COST Accounting

COST ACCOUNTING What is Cost Accounting?
he term cost accounting comprises of two terms costs and accounting therefore it is important to define the two terms. Cost can be defined as what must be given up in order to obtain something. The monetary value of resources scarified to acquire a good or services. It can also be seen as the value of economic resources used in the production of goods, services, income or profit. A cost has three element is material, labour and expenses. Accounting is defined as the process of identifying measuring and communicating economic information to permit informed judgment and decision by users of the information. From the above view point, cost accounting can be defined as process of identifying, analyzing, computing and reporting cost to management. It is important to note that cost accounting has only the management of an organization as the user of its information. Cost classification Cost can be classified or grouped in various categories of cost items using some parameters, yardstick or basis as follows (1) Behaviour (2) Nature (3) Degree of control (4) Functions (5) Responsibilities (6) Economic Characteristic
Behaviour:- Cost are categories base or the way they re-act or not
react to change in activity level can be categories as (a) Fixed cost (b) variable cost (c) mixed cost/semi variable cost (d) Step cost (a) Fixed cost: this is a cost that is incurred for a period output, and turnover limit which is tend to be unaffected by fluctuation in the level of activity. It s alternatively called period cost. Fixed cost are those which in accrue in relation to the passage of time and which within definable limits, tend to be
Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957
unaffected by fluctuations in the volume of output e.g. wage of supervisor and storekeeper in a factory rent, rate, insurance, administrative cost e.t.c.
Variable cost: This represent an items of costs which tend to vary in direct proportiont to change in the volume of cost centre to which they relate. It may be seen as the cost item that maintains G perfect relationship with the activity level it can be define as cost that react proportionately to movement within the level of activity e.g. direct wage, e.t.c.
Semi variable cost /mixed cost This can be defined as a cost containing both fixed and variable components and which is caused partly by fluctuations in the level of activity. E.g. Nitel bill, PHCN bill this is in a situation where a standing charge contains a fixed element and the cost per unit consumed.
Nature:- This describes a situation where physical feature or
(a) (b) (c)
characteristics of cost items are used for classification. This involves three types of cost viz. Material cost: This is the cost of inventory, stock, component part bought solely because of a particular job. It is divided into direct material cost and indirect material cost. Labour cost: The cost of workers weather traceable to a product or job in an economically feasible manner. We can divide labor cost into direct labour cost into direct labour cost and indirect labour cost. Over head cost: This is a cost that is incurred to facilitate the production although it does not bear direct impact on the production. It can be a direct overhead cost or indirect overhead cost. It make use of apportionment basis to allocate cost to production.
Degree of control: This is classification basis on degree of influence
that an operating manager can exert on a particular item of cost. This is classified into (a) Controllable cost: item of cost that an operating manager can control or manipulate. (b) Uncontrollable cost: This is a cost item that an operating manager can not influence or control e.g. fixed costs are uncontrollable cost.
Functional Classification: Cost can be classified based on the main
functional area of business. (a) Production cost: This consist cost of procurement of material labour & services with their efficient use in the creation of products up to the stage of primary packing. (b) Marketing cost: This is a cost incurred in creating and stimulating demand for a product, securing orders and warehouse and delivering cost (c) Administrative cost: This is the cost of formulating policy, directing the organization and controlling operation. It assists in the area of cost identification.
Responsibility: This is the classification by the specific responsibility
centre in which cost is incurred. Under this classification are: (a) Cost centre: This refers to a location a person or an item of equipment in relation to which cost may be ascertained and used for the purpose of cost control. The cost incuredgre charged to the relevant cost centre for effective
Examples of a location are department, store-yard, control sales- area, and factors. Examples of person are sales manager, production manager personal manager e.t.c. Example of items of equipment include, machine, delivery vehicles, car, truck e.t.c. (b) Profit centre: The segment of business entity by which both revenue and expenditures are controlled. Both revenue and expenditure are accumulated and thereby a profit/Loss established. It consist a number of cost centres for control purposes. (c) Investment centre: This is a profit centre controlling revenue and cost in which in addition, the profit is related to the assets employed in earning the profit. An investment centre comprises sexual profit centre giving control at a higher stage in the management structure.
