Professional Documents
Culture Documents
TO SCAN IN STILL..........................................................................................................................................................................................................................................6
QUESTIONS....................................................................................................................................................................................................................................................7
RECORDING RAW MATERIALS PURCHASE & RETURNS..................................................................................................................................................................................7
1-TERMS........................................................................................................................................................................................................................................................8
TABLE OF ALTERNATIVE TERMINOLOGY /USA /UK................................................................................................................................................................................8
CAPEX= capital expenditure ( eg buying PPE like land or machines)..................................................................................................................................................9
the production point of indifference, :..................................................................................................................................................................................................9
analysis of the companies cost structure:............................................................................................................................................................................................9
Capital structure...................................................................................................................................................................................................................................9
annuity:................................................................................................................................................................................................................................................9
over-trading..........................................................................................................................................................................................................................................9
Cost Objects:.............................................................................................................................................................................................................................................9
Direct and Indirect Costs...........................................................................................................................................................................................................................9
inventory valuation:(note)....................................................................................................................................................................................................................9
DIRECT COSTS :..................................................................................................................................................................................................................................10
INDIRECT COSTS :...............................................................................................................................................................................................................................10
Categories of manufacturing costs. – with direct/indirect costs.........................................................................................................................................................10
DIRECT MATERIALS :...........................................................................................................................................................................................................................10
INDIRECT MATERIALS :.......................................................................................................................................................................................................................10
DIRECT LABOUR :...............................................................................................................................................................................................................................10
INDIRECT LABOUR..............................................................................................................................................................................................................................10
DIRECT EXPENSE :..............................................................................................................................................................................................................................10
PRIME COST........................................................................................................................................................................................................................................10
MANUFACTURING OVERHEAD :..........................................................................................................................................................................................................10
COST ALLOCATIONS :.........................................................................................................................................................................................................................11
TOTAL MANUFATURING COST :..........................................................................................................................................................................................................11
Period and Product Costs...................................................................................................................................................................................................................11
PRODUCT COSTS :..............................................................................................................................................................................................................................11
PERIOD COSTS :..................................................................................................................................................................................................................................11
Relevant and Irrelevant Costs:................................................................................................................................................................................................................11
RELEVANT COSTS AND REVENUES :...................................................................................................................................................................................................11
IRRELEVANT COSTS AND REVENUES:.................................................................................................................................................................................................11
Avoidable or Unavoidable costs:.............................................................................................................................................................................................................11
AVOIDABLE=......................................................................................................................................................................................................................................11
UNAVOIDABLE....................................................................................................................................................................................................................................11
Opportunity Costs:..................................................................................................................................................................................................................................11
-Incremental /or Differential- and Marginal Costs...................................................................................................................................................................................12
INCREMENTAL or DIFFERENTIAL COSTS :...........................................................................................................................................................................................12
MARGINAL COSTS :.............................................................................................................................................................................................................................12
Job Costing and Process Costing systems:..............................................................................................................................................................................................12
JOB COSTING SYSTEMS:......................................................................................................................................................................................................................12
PROCESS COSTING SYSTEMS:............................................................................................................................................................................................................12
ABSORPTION COSTING AND VARIABLE COSTING:and STANDARD COSTING..........................................................................................................................................12
inventory valuation:(note)..................................................................................................................................................................................................................12
IAS 2 on INVENTORIES States the Following.:....................................................................................................................................................................................12
Absorbtion costing :............................................................................................................................................................................................................................12
Cost Absorbtion Rate :........................................................................................................................................................................................................................13
Fully Integrated Absorbtion costing System ( or “full” absorb. costing system)................................................................................................................................13
Variable Costing (or Marginal or Direct Costing)................................................................................................................................................................................13
Direct Costing.....................................................................................................................................................................................................................................14
Marginal Costing.................................................................................................................................................................................................................................14
Standard Costing:...............................................................................................................................................................................................................................14
Sunk Costs:.............................................................................................................................................................................................................................................14
SUNK COSTS :.....................................................................................................................................................................................................................................14
Responsibility Accounting :.....................................................................................................................................................................................................................14
RESPONSIBILITY ACCOUNTING :.........................................................................................................................................................................................................14
PROFIT CENTRE :................................................................................................................................................................................................................................14
COST CENTRE:....................................................................................................................................................................................................................................14
INVESTMENT CENTRE:........................................................................................................................................................................................................................14
Maintaining a cost database:..................................................................................................................................................................................................................14
Fixed and Variable Production Overheads : and Cost Behaviour of........................................................................................................................................................14
VARIABLE COSTS :..............................................................................................................................................................................................................................15
FIXED PRODUCTION COSTS :..............................................................................................................................................................................................................15
SEMI-FIXED (or STEP-FIXED COSTS) :.................................................................................................................................................................................................16
SEMI-VARIABLE (or MIXED COSTS) :...................................................................................................................................................................................................17
Relevant Range.......................................................................................................................................................................................................................................17
Relevant Range:.................................................................................................................................................................................................................................17
Selling Costs............................................................................................................................................................................................................................................17
Selling Costs :.....................................................................................................................................................................................................................................17
Conversion Costs:...................................................................................................................................................................................................................................17
Conversion Costs :..............................................................................................................................................................................................................................17
HIGH-LOW COST ANALYSIS:...............................................................................................................................................................................................................17
contribution:.......................................................................................................................................................................................................................................17
budget:...............................................................................................................................................................................................................................................18
“Standard Hours Produced”:..............................................................................................................................................................................................................18
“Standard PROFIT STATEMENT”:........................................................................................................................................................................................................18
STATIC BUDGET..................................................................................................................................................................................................................................18
FLEXED BUDGET.................................................................................................................................................................................................................................18
BILL OF MATERIALS............................................................................................................................................................................................................................18
STANDARD COST CARD......................................................................................................................................................................................................................18
more definitions.................................................................................................................................................................................................................................18
TUT 102 : TOPIC 1: NATURE OF COSTS, COST CLASSIFICATION, COST BEHAVIOUR AND COST ESTIMATION............................................................................................19
SPECIAL FORMULAS TO LEARN :..................................................................................................................................................................................................................20
CHAPTER 2 DRURY : COST TERMS AND CONCEPTS....................................................................................................................................................................................21
need attention:...................................................................................................................................................................................................................................21
PRIME COST........................................................................................................................................................................................................................................21
MANUFACTURING OVERHEAD :..........................................................................................................................................................................................................21
PRODUCT COSTS :..............................................................................................................................................................................................................................21
