BBA 2003

COST ACCOUNTING

TAY HUI CHING

921009-66-5014

202282

AUGUST 2015

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Assignment Guidelines / Marking Criteria

COMPONENTS GUIDELINES / MARKING CRITERIA PAGE

Assignment Task

1.0 Task 1

1.1 Identify and examples of three basic cost elements

1.2 Explanation of the difference

1.3 Discuss the behavior classification

3-16

2.0 Task 2

Determine the cost of units used by using and the

value of the closing stocks by using FIFO, LIFO and

Weight Average Methods.

17-20

3.0 Task 3

Calculate the remuneration of employee by following

method:

i. Hourly rate

ii. Basic piece rate

iii. Bonus Scheme

21-23

Reference 4.0 Reference 24-25

Coursework 5.0 Coursework 26-32

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Task 1

1.1 Identify and give examples of each of the three basic cost elements involved in the

manufacture of a product.

Direct Labor Costs

Labor costs, also known as direct labor costs, refer to any funding given to workers who

produce and build the products in question. Examples of labor include assembly line

workers, machine operators and installation clerks. Indirect labor refers to individuals

who are working for the company but have indirect roles in the manufacturing process.

Indirect workers include janitors, supervisors and security guards.

Direct Material Costs

Material costs refer to the raw materials that actually create the product in question.

Raw materials cover anything from the finished product itself to any bolts, nuts and

wood that went into building the original product. The final product is considered “raw”

since it may be used as raw materials for another product for another business. Material

costs also include direct materials that play a role in the manufacturing process, such as

tiny motors, buttons and light bulbs.

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Direct Overhead Costs

Overhead costs are those associated with the manufacturing process, excluding the raw

materials and labor funding. The machinery and equipment used to build the products

must undergo frequent maintenance and funding must be available to complete repairs.

Overhead costs also cover any maintenance or rebuilding of the manufacturing

facilities, such as expanding the production line or adding new lighting in the factory.

Any expense or cost that does not fit into direct material costs and labor costs may fall

into the manufacturing overhead category.

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1.2 Explain the difference between the following terms

a) Product cost and period cost

Product costs are expenses that a business incurs in acquiring raw materials and

manufacturing a product. You can also refer to them as production costs. Calculating

the cost of a product is critical in determining that product’s price point. The business is

looking to recoup any expenses it incurred during production through sales.

A paramount thing to understand about product costs is that the production process

involves them. In the initial example given, employees working at headquarters are not

involved in manufacturing. You, therefore, cannot classify their salaries as product

costs. On the other hand, you can consider the wages of factory workers as product

costs.

You can divide products into two categories: indirect and direct costs. Direct costs

include labor, the cost of materials, the cost of power used in machinery and factory

depreciation. Indirect costs are mostly overhead expenses.

All other expenses a business incurs that are not product costs are period costs. In a

balance sheet, however, you will not find an entry for period costs. This is because the

business treats them as any other expenses that arise during a specific accounting

period. This is why the general term is period costs.

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Unlike product costs, the business does not incur period costs because of the

manufacturing process. Any expenses relating to marketing, advertising, sales, office

employees, salespersons’ commissions, legal work and office depreciation are period

costs.

b) Sunk cost and relevant cost

Sunk costs and relevant costs are both expenses that result in an outflow of cash and

reduce a firm’s income and profitability. Since sunk costs are incurred in the past, they

are a type of irrelevant cost that do not affect future cash flows and, therefore, are not

considered when making decisions about a firm’s future. On the other hand, relevant

costs are costs that will be incurred in the future, as a result of a decision made presently

and, therefore, must be considered in managerial decision making.

It must however be noted that when making pricing decisions for a long term, all costs

including relevant and irrelevant must be taken into consideration. This is because in

order for a business to be afloat in the long term the prices quoted should offer a

sufficient margin to cover all costs incurred (relevant and irrelevant both). Therefore,

total costs must be factored in when making long-term financial decisions such as

investment appraisal, expansion, new ventures, selling off business units, etc.