Economic characteristic classification: The economic classification
classify cost according to the effect or impact of a cost item on a particular decision to be taken those costs involves. (a) Opportunity cost: This is the cost of alternative forgone, the value given up to acquire something. (b) Incremental cost: The additional cost of having additional product. (c) Avoidable cost: (d) Relevant cost: The cost that has direct impact on the decision to be made (e) Sunk cost Cost Elements These are the items of cost making up the total cost of a product or service. We can divide the element into (a) Prime or Direct cost: This is made up to direct material costs, direct labour cost, and direct expenses. This also refered to as expenses incurred specifically for the product or services. (b) Factory cost: This is the aggregate of prime cost and the share of fixed production overhead cost chargeable to the product or service. (c) Total Cost: The sum of factory cost plus the share of selling, administration and distributive overhead expenses attributable to all product or services. (d) Selling Price: The total cost plus target profit target profit is to be projected by the management based on its pricing policy.
Quality of good cost accounting information Cost information must be obtained for good planning, effective control and visionary decision-making: There are qualities that makes a cost information capable of assisting management towards bringing about positive change in the affairs of the organization such qualities includes Relevance: The information should be relevant to the user(s) and the purpose for which it is intended Timeliness:- The information should be supplied timeously for the purpose for which it is required. The cost accountant should know when management needs cost accounting information and make it readily available. Reliable/Accurate: The information should be accurate and produced in compliance with relevant statutory regulations, professional requirement or manager guidelines. It is then that the information could be said to be accurate and reliable. If there is need for checking or certification before it is put to use it should be done. Understandable: The information should be simple to be understood is balance must be stroke between simplicity & complexity Completeness: this means the information mustfully disclose what is required. Incomplete cost accounting information dangerous managerial decision making. Objectivity: The information is not to be subjective or personal to the provider. It should assist manager in achieving organization objectives and goals. Comparable: The information objectives and goals for comparable analysis with information provided in the precious period(s). it should allow interfirm, or intra firm other forms of comparative analysis for easy performance assessment Target costing Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. It is a customer focused management tool used to determine the market price for a new product in which market research is adopted as basis for measuring performance needs and setting target selling price target costing involve the following stages Stage 1; Determine the target price which customer will be prepared to pay for the product. Stage 2; Deduct the target profit margin from the target price to determine the target cost. Stage 3; Estimate the actual cost of the product.
Stage 4; If estimated actual cost exceeded the targets cost, investigate ways of driving down the actual cost to the target cost is a customer oriented technique which aims achieving the target cost specified for the product at the prescribed level of functionality and quality. Advantages (1). To determining the level of locked in costs. (2). It ensured that design team arrived at the design that given an expected cost that equal or less than target cost. (3). It makes use of team approach. (4). It tries to minimize cost of production. Disadvantage (1). It result in employ demotivation as pressure is mounted to meet target. (2). It consume longer product development time because of many changes to designs and costing. (3). The exist conflicts between designers who try to reduce cost and marketing staff who give away promotion items. Life cycle costing Life cycle costing estimates and accumulates cost over a products estimate life cycle (life span) in order to determine whether profit earned during its manufacturing phase will be sustained and cover the cost incurred during the pre and post manufacturing stages. It is also the maintenance of physical asset cost records over the enter asset lines, so that decision concerning the acquisition, use or disposal of the assets can be made in a way that achieves the optimum asset usage at the lowest possible cost to the entity. Stages of product life cycle (1). Design and Development stage (2). Introduction stage (3). Growth stage (4). Maturity stage (5). Decline stage Advantages (1). It aids pricing Decision making (2). Both pre and post manufacturing cost are put into consideration. (3). It is customer oriented scheme Disadvantages (1). It is time consuming (2). It is complex and difficult to implement.
