued downwards, and the inventory records altered accordingly. Charging units of inventory to cost of production or cost of sales: It is important to be able to distinguish between the way in which the physical items in inventory are actually issued and the way in which inventory is costed. In practice, a storekeeper may issue goods in the following ways: The oldest goods first The latest goods received first Randomly Those that are earliest to reach.
10 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Pricing methods of Inventory Valuation: 1. FIFO (First In First Out) 2. LIFO (Last In First Out) 3. Cumulative Weighted Average Pricing FIFO (First In First Out): FIFO assumes that materials are issued out of inventory in the order in which they were delivered into inventory: issued are priced at the cost of the earliest delivery remaining in inventory. Worked Example FIFO and LIFO:
Date Opening Balance, 1 May 2009 Receipt, 3 May Issue, 4 May Receipt, 9 May Issue, 11 May Receipt, 18 May Issue, 20 May Closing balance, 31 May 2009 Total Quantity (Units) 100 400 200 300 400 100 100 200 Unit Cost (Tk.) 2.00 2.10 2.12 2.40 Market value Total Cost per unit on date (Tk.) of transaction 200 840 2.11 2.11 636 2.15 2.20 240 2.40 2.42 2.45 1916
4-May-09
9-May-09
11-May-09
2.10 2.12
630 212
18-May-09
20-May-09 31-May-09
100
2.12
212
2.12 2.40
11 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
LIFO (Last In First Out): LIFO assumes that materials are issued out of inventory in the reverse order from that in which they were delivered: the most recent deliveries are issued before earlier once, and issues are priced accordingly. Solution of Worked Example - LIFO:
Receipts Issues Inventory Unit Cost Amount Unit Cost Amount Unit Cost Amount Date Quantity Quantity Quantity (Tk.) (Tk.) (Tk.) (Tk.) (Tk.) (Tk.) 1-May-09 100 2.00 200 3-May-09 400 2.10 840 100 400 500 200 2.10 420 100 200 100 200 300 600 300 100 100 2.40 240 2.12 2.10 636 210 100 100 100 100 100 300 100 2.40 240 100 100 200 2.00 2.10 200 840 1,040 200 420 200 420 636 1,256 200 210 200 210 240 650 200 210 410
4-May-09
9-May-09
300
2.12
636
11-May-09
18-May-09
20-May-09 31-May-09
2.00 2.10
12 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Lecture # 03 - Chapter-2 (Contd) Calculating Unit Costs (Part I) 20 January 2010 Cumulative Weighted Average Pricing The cumulative weighted average pricing method calculates a weighted average price for all units in inventory. Issues are priced at this average cost, and the balance of inventory remaining would have the same unit valuation. The average price is determined by dividing the total cost by the total number of units. A new weighted average price is calculated whenever a new delivery of materials is received into store. This is the key feature of cumulative weighted average pricing. The issue prices are calculated each time materials are received in stores and not when they are issued. Worked Example - Cumulative Weighted Average Pricing Using cumulative weighted average pricing, the issue costs and closing inventory of the transaction as follows:
Date Opening Balance, 1 May 2009 03-May 04-May 09-May 11-May 18-May 20-May Cost of issues Closing inventory value Total 100 300 100 300 600 400 200 Received Units 400 500 200 300 Issued Units Balance Units 100 Total Units Cost Inventory (Tk.) Value (Tk.) 200 2.00 840 2.10 1040 2.08 -416 2.08 624 2.08 636 2.12 1260 2.10 -840 2.10 420 2.10 240 2.40 660 2.20 -220 2.20 Total Taka
416
840
200 2200
440
2.20
Advantages and Disadvantages of Cumulative Weighted Average Pricing: Advantages: 1. Fluctuations in price are smoothed out, making it easier to use the data for decision making. 2. It is easier to administer than FIFO and LIFO, because there is no need to identify each batch separately. Disadvantages: 1. The resulting issue price is rarely an actual price that has been paid, and can run to several decimal points which are very much laborious. 2. Price tend to lag a little behind current market values when there is gradual inflation. 3. Materials cost does not represent actual cost price.