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c) Fixed and variable cost

The difference between fixed and variable costs is that fixed costs do not change with

activity volumes, while variable costs are closely linked to activity volumes. When a

cost contains elements of both fixed and variable costs, it is considered a mixed cost.

This difference is a key part of understanding the financial characteristics of a business.

If the cost structure is comprised mostly of fixed costs (such as an oil refinery),

managers are more likely to accept low-priced offers for their products in order to

generate sufficient sales to cover their fixed costs. This can lead to a heightened level of

competition within an industry, since they all likely have the same cost structure, and

must all cover their fixed costs. Once fixed costs have been paid for, all additional sales

typically have quite high margins. This means that a high fixed-cost business can make

very large profits when sales spike, but can incur equally large losses when sales

decline.

If the cost structure is comprised mostly of variable costs (such as a services business),

managers need to turn a profit on every sale, and so are less inclined to accept low-

priced offers from customers. These businesses can easily cover their small amounts of

fixed costs. Variable costs tend to comprise a relatively high proportion of sales, so the

profits generated on each individual sale once fixed costs have been covered tend to be

lower than under a high fixed cost scenario.

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d) Avoidable and unavoidable costs

Avoidable cost is the cost that can be avoided if certain decision is taken or not taken. It

is more or less cost which is varied according to the decision taken by management.

That is all variable cost can be said to be avoidable.

On the other hand unavoidable cost is that cost which cannot be avoidable at least for

the short term. This means that unavoidable cost can be said to be more or less a fixed

cost in the short term which cannot be changed.

e) Controllable and uncontrollable costs

Controllable costs are the costs which can be influenced by the action of a

specified member of an undertaking. A business organisation is usually divided into a

number of responsibility centres and an executive heads each such centre. Controllable

costs incurred in a particular responsibility centre can be influenced by the action of the

executive heading that responsibility centre. For example, direct costs comprising direct

labour, direct material, direct expenses and some of the overheads are generally

controllable by the shop level management.

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Uncontrollable costs are cannot be influenced by the action of a specified member of an

undertaking are known as uncontrollable costs. For example, expenditure incurred by,

say, the Tool Room is controllable by the foreman in charge of that section but the share

of the tool-room expenditure which is apportioned to a machine shop is not to be

controlled by the machine shop foreman.

The distinction between controllable and uncontrollable costs is not very sharp and is

sometimes left to individual judgement. In fact no cost is uncontrollable; it is only in

relation to a particular individual that we may specify a particular cost to be either

controllable or uncontrollable.

f) Direct and indirect costs

Direct costs are expenses that a company can easily connect to a specific "cost object,"

which may be a product, department or project. This includes items such as software,

equipment, labor and raw materials. If your company develops software and needs

specific regenerated assets such as purchased frameworks or development applications,

those are direct costs.

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Indirect costs go beyond the costs associated with creating a particular product to

include the price of maintaining the entire company. These overhead costs are the ones

left over after direct costs have been computed, and are sometimes referred to as the

"real" costs of doing business.

The essential difference between direct costs and indirect costs is that only direct costs

can be traced to specific cost objects. A cost object is something for which a cost is

compiled, such as a product, service, customer, project, or activity. These costs are

usually only classified as direct or indirect costs if they are for production activities, not

for administrative activities (which are considered period costs).

g) Prime cost and conversion cost

The calculation for prime cost includes the total amount spent on direct materials in

addition to direct labor. Tangible components such as raw material necessary to create a

finished product are included in direct materials. For instance, the engine of a car or the

spokes of a bicycle are included in direct material costs because they are each necessary

to complete production of that specific item. Direct labor costs include the salary, wages

or benefits paid to an employee who works on the completion of finished products.

Compensation paid to machinists, painters or welders is common in calculating prime

costs. Unlike conversion costs, prime costs do not include any indirect costs.

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Prime costs are reviewed by operations managers to ensure the company has an efficient

production process. The calculation of prime costs also helps organizations set prices at

a level that produce an acceptable amount of profit.

