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Questions

Answers

Product costs comprise DM, DL and MOH. Product costs are costs
which are first debited into the inventory account in the balance sheet
before being debited into the COGS account in the income statement.
In that case, why are utilities considered as MOH? After all, arent
utilities recorded immediately as an expense in the income statement?

Utilities relating to factory are product cost. Previously,

you have learnt that utilities are treated as expense for
service and merchandising firms because for service and
merchandising firms, the utilities incurred are period costs
or expenses as they do not have manufacturing functions.

Philip

Now that we are looking at manufacturing firms, we need

to differentiate between product and period costs.
Okay, thank you!

Hi Mrs Chan,

Eddie,

What happens when an asset has been depreciated fully? In other

words, the asset is still in use beyond its estimated life.
What would be the accounting treatment for this?

This topic is not in AC1101 syllabus now. If an asset is

fully depreciated but the firm continues to use the asset,
there is no more depreciation charge for the use of asset.

Eddie

Thanks for the reply, Mrs Chan! The reason I'm asking this
is FM is doing estimation of cash flows and is touching a
little bit on depreciation (MACRS and after-tax salvage
value). It got a little confusing at times.

Hi Professor,

You mean tutorial 8 question 1. The cost object is pizzas

With regards to Tutorial 9 Question 1, why do we still classify period

delivered, not pizzas produced.
costs into direct and indirect costs of the cost object? I feel that since
period costs are not related to the manufacture of the good, they should
not even qualify to be classified into direct and indirect costs in the
first place.
Ying Hui
Dear Mrs Chan,

Andrew,

with regards to the production cost report, if there are 2 direct materials
and one had been completed at 100% and the other had been
completed at 60% for example, do we have to create 2 accounts for
each of the different materials? Another thing would be whether
conversion costs can possibly have more than one conversion rate too
(i.e. like some take 50% while others take 60%)? Additionally, what
does it mean when you add in another material when one is 50%
complete for example? (How do we write the production cost report
for this instance?)

If there are two types of DM added at different points, you

need two separate columns (in the production cost report)
for these two DM.

Regards,
Andrew

Conversion costs are usually incurred evenly throughout

the process, unlike DM added at a specific point of the
process. So you will not get conversions at 50% or 60%.
You imagine conversion cost as factory rental and utilities.
Will these two items be consumed at a specific point of the
process like DM? The answer is no.
Lecture 11 materials and videos are uploaded. Your
answers should be answered there.

Hi Mrs Chan,

Sylvia,

I dont understand this question from Connect Tutorial 8, Q5 (ii).

You are answering the effect of underapplied MOH on the

companys gross margin in the same manner as the effect
of inventory errors on profits that we have covered in
lecture 6.

Osborn Manufacturing uses a predetermined overhead rate of $18.20

per direct labor-hour. This predetermined rate was based on a cost formula
that estimates $218,400 of total manufacturing overhead for an estimated
activity level of 12,000 direct labor-hours.
The company incurred actual total manufacturing overhead costs of
$215,000 and 11,500 total direct labor-hours during the period.

The question is asking when MOH is underapplied, what

will happen to gross margin. When MOH is underapplied,

(i)Determine the amount of underapplied or overapplied MOH for the period.

the underapplied MOH will be closed to COGS by Dr

COGS and Cr MOH and thus COGS will increase and thus
gross margin reduces.

(ii)Assuming that the entire amount of the underapplied or overapplied

overhead is closed to COGS, what would be the effect of underapplied or
overapplied overhead on the companys gross margin for the period.
From what I understand, when MOH is underapplied, shouldnt COGS be
understated and the gross margin would be overstated by the same amount?
The answer suggests that when MOH Is underapplied, COGS will increase
and the gross margin would decrease.
Thanks!
Sylvia (TG02)

Hi Mrs Chan,

Ian,

If I borrow money to purchase pay for MOH (or DL or DM for that

matter), would the interest expense be a production cost as well? After
all, production would not be able to happen without that borrowing.

No. FRS 23 on borrowing costs (ie interest cost) restricts

the scenarios where interest cost can be recognise as asset.
That toilet paper is not far fetched leh.

It sounds a little far fetched, but it seems to be similar to the toilet

paper in the factory toilet kind of example.
Thankyou
Ian
Hi folks,
I have a question to ask you. A student sent an email to me saying that
I don't understand why we Debit WIP and Credit Manufacturing

MOH is the other related production costs that are required

to produce the product, for example, in Prof Chans
example in lecture, to produce a pair of jeans, the MOH
can be the electricity to power the sewing machines, the
detergents to wash the fabric etc.

Overhead when MOH is applied.

Please tell me how would you explain this to your peers. Thanks!
Ai Lin

These are spent on producing the good and adds value to

the products being made, so inventory is worth higher
now. And since inventory is an asset, to increase it we
debit, so we debit WIP inventory.
At the end of the month when we are tabulating all the
costs, we may still not yet know all the extra costs used up
to produce the good. So we forecast/estimate a value for
MOH. You may think of MOH as a holding account to
slowly accumulate the extra costs during the production
process, at the debit side, and on the credit side, is where
our estimated MOH goes, so that at the end we can
compare the two sides and make adjustments.
(I think my explanation for why credit MOH not very clear,
anyone can explain?)
Jason
Thanks Jason.

For tut 10 qn4,

For (3), just to confirm, it says
At the end of April, the Company identified one customer as likely to
default on his debt and the amount due from this customer was
$13,250.
End of April is the financial year end? It is quite weird if they make
these adjusting entries in the middle of financial year right. Or can they
adjust any time of the year as they sees fit?

Adjustment for impairment loss on AR can be made at end

of each month, not just end of each financial year.

Jason
For lecture 10 students slides slide 46, how do we allocate the MOH
variance when it is material? I dont understand the calculation :/ Can
anyone explain it? Thank you!
Siew Ann

Dear Mrs Chan

for the reciprocal method, if we have more than 2 of the departments,
lets say 3, then would the simultaneous equations contain the 2 other
variables (e.g. x = 4y + 3z + 5000)? The same rule applies right?
in connect questions, one of the answers for tutorial 11 is that the
difference between the FIFO and weighted average methods for
production cost report is the equivalent units. What does this mean
because I thought both involved equivalent units?