13 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Periodic Weighted Average Pricing: The average method differs from the cumulative weighted average method. Instead of calculating a new inventory value per unit whenever a receipt occurs, a single average is calculated at the the end of the period based on all purchases for the period. This method is extremely simple to operate and can be used in process industries where each individual order is absorbed into the general cost of producing a large quantity of articles. But where each individual order is to be priced separately at each stage of completion, such as in jobbing industry, this method is unsatisfactory. Unless stated to the contrary, assume the cumulative method is required in an exam question. Worked example: Periodic Weighted Average Pricing Using periodic weighted average pricing, the issue costs and closing inventory of the transaction as follows:
Periodic weighted average price = Cost of opening inventory + Total cost of receipts in period Units in opening inventory + Total units received in period
This average price is used to value all the units issued and the units in the closing inventory. Cost of issues = 700 units x Tk. 2.129 Cloing inventory value = 200 units x Tk. 2.129
Inventory Valuation and Profitability: Each method of inventory valuation usually produces different figures for the value of closing inventories and the cost of material issues. A summary of the valuations based on the previous example which we have learned in the earlier is as follows: Since material costs affect the cost of production, and the cost of production works through eventually into the cost of sales (which is also affected by the value of closing inventories), it follows that different methods of inventory valuation will provide different profit figures.
Closing Inventory Cost of Issue (Tk.) Value (Tk.) 452 1464 410 1506 440 1476 426 1490
Valuation Method FIFO LIFO Cumulative weighted average Periodic weighted average
14 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Worked example: Inventory Valuation and Profitability: On 1 November 2009, DD Ltd. held 3 pink satin dress with orange sashes, designed by Freda Swoggs. There were valued at Tk. 120 each. During November 2009, 12 more of the dresses were delivered as follows:
Dress Received 4 4 4 Purchase cost per dress (Tk.) 125 140 150
A number of the pink satin dresses with orange sashes were sold during November as follows:
Dress Sold 5 5 1
Calculate the gross profit from selling the pink satin dresses with orange sashes in November 2009, applying the following principles of inventory valuation. a) FIFO b) LIFO c) Cumulative weighted average pricing Calculate gross profit using the formula: Gross profit = (Sales - (opening inventory + purchase- closing inventory) BAS-2: Inventories (Paragraph 23-27): Cost Formulas: As per paragraph 23, The cost of inventories shall be assigned by using the first-in, firstout (FIFO) or weighted average cost formula. The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity.
15 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Methods Used in Issuing Materials: The various methods which are used for valuing materials issued from store can be grouped as follows: A. Cost Price Method:
1 2 3 4 1 2 3 4 5 1 2 1 2 Specific Price FIFO (First In First Out) LIFO (Last In First Out) Base stock Simple Average Weighted Average Periodic Simple Average Periodic Weighted Average Moving Simple Average Replacement Price Realizable Price Current Standard Price Basic Standard Price
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Lecture # 04 - Chapter-3 Calculating Unit Costs (Part 2) 27 January 2010 Exam Requirement: Student should be prepared to tackle narrative questions on overhead absorption as well as on the selection of the most appropriate costing method in the specific circumstances. Main Focus of this chapter: Calculate the full cost of a cost unit using absorption costing Demonstrate an understanding of the basic principles of activity based costing Identify the most appropriate costing method in specific circumstances Demonstrate an understanding of the general principles of target costing, life cycle costing and just in time. Main Study Book: 1. Management Information published by the Institute of Chartered Accountants of Bangladesh and Reference Book: 1. Managerial Accounting, By Garrison and Noreen, Edition # 9, Chapter # 7 and 8. Chapter: 8 (Review Problem Activity Based Costing) (Exercise # 8-4, 8-5,8-6, 8-7, 8-10) (Problem # 8-12, 8-14, 8-15, 8-16) 2. Theory and Practice of Costing, Volume One by Basu & Das, Chapter # 5
Topic List: Chapter-3 1 Absorption Costing 1.1 Calculating the absorption cost of a cost unit 1.2 Overhead Allocation 1.3 Overhead Apportionment 1.4 Overhead Absorption 1.5 Blanket Absorption rates ad departmental absorption rates 1.6 Over and under Absorption of overheads 2 Activity Based Costing 2.1 The problems with traditional absorption costing 2.2 The Activity Based Costing approach Costing Methods 3.1 Specific order costing 3.2 Process (continues operation) Costing Other approaches to cost management 4.1 Life cycle costing 4.2 Target costing 4.3 Just-In-Time (JIT)
Calculating the absorption cost of a cost unit: To calculate the full cost of an item using absorption costing (sometime referred to as full costing) it is necessary first to establish its direct cost or prime cost and then to add a fair share of indirect costs or overhead.