CODING SYSTEM A code defined as a systematic designed to be applied to a classified set of items, to give a brief accurate reference facilitating entry, collection and analysis. A code is a system of alphabetic and or numeric symbols designed to be applied to a classified set of items, to give brief, accurate reference facilitating entry, collation and analysis. Advantage of a coding system 1. It identifies uniquely, items, materials and part which cannot be done. 2. It avoids ambiguity which would arise from using descriptions 3. It avoids processing. This is particularly important with computer base system 4. It reduces data storage in the majority of cases, a code is much shorter than descript Features 1. Inquirers: Every item of cost unit must attached to it one and only one symbol 2. Clearity: It consist either a number or alphabet 3. Distinctioneness: each item with each code for differentiation 4. Brevity 5. Uniformity 6. Exhaustivess: It should accommodate the full range of grouping as it exist and again be able to absorb new items as they arise. (7) Non-Ambiguity (8) Significance (9) Mnemonic Types of coding systems (a) Group Classification code: This is a code where a specified digit, usually the first, indicates the items classification. e.g. 2000 Television 3000 Sound System 4000 Sound system
(b) Hierarchical Codes:- It is an improvement/development on then group classification code: it is extremely flexible and can incorporate numerous sub-classification e.g 2000 - Television 2100 - Sharp Television 2200 - Samsum Television 2110 - 21 sharp Television 2111 flat screen 21 sharp Television (c) Significant digit code: These are codes where some of the digits are part of the description of the item being coded it enables the description of an item to be largely derived from its code e.g. 8460 = Neon tube , 4feet, 60walts 8460 = Neon tube , 6feet, 40walts Practical aspects of coding system: the following are the practical matters needed to consider in implementation of coding systems. (a) A close notation; This is useful for most data processing purposes e.g book classification in libraries it is capable of indefinite expansion. (b). Block coding; this permit introduction of new items from tine to tine without destroying the coding structure it is useful for costing purposes e.g. Raw material 1000 2999 Work in progress 3000 3999 Indirect materials 400 4999 Indexing: A code should be self indexing therefore a clear index or coding list should be readily available. Centralized control: This system allow new codes to be issued only from central point. It is not be possible for branches, junior staff e.t.c. to introduced a new code into the system. Check digit verification: Because of the supreme importance of correct identification through the code number, it is necessary that important code numbers have an extra digit suffixed which makes them self checking and guards against many of the common coding errors. Code layout: In a system where codes are un avoidably lengthy, it is expected that if should be grouped or subdivide e.g. 658-291-204, 0805,951,6957
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(c). (d) (e)
(f)
Material accounting & control procedure Material is synonymous to inventory or stock in financial accounting. In a manufacturing coy: there are three types of material or stock known as (i) Raw materials: these are the items of mat that have not been processed @ all by the relevant manufacturing department but will be used later as part of the inputs for the output of the firm. (ii) Work In Progress (WIP): These are the items of which work has starters in the manufacturing process but not yet completed for sales. It is valued by adding the cost of raw mat. Consumed so far with the labour and other manufacturing cost incurred on the items semi-processed up to the end of the accounting period. (iii) Finished Goods: They are manufactured goods completed and being held for sales. They are values by adding up the direct mat and direct labour consumed and the overhead cost absorbed by the finished units still to be sold. Material Pricing There are these basic methods of pricing material stock viz (i) Average cost (ii) First-in-first-out (iii) Last-in-first-out (iv)Weighted average cost: this method given result that are between LIFO&FIFO. It is a compromise for those who do not find the argument for one or the other of these methods to be compelling. This method can be divided into (i) Weighted average unit cost (ii) moving average (a) Average cost is applied when inventory system is periodic (b) Moving average unit cost is used when inventory system is perpetual. This method compute /calculate are new average unit cost after each purchase unlike in the average cost where a single average is cal. For the period. Illustration Jan 1. opening stock 1,00o unit @ N3.each May 1 purchase 800 unit @ N3.12 each Oct I purchase 1000 unit @ N3.26 each