In that slide, the overhead variance is $300. If the overhead

variance is material, the overhead variance will be prorated to WIP, FG and COGS account, in the proportion of
the balance in the WIP, FG and COGS account. In slide 46,
WIP account is zero, so the overhead variance is pro-rated
to FG and COGS account. The detailed workings are
provided in the slide.
If there are 3 service departments, you will have three
unknown and thus create three equations. And yes, each
equation will contains two unknown variables.
Both WA and FIFO calculates EUs but the EUs computed
are differently. The difference lies in WA EU does not take
into account work done in the previous period.

Thank you very much.

Regards
Andrew
Hi Mrs Chan,
In lecture 12, it is mentioned that using actual costs will not promote
efficiency in service departments. How is it then that budgeted rates
would motivate service departments to be more efficient? Is it because
of the drawbacks of being inefficient? (i.e. drawbacks of actual cost >
budgeted cost)

Yes. If actual costs are allocated to the user departments,

then the service departments may have no motivation to be
efficient. The user departments would also be frustrated
being allocated with the high actual costs incurred.
Using budgeted costs for allocation is based on pre-agreed
amounts and the service departments are under pressure to

If so, what are some of the drawbacks these service departments will
face? (Im assuming this is why they are motivated to be more
efficient)
Thank you!
Cheers,
Gavin Loh

keep to their promised costs.

If service departments are not efficient and the user
departments are not happy, the user departments may use
outside services instead of internal services. Big
companies allow such autonomy to their subsidiaries and
business units. If the user departments hire outside services
instead of using internal services, the internal resources
may become redundant and the staff may face
retrenchment. So the service departments are motivated to
be more efficient.
Got it! Thank you!

Hi Mrs Chan,
For the step-down method, service department costs are allocated to
other service departments and production departments, starting with
the service department providing the greatest amount of service to
other service departments.
1. Is this greatest amount of service determined by the
percentage of service provided? Or is it determined by the
absolute figure? (e.g Service Department A provides $500
(10%) to Service Department B, but Service Department B
provides $200 (20%) to Service Department A. In this case,
which service department would we use to allocate the cost?)
2. Does the step-down method involve only 2 service
departments? If there are more than 2 service departments,
what will happen?
Philip

1. By proportion of service in % so Service

Department B will allocate to A first.
2. If there are more than 2 service
departments, then the next department that
provides the second highest proportion of service
in % will be allocated second.
Okay, thanks!

Hi Mrs Chan,
With regards to your answer to the previous question by Philip in point
number 2, after allocating the cost for the 1st service department, how
do we determine the next department that provides the second highest
proportion of service? Should we recalculate the % of service to other
service department again before choosing which to allocate or should
we use the values calculated from the start.

Just decide the sequence right at the start

before allocation, so from your example, A C
B.

For example, before allocating cost of Serv Dept A, Serv Dept B

provides 50% of service to other Serv Department (A&C) and Serv
Dept C provides 60% of service to other Serv Department(A&B).
However, after allocating cost and recalculating the %, Serv Dept B
now provides 40% of service to Serv Dept C and Serv Dept C provides
only 20% of service to Serv Dept B. If we were to use the values from
the start, we would allocate C next but if we were to recalculate, we
would allocate B next.
Thank you!
Chuan Mao
HII would like to ask you about gross margin and markup.
Just to clarify, if gross margin is 20%, considering sales-COGS=gross
margin, sale price will be COGS/80% right? and if markup percentage
is 20% it will just mean sale price = COGS*120% ?
In TB vol 2 page 106 self-study problem, at the end of the page at
point g, it says " both jobs had gross margins of 20% based on
manufacturing cost".
The answer in page 121 under part g take COGS*120%. Why is this
so? shouldn't it be $55000/80%=sale price?

I feel that the textbook is misleading using the terms

margin and then based on manufacturing cost. The
words based on manufacturing cost tells us this is a mark
up.

Hi Mrs Chan,
For Tutorial 12 Q4(d), the question asks us to look at the production
cost report prepared in (b), so can we answer the cost of water and
flowers as $0.48 which is the weighted average cost? Why should we
calculate it via the FIFO method to answer that the cost is $0.50 and
hence there is no cost savings?
-Siew Ann

The question states that last month cost is 0.40 per unit and
current month cost is 0.50 per unit. The production cost
report is 048 per unit. The question asks if there is a cost
saving. You need to show that the current month cost is
indeed 0.50 per unit. This can be shown by finding the cost
per unit using FIFO method. In fact, you can also find cost
per unit for last month using FIFO method and you will
realise that it is indeed 0.40 for last month and 0.50 for this
month. Thus, there is no real cost saving. The 0.48, which
is lower than 0.50, is a result of weighted average of last
and this month cost.
Added comments:
Students told me they did not understand why we need to
compute cost per equivalent unit using FIFO for this part.
We need to show evidence that the current month cost is
0.50 per unit. If you understand the difference between
FIFO and weighted average, you will know cost per
equivalent cost under FIFO is the current period cost per
unit. So by computing cost per equivalent unit under FIFO,
you are showing proof that current period cost is 0.50.
You can also show cost per unit for last month. You
compute the equivalent units of work done to Beginning
WIP last month and then you divide beginning WIP cost
over that equivalent units and you will get cost per unit for
last month.

I would like to ask if there are 2 products A and B from split off point,

The NRV method will use the following selling price:

and if product A can be further processed and process B is sold after

split off point, how do we do the NRV method? does that mean that
product Bs NRV will just be the selling price since there is no
separate/further cost?
Hi Mrs Chan,
I would like to ask a question for financial accounting. When a
company order goods from a supplier and paid cash upfront on 31st
December, but the goods is FOB destination and is expected to reach
the company only on 2 Jan the next year. How do we record the entry
for the cash paid upfront on 31st Dec? Do we debit an asset account
like prepayment?

