Cima revision cards management accounting fundamentals by janet walker

Cost units and cost centresDefinitions Cost unit – a unit of product or service in relation to which costs are ascertained Cost centre – a production or service location, function, activ

CIMA REVISION CARDS

Management Accounting

Fundamentals

Janet Walker

Certificate Level Paper C1

AMSTERDAM l BOSTON l HEIDELBERG l LONDON l NEW YORK l OXFORD PARIS l SAN DIEGO l SAN FRANCISCO l SINGAPORE l SYDNEY l TOKYO

Linacre House, Jordan Hill, Oxford OX2 8DP

30, Corporate Drive, Burlington, MA 01803

First published 2005

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British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

A catalogue record for this book is available from the Library of Congress

ISBN 07506 64770

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Welcome to CIMA’s Official Revision Cards These cards have been designed to:

. Save you time by summarising the syllabus in a concise form

. Jog your memory through the use of diagrams and bullet points

. Follow the structure of the CIMA Official Study Systems

. Refer to relevant questions found within the Preparing for the Assessment section of the study system. Provide you with plenty of assessment tips and hints

Ensure assessment success by revising with the only revision cards endorsed by CIMA

TABLE OF CONTENTS

1 Basic aspects of cost accounting 1

2 Materials 11

3 Labour 19

4 Overhead 25

5 Specific order costing 31

6 Continuous operation costing 37

7 Bookkeeping systems 55

8 Absorption costing and marginal costing 63

9 Breakeven analysis and decision-making 71

10 Budgetary planning and control 87

11 Standard costing and variance analysis 101

Basic Aspects of Cost AccountingThe fundamental concepts of the framework of cost accounting

Topics

. Cost units and cost centres

. The classification of costs

. The coding of costs

. The elements of cost

. Cost behaviour patterns

. Analysing semi-variable costs

Key study system questions

1 Cost behaviour

3 High-low method

1

Cost units and cost centres

Definitions

Cost unit – a unit of product or service in relation

to which costs are ascertained

Cost centre – a production or service location,

function, activity or item of equipment for which

costs are accumulated

The link between cost centres and

cost units

A cost centre acts as a collecting place for costs

The total cost centre cost may then be related to

the cost units which have passed through the cost

centre to determine a cost per unit

Cost unit examples

Product: litre of paint, batch of cakesService: restaurant meal, tonne-mile

Cost centre examples

Location: production department AFunction: administration

Activity: invoice processingItem of equipment: stamping machine

2

Basic Aspects of Cost Accounting

The classification of costs

Types of cost classifications

K Nature of cost: material, labour or expense

K Direct or indirect

K Functional analysis: production, selling,

distribution, administration

K Fixed or variable

K Controllable and non-controllable: important

when preparing management information

K Normal and abnormal: highlighting abnormal

events draws them to managers’ attention

K Relevant and non-relevant: in respect of

The coding of costs

Definition

Code – a system of symbols designed to be

applied to a classified set of items to give a brief

accurate reference, facilitating entry, collation and

analysis

Advantages of a coding system

K A code is usually briefer than a description

K Reduces ambiguity

K Assists computerised processing of data

Requirements for efficient coding system

K Each code should be unique and certain

K Coding system should be comprehensive and

capable of expanding to include new items

K Code numbers should be as brief as possible

K Incorporate check digits in computerised codes

K Only authorised personnel permitted to add new

The elements of cost

Study tip

A sound understanding of the difference between

total direct cost, total production cost and total

cost will help you in assessment questions on a

variety of different topics

5

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Basic Aspects of Cost Accounting

Cost behaviour patterns

Cost behaviour patterns describe the way that costs behave in relation to changes in the level of activity

Definition

Fixed cost – a cost which, within certain activity

limits, is not affected by fluctuations in the level of

activity

Examples of fixed costs

K Rent of the factory

K Accountant’s salary

Definition

Stepped fixed cost – a cost which remains constant

for a range of activities, but which increases to the

next step when a critical level of activity is reached

Examples of stepped fixed costs

Cost behaviour patterns

Definition

Variable cost – a cost which varies in relation to

the level of activity

Examples of variable costs

K Packaging material costs

K Royalties

Definition

Semi-variable cost – a cost containing both

fixed and variable components and which is thus

partly affected by a change in the level of activity

Examples of semi-variable costs

K Telephone expenses

K Gas and electricity bills

Semi-variable costs are also referred to assemi-fixed or mixed costs

7

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Basic Aspects of Cost Accounting