Feb 18 sales 600 unit July 30 sales 700 unit Nov 11 sales 800 unit Periodic weighted average 1/1 Opening stock 1000 3. 3000 1/5/ Purchase 800 3.12 2496 1/10/ Purchase 1000 3.26 3260 2800 8,756 Cost of goods sold + closing stock = Total goods available for sale Unit sold = 600+700+800 = 2100 :. Unit left in inventory (closing stock) = 700 Weighted average cost per unit = 8756 = N3.13 Cost of good sold = 8756 x 2100 2800 = N6,567 Closing stock: 8756 2800 = N2,189 Cost of good sold + closing stock = 6,567 +2,189 = 8,756 Moving Average Receive Date Unit Cost Total 1/1/ 13/2 1/5 300 3.12 2496 30/7 1/10 1000 3.26 3260 15/11 FIFO & LILO Illustration 1/71 purchase 300 unit @ N10 each 24/7 purchase 150 units @ N11 each 20/10 purchase 80 unit @ N12 each 5/8 issued 140 units
Issued Unit Cost Total 600 700 300 3 1800
3.08 2156 3.20 2560
Balance Unit Unit 1000 3 400 3 1200 3.08 500 3.08 1500 3.20 700 3.20
Total 3000 1200 3696 1540 4300 2200
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16/9 issued 150 units 11/11 issued 140 units Assure no opening stock Comparison of FIFO & LILO (i) Cost of goods sold: In a inflation period, FIFO matches the oldest low cost with sales. It does not month the current cost with current sales. The implication is that the profit shown under FIFO is higher than that which matches current sales with current cost. LIFO cost of good sold approximates current cost it shows the cost of most recent purchase. The implication is that has the tendery to limit the amount of reported profit to an amount which might be made available to shareholders without impairing the scope and intensity of the org. as a going concern. (2) Tax effect: When there is inflation, LIFO reports a lower net profit and hence tax payment is smaller and consequently cash flow is greater than when FIFO used. (3) Closing stock: In a period prolonged inflation, Lifos closing stock is far below current material cost and hence the balance sheet figure will littele usefulness. (4) Profit manipulation: Lifo can be used to manipulate profit, but FIFO can not (5) Variation in application: Fifo gives a consistent result regardless of when the goods are received or issued while Lifo present too many complexity and variation in application. Inventory control Method of ensuring that the right quantity and quality of relevant stock is available at the right time and right place. Categories of stock costs: There are 4 categories viz. (1) purchase costs, (2) ordering cost (3) carrying cost (4) stock out cost. This can be represented as TC = C0 + Cc + Cu + Ci
Ordering cost carrying cost stock out purchase /inventory cost
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Function of inventory control: (a) Ensuring that raw material are available for production purpose (b) Ensuring that finished goods are available for dispatch to customer (c) Enabling work in progress to be valued (d) Controlling the amount of cash tied up in stock (e) Helping to control wastage and pilferage of material. (1) purchase costs: This can be view in two ways (i) when there is no discount: in this case the unit cost is constant. (ii) when there is discount in the case of discount the unit cost of inventor varies. (2) Ordering cost: This is the cost incurred in written purchase order sending inquires, receiving and inspecting good and, transportation cost. It is majorly administrative in nature it increase as the number of orders increase but the higher the quantity order per time the smaller the ordering cost per unit. (3) Carrying cost: This cost can also be referred to as holding cost, it is the cost material stored. It include cost of capital tied down, insurance cost, auditing, cost or warehouse rent, store labour & administration cost, damage & pilferages, deterioration and obsolescence, storage cost interest on money borrowed to buy stock. It is good to note that the larger the size of stock held, the higher the carrying costs incurred. (4) Stock-out cost: This is the cost of not being able to meet the demand of customers because the stock is exhausted. The cost is subjective because it does not involve movement of cash. It involves cost of loss of turnover, loss of goodwill, loss of qualified employees, loss of trade secrets to competitors due to loss of staff, premium payment for rush delivery. BASIC EQQ MODEL Assumptions: (1) Demand rate is constant and can be ascertained (2) There is zero lead time on orders ie. Lead time (3) stock outs are not allowed /permitted and the safety or buffer stock (4) purchase price per unit is constant and hence quality discount are not (5) order arrive instantaneously and not gradually. (6) The ordering cost per order is known (7) The annual holding cost per item can be determined