Product A - Final selling price less separable costs

Product B - Selling price at split off
Yes, your concept is correct. We will Dr an asset account
and Cr Cash. Some companies will Dr Prepayment
others Dr Inventory in Transit.
The actual account name is not important here. It is
important that you have recognised it is an asset that you
have to Dr to.

Thank you!
Chuan Mao

Other than AC1101 and AC1102, I do not think the other

advanced accounting modules bother too much about
accounts names. They are only concerned if students know
whether to record an asset or an expense.

What is the difference between advanced billing and unearned

revenue?

Unearned revenue is cash is received in advanced from

customers and we Dr Cash Cr Unearned Revenue.
Advanced billing is where cash is not received but an
invoice is sent to customer in advance of delivery goods
and services (thus revenue not earned). So we Dr AR Cr
Advanced Billing.
Some companies do not differentiate between advanced
billing and unearned revenue.

1) With regards to balance sheet, do we need to split the assets and

liabilities into current and non current for presentation? This is because
the loans need to be split into current and non current liabilities if its

1. Yes.
2. Order of liquidity is for balance sheet and
not income statement. Apparently you have not

split.
2) If I am not mistaken, I could recall that you mentioned for Income
statement, we do not need to classify according to liquidity. This
question was asked with regards to Mid Term. Just to clarify, we do not
need to do so also right? The alternative to liquidity is the classification
according to type (admin, ....) which might be relevant for
manufacturing firms.
3) Is Financial reporting standards and contracting theory part of
accounting setters for Lecture 2?

1. Can sales method be used for products that are furthered processed?
2. For qn 7-46 part 3, if they didn't state the sales value method, can we
use the NRV method?
3. What if product A is further processed but product B is not further
processed, if they asked us to use NRV method, can we assume that
product B's seperable cost is 0$?
4. For reciprocal method, if there are 3 service department, do we have
to solve for 3 different unknown algebra?

understood what it is. Order of liquidity is never a

requirement under FRS, just a practice. Current and
non current classification is a requirement under
FRS.
3. I do not think we cover any FRS in lecture
2 yet, except for the Conceptual framework
covered in lecture 2. Accounting setters is objective
8 of lecture 2. Contracting theory is objectives 1
and 2 of lecture 2. Conceptual framework is
objectives 4, 6, 9 and 12 of lecture 2. FRS are
covered in the various subsequent lectures. Do you
think they are the same?
1. Sales value method can be used for all joint
products which can be sold at split off. It does not
matter if these joint products are further processed
or not.
2. Yes, but that part does not provide the final
selling price of SE-5.
3. If both products A and B can be sold at split
off and only product A is further processed, the
company should use sales value method instead. So
if the question asked for NRV method, then product
A cannot be sold at split off (thus need to further
processed) while product B can be sold at split off
(and thus not further processed). Thus we cannot
use Sales Value Method but have to use the NRV
method. Then we will allocate the joint costs using
the product As NRV (final selling price less
separable costs) and product Bs selling price at
split off.
4. Yes.

If the cost object is the product, the direct cost is DM + DL and

indirect cost is MOH. But if the cost object is the production
department, then the direct cost is DM + DL + MOH of production
department, then indirect cost is MOH of service department? What
about the DM and DL of the service department why is it not part of
the indirect costs too?

Service departments do not incur DM and DL because

service departments do not produce products. Only
production departments incur DM and DL.

For the last part of tutorial 12 question 1, they asked what other ways
can the company assign the overhead costs of the service departments,
then the answer is by abc or assign market rates. Does it mean that we
can use abc to allocate service costs too? But so far we have only done
questions that allocate costs to production departments (tbc) in tutorial
12 and the lecture example.

Service department costs is part of the overhead costs that

ABC is allocating in those tutorial questions we have done.
ABC can be used to allocate any costs, not just
overhead/product costs. ABC can be used to allocate
period costs too. Beside product profitability, ABC can be
used to find customer profitability too. Just that we are not
covering customer profitability in our course.

Sometimes when we calculate our answers for the production cost

report for the cost accounted for section, the answers will be in
decimals. Do we leave it in 2dp or round up/down? Because
sometimes we wont be able to tally the total costs to account for and
cost accounted for due to rounding differences, is it okay?

Follow the instructions given in the question for rounding.

It is ok if there are rounding differences.

Lastly, sometimes when we do adjusting entries we need to compare

with the original balance given in the question e.g. for allowance of
impairment loss of AR, rent expense and interest expense. But is it true
that for other type of accounts we don't need to compare? for e.g. for
tutorial 10 self practice 5 adjusting entry (4), the $100 of credit note.
Why don't we have to compare with the original balance of $20,000 in
the sales return and allowance account and write our entry as: Dr sales
return and allowances 20,100 Cr AR 20,100. So when do we know we
need to compare and when no need...

Your question just shows that you do not understand what

you are doing.
Adjusting entry (4) is to record a sales return transaction
which is omitted to record during the recording phase.
Thus there is no need to compare with the original account
balance.
Adjusting entries for rent expense and interest expense are
to make sure that the rent expense and interest expense

reported for the financial year are correct. Thus after you
computed the correct rent expense and interest expense,
you need to compare with the original account balance to
work out the difference to adjust.
As for impairment loss on AR, the figure you computed
based on the ending AR is the desired ending balance of
the allowance account. Thus you need to compare with the
original balance of the allowance account to see how much
you need to adjust to get your desired balance.
This is why sometimes you have to compare with the
original account balance and sometimes you do not. If you
are trying to look for a pattern, then this is not going to
work. You need to understand why you are preparing the
adjusting/correcting journal entries.
Hello Ms Chan,
In Appendix A of FRS 115, contract asset is defined as
an entitys right to consideration in exchange for goods or services
that the entity has transferred to a customer when that right is
conditioned on something other than the passage of time (for e.g., the
entitys future performance)
(i) what does conditioned on something other than the passage of
time mean?
(ii) is there any difference between a contract asset and any other
normal asset? and is cash a contract asset?
Thank you!