PERIOD COSTS :..................................................................................................................................................................................................................................21
AVOIDABLE=......................................................................................................................................................................................................................................21
UNAVOIDABLE....................................................................................................................................................................................................................................21
INCREMENTAL or DIFFERENTIAL COSTS :...........................................................................................................................................................................................21
MARGINAL COSTS :.............................................................................................................................................................................................................................21
SEMI-FIXED (or STEP-FIXED COSTS) :.................................................................................................................................................................................................21
SEMI-VARIABLE (or MIXED COSTS) :...................................................................................................................................................................................................22
Cost Objects:...........................................................................................................................................................................................................................................22
DIRECT COSTS :..................................................................................................................................................................................................................................22
INDIRECT COSTS :...............................................................................................................................................................................................................................22
Categories of manufacturing costs. – with direct/indirect costs. ..all those below down to cost allocations...................................................................................22
DIRECT MATERIALS :...........................................................................................................................................................................................................................22
INDIRECT MATERIALS :.......................................................................................................................................................................................................................22
DIRECT LABOUR :...............................................................................................................................................................................................................................22
INDIRECT LABOUR..............................................................................................................................................................................................................................22
DIRECT EXPENSE :..............................................................................................................................................................................................................................23
PRIME COST........................................................................................................................................................................................................................................23
MANUFACTURING OVERHEAD :..........................................................................................................................................................................................................23
COST ALLOCATIONS :.........................................................................................................................................................................................................................23
TOTAL MANUFATURING COST :..........................................................................................................................................................................................................23
Period and Product Costs...................................................................................................................................................................................................................23
PRODUCT COSTS :..............................................................................................................................................................................................................................23
PERIOD COSTS :..................................................................................................................................................................................................................................23
Relevant and Irrelevant Costs:................................................................................................................................................................................................................23
RELEVANT COSTS AND REVENUES :...................................................................................................................................................................................................23
IRRELEVANT COSTS AND REVENUES:.................................................................................................................................................................................................24
Avoidable or Unavoidable costs:.............................................................................................................................................................................................................24
AVOIDABLE=......................................................................................................................................................................................................................................24
UNAVOIDABLE....................................................................................................................................................................................................................................24
Opportunity Costs:..................................................................................................................................................................................................................................24
-Incremental /or Differential- and Marginal Costs...................................................................................................................................................................................24
INCREMENTAL or DIFFERENTIAL COSTS :...........................................................................................................................................................................................24
MARGINAL COSTS :.............................................................................................................................................................................................................................24
SUNK COSTS :.....................................................................................................................................................................................................................................24
VARIABLE COSTS :..............................................................................................................................................................................................................................24
FIXED PRODUCTION COSTS :..............................................................................................................................................................................................................25
SEMI-FIXED (or STEP-FIXED COSTS) :.................................................................................................................................................................................................26
SEMI-VARIABLE (or MIXED COSTS) :...................................................................................................................................................................................................26
Relevant Range:.................................................................................................................................................................................................................................26
HIGH-LOW COST ANALYSIS:...............................................................................................................................................................................................................26
contribution:.......................................................................................................................................................................................................................................26
more definitions.................................................................................................................................................................................................................................27
Maintaining a cost database:..................................................................................................................................................................................................................27
Fixed and Variable Production Overheads : and Cost Behaviour of........................................................................................................................................................27
D RURY: C HAPTER 3: C OST ASSIGNMENT . P AGES 47 – 78.........................................................................................................................................................................................28
EXAM...........................................................................................................................................................................................................................................................28
INTRO...........................................................................................................................................................................................................................................................28
ASSIGNMENT OF : DIRECT AND INDIRECT COSTS.......................................................................................................................................................................................28
the two stage allocation process for costs..................................................................................................................................................................................................29
EXTRACTING RELEVANT COSTS FOR DECISION MAKING.............................................................................................................................................................................31
BUDGETED OVERHEAD RATES....................................................................................................................................................................................................................31
UNDER + OVER RECOVERY OF OVERHEADS...............................................................................................................................................................................................31
MAINTAINING THE DATABASE AT STANDARD COSTS..................................................................................................................................................................................31
NON-MANUFACTURING OVERHEADS...........................................................................................................................................................................................................32
Ch 23 COST ESTIMATION AND COST BEHAVIOUR.......................................................................................................................................................................................33
1) sPECIAL THINGS TO REMEMBER:........................................................................................................................................................................................................33
2) tERMS.................................................................................................................................................................................................................................................33
3) General: :............................................................................................................................................................................................................................................33
4) Mathematical principles applying to cost estimation methods:.........................................................................................................................................................33
5)SEPARATING SEMI-VARIABLE COSTS INTO FIXED AND VARIABLE Methods:........................................................................................................................................34
1-Engineering methods......................................................................................................................................................................................................................34
2-Inspection of accounts method.......................................................................................................................................................................................................34
3-Graphical or scattergraph method..................................................................................................................................................................................................34
4-High-low method.............................................................................................................................................................................................................................34
5-Least squares method.....................................................................................................................................................................................................................36
6-TESTS OF RELIABILITY:....................................................................................................................................................................................................................36
..............................................................................................................................................................37
6)relevant range and non-linear functions:............................................................................................................................................................................................37
7)summary of steps involved in estimating cost....................................................................................................................................................................................37
8)MULTIple regression analysis:.............................................................................................................................................................................................................37
9)learning curve......................................................................................................................................................................................................................................37
1-CUMULATIVE AVERAGE TIME-LEARNING MODEL.............................................................................................................................................................................37
B-INCREMENTAL UNIT-TIME LEARNING MODEL:.................................................................................................................................................................................39
c- limitations of the learning curve....................................................................................................................................................................................................39
d-learning curve is applicable to :......................................................................................................................................................................................................39
10)INDEX VALUES:..................................................................................................................................................................................................................................39
TUT 102 TOPIC 2 COSTING&MNGMNT :MATERIAL LABOUR & OVERHEADS :..............................................................................................................................................41
CH4 DRURY ACCOUNTING ENTRIES FOR A JOB COSTING SYSTEM..............................................................................................................................................................42
INTRo:..........................................................................................................................................................................................................................................................42
MATERIALS (movements) RECORDING PROCEDURE...................................................................................................................................................................................42
PRICING THE ISSUES OF MATERIALS PROBLEM:..........................................................................................................................................................................................42
CONTROL ACCOUNTS:.................................................................................................................................................................................................................................43
RECORDING RAW MATERIALS PURCHASE & RETURNS................................................................................................................................................................................43
RECORDING ISSUE OF MATERIALS..............................................................................................................................................................................................................43
Recording Labour Costs:..............................................................................................................................................................................................................................44
RECORDING MANUFACTURING OVERHEADS...............................................................................................................................................................................................44
NON – MANUFACTURING OVERHEADS:.......................................................................................................................................................................................................45
NON – MANUFACTURING OVERHEADS:
TO SCAN IN STILL
Accounting entries chapter pg 44 own notes +-: scan example in ..pg80/81 drury)
Accounting entries chapter pg 44 own notes +-: Scan in pg 85 exercise question & answer for accounting entries example , and paste in here to see what end result
looks like.