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Labour Costing Labour is a factor of production, it is the manpower supply in production of goods and services. For every factor of production there is a return/reward as in profit for entrepreneur, rent is for land while wage is the return on labour. Wage can be defined as compensation for services rendered in a measurable way. Labour cost is divided into (i) Direct labour cost and (ii) Indirect labour cost (A) Direct labour cost: This include the compensation of all manufacturing labour that can be traced to the cost object in an economically feasible way Examples are wages and fringe benefit paid to machine operations, assembly line workers, wage paid to a worker working directly on materials. (B) Indirect labour costs: These are costs compensation for the work that is not directly traceable to a unit of production or service e.g. forklift truck operator, idle time, production manager salaries e.t.c. Feature of labour costing -The objective of work must be clearly communicated to the employee - The basis of employees compensation must be mutuall agreed - The reward for labour or payment should be made as soon as the work is performed or carried out - Intensive skill must be equitable - Workers should not be made accountable for circumstance beyond their control - Objective of work should be attainable by average employee Department involved in planning & control of labour cost (1) Personnel Department: This dept is responsible for the engagement, training, welfare, transfer and retirement or discharge of labour. It keeps documents & information of each worker. (2) Production Department: This is the department that engages direct labour workers. This is the department that keep record of job done by each worker and its responsible for the labour cost varianet. (3) wage department: This dept maintains a records of job classification and wage rate of each employee. Its also determine the gross and net earning of each worker.
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(4)
Cost Accounting Department: This dept charges jobs processes, product with the appropriate cost as supplied by the wages dept.
Method of remuneration There are three basic methods of remuneration (1) Time based (2) output (3) Incentive schemes Time Based: Workers are paid on the basis of hours/days engaged. It is applicable when (a) nature of work makes it difficult to identify a specific item or output e.g. sweepers cleaners, night watch e.t.c. (b) Where the work involves a high degree of skill or use of expensive materials. (c) When rate of production is outside employees control Advantages: (2) it can be adopted to different skills and grades Disadvantages: (1) There is no special incentive for employee to work hard (2) Efficient and inefficient worker are paid the same rate (3) worker can deliberately work slowly in order to earn overtime pay to increase their total earning Output Rate This is a payment by result or incentive scheme or incentive scheme. The workers remuneration is calculated by multiplying the quantity of goods unit produced by the fixed rate per price. This method is applicable (1) when output for each worker can be identified (2) when attention is paid to the quantity of output rather than the quality Advantages (1) It encourage hardworking (2) It rewards hardworking ones with me earning than the hazy one
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Disadvantages (1) There is the danger that the quality of the output may be scarified in order to achieve greater quality (2) High cost of supervision and inspection is required to ensure quality (3) Reasonable compensation must be given to the workers in the case of production stoppage outside the workers control. Incentive Scheme This is another payment by result scheme. It is a compromise between time rate and output rate. It relates earning to the time worked and the output achieved. It share the benefits of such extra unit between the employer and the employee on the formula adopted. The common incentive scheme are:(i) Halsey scheme (ii) Halsey weir scheme (iii) Rowan scheme (i) Halsey scheme = x time saved x base rate (ii) Halsey Weir scheme = 1/3 time saved x base rate (iii) Rowan = Time taken x Time saved x base rate Time allowed (i) Group incentive scheme: A group incentive is a method of remuneration where a number of workers are jointly paid. Its usually where functions are interwoven or interlocking in the output achievement of final output Advantage (1) Promote unity and team spirit among worker (2) Lazy workers are compel to put more effort (3) synehy effect (4) Lecs supervision is required. Disdvantages (1) There is no personal recognition of individual effort (2) All categories of workers both efficient and inefficient are paid equally thereby demoralizing and de motivating the efficient ones.
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Overtime Overtime is an incentive paid to workers when they perfumed work after the normal working hours. Usually it is a time and a half if the work is after the regular hours of a given day and double the normal rate if the work is performed on a day set aside for holiday. Overtime Premium can be define as the additional pay above the normal day-rate pay which a worker must earn if he is to work for a given period after the regular hours. Treatment of Overtime Premium: Overtime Premium arises in two forms viz (1) Based on demand on production facilities in excess of regular time capacity. In this case overtime premium is treated as part of direct labour cost (2) Arised on no demand: when the overtime does not arise because of any particular job, the premium should be regarded as overhead cost of production which will be shared by all the jobs. Deduction * Statutory Deduction & non statutory deduction Labour Turnover * Causes of Labour Turnover
Marginal and absorption costing