(i) the standard has given an example - conditioned upon

the entitys future performance.
(ii) for our course, students just need to know the assets for
exchange for goods and services is either cash or AR. We
did not cover the other scenarios.

Hello Ms Chan,
Previously you mentioned that we can Dr Inventory Cr COGS for a
sales return if the physical goods are faulty, but can be reworked. If for
example the initial Cr Inventory was $100, is it we also Dr Inventory at
$100 regardless of the fact that the inventory is faulty?
Yes
Then isit the extra costs incurred in reworking would be recorded in
another journal entry where we add these extra costs to the cost of
inventory?
Something like this. Just that we did not cover how to account for
rework costs.
why is sales commission an expense and not other income? can it be
like the company is the consignee and receive the sales commission
instead of being the consignor and giving the sales commission?
Sales commission is an expense as it is paid to sales personnel. If it is
commission received from consignors then it should be termed as
commission fees or commission income etc.
For impairment loss on AR, i understand that the estimated loss
calculated is always the desired ending balance for the allowance for
impairment of AR account, and not the impairment loss on AR account.
However, why is it that the estimated sales return calculated is the
desired ending balance for the sales return account and not the
allowance for sales return account? is it two different concepts?
thankyou!
Do u remember there are two methods in estimating the impairment

loss of AR - income statement approach and balance sheet approach?

We have been using the balance sheet approach of estimating x% of
AR which is the desired ending balance of the allowance account.
The other method, income statement approach method, will estimate y
% of credit sales which is the impairment loss on AR figure.
The income statement approach is similar to the method to estimate the
sales returns.

1.The department cost for production departments include DM DL and

MOH. is the MOH in this case actual MOH?
2. By allocating service department MOH to production department,
the increase in cost will not affect the cost of goods produced right?
if so, this allocation is strictly for internal use only right? (i.e. for
managers to see if departments are efficient)
3. Are the overhead calculated for each product from ABC and volume
based, the applied MOH or is it the actual MOH?

1. The production department will capture the

actual MOH costs but it is the estimated MOH that
is applied to products when we use normal costing.
The OH variance will be separately accounted for.
2. Yes it is an internal allocation. The total
COGS will not be affected but the individual
product costs are affected.
3. Under normal costing, we use applied
MOH for both traditional costing and ABC.
4. Yes. I remember we have a question that
you have to compute conversion cost. It is Tutorial
11 self-practice question 4.

4. If so, if the qn ask for it, do we derive the conversion cost for
process costing as direct labour (given by qn) + Applied MOH
(calculated using ABC)?

1. After debiting Sales returns and crediting allowance for

sales returns at the end of the period what are we supposed to
do if a) there is no sales returns? Do we leave the credit balance

1. Yes, until the next review of sales returns

allowance.
2. Yes.

in the allowance for sales returns account like what we did for
the allowance for the impairment of AR
2. And if b) there has been sales returns- do we debit the allowance for
sales returns and credit accounts receivable?

Hi Mrs Chan, can I check what we have to talk about when we

compare why ABC is better than VBC?
1. VBC allocates MOH based on usage of a single cost driver
Not correct. VBC can use more than a single cost driver eg
departmental rates. Should be VBC allocates MOH using
volume-based cost drivers.
2. Product using more of the cost driver will be allocated more
MOH
Not correct. If products using more of the cost driver will be
allocated more MOH, then nothing is wrong. Should be
As a result of using volume-based cost drivers, higher volume
products are allocated with more MOH when these products do
not necessarily use more MOH resources.
3. Some products which are less expensive to manufacture uses
more of the cost driver than more expensive products, resulting
in accuracy.
Huh? What are you trying to say here? Resulting in accuracy is a
good thing isnt it? Should be The lower volume products are
allocated with less MOH when these products use more MOH

You are not clear in your explanation at all.

resources. This leads to product cost distortion.

4. ABC allocates cost to different products according to how much
of each activity it uses
5. The more you use the activity in manufacturing the product, the
more cost will be allocated based on the activity driver.
ABC overcomes the limitations of VBC by allocating MOH to
products using activity drivers and aims to allocate MOH to
products in accordance to how the products consume the MOH
resources.
Also, when comparing TDABC and ABC
1. TDABC assigns cost based on the average time
required for each activity instead of using an activity driver
2. As ABC requires accurate figures regarding usage of
the activities, it is very expensive to develop and implement
and also very time consuming
3. TDABC makes it easier and cheaper to track the usage
of activities
This is much better.
Are there any other points that need to be included or require more
elaboration when we are answering such questions in the exam?
Thanks so much!
Hello Ms Chan,
for contra asset accounts like accumulated depreciation and
allowance for impairment of AR is the normal balance a credit
balance? (like if the question gives the balance of the allowance
account to be $9,000 and says the account has a normal

Yes

balance, does it mean the $9,000 is a credit balance?) thank

you!
Dear Mrs Chan
for the TDABC, does it only necessarily use 1 cost driver only, or it
can use multiple cost drivers like in ABC?
TDABC allocates MOH based on time spent only.
for the dual cost allocation, the Fixed costs part is budgeted, then
does that mean at the end of the period, there is also a variance,
so must adjust at the end of the period?
No.
for by-product, when they become a main product, like in qn 7-46
of tutorial 12, what does it mean by calculate salvage value
less the separable costs?
Huh? What is calculate salvage value less the separable costs?
Salvage value is for by products only not main products.
for unused capacity, can there be such a thing as too little = not
effective, or should all companies aim to have zero capacity?
Zero capacity or zero idle capacity? Zero capacity means nothing
will be produced.
thank you very much
regards
andrew

Hi Mrs Chan,
For Normal Spoilage, we:

Of course not an asset indefinitely. When the spoiled

goods are sold, we will Dr Cash Cr Inventory of
Spoiled Goods.

