Accounting 2 Third Edition PDF

ACCOUNTING 2 Third Edition  1 Managerial Accounting Basics 2 Cost: Concept, Classi cation and Component 3 Manufacturing Costs 4 Actual Costing and Normal...

ACCOUNTING 2 Third Edition  1 Managerial Accounting Basics 2 Cost: Concept, Classi cation and Component 3 Manufacturing Costs 4 Actual Costing and Normal Costing 6 Cost Volume Pro t Table of Contents 7 Absorption Costing and Marginal Costing 8 Job Order Costing 9 Process Costing 10 Standard Costing and Variance Analysis 11 Decision Making Reference Editor’s Updates & Notes copyright fi fi  Table of contents Editor’s Note ACKNOWLEDGEMENT Kolej Matrikulasi Perlis Kolej Matrikulasi Kedah Kolej Matrikulasi Perak Kolej Matrikulasi Selangor Kolej Matrikulasi Pulau Pinang Kolej Matrikulasi Negeri Sembilan Kolej Matrikulasi Melaka Kolej Matrikulasi Johor Kolej Matrikulasi Pahang Kolej Matrikulasi Kelantan Kolej Matrikulasi Labuan  Table of contents 1 MANAGERIAL ACCOUNTING BASICS INTRODUCTION This topic covers the comparison between managerial accounting and nancial accounting, functions of management and roles of accounting information in management, characteristics of managerial accounting information, roles of management accountant and code of ethics in management accounting. fi  2 Table of contents 1 LEARNING OBJECTIVES Students should be able to: 1.1 Explain managerial accounting. Explain the differences of managerial accounting and nancial accounting based on these features: primary users of reports, types and frequency of reports, purpose of reports, content of reports and veri cation of reports. 1.2 Explain the functions of management: planning, directing and controlling. Explain roles of accounting information in management 1.3 Explain the characteristics of managerial accounting information: accuracy, timeliness, understandability, relevance, cost effective and exibility. 1.4 Describe the roles and functions of management accountant to assist in executing the functions of management. 1.5 Describe about ethics State importance of Ethics in Management Accounting State Issues in Management Accounting Ethics fl fi fi  1 Table of contents 1.1 COMPARISON BETWEEN FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING Managerial accounting, also known as management accounting, is the process of identifying, analysing, recording and presenting nancial information that is used internally by the management for planning, directing and controlling. The comparison between nancial accounting and managerial accounting is as follows : Categories Financial Accounting Managerial Accounting Primary Primary users of reports Internal users: of cers and Users of include external users such managers of the business Reports as stockholders, creditors, regulators, government entities, banks, and suppliers Types and Financial statements include Internal reports such as Frequency of the statement of pro t or budgets, Cost-Volume-Pro t Reports loss, statement of changes in analysis equity, statement of nancial As frequently as needed by the position, and cash ow management statement Quarterly and annually Purposes of General-purpose Special-purpose for speci c Reports decisions. Contents of Pertains to business as a Pertains to subunits of the Reports whole business. Highly aggregated Very detailed. (condensed) and limited to Extends beyond double entry double-entry accounting and accounting. cost data Not required to follow MFRS Required to follow MFRS Veri cation Required to be published Neither published nor audited by of Reports and audited by statutory statutory auditors. auditors 1-1 fi fi fl fi fi fi fi fi fi  1 Table of contents 1.2 FUNCTIONS OF MANAGEMENT AND ROLES OF ACCOUNTING INFORMATION IN MANAGEMENT The following are the management's functions. Function Explanation Planning The process of setting objectives/goals to be achieved. Selection methods/strategies that will be implemented to achieve the objectives. Example: Maximise short-term and market share, commit to environment protection and social programs Directing Directing involves coordinating a company’s diverse activities and human resources to produce a smooth-running operation. This function relates to implementing planned objectives and providing necessary incentives to motivate employees. Example: manufacturers such as Campbell Soup Company, General Motors, and Dell must coordinate purchasing, manufacturing, warehousing, and selling. Controlling Process to ensure that the strategy is on the right track and the goal is achieved or not based on performance evaluation. Follow-up is made if necessary Example: Determine whether goals are met. i. Decide changes needed to get back on track. Decision making is not a separate management function. Rather, it is the outcome of the exercise of good judgement in planning, directing and controlling. 1-2  1 Table of contents The following are the roles of accounting information in management: Roles Explanation Decision The thought process of selecting a logical choice from the making available options. Control and A systematic exercise which is called as a process of checking evaluate actual performance against the standards or plans with a view to performance ensure adequate progress and also recording such experience as is gained as a contribution to possible future needs Planning It is deciding what to do, and who, where, when, why and how to do it. Here managers decide what goals to be accomplished, how they will be accomplished. It gives the manager some warning of crises that might occur in the future. The management accountant’s role in assisting in formulation of future plans is by providing information to e.g. decide what to sell, in what markets and at what prices Budgeting A budget forecasts the nancial results and nancial position of a company for one or more future periods. A budget is used for planning and performance measurement purposes, which can involve spending for xed assets, rolling out new products, training employees, setting up bonus plans, controlling operations, and so forth. Stock the process of calculating the value of goods or materials owned evaluation by a company or available for sale in a store at a particular time. Determination a process of calculating cost of goods sold/ cost of services and of cost and setting the price of the goods/service in order to get pro t. prices of products or services 1-3 fi fi fi fi  1 Table of contents 1.3 CHARACTERISTICS OF MANAGERIAL ACCOUNTING INFORMATION The following are the characteristics of management accounting information: Characteristic Explanation Accuracy Accounting information must be correct