17 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
The full or absorption cost per unit is therefore made up as follows: Tk. Direct Materials x Direct labour x x Direct expenses (if any) Total direct cost (Prime Cost) x Share of indirect cost/overhead x Absorption (Full) Cost x There are three stages in determining the share of overhead to be attributed to a cost unit. Overhead Allocation Overhead Apportionment Overhead Absorption Overhead Allocation: The first stage in absorption costing is allocation. Allocation is the process by which whole cost items are charged direct to a cost centre. A cost centre acts as a collecting place for costs before they are analyzed further. Cost centre may be one of the following types: A production Department, to which production overheads are charged. A production Service Department, to which production overheads are charged. An Administration Department, to which administration overheads are charged. A selling or Distribution Department, to which sales and distribution overheads are charged. An Overhead Cost Centre, to which items of expenses which are shared by a number of departments, such as rent and rates, heat and light and the canteen, are charged. Worked Example: Overhead Allocation Consider the following costs of a company. Tk. Wages of the supervisor of department A Wages of the supervisor of department B Indirect Material consumed in department A Rent of the premises shared by department A and B 200 150 50 300
The cost accounting system might include three cost centre. Cost Centre: 101 Department A 102 Department B 201 Rent Requirement: Compute the allocation of the above overhead cost.
18 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Overhead to which the basis applies Rent, rates, heating and light, repairs and depreciation of buildings Depreciation, insurance of equipment Personnel office, canteen, welfare, wages and cost offices, first aid Heating, lighting (see abive)
Interactive Question: Bases of Apportionment The following bases of apportionment are used by a factory. A Volume of cost centre B Value of machinery in cost centre C Number of employees in cost centre D Floor areas of cost centre Compute the below table with using one of A to D of the above the bases.
Production Overheads Rent Heating costs Insurance of machinery Cleaning costs Canteen costs Basis
Worked Example: Overhead Apportionment: McQueen Co has incurred the following overhead cost. Depreciation of Factory Factory repairs and maintenance Factory office cost (treat as production overhead) Depreciation of equipment Insurance of equipment Heating Lighting Canteen Tk. (000) 100 60 150 80 20 39 10 90 549
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Floor space (square meters) Volume (cubic metres) Number of employees Book value of equipment (Tk.)
The overhead cost Apportionment Formula: Total overhead cost Total value of apportionment base For example, Heating for Dept. 1 = Value of apportionment base of cost centre
X 3000
Tk. 9,000
Items of cost Depreciation of Factory Factory repairs and maintenance Factory office cost Depreciation of equipment Insurance of equipment Heating Lighting Canteen Total
Basis of Apportionment Floor Area Floor Area Number of employees Book value Book value Volume Floor Area Number of employees
Department (Tk.'000) Total cost Pduction- Pduction- Service Service 1 2 100 100 (Tk.)
Second stage: Service Cost Centre Cost Apportionment: The second stage of overhead apportionment concerns the treatment of service cost centres. The next stage in absorption costing is, therefore, to apportion the costs of service cost centres to the production cost centres. Example of possible apportionment base are as follows:
Service Cost Centre Stores Maintenance Production planning Basis of Apportionment Number of materials requisition Hours of maintenance work done for each cost centre Direct labour hours worked in each production cost centre
Overhead Absorption: Having allocated and/or apportioned all overheads, the next stage in absorption costing is to add them to, or absorb them into, the cost of production or sales. Production overheads Administration, selling and distribution overheads Predetermined Absorption Rate: In absorption costing, it is usual to add overheads into product costs by applying a predetermined overhead absorption rate.
20 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
21 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
22 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
23 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
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25 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Cost-Plus Pricing: In practice cost is one of the most important influences on price. While in economic theory it is possible to set a sales that will maximize profit, in reality there is a lack of precise information about cost behavior patterns and the effect of price on sales demand.
26 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Fixed production overheads are budgeted to be Tk. 69,000 each period. The overhead absorption rate will be based on 17,250 budgeted direct labor hours each period. Requirement: The company wishes to add 20 percent to the full production cost in order to determine the selling price per unit for product S. Determining the mark-up percentage: A business may have an idea of the percentage profit mark-up it would like to earn, and so may decide on an average profit mark-up as a general guide for pricing decisions. This would be particularly useful for businesses that carry out a large amount of contact or jobbing work, for which individual job or contact prices must be quoted regularly to prospective customers. However, the percentage profit mark-up does not have to be rigid and fixed. It can be varied to suit the circumstances. In particular, the percentage mark-up can be varied to suit anticipated supply and demand conditions in the market. Determining the mark-up to achieve a required return on investment: A business might calculate the mark-up percentage for a product in order to achieve a required return on the investment in the product.
