Cost & Management Accounting

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

FORM OF BUSINESS

Trading

Service
Manufacturing

TRADING BUSINESS TRANSACTIONS

Mr. Afaq commenced business with cash investment of Rs 75,000.

Paid Shop Rent for three months at Rs 5.000 per month. Bought Furniture for Rs 12,000 cash. Purchased goods for Rs 2,000 cash. Purchased merchandise from AAA Store Rs 5,000 and paid cash. Sold goods for Rs 7,000 cash. Sold merchandise to HHH Traders for Rs 13,000 and paid cash. Paid advertising expenses Rs 500. Paid Cash Rs 8,000 to J.J. Store on account. Purchased Equipment from Modern Equipment House Rs 15,000. The payment of Rs 3,000 was made and Mr. Afaq has promised to pay the remaining amount in a week. Received Cash from Noble Store Rs 22,000. Withdrew cash for personal use Rs 2,000.

SERVICE BUSINESS TRANSACTIONS

Mr. Jamil opened a Training Center with cash investment of Rs 95,000.

Paid Office Rent for six months at Rs 5.000 per month. Purchased Furniture Rs 12,000 on account from J.J. Store. Purchased Office Supplies (Stationery) for Rs 2,000 on credit from P Stationers. Rendered services and collected cash Rs 24,000. Paid Electricity Bill for the month Rs 1,500 Rendered services and sent bill to Noble Traders totaled Rs 47,000. Paid Cash Rs 8,000 to J.J. Store on account. Purchased Equipment from Modern Equipment House Rs 15,000. The payment of Rs 3,000 was made and Mr. Afaq has promised to pay the remaining amount in a week. Received Cash from Noble Traders Rs 22,000. Withdrew cash for personal use Rs 2,000.

MANUFACTURING BUSINESS TRANSACTIONS

During the month, the following transactions took place in City Sugar Mill.

Purchased Materials on account from Arshad Company Rs 35,000. Materials issued for production Rs 29,000 and Supplies Rs 5,000. Freight paid in cash for material received Rs 1,000. Materials returned to the vendor during the month Rs 600. Payroll for the period was distributed as: direct labour Rs 38,000, indirect labour balance of payroll. Employee payroll deductions were: Income tax 10% and for EOBI 1%. Employer s contribution: Social security 6% and EOBI 5%. Depreciation for the month: building Rs 4,000, machinery Rs 6,000. Factory overhead charged to production at Rs 30 per direct labour hour. Insurance expired with credit to the prepaid account Rs 2,000. Factory overhead is charged to production at 2.40 per direct labour hour. Record shows 20,000 direct labour hours used during the month. Cost of goods manufactured during the period was Rs 89,000. Goods costing Rs 70,000 were sold on account for Rs 120,000.

What is Cost Accounting?

A

systematic, disciplined study to analyse and ascertain cost of product, service or idea. of cost resulting reduction of cost by identifying the abnormal losses and leakage of material usage, wastage of labour time and overhead cost.

Control

Cost Definition
Commonly

used as an amount require to buy something or to pay for service.

According

to cost accounting, cost is defined with reference to classification, such as by function, Behavior, Time, attribute & Control etc.

Cost Accounting: Application

To

determine Cost of Product and Services of Cost

Control

Cost Classifications
By

Nature or Function

Production
Selling & Distribution

Administration Finance

By

Behaviour

Variable Fixed Semi Variable Stepped

Cost Classifications
By

Time

Period Cost Product Cost

By Management

Controllable Cost Non-Controllable Cost

By

Attribute

Direct

Cost Indirect Cost

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Cost of Production: Elements

Direct
Direct

Material
Labour Overhead

Factory

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Direct Material
The material that forms an integral part of the finished goods and that can be included directly in calculating the cost of the product .

Raw Material Raw Cotton Gypsum Clay Iron Ore Wheat Oil Seed Bamboo Pulp Crude Oil

Finished Product Cotton Bales Cement Iron & Steel Flour Oil & Ghee Paper
Petrol, Diesel & Gasoline

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Direct Material

Direct Material Purchased from supplier and placed to Store (Material Debit & A/Payable Credit) Defective Material Returns to Supplier
(A/Payable Debit & Material Credit)

Direct Material issued to production

( W. I. Process Debit & Material Credit)

Excess Material Returns back to Store from Production (Material Debit & W.I. Process Credit)

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Direct Material Cost - Computation

Rs. Material Inventory Jan.1 4,000 Material Purchase 86,000 90,000 Material Inventory Jan. 31 6,000

Cost of Material Consumed 84,000

Material
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Requisition (Evidence)

Direct Labour
The Labour is applied directly to the materials comprising the finished product.

Direct Labour Machine Operator Car Driver Faculty Telephone Operator Cashier Pilot Advocate Chemist

Industry Factory Plant Rent a Car University P.T.C.L. Bank Airline Solicitors firm Pharmaceutical

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Direct Labour Cost

Labour wage
= No. of Hours worked (x) wage per hour 4,000 Hours (x) 50 =Rs 200,000
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Factory Overhead

Indirect Labour Depreciation Insurance Factory Repair & Maintenance Indirect Material Fuel Electric & Power Telephone

Fixed Fixed Fixed Variable Variable Variable Semi Variable Semi Variable

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Product: Pricing Model

Material ( 3 Kg. @ Rs 100 per Kg.) = 300 Labour (4 Hours @ Rs 200 per hr) 800 Factory overhead ( 4 hrs x Rs150) 600 Total Production Cost 1,700 Selling & Distribution Exp (20%) 340 Administrative & General Exp (10%) 170 Finance Cost (15% of Rs 2,210) 332 Total Product Cost 2,542 Profit on Product (20%) 508 18 Price of the Product (Ex- Sales Tax) 3,050

Statement of Cost of Goods Manufactured

Cost of Direct Material Consumed Direct Labour Cost incurred Factory Overhead Applied (@ 30) Total Manufacturing Cost Work in Process Jan.1 Work in Process Jan.31 Cost of goods manufactured

Rs

84,000 200,000 120,000 404,000 24,000 428,000 32,000 Rs 396,000

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Statement of Cost of Goods Sold

Finished Goods Jan. 1 Cost of goods manufactured (As per statement) Finished Goods Jan. 31 Cost of goods sold Adjust. of under /over applied FOH Cost of goods sold (Adjusted)

Rs 60,000 396,000 456,000 50,000 406,000 - Nil 406,000

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Statement of Comprehensive Income

Sales Revenue Cost of goods sold (As per statement) Gross Profit Selling & Distribution Expense Administrative & General Exp

Rs 650,000 406,000 144,000 40,000 50,000 90,000 54,000

Net Income

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Good Luck

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