for its intended purposes. Incorrect information could have serious and damaging consequences. Example: Business owners need accounting information that is applicable to the business decision at hand. They can request nancial statements, accounting schedules, reconciliations or cost-bene t analysis. Timeliness Timeliness means having information available to decision- makers before it loses its capacity to in uence decisions. Example: Information is timely when it is available to users early enough to allow its use in the decision process. The need for timely information requires that companies provide information to external users on a periodic basis. Understandability Using terms that are easily understood to ensure that the information obtained is clear and can be used to make informed decisions. Example: Presentation of information should not only facilitate understanding but also avoid wrong interpretation of nancial statements. Thus, understandable nancial accounting information presents data that can be understood by users of the information and is expressed in a form and with terminology adopted to the user’s range of understanding 1-4 fi fi fi fl fi  1 Table of contents Characteristic Explanation Relevance Relevance is closely and directly related to the concept of useful information. Relevance implies that all those items of information aid the users in making decisions and/or predictions. To make a difference in the decision process, information must possess predictive value and/or feedback value Example: if net income and its components con rm investor expectations about future cash-generating ability, then net income has feedback value for investors. Cost Producing good results without costing a lot of money. Acquiring Effectiveness information costs money. The bene t gained from that piece of information must outweigh the cost of getting the information. Example: The company can get the information on customer satisfaction through surveys done by interviewing the customers in person or by doing the online survey. In deciding the mode of the survey, the company must compare the costs of both methods with the bene t gained from the result of the survey. It should choose the most cost effective method. Flexibility Information is not necessarily detailed for pointless accuracy, but it is easily adaptable to the needs of decisions to be made. Example: It relates to accounting information systems. It describes an accounting system that is able to adapt to changes in the company, its operations, and needs of decision makers. Flexibility means that the system, which can deal with the changes in technology, competitive pressure, consumer, tastes, and regulations. 1-5 fi fi fi  1 Table of contents 1.4. ROLES OF MANAGEMENT ACCOUNTANT Responsible for carrying out the task of helping the management in planning. i. Managers use the information to develop speci c goals and strategies for the future. ii. Planning involves aligning the company’s objectives with its available resources. iii.A manager’s ability to forecast and plan depends on the budgets developed by accountants Provide information and accounting reports. i. Managerial accountants often perform cost analysis for certain products and divisions, which include variable and xed costs. ii. The production decisions made by managers are a direct result of information received from managerial accountants Assist departments in achieving the organisation's objectives through preparing a budget. i. Preparing budgets is a basic activity for managerial accountants. Budgets express the company’s plan of action using quantitative gures. ii. The budgeting process allows managers to allocate resources to the most nancially needy departments, and eliminate programs and departments that are not effectively using the resources. iii. The particular budgets produced by managerial accountants depend on the needs of the organisation. iv. Common budgets prepared include the master, sales, production, material, labour and cash budgets. 1-6 fi fi fi fi  1 Table of contents 1.5 CODE OF ETHICS IN MANAGEMENT ACCOUNTING Ethics Ethics is more than simply obeying laws; it involves doing the right thing as well as the legal thing. Many companies have a code of conduct to help guide their employees. For example, Google has a code of ethics that they expect all of their employees and board members to follow. Failing to do so can cause termination of employment. The preface of the code includes “Don’t be evil.” They use that to show all employees and other shareholders within Google that they are serious about ethics—that trust and respect are essential in providing a great service to their customers. Importance of Ethics in Management Accounting Ethics is an important part of managerial accounting, and companies follow a code of ethics or conduct that addresses ethical issues/concerns for management accountants. Managerial accountants should never commit acts that violate the standards of ethics, and they should never ignore such deeds by others within their companies. The ethical dilemmas of managerial accountants are increasing in response to big data, arti cial intelligence and other technologies, as reported in the September 2019 issue of the CPA Journal. Ethical codes of professional organisations provide helpful guidance. Issues in Management Accounting Ethics Circumventing Unethical Behaviour i.Companies may choose to act unethically in the business environment. Business owners may determine that unethical behaviour is not necessarily illegal, a logic that creates a grey-shaded area in business. ii.Managerial accountants constantly may push ethical limits when recording and reporting nancial information. iii.Companies should provide detailed explanations to those conducting external audits regarding questionable accounting procedures to ensure adherence to Institute of Management Accountants (IMA) standards of practice. 1-7 fi fi  1 Table of contents Consequences of Unethical Actions i. Accountants who fail to abide by the IMA's accounting ethical code face a variety of punishments. ii. Accountants may lose their professional certi cation, be removed from accounting positions and face legal penalties depending on their inappropriate actions. iii. Managerial accountants who do not disclose inappropriate accounting operations in their company also can be held liable. iv. Maintaining the general public's trust in companies is a primary responsibility of managerial accountants. Institute of Management Accountants (IMA) The Institute of Management Accountants (IMA) is a professional organisation responsible for creating managerial accounting guidelines. The IMA provides managerial accounting ethics for licensed accountants, and non-licensed accountants also can use these ethical standards to govern their accounting career. The IMA's ethical principles are based on honesty, fairness, objectivity and responsibility. IMA members must use these ethical principles when engaging in accounting services for their company and the general public. 