QUESTIONS
1. DRURY TEXT BOOK CH 3 Q 17 WHY IS IS D, NOT C ? CAUSE YOU KNOW WHAT ACTUAL WAS, YOU KNOW UNDER-RECOVER, SO ADD THEM TO GET
BUDHGETED?
2. High low method : What do you use.. in exams hey sometimes mix it up so the 2 gives very different answers ,ALLWAYS USE THE ACTIVITY LEVEL (COST
DRIVER) to choose the high&low values- not the costs.????
3. (So non-overheads (non-mnftr) expenses go in the General Ledger, but overheads(mnftr) go in the subsidiary ledger???) in a mnftr company.
PRODUCT COSTS :
Costs that ARE included in the calc. of inventory for the period,and are not recorded as expenses for the period. (incl. work in progress)
ONLY MANUFACTURING OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock. Product costs=
TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg:
distribution+telephone for telesales .as per book exactly: Certain Admin Overheads or selling overheads may never be associated with
production.
PERIOD COSTS :
Costs that are not included in the calc. of inventory for the period , thus costs that are treated as expenses in the period in which
they occoured .Valuation. Period costs= eg: sales expenses+ travel , distribution expenses.
AVOIDABLE=
Costs that can be left out of a new project ,over which one has control in a current decision, not costs that must be paid anyway, thus
called relevant costs. Sometimes used in place of relevant costs
UNAVOIDABLE
Costs that will have to be paid anyway, and are thus not relevant to a current decision.Sometimes used in place of irrelevant costs
MARGINAL COSTS :
Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new product whereby
production has been increased.
COST OBJECTS:
COST OBJECT :Definition: ANY ACTIVITY for which a SEPARATE MEASUREMENT of COSTS is desired.
Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territory or dept.
The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg labour,materials ,overheads.( or by fixed & variable).THEN assigns
these costs to cost objects.
DIRECT COSTS :
Costs that can be specifically and exclusively identified with a particular cost object. . Eg:wood in a desk, maintenance labour in -(cost object
maintenance dept)-but NOT Maint.Labour in a –(cost object desk produced).The more direct cost and less indirect costs in your estimate
=the more accurate the estimate.
INDIRECT COSTS :
Costs that cannot be identified specifically and exclusively with a particular cost object, but can only be identified with a a number of depts.. /cost objects.
CATEGORIES OF MANUFACTURING COSTS. – WITH DIRECT/INDIRECT COSTS. ..ALL THOSE BELOW DOWN TO COST
ALLOCATIONS.
Direct Materials Xx
Direct Labour x
Xx
Prime Cost x
Xx
Manufacturing Overhead x
Xx
Total Manufacturing Cost x
Xx
x
i) In manufacturing organisations traditional product costs accumulated as follows – developed esp. from/for ext. accounting requirements.
DIRECT MATERIALS :
Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenance materials on machine to produce with is
not,that is an indirect materials cost.
INDIRECT MATERIALS :
cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.
DIRECT LABOUR :
can be specifically traced to or identified with product eg:labour assemble product
INDIRECT LABOUR
can not be specifically traced to or identified with product eg:labour maintenance of many different product lines machines.
DIRECT EXPENSE :
Any expnse that be specifically traced to or identified with product eg hiring of machine to produce a specific quantity of a product is a direct
expense.
PRIME COST
= Direct materials+Direct Labour +Direct Expenses. (excludes any indirect expenses)(Opposite of Manufacturing Overheads)
MANUFACTURING OVERHEAD :
All manufacturing costs except : Direct materials+Direct Labour +Direct Expenses eg:rent of factory or depreciation of machines. It therefore
includes : NB: Indirect materials,labour and expenses.(opposite of Prime Costs)
COST ALLOCATIONS :
process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSO – the assigning of eg: rent between mnftring
and / non-mnftring depts.
INTERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringing to current state – ????ONLY manufacturing direct
and indirect costs- ie:COSTS OF CONVERSION ???????YES OR NO. Includes systematic allocation of fixed & variable overheads.
However FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low production inventory costs are ONLY allocated at normal prod.
Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not
valued at below cost.
PRODUCT COSTS :
Product costs= TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg:
distribution+telephone for telesales .as per book exactly: Admin Overheads or selling overheads may never be associated with production. Costs identified with
goods purchased or produced for resale.-in mnftring is costs attached to product for inventory valuation of finished goods ,work in progress, matched against sales
for recording profits. ONLY MANUFACTURING OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing would
treat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold ,then as an expense.(when you 'write out' last inventory
count and write in new inventory in the profit & loss statement at year end I THINK? ) !
PERIOD COSTS :
Costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of inventory valuation.(or /sales/work in progress.)recorded
as an expense ONLY,never as an asset! Period costs= eg: sales expenses+ admin +distribution expenses. – everything that may not be included in the
calculation of the product cost .