Conversion costs include direct labor and overhead expenses incurred due to the

transformation of raw materials into finished products. Overhead costs are defined as

the expenses that cannot be directly attributed to the production process but are

necessary for operations, such as electricity or other utilities required to keep a

manufacturing plant functioning throughout the day. Direct labor costs are the same as

those used in prime cost calculations.

Conversion costs are also used as a measure to gauge the efficiencies in production

processes but take into account the overhead expenses left out of prime cost

calculations. Operations managers also use conversion costs to determine where there

may be waste within the manufacturing process.

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1.3 Discuss the behavioral classification of costs, explaining all the terms used there in.

Definition of cost behavior

Cost behavior is associated with learning how costs change when there is a change in an

organization's level of activity. The costs which vary proportionately with the changes

in the level of activity are referred to as variable costs. The costs that are unaffected by

changes in the level of activity are classified as fixed costs.

Cost behavior is not required for external reporting under U.S. GAAP. However, the

understanding of cost behavior is very important for management's efforts to plan and

control its organization's costs. Budgets and variance reports are more effective when

they reflect cost behavior patterns.

The understanding of cost behavior is also necessary for calculating a company's break-

even point and for any other cost-volume-profit analysis.

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Cost Behavior can be used to produce various classifications of costs such as:

Variable costs VS. Fixed Costs

A variable cost is a cost that varies in relation to changes in the volume of activity.

Variable costs are those costs that vary depending on a company's production volume;

they rise as production increases and fall as production decreases.

If the number of units produced doubles, then variable production costs will double

also. An example would be the cost of material used to produce units.

If the number of units sold increases by 20% then variable selling and distribution costs

would increase by 20% also.

On a graph, variable costs would look like:

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-Semi variable costs

A semi-variable cost is a cost that contains both fixed and variable cost elements. The

fixed element of the cost will be incurred repeatedly over time, while the variable

element will only be incurred as a function of activity volume. Thus, a base-level cost

will be always be incurred, irrespective of volume, as well as an additional cost that is

based only on volume. This concept is used to project financial performance at different

activity levels.

An example would be a telephone bill. Usually there is a fixed cost for the line rental

then each minute of telephone calls causes an additional cost.

On a graph, fixed costs would appear as:

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-Fixed costs

A cost that does not change with an increase or decrease in the amount of goods or

services produced. Fixed costs are expenses that have to be paid by a company,

independent of any business activity. A fixed cost is a cost that does not vary in the

short term, irrespective of changes in production or sales levels, or other measures of

activity. A fixed cost is a basic operating expense of a business that cannot be avoided.

An example would be the factory rent. It does no matter how many units are made, the

rent is fixed.

On a graph, fixed costs would appear as:

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-Semi fixed costs

A semi-fixed cost is a cost that contains both fixed and variable elements. As a result,

the minimum cost level that will be experienced will be greater than zero; once a certain

activity level is surpassed, the cost will begin to increase beyond the base level, since

the variable component of the cost has been triggered.

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Task 2

Assume the following purchases were made in ABC

Date of purchase Units Purchased Price per Unit

1st January 500 100

2nd January 600 200

3rd January 800 400

Units used on 4th January are 900.

Required:

Determine the cost of units used by using and the value of the closing stocks by using

FIFO, LIFO and Weighted Average Methods.

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FIFO

Purchases Issue Balance

Date Units Price Amount Units Price Amount Units Price Amount

1st Jan 500 100 50000 500 100 50000

2nd Jan 600 200 120000 1100 200 170000

3rd Jan 800 400 320000 1900 400 490000

4th Jan 900 130000 1000 360000

The 900 units of goods are including the 500 units of first batch’s goods, which price is

100 per unit, and the 400 units of second batch’s goods, which price is 200 per units.

Price for the material use is different. Closing stock consists of the 200 units of second

batch’s goods, which price is 200 per unit, and the 800 units of third batch’s stock,

which price is 400 per unit.

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LIFO

Purchases Issue Balance

Date Units Price Amount Units Price Amount Units Price Amount

1st Jan 500 100 50000 500 100 50000

2nd Jan 600 200 120000 1100 200 170000

3rd Jan 800 400 320000 1900 400 490000

4th Jan 900 340000 1000 150000

The 900 units of goods are including the 800 units of third batch’s goods, which price is

400 per unit, and the 100 unit of second batch’s goods, which price is 200 per unit.