1-8 fi  Table of contents 2 COST: CONCEPT, CLASSIFICATION AND COMPONENT INTRODUCTION This topic covers the importance of cost information, difference between costs and expenses, cost classi cation, manufacturing costs, non-manufacturing costs, direct costs, indirect costs, product costs and period costs. fi  2 Table of contents 2 LEARNING OBJECTIVES Students should be able to: 2.1 Explain the importance of cost information to management. 2.2 Explain the differences between costs and expenses. 2.3 Explain the classi cation of costs according to function, cost behaviour and other classi cation such as direct cost and indirect cost. 2.4 Calculate manufacturing costs, direct material, direct labour, and overhead: prime and conversion costs. 2.5 Calculate non-manufacturing costs: selling expenses and administration expenses. 2.6 Calculate cost of direct material and cost of direct labour. 2.7 Calculate cost of indirect labour, indirect material and other manufacturing cost. fi fi  2 Table of contents 2 LEARNING OBJECTIVES Students should be able to: 2.8 Explain the differences between product costs and period costs, and compute both costs  2 Table of contents 2.1 THE IMPORTANCE OF COST INFORMATION To enable management to carry out management functions in an organization, for example planning, directing and controlling. Managers need to have deep knowledge about costs and cost classi cation in order to be able to control and manipulate costs so that the company can achieve maximum performance. 2.2 DIFFERENCES BETWEEN COSTS AND EXPENSES Costs Expenses Costs are the sacri ce of resources to Expenses are the sacri ce of resources to acquire products or services which will obtain bene t in the current period. bene t in the future. Example: Cost to acquire assets such as Example: Cost of operational or non- cost in purchasing machinery. operational expenses such as the amount of Utilities Expense. 2.3 COST CLASSIFICATION Function Manufacturing Costs Costs that are incurred in the process of producing products such as direct materials cost, direct labour cost and manufacturing overhead costs. Costs Explanation Direct materials cost Cost of primary direct materials used in producing products. Example: Cost of wood used in the making of wooden tables. 2-1 fi fi fi fi fi  2 Table of contents Costs Explanation Direct labour cost Salaries or wages paid to labour directly involved in converting direct materials into nished product. Example: Wages paid to assembly-line worker. Manufacturing All manufacturing costs except direct materials cost and overhead costs direct labour cost. Example: Cost of indirect materials such as screws, nails used in the making of wooden tables. Prime costs Main costs involved in the process of producing products. Consist of direct materials cost and direct labour cost. Conversion costs Costs involved in the process of converting direct materials into nished products ( nished goods). Consist of direct labour costs and manufacturing overhead costs. Selling Expenses and Administration Expenses i. Also known as non-manufacturing costs. ii. Costs incurred in selling products and managing the business such as Advertising Expense, Salaries of Sales and Administrative and Depreciation Expense of Of ce Equipment. iii. Also known as operational expenses or period costs and will be reported in the Statement of Pro t or Loss or Statement of Comprehensive Income. 2-2 fi fi fi fi fi  2 Table of contents Behaviour Costs Explanation Variable Cost Costs that vary in total as activity changes, while variable cost per unit is constant. Fixed Cost Costs that do not change even though the activity changes and xed cost per unit changes inversely to the change of the activity. Mixed Costs Costs that contain both variable cost and xed cost elements. Other Classi cation Costs Explanation Direct Cost Costs involved directly in the production process and can be traced to the product such as direct materials cost and direct labour cost. Also known as prime costs. Indirect Cost Costs that cannot be traced to a cost object. Can be categorised into indirect manufacturing costs and indirect non-manufacturing costs. Indirect manufacturing costs are costs involved indirectly in the production process and cannot be traced to the product, also known as manufacturing overhead costs, consisting of indirect materials cost, indirect labour cost and manufacturing overhead costs. Indirect non-manufacturing costs are referred to as selling and administrative costs and also known as period costs. 2-3 fi fi fi  2 Table of contents 2.4 MANUFACTURING COSTS Example 1: Costs And Expenses RM Factory Equipment Rent 1,500 Factory Building Insurance 500 Direct Materials 200,000 Factory Utilities 800 Of ce Supplies 400 Assembly Line Wages 70,000 Depreciation on Of ce Equipment 400 Indirect Materials 10,000 Factory Property Taxes 125 Factory Supervisory Salaries 1,700 Advertising 1,250 Sales Commission 80,000 Depreciation on Factory Building 900 Required: Calculate: a.Prime costs b.Manufacturing overhead c.Conversion costs d.Manufacturing costs 2-4 fi fi  2 Table of contents Solution: a. Prime costs Prime costs RM Direct Materials: Raw Materials 200,000 Direct Labour: Assembly Line Wages 70,000 Total 270,000 b. Manufacturing overhead Manufacturing overhead RM Factory Equipment Rent 1,500 Factory Building Insurance 500 Factory Utilities 800 Indirect Materials 10,000 Factory Property Taxes 125 Factory Supervisory Salaries 1,700 Depreciation On Factory Building 900 Total 15,525 c. Conversion costs Conversion costs RM Direct Labour: Assembly Line Wages 70,000 Manufacturing Overhead 15,525 Total 85,525 2-5  2 Table of contents d. Manufacturing costs Manufacturing costs RM Direct Materials 200,000 Assembly Line Wages 70,000 Manufacturing Overhead 15,525 Total 285,525 2.5 NON-MANUFACTURING COSTS Example 2: Refer to cost information in Example 1 Required: Calculate non-manufacturing costs: Solution: Non-manufacturing costs RM Of ce Supplies 400 Depreciation on Of ce Equipment 400 Advertising 1,250 Sales Commission 80,000 Total 82,050 2-6 fi fi  2 Table of contents 2.6 DIRECT COSTS Example 3: Refer to cost information in Example 1 Required: Calculate direct costs: Solution: Direct costs RM Direct Materials: Raw Materials 200,000 Direct Labour: Assembly Line Wages 70,000 Total 270,000 2.7 INDIRECT COSTS Example 4: Refer to cost information in Example 1 Required: Calculate indirect manufacturing costs and indirect non-manufacturing costs: Solution: Indirect manufacturing costs RM Manufacturing Overhead: Factory Equipment Rent 1,500 Factory Building Insurance 500 Factory Utilities 800 Indirect Materials 10,000 Factory Property Taxes 125 Factory Supervisory Salaries 1,700 Depreciation On Factory Building 900 Total 15,525 2-7  2 Table of contents Indirect non-manufacturing costs RM Of ce Supplies 400 Depreciation On Of ce Equipment 400 Advertising 1,250 Sales Commission 80,000 Total 82,050 2.8 PRODUCT COSTS AND PERIOD COSTS Product Costs Period Costs Costs involved in the process of Costs involved in the process of selling making products. products and administrating the whole company. Also known as manufacturing costs. Also known as non-manufacturing cost. Reported in the Statement of Cost of Presented in the Statement of Pro t or Goods Manufactured. Loss or Statement of Comprehensive Income as operational expenses. Example: Example: Direct materials Cost, Direct Labour Advertising Expense, Sales Cost and Manufacturing Overhead Commission Expense, Freight Out and Cost. Director’s Salaries Expense. Example 5: Refer to cost information in Example 1 Required: Calculate product costs and period costs: 2-8 fi fi fi  2 Table of contents Solution: Product costs RM RM Direct Materials: Raw Materials 200,000 Direct Labour: Assembly Line Wages 70,000 Manufacturing Overhead: Factory Equipment Rent 1,500 Factory Building Insurance 500 Factory Utilities 800 Indirect Materials 10,000 Factory Property Taxes 125 Factory Supervisory Salaries 1,700 Depreciation on Factory Building 900 Total Manufacturing Overhead 15,525 Total Product Costs 285,525 Period costs RM Of ce Supplies 400 Depreciation on Of ce Equipment 400 Advertising 1,250 Sales Commission 80,000 Total Period Costs 82,050 2-9 fi fi  Table of contents 3 MANUFACTURING COSTS INTRODUCTION This topic covers material cost, labour cost, manufacturing overhead cost and Statement of Costs of Goods Manufactured.  3 Table of contents 3 LEARNING OBJECTIVES Students should be able to: 3.1 Explain and state examples of direct material and indirect material involved in related production. Explain elements related to material cost such as purchase price, purchase discount, delivery cost and warehouse insurance. Explain Inventory Method, Just-in-Time (JIT) and Economic Order Quantity (E0Q). Calculate direct and indirect material cost used in the production. 3.2 Explain and state examples of direct labour and indirect labour involved in related production. Explain elements related to labour cost such as wages and salaries, overtime, PERKESO, KWSP. Calculate direct and indirect labour cost in the production. 3.3 Explain manufacturing overhead and state examples of manufacturing overhead involved in related production. Calculate manufacturing overhead cost.  3 Table of contents 3 LEARNING OBJECTIVES Students should be able to: 3.4 Prepare Statement of Costs of Goods Manufactured and explain its relationship with Income Statement/Statement of Pro t or Loss. Calculate production cost per unit fi  3 Table of contents 3.1 MATERIAL COST Direct materials and Indirect materials Direct materials Cost i. Direct materials refer to primary raw materials used in the production of nished goods that can easily be traced physically and directly to the nished product. ii. Direct materials cost is the cost of the primary raw materials used. iii. Examples include the cost of our used in bread production, cost of cotton fabric used in the production of school shirts, cost of wood used in making wooden furniture. Indirect materials Cost i. Indirect materials cost refers to the cost of other raw materials than the primary raw materials used in the production of nished goods. ii. Indirect materials are neither physically visible nor traceable to the nished product. iii. They are impractical to trace because their physical association with the nished products are too small in terms of cost. iv. Indirect materials cost is considered as a part of manufacturing overhead. v. Examples; Costs of yeast and salt used for bread production, cost of thread and button used in the production of school shirts and cost of nails and glue used in making wooden furniture. Elements related to material cost Purchase price i. Is the agreed prices, in the respective currency exclusive of value-added tax, which shall be added at the statutory rate valid on the day of delivery. ii. Packaging, transportation, insurance and other incidental expenses shall not be included in the price, and shall be billed separately. iii. Any charges, taxes, customs duties or other levies in connection with delivery shall be borne by the customer. 3-1 fl fi fi fi fi fi  3 Table of contents Purchase discount i. A purchase discount is a deduction that a payer can take from an invoice amount if payment is made by a certain date normally before a discounted period ends. ii. This discount is used when a seller needs to accelerate the in ow of cash. iii. A purchase discount will reduce the cost of purchasing raw materials. Delivery cost i. Refer to the costs incurred in connection with the execution and delivery of the agreement, including counsel fees, fees and expenses of the Acquisition Fund Custodian and similar costs, fees and expenses. ii. Delivery cost will increase the cost of purchasing raw materials. The reason is that cost of raw materials purchased should include any delivery cost to bring the raw materials to the purchaser and make it ready to use in production. Warehouse insurance i. It is a policy that protects the Legal Liability, cost and expenses when the buyer/ seller transport and store the goods and merchandise in the care, or custody or control of the warehouse. ii. Warehouse insurance will increase the cost of purchasing raw materials Inventory Method, Just-in-Time (JIT) and Economic Order Quantity (EOQ). Inventory is the number of stocks held by a business or a company and considered as an asset. Good inventory management is a key to a company in achieving its goal of meeting customers’ demand and having high pro tability. There are two ways of managing inventory: i. Just-in-Time (JIT) 1. Under JIT inventory method, goods manufactured or purchased just in time for sale 2. It focuses on providing customers with stocks at the right time and with the right stock quality and quantity. 