UNAVOIDABLE
irrelevant costs (sometimes used in place of other name)
OPPORTUNITY COSTS:
OPPORTUNITY COST =The cost of a foregone opportunity in favour of having chosen another one :eg . if the cost of selling a new product is to stop selling
another one , the opportunity cost is the rvenue one used to receive from the old one.
MARGINAL COSTS :
Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new product whereby production has been increased.
IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST
QUICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINGS
OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION ..
The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as period costs.(as per book- fixed mnfrtring costs
are charged to the Income statement as an expense for the period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all
mnfring fixed costs.The System is representative of managerial accounting for decision making.
Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)
SUNK COSTS :
These are COSTS created by a decision in the PAST that cannot be changed by any future decision – or which has a zero value when making future decision:
eg:depreciation,or money spent on material that is no longer required/ or sellable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selling
price depends on what the buyer will pay –it can be above or below 10000 . irrelevant for decision making.
VARIABLE COSTS :
Vary directly or very nearly directly according to incr./decr. in volume(eg:of production). Eg direct material costs , direct labour etc .See chart below : Total variable
costs are linear/direct and Unit var. cost is constant.
VARIABLECOSTS: (a)TOTAL
TOTAL Variable
5000 5000
4000 4000
Cost
3000 3000
2000 2000
1000 1000
0 0
0 100 200 300 400 500
ActivityLevel
RELEVANT RANGE:
A limited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000 units, over that another costing structure is used,or
another range.
ADMINISTRATION Costs:
Administration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring process – but in most instances they are written off as
a period cost- not mnftr. Cost. Eg: cost of accountant= period cost , cost of person who records all manufacturing processes number produced, materials used etc
only in mnftring = manftring admin cost .
CONTRIBUTION:
CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a
company will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE – VARIABLE COSTS = contribution, then
after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where
fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production
volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than
before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL
OF THE CONTRIBUTION goes toward profit.
SALES
- Variable Costs
(incl.marketing,selling,distribution ie:
ALL.
= CONTRIBUTION (to fixed +profit)
- Fixed Costs
= PROFIT
MORE DEFINITIONS
1.1. Indirect (common) fixed cost : applies to all products eg rent
1.2. Direct (avoidable) fixed costs : applies only to single 1 of many PRODUCTS .
1.
DRURY: CHAPTER 3: COST ASSIGNMENT. PAGES 47 – 78.
GO TO PAGE pg 56 drury in still- see 56 drury : Overhead Analysis sheet: know how to set it OUT!(Scan in)
1) This chapter is part of the main heading in the drury book of : Cost Accumulation For Inventory Valuation + Profit Measurement. It is one of 5 chapters
in this heading: 1-job costing accounting entries, 2-joint + by product costing + 3-process costing. 4-income effects of alternative systems of cost accumulation.
EXAM
1. IF THEY give variable indirect costs & fixed indirect costs per month/year etc, and you want to get the overhead absorbtion rate for this : don’t worry if its
var or fix , just add the 2 up together, then divide by TOTAL number of machine hrs/ or labour hrs that or whatever cost driver there is to use, to get the
rate per hr or whatever.
2. To choose between labour hrs or machine hrs etc, just take the one that is the BIGGER DEAL in that dept. basicly, don’t get confuses by they say ‘larger
variation in rates of labour pay ‘ in a dept, it just might mean you should take labour hrs because it is more relevant there.
INTRO
1) Different levels of accuracy are needed for 1- financial reporting 2-mangement needs. For (1) law requires only that mntring cost be allocated to inventory but
for (2) it must be far more of the firms costs that get allocated to products so one can make accurate continue/discontinue decisions about products etc.
2) Most companies use older IT systems which are geared to ‘financial reporting’ for invenotory evaluation ,not to detailed cost analysis for MACN. Some use one
database for financial acc. and another for MACN, with different levels of accuracy etc.
3) Thus many firms implement ABC to get accuracy, if cost – benefit is positive – up to point where marginal cost of improvement, gets more than the marginal
benefit, derived
4) SIMPLE SYSTEMS:
a) Cheap to operate
b) High cost of errors
c) Simple
d) Low accuracy
5) SOPHISTICATED SYSTEMS:
a) Expensive to operate
b) Low cost of errors
c) Complex
d) High accuracy
1. Definitions:
a. Overheads – term used instead of indirect costs sometimes
b. Cost Tracing – term describes only Direct cost tracing , not indirect costs ever . When you can 100% sure directly attribute a cost to something.
c. Cost Allocation : indirect cost allocation process , can use either arbitrary or cause–and-effect allocations.
d. Arbitrary Cost Allocations :only for indirect costs – term describes “not so sure” methods used to allocate indirect costs to cost objects. Like…
labour hrs for fetching to decide qty of each material used for purchased, instead of a surer indicator. Generally more used in old ‘traditional costing
syatems’ not in new ABC costing systems which use more cause-and-effect allocations.
e. Cause–And-Effect Cost Allocations.: term describes very accurate methods used to allocate indirect costs to cost objects. Like…to decide qty of
each material purchased,maybe % used in a product X no. of products produced etc . Generally more used in newer ABC costing systems than in old
‘traditional costing systems’ which use more ‘arbitrary’ cost allocations.
f. ‘Allocation Base’ : eg labour hours , the base used to divide the total overheads up , to get a overhead rate per hour …so you can assign costs to
products using this rate and labour hours on job card.
g. Departmental overhead rates : more accurate method : where you use these rates and see through which depts. the product goes, to more
accurately determine product overhead share..since 1 dept may have very low and another very high overheads.multiply by hrs or kg used etc .
allocation base to get overhead share for product.
h. Plant Wide or Blanket Overhead Rates : generally results in less accurate figure, because some products might only use 1 dept where the
overheads are low, but another product uses 4 depts where the overheads add up to more. So one is measured too cheap and the other too
expensive.where the entire MANUFACTURING(not sales/admin) overhead of the factory is divided up using a single ‘Allocation Base’ eg labour hours.