27 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
28 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Transfer pricing is used when divisions of an organization need to change other divisions of the same organization for goods or services that they provide to them. For example: subsidiary A might manufacture a component that is used as part of a product made by subsidiary B of the same company. The component can also be bought on or sold to the external market. Therefore there will be two sources of revenue for subsidiary A. External sales revenue from sales made to other organization. Internal sales revenue from the transfer prices charged for components supplied to subsidiary B. Practical Methods of Transfer Pricing: Practical Methods of Transfer Pricing
Market Price
Cost-Plus Price
Dual Pricing
29 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Total Mark-50
Time: 1 Hour
Chapter # 1: The fundamentals of costing 1. Who are the user party of financial accounts and management accounts? 2. Define Cost Unit with example. 3. What are the three elements of cost? 2 2 2
4. Define Fixed Costs, Variable Cost and Semi-variable Cost with example and graph. 2 5. Write down the components of Total Cost, Direct Cost/Prime Cost and Indirect Cost/Overhead Cost. 2 Chapter # 2: Calculating unit cost (Part 1) 6. Write down the Advantages and Disadvantages of the FIFO Method. 2
7. At the beginning of week 10 there were 400 units of component X held in the stores. 160 of these components had been purchased for Tk. 5.55 each in week 9 and 240 had been purchased for Tk. 5.91 each in week 8. On day 3 of week 10 a further 120 components were received into stores at a purchase cost of Tk. 5.96 each. The only issue of component X occurred on day 4 of week 10, when 150 units were issued to production. Using the FIFO valuation method, what was the value of the closing inventory of component X at the end of week 10? 2+2 8. Write down the formula of computation of Periodic Weighted Average Pricing. Chapter # 3: Calculating unit cost (Part 2) 9. How you will calculate the Absorption Cost of a product? 2 2
10. Write down the three stages in determining the share of overhead to be attributed to a cost unit under absorption costing. 2 11. The following bases of apportionment are used by a factory. A. Volume of cost centre B. Value of machinery in cost centre C. Number of employees in cost centre D. Floor areas of cost centre Requirement: Compute the below table with using one of A to D of the above the bases.
Production Overheads Rent Heating costs Insurance of machinery Cleaning costs Canteen costs Basis
12. How you will calculate the predetermined overhead absorption rate?
30 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
16. A particular electrical goods is sold for Tk.1009.99. The variable material cost per unit is Tk. 320, the variable labour cost per unit is Tk192 and the variable production overhead cost per unit is Tk. 132. Fixed overheads per annum are Tk. 100,000 and the budgeted production level is 1,000 units. Requirement: a. What would be the contribution per unit of the electrical goods? 2 17. What are the differences between Marginal Costing and Absorption Costing. 18. The following costs card relates to one unit of Product EZ. Costs Components Variable materials Variable labor Production Overheads: Variable Fixed Sales and distribution overheads: Variable Fixed Total Cost Tk. 20 40 10 5 5 10 90 2
Requirement: What would be the marginal production cost of one unit of Product EZ? Chapter # 5: Pricing calculation 19. What are the differences between mark-up and margin?
20. XY Ltd. requires an annual return of 30% on the investment in all of its products. In the forthcoming year Tk. 800,000 will be invested in non-current assets and working capital to produce and sell 50,000 units of product X. The full cost per unit of product Z is Tk. 100. Requirement: a. What would be the mark-up percentage of full cost basis? 2 b. What would be the selling price of product Z? 2 21. Why you will consider inflation at the time of setting selling prices of a product? 2
22. The marginal cost per unit of a product is 70% of its full cost. Selling prices are set on a full costplus basis using a mark-up of 40 percent of full cost. Requirement: a. What percentage mark-up on marginal cost would produce the same selling prices as the full cost-plus basis described? 2 23. Write down the practical methods of transfer pricing. 2
31 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
These budgets provide definite plans, as well as yardstick for control purposes. Notice that the labour hours budget is not expressed in financial terms. It still fulfills the role of a budget because it is quantified. Therefore a budget does not necessarily need to be expressed in financial terms. Of course the semi-skilled labour hours budgeted can be converted into a budget expressed in financial terms by applying a rate of pay per hour to the budgeted number of labour hours. An important feature of any quantified budget is the fact that it is time bound. Just to say, We plan to spend Tk. 107,000 on advertising without specifying a period over which this amount is to be spent would render the budget useless. Budget Committee: The budget committee is the coordinating body in the preparation and administration of budgets. The budget committee is usually headed up by the managing director (as chairman) who is assisted by a budget officer, who is usually the finance director or another accountant. Every part of the organization should be represented on the committee, so there should be a representative from sales, production, marketing and so on. Functions of the Budget Committee: Coordination and allocation of responsibility for the preparation of budgets. Issuing of the budget manual Timetabling Provision of information to assist in the preparation of budgets. Communication of final budgets to the appropriate managers. Monitoring the budgeting process by comparing actual and budgeted results.