3-2 fi fl  3 Table of contents 3. It aims at reducing in-process inventory and carrying costs and maximising pro ts at the same time. 4. It was developed as a way for the company to meet its customers’ demands on time and with minimum time, resource, and material wastes. ii. Economic Order Quantity (EOQ) 1. It is the amount or size of inventory that is ordered at one time which minimises the ordering and annual inventory costs. 2. It aims at maintaining the amount of materials at a desired level at a minimum cost. 3. The inventory level is closely monitored, and a xed number of units are set so that each time that it reaches its reorder level, the exact quantity is ordered. 4. It is applied especially if there is a continuous demand for the product, and the new order is delivered in full. Calculation of direct and indirect materials cost used in the production. Example 1: (Calculating direct materials cost) The information below is related to ABC Company. RM Direct Materials Inventory on 1 January 2022 35,000 Direct Materials Purchases 356,300 Direct Materials Inventory, 31 December 2022 43,800 Required: Calculate the direct materials used in the year 2022. 3-3 fi fi  3 Table of contents Solution: RM Direct Materials Inventory on 1 January 2022 35,000 (+)Direct Materials Purchases 356,300 Direct Materials available for use 391,300 (-) Direct Materials Inventory, 31 December 2022 43,800 Direct Materials used 347,500 Example 2: (Calculating indirect materials cost) Below are the raw materials used in the production of 1 pack of “keropok ikan” crackers. Items Requirement for 1 pack RM Fish 0.3kg x RM18 5.40 Starch our 0.5kg x RM0.30 0.15 Wheat our 0.4kg x RM0.50 0.20 Egg 2 eggs x RM0.30 0.60 Oil 0.06L x RM0.50 0.03 Packaging 0.20 Required: Calculate the indirect materials used in the production for 1 pack of “keropok” crackers. Solution: Items RM Starch our 0.15 Wheat our 0.20 Egg 0.60 Oil 0.03 Packaging 0.20 Total Indirect Materials Cost per pack RM 1.18 3-4 fl fl fl fl  3 Table of contents 3.2 LABOUR COST Direct labour and indirect labour i. Direct labour 1. Direct labour cost refers to the wages or salaries paid to workers directly involved in production. 2. Direct labours are factory employees that can be physically and directly associated with converting raw materials into nished goods during the production process. Some of them directly handle machines on the production line. 3. The amount of wages or salaries can be conveniently identi ed with a particular line, product, job or process. 4. Examples: assembly line wages, tailor in a clothing factory wages, graphic designer’s salaries in a printing factory. ii. Indirect labour 1. Indirect labour cost refers to the amount of wages or salaries paid to factory employees that has no physical association with nished product or which is impractical to trace costs to goods produced. 2. Indirect labour costs are considered part of manufacturing overhead. 3. Examples; indirect labour constitutes those factory employees that are not directly engaged in the core manufacturing process such as factory manager salaries, factory supervisors’ salaries, factory security personnel salaries, janitor’s salaries etc. Elements related to labour cost i. Wages and Salaries 1. Wages means basic wages and all other payments in cash payable to an employee for work done in respect of his/her contract of service. Wages is calculated based on actual hours worked and is paid at a predetermined hourly rate. 2. Salary is a xed amount that is paid to employees, normally on a monthly basis. 3-5 fi fi fi fi  3 Table of contents ii. Overtime 1. Overtime is hours worked in excess of normal working hours. 2. It is a remuneration paid to employees for work done during hours in excess of normal working hours. 3. For example, if the painter in the previous example worked until 6pm then he would be remunerated for 2 hours’ overtime. iii. PERKESO 1. SOCSO (Social Security Organization), also known as PERKESO (Pertubuhan Keselamatan Sosial), was established in 1971 under the Ministry of Human Resources (formerly known as Ministry of Labour) to provide social security protections to all employees/ workers in Malaysia. 2. Not all wages payments to staff/workers are subject to SOCSO contribution and there are certain wages excluded from SOCSO contribution 3. Wages subject to SOCSO contribution: a.Salary / Wages (full/part time, monthly/hourly) b.Overtime payments c.Commission d.Paid leave (annual, sick and maternity leave, rest day, public holidays) e.Allowances f. Service Charge iv. KWSP 1. EPF stands for Employees Provident Fund and is commonly known as KWSP or Kumpulan Wang Simpanan Pekerja in Malaysia. 2. Every company is required to contribute EPF for its staff/workers and to remit the contribution sum to KWSP before the 15th day of the following month. 3-6  3 Table of contents Calculation of direct and indirect labour cost in the production. Example 3: (Calculating direct labour cost and indirect labour cost) Given below is the cost incurred for the labour in Syarikat XYZ Manufacturing Sdn. Bhd for the month of January 2022. Item Particular Rate/ Hour Amount/Cost (RM) (RM) Assembly Line Wages 7 Hours Daily 12 - ( 30 workers) (28 working days) Supervisors Salaries Monthly - 3,200 Factory Manager Salaries Monthly - 5,400 Required: Calculate the direct labour and indirect labour cost for the month of January 2022. Solution: Direct labour cost Particular Total Cost (RM) Assembly Line Wages RM12 x 7 hours x 30 x 28 days 70,560 Indirect labour cost Particular Total Cost (RM) Supervisors Salaries RM 3,200 8,600 Factory Manager Salaries RM 5,400 3-7  3 Table of contents 3.3 MANUFACTURING OVERHEAD COST Manufacturing overhead Manufacturing overhead cost refers to the cost of indirect materials, indirect labour and other expenses in the factory. It is the cost incurred in the factory other than the cost of direct materials and direct labours. Manufacturing overhead is considered a product cost and is allocated using various overhead allocation methods. These may include traditional absorption costing or Activity Based Costing (ABC). Examples; factory supervisor’s salaries, indirect materials cost, factory rental, depreciation expense on production machinery, prepaid insurance on factory buildings etc. Calculation of manufacturing overhead cost Example 4: (Calculating manufacturing overhead cost) Naura Sdn Bhd produced 1,000 refrigerators a month. The cost and expenses incurred are as below: Items RM Factory Equipment Rent 1,500 Insurance Expense - Factory building 500 Direct Materials 200,000 Factory utilities Expense 800 Of ce Supplies 400 Assembly Line Wages 70,000 Depreciation Expense- Of ce