= eg 450 000/5000hrs = R90/labour hour. Then the job card hours are used to multiply by this rate to get the cost for that one job etc.
i. First Stage Allocation bases : to allocate costs from eg property taxes, depreciation, to each cost centre, you use eg area of factory, or no. of
employees etc.
j. Overhead Analysis sheet: used to work out the whole thing. Scan pg 56 drury in still- see 56 drury for this sheet, to see how it is worked out from
a-z.
i. NOTE: you have problems rembembering with this :notice how they use direct labour hrs to assign ‘the service cost centre general factory
support’ to production cost centres at bottom, and value of materials issued to assign ‘materials procurement cost centre costs to
production.
k. Activity Cost Centres : ABC costing uses ‘activity centres’ instead of departments as Cost Centres. Activities consist of the aggregation of many
different tasks and are described by verbs assoisated with objects , typical Costs Centres (activities) are : schedule production , set-up machines ,
move materials, purchase materials, inspect items, process supplier records.
l. Product diversity: means if products in the same dept. consume overheads equally,or in very , very different proportions.
2. DIRECT COSTS: use ‘cost tracing’ to allocate costs to cost objects.
a. Cost Tracing – term describes only Direct cost tracing , not indirect costs ever . When you can 100% sure directly attribute a cost to something.
b. Use : VERY EASY , both sytems get it right easily with : time sheets , job cards , materials requisition paper , bar coding ,
customer/hours/product/materials/qty/etc details.
3. INDIRECT COSTS :Use either of following methods to allocate costs.
a. Arbitrary Cost Allocations :only for indirect costs – term describes “not so sure” methods used to allocate indirect costs to cost objects. Like…
labour hrs for fetching to decide qty of each material used for purchased, instead of a surer indicator. Generally more used in old ‘traditional costing
syatems’ not in new ABC costing systems which use more cause-and-effect allocations.
i. Plant Wide or Blanket Overhead Rates : generally results in less accurate figure, because some products might only use 1 dept where
the overheads are low, but another product uses 4 depts where the overheads add up to more. So one is measured too cheap and the other
too expensive.where the entire MANUFACTURING(not sales/admin) overhead of the factory is divided up using a single ‘Allocation Base’ eg
labour hours. = eg 450 000/5000hrs = R90/labour hour. Then the job card hours are used to multiply by this rate to get the cost for that
one job etc. used very little in real life today anymore 5% of companies maybe use it.too inaccurate, bad product pricing is not competitive.
b. Cause–And-Effect Cost Allocations.: term describes very accurate methods used to allocate indirect costs to cost objects. Like…to decide qty of
each material purchased,maybe % used in a product X no. of products produced etc . Generally more used in newer ABC costing systems than in old
‘traditional costing systems’ which use more ‘arbitrary’ cost allocations.
i. Departmental overhead rates : where you use these rates and see through which depts. the product goes, to more accurately
detarnmine product overhead share..since 1 dept may have very low and another very high overheads.
4. Traditional costing systems: use more Arbitrary Cost Allocations for indirect costs. older from 1900 method. Both systems use same method for direct
costs though- ie “cost tracing”
5. ABC costing systems : use more Cause–And-Effect Cost Allocations for indirect costs Both systems use same method for direct costs though- ie “cost
tracing”
2. There are 2 stage in allocating costs to cost objects : (EG PRODUCT ETC).This process is exactly the same for Traditional as well as ABC costing However
in traditional they use LESS “cost centres”(eg depts.) and fewer ‘allocation bases’ (eg labour hrs) than in ABC costing.
a. STAGE 1 : Overhead expense accounts ( eg property taxes, depreciation) are assigned/divided up between : the different “cost centres“ (eg
departments or even “work centres” in depts.) using “first Stage allocation bases” like “area of factory” for “water & lights” etc.
i. STAGE 1 PART1 : assign all overheads to 1-production and 2- all service/support cost centres(a service cost centre is like manufacturing
admin…OR maintenance ..that serves all (or some of )production depts.
ii. STAGE 1 PART 2: assign all service “cost centre” costs to production depts.
b. STAGE 2: Using an “allocation base” ( direct labour hours) you first work out a rate ( eg Rands per labour Hr) for each cost centre individually , then
multiply rate by eg : hrs labour used on each product. = will give you the total overhead cost/expense that each product uses up.
5. Second stage Allocation bases : direct labour hrs , machine hrs, direct labour cost , units of output, direct materials cost. NOTE
a. You cannot remember this: if a question gives values for direct labour hrs, or machine hrs,or direct wages per production centre it probably
means you must use these to work out a RATE for each production dept, AFTER you finished assigning all costs to them, incl. after reassigning
service/support centres to them.
6. Cost centers : departments, work centres in depts. , machine shops, assembly , other depts.. which support production depts. eg materials handling etc.
7. Cost objects: products, services, customers.
8. METHODS OF ALLOCATING COSTS FROM SERVICE DEPT TO PRODUCTION DEPT: drury pg71
a. IT IS EASY IF THE SERVICE DEPTS DO NOT ALLOCATE TO EACH OTHER, but if every time you allocate you have some left in the other service dept
account again that you just cleared ,because they allocate to each other too, there are a few methods to see ‘which one goes last’
i. Repeated distribution method: first do one, then next till all the service depts.. have been allocated. Then go back and start with no.1
again and carry on 5 or 6 cyles till the amounts left are under R1- then just assign the last few cents sommer anywhere and reg.
ii. Simultaneous equation method : make 2 equations with x=service dept 1 overhead and y = service dept 2 etc etc. then say x =
14000(x’s overheads) + 20% y (it gets 20% of y.s overheads) Do the same for y etc etc. then multiply ONE (only one of- rule allows this)
equations on both sides to get –Y on one and a +y on the other equation. Now youy can add the 2 up and you have just one thing to work
with ie: x= 5000 or something …so you can apply this to solve the equations!
iii. Specified order of closing : just say: dept with MOST overheads gets dealt out first till 0 left, then next lower, next etc.
iv. Direct allocation method: it just ignores inter-service dept allocations completely!
9. TRADITIONAL COSTING SYSTEMS : use less cost drivers ( mostly dir.machine&labour hrs)& few cost centres.
a. Uses bigger cost centres, not very detailed – like huge department.
b. These are appropriate to use where the company has fairly LOW INDIRECT COSTS proportion and they all consume resources in similar proportions
(not one uses a certain overhead nuch more than another one uses it) so any blanket pricing/simplistic will not cause any items to bear other
products costs/ be overcharged.