Analysing semi-variable costs

The high-low method

K Uses historical data on costs and activity levels

K Selects the highest and lowest activity levels and

assumes that the change in cost between the

levels is caused by the change in variable cost

K Variable cost per unit of activity is determined by

dividing change in total cost by change in activity

level

K Fixed cost determined by substituting variable

cost per unit into either of the activity levels

Study tipThis is a very important technique It is vital

that you are able to apply it to a wide variety of

data The activity measure will vary but the

technique remains the same

Variable cost per unit ¼£ ð5;200
4;330Þ

ð800
220Þ

¼£ 1:50Fixed cost ¼ £ 5;200
£ ð1:50  800Þ

¼£ 4;000

8

Basic Aspects of Cost Accounting

Analysing semi-variable costs

Scattergraph

K Uses historical data on costs and activity levels

K All available pairs of data plotted on graph

K Line of best fit is drawn by eye

Example

Fixed cost ¼ vertical axis intercept ¼ £ 200

Variable cost per unit ¼ gradient of line of best fit

¼£ ð500
200Þð150
0Þ

Fixed cost is given by intercept on vertical

axis, i.e., cost at zero activity

9

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Basic Aspects of Cost Accounting

Materials accounting and control procedures

Topics

. Recording stock movements

. Stock control levels

. Stock valuation

Key study system questions

8 Stock level calculations

11 Stock control

12 Stock valuation methods

11

Recording stock movements

Ordering and receiving stock

1 Stockholding falls to reorder level

2 Storekeeper raises purchase requisition

3 Buying department completes purchase order

4 Goods received from supplier and goods

received note (GRN) completed

5 Supplier’s invoice received

Supplier may also leave a delivery noteCopy of GRN sent to accounts departmentand to buying department

Invoice checked against purchase orderand GRN before being authorised forpayment

12

Materials

Recording stock movements

Issuing stock from stores

1 Department requiring materials raises material

requisition

2 Excess materials returned to stores are

recorded on a materials returned note

3 Excess materials transferred to another job

without first returning to stores are recorded

on a materials transfer note

Ensures that cost of material is charged tocorrect cost centre or cost unit

13

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Materials

Recording stock movements

Recording and checking stock

balances

K Bin cards and/or stores ledger cards record all

transactions and show continual record of stock

balance

K Stock may be counted and checked against stock

records annually on a particular date

K Alternatively, a number of items may be counted

and checked against records each day This is

continuous stocktaking Each item is checked

at least once a year

14

Materials

Stock control levels

Stock kept at optimum level to minimise risk of

stock-outs and the costs of ordering and storing

stock Usually achieved by monitoring free stock

balance ¼ physical stock þ stock on order with

suppliers
outstanding requirements unfulfilled

Reorder level ¼ maximum usage  maximum lead time

Minimum level ¼ reorder level
(average

usage  average lead time)Maximum level ¼ reorder level þ reorder

quantity
(minimumusage  minimum lead time)Average stock ¼ safety stock þ ½ reorder quantity

Study tipYou must memorize all the formulae on this card.They will not be provided in the assessment

Reorder level ¼ level of free stock atwhich an order should be placed forreplenishment stock

Stock control levels

Definition

Economic order quantity – the order size which

minimises the sum of stock ordering costs and

stockholding costs

EOQ ¼ ffiffiffiffiffiffiffi

2CoD Ch

q

Study tipThe EOQ formula will be provided in the

assessment if you need it But make sure that you

know the meaning of each of the terms in the

formula

EOQ theory assumes average stock

¼order quantity/2, i.e no safety stock is held

16

Materials

Stock valuation

Stock valuation methods

K First In First Out (FIFO) – prices issues at the

price of the oldest items in stock

K Last In First Out (LIFO) – prices issues at the

price of the latest items received into stock

K Weighted average (AVCO) – prices issues at the

weighted average price of items in stock

Example data

Opening stock 1st March 200 units at £ 2.00 per unit

Purchases 5th March 500 units at £ 2.35 per unit

Issues 7th March 300 units

FIFO methodValue of issues 7th March ¼ (200 units  £ 2.00)

þ(100 units  £ 2.35)

¼£ 635Value of closing stock ¼ 400 units  £ 2.35 ¼ £ 940LIFO method

Value of issues 7th March ¼ 300 units  £ 2.35 ¼ £ 705Value of closing stock ¼ (200 units  £ 2.00)

þ(200 units  £ 2.35) ¼ £ 870AVCO method

Average price ¼ ((200  £ 2.00) þ (500  £ 2.35))/700

¼£ 2.25 per unitValue of issues 7th March ¼ 300 units  £ 2.25 ¼ £ 675Value of closing stock ¼ 400 units  £ 2.25 ¼ £ 900

17

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Materials

Stock valuation

Closing stock valuation Highest Lowest Between FIFO and LIFOCharge to cost of sales Lowest Highest Between FIFO and LIFO