Dr Inventory of Spoiled Goods

Cr WIP Inv
What happens to the Inventory of Spoiled Goods account?
I think its an asset but does it mean that itll just be recognised as
an asset in the Balance Sheet indefinitely?
I think its very admirable that youre almost perpetually available
on this document
With reference to Tut 10 Qn2, spoilage rate. My understanding of
spoilage is that given a normal spoilage rate of 5% of total units
produced(100 units), 5 units would be considered normal spoilage.
And if the production yielded 94 units eventually, 1 unit would be
considered abnormal while the other 5 would be considered normal.
However, this is not the case when looking at this particular tutorial
question. May I ask how does the phrasing of this question affect the
way we calculate normal and abnormal spoilage units?
Eugene Nah (thank you for saving my accounting)

Dear Prof Chan,

May I know if there is a need to adjust for the overhead variance in the
schedule for COGS? Because I seem to see some examples adjusting
while some does not. Does it have to do with whether we have already

For tutorial 10 qn 2, it is stated that normal spoilage rate

of 2.5% of GOOD UNITS PRODUCED (BEFORE
SPOILAGE). This is not the same as 2.5% of total units
produced in your example. You are computing 2.5% of
TOTAL UNITS PRODUCED.
If I use your example of the company produced 100 units
and only 94 are good units, based on 5% of GOOD UNITS
PRODUCED (BEFORE SPOILAGE), then 94 units is at
95% level, the goods units produced (before spoilage) is at
100% level which is 98.9 ~ 99 units. So normal spoilage is
5% X 99 units ~ 5 units. Though we get the same 5 units,
our workings are different.
Actually no need. Schedule of COGS is essentially the FG
inventory account in statement format. OH variance is
adjusted at the COGS account.

calculated and adjusted for the MOH variance prior to doing the COGS
schedule? (e.g. if part a) is adjusting for MOH variance, then part b)
COGS schedule needs to show adjustment. If part a) is COGS
schedule, then no need?)
Thank you!
Under the perpetual, when there's a sales return of faulty goods, we
will account for that by not Dr Inventory & Cr COGS.
If the physical good is faulty and has no other use, why Dr back to
inventory?
However, under periodic system, whether the sales returns are in good
condition or in faulty condition, we do not Dr Inventory & Cr COGS.
Apparently you do not understand the difference between perpetual
and periodic inventory system. Perpetual records every single
inventory movement but periodic does not .
Sales return & allowances will only be shown in the income statement,
so how would we account for difference between the sales return of
faulty goods and the sales return of goods in condition for periodic
system? Both would give the same net inventory value in the balance
sheet and the same net gross profit in the balance sheet.
Under periodic, COGS, which is net of sales returns, is derived.
Also, FRS 2:34 states that the reversal of write down will be
recognised as a reduction in expense (ie. COGS). However, to reverse
a write down, we would Dr Inventory Cr Impairment Loss on

Inventory. I understand that Impairment Loss on Inventory is a

separate expense account but it is classified as COGS on the income
statement.
However, when we do the income statement, do we just reflect the
reversal of write down as a revised COGS figure?
eg.
Sales Revenue
Less: COGS (Begin. COGS + changes made to COGS recorded in
journal entries + reversal of write down)
Gross Profit
Or do we do it like this instead:
Less: Expenses
Impairment Loss on Inventory
Since we lump inventory write down to COGS, then your first
approach is suffice.
Hello Ms Chan,
if it is not probable for the entity to collect consideration from the
customer, but goods have already been delivered (i.e. control of asset
has already been transferred to the customer), do we recognise
revenue? or is it a liability?
for the case where the consideration is refundable, how do we deal
with the revenue recognition?
when the question says the accountant estimated that x% of the AR as
at 31 Dec 2014 is likely to be uncollectible, do we take the desired

Hi, since part e) (probability of collection) of the first step

of revenue recognition (identifying contract) is not
established, the contract would not even be formed in the
first place and it is unlikely that the company would
deliver goods in the first place. Unless there are certain
exceptions not covered in class? - Rayner
For the case of refunds, I believe its similar to sales return?

ending balance of the allowance account to be x% of the raw AR given

to us in the question or do we take x% of the adjusted AR (adjustments
arising from a previous part in the question)? cause even though in the
answers the adjusted AR and not the raw AR is used, it feels weird
cause shouldnt the accountant have based his/her estimation on the raw
AR value?
thank you!
for the presentation of answers for adjusting entries, is it necessary to
draw the columns for description, debit and credit? can we
present it this way for each adjusting entry instead?:
Dr Inventory
Cr COGS

$x
$x

(cause the working for each entry (e.g. timeline, calculations) is like
destroying the whole column (omg sorry idk how to explain but the
columns make the working very out of place))
thank you!
I would like to refer to the spoilage question above for Tut 10 Qn 2.
Based on the tut qn, it states that:
Normal spoilage rate is 2.5% of good units produced(before spoilage),
where 122,000 units is the total number of units started for production
and 117,000 good units were yielded. In this case, 117,000 is taken to
be 97.5% as 120,000 is the number of good units produced (before
spoilage).
Would it be right to say that if I remove the (before spoilage) part and
say that if normal spoilage rate is 2.5% of good units produced,
117,000 would be taken to be the 100%?

Yes. Then normal spoilage is 2.5% of 117,000.

Eugene Nah - Thank you!

Hello Ms Chan,
if the process of disposing the normal spoilage incurs additional costs,
how do we record it?
thank you!

Hi Prof, for tut 10 qn 5 to find the purchases of DM i actually did this:

by doing this i actually ignored the 5% indirect material and 9k raw

material part and the AP of 40k. Not sure why. Is this method of doing
correct for this case?

If the normal spoilage can be salvaged for a small

value, then this additional cost will be net off and
the net salvage value will be recorded as
Dr Inventory of Spoiled Units
Cr WIP

Can. Next time, I must remember to remove one figure

so that students cannot work backwards like
this...haha!