10. ABC costing SYSTEMS : use many more(1 to 10max) cost drivers ( mostly dir.machine&labour hrs)& few cost centres (6 to 20max).
a. Very NB: Uses Activity Cost Centres : ABC costing uses ‘activity centres’ instead of departments as Cost Centres. Activities consist of the aggregation
of many different tasks and are described by verbs assoisated with objects , typical Costs Centres (activities) are : schedule production , set-up
machines , move materials, purchase materials, inspect items, process supplier records.
b. ABC costing also does not do much re-allocation of ‘Service/support Cost Centres” to Production Centres, they are usually directly assigned to cost
objects eg product using some ‘allocation base’.For instance a support centre called: materials handling : for traditional costing would be split into 1-
purchasing components(no. of purchse orders) , 2-receiving components(no. of receives), 3-disbursing components for ABC costing which would then
each be assigned to cost object eg product , by using some driver.( or for ‘general factory support’ service cost centre : split into 1-scheduling
production 2-quality inspection 3-set up machines.
NON-MANUFACTURING OVERHEADS
1. Eg travelling expenses, selling costs, advertising, delivery expenses.
2. These are incl. in the calculation if needed for managment purposes only, not for financial reporting purposes.
3. How to include them: an appropriate cost driver(allocation basis) must be found to allocate it. This is sometimes difficult, so mostly companies just say
non-manuf. / manufacturing costs = eg 20 % , : to get a ratio to include them by. So you use the actual final ‘cost’ of the product as the cost driver : eg
20% of costs are selling costs, this is the rate one uses (like R 3 / hr labour , here we just say(20/100 X mnftr.cost)
2) TERMS
1. Cost Driver or Activity Measure : Any factor whose change causes a change in the total cost of the activity eg direct labour hours / machine hours / units of
output / no of production run setups.
2. Semi-Variable costs :have a fixed and a variable component which must be separated for accounting processes. –
3. Cost function: refers to a regression equation that describes the relationship between a dependant variable and an independent variable.
1. Coefficient of variation / or of determination : r2 is a ‘goodness of fit’ measure. It is always a number between 0-1 , and shows the % of the data that is
precisely explained by the regression line you are using to show the data as a straight line.
1.1. So if r2 = 0.82 it means 82% of the data fits the line , the rest can be explained either by random variation or ‘random variation plus the
combined effect that other omitted explanatory variables have on the dependant variable.(meaning it might either have more than 1 cost driver,
not just one , affecting this number ; or there are just a lot of outliers .)
1. Correlation Coefficient : r It measures the degree of association between 2 variables. When you square it ie: r X r , then you get the coefficient of variation.
this latter is what you use to judge your answer. The following formula just gives you the answer to r, then you must still square it to get r2.
2. Steady state production levels: where no further improvement on the learning curve takes place – ie the time taken stays the same each time.
3. Cumulative average learning time : the average per unit , of all the units up to now , eg the first 8 , or first 16 etc.
3) GENERAL: :
1. Semi-Variable costs have a fixed and a variable component which must be separated for mngmnt accounting processes eg CVP analysis/ variable costing etc.
Often for semi –variable costs all that is available is the cost of the activity and the measure of the usage- nothing else on what part is fixed or variable. The
following tecniques were developed to calculate this.
2. Examples of semi – variable costs :
2.1. NORMAL : EG : 1-maintenance has a fixed part ( planned maintenance) and A variable part (related to activity level –breakdowns , oiling etc.) 2-
Depreciation – some types can be variable ,if asset value declines in proportion to usage, other are fixed- eg straight line method; so to separate the 2 if
added together
2.2. TIME DEPENDANT : eg maintence staff salaries are fixed in short term, but in long term related to activity level- the more activity the more staff are
needed eventually.
3.1. Y= a + bx
3.1.1.Where b= slope (or variable cost per unit)
3.1.2. a = y intercept .
1-ENGINEERING METHODS
1. Based on engineering analysis of tech relationship between inputs & outputs eg :Time&Motion studies ; Work sampling, Methods study.
2. You basicly do a direct observation of the physical qty needed for an activity. Suited to engineers on a production line making estimates of what the exact costs
are.
3. Cannot be used for separating semi-variable costs into fixed & variable. – if one can not directly observe and record.
4-HIGH-LOW METHOD
1. METHOD: identification of fixed & variable components.
1.1. METHOD: Simply Take the HIGHEST and LOWEST values of the COST DRIVER (some books use costs instead)(eg:a cost driver is = total.units -NOT
total.cost- ) and use these as the 2 different values .Then you have this :
Volume of production (units) Indirect cost
Lowest Activity 5000 22000
Highest Activity 10000 32000
1.2. If variable costs remain constant per unit produced, and the fixed costs remain the same, the increase in costs will be entirely due to an increase in
variable costs.
1.3. So to get the VARIABLE COSTS per unit, you say :
1.3.1.
DIFFERENCE IN COST (Rands)
/ DIFFERENCE IN ACTIVITY (Units ) = Variable Costs Per 1 Unit.
1.3.2. So to get fixed costs per unit, you just say : at any level of units given
:TOTAL COSTS AT THAT LEVEL - [VarCostPerUnit X Units] = FIXED COSTS
1.4. Cost function is y=a+bX ,so variable= slope=b. Any of high or low can be used to compute constant from here ('because both equations are linear
with 2 unknowns-slope+constant-as per book' !). So fixed is =a ,and X = cost driver eg machine hours or units produced.
2. Warning 1: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high low
method- OR you will definitely get wrong answers!!!!
3. Warning 2 :ALLWAYS USE THE ACTIVITY LEVEL (COST DRIVER) to choose the high&low values- not the costs. BUT YOU MUST look at the figures in the question
and use your head. Per Unisa vertabim: if the units go up steadily , and the costs also go up steadily , BUT suddenly the units go up but the costs fall – one can
guess that at that level something is different (var or fix changed!) and it is NOT in the ‘relevant range’. –SO LEAVE EVERY THING FROM THERE OUT OF THE
CALC. – just take the high & low from figures where both units & costs rise together ie : use RELEVANT RANGE only.