Calculating the weighted average price

Revised average price usually calculated

whenever new batch received into stock ¼

cumulative weighted average

If single average calculated at period end based

on total purchases for period ¼ periodic moving

average

18

Materials

. Time and activity recording systems

. Classification of labour costs

Key study system questions

14 Labour remuneration

15 Labour remuneration

19

Remuneration systems

Piecework systems

K Employee paid for output

achieved: outputachieved
piecework rate perunit

K May include guaranteed

minimum wage

K Differential system pays

increasing rates for higheroutput: important to state ifhigher rates apply to additionalunits only

K Important to check quality

K Suitable where quantity of

output is important

Bonus schemes

K Employee paid a bonus for

time saved against agreedtarget

K Benefit of efficiency shared

between employee andemployer

K Many different schemes

K May be applied to groups

where: operations carried out

in groups, not possible tomeasure individualperformance, whole groupmust work faster to exceedtargets

Time-based systems

K Employee paid for hours

attended: hours attended

agreed hourly rate

K Wages not dependent on

output achieved

K Overtime hours usually paid at

premium above basic rate

K Suitable where: output difficult

to measure, activities

undertaken vary widely,

quality of output important

20

Labour

Labour turnover

Definition

Labour turnover – a measure of the number of

leavers relative to the size of the workforce

Usually expressed as a percentage

Labour turnover ¼ number of leavers replaced

average number of employees

100%

Study tipLearn this formula It will not be provided in the

exam

BenefitsMay help to reduce turnover and encourage highermorale among workforce For example:

Time and activity recording systems

Time recording systems

K Important for time-based employees

K Also important for reconciling analysis of total

time in jobbing environment

K Clock cards: record starting and finishing times

May be mechanical or electronic

K Important, with flexible time working for

employees, to know cumulative hours worked

in current period

Activity recording systems

K Important for employees who are paid according

to output

K Also important in a jobbing environment

K Piecework/bonus ticket

K Time sheets: daily or weekly

K Important to record and report on idle time¼when employee is being paid but not doingproductive work

22

Labour

Classification of labour costs

Usually treated as direct labour

K Basic pay of direct workers

K Basic rate of direct overtime hours worked

K Overtime premium and bonus payments which

can be identified with specific customer or job

Usually treated as indirect labour

K All payments to indirect workers

K Overtime premium and bonus payments unless

directly attributable to specific job

K Idle time payments

K Holiday pay, sick pay, etc

SolutionDirect wages ¼ £ 37;800 þ ð2=3  £ 3;900Þ

¼£ 40;400Indirect wages ¼ £ 30;800 þ ð1=3  £ 3;900Þ þ £ 400

Overhead analysis

Definitions

Overhead – expenditure on labour, materials or

services which cannot be economically identified

with a specific saleable cost unit

Absorption costing – a method of costing that, in

addition to direct costs, assigns production

overhead costs to cost units by means of

overhead absorption rates

Production cost centre – a cost centre that is

directly involved with the production of the

organisation’s output

Service cost centre – a cost centre that provides

support services to the production cost centres,

e.g., maintenance, stores, canteen

Remember

Overhead costs are also called indirect costs

Three stages in overhead analysis

K Allocation Allot whole items of overhead to

individual cost centres, e.g., allocatestorekeeper’s wages to stores cost centre

K Apportionment Apportion remaining overhead

between cost centres on an equitable basis,e.g., apportion factory rent over several costcentres on basis of floor area

K Absorption Absorb total cost centre production

overhead costs into cost units

26

Overhead

Overhead apportionment

Apportionment and re-apportionment

K Once all possible direct allocations have been

made, apportion the remaining production

overhead costs to production and service cost

centres on an equitable basis

K Then re-apportion the total of the service cost

centre costs to production cost centres

Remember

After the apportionment stage you should end

up with overheads attributed to production cost

centres only

Reciprocal servicing

K Occurs when service cost centres provide service

to each other

K Take account of reciprocal servicing by repeated

distribution of service cost centre totaloverheads to production cost centres and to otherservice cost centres until amounts involvedbecome negligible

27

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Overhead

Overhead absorption

Total overhead of production cost centre is absorbed into

unit costs, using pre-determined overhead absorption

rate (OAR):

OAR ¼budgeted production overhead for cost centre

budgeted units of absorption base

Reasons for pre-determined OARs

K Overhead not incurred evenly over period: actual

rates per unit subject to wide fluctuation

K Activity levels may fluctuate during period: OAR

would also fluctuate

K Managers have an overhead rate available for

use in product costing, price quotations, etc

Main bases of overhead absorption

K Rate per unit – only suitable if identical units

produced

K Direct labour hour rate – suitable for

labour-intensive cost centres

K Machine hour rate – suitable for

machine-intensive cost centres

Study tip

A common error is to use the actualoverhead and activity figures to determine theOAR Remember that OARs are pre-determined,based on budgeted figures for the period