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Marginal costing is defined as the accounting system in which variable cost are charged to cost units and the fixed cost of the periods are written-off in full against the aggregate contribution. Contribution is the differences between sales and marginal cost. Marginal costing can be referred to as contribution approacto because it lay emphasis on variable cost and treats all fixed cost as period cost. Marginal cost is also referred to as direct cost, which comprise direct materials, direct labour and direct expenses. Marginal cost = Direct mat + Direct labour + Direct O/H Exp Contribution = sales Marginal cost. Absorption costing is also known as total absorption costing, its the basis of all financial accounting statement, it is also the basis of cost ascertainment. Costs are absorbed into production without distinguishing between fixed and variable cost. The two methods above are methods of preparing profit and loss accounting or income statement in cost accounting. Argument in favour of marginal costing/advantages (1) Simple to operate (2) It is an actual cash flow appreciate based (3) It ignores apportionment of fixed cost which in some cases are indivisible by nature (4) Fixed cost is incurred on a timely basis. They do not relate with the activity level therefore it is ideal to write them off in the period they are incurred. (5) Under or over absorption of overheads is completely eliminated because of non-inclusion of fixed production overhead in product costing. (6) Where sales are constant but production fluctuate marginal costing shows a constant net profit where absorption costing shows variable amount of profit. Disadvantages of marginal costing 1. Danger of misinterpretation of result revealed by marginal costing 2. In the long run fixed cost must be recovered without any reference to total unit cost, ignoring fixed cost may result in positive contribution which may not be sufficient if the capital outlay is huge.
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3.
The valuation it gives to closing stock is not universally acceptable.
Argument in favour of absorption costing/advantages. (1) SAS 4 and SSAPG (stock and works in progress) recommends the use of absorption costing for financial accounting, because cost and revenue must be matched in the period when they arise and incurred. (2) Where production is constant but sales fluctuate, net profit fluation are less with absorption costing them M.C. (3) Marginal costing and emphasis on contribution is misleading because it can result in under pricing of product where quoted prices are below total cost of production (4) Fixed cost is necessary to be included in stock valuation in order to eliminate the possibilities of fluctuation losses in financial statement. Disadvantage of absorption costing (1) The cost figure attributed to call unit of production are dependent on the level of costs incurred as well as the volume of production, therefore increase in volume will result to a relatively decrease in cost per unit. (2) Fixed overheads are difficult to accurately attribute to each unit hence results are not dependent on the various allocation methods used. Fixed production overhead absorption Rate = fixed production o/h Acting level Adsorption Costing Format Sales Less:- Production Cost Opening stock Direct material Direct wages Direct expense Variable production Fixed production overhead Goods available for sales Less closing stock
N xx
x x x x x x x x x
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Add: Under absorbed FPO Less: over absorbed FPO Gross profit Less non production costs Selling and distribution cost Administrative cost Other cost (specify) Net income before Tax Less income tax Net income after Tax Marginal costing format Sales Less available product cost Opening stock Direct materials Direct wages Direct Expenses Variables production O/H Less closing stock
x x x x x x (x) x
(x)
(x)
xx x x x x x x (x) x
Add: variable non-production cost Selling and distribution cost x Administration cost x Other cost (specify) x x Total contribution x Less period cost Fixed production cost x Fixed non-production cost x (x) Net income before x Less income taxes (x) Net income after taxes x Reconciliation statement: The difference between the marginal and absorption costing net income is as a result in stock valuation. In absorption costing stock is valued at total
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cost of production while in marginal costing technique stock is value at variable cost and fixed overhead is written off as a period expenses. The differenced can be reconciled by the following format. 1. Closing stock only Net profit Closing Stock Absorption costing x x Less marginal costing x x x x (ii) Both opening & closing stock N Difference in Net profit x Absorption costing xx Marginal costing xx xx Difference in Stock value Closing Opening Stock Stock Absorption costing x x Marginal costing x x x x Differences in closing stock xx Less difference opening stock xx xx Changes in the level of activity Whenever there is change in activity level in absorption costing method there will be change in the value of stock and profit will be altered.
Break Even Point/Cost Volume Profit Analysis