The Budget Period: The budget period is the period covered by the budget, which is usually one year. However, budgets can be prepared and used for longer periods, for example capital expenditure budgets. Budgets can also be prepared for shorter periods, for example in an environment where technology or other factors are rapidly changing with the result that annual budgets quickly become out of date. In the common situation where a budget is prepared for a year it will usually be divided into monthly control periods so that regular comparisons can be made of the actual and budgeted results.
33 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Steps in the preparation of a Budget: The procedures for preparing a budget will differ from organization to organization but the steps described below will be inactive of those followed by many organizations. The preparation of a budget may take weeks or months and the budget committee may meet several times before the master budget (budgeted income statement, budgeted balance sheet and budgeted cash flow) is finally agreed. Functional budgets (sales budget, production budgets, direct labour budgets and so on), which are amalgamated into the master budget, may need to be amended many times as a consequence of discussions between departments, changes in market conditions and so on during the course of budget preparation. Ideally, a master budget should be finished prior to the start of the period to which it relates. Identifying the Principal Budget Factor: The budget for the principal budget factor must be prepared first. The principal budget factor is that factor which limits an organizations activities. This factor is usually sales demand. A company is usually restricted from making and selling more of its products because there would be no sales demand for the increased output at a price that would be acceptable/profitable to the company. The principal budget factor may alternatively be machine capacity, distribution and selling resources, the availability of key raw materials or the availability of cash. Once this factor is defined then the reminder of the budgets can be prepared. For example, if sales are the principal budget factor then the production manager can only prepare the production budget after the sales budget is complete. The order of Budget Preparation: Assuming that sales has been identified as the principal budget factor, the stages involved in the preparation of a budget for a manufacturing business can be summarized as follows. a. The sales budget is prepared in terms of units of product, unit selling price and total sales value. The finished goods inventory budget can be prepared at the same time. This budget decides the planned increase or decrease in finished goods inventory levels.
34 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
g. From the above information a budgeted income statement can be prepared. h. In addition, several other budgets must be prepared in order to arrive at the budgeted balance sheet. These are the capital expenditure budget (for non-current assets), the working capital budgets (for budgeted increases or decreases in the level of receivables and accounts payable as well as inventories), and a cash budget. Preparing Functional Budget: Functional/department budgets include budgets for sales, production, purchases, labour and administration. Having seen the theory of budget preparation, let us look at functional (or department) budget preparation, which is best examined by means of an example. Worked Example: Preparing a Materials Purchase Budget: ECO Co. manufactures two products, S and T, which use the same raw materials, D and E. One unit of S uses 3 liters of D and 4 kilograms of E. One unit of T uses 5 liters of D and 2 kilograms of E. A liter of D is expected to cost Tk. 3 and a kilogram of E Tk. 7. Budgeted sales for 2002 are 8,000 units of S and 6,000 units of T; finished goods in inventory at 1 January 2002 are 1,500 units of S and 300 units of T, and the company plans to hold inventories of 600 units of each product at 31 December 2002. Inventories of raw material are 6,000 liters of D and 2,800 kilograms of E at 1January and the company plans to hold 5,000 liters and 3,500 kilograms respectively at 31 December 2002. The warehouse and stores managers have suggested that a provision should be made for damages and deterioration of items held in store, as follows: Product S Product T Product D Product E : loss of 50 units : loss of 100 units : loss of 500 liters : loss of 200 kilograms
35 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
36 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
The directors wish to know what the budgeted profit will be if a higher quality material is used. This will increase material costs per unit by ten percent but sales volume will be increased by five percent. There will be no change in the unit selling price. Assumption: The budgeted sales volume will increase to 21,000 units and, in the absence of information to the contrary, we will assume there will be no changes in the total fixed overhead cost incurred and no changes in the variable labour and overhead costs per unit. Requirement: Prepared the revised budgeted income statement based on the above assumption.