4.
5. NOTES:
5.1. Note ‘units produced’ or any other cost driver could also be used as the COST DRIVER in a high-low method , to calculate any similar type of exercise , it
does not have to be ‘units produced’.
5.2. This is a very simple method, and not very accurate because only 2 values are used, not all the values like some other mathematical methods.Very
commonly well known method.Managers sometimes use very simple methods to estimate cost functions-
5.3. The high / low method is used where MULTIPLE cost differences are given for MULTIPLE LEVELS OF PRODUCTION eg: values at 100,300,500,700 etc etc
-not where just 2 levels are given eg:at 30 units and 100 units, as in previous Standard Method & example.
5.4. This method cannot be recommended because it relies on the highest & lowest numbers , which are normally very likely to be abnormal measurements. –
also it only uses 2 points on the line – not all the data.
1. THIS IA AN EXAMPLE OF FIGURES TO SEE HOW ASIMPLE H-L METHOD WORKS. (not income stat/ebit..just any)
COST BUDGET
MARGINAL (Differential Units VARIABLE Per Unit Costs
=A-minus-B) (Tot. Price/Tot.Units= change per
unit)
UNITS produced: 60000 80000 80000-60000= 20000 .
R R R R R
Direct Materials 600000 800000 =(800000-600000)=200000 200000/20000=R10 per unit
Labour 400000 500000 =500000-400000=100000 100000/20000=R5 per unit
Production Overheads 380000 440000 =440000-380000=60000 60000/20000= R3 per unit
Rent 120000 120000 0 0/0=0 per unit
Power 200000 260000 =60000 60000/ 20000=R3 per unit
ANSWER Cont. TO SHOW THE FIXED COSTS AS WELL you basicly now do a Full analysis of costs worksheet for CVP
Units Variable Unit Total Cost LESS variable costs at Per Unit Fixed Costs
Cost(from that level(use any level-say 60000)
above) Remember: FIXED costs cannot be
worked out for a PER UNIT basis–only
as a “total value” per relevant range
Direct Materials R10 600000 –(60000*10)= 0
Labour R5 100000
400000 –(60000 * 5) =400000-300000 =
Production Overheads R3 380000 –(60000 * 3) = 380000-180000 = 200000
3.1.
3.1.1. Note: the above a formula means the same as (avg Y) – (avg x)*b.
3.2. Regression line : Y= a+ bx
3.3. Where : a = fixed costs (Y intercept) b = variable costs (slope ) and x = cost driver ( eg machine hours , or units produced.)
4. Method : first calculate the value of b above , then use it to calculate the value of a.Now you can fit it in the “regression line” equation and work out the variable
costs for your current level of activity. The fixed costs are already given- it will be = “a” VERY EASY.
5. VERY EASY – YOU ARE DONE!
6. Now you can use the ‘TEST OF RELIABILITY’ below to see how close your answer is to the truth.
7. Note : if given a question where you are not sure what is x and what is y, then just decide by seeing which is the dependant variable=y, and which is
independent=x. Eg sales revenue is dependant on advertising cost – the more advertising(cost driver), the more sales revenue.
6-TESTS OF RELIABILITY:
1. Note: spreadsheets have this formula in them, so it is easy to get the value in a corner of the sheet.
2. There are many methods to test how reliabile potential cost drivers are going to be in predicting info. about data.One could plot the line on a graph and see how
far all the actual data lies from it. Or one can use the following mathematical method:
3. The Coefficient Of Variation (known as r2) OR Coefficient of Determination : is a ‘goodness of fit’ measure. It is always a number between 0-1 , and
shows the % of the data that is precisely explained by the regression line you are using to show the data as a straight line.
3.1. So if r2 = 0.82 it means 82% of the data fits the line , the rest can be explained either by random variation or ‘random variation plus the
combined effect that other omitted explanatory variables have on the dependant variable.(meaning it might either have more than 1 cost driver,
not just one , affecting this number ; or there are just a lot of outliers .)
4. The CORRELATION COEFFICIENT = R. (NOT R2) . It measures the degree of association between 2 variables. When you square it ie: r X r , then you get the
COEFFICIENT OF VARIATION. This latter is what you use to judge your answer. The following formula just gives you the answer to r, then you must still
square it to get r2.
4.1.
5.
6. Look at the graph to spot any outliers and investigate if they are correct.
7. DON’T FORGET TO SQUARE THE ANSWER FROM THE FORMULA (MUTIPLY BY r) , TO GET THE COEFFICIENT OF VARIATION.
9)LEARNING CURVE
1) This is a method to calc. how much faster it gets to produce units as workers get more experienced.It is only quoted as a percentage % -all else works from or
around this %.Time decreases exponentially and learning continues at same rate till conditions change or a steady state is reached.
5) If given average time for 1 and 4 or 8 ,and required to find the learning curve % from this, you can do it by equation ie : x/100 * x = (time for
4th one) or (x/100 *x * )(x/100*x) for 8th etc. OR you can use the following method :
I) SAY learning curve is 80% :then you just work out 4th time / 1st time and get the 3rd square root of the answer like this:
a) 1 = 100%
b) 2=80%
c) 3=(80% * 80% =)64% ….. to get 80% say = 2 (square) root of 64
d) 4=(80%*64% =) 51.2% …..to get 80% say = 3rd root of 51.2
e) Etc. next is 4th root,5th root etc.
II)
Example : using 80% learning curve : 40hrs to make first unit
½ way MARGINAL times
Units Learning Production Cumulative Average Time (per Total Total Average Note : this
Produced Curve % :for last half of Production. unit) Time (all units) Time (last ½ of Unit marginal is
total units total units Time(per cockeyed – it is
made made) each of last only for the last ½
half of total of units made , an
units made) average for them
only
1 100% 1 1 40 40 40 40
2 80% 1 2 80%*40=32 32 X2=64(note) 64-40=24 24
(Or 40*80%)
3
4 64%(80*80) 2 4 32*80=25.6 25.6*4=102.4 102.4-64=38.4 19.2 38.4/2=19.2
(Or 32*80% Or
40*64% )
5
6
7
8 51.2%(64*80) 4 8 25.6*80%=20.48 20.48*8=163.84 163.84- 15.4 61.44/4=15.4
(Or 25.6*80% 102.4=61.44
40*51.2%)
16 40.96% (51.2*80 %) 8 16 20.48*80%= 16.384 262.14 98.3 12.3 98.3/8=12.3
(Or40*40.96%)
Previous Average X AverageTime .X Current Total Previous
80% multiply Cumulative Time –minus column
(Or new learning Production Previous divided by
curve * hours for KNOWN Total Number of
1st one ever made) Time units in this
last half of
TOTAL units
made.