Thanks

May I clarify something:

For Normal Spoilage are these the correct entries?
Dr Inventory of Spoiled Goods (salvage value)
Cr WIP
Dr MOH (cost of spoiled goods - salvage value)
Cr WIP
For Abnormal Spoilage, will the Loss from Abnormal Spoilage
account be reflected under expenses in the income statement?
Thanks,

Not correct. Let me explain the same example in the

textbook appendix (under job costing chapter).
The example states that $500 is the cost of spoiled
units but the spoiled units can be salvaged for
$100.
If the spoilage is unique to the job, then we will just
reduce the production costs by the salvage value by
Dr Inventory of Spoiled Goods $100
Cr WIP $100
Do you notice that the net cost of spoiled units of $400
is still in the WIP account for the job since the
spoilage is unique to the job?
If the spoilage is not unique to the job, the cost of
spoilage will be shared with other jobs, then we
will transfer the cost of spoilage to MOH to be
shared with other jobs. We will:
Dr Inventory of Spoiled Goods $100
Cr MOH
Dr MOH $500
Cr WIP $500
So net effect is:

Dr Inventory of Spoiled Goods $100

Dr MOH $400
Cr WIP $500
The above is the example in the textbook appendix.
Yes, loss from abnormal spoilage is an expense in the
income statement.

Hi Prof Chan,
1. Why are factory equipment maintenance costs indirect
costs? If factory equipment only used to produce cost object
which is the product, then isnt it easily traced to cost object?
2. Is the purchase of a factory equipment a product cost
(and direct cost if cost object is product)?

1. The factory equipment is used to produce

many different products and thus not directly
traceable to a single product.
2. No. The cost is an asset known as Property,
Plant and Equipment (PPE). Depreciation will be
charged. It is the depreciation that is a product cost.
3. Yes, factory manager salary is an indirect
labour cost.

3. Since telephone expense incurred by factory

management is a product cost, is the salary of the factory
manager a product cost too?
Thank you!
what about the difference between sales return of faulty goods under
periodic inventory system vs sales return of normal goods under
periodic inventory system?
Because based on the journal entries for both, there doesn't seem to be
any difference.

No difference in journal entries cos periodic inventory

system does not account for every inventory
movement.
The difference lies in the derived cogs at the end of
period.

1. Allowances for sales return is a Dr or cr nature? Where should it

placed under BS? PNL?
2. If my company issue a credit memo to my customers means that I
am trying to reduce my accounts receivable? And if my company issue
a debit memo, it is issue to who? Or if I issue a credit memo who am I
issuing it to? I am kind of confused between credit and debit memo.

1. Regarding the period-end adjustment for the periodic inventory

system:
Dr Inventory (Ending Inventory)
Dr COGS
Dr Purchase Returns and Allowances
Dr Purchase Discounts
Cr Purchases
Cr Freight-in Charges
Cr Inventory (Beginning Inventory)
I don't quite understand the purpose of this adjusting entry >< And why
do we have to zeroise purchase returns, purchase discounts, purchases
and freight-in charges? How do all the entries help you to derive the
COGS? Sorry I'm really confused
2. Regarding impairment loss on inventory, the notes said that the
separate expense account will still be classified as COGS in the income
statement. So how exactly do we present it? Do we sum up impairment
loss on inventory and the actual COGS?

1. Allowances for sales return is a contra asset

account , has a credit normal balance, just like the
allowance for impairment of AR. This is to offset
against the AR in the BS.
2. Yes to the credit memo/note. Debit
memos/notes are issued to customers only to adjust
the invoice originally sent to the customers. Credit
memos/notes are to reduce the invoice amount and
debit memos/notes will increase the invoice
amount.
1. In that period end adjustment, we are trying
to derive COGS using the following cost formula:
Beginning inventory + Purchases + Freight in charges
Purchase Returns and Allowance Purchase
Discounts Ending Inventory = COGS
Where Purchases + Freight in charges Purchase
Returns and Allowance Purchase Discounts = Net
purchases.
2. Yes this is one way.

For the mid semester test question on cash receipts from AR,
When we draw the AR T account, when we calculate the sales for that
year, do we use the sales revenue amount shown on the trial balance or
do we calculate the total sales shown in the schedule.
Also, when we find the cash receipts, do we include the bad debts or
exclude bad debts?

You basically reconstruct the AR account. Use adjusted

balances. In your AR account, you do have
beginning and ending balances, credit sales, sales
returns and allowances, sales discounts and write
off of AR beside the unknown cash collected from
customers.

Accounts receivable
$xxx
Less: allowances for imp.
$xx
Less: allowances for sales ret. $xx
Net accounts rec.
$xxx
Is this correct?

Yes

assuming ABC pte ltd sold goods at 100 units at $10 each on 1 sep on
credit terms 2/10 n/30. Buyer paid on 2 sep. On 10 sep, the buyer
returns 10 units. Hence, this is a sales return after sales discount.
Assume cost is $5 per unit. Is this the correct double entries:
Accounts receivable $1000
Sales.
$1000
Cogs.
$500
Invt.
$500
Cash.
$980
Sales discount.
$ 20
AR.
$1000
Sales return
$98
AR.
$98
INVT
$50
COGS.
$50
we do not have to reverse out the sales discount for the 10 units right?

The sales returns should be as follows:

Dr Sales Returns and Allowance 100
Cr Sales Discount $2
Cr AR $98

1. (for job costing spoilage concept). For tutorial 10 Qn 4-53 in Vol 2

book, it is said that 900 units were rejected due to very unusual design
and corrected and 4100 units were rejected and sold at salvage value.
Why is 900 units not rework? ( since the qn stated 'corrected'. ) Why is
4100units not scrap since it can be sold at a salvage value?
Rework and scrap and spoilages are three different things or is scrap
part of abnormal spoilage or..?

2. For accounts receivable, what if at the current financial year end, a

customer who purchased it this year was not able to pay the goods. Do
we still DR allowance and CR AR? but isn't allowance like an
estimated amount that customers can't pay for the year? But in this
case, if it is confirmed that the customer can't pay this year though he
bought the goods this year, shouldn't we straight away DR impairment
loss of AR and CR AR?