37 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
38 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Imposed or Top-Down Style of Budgeting: In this approach to budgeting, top management prepare a budget with little or no input from operating personnel, which is then imposed upon the employees who have to work to the budgeted figures. The time when imposed budgets are effective: Advantages of Imposed or Top-Down Style of Budgeting: Disadvantages of Imposed or Top-Down Style of Budgeting:
39 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
40 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Sample Question & Answer Q. Ans: Write down the two ways in which a budget can be set. There are basically two ways in which a budget can be set: Top down (imposed budget) Bottom up (participatory budget) Explain Imposed or Top-Down Style of Budgeting. In this approach to budgeting, top management prepare a budget with little or no input from operating personnel, which is then imposed upon the employees who have to work to the budgeted figures. Explain Participative or Bottom-Up Style of Budgeting. In this approach to budgeting, budget are developed by lower-level managers who then submit the budgets to their superiors. The budgets are based on the lower-level managers perceptions of what is achievable and then associated necessary resources. Explain Incremental budgeting approach. The traditional approach to budgeting is to base the forthcoming years budget on the current years results modified for changes in activity levels, for example by adding an extra amount for estimated growth or inflation next year. This approach is known as incremental budgeting since it is concerned mainly with the increments in costs and revenues which will occur in the coming period. When Incremental budgeting is a reasonable approach? Incremental budgeting is a reasonable approach if the current operations are as effective, efficient and economic as they can be.
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41 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
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42 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Question Bank
Prepared By:
Md. AKH Hasif Sowdagar, ACMA, ACA The Institute of Chartered Accountants of Bangladesh
43 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
Chapter-2 Calculating Unit Costs (Part I) 17. Write down the Advantages and Disadvantages of the FIFO Method. 18. At the beginning of week 10 there were 400 units of component X held in the stores. 160 of these components had been purchased for Tk. 5.55 each in week 9 and 240 had been purchased for Tk. 5.91 each in week 8. 19. On day 3 of week 10 a further 120 components were received into stores at a purchase cost of Tk. 5.96 each.
44 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
21. How you will calculate the Absorption Cost of a product? 21. Write down the three stages in determining the share of overhead to be attributed to a cost unit under absorption costing. 21. The following bases of apportionment are used by a factory. Volume of cost centre Value of machinery in cost centre Number of employees in cost centre Floor areas of cost centre
A. B. C. D.
Requirement: Compute the below table with using one of A to D of the above the bases.
Production Overheads Rent Heating costs Insurance of machinery Cleaning costs Canteen costs Basis
22. How you will calculate the predetermined overhead absorption rate? 23. Define the four stages of calculating product cost using Activity Based Costing (ABC). 24. Write down the advantages of Just-In-Time (JIT) cost approach.
Chapter-4 Marginal Costing and Absorption Costing 25. How you will calculate the Marginal Cost and Contribution of a product? 26. A particular electrical goods is sold for Tk.1009.99. The variable material cost per unit is Tk. 320, the variable labour cost per unit is Tk192 and the variable production overhead cost per unit is Tk. 132. Fixed overheads per annum are Tk. 100,000 and the budgeted production level is 1,000 units. Requirement: a. What would be the contribution per unit of the electrical goods?
45 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
5 10 90
Chapter-5 Pricing Calculation 34. What are the differences between mark-up and margin? 35. XY Ltd. requires an annual return of 30% on the investment in all of its products. In the forthcoming year Tk. 800,000 will be invested in non-current assets and working capital to produce and sell 50,000 units of product X. The full cost per unit of product Z is Tk. 100. Requirement: a. What would be the mark-up percentage of full cost basis? What would be the selling price of product Z? 36. Why you will consider inflation at the time of setting selling prices of a product? 37. The marginal cost per unit of a product is 70% of its full cost. Selling prices are set on a full cost-plus basis using a mark-up of 40 percent of full cost. Requirement: 38. a. What percentage mark-up on marginal cost would produce the same selling prices as the full cost-plus basis described?
46 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA
47 Management Information, Conducted By: Md. AKH Hasif Sowdagar, BBA, MBA (DU), ACMA, ACA