Equipment 400 Indirect Materials 10,000 Factory Property Taxes 125 Factory Supervisory Salaries 1,700 Advertising Expense 1,250 Sales Commission 80,000 Depreciation Expense- Factory Building 900 3-8 fi fi  3 Table of contents Required: Calculate the manufacturing overhead cost incurred. Solution: Items RM Factory Equipment Rent 1,500 Insurance Expense- Factory Building 500 Factory Utilities Expense 800 Indirect Materials 10,000 Factory Property Taxes 125 Factory supervisory Salaries 1,700 Depreciation Expense- Factory Building 900 Total Manufacturing Overhead Cost 15,525 3-9  3 Table of contents 3.4 STATEMENT OF COSTS OF GOODS MANUFACTURED Format for Statement of Costs of Goods Manufactured and its relationship with Income Statement/Statement of Pro t or Loss. (Company name) Statement of Costs of Goods Manufactured For the year ended 31 December 20XX RM RM Direct Materials: Beginning inventory of Direct Materials XXX (+)Direct Materials purchases XXX Direct Materials available for use XXX (-) Ending inventory of Direct Materials (XXX) Direct Materials Used XXX Direct Labour: Assembly Line Wages XXX Manufacturing Overhead: Indirect Materials XXX Supervisors’ Salaries XXX Factory Rental XXX Depreciation Expense - Factory Machines XXX Factory Insurance XXX Factory Manager’s Salaries XXX Total manufacturing overhead XXX Total current manufacturing costs XXX (+) Beginning inventory of Work In Process XXX Total cost of Work In Process XXX (-) Ending inventory of Work In Process (XXX) Costs of Goods Manufactured XXX 3-10 fi  3 Table of contents (Company name) Statement of Pro t or Loss For the year ended 31 December 20XX RM RM Net Sales XXX (-) Costs of Goods Sold Beginning inventory of nished goods XXX inventory (+) Costs of goods Manufactured XXX Costs of goods available for sale XXX (-) Ending inventory of nished goods (XXX) XXX inventory Gross pro t XXX (-) Operating expenses: Selling Expenses XXX Administrative Expenses XXX XXX Net Income XXX Calculation of production cost per unit Sales unit - beginning units of nished goods Production Units = + ending units of nished goods. Costs of Goods manufactured Production cost per unit = Production Units 3-11 fi fi fi fi fi fi  3 Table of contents Example 5: (Preparing Statement of Costs of Goods Manufactured and calculating production cost per unit) Below are the cost incurred in for Perusahaan Diamond Bay for the period ended 31 December 2022: Item RM Sales (14,000 units) 99,000 Purchases of Direct Materials 27,000 Beginning inventory: Direct Materials 13,000 Work In Process 7,000 Assembly Line Wages 66,000 Factory’s Manager Salaries 29,000 Indirect materials 10,500 Depreciation Expense – Factory Machine 5,800 Supervisor’s Salaries 8,000 Factory Utilities Expense 16,000 Factory Rental Expense 9,000 Sales Expense 68,000 Administrative Expense 15,000 Ending inventory: Direct Materials 5,500 Work In Process 4,650 The nished goods inventory (units) is as follows: Beginning inventory 4,800 units Production Units Ending inventory 1,000 units Required: a.Prepare Statement of Costs of Goods Manufactured for the year ended 31 December 2022. b.Calculate the production cost per unit. 3-12 fi  3 Table of contents Solution: a. Perusahaan Diamond Bay Statement of Costs of Goods Manufactured For the year ended 31 December 2022 RM RM Direct Materials used: Beginning inventory of Direct Materials 13,000 (+) Direct Materials purchases 27,000 Direct Materials Available for use 40,000 (-) Ending inventory of Direct Materials (5,500) Direct Materials Used 34,500 Direct labour: Assembly Line Wages 66,000 Manufacturing overhead: Factory’s Manager Salaries 29,000 Indirect Materials 10,500 Depreciation Expense – Factory Machine 5,800 Factory Utilities Expense 16,000 Supervisor’s Salaries 8,000 Factory Rental Expense 9,000 Total manufacturing overhead 78,300 Current manufacturing cost 178,800 (+)Beginning inventory of Work In Process 7,000 Total cost of Work In Process 185,800 (-) Ending inventory of Work In Process (4,650) Costs of goods manufactured 181,150 Production Units b. Total units manufactured = 14,000 – 4,800 + 1,000 = 10,200 units Production cost per unit = RM181,150 / 10,200 units = RM17.76 3-13  Table of contents 4 ACTUAL COSTING AND NORMAL COSTING INTRODUCTION This topic covers the de nition of Actual Costing and Normal Costing, differences between Actual Costing and Normal Costing, Actual Overhead, Applied Overhead and Budgeted Overhead, calculate Predetermined Overhead Rate (POR) in Activity-Based Costing (ABC) and calculate applied manufacturing overhead cost for every basis of predetermined overhead rate. fi  4 Table of contents 4 LEARNING OBJECTIVES Students should be able to: 4.1 Explain actual costing and normal costing. Identify components of actual costing and normal costing. Explain the difference between actual costing and normal costing. Explain the advantages and disadvantages of using normal costing to management. 4.2 Explain actual overhead, applied overhead and budgeted overhead. Identify and explain over-applied and under-applied manufacturing overhead cost. Explain pre-determined overhead rate used in Activity-Based Costing (ABC): i. Explain basis /cost driver in predetermined overhead rate such as units of production, direct labour hours, machine hours, direct material cost and direct labour cost. ii. Calculate predetermined overhead rate based on units of production, direct labour hours, machine hours, direct material cost and direct labour cost. Calculate applied manufacturing overhead cost for every basis of predetermined overhead rate  4 Table of contents 4.1 ACTUAL COSTING AND NORMAL COSTING De nition Actual Costing System Normal Costing System Actual Costing System is considered Normal Costing System uses actual the actual cost of direct materials costs of direct materials and direct labour and direct labour involved and actual and applied manufacturing overheads to manufacturing overhead cost applied various jobs using a predetermined to or allocated across several job overhead rate to avoid uctuations in types. cost per unit caused by differing production volumes Component of Actual Costing and Normal Costing Actual Costing RM Normal Costing RM Actual Direct materials XXX Actual Direct materials XXX Actual Direct Labour XXX Actual Direct Labour XXX Actual Manufacturing XXX Applied Manufacturing XXX Overhead Overhead Product cost XXX Product cost XXX 4-1 fi fl  4 Table of contents Difference between Actual Costing and Normal Costing Actual Costing Normal Costing Manufacturing cost are based on the Manufacturing cost are based on actual actual cost of direct materials, actual cost of direct materials, actual cost of cost of direct labour, and actual direct labour, and applied manufacturing manufacturing overhead cost overhead cost. Advantages and disadvantages of using Normal Costing to management Advantages Disadvantages i. The company can set the product i. Budgets are often unrealistic if the pricing earlier or in advance. actual overhead amounts differ greatly from what was budgeted. ii. The cost of the product will remain consistent at a certain period for ii. Cost information is less accurate using the same overhead rate. since the information is based on estimation. This can result in incorrect information being given to management. 