3. If there are two products and one can be further processed and
another is sold at split off point (confirmed that there will be no further
processing) , how do we use NRV method? do we estimate separate
cost for the good that is sold at split off point or we just treat separate
cost =0, i.e. sale price=NRV?

1. The actual sentence from the question is

900 of the first units produced were rejected due
to a very unusual design defect that was corrected
immediately; no more units were rejected for this
reason. Based on English, that in the sentence
refers to the very unusual design defect and not
900 units so it is the very unusual design
defect that is corrected, not 900 units corrected.
Rework, scrap and spoilages are three different things.
Refer to appendix to chapter 4 of BSJC. If that does not
help, consult google.
2. Yes we can Dr Allowance Cr AR, especially when there
is sufficient balance in the Allowance account. If there is
not enough balance, then can write off to Impairment Loss
on AR.
3. The product that is further processed cannot be
marketable at split off thus there is no sales value at split
off. Because if the product that is further processed can be
sold at split off, then it should be sales value method in
use.
So if one product can be sold at split off and the other
cannot be marketable at split off and has to be further
processed, then one product will use split off sales value
while the other product uses final sales value less
separable costs to allocate the joint costs. This is NRV
method.

Hello Ms Chan,
if the process of disposing the normal spoilage incurs additional costs,
how do we record it?
thank you!

Hi Prof,
1. since ABC can allocate non-manufacturing overheads,
should we considering allocating advertising, admin overhead
as well? Does the broad use of the word overhead mean just
MOH but admin overhead as well?
2. Is freight-out expense reported above gross profit line
3. For departmental overhead rate, can each department
use a different cost driver i.e. 1 use MH, 1 use DLH
4. Is short form like WIP, MOH allowed in exam
Thank you!
Hello Ms Chan,
1. following point 2 in the row above, does it mean:
freight out expense - below gross profit line
freight in expense - above gross profit line, with COGS
2. also, are all joint product costs and support service costs indirect
cost if the cost object is defined as product/finished good?
3. then if the cost object is the production department, are these two
costs still indirect costs?
how must the cost object be defined for these two costs to be direct
cost?

If the normal spoilage can be salvaged for a small

value, then this additional cost will be net off and
the net salvage value will be recorded as
Dr Inventory of Spoiled Units
Cr WIP

1. Depends on the questions.

2. No. This is an expense so below the gross
profit line.
3. Yes, definitely.
4. Refer to the exam announcement.

Dear Student (you know who you are), it is not wise to

study overnight at this stage. If you try to work
some questions at 9 am later, I can guarantee you
that your mind will be tired and you will not be
thinking well.
1. Proof of not thinking - freight in is not an
expense. Refer how we record freight in in
perpetual and periodic inventory system and you
will know why freight in is with COGS above the
gross profit line.
2. Yes

3. Yes for support service costs and depends

for the joint product costs. If it is the production
department incurs the joint production costs, then it
is a direct cost.
4. Cost necessary to make the sale is a selling
cost such as sales commission. If that costs
necessary to make a sale refers to the product costs,
then NRV will be a negative figure. Because we are
having a situation of NRV < cost.
5. If actual costs of the support service
departments are allocated to the production
departments and if the support service departments
are not cost inefficient, the actual cost
inefficiencies are allocated to the production
departments.
6. Dual cost allocation is used concurrently
with Direct or Step Down or Reciprocal methods.

4. and regarding the lower of (total) cost and NRV concept,

is it correct to say that
(i) based on the NRV definition: NRV is the estimated selling price
less the estimated cost of completion and costs necessary to make the
sale
1. cost of completion = conversion costs = part of product
cost
2. cost necessary to make the sale = selling costs = period
cost
3. since its estimated, these values are the budgeted
values

(ii) total cost = COGS = purchase cost + conversion cost + other costs
to bring inventory to current state (e.g.fright in) = product cost
(iii) at point of inventory purchase, NRV = purchase cost + profit mark
up, and since NRV > total cost, the profit mark up > conversion costs +
other cost to bring inventory to current state
5. and for the dual cost allocation concept, referring to slide 39 of
lecture 12, budgeted rates are used when calculating variable costs
instead of actual rates because actual rates does not motivate the
support services department to cut costs. but why is it that actual rates
promote inefficiency?
thank you!!!!!!!!!!
6. ps: is this dual cost allocation an alternative/substitute for
departmental cost allocation (be it for service or production
departments?)? :o
Hi Mrs Chan,
1) This question is with regards to question 2 of tutorial 4.
I took down some notes saying that if the equipment is based on
specifications, customers sign off is no longer important but if it is a
modified model, customer acceptance is important.
Does this mean that if the model is based on the specifications, even if
the customer, does not sign off, the revenue can be recognised but it it
is a modified mode, the product has to be signed off before the revenue
can be recognised?
2) My second question is with regards to the question with the 2.5% of
good units produced (before spoilage)

1. In that question, the entity cannot test the

equipment that is modified in accordance to the
customers specifications. Thus customer
acceptance is important in revenue recognition. The
issue here is not because the equipment is
modified. The issue here is because the entity
cannot test and confirm that the equipment has met
the required specifications.
2. That 2,000 units are spoiled units so how
are they good units? There are questions relating to
this question above.

Why is the number of good units produced not the 122,000 started but
120,000? Does it mean that the 2,000 units are not good units
produced?
Thanks!

Hello Mrs Chan,

I would like to seek your clarification regarding the
following questions:
1. when we prepare an income statement in contribution
margin format, do we combine the net sales revenue
and other income before subtracting variable cost from
the it?

1. No
2. Yes
3. No. The ending balance of the allowance
account as at say 30 Jun is the amount of AR which
is still outstanding as at 30 Jun that may default on
payment.