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This is a method where by total cost equated the total revenue. This concept rely heavily on the application of the behavioural classification of cost, i.e. the distinction between fixed and variable cost. The objectives of C- V P Analysis (a). How many unit must be produced and sold in order to absorb the total cost of production or what the break even point in unit? (b). What is the total turn over required in order to equate the total cost of production or //what is the break even point in unit in (c). what is the turn over required for the purpose of achieving a pre determined amount level of profit? (d). under a pre- determined amount of profit how many unit must be produced and sold in order to achieving the desired target? Assumption of Break even Analysis (1). It is assumed there will be no uncertainty (2). All other variable cost remain constant (3). All cost can be accurately divided into fixed and variable element. (4). There are no stock level changes as that stocks are valued at margined cost only. (5). The analysis applies to the relevant range only. (6). Profit are calculated on a variable costing basis. (7). The only factor affecting revenue and cost is activity level (8). The analysis of c v p relates to a single product or constant sales mix. (9). Fixed cost will remain constant within the relevant range. (10). That method of production level of technology and efficiency remain unchanged. (11). That within the relevant range, cost and revenue behave in a linear fraction. Application of Break even Analysis (1). Profit volume ratio = contribution margin ratio / the ratio of contribution margin to selling price. (a). CMR ( in unit ) = selling price variable cost per unit Selling price (b). CMR ( in total ) = Total sales Total variable cost Total sales (c). where selling price or sales value is not given
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CMR = fixed cost + Profit Contribution + variable cost (d). where Net profit is at different level of activity CMR = Changes in Profit Changes in sales value Contribution = sale variable cost Sales = Total cost + profit Total cost = variable cost + fixed cost @ break even point profit = o Contribution + profit = o Formular of Break even analysis (a) BEP ( unit) = fixed cost Contribution / unit (b) BEP (Sales N) = fixed cost Contribution margin ratio OR BEP (unit) x selling price (c) Sales volume (unit) @ a pre-determined profit before tax (PBT) = Fixed cost + PBT Contribution/unit (d) Sales in value @ target profit before tax = Fixed cost-profit before tax Contribution/margin ration OR Fixed cost + target profit x sales price ration Contribution/unit Sales in value @ target profit after tax = fixed cost + PAT
1- Tax Rate
Contusion margin ration Margins of Safety: This as measures the number of units by which the anticipated sales can fall before the business begins to make a loss. Assuming a sales manager anticipates a sales level of 20,000 units, if break-even point is calculated @ 12,500 units, his margin of society is 7,500 units. The advantage of margin of safety is that it can be used as a measure of risk. For instance, if an organization forecasting error is negligible then if it has a high margin of society it will be less vulnerable to unexpected changes in demand than if it has a low margin of safety. Margin of safety is calculated as follows:
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(i) (ii)
Mos (unit) = budget unit BEP (unit) MOS (sale value|) = budgeted BEP (value).
Graphical Analysis: The relationship existing between cost, volume and profit @ diff. activity or chart known as break-even chart. A break-even chart is a chart that indicates approximate profit or loss at different levels of sales volume within a limited range. This approach may be preferred in the thing instance. (a) Where a simple overview is sufficient (b) Where detained numerical analysis is not required especially is the user of the information have no accounting acknowledge or background. Further more, breakeven chart are used to:- Plan the production of a companys product - Market a companys product - Give a visual display of breakeven arithmetic there are two different approaches to be applied in presenting the chart as follows: Traditional Approach After clearly distinguish between the fixed cost and variables cost then apply the following steps: (1) Draw two axes in a way that the horizontal axis will represent activity level, and the vertical axis will reveal the amount for both reveal cost (2) The fixed cost line will be drawn parallel to the horizontal axis (3) The total cost line will start where the fixed cost interest the vertical (4) Draw a revenue line from the point of origin stopping upwards with an angle determined by the selling price.
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Multi Product Break Analysis In a multi product situation, to calculate break-even point a constant product sales mix be assumed or all product must have the same c/s ratio. We must ascertain a weighted average contribution per mix, the weighting being on the basis of the quantities of the product in the constant mix. The breakeven point in a multi product for a standard mix of product is calculated as fixed cost divided by contribution per mix. This can be achieve using the following basic steps:(1) Cal. The contribution per unit for each product (2) Compute the contribution per mix (3) Cal. The BEP in terms of the number of mixes (4) Compute the BEP in terms of the number of units of the product (5) Cal. The BEP in terms of revenue LIMITATION OF BREAK EVEN ANALYSIS (a) The result of the analysis can only be relied upon within the relevant range i.e. within the activity level that associated costs can be accurately determined. (b) The assumption that fixed costs will remain the same at all activity levels may be family. This is because fixed cost are likely to change at different activity level. A stepped fixed line is probably the most accurate representation of breakeven analysis. (c) It is not proper to conclude that variables cost and sales will be linear. The effect of extra discount, overtime payment,, learning curve, special price contracts and other similar matters will make variable cost and revenue as a curve rather them a straight line. (d) The cost volume profit analysis merely represent relationship which are essentially short term. However, where the same scale involves a several years, then the analysis will be inappropriate. (e) The concept of C-V-P analysis relies heavily on the behavioural classification of cost, but there are numerous factor that will influence change in cost and revenue in addition to the activity level. (f) It is also incorrect to assume that the firm is a price taker and that a perfect market exists.