Price for the material use is different. Closing stock consist of the 500 units of first

batch’s goods, which price is 100 per unit, and the 500 units of second batch’s goods,

which price is 200 per unit.

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Weight Average Methods

Purchases Issue Balance

Date Unit

s

Price Amoun

t

Unit

s

Price Amoun

t

Units Price Amoun

t

1st Jan 500 100 50000 500 100 50000

2nd Jan 600 200 120000 1100 154.54 170000

3rd Jan 800 400 320000 1900 257.89 490000

4th Jan 900 257.8

9

232101 1000 257,89

5

257,89

9

Average Price Per Unit = TotalValue of StockNo .of units of stocks

The issue price after every purchase is arrived at as:

= MoneyValue of Old Stocks+MoneyValue of NewStocksQuantities of Old Stocks+Quantities of NewStocks

For instance, the weighted average price after the 2nd purchase shall be

50,000+120,000500+600 = 154.54

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Task 3

Based on the data below, you are required to calculate the remuneration of each

employee as determined by each of the following methods.

i. Hourly rate

ii. Basic piece rate

iii. Individual bonus scheme where the employee receives the bonus in proportion

of the saved to time allowed.

Name of employee SS RR PP

Units produced 270 200 220

Time allowed in minutes per unit 10 15 12

Time taken (hours) 40 38 36

Rate per hour ($) 125 105 120

Rate per unit ($) 20 25 24

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i. Hourly rate

Name of employee SS RR PP

Time taken (hours) 40 38 36

Rate per hour ($) 125 105 120

Total amount (time X $) 5000 3990 4320

ii. Piece rate

Name of employee SS RR PP

Output in units 270 200 220

Rate per unit ($) 20 25 24

Gross wages (units X $) 5400 5000 5280

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iii. Bonus scheme

Name of employee SS RR PP

Units produced 270 200 220

Time allowed in minutes per unit 10 15 12

Total time allowed (hours)

( unit × time per unit )45 50 44

Time taken (hours) 40 38 36

Time saved 5 12 8

Proportion (time saved/time allowed)5

45=1

91250

= 625

844

= 211

Bonus time (time savedtime allowed × time taken)

19 × 40 6

25 × 38 211 × 36

Total time to be paid

(time taken + bonus)

44+4.44

=44.44

38+9.12

=47.12

36+6.55

=42.55

Rate per hour ($) 125 105 120

Total pay 5555 4947.60 5106

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References

http://smallbusiness.chron.com/three-types-costs-used-manufacturing-products-

20588.html

http://www.accountingcoach.com/blog/product-cost-period-cost

http://www.accountingformanagement.org/product-cost-and-period-cost/

http://accounting-financial-tax.com/2009/03/relevant-cost-and-sunk-cost/

http://www.differencebetween.com/difference-between-sunk-cost-and-vs-relevant-cost/

http://www.diffen.com/difference/Fixed_cost_vs_Variable_cost

http://www.accountingtools.com/questions-and-answers/the-difference-between-fixed-

and-variable-costs.html

http://www.bayt.com/en/specialties/q/13054/what-are-the-differences-between-

avoidable-costs-and-non-avoidable-costs/

http://www.careerride.com/fa-controllable-uncontrollable-cost.aspx

http://www.answers.com/Q/Difference_between_controllable_and_uncontrollable_cost

http://www.accountingtools.com/questions-and-answers/the-difference-between-direct-

costs-and-indirect-costs.html

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http://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html

http://www.investopedia.com/ask/answers/050715/what-difference-between-prime-

cost-and-conversion-cost.asp

http://www.accountingcoach.com/terms/C/cost-behavior

http://www.accountingtools.com/dictionary-variable-cost

http://opentuition.com/fia/ma1/cost-classification/

http://www.investopedia.com/terms/s/semivariablecost.asp

http://www.accountingtools.com/questions-and-answers/what-is-a-semi-variable-

cost.html

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