2. Is Advance billing a liability account?

3. If adjustment is made for impairment loss of AR at the
end of each month instead of the end of the financial
year, is the ending balance of allowance for impairment
of AR at the end of each month equal to the cumulative
sum of possible defaults on AR in all month that have
passed in that particular financial year?
Thank you very much!
For the T.b. pg 241, problem 7-29,
How do you use the step-down method?
Since both of the allocations to the service departments are 10%.

In this case, either S1 or S2 can go first. And we will

choose S1 to go first since S1 has the higher
operating costs.

Do you use the Service department with the highest operating cost
first? (S1 in this example)
Thanks!
Joel Lee
Hi Mrs Chan,

1. Is the homogeneity assumption a limitation

of ABC?
2. Simple workings such as X units multiplied
by unit cost no need to show.

Can I clarify on a few things:

1. must we mention the homogeneity assumption as the
limitation of ABC when comparing TDABC and ABC?
2. Do we have to show workings for the production cost
report? or show only for spoilage
Thank you!
1. For normal spoilage with salvage value, we debit to Inventory for
normal spoilage and use it to reduce COGM at this point it is not sold
yet right?

1. Yes
2. No. Dr cash
3. Yes

1a. If so, when we actually sell these spoilt units, what are the journal
entries? Db Sales revenue Cr inventory for normal spoilage?
2. For abnormal spoilage, is the account placed under other expenses in
the income statement?
Hello Ms Chan,

Yes

for lecture 7 slide 81, why do we Dr allowance for sales return and Cr
AR in the following year? is it because the customers actually returned
the good, and this info is not given in the example?
Hi Mrs Chan,

You should know the journal entries. If the unused

capacity made up of salary cost, then goes to salary

Under TDABC, after calculating utilisation (capacity used)

Remaining unallocated overhead cost is for unused capacity and will
be expensed off to income statement
Are we required to know the journal entry for this statement?
If yes, what would it be?

expense, rental cost goes to rent expense, and so

on.

Thank you!
Hi Mrs Chan,
Just to clarify, for allocation of service costs, there is no fix format as
to how we answer the question right? For example we do not
necessarily need to present in table form like the ones in the slides
right?

Yes no fixed format. No need to use table.

thank you!
Hi Mrs Chan,
You mentioned that sales value @ split off point is a better method
than the NRV method. May I know how should we phrase this if we
are asked to compare between the two methods?

Did I say sales value method is better than NRV

method? I did say if the joint products can be sold at
split off point, then sales value method will be used
even when the products are further processed.

Thank you very much!

This does not mean sales value method is better than

NRV method.

Hi Mrs Chan,

No. I remember that question. U read carefully.

Advertising is not a product cost in that question. ABC
is used to allocate advertising costs to the products to
find product margin.

With reference to connect spq tut 9 qn 3 on ABC, the answer shows

that advertising costs are product cost and is also a direct cost as the
ABC implementation team could trace the advertising cost to the
products themselves. However, in the tutorial question, advertising cost
is a period cost and a selling expense. Can advertising cost be a
product cost only under ABC?

ABC can be used to allocate both product and period

costs.
Not all costs that can be traceable to the product are

Does this also mean that if we can trace any kind of cost to the product
itself, it can be classified as a product cost? For example, if the
question states that the ABC implementation team could trace $x
amount of sales commission to product y, then this $x is counted as a
direct product cost for y?

product costs. They are, at most, direct costs to that

product.

Thank you!
Hi Mrs Chan,
1. What is the difference between practical capacity and
used capacity?
2. For unused capacity e.g. rent, if it is charged to the
income statement, what will be credit if we debit rent expense
3. What is an example of spoilage due to a not unique
reason
4. Is it correct to say that if the spoilage is due to a unique
reason, then loss from the spoilage will be debited to finished
goods inventory/transferred to wip of next process?
Thank you so much!

Hi Mrs Chan,
1. For the journal entries in Question 3, S1 14/15, how do we record
the adjusting entries for the purchase of the new van?

1. For example, total capacity is 10 workers X

8 hours per day = 80 man hours. But we know
humans cannot work every minute. So the practical
capacity is 80% of 80 hours = 64 man hours. Used
capacity is the man hours utilised and say 50 man
hours.
2. Aiyo, the accounting for used and unused
capacity is a matter of treating the cost of used
capacity to assets (as inventory / product costs) and
unused capacity as expenses (period costs). How
do you usually recognise a rental cost for MOH or
a rental cost for rent expense? The same applies
here.
3. No. Only normal spoilage is recognised as
product cost and abnormal spoilage is recognised
as period cost/expense. I believe you have mixed
up with whether the spoilage is unique to the
job/process or not unique to the job/process (i.e.
common to all jobs/processes).
Jiake, please do not waste your time. I have already
said that all those past semester exam questions that
you can do are already in your tutorials.

Do we record:

The accounting for new van, etc is out of syllabus now.

Dr Motor Vehicles
Cr Cash
Cr Inventory?
The question states that the company is adopting a perpetual inventory
system so we are not supposed to use purchase discount, but I feel
that Cr Inventory does not seem to be correct. Should we simply Dr
Motor Vehicles and Cr Cash by the discounted amount?
2. For the same part of the same question, how do we record adjusting
entries for Annual road tax? Should we open a new account Prepaid
tax expense and:
Dr Tax Expense
400
Dr Prepaid Tax Expense 800
Cr Cash
1200
I see, Mrs Chan.
Thank you very very much!
Dear Prof Chan,
1. I acknowledge the fact that for balance sheet, it is
required under the FRS to categorise assets and liabilities into
current and non-current. If we were to categorise wrongly, say,
a current asset account is supposedly a non-current asset, will
we be penalised?
2. I understand that allowance for impairment of AR is a
contra-asset account with a credit balance. However, when this
increase, why do we still debit it? Shouldn't we credit it
instead?
Thank you!

1. If you classify an asset wrongly, you will

not get marks for that figure/item. Is that a penalty?
2. If you want to increase the allowance for
impairment of AR account, you have to credit it,
not debit it. We debit it to reduce the allowance for
impairment of AR, like when we write off AR
against the Allowance account.