28

Overhead

Under/over absorption

Pre-determined OARs result in under or over absorption

due to either or both of the following:

K actual overhead is different from budget

K actual activity level is different from budget

Actual overhead > absorbed overhead ¼ under absorbed

Actual overhead < absorbed overhead ¼ over absorbed

ExampleMachining department results for latest period:

Actual BudgetMachine hours 23,800 22,700Production overhead £ 8,330 £ 9,080Solution

Pre-determined OAR ¼ £ 9,080/22,700

¼£ 0.40 per machine hourOverhead absorbed ¼ 23,800 hr  £ 0.40 ¼ £ 9,520Overhead incurred £ 8,330Over-absorbed overhead £ 1,190

29

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Overhead

Specific Order Costing

Job, batch and contract costing systems

Topics

. Job and batch costing

. Contract costing

Key study system questions

22 Specific order costing

25 Job/batch costing

26 Specific order costing

31

Job and batch costing

Definition

Specific order costing – the basic cost

accounting method applicable where work

consists of separately identifiable contracts, jobs

or batches

Characteristics of job costing

K Customer-driven production Jobs are

undertaken as the result of a customer request

K Each job is a separately identifiable unit

K Jobs are of relatively short duration

K Each job has a unique number Costs are

accumulated against the number on a job card

Characteristics of batch costing

K Similar to job costing

K Each batch is a group of similar articles, which

is separately identifiable from all other batches

K Cost per item within batch¼

total batch costnumber of items in batch

Relatively short duration

Compared with those to which contractcosting is applied

32

Specific Order Costing

Job and batch costing

Example

Data for job no 9364 is as follows:

Direct material cost £ 465

Direct labour cost £ 790

Hire of special machine £ 250

Production overheads are absorbed at a rate of 30 per

cent of direct labour cost Other overheads are added at

a rate of 10 per cent of total production cost The required

profit margin for each job is 15 per cent of the sales price

Calculate the selling price of job no 9364, to the nearest

penny Show separate subtotals for prime cost, total

production cost and total cost

Study tip

Be careful! Sometimes the required profit is

expressed as a percentage of the total job cost

SolutionDirect material £ 465.00

Production o’head (£ 790 30%) £ 237.00Total production cost £ 1,742.00Other overhead (£ 1,742  10%) £ 174.20

Contract costing

Characteristics of contract costing

K Customer-driven production Contracts are

undertaken as the result of a customer request

K Each contract is a separately identifiable unit,

usually constructional in nature

K Contracts are of relatively long duration and

often span more than one accounting period

K Costs accumulated in separate account for

each contract

K Architect’s certificates state the value of work

completed to date Progress payments are made

by customer according to value of work certified,

less any retention money

The contract account

K Acts as a collecting place for costs incurred on

contract

K Debit all costs incurred during period,

e.g., materials issued to contract, wages paid,plant delivered to site, head office charges

K Credit value of plant or material returned or

transferred from site during period

K Credit value of plant and material on site at end of

period

K Credit cost of work not yet certified

K Balance on account¼ cost of work certifiedduring period

34

Specific Order Costing

Contract costing

Recognising profits on contracts

K Profit recognised in stages as contract

progresses Otherwise wild fluctuations in profits

reported year on year

K Requirements of prudence concept must be

adhered to

K No profit recognised if contract in early stages

and final outcome cannot be foreseen with

reasonable certainty

K If difficulties or a loss are foreseen the whole

of the final estimated loss on contract should

be recognised immediately

Study tipMany different methods exist for calculating theprofit to be recognised on an incomplete contract

In the assessment you should assess theinformation available and follow any instructionsconcerning the calculation of profit

35

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Specific Order Costing

Contract costing

Example

Agreed contract price £ 380,000

Value of work certified to date £ 340,000

Progress payments received from

Cost of work certified to date £ 275,000

Cost of work to complete contract £ 35,000

(a) Profit to be recognised is a percentage of the

notional profit to date, based on the proportion of

the certified value received from the customer

(b) Profit to be recognised is a percentage of the

estimated final contract profit, based on the

proportion of total contract costs incurred to date

Solution(a) Profit to be recognised ¼ notional profit todate  (cash received/value of work certified)

¼£ (340,000
275,000)  £ (289,000/340,000)

¼£ 55,250(b) Profit to be recognised ¼ estimated finalprofit  (cost incurred to date/estimated finalcontract cost)

Estimated final contract cost ¼ £ ð275;000 þ 35;000Þ

¼£ 310;000Profit to be recognised ¼ £ ð380;000
310;000Þ