4-2  4 Table of contents 4.2 ACTUAL OVERHEAD, APPLIED OVERHEAD AND BUDGETED OVERHEAD. Actual overhead Applied overhead Budgeted overhead Refers to planned or Refers to the actual Is the overhead cost scheduled manufacturing amount of indirect allocated to a speci c overhead costs, actual manufacturing costs job, calculated based on manufacturing overhead cost incurred in a certain the actual activity base is still unknown. period. Example: Syarikat Awal Sdn Example: Telephone, Formula: Bhd makes an estimation of electricity, and water Applied overhead = overhead such as: bills—actual amounts are only known once Predetermined Supervisor salary RM100,000 the bills are received Overhead Rate X Actual Plant depreciation RM 7,500 Activity Based Used Machine repair RM 25,000 Difference between the actual overhead costs incurred and the cost of applied overhead : under-applied overhead and over-applied overhead Applied Overhead > Actual Overhead Over-applied Overhead Applied Overhead < Actual Overhead Under-applied Overhead 4-3 fi  4 Table of contents Predetermined Overhead Rate (POR) used in Activity-Based Costing (ABC) Manufacturing overhead costs were absorbed/applied into products using Predetermined Overhead Rate (POR). POR is obtained from the estimated manufacturing overhead costs for a period by choosing an activity base that will be used to apply the overhead costs for example direct labour hours, machine hours, and units of production. POR used in Activity-Based Costing (ABC) is an approach in which cost is allocated to the cost product based on resources used in the production activity. POR formula Budgeted annual overhead cost POR = Budgeted annual operating activity The choices of budgeted annual operating activities are: 1. Direct labour hours 2. Direct labour costs 3. Machine hours 4. Direct materials cost 5. Production unit 4-4  4 Table of contents Example 1: Syarikat Seri Bayu manufactures two types of products named Din and Don at the beginning of 2022. Factory managers provide estimated information such as the following: Manufacturing overhead RM500,000 Machine hours 200,000 hours Direct labour hours 100,000 hours Direct labour cost RM650,000 Direct materials cost RM400,000 Production unit 75,000 units Required: Calculate the predetermined overhead rate (POR) basis on the of the following activities: a.Machine hours b.Direct labour hours c.Direct labour cost d.Direct materials cost e.Production unit Solution: a. RM 500 000 200 000 MH d. RM 500 000 x 100% RM 400 000 = RM 2.50 / MH = 125% of DMC b. RM 500 000 100 000 DLH e. RM 500 000 75 000 unit = RM 5.00 / DLH = RM 6.67 / unit c. RM 500 000 x 100% RM 650 000 = 76.92% of DLC 4-5  4 Table of contents Example 2: On September 2022 these are the data found regarding manufacturing cost: Activity basis Department X Department Y Department Z Direct Materials RM 140,000 RM 126,000 RM 78,000 Direct Labour Cost RM 120,000 RM 110,000 RM 37,500 Manufacturing Overhead RM 98,000 RM 129,000 RM 80,000 Direct Labour Hours 8,000 hours 11,000 hours 3,500 hours Machine Hours 34,000 hours 45,000 hours 10,400 hours Each department uses a different basis to determine applied overhead. Department X is based on 125% of direct materials cost, department Y is based on 76.92% of direct labour cost while department Z is based on RM2.50 per machine hour. Required: Calculate the applied overhead for each department Solution: Applied overhead = Predetermined overhead rate X Actual activity base used Activity Department X Department Y Department Z basis Direct 125% x RM 140,000 Materials = RM 175,000 Direct 76.92% x RM Labour 110,000 Cost = RM 84,612 Machine RM 2.50 x 10,400 Hours hrs. = RM 26,000 4-6  4 Table of contents Example 3: For 2022, Malim Enterprise estimates manufacturing overhead cost RM 1,200,000. While actual overhead costs for the year 2022 are RM1,180,000. Basis activities used are stated as below: Basis Activities Estimation Actual Direct Labour Cost RM 2,000,000 RM 2,100,000 Direct Labour Hours 180,000 hours 190,000 hours Machine Hours 200,000 hours 192,000 hours Required: a.Calculate predetermined overhead rate (POR) based on direct labour costs, direct labour hours and machine hours. b.Calculate applied manufacturing overhead Solution: a. Direct Labour Costs = RM1,200,000 x 100% RM 2,000,000 = 60% Direct Labour Hours = RM1,200,000 180,000 Hours = RM 6.67/ Hours Machine Hours = RM1,200,000 200,000 Hours = RM 6.00/Hours = RM1,152,000 4-7  4 Table of contents b. Direct Labour Cost = 60% x RM2,100,000 = RM1,260,000 Direct Labour Hours = RM6.67 X 190,000 hours = RM1,267,300 Machine Hours = RM6.00 X 192,000 hours = RM1,152,000 4-8  Table of contents 6 COST VOLUME PROFIT INTRODUCTION This topic covers the Cost Volume Pro t (CVP) analysis, assumption in CVP analysis, cost behaviour, CVP analysis method, margin of safety, sensitivity analysis, the importance of CVP analysis to management and the ethical issues involved in CVP analysis fi  6 Table of contents 6 LEARNING OBJECTIVES Students should be able to: 6.1 Explain CVP analysis. 6.2 Explain the assumptions used in CVP analysis 6.3 Explain total variable costs and variable cost per unit of production using calculation and graph. Explain total xed costs and xed cost per unit of production using calculation and graph. Explain mixed cost State three methods used to segregate mixed costs: high-low method, graph method and simple regression method. Segregate mixed costs using high-low method. F Form a cost function equation: Y= a + bx 6.4 Calculate break-even point (BEP), forecasted sales and targeted pro t using mathematical equation method Calculate break-even point (BEP), forecasted sales and targeted pro t using contribution margin method fi fi fi fi  6 Table of contents 6 LEARNING OBJECTIVES Students should be able to: 6.5 Explain and calculate margin of safety in ringgit, unit and percentage. 6.6 Explain the effects of changes in selling price, xed costs and or variable costs on CVP based on calculation. 6.7 Discuss the importance of Cost Volume Pro t Analysis to management. 6.8 Identify ethical issues involved in Cost Volume Pro t Analysis. fi fi fi  6 Table of contents 6.1 CVP ANALYSIS Cost-volume-pro t analysis examines how changes in costs and volume affect a company’s pro ts. It is a planning process that management uses to predict the future volume of activity, the costs incurred, the sales made, and the pro t received. Cost-volume-pro t analysis examines the behaviour of total revenues, total costs, and operating income as changes occur in output level, selling price, variable cost per unit, or xed cost of a product. 6.2 ASSUMPTIONS IN CVP ANALYSIS Units sold equal to units produced Cost behaviour can be classi ed accurately as either variable or xed. Costs and revenues are linear. Selling price per unit is constant. Variable cost per unit is constant. Total xed cost is constant. Changes in activity (known as ‘x’) are the only factors that affect costs. 6.3 COST BEHAVIOUR Variable Costs Aspect Total Cost Cost Per Unit De nition Varies in total in direct proportion to Remains constant at any level of changes in the level of activity. activity. Graph Cost (RM) Cost/unit (RM) Units Units Cost Y= bx Function Y = Total cost, b = Variable cost per unit, x = Level of activity Example Direct materials, direct labour, indirect materials, and sales commission. 6-1 fi fi fi fi fi fi fi fi fi  6 Table of contents Example 1 Mummy Cake House sells a variety of cakes. The information below is related to its business operation: The cost of our is RM0.80 per cake. Level of production for 3 months are 2,000 units, 3,000 units and 4,000 units respectively. Required: Calculate the total variable cost and variable cost per unit of our for each month. Solution: Production Unit Variable cost per unit (RM) Total Variable Cost (RM) (a) (b) (a x b) 2,000 0.80 1,600 3,000 0.80 2,400 4,000 0.80 3,200 The graph plotted for the above cost is as follows: Cost (RM) Total Variable Cost 3,200 2,400 1,600 Units 2,000 3,000 4,000 Graph 1: Relationship Between Total Variable Cost and Level of Activity 6-2 fl fl  6 Table of contents Cost/unit (RM) 0.8 Variable cost/unit Units 2,000 3,000 4,000 Graph 2: Relationship Between Variable Cost Per Unit and Level of Activity Fixed Cost Aspect Total Cost Cost Per Unit De nition Remains constant in total Varies inversely with changes in regardless of the level of activity. activity. Graph Cost (RM) Cost/unit (RM) Units Units Cost Y= a Function Y = Total cost , a = Total xed cost Example Factory rental, of ce rental, factory depreciation, of ce depreciation, supervisor’s salary, secretary’s salary, etc. 6-3 fi fi fi fi  6 Table of contents Example 2 The cost information shows Rent Expense of Irfan Creative Enterprise is RM15,000. Production for 3 months are 2,000 units, 3,000 units and 4,000 units respectively. Required: Calculate the total xed cost and xed cost per unit for each month Solution: Production Unit Total xed cost (RM) Fixed cost/unit (RM) (a) (b) (b ÷ a) 2,000 15,000 7.50 3,000 15,000 5.00 4,000 15,000 3.75 The graph plotted for the above cost is as follows: Cost (RM) 15,000 Total Fixed Cost Units 2,000 3,000 4,000 Graph 3: Relationship Between Total Fixed Cost and Level of Activity 6-4 fi fi fi  6 Table of contents Cost/unit (RM) 8.00 7.00 6.00 5.00 4.00 Fixed cost/unit 3.00 2.00 1.00 Units 2,000 3,000 4,000 Graph 4: Relationship Between Fixed Cost Per Unit and Level of Activity Mixed Cost i. Explanation Aspect Total Cost De nition Mixed cost has both behavioral xed cost and variable cost. Cost that varies in total but the changes is not in direct proportion to the changes in the level of activity Graph Cost (RM) } Variable Cost Fixed Cost Units Cost Y= a + bx Function Y = Total cost, a = Total xed cost, bx = Total variable cost Example Factory Utilities 6-5 fi fi fi  6 Table of contents i. Three methods used to segregate mixed cost 1.High-low method 2.Graph method 3.Simple regression method ii. Segregate mixed cost using high-low method. 1.Data on the highest activity and the lowest activity are used to estimate the variable cost per unit. 2.Activity: Production unit, hours, kilometre 3.Step: a.Identify the highest activity and the lowest activity level. b.Calculate variable cost per unit Cost of highest activity (RM) - Cost of lowest activity (RM) Highest activity (unit) - Lowest activity (unit) c.Calculate total xed cost d.Generate cost function Example 3 (Single cost situation) The followings are information about quarterly maintenance cost to produce tablet for the current year. Number of tablets Total maintenance produced cost (RM) 1st quarter 360 1,720 2nd quarter 415 1,830 3rd quarter 480 1,960 4th quarter 240 1,480 6-6 fi  6 Table of contents Required: a.Calculate variable cost per unit and quarterly total xed cost. b.Generate the cost function for maintenance cost. c.Estimate total maintenance cost at 400 units of tablet. Solution: a.Variable cost per unit and quarterly total xed cost Cost of highest activity (RM) - Cost of lowest activity (RM) Variable cost per unit (b) = Highest activity (unit) - Lowest activity (unit) (RM1,960 − RM1,480) (480 tablets − 240 tablets) = RM480 / 240 tablets = RM2 per tablet Total xed cost (a) = Total mixed cost – Total variable cost = Total mixed cost – (Variable cost per unit × Number of units) = RM1,960 – (RM2 per tablet × 480 tablets) = RM1,960 – RM960 = RM1,000 b.Cost function Y = RM1,000 + RM2x c.Total maintenance cost at 400 units of tablet Y = RM1,000 + (RM2 x 400 units) = RM1,800 6-7 fi fi fi  6 Table of contents Example 4 (Multiple cost situation) Khaleesah Manufacturing is a banana chips manufacturer around the city of Jasin, Melaka. Here are some cost information taken from its nancial records for January and February 2022; January February Units of production 21,000 27,000 RM RM Bananas 15,750 20,250 Wages and salaries 15,250 16,750 Rental on factory building 1,500 1,500 Depreciation on factory machine 200 200 Factory utilities 1,420 1,540 34,120 40,240 Required: a.Calculate the variable cost per unit and the xed cost for each cost item using the high-low method. b.Identify the cost behaviour of each item whether it is a variable cost, xed cost, or mixed cost. c.Estimate the total cost of factory utilities if the company produces 35,000 banana chips. d.Create an equation of total cost to show the behaviour of mixed cost. (y=a+bx). e.Estimate the total cost if the company produces 35,000 units of banana chips. Solution: a. Cost Variable Cost Fixed Cost (RM) (RM) Bananas (20,250 - 15,750) 20,250 =0.75(27,000) + a (27,000 - 21,000) a=0 b = 0.75/unit 6-8 fi fi f