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(g) Break even analysis ignores risk and uncertainty therefore perfect knowledge of cost and revenue function is assued. But in practice risk and uncertainty remains a crucial factor in all business decision.
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Budgeting & Budgeting Control Sub Topic 1. Types of Budgets 2. Budget procedure, budget committee, budget manual 3. Preparation of budgets functional, mater, cash, capital budget investment app 4. Meaning & Obj. of budgeting control 5. Preparation of operating statement and variance including flexible budgeting 6. Budgeting control improvement techniques 7. Zero based budgeting, incremental based budgeting; planning, programming and budgeting system. What is a budget? A plan quantified in monetary terms prepared and approved prior to a defined period of time visually showing planned income and/or expenditure during a period and the capital to be employed to achieve a given objective. It can be define as a future plan of action formulated by mgt for the whole or a section of organization, which is expression monetary terms. Types of Budget: Budgeting committee: The following are outline of budgeting committee function (i) A budget committee meets @ regular intervals and would be serviced buy a budget officer, usually the accountant. (ii) The task of the committee is to co-ordinate and reviews the budget programme establish procedure and timetables, produce and update the budget manual. (iii) Managers are personally involved with development of their own budgets and accept responsibility for them (iv) It is unrealistic to expect a mgr to accept responsibility for an externality prepared budget which is imposed on him. The budget committee is shaddled with responsibility for developing and coordinating budget. The committee comproses of all functional heads while accountant serve as budget officer and provides technical assistance and data.
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Budget process (1) Prediction of future events through forecasting is carried out (2) Functional/departmental coordination & communication for effective inter locking feasible budget. Cash budget: The summary of cash implication of all other budget except the master budget. The objectives of the cash budget is to ensure that sufficient cash is available at all times to meet the level of operations which are outlined in the various budget. Cash budget help mgt to decide in advance to invest the surplus cash pending the time it is needed it also identities cash deficiencies which help mgrs to take steps to meet up by taking bank loan or overdraft. Cash budget format
Master Budget: This is usually presented in the form of (a) Budget operating statement (b) Budget trading profit and loss accounts (c) Budget balance sheet Its a consideration of all the support budgets and represent the financial effected of the plan for the biz as a whole. Each of the parts of the master budget is prepared in conventional manner except that budget cost, revenue, investment e.t.c. are used insisted of historical figures.
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Standard Costing: Standard is the expected level of performing standard costing can be seen as an estimated or a pre-determined total cost of product per unit for an organizational. Std. costly is concerned basically with setting performed std, measuring the actual output and comparing the actual result with std standard costing techniques is a process of estimating the total cost of production per unit. Basic steps involved in standard costing technique (1) Identify the long term corporate objective of a biz outfit (a) determine the short term achievable objective from the corporate objects. Limitation of standard costing technique (1) Established of attainable standard (2) Problem of identifying the specific needs of consumers (3) Persistent increase in the level of inflation (4) Frequent changes in the level of technology (5) Political instability (6) Labour rate varies among org. based on economic Types of standard (1) Ideal STD: an essential std designed on the basis of the maximum productive capacity of the organization. It is establish without providing adequately for any negative factor. (2) Attainable std: aka practical std. it is an established std specially premised on what is considered practicable within the org. it is est. with adequate provision for negative factors that may affect the attainment of established std. (3) Current std: established std specially based on the prevailing working condition within the org. or the industry at large. It is suggested to frequent change (4) Basic std. an old established std. designed principally to satisfy a given objective. It is not subjected to frequent alteration:. Outdated in nature
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COST Accounting

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COST ACCOUNTING What is Cost Accounting?

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Nature:- This describes a situation where physical feature or

(a) (b) (c)

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

(c). (d) (e)

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Issued Unit Cost Total 600 700 300 3 1800

3.08 2156 3.20 2560

Total 3000 1200 3696 1540 4300 2200

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Marginal and absorption costing

The valuation it gives to closing stock is not universally acceptable.

Break Even Point/Cost Volume Profit Analysis

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

Compiled by Seye Bamigboye ACA, ANIM, HND seyebamigboye@yahoo.com 07034986470 , 08059516957

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