6) MATHEMATICAL ALGEBRA FORMULA FOR LEARNING CURVE:(use esp.to work out between doubles ie: 3,5,6 etc.)
I) y=axb
II) where b=log%/log2 Press on calc : %as decimal ie 80%=0.8 SO press:
Log 0.8 / Log 2 =
III) y= cumulative total average time /units when x units are produced (ie: it gives you avg. time per unit as an answer,same as the
answer you get when you multiply {learning curve % by hours taken sort of thing})
IV) a=time to produce first unit
V) x= cumulative number of units produced (eg: if you want to know avg. time ea. For for 15 units, then x=15)
VI) measure of learning (where b = log % / log 2 )rem: on calculator 80% =0.8 NOTE )
a)
VII) NOTE: to get b – you do it on calculator : b= log (learning%as decimal) / div by / log (2)
VIII) You type in log on calc. like this: first :
2ndfunct. Log second : 0.8
IX) Use this formula esp. to work out between doubles ie: for number 3,5,6 etc.)
X) You can use it to make a % TABLE for units 1-200 etc where each no.of units has a simple % next to it to use.
10)INDEX VALUES:
1. If an index value is quoted in relation to any question which IS NOT a learning curve , it means a %, ie 120 means multiply by 120/100.
2. If an index value is quoted in relation to a LEARNING CURVE QUESTION it means the b in formula Y=aXb , which is the logarithim formula for the learning curve-
so it is just the logarithm worked out for you.
TUT 102 TOPIC 2 COSTING&MNGMNT :MATERIAL LABOUR &
OVERHEADS :
INTRO:
1) DEFINITIONS :
a) Contract costing : where job costing is applied to very large projects eg civil engineering.( it is a study on its own – read up on contract costing)
b) Integrated cost accounting system : where cost + financial accounts are in same system, considerd superior to interlocking system since figures are
not duplicated.
c) Interlocking cost acc. system : where the 2 are kept apart : cost + financial accounts , and amounts are duplicated etc.
d) Store Ledger Account : go look at and scan example in ..pg80/81 drury :this is just a sheet of paper that shows : 1 –receipts(+ details) 2- issues(+
details qty , price etc etc) 3- balance left(+ details) over for each of the materials , 1 per page , in the stores of the factory. When GRN is issued it is
transferred to this sheet.(probably all on computer)
e) Stores Requisition : (go look at and scan example in ..pg80/81 drury) .This is a separate sheet of paper that must be handed in to get any issue of raw
materials from the stores. It has details of every material ordered on that requisition, to what job number / they belong , dept , and all the details of item
form the stores Ledger Account for each item. If it is for DIRECT MATERIALS it must have the JOB NUMBER recorded on the ‘stores requisition’ in top
corner. , but if it is for INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner, so that it can be
assigned to a cost centre or cost object This document forms the backbone of the recording process because it is where all the details for further accounts
in the books come from.
1) Stores Ledger Control Account : FOR EVERY ENTRY made in each individual ‘stores ledger account’ (on a separate page for every raw material) , an
equal entry is made in the “stores ledger control account” .
a) Creditors Control Account : same thing, also has a subsidiary ledger of each individual persons account, as well as the control account
CONTROL ACCOUNTS:
1) Stores Ledger Control Account : FOR EVERY ENTRY made in each individual ‘stores ledger account’ (on a separate page for every raw material) , an
equal entry is made in the “stores ledger control account” .
2) Creditors Control Account : same thing, also has a subsidiary ledger of each individual persons account, as well as the control account.
3) Factory Overhead Control Account : this is for all factory (manufacturing ONLY) overheads. It also has a subsidiary ledger which is for every individual
overhead expense type eg electricity etc.
4) These control accounts are the only accounts that are really used in the books , the subsidiary ledger does not form part of double entry system. But for
every entry made in the control account, a separate entry must also be made in the individual “stores ledger account” on its separate piece of paper for
each item .same goes for the creditors control account.
3) INDIRECT MATERIALS : OVERHEAD ACCOUNT NUMBER is recorded on the ‘stores requisition’ in top corner.
4) For every entry in the Factory Overhead Control Account, a separate equal entry must be made in the individual overhead account of that item eg : electricity
expense. and account heading there will be name of Cost centre followed by expense type,unless “cost centre” is not known-eg overall property taxes- then
just expense type-per drury.(job accounts subsidiary ledger)is it separate like creditors ledger or what? (So non-overheads (non-mnftr) expenses go in the
General Ledger, but overheads(mnftr) go in the subsidiary ledger???)
5) Scan in pg 85 exercise question & answer for accounting entries example , and paste in here to see what end result looks like.
3) Overhead EXPENSES journal entry (when it is bought – recording the liability): So for every entry in Factory Overheads account below, there is a
separate one in the Factory Overheads Subsidiary ledger.
Dr Factory Overheads Control Account R71000(& subsidary ledger with name of expense accnt.)
Cr Creditors Control Account(for expenses incurred) R41000 (& subsidary ledger)
Cr Depreciation Account R30000
4) So all real overheads expenses get written INTO overheads control account, then written out again when they get moved to WIP control account. Then anything
left in here at end of year (either too much allocated to jobs using ‘overhead allocation rates’ or - too much expenses and not all allocated to jobs yet) is called
OVER/UNDER RECOVERY of OVERHEADS, which must be charged to Profit & Loss at yr end as a PERIOD COST or EXTRA TURNOVER INCOME.
3) At the end of fin yr they are written out to the Profit & Loss account
AND: