AGL – AUTONOMOUS GROUP LEARNING
CRE - CREATIVE RELAXATION EXERCISE
AGL CREATIVE COST CONTROL FOR
MANAGERS
Draft for correction before publication June 11, 2007
Dr. Bob Boland & Team
FCA, CPA, DBA, ITP (Harvard)
Source: HBS/EDW/AVM/DH et alia
Audio: freely available in www.crelearning.com
Help: [email protected]
Copyright: RGAB/1
1
DEDICATION
This is a fun programme, is dedicated to memory of the all hard
working accountants (and auditors), who have always been the
respected traditional honest leaders in the tough game of
business, but have been relegated to the relatively humble job of
scorekeepers.
In revenge the accountants keep the score, in such a complex
way, that nobody other than skilled accountants, can know what
the score really is ... was ... or will be ...
2
CONTENTS
Item
Page No
Diary
4
Workpack - Part 1
48
Workpack – Part 2
83
Guide
127
APPENDICES:
A - Glossary
B - Quiz
C – Further study
151
158
219
3
Autonomous Group Learning (AGL)
No. 4 – Cost Control For Managers
DIARY
(Retained)
4
Item
Page No
1. Important note on the learning
3
2.
Summary lecture - Part I
4
3.
Summary lecture - Part II
10
4.
Practical exercises
17
5.
Registration sheet
49
First feedback summary
51
Second feedback summary
53
Quiz answer sheets
55
5
1. IMPORTANT NOTE ON THE LEARNING
1.
AGL is specially designed as an intensive basic finance course in five
parts, for the manager with relatively little or no formal financial training
or experience. Some parts may be less challenging for the experienced
financial director with many years of experience.
2.
AGL creates a very special group learning environment that is new to the
group members. It is a highly effective but rather challenging learning
experience. Members should therefore try to keep an open mind on their
reactions until the second day of the program.
3.
Members can and do solve ALL the problems and answer ALL the
questions, from the special materials provided and the experience of
other members of the group.
4.
The Organiser is not a teacher. The Organiser's job is to help members
to:
a.
b.
c.
Understand the AGL learning system
Use fully and effectively the special learning materials and the
group experiences.
Solve administrative problems
5.
The Organiser is not usually allowed under AGL Learning Systems to
respond directly to technical financial questions, since the learning is
better when members help each other. The critical skill of the Organiser is
to HELP the participants to WORK TOGETHER to resolve successfully, all
questions arising. Thus by the end of the program EVERY QUESTION is
resolved!
6.
Since the same learning materials are used for both the two day and the
three day versions of the course, the Organiser will occasionally outline
differences in the timing of some parts of the work.
7.
Members should not be disturbed by references to various currencies
since the AGL materials are used extensively in many different countries.
8.
Since 1970 over 40,000 executives have successfully completed AGL
programmes throughout the world. This wide international experience s
resulted in development of the "Learning Maintenance Program" which is
designed to reinforce and sustain the learning achieved from the course.
6
COURSE DIARY
Course Date & Location:
Participant’s Name:
Company:
Business Address:
Previous Financial & Accounting Experience:
Quiz Results:
Day I _______
100
Day II ______
Day II _______
Day II ________
100
Personal objectives in taking the course
Note:
Complete one sheet of the course diary for each day indicating:
(1)
(2)
(3)
(4)
Key points learned
Reactions to AGL
Questions which are not satisfactorily answered
Results of any quizzes given during the day
7
STANDARD PROGRAMME FOR EACH UNIT
Activity
Group
Time
(minutes)
1.
Review/Introduction/Quiz/Mini-cases
SG
30
2.
Study (lecture)
SG
60
3.
Case
SG
CSG
MG/SG
45
30
30
4.
Review/Quiz/Mini-cases/Feedback
SG
45
Total time
_____
240
_____
Note: The standard times are a general guide to activity which may be modified as required to provide
continuous variety of: time, space and human relationships which is essential for efficient and
effective learning.
8
NOTES FOR EACH COURSE MEMBER
1.
AGL is an intensive basic training course for personnel who have little or no training.
2.
AGL creates a learning environment that is new to the course members. It is an effective but
challenging learning experience. Course members should keep an open mind on their
reactions until the second day of the course.
3.
This AGL course also helps you apply your new knowledge in your work.
4.
Course members can solve ALL problems and answer all questions using the materials
provided and the experience of other members of the group.
5.
The Course Organiser will avoid (whenever possible) responding to ANY TECHNICAL
QUESTION.
6.
The Course Organiser is NOT a TEACHER. The Course Organiser’s task is to help members:
(a)
Understand the AGL methodology
(b)
Use effectively the learning materials and the group experiences.
(c)
Solve administrative problems.
7.
The Course Organiser will occasionally outline differences in the timing of some parts of the
work.
8.
Members should not be disturbed by references to different currencies since AGL is used in
many countries.
9.
The Course Organiser can help you prepare an ACTION PLAN to apply your new knowledge
on the job and may also be able to help you carry out your action plan.
10.
We hope that you will find AGL stimulating, informative and effective!
9
AGL NO. 4 COST CONTROL FOR MANAGEMENT
FEEDBACK SUMMARY
(Detach and give to the Organizer)
MANAGEMENT DEVELOPMENT INTERNATIONAL
AGL COURSE NO.
DATE:
1.
NAME:
TITLE:
COMPANY:
BUSINESS ADDRESS:
2.
PREVIOUS FINANCIAL BACKGROUND:
3.
QUIZ SCORES:
DAY I
___out of 100
DAY II
____out of
DAY.II
DAY.II
____out of
____out of 100
4.
DID THE PROGRAMME COMPLETELY SATISFY YOUR PERSONAL OBJECTIVES
5.
WHAT SUGGESTIONS COULD YOU MAKE FOR IMPROVING THE PROGRAMME?
6.
WHAT OTHER AGL PROGRAMMES COULD BE DEVISED WHICH WOULD BE USEFUL
TO YOU OR YOUR COMPANY?
7.
WHAT IS YOUR OVERALL EVALUATION OF THE COURSE IN TERMS OF:
Excellent
1
Good
2
Fair
3
Poor
4
Terrible
5
Content
Presentation
Administration
Usefulness
Note:
Mark the appropriate item with an X.
10
ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART I
11.1
FINANCIAL AND COST ACCOUNTING
Financial accounting deals with the business as a whole and results in an Income Statement
and a Balance Sheet covering generally all the business activities for the period.
Cost accounting concentrates on the computation and control of costs for products and
specific activities.
11.2
TYPES OF COSTS
Cost is precisely what we define it to be. It is never “true” or “correct” but only a “useful
estimate” relevant for specific purposes.
Cost has thirty-five possibilities :
Labour, material or overhead
Manufacturing, selling or administrative
Direct or indirect
Controllable or non-controllable
Fixed or variable
Specific or allocated
Engineered, managed or committed
Product or product group or department
Relevant or non-relevant
Book or opportunity (value)
Past or future
Actual or standard
Unit or total
Job, batch, contract, output, process, etc.
Cost must be useful to management not merely to accountants.
11.3
COST SYSTEMS
(a)
Define the unit of production to “focus” the cost system, (i.e. Job? Batch? Contract?
Output? Process?) and then define the standard which measures efficiency.
(b)
Define the reports and data that management want from the system now and later?
Routine and special?
(c)
Define responsibility centres in the organisational structure. Set appropriate
productive and service cost centres. Try to establish Profit Centres and Investment
Centres, not merely Cost Centres.
(d)
Define the extent to which the system will use standard costing techniques for labour,
material and overhead rates.
(e)
Regularly evaluate the system by relating objectives to actual achievements.
11
11.4
DIRECT AND INDIRECT COSTS
Direct costs can be conveniently associated with a unit of production without arbitrary
allocations and assumptions. They are definite and reliable ... but incomplete.
11.5
OVERHEAD RATES
To develop an overhead rate:
(a)
Set the estimated overhead amount.
(b)
Decide upon the activity measure : direct labour cost, direct labour hours, prime cost,
factory cost, machines hours, sales price, etc.
(c)
Fix the estimated volume of the activity measure for the accounting period.
(d)
Divide the overhead by the activity volume to compute the rate. COMPUTE ANNUAL,
NOT MONTHLY RATES !!!
Allocate the overhead to products or cost centres. For each period there will normally be a
balance of overhead over or under-allocated. Do not re-allocate this difference to product cost
because it would change all the product costs for the year. Take the difference direct to the
income statement as “loss” or “profit”.
Product costs containing overhead allocations must be used with care … the under / overallocations of overhead may be significant!
Use one or a number of overhead rates according to the number of cost centres. Don’t have
too many cost centres!
Any complications of the cost system must be justified by the usefulness of the results to the
management, i.e. are more precise cost computations really useful? For what?
Ask : What can we do with the data?
11.6
INVENTORY EFFECTS
Costs incurred for the year must always be adjusted for inventory changes.
Thus the materials actually used in the period are not the purchase but:
Opening inventory plus purchase less
closing inventory.
Similarly adjustment must be made for inventory of work in process and finished goods.
12
11.7
COST, PROFIT AND INVESTMENT CENTRES
Choose centres which clearly associate actual performance against a standard with a
responsible manager.
Get managers to be concerned not merely with cost and profit but also the assets employed
in the operation ... in terms of return on investment. This is a most effective way to control
costs.
Design responsibility centres as part of the organisation structure.
Get profit orientation as low down in the organisation as possible.
11.8
BREAK-EVEN ANALYSIS
Key analysis of costs into Variable Cost (per unit) which is incurred for every unit, as apart
from Fixed Cost which exists regardless of the volume of units produced.
Break-even analysis aids understanding of cost and profit in relation to volume; it indicates
regions of loss or profit, but is valid only for a limited volume … fixed costs increase at higher
volume levels.
In the long run all costs are variable. Define the “horizon” (time period) when defining variable
costs.
Full cost may sometimes approximate long-run variable cost (but not always).
11.9
MEASUREMENT OF PERFORMANCE
Set a standard, compare actual against standard, compute the variance and associate it with
a manager responsible.
11.10
RELEVANT COST ANALYSIS
(a)
Define the problem and the relevant factors
(b)
List all the alternatives
(c)
Set criteria for decision
(d)
Consider the quantitative data and the non-quantitative factors
(e)
Evaluate each alternative in terms of Q and NQ factors
(f)
Decide and justify
(g)
PFD … provide for disaster (contingency plans for when assumptions prove to be
invalid)
NOTE : Normally only variable costs are relevant, but the relevant variable costs change with
each specific decision. Allocated costs are normally fixed and not relevant.
13
11.11
CONTROL CONCEPTS
Control may relate to a product or an operation.
It involves a continuous, rhythmic and integrated process of comparing actual performance
against a standard followed by corrective action.
Top management support is a key requirement for any control system. The system relates
management objectives to organisation and the key profit-making features of the industry.
11.12
MATERIALITY
Materiality concept is the key to all cost and profit control.
Large amounts are very important.
SMALL AMOUNTS ARE OF NO IMPORTANCE AND SHOULD BE COMPLETELY
IGNORED (unless multiplied by large volume).
Data should not appear to be more accurate than the assumptions underlying it.
Rough estimates now are almost always more valuable than so called “correct” Figures much
later. Don’t let the accountant pretend to be too accurate.
Show quantitative data as an estimate! Control the big costs - leave the peanuts to the
monkeys!
Cost control and reduction is more a problem of attitudes than technique.
14
11.13
LEARING PATTERNS
11.13 (a)
COST SYSTEMS
11.13(b)
DIRECT & INDIRECT COSTS
11.13 (c)
BREAK EVEN ANALYSIS
15
11.13 (d)
RELEVANT COST ANALYSES
11.13 (e)
STANDARDS OF PREFOMANCE
11.13 (f)
CONTRIBUTION & COST
16
11.14
INSTRUCTIONS
(a)
Re-assemble in SG now
(b)
Study this note and learning patterns very carefully
(c)
Discuss outstanding questions with your SG
(d)
Record significant points in your notebook
(e)
Do the following work in your own time :
i.
Complete your Course Diary for Part I including notes on each case
and the key points learned (for review later)
ii.
Read the text book and your copy of the summary lecture for Part I in
the Course Diary
iii.
Do ASS set D.1, complete Set 4 and read all the ASS summaries
iv.
Review the Glossary
17
ASSIGNMENT 12.0 - SUMMARY LECTURE
12.1
12.2
SPECIFIC OBJECTIVES
a)
Understand the language and concepts of cost accounting and control.
(b)
Evaluate cost systems and analyse product cost and overhead cost.
(c)
Develop skills in using cost data for practical cost control and decision-making.
(d)
Communicate effectively with cost control specialists.
(e)
Motivate further study in the future.
COST
Cost is exactly what we define it to be.
Key analysis of cost is into:
(a)
(b)
(c)
(d)
(e)
12.3
Variable or fixed.
Book or opportunity cost (value).
Relevant or non-relevant.
Actual or standard.
Past or future.
STRUCTURE OF COST
Cost may be analysed into
Direct cost
Labour
Material
Services
Indirect cost
Manufacturing overhead
Total manufacturing cost
Indirect cost:
Selling and administrative
Overhead
Total Cost (ESTIMATED)
XX
XX
XX
-------XXX
XX
-------XXX
XX
-------XXX
--------
18
12.4
COST SYSTEMS
(a)
Systems relate to the unit of cost :
Job cost
Contract cost
Batch cost
Process cost
Output cost
(b)
Systems relate to the analysis of cost :
Direct cost
Full cost
(c)
Systems relate to the control of costs :
Actual - compared with estimated cost.
Standard - compared with actual cost.
12.5
STANDARD COST SYSTEM
All cost systems may use some standard rates for labour, material and overhead and thus
simplify the computation work.
“Actual” or average rates are only estimates - standards are more useful and less trouble.
Standard costing starts with setting good engineering standards for labour and material
quantities, and for the volume of activity.
Standard quantities are priced at standard rates on a Standard Cost Sheet for each part, subassembly and assembly and finished product.
Cost of the product is the standard cost from the summary standard cost sheet. (Unless the
standards are wrong).
Variances between actual and a good standard are due to inefficiency of the operations NOT
the product. Blame the department not the product.
Variances between actual and standard cost is computed and reported not by product but by
operation in terms of price, efficiency and volume.
19
12.6
OVERHEAD RATES
(a)
All full cost systems use overhead rates which are estimates based upon
assumptions for each cost centre:
overhead amount
measure of activity
activity volume.
(b)
Overhead may be allocated by:
direct labour hour
direct labour cost
direct material
machine hour
prime or manufacturing cost
sales price, etc.
12.7
(c)
Whatever basis is chosen it should be appropriate to the use that management
makes of the data. Rates that are “high” should be investigated - perhaps the wrong
activity measure it being used.
(d)
Allocating a fixed cost does not make it variable !! - and does not control it. Only
budgets by responsibility control costs.
RELEVANT COST ANALYSIS
Cost and revenue decisions require special analysis of data relevant to each specific
decision.
Generally historical cost reports are not relevant. Variable cost and contribution (selling price variable cost) are more relevant than full cost and profit, especially in the short-term!
Break-even analysis is a useful technique for understanding profit, cost and volume
relationships.
Direct costing helps segregate variable costs from period costs.
12.8
REPORTING ESSENTIALS
(a)
Design - serve user needs, signal variances, minimum data with maximum
information.
Note : Every report can be designed to fit one sheet of paper with supporting detail
on following pages. Thus each page is complete in itself. Complex reports
are NOT unavoidable … just poor design and low creativity.
(b)
Speed-rapidly changing situations need quick decisions and rapid reporting.
Conversely, when nothing can be done, no rapid reporting. Increased speed “tradeoff” for less accuracy. Timeliness of decisions affected by delay in reporting.
20
12.8
(cont.)
(c)
Frequency - changing situations need reporting but too many reports restrict
the manager and are “disfunctional”.
(d)
Clarity - reports absolutely clear to the user - without undue effort and with
proper training. Significant data only.
(e)
Signals - managers need signals of key items. They do not need all the
information all the time. Distinguish routine from special reporting.
NOTE : All figures are estimates based on assumptions. Excessive accuracy is
wasteful, ridiculous,… fraudulent. Rough accuracy is generally fast and
effective.
12.9
CONTROL OF COST
Cost may be controlled by product, department or the whole company.
Control results by comparison of actual against a standard to produce variances, by price,
efficiency and volume for which specifi managers are responsible.
Good standards, effective reporting and top management support are vital for control.
12.10
COST REDUCTION
Cost reduction is an attitude of mind. It is a continuous process of improvement by creative
thinking in terms of:
(a)
(b)
(c)
(d)
12.11
eliminating activities
combining activities
changing the sequence of activities
simplifying the activities.
ORGANISATIONAL ENVIRONMENT
Top management and the controller set the organisational environment which is key to the
effectiveness of the cost control and budget system.
A defensive environment encourages managers to : set low targets, show little initiative, be
reluctant to make decisions and to settle for safe. plans.
A creative environment (whereby managers feel secure yet motivated) encourages managers
to : set high achievable targets, .make confident, bold decisions, use resources creatively,
take ba1nced risks and achieve both personal and corporate goals.
NOTE : How is your organisational environment?
21
12.12
LEARNING PATTERNS
12.12 (a)
OBJECTIVES
12.12 (b)
COSTS
12.12 (c)
COST SYSTEM
22
12.12 (d)
STANDARD COST SYSTEM
12.12 (e)
OVERHEAD RATES
12.12 (f)
COST CONTROL
23
12.12 (g)
MOTIVATION
12.12 (h)
INTERACTION
24
12.13
CONCLUSIONS
(a)
Cost is only what we define it to be: Control cost by setting a target and holding a
manager responsible for achieving it :
(b)
Cost must relevant and useful to the specific management decision to be made. No
cost is relevant to all decisions.
(c)
Cost systems produce routine date and leave a “trail” for preparing of special data
when required.
(d)
Distinguish the cost data we use all the time from the data we need some of the time.
(e)
Move all cost systems towards standard costing by using standard rates. No
profitable expanding business is too small for standard costing.
(f)
Cost systems are for managers not accountants.
(g)
Cost control systems become inefficient and ineffective naturally over time. Like
machines and people they need constant maintenance and review and periodic
complete rethinking.
(h)
Cost reports shou1d be simple; they should not merely contain information but should
communicate it to managers.
(i)
The test of cost is not is it true or correct but is it useful to you now.
(j)
Cost control helps profitability – but sometimes efforts towards a bigger total
contribution may be more profitable than cost reduction.
(k)
Cost reduction and control is continually possible with the right attitude and creative
thinking.
(1)
In an increasingly competitive market, effective and continuous cost reduction may be
the key to survival of the business.
(m)
Cost control is really more a human than a technical problem – can we motivate
people to make it important for them!
FINAL NOTES
THIS ENDS OUR COURSE. WE HOPE IT HAS INSPIRED YOU TO DEVELOP YOUR SKILLS BY
PRACTICAL APPLICATION. WE THANK YOU FOR YOUR INTEREST AND HARD WORK. KEEP
YOUR GLOSSARY AS A DAILY REFERENCE FOR COST CONTROL LANGUAGE AND
CONTINUE YOUR STUDIES
WE HOPE YOU HAVE ENJOYED THE AGL EXPERIENCE
25
PART OF DIARY
PRE-INSEAD MULTI-MEDIA SYSTEM
(P.I.M.M.S.)
PRACTICAL EXERCICES IN
B A S I C
C O S T
A C C O U N T I N G
Score ... out of 37
Copyright : R.G.A. BOLAND
No copies of this material may be made without written permission.
26
Set 1 - Questions
1.
Prepare an income statement from the following data:
Cost paid in cash
Sales in cash
Expenses not yet paid in cash
Sales not yet paid in cash
2.
Prepare an income statement from the following data:
Sales
Purchases
Expenses
Stock unsold
3.
2 hours
6 lbs.
1.00 per hour
3.00 per hour
2.00 per lb.
What is the profit to date from the following
Purchase
Sales
5.
000
2,500
1,500
500
250
Compute the cost of product from the following data:
Labour
Material
Labour cost
Overhead cost
Material cost
4.
20.00
20.00
10.00
20.00
10 units at 2.00 each
6 units at 10.00 each.
If we buy 10 items for 100.00 and sell S of them for 100.00
(a)
(b)
What is the profit to date?
Would your answer be different if you knew that the remaining items unsold could
never be sold?
27
BASIC COST ACCOUNTING
Set 1 - Answers
1.
Income Statement
Sales
40.00
Costs
Expenses
20.00
10.00
Profit
2.
30.00
10.00
Income Statement
000
Sales
Costs
Expenses
Profit
Stock unsold
3.
4.
5.
2,500
1,250
500
1,750
750
250
Cost of Product A
Labour 2 hrs. at 1.00
2
Material 6 lbs. at 2.00
12
Overhead 2 hrs. at 3.00
Total cost
14
6
20
Computation of Profit to Date
Sales 6 at 10.00
60
Cost 6 at 2.00
Profit to date
Unsold inventory 4 at 2.00
12
48
8
Computation of Profit to Date
(a) Sales 5 at 20.00
Cost 5 at 10.00
100
50
Profit to date
50
Unsold stock 5 at 10.00
50
Sa1es 5 at 20.00
100
Cost 10 at 10.00
100
Profit to date
Unsold Stock 5
–
No
Value
28
BASIC COST ACCOUNTING
Set 2 - Questions
6.
State whether or each of the following costs is manufacturing, sales, distribution or
administrative overhead.
(Note : Some items may apply to more than one heading).
M
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
7.
D
A
Which of the following is not an objective of cost accounting :
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
8.
S
Direct labour
Sales salaries
Accounting
Indirect material
Advertising
Transport out
General management
Promotion of sales
Occupancy
Maintenance
Packaging
Despatch
Sales office
Direct material
Insurance
Compute selling prices
Control costs
Prepare income statement
Value work in process
Estimate cost to assist in fixing selling price
Reduce time
Cut overhead
Reduce selling prices
Improve sales
Efficient administration
The cost of a manufactured unit is
Labour
200.00
Material
500.00
Overhead
400.00
1100.00
Compute the work in process cost of a unit half manufactured.
29
9.
What unit of cost would you select for the following costing methods :
1.
Job costing
2.
Contract costing
3.
Batch costing
4.
Output costing
5.
Process costing
30
BASIC COST ACCOUNTING
Set 2 - Answers
6.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
7.
8.
M
S
D
A
–
–


–
–
–
–



–
–
–

–

–


–
–



–
–

–

–
–
–

–

–
–



–
–
–

–
–
–

–
–

–


–
–
–
–

Direct cost
Direct cost
1
3
6
7
8
9
10
Cost of work in process
Labour
Material
Overhead
Total
9.
Direct cost
50 %
100 %
50 %
1.
One job
2.
One contract
3.
One batch of products
4.
One unit of output
5.
One process
100.00
500.00
200.00
800.00
31
BASIC COST ACCOUNTING
Set 3 - Questions
10.
Compute for job X prime cost, manufacturing cost and total cost:
Labour
Material
200.00
400.00
Manufacturing overhead 100 % of direct labour.
Sales and administrative overhead 25 % of manufacturing cost.
11.
Compute for the XYZ Company
1. Manufacturing cost incurred
2. Cost of finished goods produced
3. Cost of finished goods sold
from the following data:
Manufacturing overhead
Direct Labour
Work in process – opening
closing
Direct material
Finished goods – opening
closing
12.
6,000.00
2,000.00
1,500.00
2,500.00
4,500.00
3,000.00
5,000.00
Compute the sales, cost and profit from the following data for sales of:
a.
1 unit
b. 100 units
c. 600 units
d. 1,000 units
Data:
Fixed costs
Manufacturing
Administrative
Variable costs
Manufacturing
Sales price
2,000.00
1,000.00
4.00 per unit
9.00 per unit
What is the break-even point ?
32
BASIC COST ACCOUNTING
Set 3 - Answers
10.
Job X
Labour
Material
200
400
Prime cost
Manufacturing overhead
600
200
800
200
Manufacturing cost
Sales and administrative overhead
Total cost
11.
1,000
Cost of finished goods sold
Direct labour
Direct material
Manufacturing overhead
2,000
4,500
6,000
Manufacturing cost incurred
Work in process - opening
12,500
1,500
Work in process - closing
14,000
2,500
Cost of finished goods
produced
Finished goods - opening
11,500
3,000
Finished goods - closing
14,500
5,000
9,500
Cost of finished goods sold
12.
1
Sales
Variable Costs
Contribution
Fixed costs
Profit (Loss)
9
4
5
3,000
(2,995)
Loss
Units sold
100
600
900
5,400
400
2,400
--------500
3,000
3,000
3,000
(2,500)
Loss
Break-Even
1.000
9,000
4,000
-----5,000
3,000
2,000
Profit
33
BASIC COST ACCOUNTING
Set 4 - Questions
13.
Compute the two sales prices of product X using a manufacturing
overhead rates based on:
(a)
(b)
Prime cost
Direct labour
Data - Product X
Labour
Material
20.00
10.00
Data - Results of recent period
Labour
Material
Manufacturing overhead
2,000
4,000
6,000
Manufacturing cost
Sales and Administrative
overhead
Total cost
Profit
12,000
4,000
Sales Price
14.
From the following data, which job, A, B or C, contributes the most fixed overhead and profit?
Labour
Material
Variable manufacturing overhead
Fixed manufacturing overhead
Fixed sales and administrative overhead
Total cost
Sales price
Profit (Loss)
15.
16,000
4,000
--------20,000
---------
Job A
10
10
10
20
Job B
20
10
20
60
Job C
20
20
20
40
50
10
60
70
110
20
130
140
100
20
120
130
10
10
10
Compute the sales price of Contract B :
Labour
Material
10.00
20.00
Data rates
Manufacturing overhead 400 % of direct labour, sales and administrative overhead 30
% of manufacturing, profit 20 % of total cost.
34
BASIC COST ACCOUNTING
Set 4 - Answers
13.
Sales Price of Product X
Prime Cost
Overhead
Rate
20
10
30
Labour
Material
Direct Labour
Overhead
Rate
20
10
30
Prime cost
Manufacturing overhead:
100 % of prime cost
300 % of direct labour
30
Manufacturing cost
Sales and administrative overhead - 33 1/3 %
60
20
90
30
80
20
120
30
100
150
60
Total cost
Profit 25%
Sales price
14.
Contribution
Job A
Job B
Job C
Variable Costs :
Labour
Material
Overhead
Total
Sales Price
10
10
10
30
70
20
10
20
50
140
20
20
20
60
130
40
90
70
Contribution
15.
Sales Price - Contract B
Labour
Material
10
20
Manufacturing overhead
Sales and Administrative overhead
Profit 20 %
30
40
70
21
91
18
109
Sales Price
35
BASIC COST ACCOUNTING
Set 5 - Questions
16.
From the following data, compute overhead rates for three productive cost centres, I, II and
III.
(a)
Data
Cost
Centre
(b)
17.
Specific
Costs
Non
Specific
Costs
Direct
Labour
900
5,200
2,900
Productive
I
II
III
500
1,000
1,600
180
380
580
Service
A
B
C
400
600
1,100
200
280
480
Service cost centres analysed :
Cost
Centre
Service Cost Centre
A
B
Productive
I
II
III
20%
20%
20%
50%
10%
10%
Service
A
B
C
20%
20%
–
–
30%
C
25%
50%
25%
–
–
–
Give a first and a second basis for analysing the following costs between manufacturing cost
centres :
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Rent of whole factory
Foreman’s salary
Cleaning
Power House
Lighting and Heating
Repairs
Depreciation
Insurance
Personnel department costs
Timekeeper
From the following possible bases
A.
B.
C.
D.
No. of workers
Space occupied
Technical estimate
Units used
36
BASIC COST ACCOUNTING
Set 5 - Answers
16.
Cost
Specific
Non-specific
Service A
B
C
Direct
I
500
180
680
Production C.C.
II
1,000
380
1,380
120
500
500
1,800
labour 900
120
100
1,000
2,600
5,200
Overhead rate 200 % 50 %
17.
Service C.C.
B
600
280
880
III
1,600
580
2,180
A
400
200
600
120
100
500
2,900
(600)
-
120
(1,000)
-
C
1,100
480
1,580
120
300
(2,000)
2,900
100 %
Basis of analysis:
1
2
3
4
5
6
7
8
9
10
First Choice
B
C
B
D
D
C
C
C
A
A
Second Choice
A
A
A
C
C
A or B
B
A
C
C
37
BASIC COST ACCOUNTING
Set 6 - Questions
18.
Calculate overhead rates based on:
(a)
(b)
(c)
Labour hours
Labour costs
Machine hours
From the following data:
Overhead
Labour hours
Labour cost
Machine hours
19.
Use these rates to calculate the overhead cost and total cost of the following job
Material
Labour (200 hours)
Machine hours
20.
21.
12,000
24,000
6,000
8,000
75.00
100.00
150
From the following data prepare a break-even chart and find the break-even point
Units
Output
Fixed
Cost
Variable
Cost
Sales
500
800
1,200
1,500
1,000
1,000
1,000
1,000
500
800
1,200
1,500
1,000
1,600
2,400
3,000
Compute overhead under / over-charged in the following case:
Data - Actual direct labour
500.00
Actual overhead
2,000.00
If we had used an overhead rate of:
(a)
(b)
(c)
22.
400 %
300 %
500 %
Production costs for the period are budgeted as follows:
Material
Labour
Overhead
Labour hours
Machine hours
800.00
1,600.00
1,200.00
4,000
3,000
Calculate three overhead rates and apply them to compute the cost of Job A.
Job A
Material
Labour
Labour hours
Machine hours
12.00
9.00
24
16
38
BASIC COST ACCOUNTING
Set 6 - Answers
18.
Overhead rates based on:
A.
B.
C.
19.
Labour hours Labour cost
Machine hours -
Cost of job:
Material
Labour
Overhead
Total cost
20.
21.
A
75
100
100
275
B
75
100
200
375
C
75
100
225
400
Data:
Fixed cost
Variable cost
Sales price
1,000.00
1.00 per unit
2.00 per unit
Break-even point
1,000.00 = 1,000 units
2.00 - 1.00
Overhead
Actual
(a)
(b)
(c)
22.
5.00 per hour
200 % per hour
1.50 per hour
2,000
2,000
2,000
Charged
to jobs
Over
charged
Under
charged
–
–
500
2,000
1,500
2,500
–
500
–
Overhead rates:
1.
2.
3.
Labour cost
Labour hours
Machine hours
75 %
0.30 per hour
0.40 per hour.
Job A Cost
Material
Labour
Overhead
Basis
1
12
9
7
28
2
12
9
7
28
3
12
9
6
27
39
Set 7 - Questions
23.
Calculate estimated cost and selling price of contract 1234:
Labour
Material
Direct expenses
Overhead
20 % of prime cost
Profit
25 % of contract cost
24.
20,000
26,000
16,500
The costs of the above contract to date were:
Labour
Material
Direct expenses
10,000
10,000
5,000
How much profit have we earned to date ?
25.
Compute cost of job A from the following data :
Labour
-
Cost Centre I
Cost Centre II
Material
Overhead
-
Cost Centre I
Cost Centre II
Sales and Administrative Overhead
15
25
50
300 %
100 %
10 %
40
Set 7 – Answers
23.
24.
Contract 1234
Labour
Material
Direct Services
20,000
26,000
16,500
Overhead
62,500
12,500
Profit 25%
75,000
18,750
Sales Price
93,750
Profit earned to date :
Cost incurred
Labour
Material
Direct Services
10,000
10,000
5,000
Overhead
25,500
5,000
30,000
30,000
 18,750.00  7,5000.00
75,000
25.
Cost of Job A
Labour
Material
Overhead
C.C. I
II
40
50
45
25
Sales and Admin.
Overhead
Sales Price
70
160
16
176
41
BASIC COST ACCOUNTING
Set 8 – Questions
26.
Compute detailed costs of production per 1,000 bricks from the following data:
Production 400,000 bricks
Material
Labour
Expenses
Works overhead
27.
Compute cost of sales and profit from the above data and the following information:
Stocks brought forward
Unsold stock 50,000 bricks
Sales and administrative costs
Sales
28.
2,000
800
200
1,000
1,000.00
250.00
6,000.00
Computer cost per ton / mile of transport company:
Bus depreciation
Wages
Operating costs
Miles covered
Ton carried
5,000
7,000
8,000
200,000
1,000
42
BASIC COST ACCOUNTING
Set 8 – Answers
26.
Cost of 1,000 bricks – Production 400,000 bricks
Total Cost
Per 1,000
2,000
800
200
1,000
4,000
5.00
Material
Labour
Expenses
Overhead
27.
Cost of sales and profits
Sales
Cost of goods sold
Stock – opening
Production
6,000
1,000
4,000
5,000
500
Stock - closing 50 x 10.0
28.
.50
2.50
10.00
Gross Profit
Sales and Administrative Overhead
4,500
1,500
250
Profit
1,250
Costs per passenger / mile
Costs
Depreciation
Wages
Operating
Mils covered
Ton carried
Per ton / mile
5,000
7,000
8,000
20,000
200,000 per mile
1,000 per ton
20,000
20,000  1,000
.10
20.00
=
0.0001
43
Set 9 - Questions
29.
Prepare process cost accounts for production of cups from Pottery :
Processes –
Material
Labour
Overheads
Wastage
30.
I Mixing
II Moulding
III Firing
57.00
130.00
10 % labour
10 %
–
150.00
20 % labour
16 2/3 %
–
40.00
50 % labour
10 %
From the following data :
Opening stock
Material
Labour
Overhead
Production completed
Closing stock
Units
Cost
10
90
–
–
60
20
200.00
200.00
200.00
400.00
–
–
Compute :
(a)
Units wasted
(b)
Cost of process A per complete unit.
44
BASIC COST ACCOUNTING
Set 9 - Answers
29.
Cost of Finished Production - Cups
Material
Labour
Overheads
I
II
III
57
130
13
–
150
30
–
40
20
200
180
60
200
380
380
Cost of finished production
30.
440
Cost of Process A
A.
Computation of units wasted
Stock-opening
Put into production
B.
10
90
100
Completed and passed to next process
60
Stock – closing
40
20
Wastage
20
Process A
Costs
Units
Material
Labour
Overhead
200
200
400
90
Stock opening
800
200
90
10
–
20
1,000
–
100
20
10
–
1,000
250
750
80
20
60
12.5
12.5
12.5
Wastage
Stock closing
Completed
Per Unit
45
AGL No. 1 Finance for Non-Accountants
NAME: ..................................................................
QUIZ ANSWER SHEET
Mark each correct answer with a clear X
1.
(a) (b) () (d)
26.
(a) (b) (c) ()
51.
(a) (b) () (d)
76.
(a) () (c) (d)
2.
() (b) (c) (d)
27.
() (b) (c) (d)
52.
(a) (b) (c) ()
77.
(a) (b) (c) ()
3.
(a) (b) (c) ()
28.
(a) (b) () (d)
53.
() (b) (c) (d)
78.
(a) (b) (c) ()
4.
() (b) (c) (d)
29.
() (b) (c) (d)
54
(a) (b) () (d)
79.
() (b) (c) (d)
5.
(a) () (c) (d)
30.
(a) (b) (c) ()
55.
(a) (b) (c) ()
80.
(a) () (c) (d)
6.
(a) (b) () (d)
31.
(a) () (c) (d)
56.
(a) (b) () (d)
81.
(a) (b) () (d)
7.
(a) (b) () (d)
32
(a) (b) () (d)
57.
() (b) (c) (d)
82.
(a) (b) (c) ()
8.
(a) () (c) (d)
33.
(a) (b) (c) ()
58.
(a) (b) (c) ()
83.
(a) (b) (c) ()
9.
() (b) (c) (d)
34.
(a) () (c) (d)
59.
(a) (b) (c) ()
84.
(a) (b) () (d)
10.
() (b) (c) (d)
35.
(a) (b) () (d)
60.
(a) () (c) (d)
85.
(a) () (c) (d)
11.
(a) (b) (c) ()
36.
() (b) (c) (d)
61.
(a) (b) (c) ()
86.
(a) (b) () (d)
12.
(a) () (c) (d)
37.
() (b) (c) (d)
62.
() (b) (c) (d)
87.
(a) (b) (c) ()
13.
(a)(b) (c) (d)
38.
(a) () (c) (d)
63.
(a) () (c) (d)
88.
(a) () (c) (d)
14.
(a) (b) (c) ()
39.
(a) (b) () (d)
64.
() (b) (c) (d)
89.
(a) (b) (c) ()
15.
() (b) (c) (d)
40.
(a) (b) (c) ()
65.
() (b) (c) (d)
90.
() (b) (c) (d)
16.
(a) () (c) (d)
41.
(a) () (c) (d)
66.
() (b) (c) (d)
91.
(a) (b) (c) ()
17.
(a) (b) () (d)
42
(a) () (c) (d)
67.
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92.
(a) () (c) (d)
18.
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43.
() (b) (c) (d)
68.
(a) () (c) (d)
93.
(a) (b) (c) ()
19.
(a) (b) () (d)
44.
(a) () (c) (d)
69.
(a) () (c) (d)
94.
(a) () (c) (d)
20.
(a) (b) (c) ()
45.
(a) (b) () (d)
70.
(a) (b) () (d)
95.
() (b) (c) (d)
21.
(a) (b) (c) (d)
46.
(a) (b) (c) ()
71.
(a) () (c) (d)
96.
(a) (b (c) ()
22.
(a) () (c) (d)
47.
(a) () c() (d)
72.
() (b) (c) (d)
97.
(a) () (c) ()
23.
(a) b) (c) (d)
48.
(a) (b) () ()
73.
(a) () (c) (d)
98.
(a) (b) () ()
24.
() (b) (c) (d)
49.
(a) () (c) (d)
74.
(a) (b) () (d)
99.
(a) (b) (c) ()
25.
(a) (b) (c) ()
50.
(a) () (c) (d)
75.
(a) (b) (c) ()
100.
(a) (b) () (d)
Note: Detach and give to the Course Leader for marking
46
AGL No. 1 Finance for Non-Accountants
NAME: ..................................................................
QUIZ ANSWER SHEET
Mark each correct answer with a clear X
1.
(a) (b) () (d)
26.
(a) (b) (c) ()
51.
(a) (b) () (d)
76.
(a) () (c) (d)
2.
() (b) (c) (d)
27.
(a) () (c) (d)
52.
(a) (b) (c) ()
77.
(a) (b) (c) ()
3.
(a) (b) (c) ()
28.
(a) (b) () (d)
53.
() (b) (c) (d)
78.
(a) (b) (c) ()
4.
() (b) (c) (d)
29.
() (b) (c) (d)
54
(a) (b) () (d)
79.
() (b) (c) (d)
5.
(a) () (c) (d)
30.
(a) (b) (c) ()
55.
(a) (b) (c) ()
80.
(a) () (c) (d)
6.
(a) (b) () (d)
31.
(a) () (c) (d)
56.
(a) (b) () (d)
81.
(a) (b) () (d)
7.
(a) (b) (c) ()
32
(a) (b) () (d)
57.
() (b) (c) (d)
82.
() (b) (c) (d)
8.
(a) () (c) (d)
33.
(a) (b) (c) ()
58.
(a) (b) (c) ()
83.
(a) (b) (c) ()
9.
() (b) (c) (d)
34.
(a) () (c) (d)
59.
(a) (b) (c) ()
84.
(a) (b) () (d)
10.
() (b) (c) (d)
35.
(a) (b) () (d)
60.
(a) () (c) (d)
85.
(a) () (c) (d)
11.
(a) (b) (c) ()
36.
() (b) (c) (d)
61.
(a) (b) (c) ()
86.
(a) (b) () (d)
12.
(a) () (c) (d)
37.
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62.
() (b) (c) (d)
87.
(a) (b) (c) ()
13.
() (b) (c) (d)
38.
() (b) (c) (d)
63.
(a) () (c) (d)
88.
() (b) (c) (d)
14.
(a) (b) (c) ()
39.
(a) (b) () (d)
64.
() (b) (c) (d)
89.
(a) (b) (c) ()
15.
() (b) (c) (d)
40.
(a) (b) (c) ()
65.
() (b) (c) (d)
90.
() (b) (c) (d)
16.
(a) () (c) (d)
41.
(a) () (c) (d)
66.
() (b) (c) (d)
91.
(a) (b) (c) ()
17.
(a) () (c) (d)
42
(a) () (c) (d)
67.
(a) (b) () (d)
92.
(a) () (c) (d)
18.
(a) () (c) (d)
43.
() (b) (c) (d)
68.
(a) () (c) (d)
93.
(a) (b) (c) ()
19.
(a) (b) () (d)
44.
(a) () (c) (d)
69.
(a) () (c) (d)
94.
(a) () (c) (d)
20.
(a) (b) (c) ()
45.
(a) (b) () (d)
70.
(a) (b) () (d)
95.
() (b) (c) (d)
21.
(a) () (c) (d)
46.
(a) (b) (c) ()
71.
(a) (b) () (d)
96.
(a) (b) (c) ()
22.
() (b) (c) (d)
47.
(a) () (c) (d)
72.
() (b) (c) (d)
97.
(a) () (c) (d)
23.
(a) () (c) (d)
48.
(a) (b) () (d)
73.
(a) (b) () (d)
98.
(a) (b) () (d)
24.
() (b) (c) (d)
49.
(a) () (c) (d)
74.
(a) (b) () (d)
99.
(a) (b) (c) ()
25.
(a) (b) (c) ()
50.
(a) () (c) (d)
75.
(a) (b) (c) ()
100.
(a) (b) () (d)
Note: Detach and give to the Course Leader for marking
47
Autonomous Group Learning (AGL)
NO. 4 – Cost Control For Managers
WORKPACK PART I
(Not Retained)
48
PART I
Assignment
Activity
Group
Time
1.
Introduction
IND
SG
8.30 –9.00.a.m.
2.
Quiz
IND
9.00 – 9.45 a.m.
3.
PL: Basics of Cost and
Control
IND
SG
9.45 – 10.30 a.m.
4.
Lecture: Basics of
Cost and Control
MG
SG
10.45 – 11 .15 a .m.
5.
Case: Intray Company
SG
CSG
11.15–12.00 noon
12.00 – 12.30 p.m.
6
Lecture: Intray
Company
MG
CSG
12.30 – 1.00 p.m.
7.
PL: Direct & Indirect
Cost
2.00 – 3.00 p.m.
8.
Lecture: Direct &
Indirect Cost
IND
SG
(new)
MG
SG
9.
Case: Tofkusel Stores
Company
SG
3.30 – 4.15 p.m
–
Case: Tofkusel Stores
Company
CSG
4.30 – 5.15 p.m.
10.
Lecture: Tofkusel
Stores Company
MG
CSG
5.15 – 5.45 p.m.
11.
Summary Lecture
MG
SG
5.45 – 6.30 p.m.
3.00 – 3.30 p.m
49
PART II
Assignment
Activity
Group
Time
1.
Review & Quiz
SC
8.30 – 9.00 a.m.
2.
PL: Cost Systems and Standards
IND
SG
9.00 – 10.00 a.m
3.
Lecture: Cost Systems and
Standards
MG
SG
10.00 – 10.30 a.m
4.
Case: Primrose
Production Company
SG
CSG
10.45 – 11.30 a.m
11.30 – 12.30 p.m
5.
Lecture: Primrose Production
Company
CSG
MG
12.00 – 12.30 p.m
6.
Case: Bill Brown
IND
12.30 – 1.00 p.m (lunch)
–
Case: Bill Brown
SG
2.00 – 2.15 p.m
7.
PL: Cost Control and Reporting
IND
SG
2.15 – 2.45 p.m
8.
Lecture: Cost Control and
Reporting
MG
SG
2.45 – 3.15 p.m
9.
Case: Chemical Products
Company
SG
3.15 – 4.00 p.m
–
Case: Chemical Products
Company
CSG
4.15 – 4.45 p.m
10.
Lecture: Chemical Products
Company
MG
CSG
4.45 – 5.15 p.m
11.
Quiz
IND
5.15 – 6.00 p.m
12.
Summary Lecture
MG
SG
6.00 – 6.30 p.m
50
AGL NO 4 COST CONTROL FOR MANAGERS
ABBREVIATIONS
AGL
–
AUTONOMOUS GROUP LEARNING
IND
–
INDIVIDUAL
SG
–
SMALL GROUP
CSG
–
COMBINED SMALL GROUP
MG
–
MAIN GROUP
ASS
–
ACCOUNTING STEP BY STEP
PL
–
PROGRAMME LEARNING
L
–
LECTURE
D
–
DISCUSSION
CH
–
CHAPTER
–
STOP! DO NOT TURN THE PAGE UNLESS SPECIFICALLY INSTRUCTED
51
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 1.0 – Introduction (30 minutes)
1.1
1.2
SPECIFIC OBJECTIVES
(a)
Understand the language and concepts of cost accounting and control.
(b)
Evaluate cost systems and analyse product cost and overh cost.
(c)
Develop skills in using cost data for practical cost control and decision making
(d)
Communicate effectively with cost control specialists.
(e)
Motivate further study in the future.
AUTONOMOUS GROUP LEARNING (AGL)
The AGL method is designed to achieve rapid individual learnil using special materials and
the stimulus of group activity without a formal instructor. The groups use the materials to find
the answers to all problems and questions.
1.3
GROUP ARRANGEMENTS
The work will be done:
1.4
(a)
IND – INDIVIDUALL or
(b)
SC – SMALL GROUP (in small groups of three or four members which will change
daily). Each group has a “Role Assignment for each case study indicating the main
(but not exclusive approach to the problems encountered in the case.
(c)
CSG – COMBINED SMALL GROUP (two small groups together, with one group as
“dealers” to lead the discussion and record key points on the “flipcharts” provided).
(d)
MG – MAIN GROUP (for short taped lectures on key learning points with visual aids).
SG – SMALL GROUPS
Initial group names provided by the Organiser. Note the name of your SG and names of the
other members
52
AGL NO 4 COST CONTROL FOR MANAGERS
1.5
LEARNING MATERIALS
(a)
(b)
Retained by members:
—
Textbooks
—
Notebooks
—
Course Diary
Used but not retained by members:
–
NOTE:
1.6
Daily Work Packs for Part 1 and Part 2 including: introduction, lectures,
cases, key learning, points to be noted, etc.
Use your notebook. Do not mark the Daily Work Pack which must be handed back
at the end of each day. You receive all the materials in your SG. Don’t look ahead
in the Work Pack until you are specifically instructed to do so!
METHOD
Try to complete fully every task in the time allowed.
A pattern of learning methods will be used, including:
(a)
Programmed learning
(b)
Case analysis
(c)
Role assignments
(d)
Lectures
(e)
Quizzes
(f)
Learning patterns
(g)
Homework activities.
53
AGL NO 4 COST CONTROL FOR MANAGERS
LEARNING PATTERNS – REVIEW
(a)
OBJECTIVES
(b)
GROUPS
(c)
METHOD
54
AGL NO 4 COST CONTROL FOR MANAGERS
1.8
INSTRUCTIONS
(a)
Assemble in SG to introduce yourself, indicate your past experience in cost control
and what you hope to gain from and contribute to the course.
(b)
Complete page one of the Course Diary.
(c)
Re–assemble in MG when the bell rings.
NOTE: Check that you have a full set of learning materials NOW (See 1.5)
ASSIGNMENT 2 .0 – QUIZ (45 MINUTES)
2.1
INSTRUCTIONS – INDIVIDUAL WORK
(a)
Assemble in SG.
(b)
Answer the quiz of 100 questions; mark your answers a, b, c or d with a clear X on
the special form provided in the Course Diary.
(c)
Work as quickly as possible but don’t guess – leave blanks.
(d)
Hand in your answer sheet to the Organiser who will mark it and give you a quantitive
measure of your Cost Control knowledge at the start of the course.
(e)
Re–assemble in MG when the bell rings
ASSIGNMENT 3.0 – PROGRAMMED LEARNING
BASICS OF COST AND CONTROL (45 MINUTES)
3.1
INSTRUCTIONS
(a)
Assemble in SG.
(b)
INDIVIDUAL WORK – Locate the ASS Glossary for reference. Then quickly read ASS
Ch. 1 (3 minutes) and do in writing set 1 (15 minutes), – set 2 (15 minutes) and start
set 4 frames 1–20 (8 minutes).
(c)
Record key points in your notebook.
(d)
Re–assemble in MG when the bell rings.
NOTE:
Work as quickly as possible. If you do not immediately know an answer, do not
hesitate to cheat ……….. because limited cheating is very educational!
55
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 4 0 Lecture - Basics of Cost & Control (30 Minutes)
4.1
FINANCIAL AND COST ACCOUNTING
Financial accounting uses “accounting concepts” to produce balance sheets and income
statements for the whole business.
Cost accounting:
(a)
Is accounting specially for Management and has several different objectives.
(b)
Relates to specific segments of the business.
(c)
Estimates the cost of products or operations or departments.
(d)
Always relates actual cost against a standard of performance.
NOTE: Cost is exactly what we define it to be - nothing more.
4.2
SPECIFIC COST ACCOUNTING OBJECTIVES
(a)
Estimate “product cost” as an aid to process for profit computation.
(c) Control costs by associating them with centres of responsibility. Compare actual against
plan
(d) ned cost and motivate responsible managers to take corrective action.
4.3
COST AND TENTATIVE SELLING PRICE
Product cost and tentative selling price may be simply computed as:
Direct labour
Comment
definite
Direct materials
Prime Cost
Manufacturing overhead
(say 50% of prime cost)
Manufacturing cost
18
24
12
Selling and administrative overhead
(say 33% of manufacturing cost)
12
estimate!
Total cost
48
estimate!
Profit (say 50% of total cost)
Tentative selling price
24
72
estimate!
estimate!
NOTE:
4.4
Amount
6
definite
estimate!
36
Selling price depends upon the market - not merely the cost. Excess of selling price
over variable cost is the “Contribution” not the profit.
CONTROL CONCEPTS
Management control is financial control of a business on a systematic, rhythmic and
integrated basis.
56
It involves:
(a)
standards of performance in quantitative and financial terms
(b)
comparison of actual performance against standard
(c)
reporting system
(d)
corrective action.
Motivate responsible managers by “challenge, responsibility and sense of achievement” to
attain planned objectives.
57
AGE NO 4 COST CONTROL FOR MANAGERS
4.5
TYPES OF COST - NATURE
Cost may be analysed into:
(a)
Direct Costs:
Direct labour - labour conveniently associated with a unit of production.
Direct material - material conveniently associated with a unit of production.
(b)
Indirect Costs (overheads):
Manufacturing overhead - labour, materials and service not conveniently
associated with a unit of production
Overhead may be “allocated” to compute “full” cost of each product. Separate
overhead rates may be used for manufacturing and selling and administrative over
However, costs are estimates based upon assumptions - there is no “true cost” of anything.
4.6
TYPES OF COST - ACTIVITY
Cost may be analysed also into:
(a)
Direct or indirect cost.
(b)
Variable or fixed cost - vary in total (not per unit) with the volume of production.
(c)
Relevant and non-relevant cost - to a particular management decision to be taken.
(d)
Book or opportunity cost (value) - book cost as opposed to the real value of an
opportunity missed or foregone.
(e)
Controllable or non-controllable cost - by a responsible manager.
(f)
Engineered, managed or committed cost - “engineered” (in automatically with the
volume of production) or “managed (discretion of management) or “committed”
(management can do nothing about them).
(g)
Manufacturing, selling and administrative cost.
58
AGL NO 4 COST CONTROL FOR MANAGEMENT
4.7
TYPES OF COSTS - RESULTS
Cost may also be analysed into:
(a)
Product cost - the cost of the product including labour, material and overhead (this
may be a “direct” cost or a “full” cost).
(b)
Departmental cost - the cost of running a department or operation.
(c)
Standard cost - engineering standards of labour, material and overhead for efficient
operation.
(d)
Actual cost - labour, material and overhead as actually incurred (compared against
standard or estimate to measure efficiency).
(e)
Past cost - operations completed.
(f)
Future cost - estimates for future periods.
(g)
Factory (manufacturing) cost - labour, material and manufacturing overhead only (not
selling and administrative cost).
(h)
Selling and administrative cost.
NOTE: The accountant cannot give you “the cost” unless he knows which cost you want.
Most costing systems produce an “actual cost” which is an estimate of “full cost”
based upon practical assumptions.
4.8
TYPES OF COST - SYSTEMS
Cost systems involve cost analysis into: job, batch, contract, output, process, standard, direct
cost, etc.
4.9
RELEVANT COST ANALYSIS
There is no “true cost” only a cost relevant for a particular purpose. For each purpose
determine the relevant cost.
Variable costs are usually relevant, whereas fixed costs (which do not change with the
decision) are usually not relevant.
Unit costs are deceptive because they involve assumptions of a volume which may not be
relevant; work on total costs.
Try to use future costs and not past costs for “future” decisions. Remember all costs are
based on assumptions.
59
AGL NO 4 COST CONTROL FOR MANAGERS
4.10
APPROACH TO COST CONTROL PROBLEMS
For practical management decision making we need a systematic approach:
4.11
(a)
Define carefully the problem and the key relevant factors
(b)
Think creatively about all alternatives.
(c)
Compute quantitative data for each alternative.
(d)
Evaluate each alternative in quantitative and non-quantitative terms.
(e)
Decide and justify your decision.
(f)
PFD - provide for disaster; decide what to do if the expected assumptions prove
invalid.
MAKE v. BUY DECISIONS
(a)
A key area for cost control and reduction is “Effective Purchasing”. Management
decides what to manufacture and what to purchase, in a “Make v. Buy Decision”.
(b)
Relevant costs are normally only variable costs, since fixed costs do not change.
(c)
Estimate future variable costs rather than past cost.
(d)
Difference between the variable cost (to make) and the purchase price (to buy) is
sometimes known as the “contribution from making”.
(e)
Decide the relative attractiveness of “make or buy” for a series of items. Tend to
make those items that produce the higher contributions!!
(f)
Non-quantitative factors of control, quality, delivery control, etc., are always relevant
to the “Make v. Buy” decision. Strategy and long term effects are also important.
60
AGL NO 4 COST CONTROL FOR MANAGERS
4.12
LEARNING PATTERNS
4.12a
Financial and Cost Accounting
4.12b
Costs
61
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 1
Assignment 5.1
INTRAY COMPANY
QUESTIONS
(a)
This case challenges you to control costs in a “make v. buy” situation.
(b)
Role assignments:
General Manager
Container Dept. Manager
A, C, E.
B, D, F.
(c)
Read the case carefully. Recheck lecture points 4.9, 4.10 and 4.11.
(d)
Work on each question in SG; keep notes individually. (Ignore income tax and DCF).
1.
What decision confronts the General Manager and by what criteria should he make it?
2.
Decide which of the costs are “relevant”, i.e. would be saved purely as a result of the decision to
buy from the supplier by completing an analysis in your notebook using the following format:
000
132
Buying price of containers p.a.
Less costs saved:
Labour
AKS material
Departmental overhead:
Manager’s salary
Rent – inside
Other expenses
Equipment costs
Administrative overhead
76
?
8
?
20
?
?
–
Net advantage (disadvantage)
of buying containers:
3.
What non–quantitative factors affect the decision?
4.
List seven possible alternative courses of action (creative thinking here!)
5.
Based on the limited data available, decide and justify your decisions.
62
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 2
Assignment 5.1
The Intray Company used containers manufactured in a special department from a special AKS
material.
General Manager believed Intray could save money by accepting an offer from Container Corporation
to supply the normal (40,000 p.a.) containers needed for 132,000.00 p.a. under a fixed price four year
contract and closing the container department (260,000.00 cost p.a.). (Exhibit 3)
The Manager of the Container Department (brother–in–law of the General Manager) disagreed saying
“the cost of 260,000.00 is not relevant because:
(a)
Department equipment (book value 120,000.00) useful for four more years, but if sold now
would realise only 60,000.00.
(b)
Inventory of “AKS” material (cost 80,000.00) enough for four more years, could be sold now
for only 40,000.00.”
Accountant supported the General Manager saying “my figures are right – ignore machines and
inventory, transfer the manager to a vacant job in another department; use the inside space
(6,000.00) to store the containers. No administrative overhead actually saved, but it must be
included”.
EXHIBIT 3
Assignment 5.1
TOTAL COST TO 1AKE CONTAINERS
000
Labour
76
AKS Material
Department overhead:
Manager’s salary
20
8
Rent – inside
Other expenses
6
20
Equipment (depreciation and salvage cost)
30
Allocation of administrative overhead
Total cost for one year
64
100
260
STOP: DO NOT TURN THE PAGE UNLESS SPECIFICALLY INSTRUCTED
63
ASSIGNMENT 8.0 – LECTURE – DIRECT INDIRECT COST (30 MINUTES)
8.1
DIRECT COST
Cost conveniently associated with a unit of production.
8.2
(a)
Direct labour – which is direct operating labour. Normally excludes: storemen,
foremen, transport, drivers, office clerks, salesmen inspectors, managers and other
indirect labour, etc.
(b)
Direct material which forms part of the product sold. Normally excludes oil, grease,
machine repairs, rags and other indirect material.
(c)
Direct services which are special costs for particular jobs e.g. hire of machines.
INDIRECT COST
Cost not conveniently associated with a unit of production
(a)
Manufacturing cost – factory overhead cost.
(b)
Selling cost – marketing, selling and distribution cost.
(c)
Administrative cost – general costs of administering the business which are not
selling or manufacturing.
64
8.3
STRUCTURE OF’ PRODUCT COST
For cost control continually review the Structure of Cost in terms of both full and direct costing
(a)
Full Costing
Direct labour
Direct material
Cost
XX
XX
Prime cost:
Manufacturing overhead
XXX
XX
Manufacturing cost:
Selling & admin. Overhead
XXX
XX
Total cost:
XXX
Comment
Definite
Definite
Poor estimate
Very poor estimate
NOTE: Inventory valued at manufacturing cost only Selling and administrative overhead
charged in the income statement.
(b)
Direct Costing
Direct labour
Direct material
Direct manufacturing (variable) overhead
Cost
Comment
XX
XX
XX
Definite
Definite
Definite
Direct selling (variable) overhead
Total direct cost
Indirect cost:
Manufacturing
Selling
Administrative
XX
XXX
Definite
Total cost:
XXX
XX
XX
XX
Poor estimate
Poor estimate
Poor estimate
NOTE: Inventory valued at direct manufacturing cost only!
65
8.4
INVENTORY EFFECTS ON COST
Cost must be adjusted for inventory changes.
The material cost is therefore:
Opening inventory 100 plus purchases 50 less closing inventory 20.
Material actually used in production (100 + 50 – 20) = 130
Value of inventory of raw materials, work in process and the finished goods must be adjusted
in the income statement to compute the cost of manufacturing.
Selling and administrative expenses are never charged to inventory but charged direct to
income statement for the period.
8.5
COST PROFIT AND INVESTMENT CENTRES
(a)
Cost centres may be either productive centres or service cost centres:
Productive cost centres are concerned with operations. Service cost centres provide
services to productive cost centres.
The costs of service cost centres are allocated to productive cost centres.
(b)
Allocation of the cost is always possible using some basis i.e. number of workers,
floor areas, units produced, estimates, activity, etc. However, allocated costs are
rough estimates which are less definite than specific and direct costs.
(c)
For control associate each activity with a manager responsible. Centres of
responsibility may be:
or
or
Cost centres – cost against standards
Profit centres – profit against target
Investment centres – profit against assets employed
66
8.6
8.7
OVERHEAD RATES – COMPUTATION
(a)
No rate is scientific – merely an estimate based on assumptions.
(b)
Key management decisions in overhead rates are:
–
number of cost centres – not too many cost centres with similar rates
–
choice of measure – labour rate, machine rate, labour cost, prime cost, sales
volume, etc. (labour rates over 300% are probably suspect – use machine
rates)
–
use of the rate and resulting data.
(c)
To determine the overhead rate, estimate three things: overhead amount, measure of
activity, appropriate volume of that measure.
(d)
Under or over–allocated overhead results when the actual overhead is more or less
than the amount allocated to product. Difference is due to either cost or volume.
Results in a “loss” or “profit” because the product costs do not contain enough
overhead.
(e)
Do not change product costs – merely take a “profit” or “loss” from over or under–
allocated overhead in the statement of the period.
OVERHEAD RATE FOR A COST CENTRE
(a)
Determine specific overhead costs for the particular cost centre.
(b)
Allocate non–specific costs assumed basis (number of people, floor area, units
produced, etc.)
(c)
Set a volume of activity.
(d)
Compute allocation rate as follows:
Total
Overhead
Amount
Direct
Labour
Machine
Hours
Labour
Cost
100.00
50 hours
100 hours
200.00
Rate:
2.00 per hour
1.00 per hour
50% of cost
67
8.8
8.9
CONTROL OF FIXED AND VARIABLE COST
–
Consider the structure of cost. How much is variable is and how much fixed?
–
Fixed cost does not change in the short run and is therefore not relevant to short run
decisions.
–
We may allocate a fixed cost on the basis of a variable cost (say direct labour) but
this does NOT change its nature as a FIXED COST. Allocation merely spreads cost –
it does not change its nature or control it!
–
Fixed cost is normally indirect and remains unchanged with volume (within limits).
–
Fixed cost per unit decreases with additional volume – but is still fixed! Variable cost
per unit does not decrease (normally) with additional volume.
–
Fixed cost is normally direct cost – clearly associated with a product such that each
additional unit produced always involves the same additional variable cost per unit.
CONTRIBUTION CONCEPT
Contribution is selling price less variable cost:
(a)
Contribution not calculated:
Selling Price
Total cost
Profit
(b)
8.10
2.00
1.98
.02
Contribution calculate
Selling price
Variable cost
2.00
.68
CONTRIBUTION
1.32
Fixed cost
Profit.
1.30
.02
BREAK EVEN ANALYSIS
(a)
Useful tool for understanding the effect on profit of: volume, costs and prices. Sales
and costs computed at different sales volumes. Distinguish fixed and variable costs.
Break even point – sales equals total cost – no profit or loss.
(b)
Break even analysis aids understanding of cost and profit targets:
1.
Shows profit (loss) at different sales volumes
2.
For any volume indicates what must be changed if achieve profit target.
68
8.11
(c)
No accurate: an estimate for a limited known range of volumes.
(d)
Conceals real difficulty of changing assumptions i.e. it may be much more difficult to
reduce cost by 2% than to increase selling price by 4%.
STANDARDS OF PERFORMANCE
Cost must be related to a standard i.e. engineering target or estimate or previous year or past
job or another company.
Best standard to measure efficiency is “standard cost” based on engineering studies.
Measure actual against standard cost to determine “variance”; associate variance with a
responsible manager or worker.
DON’T REVISE TARGETS TOO EASILY = KEEP THEM TOUGH!
8.12
MEASUREMENT OF PERFORMANCE
Management wants to know
(a)
How much was done?
(b)
How well it was done?
(c)
What was the cost?
To measure performance therefore, we must have standards against which to measure actual
performance.
Consider performance now – and performance for the future – don’t cut costs today and
destroy market volume tomorrow.
A bigger contribution may provide more profit than a lower cost.
69
8.13
LEARNING PATTERNS
8.13 (a)
DIRECT & INDIRECT COST
8.13 (b)
STRUCTURE OF COST
8.13 (c)
OVERHEAD RATES
70
8.13 (d)
CENTRES
8.13 (e)
BREAK EVEN ANALYSIS
8.13 (f)
PERFORMANCE
71
8.14
(d)
INSTRUCTIONS (15 minutes)
(a)
Re–assemble in SG now.
(b)
Study this note and learning patterns very carefully. (10 minutes)
(c)
Discuss each key point in SG and record key points in your notebook. (5 minutes)
Then carry on with the case study which follows.
72
EXHIBIT I
Assignment 9.1
TOFKUSEL STORES COMPANY
QUESTIONS
(a)
This case challenges you to analyse direct and indirect cost data to decide whether or not to
eliminate a department making a loss.
(b)
Role assignments:
General Manager
Confectionary Dept. Manager
A, C, E.
B, D, F.
(c)
Read the case carefully. Recheck lecture points 8.8, 8.9 and 8.12.
(d)
Work on each question in SG but keep notes individually.
1.
Does the reported loss indicate departmental inefficiency? What does it indicate? Is it useful?
2.
Analyse the costs into fixed and variable costs for the decision facing the General Manager.
What exactly is a fixed cost?
3.
Compute the relevant “Contribution” (sales less variable costs) from the department to the
general fixed costs and profit of the business for the General Manager.
4.
For the departmental charges for “rent” and “general administrative expense” consider the
following questions:
(a)
(b)
(c)
(d)
(e)
(f)
How is the charge computed?
Are alternative allocation methods possible?
Should we charge it at all? Why?
Should we charge less, so as not to cause too great a loss?
Why allocate any fixed cost to the department anyway?
Can a departmental manager control these costs?
5.
Could the new departmental cost system be modified to produce more useful information for
management?
6.
Is the gross margin adequate? Why? Compared with what? Think of ten reasons why it might be
too low.
7.
By what standard can we measure performance of the department for this year?
8.
List all the data we need to decide whether or not to close down the department.
9.
What measures of cost control and performance would be useful to the manager of the
department?
10.
As general manager decide what to do now and justify your opinion.
73
EXHIBIT 2
Assignment 9.1
TOFKUSEL STORES COMPANY (TSC)
The Tofkusel Stores Company (TSC) introduced a department cost control and profit system for last
year to improve the effectiveness of the operations.
Unfortunately last year accounts for the Confectionary Department showed a substantial loss,
whereas all other departments appeared to make a profit. The overall gross profit percentage of the
business was 15% and the net profit percentage 2% on sales of 31,000,000,00.
The manager of the Confectionary Department (brother–in–law of the General Manager) was rather
upset when other members of the Management Committee suggested that the department be closed
immediately, as it was not necessary for the general business of the store and was losing money.
EXHIBIT 3
Assignment 9.1
TOFKUSEL STORES COMPANY
000
Amount
1060
Sales
Cost of Sales
Gross Profit
Percentage of
Sales
100%
937
89
123
11
Less departmental expenses:
Payroll (departmental staff only)a
68
Depreciation of departmental equipment
4
Interest charged on departmental inventory
2
Rental charges based on the cubic footage used of the
company–owned building)
42
Allocation of general administrative expenses (based on
a percentage of sales)
32
Profit(loss)
148
13%
(25)
(2%)
STOP: DO NOT TURN THE PAGE UNLESS SPECIFICALLY INSTRUCTED
74
ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART I
11.1
FINANCIAL AND COST ACCOUNTING
Financial accounting deals with the business as a whole and results in an Income Statement
and a Balance Sheet covering generally all the business activities for the period.
Cost accounting concentrates on the computation and control of costs for products and
specific activities.
11.2
TYPES OF COSTS
Cost is precisely what we define it to be. It is never “true” or “correct” but only a “useful
estimate” relevant for specific purposes.
Cost has thirty-five possibilities :
Labour, material or overhead
Manufacturing, selling or administrative
Direct or indirect
Controllable or non-controllable
Fixed or variable
Specific or allocated
Engineered, managed or committed
Product or product group or department
Relevant or non-relevant
Book or opportunity (value)
Past or future
Actual or standard
Unit or total
Job, batch, contract, output, process, etc.
Cost must be useful to management not merely to accountants.
11.3
COST SYSTEMS
(a)
Define the unit of production to “focus” the cost system, (i.e. Job? Batch? Contract?
Output? Process?) and then define the standard which measures efficiency.
(b)
Define the reports and data that management want from the system now and later?
Routine and special?
(c)
Define responsibility centres in the organisational structure. Set appropriate
productive and service cost centres. Try to establish Profit Centres and Investment
Centres, not merely Cost Centres.
(d)
Define the extent to which the system will use standard costing techniques for labour,
material and overhead rates.
(e)
Regularly evaluate the system by relating objectives to actual achievements.
75
11.4
DIRECT AND INDIRECT COSTS
Direct costs can be conveniently associated with a unit of production without arbitrary
allocations and assumptions. They are definite and reliable ... but incomplete.
11.5
OVERHEAD RATES
To develop an overhead rate:
(a)
Set the estimated overhead amount.
(b)
Decide upon the activity measure : direct labour cost, direct labour hours, prime cost,
factory cost, machines hours, sales price, etc.
(c)
Fix the estimated volume of the activity measure for the accounting period.
(d)
Divide the overhead by the activity volume to compute the rate. COMPUTE ANNUAL,
NOT MONTHLY RATES !!!
Allocate the overhead to products or cost centres. For each period there will normally be a
balance of overhead over or under-allocated. Do not re-allocate this difference to product cost
because it would change all the product costs for the year. Take the difference direct to the
income statement as “loss” or “profit”.
Product costs containing overhead allocations must be used with care … the under / overallocations of overhead may be significant!
Use one or a number of overhead rates according to the number of cost centres. Don’t have
too many cost centres!
Any complications of the cost system must be justified by the usefulness of the results to the
management, i.e. are more precise cost computations really useful? For what?
Ask : What can we do with the data?
11.6
INVENTORY EFFECTS
Costs incurred for the year must always be adjusted for inventory changes.
Thus the materials actually used in the period are not the purchase but:
Opening inventory plus purchase less
closing inventory.
Similarly adjustment must be made for inventory of work in process and finished goods.
76
11.7
COST, PROFIT AND INVESTMENT CENTRES
Choose centres which clearly associate actual performance against a standard with a
responsible manager.
Get managers to be concerned not merely with cost and profit but also the assets employed
in the operation ... in terms of return on investment. This is a most effective way to control
costs.
Design responsibility centres as part of the organisation structure.
Get profit orientation as low down in the organisation as possible.
11.8
BREAK-EVEN ANALYSIS
Key analysis of costs into Variable Cost (per unit) which is incurred for every unit, as apart
from Fixed Cost which exists regardless of the volume of units produced.
Break-even analysis aids understanding of cost and profit in relation to volume; it indicates
regions of loss or profit, but is valid only for a limited volume … fixed costs increase at higher
volume levels.
In the long run all costs are variable. Define the “horizon” (time period) when defining variable
costs.
Full cost may sometimes approximate long-run variable cost (but not always).
11.9
MEASUREMENT OF PERFORMANCE
Set a standard, compare actual against standard, compute the variance and associate it with
a manager responsible.
11.10
RELEVANT COST ANALYSIS
(a)
Define the problem and the relevant factors
(b)
List all the alternatives
(c)
Set criteria for decision
(d)
Consider the quantitative data and the non-quantitative factors
(e)
Evaluate each alternative in terms of Q and NQ factors
(f)
Decide and justify
(g)
PFD … provide for disaster (contingency plans for when assumptions prove to be
invalid)
NOTE : Normally only variable costs are relevant, but the relevant variable costs change with
each specific decision. Allocated costs are normally fixed and not relevant.
77
11.11
CONTROL CONCEPTS
Control may relate to a product or an operation.
It involves a continuous, rhythmic and integrated process of comparing actual performance
against a standard followed by corrective action.
Top management support is a key requirement for any control system. The system relates
management objectives to organisation and the key profit-making features of the industry.
11.12
MATERIALITY
Materiality concept is the key to all cost and profit control.
Large amounts are very important.
SMALL AMOUNTS ARE OF NO IMPORTANCE AND SHOULD BE COMPLETELY
IGNORED (unless multiplied by large volume).
Data should not appear to be more accurate than the assumptions underlying it.
Rough estimates now are almost always more valuable than so called “correct” Figures much
later. Don’t let the accountant pretend to be too accurate.
Show quantitative data as an estimate! Control the big costs - leave the peanuts to the
monkeys!
Cost control and reduction is more a problem of attitudes than technique.
78
11.13
LEARING PATTERNS
11.13 (a)
COST SYSTEMS
11.13(b)
DIRECT & INDIRECT COSTS
11.13 (c)
BREAK EVEN ANALYSIS
79
11.13 (d)
RELEVANT COST ANALYSES
11.13 (e)
STANDARDS OF PREFOMANCE
11.13 (f)
CONTRIBUTION & COST
80
11.14
INSTRUCTIONS
(a)
Re-assemble in SG now
(b)
Study this note and learning patterns very carefully
(c)
Discuss outstanding questions with your SG
(d)
Record significant points in your notebook
(e)
Do the following work in your own time :
i.
Complete your Course Diary for Part I including notes on each case
and the key points learned (for review later)
ii.
Read the text book and your copy of the summary lecture for Part I in
the Course Diary
iii.
Do ASS set D.1, complete Set 4 and read all the ASS summaries
iv.
Review the Glossary
81
WORKPACK – PART 2
82
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 1.0 – Review and Quiz (30 minutes)
1.1
INSTRUCTIONS
(a)
Assemble in your NEW SG
(b)
Discuss the work completed in Part I, your summaries of key points and any
outstanding questions.
(c)
Do in SG the “Short Quiz” of 48 questions on “The effect of Cost Changes” (Exhibit I).
Don’t look at the solution.
(d)
Check your answers (Exhibit 2) and discuss questions arising.
(e)
Re–assemble in MG when the bell rings.
83
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT I
Assignment 1.1
SHORT QUIZ ON THE EFFECT OF COST CHANGES
For a manufacturing company indicate how the variable cost per unit, actual break–even volume, total
contribution and total profit would probably change under the following conditions:
In the spaces provided, entre:
+ to indicate INCREASE
– to indicate DECREASE
O to indicate NO CHANGE or CAN’T TELL
NOTE: Choose the “most probable” solution. Assume that standard cost may be changed if
appropriate.
Standard
Variable
Cost per
Unit
1.
Standard and actual direct labour cost
reduced (given)
2.
Large volume of defective product
scrapped
3.
Actual fixed overhead reduced
4.
Old equipment scrapped at heavy loss
and new equipment installed and
increased volume of output achieved.
5.
Labour strike for two months
6.
Volume of output increased
7.
Product prices reduced (no volume
increase expected)
8.
Temporary cost reduction achieved
9.
Material price variance increased (loss)
10.
Supervision and inspection costs
increased
11.
Inventory of raw materials increased
(ignore carrying costs)
12.
Production method changed to achieve
better utilisation.
–
Actual
Break –even
Total
Actual
Volume
Contribution
–
+
Scores ................ out of 48
84
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 2
Assignment 1.1
ANSWERS TO SHORT QUIZ ON THE EFFECT OF COST CHANGES
1.
2.
3.
4.
Standard
Variable
Cost per
Unit
Actual
Break –even
Total
Actual
Total
Actual
Volume
Contribution
Profit
Standard and actual direct labour cost
reduced (given)
–
–
+
+
Large volume of defective product
scrapped
0
+
–
–
0
–
0
+
0 or –
0 or +
+
0
0
+
–
–
0
0
+
+
0
+
–
–
0
– or 0
+
+
0
+
–
–
0
+
0
–
0
0
0
0
–
–
+
+
Actual fixed overhead reduced
Old equipment scrapped at heavy loss
and new equipment installed and
increased volume of output achieved.
5.
Labour strike for two months
6.
Volume of output increased
7.
8.
Product prices reduced (no volume
increase expected)
Temporary cost reduction achieved
9.
Material price variance increased (loss)
10.
Supervision and inspection costs
increased
11.
12.
Inventory of raw materials increased
(ignore carrying costs)
Production method changed to achieve
better utilisation.
Score ……......….. out of 48
NOTE: Either of alternative answers is acceptable as correct.
85
ASSIGNMENT 2.0 – PROGRAMMED LEARNING – COST SYSTEMS AND STANDARDS (60
MINUTES)
2.1
INSTRUCTIONS
(a)
Assemble in SG
(b)
Individual work. Do ASS set 7 (20 minutes) set 8 (20 minutes) set 11 (20 minutes).
(c)
Discuss outstanding questions with your SG and record key paints in your notebook.
(d)
Re–assemble in MG when the bell rings.
86
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 3.0 - Cost Systems and Standards (30 minutes)
3.1
COST SYSTEM OBJECTIVES
Difficult for a single system to achieve all objectives equally effectively:
(a)
Compute product cost as an aid to pricing
(b)
Value work in process
(c)
Control costs by responsibility
Determine the volume of activity and management requirements before deciding upon the
appropriate system. Relate the cost of the system (or systems) or their value of management.
3.2
PRODUCT COST
Product cost if exactly what we define it to be.
Computed in terms of labour, material and overhead.
Direct costing defines product cost as “direct cost clearly associate with the product”. Definite,
but fails to include all overhead costs.
Full costing defines product cost as “both direct cost and allocated overhead cost”. Appears,
to be definite, but in reality includes many estimates and assumptions.
Always question the assumptions underlying product cost.
87
AGL NO 4 COST CONTROL FOR MANAGERS
3.3
CONTRACT, JOB AND BATCH COSTING
(a)
In contract costing the “unit of cost” is one contract. Labour, materials and some other
costs are direct contract costs. General overhead may be allocated on some basis.
(Profit on contracts may be taken during or at the end of the contract.)
(b)
In job or batch costing the “unit of cost” is one job or batch of jobs. Direct and indirect
cost charged to the job. Sometimes selling and administrative overhead charges as a
percentage of the manufacturing cost.
NOTE: Allocation of overhead costs on the basis of sales or previously accumulated costs is’
adding one estimate to another and may not produce a useful result. Such “total
costs” should be treated with considerable scepticism.
(c)
Control of costs in contract, job or batch is by comparison of estimated cost against
total actual cost to indicate:
i)
ii)
iii)
(d)
Profitability
Efficiency
Accuracy of the estimating procedure.
Try to use standard costs and rates in computing contract, job and batch costs.
Standard rates are simpler and standard costs are a better measure of efficiency.
Analyse the variance between actual and standard costs into price efficiency and
volume variances.
Avoid “actual” or “average” rates; they are not more “useful” than standard rates!
3.4
OUTPUT COSTING
With only one product we have “output costing”. Divide each cost by the volume of output for
the period. To measure efficiency: compare actual against standard.
88
AGL NO 4 COST CONTROL FOR MANAGERS
3.5
PROCESS COSTING
Suitable for a “continuous production flow” with final products resulting from a sequence of
operations or processes. Output of one process is the input of the next.
Costs collected by period for each process and the unit of cost of each process computed by
dividing the total process by the output.
System is in effect “Output costing” for each process in a series of processes which together
form a production cycle.
The measure of efficiency in process costs is the same as for output costing: actual against
previous cost, standard or budget. Use “standard” as much as possible.
3.6
STANDARD COSTING - CONCEPTS
(a)
The best performance target is the standard cost computed from engineering studies
on a “Standard Cost” Sheet.
(b)
The Standard Cost Sheet indicates the:
i)
ii)
iii)
3.7
Standard labour hours at standard labour rate
Standard material quantities at standard material costs.
Standard overhead allocations at standard overhead rates (one or several cost
centres).
(c)
Standard costing system is only as good as the standards. Set standards each year
for costs, activity and volume at a level of reasonable (not theoretical) efficiency!
(d)
Product cost under standard costing is the Standard Cost. Variances are developed
not for products but by departments responsbile for operations, in terms of prices,
efficiency and volume.
(e)
Actual product cost is never known! – only the standard cost. Deal with variances as
matters of efficiency for cost centres (and departments) not as changes in product
cost.
STANDARD COSTING – SETTING STANDARDS
Standards are set by the engineering department together with the purchasing department
and the personnel department (and of course the operating managers).
Past performance may be used for initial standards in some situations
Standards are not revised more than once a year, or sometimes less (not more) frequently
because the change effects every part, sub–assembly, and assembly and results in excessive
clerical work ie. change a labour rate, and you may change hundreds of “Standard Cost
Sheets”.
89
AGL NO 4 COST CONTROL FOR MANAGERS
3.8
STANDARD COSTING – VARIANCE ANALYSIS
(a)
Variance of actual from standard cost by department or cost centre may be analysed
in terms of:
Price variance – difference between actual and standard price for the actual quantity
purchased.
Efficiency variance – difference between the actual and standard quality of material and
labour (priced at standard).
Volume variance – difference in fixed overhead due to actual volume being more or less than
the standard volume.
3.9
(b)
Difference between actual and standard cost must be analysed into price, efficiency
and volume variances because no one manager can be responsible for all three
factors.
(c)
Associate each variance with responsible manager.
(d)
Do not change standards too frequently – but control variances carefully – especially
big ones!
STANDARD COSTING REPORTING
Overall standard cost reports show total sales less standard cost of sales to give standard
gross profit.
From the standard gross profit deduct variances for: price, efficiency and volume, to show the
actual gross profit.
Departmental standard cost reports analyse operational inefficiencies in terms of variances of:
price, efficiency and volume.
Close investigation and speedy action on variances is vital.
Variances may be due to:
a)
b)
c)
d)
Poor standards
Poor accounting
Product mix
Inefficiencies!
90
AGL NO 4 COST CONTROL FOR MANAGERS
3.10
3.11
COST AND CONTROL
(a)
Compare actual cost against standard to determine variance; analyse and determine
the causes.
(b)
Determine who is responsible for the variance and take corrective action; motivate
managers to achieve targets in the future.
(c)
Revise standards annually or every three years. Do not revise too often because it
involves too much paperwork. Control variances closely.
(d)
Periodically check by special cost studies the actual product costs; determine the
relevance of standards to reality.
(e)
Do not accept the standard cost without checking regularly the variances and the
reliability of the standards.
CHOICE OF THE COST SYSTEM
(a)
Move towards standard costing and variances in terms of: price, efficiency and
volume by responsible managers.
(b)
Choose the appropriate cost system (with standards) by selecting the unit of
production appropriate to the industry and the company.
(c)
Introduce standard rates for materials, labour and overhead - do not use actual rates.
(d)
Consider the cost of the system in relation to its value to all levels of management.
(e)
Renew, re-think and revise the system regularly! The system gets rusty and
inefficient!
91
3.12
LEARNING PATTERNS
3.12 (a)
CONTRACT, JOB & BATCH COSTING
3.12 (b)
PROCESS COSTING
3.12 (c)
STANDARD COSTING – COSTS
92
3.12 (d)
STANDARD COSTING (PRODUCTON FLOW)
3.12 (e)
STANDARD COSTING - DEPARTMENTAL VARIABLE ANALYSIS
93
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 1
Assignment 4.1
PRIMROSE PRODUCTION COMPANY (PPC)
QUESTIONS
(a)
This case challenges you to use standard cost data to determine whether a factory should be
closed to improve profitability.
(b)
Role assignments:
General Manager
Blanket Department Manager
A, C, E.
B, D, F.
(c)
Read case carefully, recheck lecture points 3.6 and 3.10.
(d)
Work on each question in SG, but keep notes individually.
1.
Is it “more profitable” to sell only yarn rather than blankets?
2.
Are the standard costs reliable? What addition data must you have before you use product
cost figures for decision making?
3.
Is the analysis and estimate of fixed cost useful in making the decision about the blanket
factory?
Is labour a fixed cost for this particular decision?
Is overhead a fixed cost?
4.
What is more important in the short term: profit or contribution? And in the long term?
5.
What alternatives are available to the company? (Creative thinking here)
6.
What additional data would you need to decide whether or not to close the blanket factory? Is
the overall business strategy relevant
7.
On the basis of the limited data available, decide and justify your opinion with fact and
argument.
94
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 2
Assignment 4.2
PRIMROSE PRODUCTION COMPANY (PPC)
PPC was a vertically integrated manufacturer of wool and synthetic blankets competing the whole
production process from yarn to finished blanket.
Last year the poor blanket market caused low sales and heavy under capacity working of the blanket
factory. However, the market for woollen yarn was good and the Sales Manager suggested that it
might be more profitable to sell yarn instead of blankets, and to save costs by closing blanket factory.
The accountant produced the following standard cost data for consideration:
Cost per blanket including 5lbs
woollen yarn and other
materials
Cost of 5lbs woollen yarn
Labour
Material
Overhead
.65
1.90
.50
1.50
5.70
1.15
Total standard cost
Selling price
3.05
3.40
8.35
8.30
.35
(.05)
Profit (Loss)
However, the Blanket Production Manager (brother–in–law of the General Manager) was against the
idea of closing down the blanket factory. He pointed out that 60% of the overhead was fixed cost and
10% of the labour was also fixed cost. Accordingly the accountant produced further data as follows:
Cost of 5lbs
woollen yarn
VC
Cost per blanket
FC
Total
VC
FC
Total
.59
.06
.65
1.35
.15
1.50
Material
Overhead
1.90
.20
––
.30
1.90
.50
5.70
.46
––
.69
5.70
1.15
Total
2.69
.36
3.05
7.51
.84
8.35
Selling Price
3.40
––
3.40
8.30
––
8.30
Contribution
or Profit
.71
––
––
.79
––
––
––
––
.35
––
––
(.05)
Labour
There was a considerable difference of opinion at the Executive Committee meeting as to whether the
company should continue to “sell blankets at a loss” rather than “selling yarn at a profit”, especially
since the sales manager revealed, because of strong demand, that he hoped to increase yarn prices
from 3.40 to 3.80.
The Committee seriously considered closing down the blanket factory!
PLEASE DO NOT LOOK AHEAD!
95
3.12 (f)
STANDARD COSTING REPORT
Actual Sales
Standard cost of those
sales from Standard Cost Sheets
Standard gross profit
Total variances:
Price
Efficiency
Volume
6
8
10
Actual Gross Profit
100
58
___
42
24
___
18
___
___
96
3.12 (g)
COST & CONTROL
3.12 (h)
COST SYSTEMS
97
3.13
(d)
INSTRUCTIONS (15 Minutes)
(a)
Re–assemble in SG
(b)
Study this note and learning pattern very carefully. (10 minutes)
(c)
Discuss each key point with your SG and record key points in your notebook.
Then carry on with the case study which follows.
98
ASSIGNMENT 6.0 - CASE OP BILL BROWN (45 MINJUTES)
6.1
6.2
INSTRUCTIONS - INDIVIDUAL WORK. (30 MINUTES)
(a)
Assemble in SG.
(b)
Individual work – Answer all questions (Exhibit 1).
(c)
SG work - Discuss answers with your SG. Don’t look at the answers yet.
INSTRUCTIONS - SG WORK (15 MINUTES)
(a)
Check your answers with the correct solution (Exhibit 2). Record the score in Course
Diary.
(b)
Discuss outstanding questions with your SG and record key points in your notebook.
(c)
Re-assemble in MG when the bell rings.
NOTE:
Use your notebook; do not mark the Daily Work Pack
99
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 1
Assignment 6.1
BILL BROWN — QUESTIONS
As Bill Brown, Cost Control Consultant, deal with the following problems for your clients. Answer each
question individually.
1.
ANDREMER COMPANY
Company set up a standard costing system only three years ago and now ( .) discovers some
rather high variances in price, effici and volume. Manager wants to revise all the standards
now and to continue to change them each month until the year end ( ) when the variances
become insignificant. Should the Company change its standards now?
2.
PAT PIPPER COMPANY
Company manufactures industrial tools in a variety of sizes and patterns. Its “actual job
costing system” uses labour and manufacture overhead rates computed every month. These
rates are also used to estimate for new jobs. Costs are not available until four weeks after
month’s end and this delays cost reports and job estimates. Furthermore, in slack months the
overhead rate is high and customers complain about widely different estimates based on
“cost” for the same type of job in different months. What should be done?
3.
DAVE RAVE COMPANY
New company accountant set up a new costing system but could not decide what was “direct
labour” for operating departments producing and assembling a variety of small machines:
(a)
(b)
(c)
(d)
(e)
(f)
foreman’s wages
inspector’s wages
machine operator’s wages for processing parts
assembly workers
inventory control clerk
storekeepers
What is direct labour? What do you advise?
4.
BOB ACTION COMPANY
For “more accurate costing” the accountant increased the number of cost centres from 6 to
48.
Typical range of overhead rates produced by the new system was as follows:
Cost Centre
35
36
37
Overhead Rate
116%
118%
119%
General Manager had some doubts about the new system but felt ung to comment because
he was not an accountant. What do you think
100
AGL NO 4 COST CONTROL FOR MANAGERS
5.
BRONGOLF TRUCK COMPANY
Company manufactured truck bodies to order. Each job was similar but had differences to
meet the customer’s preferences. Job cost system used. Control by comparing actual cost
against original estimate. Main controller used standard costing. Could standard costing
techniques be applied? Why change?
6.
JOHNSON COMPANY
Heating contractor used contract costing and took profit only when the contract was
completed. most of his work was for a long term contract which would not be completed for
two years; thus no profit this year. What to do?
7.
LYN ONE/TWO COMPANY
Company introduced a costing system to compute the “full cost” of each product for the first
time in its five years of successful operations as manufacturer of office furniture. Accountant
now suggests that all products being sold at a “loss” be dropped! Should this be done? What
data is relevant?
8.
HEAVY MAC COMPANY
Company was experiencing very heavy losses due to a fall off in the market and subsequent
low production levels. Cost reduction programme was instituted and each manager was
asked to suggest maximum cost savings which could be conveniently made now. Managers
responded with savings of abour 2%. What to do: about cost reduction?
9.
ALLAN SOLO COMPANY
Contract completed at a cost far above estimate and-manager held foreman personally
responsible. Foreman blamed material prices - responsibility of purchasing department.
Purchasing department blamed production control department for high overhead rates due to
low working capacity. Product control department blamed marketing department for lack of
orders and low prices. Marketing department blamed costing system. To what extent can we
hold the foreman responsible
10.
KEITH COMPANY
Accountant refuses to release monthly cost reports until six weeks after the month end to
ensure the “absolute accuracy” of the figures on the grounds that “inaccurate costs” are
dangerous. Is he right?
11.
BILLOIL COMPANY
Company buys containers but normal supplier quotes price increase of 25%. List 8 cost
reduction alternatives’ available to the company.
12.
LEEMAC PRODUCTION COMPANY
Accountant insists that his salary must always be a fixed cost. How could you best convince
him that he is not right and that it could be variable
101
AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 2
Assignment 6.1
BILL BROWN – ANSWERS
1.
ANDREMER COMPANY
Do not change the standards until the end of the year. In the meantime control the variances
very carefully. Changing standards involves a lot of paperwork and is not justified more than
once a year at the most. Maybe the variances really do reveal production inefficient However,
when using the standard costs for decision making, be careful to consider the effect of the
variances on product cost.
2.
PAT PIPPER COMPANY
Do not calculate monthly rates for labour and overhead. Use standard annual rates for the
whole year. Eliminate changes in job estimating due to heavy or light activity in a particular
month. Avoid excessive “accurate” cost data. Speed up the monthly cost data. Use special
rates for estimating for new jobs. Price should depend finally on the market not cost.
3.
DAVE RAVE COMPANY
Direct labour can be “conveniently associated with a unit of production without arbitary
allocation. Item c and d are clearly direct labour. Generall items a, b, e and f are overhead
costs. Particular production systems and a limited product range could allow possible
alternative solutions.
4.
BOB ACTION COMPANY
Cost centres do give more precision to cost accounting but they must be useful to
management. No point in having 48 different overhe rates if they are all almost the same.
Overhead rates are only estimates. Reduce the number of overhead rates to those that fit the
organisation and do show significant differences.
5.
BRONGOLF TRUCK COMPANY
Definitely yes! First standardize production parts and sub–assembli as far as possible. Then
introduce standard prices for labour, material rates. Products do not have to be the same for
standard costing. Work up standard cost sheet for each product before introd the system.
Standard costing provides better data for both management control and estimating. Variances
between actual and standard cost best analysed by price, efficiency and volume.
6.
JOHNSON COMPANY
Profit on contracts need not be taken only at the end. Take profit as work progresses but
provide adequate reserve for possible losses.
102
AGL NO 4 COST CONTROL FOR MANAGERS
7.
LYN ONE/TWO COMPANY
Full costing is not appropriate for the decision to eliminate products. We need direct costing
and computation of a contribution for each product. Never eliminate products making a “loss”
until we have data on the extent of the positive contribution, which would be lost. Need to
keep products having a positive contribution until they can be replaced with other products to
provide a better contribution. Need forecast of future costs and prices and volumes!
8.
HEAVY MAC COMPANY
Analyse the structure of costs to set a target of potential savings. Cost reduction in crisis
situations can never be “voluntary”. Set cost reduction targets of 20% to 40% to indicate the
“kind of cost cut” required from each manager and then let him decided how to achieve it. Be
firm. Managers tend to allow and protect activities that are not absolutely necessary. They
need pressure to keep operations efficient. Change some managers?
9.
ALLAN SOLO COMPANY
Failure to reach target may be due to: poor estimating, price variances, volume variances,
efficiency variances, poor reporting, poor selling of products – foreman only limited
responsibility for efficiency
– unless he operates as a profit centre.
10.
KEITH COMPANY
Fast rough case figures on time or within seven days of the month ends are more useful to
management than “so called accurate cost” reports later. Manager decides what he needs in
terms of accuracy not the accountant. There are no “absolutely accurate costs”, only costs
that are useful for a purpose are based on acceptable assumptions.
11.
BILLOIL COMPANY
Creative thinking:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
12.
Get alternative quotations
Force supplier to reduce his quotation
Offer supplier other benefits (volume, continuity, other work, etc.)
Re–design container
Change the containers
Eliminate the container
Manufacture the container
Improve the supplier’s efficiency
Import container from overseas
Eliminate the product itself.
LEEMAC PRODUCTION COMPANY
Fire him
103
ASSIGNMENT 7.0 – PROGRAMMED LEARNINGS COST CONTROL AND REPORTING
(60 MINUTES)
7.1
INSTRUCTIONS
(a)
Assemble in SG
(b)
INDIVIDUAL WORK. – Do ASS set 10 (20 minutes) set 5 (20minutes) and set 6 (20
minutes)
(c)
Review the ASS summaries and glossary. List any words you still do not immediately
understand. (10 minutes)
(d)
Discuss outstanding questions with your SG and record key points in your notebook
(e)
Re–assemble in MG when the bell rings.
104
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 8.0 - Lecture - Cost Control and Reporting
(30 minutes)
8.1
8.2
CONTROL CONCEPTS
(a)
Set a clear organizational structure of Cost, Profit and Investment Responsibility
Centres.
(b)
Set standards in quantitative and non–quantitative terms as performance targets. Try
to qualify targets but use multiple measures!
(c)
Set up a reporting system for both routine and special reporting, which is fast and
“accruate enough” for the purpose (but not excessively accurate) and not too slow.
(d)
Get Top Management support for rapid action where performance falls below target.
(e)
Set up a “Free Flow Information System” whereby information is not “filtered” before it
reaches all levels of management, but goes directly from the accountant or controller
to all managers concerned.
REPORTING EFFECTIVESS
Reports should be effective. They should be “marketed” to managers just like a product to
ensure that they are giving consumer (manager) satisfaction.
Reports are designed for managers not accountants. Reports must be clear and simple and
include comparative and descriptive data preferably in figures and “learning patter” form.
8.3
RESPONSIBILITY CENTRES
Responsibility of managers for cost, profit or return on investment must be clearly defined.
Standards of performance must be set (general but not absolutely!) in relation to authority and
responsibility.
Managers must be subject to rapid “follow–up” by Top Management when they fail to meet
target.
Managers must be judged not only on financial results but on the total job. Meeting the
financial target is not necessarily doing the job.
Control actual performance against target for:
(a)
(b)
(c)
Cost centres
Profit centres
Investment centres
NOTE: All are effective for cost control but (b) and (c) are more effective because they
motivate manager to seek profit too! and to use resources effectively!
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8.4
HUMAN PROBLEMS
(a)
Budget and cost targets are devices to achieve objectives in organisation.
(b)
Co–operation is the key. Willingness to participate and become involved discourages
individual and group opposition to Top Management.
(c)
People generally say that they “do not like targets or budgets”
(d)
Motivation is vital. Help managers and employees to reconcile head office, local and
personal priorities. Motivation is complex, but in the long run challenge, responsibility
and achievement are effective! (repeated!)
NOTE: Other methods may achieve the results to survive today without developing anyone
for the future!
(ie. fear! money! KITA!)
8.5
COST REDUCTION - CONCEPTS
Every cost can be reduced over time by:
(a)
(b)
(c)
(d)
Economy
Technological advance
Cutting out operations
Planning
Compare activity five years ago to activity today to indicate the past potential for cost saving.
Then treat future cost saving as a normal part of management - not an exceptional operation.
Costs grow naturally unless specific efforts are made to reduce them. Staff should not be
“happy” but should be motivated towards increasing efficiency.
8.6
COST REDUCTION ROUTINE
Develop the attitude of cost control and reduction every year! Budget cost reductions every
year. Critical examination to consider systematically the application of the following concepts
to each area of operations!
(a)
(b)
(c)
(d)
Elimination
Combination
Changing sequence
Simplification
Revise standards to enforce technical improvements every year.
Set up Cost Reduction Teams using the tools of value analysis, O & M, operations research,
etc., to cut costs.
Use a creative approach to cost cutting and avoid routing “Blocks”. “Lateral Thinking” and
“Brain Storming” are particularly useful for developing new ides to cost–control problem
solving.
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AGL NO 4 COST CONTROL FOR MANAGERS
8.7
COST REDUCTION - CRASH PROGRAMMES
Financial crises lead to crash programmes for cost reduction.
8.8
(a)
“Less” essential departments - eliminated.
(b)
Reduction of staff by flat 20% - force managers to reconsider priorities.
(c)
Action Teams with specific financial targets achieve “miracles” in cost reduction.
(d)
Cost reduction should be done quickly so that staff may readjust to the new situation.
(e)
Strategy of “cost surgey” is not to continue an insecure position too long, but to cut
rapidly and clearly so as to re-establish confidence in the company.
TYPES OF REPORTS
(a)
Cost statements may show:
1.
Cost of each job or unit of production or product group.
2.
Overhead cost of one section or department.
3.
Cost of whole business.
4.
Operating results of divisions or whole business.
(b)
Timing or reports relates the ability of managers to control and make decisions - to
actually do something with the data!
(c)
Reports indicate actual cost against a (one only) standard not several different
standards.
(d)
Reports signal significant exceptions rather than every item.
(e)
Cost reports should show:
(i)
(ii)
(iii)
(iv)
(v)
What is significant
How the figures compare with the standard of performance
What are the causes of significant differences.
Who is responsible
What action should be taken.
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AGL NO 4 COST CONTROL FOR MANAGERS
8.9
DIRECT AND FULL COSTING
(a)
Direct costing defines product cost clearly as direct costs only! No allocation of
overhead costs to products and therefore no dubious assumptions. Fixed costs all
charged against income of the year and clearly segregated for control by budgets!
(b)
Full costing defines product cost as direct and indirect manufacturing costs. Allocation
of fixed costs to products is only an estimate, but it indicated a “minimum level of
contribution” required for the product whereby total contribution will cover fixed costs.
Selling and administrative costs not normally included but charged to the income of
the year.
(c)
8.10
For total cost compute: “full cost” plus an allocated selling and administrative
overhead.
FUNCTION OF THE CONTROLLER
(a)
The controller is the key accounting manager in the company; unless he is part of the
Management team he becomes only a scorekeeper.
(b)
Engineers may be better controllers than accountants because they are not
prejudiced by the attitudes of auditing and accounting.
(c)
His functions include:
(d)
(i)
Design the planning and control system with periodic revisions and rethinking
to meet developing needs (no system works effectively forever - because the
environment changes terms of technology, economy, policy, education, etc. and therefore the strategy organisation and control systems must change).
(ii)
Information recording, storage and retrieval.
(iii)
Reporting
(iv)
Aid to managers in developing and using data effectively.
(v)
Encouraging an organisational environment in which the control system
functions creatively not defensively.
Controller should encourage cost control and reduction as a key factor in avoiding
waste of resources and in achieving objectives.
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AGL NO 4 COST CONTROL FOR MANAGERS
8.11
COST CONTROL AND REDUCTION
Cost reduction on an ad hoc basis can only be minimally effective.
Set up five year planning systems for the effective use of resources. Integrate the cost control
and budgetary system.
Think of cost reduction in terms of the total management control - a rhythmic, continuing,
integrated operation.
Create an attitude of mind for cost reduction, a continual seeking for better standards of
performance.
Cost reduction is not really a technical problem at all - it is a human problem!
109
8.12
LEARNING PATTERNS
8.12 (a)
CONTROL CONCEPTS
8.12 (b)
DIRECT & FULL COSTING
8.12 (c)
REPORTING
110
8.12 (d)
COST REDUCTION
8.12 (e)
CRASH COST REDUCTION
8.12 (f)
CONTROLLER
111
8.13
8.14
INSTRUCTIONS (15 minutes)
(a)
Re-assemble in SG now.
(b)
Study this note and learning patterns very carefully (10 minutes)
(c)
Discuss each point with your SG and record key points in your notebook. (5 minutes)
(d)
Then carry on with the case study which follows.
INSTRUCTIONS (15 minutes)
(a)
Re–assemble in SG now.
(b)
Study this note and learning patterns very carefully. (10 minutes)
(c)
Discuss each key point in SG and record key points in your notebook. (5 minutes)
(d)
Then carry on with the case study which follows.
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AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 1
Assignment 9.1
CHEMICAL PRODUCTS COMPANY
QUESTIONS
(a)
This case challenges you to evaluate a total cost control and accounting system and to
suggest changes to make it more effective for Management.
(b)
Role Assignment:
Marketing Director
Controller
A, C, E.
B, D, F.
(c)
Read the case carefully. Recheck lecture points 8.8, 8.9, 8.10.
(d)
Then in SG answer the questions, but keep notes individually.
1.
What are the specific objectives of the new system? Are they being achieved?
2.
Why are last years financial results so poor.
3.
Distinguish direct from period costs. Do direct costs depend upon the level of analysis, ie.
product or product group? Are depreciation and advertising direct costs?
4.
Is the decision to “eliminate products that fail to make a contribution of 27% of sales or
minimum of 2,000.00” useful for product planning, cost control and efficiency? What
alternative would you suggest?
5.
What are the advantages and disadvantages of a direct costing system?
6.
Is a full costing system essential for the management of this business? Is product group A or
C significantly more profitable and/or responsive to advertising?
7.
What are the advantages and disadvantages of using “full costing” for the shareholders and
“direct costing” for the management?
8.
What do you advise the Executive Committee to do now? Justify your opinion.
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AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 2
Assignment 9.1
CHEMICAL PRODUCTS COMPANY (CPC)
1.
INTRODUCTION
Chemical Products Company (CPCO was a successful manufacturer of a range of a hundred
industrial products. Last year, a new Final Controller (brother–in–law of General Manager)
was appointed, who changed the cost accounting system from full costing to direct cost in
order to:
(a)
(b)
(c)
2.
facilitate cost control
give management better data for product planning
provide more meaningful reports for management, stockholders, government, etc.
DIRECT COSTING
With the support of top management, the new system was installed over a period of six
months. Under direct costing “product cost” was defined as: direct labour, direct material arid
direct variable expense. All other costs were classified as “period costs” and controlled by
departmental budgets. Period costs were not allocate to product cost, but simply charged to
income for the period.
The product range formed three product families, A, B and C for which reports were produced
regularly each month.
3.
CONTROLLER’S VIEWPOINT
Controller was convinced that only direct costs were relevant to product cost because they
could be controller by lower operating management. By contrast, period costs were “fixed” in
the short run and therefore matters for long–term planning by Top Management.
Furthermore, direct costing should facilitate analysis of profit, cost and volume relationships
which in the past were largely confus in the full costing system by. the allocation of fixed cost
to produce cost
4
PRODUCT DESIGNS
Using the direct costing data, the Controller was delighted to find that out of 100 products in
the three product families only labour 40 produced an “adequate contribution” (selling price
less direct costs). He defined an “adequate contribution” as 2,000.00 p.a. or 27% of sales
price.
Accordingly, a Product Committee was appointed to review the production range and
consider possible product elimination. The Committee accepted the standards suggested by
the Controller and proceeded to eliminate 60 products which did not provide “adequate
contribute The Committee also made decisions about new products and product prices and
insisted that same minimum standards be maintained.
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AGL NO 4 COST CONTROL FOR MANAGERS
5.
FURTHER USE OF THE SYSTEM
When the Controller produced last years financial reports (EXH 3 and 4) he analysed the data
to determine the attractiveness of the different product families and concluded that product
group A (33%) was much more attractive than product group C (25%) because it produced a
higher percentage contribution (Exhibit 4). He therefore suggested to the Executive
Committee that Product Group A should be promoted strongly this year.
The Executive Committee backed the Controller’s suggestions because the figures seemed to
prove his point. However, they were concerned with the overall result for last year (EXH 3)
which indicated a severe loss of volume and profit. Such loss, if reported to the shareholders,
might cause trouble and many embarassing questions.
However, this problem was soon solved by the Controller who suggested that for external
purpose it would be “inappropriate” to show low last year profits and accordingly he “adjusted”
the figures of inventory valuation to “full costing” and was thus able to change the loss of
15,000.00 to a profit of 20,000.00 for last year reporting to the shareholders. This pleased the
Executive Committee and seemed to solve the problem.
6.
MANAGEMENT REACTION
In Feb last year the Marketing Director began to doubt the Controller’s idea for promotion of
product group A because of severe market resistance and competitive reaction. The market
situation forced him (reluctantly) to take a hand in the accounting figures and he proceeded to
allocate depreciation and advertising to product groups of a “fair basis” (Exhibit 5). His
analysis indicated that in fact product C was slightly more attractive in percentage of
contribution (22%) than product group A (21%) and was far more reactive to advertising!
Thereupon, the Marketing Director suggested that (a) many of the products recently
eliminated be put back into production again because of heavy customer demand (b) direct
costing be replaced by full costing and (c) the new Financial Controller be fired!
The Executive Committee was uncertain what to do and sought advice from outside
consultants.
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AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 3
Assignment 9.1
CHEMICAL PRODUCTS COMPANY
INCOME STATEMENT FOR: last year
(CONTROLLERS REPORT)
NET SALES
Less Direct Costs
Direct cost of sales
Budget
000
691
434
Variances
Actual
000
480
290
2
Direct shipping and selling costs
Total Direct Costs
504
CONTRIBUTION
Less Period Costs
186
145
Manufacturing
44
41
Marketing
30
34
Finance
10
18
Advertising
28
33
Depreciation
34
34
NET OPERATING INCOME (LOSS)
40
15
Income Tax
20
––
NET INCOME (LOSS)
20
Total Period Costs
NOTE:
* For external reporting this figure was adjusted to a profit of 30,000.00 by increasing the
value of the ending inventory from direct cost to full cost.*
PLEASE DO NOT LOOK AHEAD!
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AGL NO 4 COST CONTROL FOR MANAGERS
EXHIBIT 4
Assignment 9.1
CHEMICAL PRODUCTS COMPANY
PRODUCT FAMILY REPORT FOR last year
(CONTROLLERS REPORT)
TOTAL
000
Gross sales
A
000
B
000
C
000
520
250
80
190
40
_____
480
____
10
____
240
____
20
____
60
____
10
____
180
____
290
2
43
_____
335
_____
145
(30%)
130
20
10
_____
160
_____
80
(33%)
40
(10)
15
_____
45
_____
15
(25%)
120
(8)
18
_____
130
_____
50
(28%)
Less:
Allowances
Net Sales:
Less:
Direct cost of sales
Variances
Direct shipping and selling costs
Total direct cost
Contribution
EXHIBIT 5
Assignment 9.1
REVISED PRODUCT FAMILY REPORT FOR last year.
MARKETING DIRECTOR’S REPORT
Product Family
Net sales
Contribution per Controller
Depreciation allocated
Contribution after depreciation
Specific advertising allocated
Contribution after advertising
& depreciation
Sales per 1.00 of advertising
TOTAL
000
A
000
480
===
145
(30%)
34
____
111
18
____
249
===
80
(33%)
17
___
63
12
___
93
(19%)
51
(21%)
27
27
B
000
60
===
15
(35%)
10
____
5
2
____
3
(5%)
12
C
000
180
===
50
(28%)
7
____
43
4
_____
39
(22%)
45
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ASSIGNMENT 11.0 – QUIZ (45 MINUTES)
11.1
INSTRUCTIONS – INDIVIDUAL WORK
(a)
Assemble in SG.
(b)
Do the quiz of 100 questions, mark the special answer form provided. (Individual work
– no cheating!)
(c)
Check answers with the solution card provided by the Organiser and record your
score in your Daily Course Diary.
(d)
Re–assemble in MG when the bell rings
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ASSIGNMENT 12.0 - SUMMARY LECTURE
12.1
12.2
SPECIFIC OBJECTIVES
a)
Understand the language and concepts of cost accounting and control.
(b)
Evaluate cost systems and analyse product cost and overhead cost.
(c)
Develop skills in using cost data for practical cost control and decision-making.
(d)
Communicate effectively with cost control specialists.
(e)
Motivate further study in the future.
COST
Cost is exactly what we define it to be.
Key analysis of cost is into:
(a)
(b)
(c)
(d)
(e)
12.3
Variable or fixed.
Book or opportunity cost (value).
Relevant or non-relevant.
Actual or standard.
Past or future.
STRUCTURE OF COST
Cost may be analysed into
Direct cost
Labour
Material
Services
Indirect cost
Manufacturing overhead
Total manufacturing cost
Indirect cost:
Selling and administrative
Overhead
Total Cost (ESTIMATED)
XX
XX
XX
-------XXX
XX
-------XXX
XX
-------XXX
--------
119
12.4
COST SYSTEMS
(a)
Systems relate to the unit of cost :
Job cost
Contract cost
Batch cost
Process cost
Output cost
(b)
Systems relate to the analysis of cost :
Direct cost
Full cost
(c)
Systems relate to the control of costs :
Actual - compared with estimated cost.
Standard - compared with actual cost.
12.5
STANDARD COST SYSTEM
All cost systems may use some standard rates for labour, material and overhead and thus
simplify the computation work.
“Actual” or average rates are only estimates - standards are more useful and less trouble.
Standard costing starts with setting good engineering standards for labour and material
quantities, and for the volume of activity.
Standard quantities are priced at standard rates on a Standard Cost Sheet for each part, subassembly and assembly and finished product.
Cost of the product is the standard cost from the summary standard cost sheet. (Unless the
standards are wrong).
Variances between actual and a good standard are due to inefficiency of the operations NOT
the product. Blame the department not the product.
Variances between actual and standard cost is computed and reported not by product but by
operation in terms of price, efficiency and volume.
120
12.6
OVERHEAD RATES
(a)
All full cost systems use overhead rates which are estimates based upon
assumptions for each cost centre:
overhead amount
measure of activity
activity volume.
(b)
Overhead may be allocated by:
direct labour hour
direct labour cost
direct material
machine hour
prime or manufacturing cost
sales price, etc.
12.7
(c)
Whatever basis is chosen it should be appropriate to the use that management
makes of the data. Rates that are “high” should be investigated - perhaps the wrong
activity measure it being used.
(d)
Allocating a fixed cost does not make it variable !! - and does not control it. Only
budgets by responsibility control costs.
RELEVANT COST ANALYSIS
Cost and revenue decisions require special analysis of data relevant to each specific
decision.
Generally historical cost reports are not relevant. Variable cost and contribution (selling price variable cost) are more relevant than full cost and profit, especially in the short-term!
Break-even analysis is a useful technique for understanding profit, cost and volume
relationships.
Direct costing helps segregate variable costs from period costs.
12.8
REPORTING ESSENTIALS
(a)
Design - serve user needs, signal variances, minimum data with maximum
information.
Note : Every report can be designed to fit one sheet of paper with supporting detail
on following pages. Thus each page is complete in itself. Complex reports
are NOT unavoidable … just poor design and low creativity.
(b)
Speed-rapidly changing situations need quick decisions and rapid reporting.
Conversely, when nothing can be done, no rapid reporting. Increased speed “tradeoff” for less accuracy. Timeliness of decisions affected by delay in reporting.
121
12.8
(cont.)
(c)
Frequency - changing situations need reporting but too many reports restrict
the manager and are “disfunctional”.
(d)
Clarity - reports absolutely clear to the user - without undue effort and with
proper training. Significant data only.
(e)
Signals - managers need signals of key items. They do not need all the
information all the time. Distinguish routine from special reporting.
NOTE : All figures are estimates based on assumptions. Excessive accuracy is
wasteful, ridiculous,… fraudulent. Rough accuracy is generally fast and
effective.
12.9
CONTROL OF COST
Cost may be controlled by product, department or the whole company.
Control results by comparison of actual against a standard to produce variances, by price,
efficiency and volume for which specifi managers are responsible.
Good standards, effective reporting and top management support are vital for control.
12.10
COST REDUCTION
Cost reduction is an attitude of mind. It is a continuous process of improvement by creative
thinking in terms of:
(a)
(b)
(c)
(d)
12.11
eliminating activities
combining activities
changing the sequence of activities
simplifying the activities.
ORGANISATIONAL ENVIRONMENT
Top management and the controller set the organisational environment which is key to the
effectiveness of the cost control and budget system.
A defensive environment encourages managers to : set low targets, show little initiative, be
reluctant to make decisions and to settle for safe. plans.
A creative environment (whereby managers feel secure yet motivated) encourages managers
to : set high achievable targets, .make confident, bold decisions, use resources creatively,
take ba1nced risks and achieve both personal and corporate goals.
NOTE : How is your organisational environment?
122
12.12
LEARNING PATTERNS
12.12 (a)
OBJECTIVES
12.12 (b)
COSTS
12.12 (c)
COST SYSTEM
123
12.12 (d)
STANDARD COST SYSTEM
12.12 (e)
OVERHEAD RATES
12.12 (f)
COST CONTROL
124
12.12 (g)
MOTIVATION
12.12 (h)
INTERACTION
125
12.13
CONCLUSIONS
(a)
Cost is only what we define it to be: Control cost by setting a target and holding a
manager responsible for achieving it :
(b)
Cost must relevant and useful to the specific management decision to be made. No
cost is relevant to all decisions.
(c)
Cost systems produce routine date and leave a “trail” for preparing of special data
when required.
(d)
Distinguish the cost data we use all the time from the data we need some of the time.
(e)
Move all cost systems towards standard costing by using standard rates. No
profitable expanding business is too small for standard costing.
(f)
Cost systems are for managers not accountants.
(g)
Cost control systems become inefficient and ineffective naturally over time. Like
machines and people they need constant maintenance and review and periodic
complete rethinking.
(h)
Cost reports shou1d be simple; they should not merely contain information but should
communicate it to managers.
(i)
The test of cost is not is it true or correct but is it useful to you now.
(j)
Cost control helps profitability – but sometimes efforts towards a bigger total
contribution may be more profitable than cost reduction.
(k)
Cost reduction and control is continually possible with the right attitude and creative
thinking.
(1)
In an increasingly competitive market, effective and continuous cost reduction may be
the key to survival of the business.
(m)
Cost control is really more a human than a technical problem – can we motivate
people to make it important for them!
FINAL NOTES
THIS ENDS OUR COURSE. WE HOPE IT HAS INSPIRED YOU TO DEVELOP YOUR SKILLS BY
PRACTICAL APPLICATION. WE THANK YOU FOR YOUR INTEREST AND HARD WORK. KEEP
YOUR GLOSSARY AS A DAILY REFERENCE FOR COST CONTROL LANGUAGE AND
CONTINUE YOUR STUDIES
WE HOPE YOU HAVE ENJOYED THE AGL EXPERIENCE
126
Autonomous Group Learning (AGL)
No. 4 – Cost Control For Managers
GUIDE
(Not Retained)
Copyright: RGAB/IR. 2007/1
No copies of without written permission
[email protected]
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AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 5.0 - Lecture - Primrose Production Company (PPC) (30 minutes)
5.1
STORY OF THE CASE
A vertically integrated blanket manufacturer experienced a fall off in sales and under-capacity
operations last year.
Sales manager suggests selling only yarn, which appears to be more profitable than blankets.
Problem of fixed and variable costs, contribution, profit and the short and long term effects of
possible cost saving by closing the blanket factory.
5.2
STANDARD COST
Standard costs are reliable estimates of “product cost” only if based upon good standards
regularly updated and tested by engineering studies - provided the variances are not
excessive.
Variance analysis needed to see how price, efficiency and volume factors effect the actual
product costs!
Large variances might indicate a very different cost picture and thus invalidate the use of
standard costs for decision making for product contribution and profitability.
5.3
FIXED COST
Fixed cost depends upon the purpose of the cost analysis:
(a)
For normal operations certain labour and overhead costs do not change directly with
the volume of production and may therefore be considered as fixed costs.
(b)
However, for the decision to close down the whole factory many “fixed costs” could
be avoided by dismissing staff and selling off assets. Such “fixed cost” thus becomes
“variable” for this decision. Probably all “fixed” labour cost is variable and some of the
“fixed” overhead is variable too!
(c)
The estimates of 60% overhead and 10% labour as “fixed” are probably not valid for
the possible closing of the blanket factory and thus the data must be reworked by the
accountant. However, the general results will not differ substantially.
NOTE: Unit costs are dangerous since they depend upon assumed volume! Always look also
at total costs (and total contribution) as well.
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AGL NO 4 COST CONTROL FOR MANAGERS
5.4
CONTRIBUTION AND PROFIT
In the short term, fixed cost will not change, therefore seek maximum contribution this year
without precluding future flexibility of operations.
Long term contribution must cover both variable and fixed cost and produce an acceptable
level of profit.
Thus in the short term we seek contribution and in the long term “profit” (or long term
contribution, ie. long term sales less long term variable costs).
5.5
ALTERNATIVES AVAILABLE
Sell blankets only
Sell yarn only
Sell blankets and yarn
Sell many other things
Lease out blanket factory
Sub-contract certain operations
Close or operate the blanket factory
Increase blanket volume (get benefit of scale and lower fixed cost per unit)
Try to increase blanket prices.
Choice among these alternatives depends upon both quantitative and non-quantitative
considerations. For important changes in operations we should perhaps reconsider the long
term strategy of the business, ie. if we leave the blanket market now, can we ever get back
again.
5.6
ADDITIONAL DATA REQUIRED
For a decision affecting several future years and a radical change in the company’s business
we need:
(a)
Market forecasts for blankets and yarn for the next five years
(b)
Forecasts of cost, contribution and profitability for the next five years
(c)
Re-statement of the company strategy as to what segments of the market it will seek
to satisfy.
Business strategy is relevant because to close the factory now would:
(a)
Change the nature of the business
(b)
Require a new distribution network
(c)
Possibly create labour troubles
(d)
Weaken our strategic position as a seller of yarn because we lost the alternative
disposal of the yarn through out own outlets as blankets. (Yarn customers may be
able to force lower prices in the future).
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AGL NO 4 COST CONTROL FOR MANAGERS
5.7
5.8
DECISION AND JUSTIFICATIONS
(a)
Do not close blanket factory just now! Available data does not justify such drastic
action which could have long term disadvantages.
(b)
Sell yarn and blankets so as to get high contribution and the benefit of all market
opportunities, while still keeping long term options and markets open.
(c)
The fixed costs are not yet well defined but closing the blankiet factory would
necessitate charging all fixed cost against yarn sales only; this would probably make
it unprofitable. (Blankets do provide a positive contribution).
(d)
Check up on long term market prospects and make long term cost and profit
forecasts to provide data for the long term decision on blanket production.
(e)
Consider the strategic implications of cutting blanket production in terms of new
distribution channels, customer relations and finally the strategic strength of the
company.
(f)
Consider means to raise blanket volume and prices to break even point or better.
(g)
Do not fire the Blanket Manager (yet).
LEARNING POINTS
(a)
Cost must be analysed as to fixed or variable in relation to each specific problem and
decision.
(b)
Fixed labour cost in normal operations may be variable in terms of closing a complete
factory.
(c)
Standard costs are a useful measured actual “product cost” provided the variances
for price, efficiency and volume are not excessive.
(d)
The volume of output seriously affects profitability; increased volume reduces fixed
cost per unit.
(e)
Contribution is computed as selling price less variable cost.
(f)
In the short term, contribution is more important than “profit”.
(g)
Do not eliminate a product which makes a positive contribution until it can be
replaced with products making a better total contribution.
(h)
Market data may be more important than cost data in planning future profitability.
130
(i)
Need long term forecast of costs, contribution and profit to support long term
decisions.
(j)
Think creatively about all alternatives.
(k)
Fixed and variable cost can only be estimates, but we must mkae the analysis for
practical decision making.
(l)
Although willing to sell in the short term at a price above variable cost, in the long run
we seek a price above full cost (“full cost” may be fair estimate of “long term variable
cost”).
(m)
Cost and profit are only dependent upon assumptions.
(n)
Unit costs data involved volume assumptions - look also at total cost and contribution
figures.
(o)
Be careful that short run decisions don’t prevent achievement of long term policies
and goals.
(p)
Use break even analysis to understand cost, profit and volume relationships.
131
5.9
LEARNING PATTERNS
5.9 (a) COSTS & VOLUME
5.9 (b) CONTRIBUTION OVER TIME
5.9 (c) STANDARD COST
132
5.9 (d) FIXED COST PER UNIT
VOLUME
TOTAL FIXED
COST
FIXED COST
PER UNIT
1
1000
1000
2
1000
500
100
1000
10
1000
1000
1
LOOK AT BOTH TOTAL AND UNIT COST
VOLUME MEANS FC PER UNIT
5.9 (e) FIXED COST
TIME PERIOD
OBJECTIVES
NORMAL/ABNOR
MAL DECISIONS
ASSUMPTIONS
FIXED OR
VARIABLE COST
DEPENDS UPON
5.9 (f) SHORT & LONG TERM FACTORS
COSTS
MARKETS
PRODUCTIVE FACULTIES
OBJECTIVES
133
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 6.0 - Lecture - Intray Company (30 minutes)
6.1
STORY OF THE CASE
Company manufactures containers in a special department. Supplier offers an attractive four
year fixed price contract less than the cost of manufacture. Container Department Manager
questions relevance of figures. Accountant defends his cost data. Relevant date complicated
by inventory and machine disposal. Many non-quantitative factors. Should the company
“make or buy” containers?
6.2
DECISION AND CRITERIA
Make or buy containers? Accept or reject the contract? Is the relevant cost of “make” less
than the contract price? What alternatives are available? What non-quantitative factors are
involved? What are the short and long term implications?
6.3
RELEVANT COSTS
The only costs relevant to this decision are costs that actually change:
(a)
Labour costs - relevant
(b)
Other expenses - relevant
(c)
AKS material - relevant to the extent of the “opportunity” (resale) cost of 40,000.00 or
10,000.00 p.a. (book value not relevant).
(d)
Manager’s salary - relevant (would be “saved” by manager doing another necessary
job).
(e)
Inside rent - not relevant (not saved in casn because space would be used to store
containers).
(f)
Equipment, depreciation and salvage cost - book value and “loss on sale” noit
relevant. However, salvage value (opportunity cost) relevant 60,000.00 or 15,000.00
p.a.
(g)
Administrative overhead - not relevant (not saved).
134
AGL NO 4 COST CONTROL FOR MANAGERS
6.4
QUANTITATIVE ANALYSIS
000
Buying price of containers p.a.
Less costs saved:
Labour
AKS material
Manager’s salary
Rent - inside
Other expense
Equipment (salvage value)
Administrative overhead
Net advantage (disadvantage) of
buying containers p.a. disadvantage
132
76
10
8
20
15
-
129
(3)
=====
NOTES:
6.5
(a)
Recovery of cash from AKS inventory is not a cost reduction, since inventory could
always be realised in cash and then repurchased as required. However, opportunity
cost (10,000.00 p.a.) relevant. Book cost (20,000.00 p.a.) not relevant.
(b)
Salvage value of machine relevant as an oppor (60,000.00 divided by 4 years =
15,000.00 p.a.)
(c)
Need to estimate future (not past) costs.
NON-QUANTITIATIVE FACTORS
The decision cannot be made on quantitative data alone. Consider other factors as:
-
6.6
alternative quotations
transportation costs
Quality and reliability
control
inflation of costs in the future
other alternatives available
policy - (are we in the chemical or’ container business)
etc.
ALTERNATIVES AVAILABLE
-
Accept contract or renegotiate contract
Make all or some
Work study to improve efficiency of the department
Contract with another supplier
Change the container
Contract later
Eliminate the container
Eliminate the product etc'.
Did you get them all? Why not?
135
AGL NO 4 COST CONTROL FOR MANAGERS
6.7
DECISION AND JUSTIFICATION
(a)
Do not accept the contract
(b)
Consider other alternatives available including the strategic problem. “Do we want to
use our productive capacity to make containers anyway?”
(c)
Improve departmental efficiency and then compare future manufacturing costs (with
improved efficiency) compared with alternative purchase arrangements.
NOTE: Any change must produce a substantial saving because of the difficulty of costing all
the factors involved. Do not change for only a small potential benefit.
6.8
LEARNING POINTS
(a)
Define decision carefully to determine relevant cost for that decision only - not for the
whole firm.
(b)
Cost may be incurred but still not be relevant.
(c)
Relevant costs are those that change over a defined horizon period.
(d)
Book values are sunk costs and not relevant.
(e)
Opportunity (market) values are often more relevant than book values. Exchange of
inventory for cash may not be relevant.
(f)
Fixed cost (general overhead) is not normally relevant because it does not change.
(g)
Many non-quantitative factors may affect a decision.
(h)
Make a creative search for all alternatives.
(i)
Use time to create alternatives - postponability - short and long term possibilities.
(j)
Get several well defined “buy” quotations (ie. who pays transport costs, etc.)
(k)
Q + NQ = D. We must get valid Q before we apply the NQ.
(1)
Do not accept past accounting costs as the basis for decisions for a future period.
Forecast future costs.
(m)
Consider improvement of efficiency of the existing operation before comparing
revised “make” cost with the “buy” alternative.
136
6.9
LEARNING PATTERNS
6.9 (a) DEFINE DECISION CAREFULLY
6.9 (b) RELEVANT COSTS
NOT
BUT OFTEN
BOOK COSTS
SUNKCOSTS
FIXED COSTS
NON CHANGING COSTS
EXCHANGED INVENTORY
FOR CASH
SALVAGE COSTS
OPPORTUNITY COSTS
VARIABLE COSTS
CHANGING COSTS
6.9 (c) BOOK COST - OPPORTUNITY COST
137
6.9 (d) CREATIVE SEARCH FOR ALL ALTERNATIVES
138
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 10 -Lecture on Tokfusel Stores Company (30 minutes)
10.1
STORY OF THE CASE
Last year TSC installed a new departmental cost control and profit system which indicated
that the Confectionery Department sustained a loss. Management Committee suggests that
the Department be closed immediately. It was not necessary to the general operation of the
store.
Confectionery Department Manager is the brother-in-law of the General Manager.
10.2
REPORT ON THE DEPARTMENT FOR LAST YEAR
Report shows a loss, subject to the assumptions on allocation of fixed costs.
Loss does not necessarily indicate inefficiency but may be a signal that the floor space could
be better used by another department.
Report is useful in that it indicates that the department does not cover fixed costs on a normal
basis of allocation. It brings management attention and may motivate the manager to better
performance.
Report is HISTORY! Future may be very different.
System has only been going one year and may be faulty, thus the report may contain
accounting errors.
How are other departments doing in the business and what overheads have been allocated to
them?
10.3
FIXED AND VARIABLE COST
Analysis of fixed cost or variable cost depends upon the purpose and the time period. All
costs are variable in the long run.
To decide whether or not to close the Confectionery Department the analysis of fixed and
variable costs is:
(a)
Cost of sales - variable; could be eliminated if the department was closed.
(b)
Labour - variable (ditto)
(c)
Depreciation - fixed; subject to the resale value of the equipment, ie. the opportunity
value.
(d)
Interest - fixed; not really a cost, but an accounting charge. Would not be affected by
closing the department.
139
AGL NO 4 COST CONTROL FOR MANAGER
10.4
(e)
Rental - fixed cost since the total would not be changed; however, the department
culd use less space and thereby the manager could influence the charge.
(f)
General administrative expense - fixed; not influenced in total by the closing of the
department.
CONTRIBUTION COMPUTATION
000
1060
937
____
123
Sales
Cost of sales
GROSS PROFIT
Less variable cost:
Payroll
CONTRIBUTION to fixed cost and profit
Less fixed cost:
Depreciation
Interest
Rental
General & admin. Expense
PROFIT (LOSS)
000
68
____
55
4
2
42
32
––––
80
––––
(25)
====
NOTE: There is no point in computing contribution with excessive accuracy since definition of
each as fixed and variable depends upon judgement.
10.5
RENTAL CHARGES
(a)
Charge is computed on cubic footage used. It could be computed in terms of square
footage used or different charges for different floors, or usable and unusable space.
Flexible allocation dependant on the judgement of the cost accountant.
(b)
Could charge less for rental but if this is otherwise “fair” there is no point in deceiving
ourselves about the space used by the department.
(c)
Department manager could influence the cost by using less space.
(d)
Need to motivate him to use space effectively.
(e)
Contribution per square foot (not sales or profit per square foot) would be a good
measure of space efficiency.
140
AGL NO 4 COST CONTROL FOR MANAGERS
10.6
GENERAL ADMINISTRATIVE COST
Allocation based on a percentage of sales - more sales the more we charge the department.
No purpose served by allocating in this way, since it does not motivate the manager to better
his performance.
Could charge a fixed amount regardless of sales activity. This would motivate manager to
produce the level of contribution required and would simplify the accounting.
Department manager “unfairly” charged with cost over which he has no control.
10.7
SYSTEM
Continue the system, because it will need a year or two to settle down and eliminate
accounting errors. It does define responsibility and could indicate contribution and profit
separately.
“Fairness” of charges for rental and administrative costs should be investigated.
10.8
GROSS MARGIN
Low in relation to industry averages, possible reasons are:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
10.9
Poor purchasing
Low volume of activity
Loss of discounts
Theft of stock
Theft of cash
Unrecorded sales
Accounting erros
Stock losses
Staff pilferage
Excessive returns and allowances
Poor pricing.
PERFORMANCE LAST YEAR.
Redesign the report to introduce budget and industry average data. Compute contribution and
profit separately. Introduce information on: inventory analysis and ageing, sales analysis,
performance by product and by square footage of space occupied.
10.10
DATA FOR DECISION TO CLOSE DEPARTMENT
Forecase five years ahead. Market survey. Long term effect on busines withou a
Confectionery Department. Data on cost and profitability in relation to the investment
involved. Alternatives available to improve profitability. Alternatives available for use of space.
141
AGL NO 4 COST CONTROL FOR MANAGERS
10.11
COST CONTROL AND PERFORMANCE MEASURES IN THE DEPARTMENT
Budget
Industry averages
Contributions per square foot of space used
Profit in relation to investment
Break even charts.
10.12
DECISION AND JUSTIFICATION
Keep open the department, it produces a positive contribution!
Modify the system to make it more useful to management, ie. segregate direct and indirect
cost, compute contribution, change overhead allocation. Set up detailed budget targets, etc.
Develop forecast data for the next five years.
Take no action on cost control and performance until the relevant data is available.
10.13
LEARNING POINTS
(a)
New cost systems need a year to settle down and be reliable. Losses may not mean
“inefficiency”.
(b)
Cost reports should include budget data as a performance standard.
(c)
Reports should show varible cost, contribution, fixed cost and profit separately.
(d)
Fixed costs do not change over a short time period whereas variable costs change.
(e)
Need to define each cost problem carefully before deciding which costs are relevant.
(f)
Rental charges are not scientific but based upon judgement.
(g)
Charge for general administrative overhead as percentage of sales does not motivate
managers towards improved efficiency.
(h)
All allocations as a ‘percentage of sales” or “previous cost” are suspect.
142
AGL NO 4 COST CONTROL FOR MANAGERS
(i)
Depreciation may be a fixed or variable cost depending on the opportunity value of
the equipment on disposal.
(j)
Need to forecast future costs and sales for decisions affecting the future.
(k)
Gross profit may be compared with industry average. Low gross profit due to many
reasons including poor purchasing, poor pricing, inventory losses, pilferage, etc.
(l)
Break-even charts useful to reveal the sensitivity of cost and profit to changes in
volume.
(m)
Cost reports are designed to motivate managers to be more effective, not to
discourage them.
(n)
Allocation of fixed cost on the basis of “departments that can afford to take charge”
serves no useful purpose.
(o)
The General Manager should think carefully before hiring (and firing) his brother-inlaw.
143
AGL NO 4 COST CONTROL FOR MANAGERS
10.14
LEARNING PATTERNS
10.14a Significance of Loss
10.14b Variable and Fixed Cost
10.14c Price – Profit – Contribution
144
AGL NO 4 COST CONTROL FOR MANAGERS
10.14d Contribution Towards Fixed Cost & Profit
10.14e Contribution Factors
145
AGL NO 4 COST CONTROL FOR MANAGERS
Assignment 10.0 - Lecture on the Chemical Products Co. (30 minutes)
10.1
STORY OF THE CASE
CPC manufactures a range of industrial products. New Financial Controller introduced a
direct costing system to replace full costing.
Direct costing data used to derive a decision rule which eliminated “unprofitable” products,
reducing the range considerably; financial results below budget target.
Direct costing used to indicate market opportunities but marketing director thinks otherwise.
Is the new costing system useful? What to do? (Usual brother-in-law trouble!)
10.2
OBJECTIVES OF THE SYSTEM
(a)
Three objectives:
Control direct costs by product and “period” costs by budget.
Give Management better data for product planning and control
Better reporting.
10.3
(b)
System separates direct and indirect costs and eliminates arbitrary allocation of fixed
cost. Enables careful control of period costs. Full costing available to management on
a test basis if required.
(c)
Data may have led management to poor decisions.
FINANCIAL RESULTS last year.
Sales, contribution and profit are below budget levels, probably because of elimination of
products producing a positive contribution but which did not meet the new “standard”.
Products eliminated not replaced with alternative contributions.
146
AGL NO 4 COST CONTROL FOR MANAGERS
10.4
10.5
DIRECT AND PERIOD COSTS
(a)
Direct costs can conveniently be associated with associated with a product. The
include labour, material and direct overheads. All other costs are indirect or period
costs.
(b)
Substantial costs should be “direct” at a higher level of analysis, ie. “product group”
rather than individual product. Analysis into direct or indirect cost therefore depends
upon the level of analysis.
(c)
Depreciation is a period cost for product level analysis. However, certain machines
used only for one product group could be direct. Similarly some advertising could be
direct at a product group level.
(d)
Need not just routine analysis of cost, but also special analysis for each type of
decision.
PRODUCT ELIMINATION DECISION RULE
Products eliminated unless they produce an adequate contribution of 27% or 2000.00
minimum.
Some products produce a positive contribution but not enough.
Some products may produce a high total contribution but not 27% of sales (23%).
New products may not meet the standard immediately - and thus never de adopted!
What “horizon” (time period) is relevant? Past? Next year? Next five years?
Future market and profit potential more important than the past result, or immediate
contribution. Rule inadequate since it omits marketing and long term factors. Need proper N +
NQ evaluation!!
10.6
DIRECT COSTING
Advantages:
Product cost is definite and not subject to arbitrary allocation of indirect costs
Period costs are carefully segregated for control by budget.
Contribution calculation is easy.
Conservative valuation of inventory.
Full cost data available by special study when required.
Disadvantages:
Product does not include fixed overhead
May influence poor pricing
Inventory is undervalued
System easily misunderstood by management.
Under full costing direct costs by product could be analysed on a test basis whenever
required by management.
147
AGL NO 4 COST CONTROL FOR MANAGERS
10.7
FULL COSTING
Full costing is direct costing plus allocation of fixed overhead on an arbitrary basis to product
cost. Gives management a feeling of false security about costs, prices and profits.
Allocation of fixed costs does not compute “true cost”, but merely indicate the “minimum
contribution” that the product should make if the total contribution is to cover the total fixed
cost of the company.
Product groups A and C may be more attractive than B but “advertising sales dollar” is
meaningless for decision making about increased promotion.
10.8
TWO COSTING SYSTEMS
Company uses direct costing for management control and full costing for external reporting to
shareholders.
Advantages:
Avoids trouble with the shareholders
All the advantages of direct costing without understating the assets and the profit for
external purposes.
Management not finally committed todirect costing.
Disadvantages:
Confusion by the Managers as to what the profits are for the year under the two
systems (where inventory changes substantially) Unnecessary complication of the
accounting system.
10.9
ADVICE TO MANAGEMENT
Keep direct costing, but “cool off” the Controller.
Prepare special studies of full costing of products and product groups periodically.
Try to include some depreciation and advertising in direct cost if appropriate.
Develop a better product elimination rule; review products in terms of: contribution, long-term
profitability and market potential …. not merely contribution v. profit today!
Do not eliminate any product producing a positive contribution unless it is immediately
replaced with other products that produce a better contribution.
Unit contribution is less important than total contribution.
Do not choose to promote products purely on quantitative data but on the total market
situation!!
148
AGL NO 4 COST CONTROL FOR MANAGERS
10.10
LEARNING POINTS
(a)
Direct costing provides clear but limited product cost without arbitrary allocation.
(b)
A “fixed cost” product level may be direct at a product group level.
(c)
Direct or full costing does not preclude special studies of any cost useful to
management!
(d)
Segregate period costs for control in budgets by managers responsible.
(e)
New systems may not necessarily improve cost control – it depends how they are used.
(f)
Define system objectives clearly and review the system periodically to ensure objectives
are actually being achieved.
(g)
Decision rules for product elimination should be carefully considered from short-term
and long-term marketing viewpoint before being used.
(h)
Decision rules based purely on accounting data are probably not adequate in business
… other factors are relevant.
(i)
Distinguish between routine cost data from the system and special data which can be
available when required periodically.
(j)
Select the relevant data for the decision. Future activity requires forecast data, not
merely historical data.
(k)
Do not eliminate a product producing a positive contribution until you can replace it with
a better contribution.
(l)
Quantitative and non-quantitative factors are relevant for each decision.
(m)
If your accountant fails to recognise that cost is only an estimate that must be useful to
management fire him! - and get a new one and pay him well.
149
10.11
LEARNING PATTERNS
10.11 (a)
DIRECT COSTS
10.11 (b)
PRODUCT DECISIONS
10.11 (c)
COST SYSTES
150
A – Glossary
COST ACCOUNTING LANGUAGE
Absorbed overhead See overhead charged.
Accounting Art of preparing accounting reports from books and other records.
Based on concepts and principles: true and fair, money, cost, conservatism,
consistency, comparability, entity, going concern, recognition of profit, etc.
Accounting period Period of time between one balance sheet and the next. Period of
the income statement. Usually a month or one year.
Administrative overhead Cost of directing and controlling a business. Indirect cost.
Administrative expense. Includes: director fees, office salaries, office rent, legal
fees, auditors fees, accounting services, etc. Not research, manufacturing, sales
or distribution overhead.
Allocated overhead See overhead charged.
Balance Sheet Statement of assets and how they are financed from liabilities and
owners equity. Not an income statement,
Batch Group of identical products or jobs.
Batch costing Cost system where the unit of cost is a batch. Similar to job costing.
Contract costing Cost system where the unit of cost is one contract. For long term
contracts a proportion of the profit to date may be taken each year.
Contribution Excess of selling price over variable cost. Contributes to fixed overhead
and profit. Also used in make or buy decisions, as the excess of purchase price
over relevant cost of making.
Controllable cost Cost for which some person may prepare a budget and be held
responsible for the variance between actual cost and budget.
Cost Several meanings:
a. Expenditure on a given thing.
b. To compute the cost of something.
c. Direct cost or indirect cost (indirect cost is overhead expense).
Cost accounting Recording of cost data and preparation of cost statements.
Objectives:
a. To compute cost of a product as an aid to pricing.
b. To value work in process.
c. To control costs.
Costing Two meanings:
a. To estimate costs.
b. Cost accounting.
151
Cost allocated Cost charged. Cost analysed. (Some cost accountants use the word
allocation to mean charge of whole items of cost as distinct from apportionment
which covers analysis of proportions of an item of cost.)
Cost apportioned Cost charged. Cost analysed. (Some cost accountants use the
word “apportionment” to mean analysis of proportions of items of cost. See also
cost allocated.)
Cost centre Centre for analysis of overhead into smaller cost sections. Used to
compute more precise overhead rates. Better cost control. Productive and
service cost centres.
Cost charged See cost allocated.
Cost classification Grouping of costs by common characteristics.
Cost code Series of alphabetical or numerical symbols to represent descriptive titles
in cost classification.
Cost control Objective of cost accounting. Achieved by:
1. Setting of budget or standard cost.
2. Recording of actual cost.
3. Comparison of standard and actual cost to compute variances (differences).
4. Investigation of cause of variances.
5. Action by responsible management.
Cost manual Manual of responsibilities, routines, forms and reports in a cost
system.
Cost of capital Not all real cost. It is the reward to each type of capital used by a
business i.e. creditors (nil.) loans (interest), preference shares (dividends),
ordinary shares (dividends).
Cost of sales Cost of goods actually sold. Labour, material and manufacturing
overhead adjusted for changes in inventory of raw material, work in process and
finished goods.
Cost report Cost statement.
Cost statement Statement of cost and/or operating results of all or part of a
business. Prepared promptly with reasonable accuracy. Contains comparative
data. Cost report.
Cost unit Unit of cost. Unit of product chosen as focus of cost accounting. Contract,
job, batch, product or process.
Current cost Actual cost. Not estimated cost. Not standard cost.
Depreciation Allocation of the cost of a fixed asset (building, equipment, vehicles,
etc.) over its working life. Measure of the cost of using the fixed asset. (Land
does not normally depreciate.) Methods: straight line, diminishing balance, sum
of the digits.
Direct costing Cost system for variable costs only. All fixed costs charged to income
statement and not to product or job cost accounts.
Direct costs Costs conveniently associated with a unit of product. Normally direct
labour, direct material, direct services (e.g.
152
hire of equipment for one specific job). All other costs are indirect costs known
as overhead expenses. (Some cost accountants also use the term “direct” for
specific costs, i.e. overhead expenses which are clearly identifiable with an
overhead cost centre but not with a unit of product.)
Direct expenses Direct costs which may be conveniently associated with unit of
product. Direct services. See direct costs.
Direct labour Labour conveniently associated with a unit of product. Direct wages.
Direct payroll. Covers all operating labour. Does not normally include inspectors
wages, foreman’s salary, indirect labour, wages paid to persons normally
employed on production for time spent on other work, etc. See direct costs.
Direct material Direct cost. Conveniently associated with a unit of product. Material
that forms part of the product sold. Not indirect material. Not manufacturing
overhead.
Direct services Direct expenses. Direct costs.
Direct wages Direct labour.
Distribution overhead Cost of packing and distributing the product. Indirect cost.
Overhead. Often grouped with sales overhead and charged to jobs as a
percentage of manufacturing cost.
Elements of cost Basic analysis of cost to compute overhead rates: direct labour
plus direct material plus direct services equals PRIME COST;
prime cost plus manufacturing overhead equals MANUFACTURING COST;
manufacturing cost plus sales, distributive and administrative overhead equals
TOTAL COST.
Expenditure Money paid for cost, expense, asset or other purposes.
Expense Indirect cost. Overhead. Manufacturing, selling or administrative overhead.
Not a direct cost. Not conveniently associated with a unit product. Fixed or
variable.
Expense analysis sheet Record of expenses for analysis.
Finished goods stock Inventory or stock of finished goods. Valued at lower of cost
(of labour, material and manufacturing overhead) or market value. Sometimes
valued at direct cost only.
First in first out price (FIFO) Method of costing material issues assuming that first
goods received are the first issued.
Fixed assets Assets such as land, buildings, plant and equipment acquired for long
term use in the business and not for resale. Valued at cost less accumulated
depreciation not at market value. Depreciation charged to overhead expense
periodically. (Exception: land is not normally depreciated.) Where the cost less
accumulated depreciation of a fixed asset, is completely unrelated to its current
value, then as an exceptional operation all assets may sometimes be restated
for all accounting purposes, at current values.
153
Fixed cost Cost not affected by variations in the volume of production. Not a variable
cost. Overhead may be fixed or variable cost.
General manufacturing overhead service cost centre
Cost centre used to
accumulate general manufacturing overhead items. Subsequently recharged on
an arbitrary basis to all cost centres. Covers such items as the factory manager’s
salary and office costs.
Historical costing Accumulation of past costs. Actual not standard costs.
Income statement Statement of sales, costs., expenses and profit for an accounting
period. Profit and loss account. Not a balance sheet.
Indirect cost Cost which cannot conveniently be associated with a unit of product.
Overhead expense. Indirect expense. Not direct cost.
Indirect expense See indirect cost.
Indirect labour Labour that cannot be conveniently associated with a unit of
production. Indirect cost. Overhead. Not direct labour but does include the nonproductive time and activity of normally direct workers.
Indirect material Material used which does not form a measurable part of the
product sold. Not conveniently associated with unit of product. Includes: oil, rags,
factory supplies, etc. Indirect cost. Usually manufacturing overhead. Sometimes
direct material of very low value is treated as indirect material to save clerical
costs.
Indirect wages Indirect labour.
Inventory Stock of goods. Raw material, work in process, finished goods. Valued at
the lower of manufacturing cost or market value. Sometimes valued at direct cost
only.
Iob card Record of work done by direct labour.
Iob Unit of cost. Single job, order or contract.
Iob costing Cost system based on one job as the unit of cost.
Labour hour rate Worker rate of pay per hour.
Labour time record Time card. Clock card.
Last in first out price (LIFO) Method of costing material issues assuming that the last
item received is the first item issued. Conservative in time of rising prices. Little
used except to avoid taxation.
Limitations of cost data Data for one purpose may not be relevant for other
purposes. Costs often meaningless unless prepared quickly and presented with
comparative data against which to measure performance. Cost depends upon
the judgment of the cost accountant.
Machine hour rate Two meanings:
a. Overhead rate for manufacturing overhead based on machine
154
hours worked on each job. Suitable for machine sections. Not
suitable
for assembly work.
b. Rate for operating a machine for one hour.
Maintenance cost Maintenance and repair of machines and buildings. Overhead.
Indirect cost. May be manufacturing sales or administrative.
Manufacturing overhead Indirect cost of running the factory. Includes rent, rates,
lighting, power, foreman, maintenance, repairs, insurance, etc. Does not include
the full cost of machines only machine depreciation.
Marginal cost Relevant cost of producing one more unit.
Marginal costing See marginal cost. Sometimes variable cost only. Sometimes used
to mean direct costing.
Material cost Cost of material used. See direct material and indirect material.
Material issue analysis sheet Record summarizing and analysing material issues by
jobs, contracts, products or overhead accounts.
Material requisition Stores or stock requisition. Issue ticket.
Objectives of cost accounting See cost accounting.
Occupancy Cost of occupying a building. Includes rent, rates, lighting, heating,
cleaning, maintenance, etc. Sometimes accumulated as a service cost centre
and recharged to other cost centres on the basis of floor space occupied. Avoids
apportionment of each individual cost to each cost centre separately.
Operating cost Cost of providing a service.
Opportunity cost Not a cost at all. The value of a particular alternative course of
action.
Organization (for cost accounting) Definition of authority and responsibility in a
business in order to design the appropriate cost accounting system. Cost
analysis follows the organization plan. Manufacturing, sales and administrative
costs may be analysed for the business as a whole, or for each division, or
product group.
Output costing Cost system for a business or department with only one output of
identical products.
Overhead absorbed See overhead charged.
Overhead allocated See overhead charged.
Overhead expense Indirect cost. Overhead. Fixed or variable with the volume of
production. See manufacturing, sales, distributive and administrative overhead.
Not direct cost.
Overhead Indirect cost cannot be conveniently associated with a unit of product.
Expense. Manufacturing, sales or administrative. Not direct cost.
Overhead charged Overhead allocated or absorbed or recovered.
155
Overhead charged to a contract, job or product using an overhead rate.
Overhead rate Rate for charging out overhead to jobs, contracts or products.
Routine;
1. compute amount of overhead.
2. estimate measure of activity.
3. compute overhead rate.
Measures of activity may be: direct labour cost, direct labour hours, prime cost or
machine hours. Overhead rates may be for the whole factory or for each cost
centre.
Overhead recovered See overhead charged.
Overhead under or over charged Overhead under or over absorbed, allocated,
recovered. Difference between overhead incurred and overhead charged to
contracts or jobs using an overhead rate. Overcharge indicates that actual
activity exceeded estimated activity. Credit or profit in the income statement
because job costs charged with too much overhead.
Undercharge indicates that actual activity was less than estimated activity. Loss
in the income statement because job costs charged with too little overhead.
Normally applied to manufacturing overhead. Not sales or administrative
overhead.
Payroll Wages sheet. Wages. Labour.
Payroll allocation Wages analysis.
Payroll analysis Wages analysis.
Pre-determined cost Cost estimate. Standard cost.
Primary costs Analysis of costs into labour, material and overhead. See elements of
cost.
Prime cost Direct labour plus direct material plus direct services. Direct cost. Does
not include overhead. Basis for overhead rate.
Process costing Cost system for a sequence of operations where the unit of cost is
one process.
Productive cost centre Cost centre engaged in direct manufacturing or productive
operations; machine shops, assembly shops, etc. Not a service cost centre.
Product group Group of products classified for cost analysis.
Profit and loss account Income statement. Not a balance sheet.
Relevant cost That part of total cost that is relevant to a particular decision or course
of action. Refers more to variable rather than fixed costs. May change over time.
Research cost Cost of research. Separate overhead or part of manufacturing
overhead. Indirect cost. Not normally direct cost.
Salary cost Not normally conveniently associated with a unit of product. Usually,
manufacturing sales or administrative overhead.
156
Sales overhead Cost of promoting sales and retaining custom. Indirect cost.
Overhead expense. Not manufacturing or administrative overhead. Includes:
advertising, sales literature, sales salaries, travelling expenses, depreciation of
sales cars, etc.
Service cost centre Cost centre for activities not engaged in direct productive
operations. Includes: power-house, maintenance, internal transport, production
control. Not a productive cost centre. Manufacturing overhead. Recharged to
appropriate cost centres.
Specific cost Indirect cost clearly associated with a specific cost centre. Not direct
cost. Overhead.
Standard cost Predetermined standard of performance against which to measure
actual cost. Standard costing as opposed to actual or historical costing.
Standard rate Rate which is set at the beginning of an accounting period. Not the
actual rate. Simplifies clerical work in cost accounting.
Stock Inventory of goods on hand. Stores. Raw material, work in process or finished
goods. Valued at the lower of manufacturing cost or market value.
Stock requisition Material requisition.
Stores requisition Material requisition.
Stores Location for keeping stock or inventory. Stock. Inventory.
Straight Line depreciation Depreciation method charging off the cost of a fixed asset
equally over the years of its working life.
Unabsorbed overhead See overhead undercharged
Unallocated overhead See overhead undercharged.
Uncontrollable cost See controllable cost.
Unit of cost Unit of product chosen for cost accounting. Contract, job, batch,
process.
Unit of product Unit of cost for cost accounting.
Unit of output Unit of product.
Variable cost Cost which varies with the volume of production or sales.
Variable expense Variable cost. Variable overhead.
Variance Difference between actual cost and the standard of performance i.e.
budget, standard cost or previous cost. Sometimes analysed into: price,
efficiency., seasonal and volume variances.
Wages Payroll. Pay of workers. Labour cost.
Wages analysis Payroll analysis. Record analysing labour cost by contract, job,
batch, process or overhead account.
Wages sheet Payroll. Record to compute gross and net pay.
Work in process See stock. Work partially completed. Valued at lower of
manufacturing cost or market value.
157
B. Quiz
A TEST OF KNOWLEDGE ACQUIRED FROM THE PROGRAMME
Estimated time 30 minutes
Note: Mark only the “most correct” answer to each question.
1. If we buy a whole live pig for £1, the cost of one of the pig’s ears:
a.
b.
c.
d.
may be computed scientifically
is related to the selling price of the pig
depends upon why we buy the pig
is nil
2. Cost Accounting is a technique for calculating the:
a.
b.
c.
d.
overall profit or loss of a business
price at which a business could be bought
selling price of a product
cost of a unit of production
3. If we buy goods for £4 and sell half of them immediately for £6, retaining the
remainder for sale later, our profit to date is:
a.
b.
c.
d.
£2
£4
£8
impossible to compute
4. If we manufacture 5½ units (one only half completed) for £55 and sell five units
for £100, our profit to date is:
a
b.
c.
d.
£45
£50
£55
£100
5. In computing the profit of a manufacturing business, the stocks (inventory) of raw
material, work in process, and finished goods left at the end of the period should
be:
a.
b.
c.
d.
valued at selling price less profit margin
valued at selling price
ignored
valued at cost or lower
158
6. Cost accounting divides costs into:
a. direct material, selling and manufacturing overhead
b. direct material and labour, selling and administrative overhead
c. direct labour and direct material, manufacturing, selling and administrative
overhead
d. direct labour and overhead
7. The system of cost accounting chosen for a particular business should:
a.
b.
c.
d.
be the same as that for other firms in the same industry
relate to the product
relate to the organization of the business
relate to the product and the organization of the business
8. One objective of cost accounting is to compute:
a. the true selling price of the product
b. the scientific cost of the product
c. the fair cost of the product
d. the company’s total costs
9. A cost centre is:
a. the middle of the cost accountant
b. a section of the business which can be used conveniently for accumulating
costs, so that all work done in that cost centre may be charged for on a
uniform basis
c. an intermediate—as opposed to a high or a low—cost
d. something else
10. The purpose of valuing work in process is:
a. to assist in the calculation of profit
b. to provide a basis for fixing selling prices
c. to find out how much work has still to be done
d. something else
11. Cost reports may be more useful in controlling costs if such reports are
submitted:
a. annually with absolute accuracy
b. semi-annually
c. monthly with absolute accuracy
d. rapidly with reasonable accuracy
159
12. Job costing is similar to:
a. standard costing
b. marginal costing
c. batch costing
d. process costing
13. For cost accounting purposes, the overhead costs of a business organization are
normally divided into:
a. management and workers
b. manufacturing, selling, distribution and administrative costs
c. buying and selling
d. direct and indirect costs
14. The direct labour and material cost of a job may be:
a. computed scientifically
b. more easily computed than the overhead for that job
c. allocated on a time basis
d. the basis for computing administrative overhead for that job
15. When valuing work in process, distribution costs should be:
a. included
b. excluded
c. partially included
d. deducted from the selling price
16. The charging of assembly shop overhead to a product may be based on the:
a. amount of selling and administrative overhead
b. quantity of direct material
c. amount of direct labour cost
d. number of machine hours
17. To charge manufacturing overhead to jobs, the overhead rate is best computed:
a. monthly, based on actual data for a past month
b. annually, based on data for a future period
c. annually, based on data for a past year
d. on some other basis
160
18. The total profit computed in cost accounting for all the jobs completed during the
period will be:
a. absolutely accurate
b. equal in total to the amount on the balance sheet
c. equal to the total profit of the income statement
d. reconcilable with the profit of the income statement
19. To determine what is “direct labour”, as opposed to “indirect labour”, we must ask
the question:
a. does the labour work regularly?
b. is the labour employed in the machine shop?
c. can the labour be conveniently associated with a unit of production?
d. is the labour done by a worker or by an engineer?
20. If there is uncharged manufacturing overhead at the end of the year:
a. job costs will show too little charge for overhead
b. job costs will show too much charge for overhead
c. overhead was definitely abnormally high
d. actual activity was definitely greater than the estimated activity
21. In computing the cost of a unit of production, normally:
a. direct costs are fairly definite and overhead costs depend upon allocations
and assumptions
b. all costs depend upon broad assumptions
c. the indirect costs are more definite than the direct costs
d. once the overhead rate is fixed, the direct costs may be calculated
22. In computing the profit of a manufacturing business:
a. closing work in process and finished goods may be ignored
b. closing work in process must be valued at cost and finished goods must
be valued at selling price
c. closing work in process and finished goods are not relevant to cost and
profit calculations
d. closing work in process and finished goods must both be valued at cost or
less
23. The cost of the foreman’s salary is normally:
a. direct labour
b. manufacturing overhead
c. administrative overhead
d. indirect material
161
24. The cost of factory heat and power is normally:
a. direct labour
b. manufacturing overhead
c. selling and administrative overhead
d. indirect material
25. The cost of sales literature is normally:
a. direct labour
b. manufacturing overhead
c. selling and administrative overhead
d. indirect material
26. The total cost of a new machine purchased during the year is normally:
a. direct material
b. manufacturing overhead
c. selling and administrative overhead
d. something else
27. The depreciation of the managing director’s motor car is normally:
a. direct material
b. manufacturing overhead
c. selling and administrative overhead
d. indirect material
28. The directors’ fees are normally:
a. non-productive labour
b. manufacturing overhead
c. selling and administrative overhead
d. indirect labour
29. Dividends and income tax payable by a company are normally:
a. direct labour
b. manufacturing overhead
c. selling and administrative overhead
d. something else
30. If a cost centre has direct labour of £2,000 against specific overhead of £4,000
and a share of general manufacturing overhead of £1,000, the overhead rate for the
cost centre is:
a. 100% of direct labour cost
b. 200% of direct labour cost
c. 250% of direct labour cost
d. 40% of direct labour cost
162
31. In computing the total cost of each productive cost centre, we must take the cost
of each service cost centre and allocate it to all:
a. productive cost centres equally
b. all productive cost centres on a fair basis
c. cost centres equally
d. appropriate cost centres on a fair basis
32. The objectives of cost accounting are:
a. simply to compute a fair cost
b. to set selling prices
c. to do both of these things
d. something more
33. The wages of an inspector of production in a factory should be treated as:
a. direct labour
b. part of material cost
c. indirect labour, unless conveniently associated with a unit of production
d. manufacturing overhead, even if it can be conveniently associated with a
unit of production
34. Selling prices depend on the:
a. cost of the product
b. efficiency of the sales force
c. amount that potential customers are prepared to pay
d. efficiency of the cost accounting system
35. Output cost accounting is similar to:
a. process costing
b. batch costing
c. contract costing
d. marginal costing
36. The elements of cost of a company making only one product are direct labour
£10,000, direct material £60,000, variable manufacturing overhead £12,000, fixed
manufacturing overhead £15,000, variable selling and administrative overhead
£13,000, and fixed selling and administrative overhead £14,000. If the company
produced and sold 10% more items, what would be the total cost?
a. £124,000
b. £126,700
c. £133,500
d. something else
163
37 Salaries and indirect wages are:
a. direct labour
b. recorded on job cards
c. manufacturing overhead
d. manufacturing, sales or administrative overhead
38. Direct labour on specific jobs or on overhead accounts is re corded on:
a. attendance cards
b. wages sheets
c. job time cards
d. something else
39. Direct workers’ time not spent directly on manufacturing the product is normally
charged to:
a. direct labour
b. selling overhead
c. manufacturing overhead
d. administrative overhead
40. Product A sells for £20, involves £12 of variable cost. Product B sells for £25,
involves £15 of variable cost. What will be the company’s profit if it sells 100
items of product A and 200 items of product B, when its fixed cost is £2,500?
a. £1,700
b. £2,000
c. £300
d. something else
41. The most useful analysis of costs for decision making purposes is into:
a. manufacturing and selling
b. direct and indirect
c. present and past
d. relevant and not relevant
42. Overtime premium is:
a. the amount paid for time worked in excess of normal hours
b. always charged to direct labour
c. extra payment to workers, in addition to their normal rates, when working
overtime
d. illegal
164
43 Responsibility accounting is particularly concerned with:
a. historical accounting
b. controllable costs
c. storekeeping
d. indirect wages
44. The system of costing most likely to be found in a bus company is:
a. job costing
b. batch costing
c. contract costing
d. output costing
45. In the case of long-term contracts, credit may be taken for profit to the extent of:
a. payments received to date
b. costs incurred to date
c. expected final profit
d. profit earned to date less provisions for possible future losses
46. The most suitable cost centre overhead rate for an assembly shop is based on:
a. machine hours
b. labour costs
c. labour hours
d. prime costs
47. We often convert “in process units” into equivalent finished units by:
a. waiting until they are completed
b, ignoring overheads
c. applying ratios based upon the amount of work done
d, applying standard prices
48. The “contribution” of a job is the:
a. gross profit
b. net profit
c. excess of sales revenue over variable costs
d. difference between fixed and variable costs
49. The costs of internal transport, repairs, maintenance, power sections in a factory
are normally charged:
a. to specific productive cost centres
b. initially to one service cost centre and subsequently to productive cost
centres only
165
c. initially to one service centre and subsequently to selling and
administrative overhead
d. initially to various service cost centres and subsequently to other cost
centres on a reasonable basis
50. Manufacturing overhead should be recovered (charged to jobs):
a. at one rate for the whole factory
b. at different rates for each cost centre
c. on the basis of selling and administrative overhead
d. in some other way
51. If we compute manufacturing overhead rates for individual cost centres:
a. there is not likely to be much difference between the various cost centre
rates
b. the manufacturing overhead rates are more complicated and less accurate
c. there is more clerical work but little benefit
d. the overhead rates for the various cost centres will be related to the actual
cost incurred by these cost centres
52. A factory had a total manufacturing overhead of £20,000 against a direct labour
cost of £10,000 and used an overhead rate of 200%. A new cost accountant set
up two separate cost centres: in Cost Centre “A” direct labour was £8,000 and
overhead £8,000, and in Cost Centre “B” direct labour was £2,000 and overhead
£12,000. When we compare the new cost system with the old system:
a. the old overhead rate of 200% will be replaced by two new rates of 100%
and 200% respectively
b. it will make no difference to the total cost of the product where the direct
labour cost is the same in Cost Centre A as it is in Cost Centre B
c. it will make no difference to the total cost of the product where the direct
labour cost in Cost Centre A is six times as much as the direct labour cost
in Cost Centre B, but it will make a difference to the cost of other products
d. it will make no difference to the total cost of the product where the direct
labour cost in Cost Centre A is four times as much as the direct labour
cost in Cost Centre B, but it will make a difference to the cost of other
products
166
53 Using the data in No. 52, the labour and overhead cost of a job which used 8
hours labour in Cost Centre A and none in Cost Centre B would be:
a. unchanged by the new system
b. increased by the new system
c. reduced by the new system
d. impossible to determine unless additional information were known
54. In a manufacturing company where the policy is to make a profit on each job
equal to 10% of the total cost of that job, the total costs for a year are:
£
Material
100,000
Direct Labour—Dept. X
10,000
Direct Labour—Dept. Y
20,000
Manufacturing Overhead—Dept. X
20,000
Manufacturing Overhead—Dept. Y
60,000
Selling and Administrative Overhead
42,000
If manufacturing overhead is charged on the basis of direct labour cost and the
selling and administrative overhead is charged on the basis of the total
manufacturing cost, what would be the selling price of the following job:
£
Material
25,000
Direct Labour—Dept. X
5,000
Direct Labour—Dept. Y
6,000
a.
b.
c.
d.
£84,480
£105,600
£76,800
something else
55. The manufacturing overhead rate for the current year is best computed from:
a. this year’s estimated manufacturing overhead divided by the actual direct
labour hours last year
b. last year’s manufacturing overhead divided by the actual direct labour
hours last year
c. last year’s manufacturing overhead divided by the estimated direct labour
hours this year
d. this year’s estimated manufacturing overhead divided by the estimated
direct labour hours this year
167
56. If a company bases its overhead rate on direct labour hours and the actual labour
hours turn out to be less than estimated labour hours, there will be:
a. under charged overhead
b. over charged overhead
c. neither under charged nor over charged overhead
d. revised manufacturing overhead rates
57. Uncharged manufacturing overhead is most likely to arise because the:
a. direct costs were not charged to jobs
b. manufacturing overhead was not charged to jobs because the rate was
computed inaccurately
c. manufacturing overhead was less than forecast
d. the estimated volume of production was not achieved
58. The method of charging manufacturing overhead to products should always be a:
a. percentage of direct labour cost if all jobs involve different amounts of
direct labour and the wage rates payable vary
b. machine hour rate if some parts of the factory are mechanized
c. machine hour rate for departments using extensive machines and labour
hour rates for departments where most of the work is done manually
d. percentage of prime costs because no method of allocating overhead is
accurate
59. Selling and administrative expense may be charged to the products as a:
a. percentage of direct labour cost
b. percentage of the selling price
c. percentage of prime cost
d. percentage of the manufacturing cost
60. Which costs may be charged to cost centres on the basis of space occupied?
a. managers’ salaries
b. power
c. machine depreciation
d. rent
168
61. Which of the following should not be included in selling and distribution overhead:
a. salesmen’s salaries, commission and expenses
b. showroom and finished goods warehouse costs
c. the small cartons in which all the company’s products are packed and
which the ultimate consumer receives when buying a product
d. the packing cases into which the small cartons are some times packed.
62. The first consideration when deciding how much detailed work should be involved
when analysing costs by products should be the:
a. cost of getting the data
b. skill of the cost accountant
c. legal requirements
d. reliability and usefulness of the analysis when completed
63. The objective of allocating all costs to products is to:
a. produce a scientifically accurate cost
b. avoid unallocated overhead and compute total product cost
c. co-ordinate the cost and financial accounts
d. compute the “contribution” of the product to the final profit
64. In contract costing the unit of cost is:
a. labour and material
b. the contract
c. that part of the contract that has been completed
d. something else
65. To evaluate the efficiency of operations the actual contract cost data may be
compared with the:
a. profit and loss account
b. original estimate
c. last contract for the same customer
d. contract completed most recently for any customer
66. If we own and operate a car at an overall cost of 1s per mile. Would it pay to hire
a car for 4d a mile for one journey of 10 miles?
a. No, providing petrol and oil costs less than 4d a mile
b. Yes, providing petrol and oil costs less than 4d a mile
c. No
d. Yes
169
67. Which of the following costing systems would you expect to find in a chemical
works:
a. contract costing
b. batch costing
c. process costing
d. job costing
68. Where a product passes through a series of operations in sequence, cost
accounting is normally done by:
a. process costing designed to produce the cost of a product
b. process costing designed to produce the cost of each process
c. job costing designed to produce the cost of each job
d. some other way
69. Costs that are the same per unit of production but increase in total when the
volume of production increases are:
a. fixed costs
b. semi-variable costs
c. variable costs
d. standard costs
70. Cost reports for management should show:
a. as much detail as possible to all levels of management
b. only summary figures
c. details of non-controllable expenses appropriate to the level of
management for which the report is prepared
d. cost data and comparable data useful to management for decision making,
pyramided for higher levels of management
71. If a job has direct labour costs of £10, direct material costs of £20, a
manufacturing overhead rate of 200% of direct labour cost, and a selling and
administrative overhead rate of 10% of manufacturing cost, should we
subcontract it for £45?
a. Yes
b. No
c. No, if overhead is fixed
d. Yes, if overhead is fixed
170
72. A contract has direct labour cost of £20, direct material cost of £20, and four
hours of machine time. The normal machine hour overhead rate is £10 per hour.
The variable cost of the contract is probably:
a. £40
b. £60
c. £80
d. something else
73. In the case of a particular job, the direct labour cost in Department A (where 20
hours work is involved) is £30 and the direct labour cost in Department B (where
8 hours work is involved) is £5. The direct material cost is £20 and production
department overheads are recovered at the rate of £1 per hour in Department A
and at the rate of £2 per hour in Department B. The manufacturing cost of this job
is therefore:
a. £83
b. £55
c. £91
d. something else
74. A job has direct labour costs of £10, direct material costs of £20, fixed
manufacturing overhead of £15, variable manufacturing overhead of £10, and
fixed selling and administrative over head of £12. Its selling price is £75. What is
the profit of the job and what is the “contribution” of the job?
a. £8 and £30
b. £8 and £35
c. £8 and £20
d. something else
75. Cost accounting data:
a. if accurately prepared is always suited to many different purposes
b. is usually difficult to prepare and is seldom of great value
c. must be specially prepared in relation to each particular decision
d. is a scientific fact and cannot be disputed
76. If a company has been operating at a high level of capacity and on this basis has
computed its overhead rate for cost estimating purposes, will its cost estimates
tend to be relatively:
a. high
b. low
171
c. average
d. unpredictable so far as accuracy is concerned
77. If the same company experiences a recession and it recomputes its
manufacturing overhead rate on the assumption that only a small proportion of its
capacity will be utilized, will its cost estimates tend to be relatively:
a. high
b. low
c. average
d. unpredictable so far as accuracy is concerned
78. The purchase of a machine costing £1,500, and having a working life of 3 years,
is expected to lead to a reduction of £1,000 per year in the labour costs. The
manufacturing overhead recovery rate is 500% of direct labour cost. The total
savings over a period of three years resulting from the purchase of this machine
will probably be:
a. £1,500
b. £16,500
c. more than £1,500 but less than £16,500
d. something else
79. In the case of a company manufacturing only one type of product, the direct
material costs per unit are £40, and 10 hours work is involved per unit produced.
The direct labour cost is £1 per hour and variable manufacturing overheads
amount to 200% of the direct labour cost. If the fixed manufacturing overheads
amount to £1,000 per year, what is the manufacturing cost per unit if the annual
output is (a) 1,000 units and if it is (b) 100 units?
a. (a) £151 (b) £160
b. (a) £71 (b) £80
c. (a) £131 (b) £140
d. something else
80. “The actual cost of a product may vary according to the time it is produced, the
assumptions adopted by the cost accountant and the volumes of production and
other things in the factory.” This statement is:
a. always true
b. partly true, partly false
c. sometimes true
d. false
172
FOR THE TEACHER
Programmed learning is designed to simulate an individual tutor. In designing this
programme, we have analysed in detail what knowledge and skills we are trying to
teach, and what behaviour we expect of the student, when he has completed the
programme.
The advantages of the programme are:—
1. Each student can learn at the pace most suitable for him.
2. The student studies advanced material only when he has mastered the
elementary material.
3. The programme is designed to prompt a correct answer from the student. The
aim is to reward the student as much as possible. If he is rewarded, he will be
motivated to continue paying attention.
4. The student cannot daydream. He is continuously active and receives immediate
and continuous confirmation of his success in learning the material.
5. Frames are designed to bring the critical point to the attention of the student, and
to establish his understanding of each critical point.
The record of responses made by the student highlights areas where the
programme might well be reconsidered. No programme is perfect, and consistent
errors in any one frame by many students, may indicate that the frame should be
redesigned.
173
ANSWERS TO THE QUIZ
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
c
d
b
b
d
c
d
c
b
a
d
c
b
b
b
c
b
d
c
a
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
GRADING:
a
d
b
b
c
d
c
c
d
c
d
d
c
c
a
c
d
c
c
c
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
d
c
b
d
d
c
c
c
d
b
d
d
c
a
d
a
d
c
d
d
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
c
d
b
b
b
a
c
b
c
d
c
d
c
b
c
b
a
c
b
a
70–80
60–70
Under 60
Excellent
Good
Fair, repeat the programme
at a later date.
FINAL NOTE
We hope that you have enjoyed this programme and that you have finally solved
to your satisfaction the many puzzles that we have presented to you. We believe that
learning of accounting can be both intriguing and entertaining.
You will retain and expand the knowledge you have acquired from this
programme, if you seek out every opportunity to use it in your day-to-day work. Have
we stimulated you to be a little curious about accounting in the future?
174
GLOSSARY OF COST ACCOUNTING LANGUAGE
Absorbed overhead See overhead charged.
Accounting Art of preparing accounting reports from books and other records.
Based on concepts and principles: true and fair, money, cost, conservatism,
consistency, comparability, entity, going concern, recognition of profit, etc.
Accounting period Period of time between one balance sheet and the next. Period of
the income statement. Usually a month or one year.
Administrative overhead Cost of directing and controlling a business. Indirect cost.
Administrative expense. Includes: director fees, office salaries, office rent, legal
fees, auditors fees, accounting services, etc. Not research, manufacturing, sales
or distribution overhead.
Allocated overhead See overhead charged.
Balance Sheet Statement of assets and how they are financed from liabilities and
owners equity. Not an income statement,
Batch Group of identical products or jobs.
Batch costing Cost system where the unit of cost is a batch. Similar to job costing.
Contract costing Cost system where the unit of cost is one contract. For long term
contracts a proportion of the profit to date may be taken each year.
Contribution Excess of selling price over variable cost. Contributes to fixed overhead
and profit. Also used in make or buy decisions, as the excess of purchase price
over relevant cost of making.
Controllable cost Cost for which some person may prepare a budget and be held
responsible for the variance between actual cost and budget.
Cost Several meanings:
a. Expenditure on a given thing.
b. To compute the cost of something.
c. Direct cost or indirect cost (indirect cost is overhead expense).
Cost accounting Recording of cost data and preparation of cost statements.
Objectives:
a. To compute cost of a product as an aid to pricing.
b. To value work in process.
c. To control costs.
Costing Two meanings:
a. To estimate costs.
b. Cost accounting.
175
Cost allocated Cost charged. Cost analysed. (Some cost accountants use the word
allocation to mean charge of whole items of cost as distinct from apportionment
which covers analysis of proportions of an item of cost.)
Cost apportioned Cost charged. Cost analysed. (Some cost accountants use the
word “apportionment” to mean analysis of proportions of items of cost. See also
cost allocated.)
Cost centre Centre for analysis of overhead into smaller cost sections. Used to
compute more precise overhead rates. Better cost control. Productive and
service cost centres.
Cost charged See cost allocated.
Cost classification Grouping of costs by common characteristics.
Cost code Series of alphabetical or numerical symbols to represent descriptive titles
in cost classification.
Cost control Objective of cost accounting. Achieved by:
1. Setting of budget or standard cost.
2. Recording of actual cost.
3. Comparison of standard and actual cost to compute variances (differences).
4. Investigation of cause of variances.
5. Action by responsible management.
Cost manual Manual of responsibilities, routines, forms and reports in a cost
system.
Cost of capital Not all real cost. It is the reward to each type of capital used by a
business i.e. creditors (nil.) loans (interest), preference shares (dividends),
ordinary shares (dividends).
Cost of sales Cost of goods actually sold. Labour, material and manufacturing
overhead adjusted for changes in inventory of raw material, work in process and
finished goods.
Cost report Cost statement.
Cost statement Statement of cost and/or operating results of all or part of a
business. Prepared promptly with reasonable accuracy. Contains comparative
data. Cost report.
Cost unit Unit of cost. Unit of product chosen as focus of cost accounting. Contract,
job, batch, product or process.
Current cost Actual cost. Not estimated cost. Not standard cost.
Depreciation Allocation of the cost of a fixed asset (building, equipment, vehicles,
etc.) over its working life. Measure of the cost of using the fixed asset. (Land
does not normally depreciate.) Methods: straight line, diminishing balance, sum
of the digits.
Direct costing Cost system for variable costs only. All fixed costs charged to income
statement and not to product or job cost accounts.
Direct costs Costs conveniently associated with a unit of product. Normally direct
labour, direct material, direct services (e.g.
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hire of equipment for one specific job). All other costs are indirect costs known
as overhead expenses. (Some cost accountants also use the term “direct” for
specific costs, i.e. overhead expenses which are clearly identifiable with an
overhead cost centre but not with a unit of product.)
Direct expenses Direct costs which may be conveniently associated with unit of
product. Direct services. See direct costs.
Direct labour Labour conveniently associated with a unit of product. Direct wages.
Direct payroll. Covers all operating labour. Does not normally include inspectors
wages, foreman’s salary, indirect labour, wages paid to persons normally
employed on production for time spent on other work, etc. See direct costs.
Direct material Direct cost. Conveniently associated with a unit of product. Material
that forms part of the product sold. Not indirect material. Not manufacturing
overhead.
Direct services Direct expenses. Direct costs.
Direct wages Direct labour.
Distribution overhead Cost of packing and distributing the product. Indirect cost.
Overhead. Often grouped with sales overhead and charged to jobs as a
percentage of manufacturing cost.
Elements of cost Basic analysis of cost to compute overhead rates: direct labour
plus direct material plus direct services equals PRIME COST;
prime cost plus manufacturing overhead equals MANUFACTURING COST;
manufacturing cost plus sales, distributive and administrative overhead equals
TOTAL COST.
Expenditure Money paid for cost, expense, asset or other purposes.
Expense Indirect cost. Overhead. Manufacturing, selling or administrative overhead.
Not a direct cost. Not conveniently associated with a unit product. Fixed or
variable.
Expense analysis sheet Record of expenses for analysis.
Finished goods stock Inventory or stock of finished goods. Valued at lower of cost
(of labour, material and manufacturing overhead) or market value. Sometimes
valued at direct cost only.
First in first out price (FIFO) Method of costing material issues assuming that first
goods received are the first issued.
Fixed assets Assets such as land, buildings, plant and equipment acquired for long
term use in the business and not for resale. Valued at cost less accumulated
depreciation not at market value. Depreciation charged to overhead expense
periodically. (Exception: land is not normally depreciated.) Where the cost less
accumulated depreciation of a fixed asset, is completely unrelated to its current
value, then as an exceptional operation all assets may sometimes be restated
for all accounting purposes, at current values.
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Fixed cost Cost not affected by variations in the volume of production. Not a variable
cost. Overhead may be fixed or variable cost.
General manufacturing overhead service cost centre
Cost centre used to
accumulate general manufacturing overhead items. Subsequently recharged on
an arbitrary basis to all cost centres. Covers such items as the factory manager’s
salary and office costs.
Historical costing Accumulation of past costs. Actual not standard costs.
Income statement Statement of sales, costs., expenses and profit for an accounting
period. Profit and loss account. Not a balance sheet.
Indirect cost Cost which cannot conveniently be associated with a unit of product.
Overhead expense. Indirect expense. Not direct cost.
Indirect expense See indirect cost.
Indirect labour Labour that cannot be conveniently associated with a unit of
production. Indirect cost. Overhead. Not direct labour but does include the nonproductive time and activity of normally direct workers.
Indirect material Material used which does not form a measurable part of the
product sold. Not conveniently associated with unit of product. Includes: oil, rags,
factory supplies, etc. Indirect cost. Usually manufacturing overhead. Sometimes
direct material of very low value is treated as indirect material to save clerical
costs.
Indirect wages Indirect labour.
Inventory Stock of goods. Raw material, work in process, finished goods. Valued at
the lower of manufacturing cost or market value. Sometimes valued at direct cost
only.
Iob card Record of work done by direct labour.
Iob Unit of cost. Single job, order or contract.
Iob costing Cost system based on one job as the unit of cost.
Labour hour rate Worker rate of pay per hour.
Labour time record Time card. Clock card.
Last in first out price (LIFO) Method of costing material issues assuming that the last
item received is the first item issued. Conservative in time of rising prices. Little
used except to avoid taxation.
Limitations of cost data Data for one purpose may not be relevant for other
purposes. Costs often meaningless unless prepared quickly and presented with
comparative data against which to measure performance. Cost depends upon
the judgment of the cost accountant.
Machine hour rate Two meanings:
a. Overhead rate for manufacturing overhead based on machine
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hours worked on each job. Suitable for machine sections. Not
suitable
for assembly work.
b. Rate for operating a machine for one hour.
Maintenance cost Maintenance and repair of machines and buildings. Overhead.
Indirect cost. May be manufacturing sales or administrative.
Manufacturing overhead Indirect cost of running the factory. Includes rent, rates,
lighting, power, foreman, maintenance, repairs, insurance, etc. Does not include
the full cost of machines only machine depreciation.
Marginal cost Relevant cost of producing one more unit.
Marginal costing See marginal cost. Sometimes variable cost only. Sometimes used
to mean direct costing.
Material cost Cost of material used. See direct material and indirect material.
Material issue analysis sheet Record summarizing and analysing material issues by
jobs, contracts, products or overhead accounts.
Material requisition Stores or stock requisition. Issue ticket.
Objectives of cost accounting See cost accounting.
Occupancy Cost of occupying a building. Includes rent, rates, lighting, heating,
cleaning, maintenance, etc. Sometimes accumulated as a service cost centre
and recharged to other cost centres on the basis of floor space occupied. Avoids
apportionment of each individual cost to each cost centre separately.
Operating cost Cost of providing a service.
Opportunity cost Not a cost at all. The value of a particular alternative course of
action.
Organization (for cost accounting) Definition of authority and responsibility in a
business in order to design the appropriate cost accounting system. Cost
analysis follows the organization plan. Manufacturing, sales and administrative
costs may be analysed for the business as a whole, or for each division, or
product group.
Output costing Cost system for a business or department with only one output of
identical products.
Overhead absorbed See overhead charged.
Overhead allocated See overhead charged.
Overhead expense Indirect cost. Overhead. Fixed or variable with the volume of
production. See manufacturing, sales, distributive and administrative overhead.
Not direct cost.
Overhead Indirect cost cannot be conveniently associated with a unit of product.
Expense. Manufacturing, sales or administrative. Not direct cost.
Overhead charged Overhead allocated or absorbed or recovered.
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Overhead charged to a contract, job or product using an overhead rate.
Overhead rate Rate for charging out overhead to jobs, contracts or products.
Routine;
1. compute amount of overhead.
2. estimate measure of activity.
3. compute overhead rate.
Measures of activity may be: direct labour cost, direct labour hours, prime cost or
machine hours. Overhead rates may be for the whole factory or for each cost
centre.
Overhead recovered See overhead charged.
Overhead under or over charged Overhead under or over absorbed, allocated,
recovered. Difference between overhead incurred and overhead charged to
contracts or jobs using an overhead rate. Overcharge indicates that actual
activity exceeded estimated activity. Credit or profit in the income statement
because job costs charged with too much overhead.
Undercharge indicates that actual activity was less than estimated activity. Loss
in the income statement because job costs charged with too little overhead.
Normally applied to manufacturing overhead. Not sales or administrative
overhead.
Payroll Wages sheet. Wages. Labour.
Payroll allocation Wages analysis.
Payroll analysis Wages analysis.
Pre-determined cost Cost estimate. Standard cost.
Primary costs Analysis of costs into labour, material and overhead. See elements of
cost.
Prime cost Direct labour plus direct material plus direct services. Direct cost. Does
not include overhead. Basis for overhead rate.
Process costing Cost system for a sequence of operations where the unit of cost is
one process.
Productive cost centre Cost centre engaged in direct manufacturing or productive
operations; machine shops, assembly shops, etc. Not a service cost centre.
Product group Group of products classified for cost analysis.
Profit and loss account Income statement. Not a balance sheet.
Relevant cost That part of total cost that is relevant to a particular decision or course
of action. Refers more to variable rather than fixed costs. May change over time.
Research cost Cost of research. Separate overhead or part of manufacturing
overhead. Indirect cost. Not normally direct cost.
Salary cost Not normally conveniently associated with a unit of product. Usually,
manufacturing sales or administrative overhead.
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Sales overhead Cost of promoting sales and retaining custom. Indirect cost.
Overhead expense. Not manufacturing or administrative overhead. Includes:
advertising, sales literature, sales salaries, travelling expenses, depreciation of
sales cars, etc.
Service cost centre Cost centre for activities not engaged in direct productive
operations. Includes: power-house, maintenance, internal transport, production
control. Not a productive cost centre. Manufacturing overhead. Recharged to
appropriate cost centres.
Specific cost Indirect cost clearly associated with a specific cost centre. Not direct
cost. Overhead.
Standard cost Predetermined standard of performance against which to measure
actual cost. Standard costing as opposed to actual or historical costing.
Standard rate Rate which is set at the beginning of an accounting period. Not the
actual rate. Simplifies clerical work in cost accounting.
Stock Inventory of goods on hand. Stores. Raw material, work in process or finished
goods. Valued at the lower of manufacturing cost or market value.
Stock requisition Material requisition.
Stores requisition Material requisition.
Stores Location for keeping stock or inventory. Stock. Inventory.
Straight Line depreciation Depreciation method charging off the cost of a fixed asset
equally over the years of its working life.
Unabsorbed overhead See overhead undercharged
Unallocated overhead See overhead undercharged.
Uncontrollable cost See controllable cost.
Unit of cost Unit of product chosen for cost accounting. Contract, job, batch,
process.
Unit of product Unit of cost for cost accounting.
Unit of output Unit of product.
Variable cost Cost which varies with the volume of production or sales.
Variable expense Variable cost. Variable overhead.
Variance Difference between actual cost and the standard of performance i.e.
budget, standard cost or previous cost. Sometimes analysed into: price,
efficiency., seasonal and volume variances.
Wages Payroll. Pay of workers. Labour cost.
Wages analysis Payroll analysis. Record analysing labour cost by contract, job,
batch, process or overhead account.
Wages sheet Payroll. Record to compute gross and net pay.
Work in process See stock. Work partially completed. Valued at lower of
manufacturing cost or market value.
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EXERCISES 1-8
CREATIVE COST CONTROL
1. SUMMARY
Cost reduction is a key objective of cost accounting an control, with new CCI's
(Cost Control Initiatives) becoming continually evident.
Every cost can be reduced over time by: economy, technological advance,
cutting operations and planning. Compare activity five years ago with today, to
indicate the past potential for cost savings. Then treat cost saving as a normal
part of management.
Costs grow "naturally" unless controlled. Managers should not be "happy" but
"motivated towards increasing efficiency. Set up cost reduction teams using
such tools as: O & M, operations research, ABC, JIT, standard cost accounting,
strategic cost management etc.
Activity based costing (ABC) recognizes that with increasing automation, direct
labour may be only 10% of manufacturing cost and thus other "cost drivers"
should be used to allocate overhead cost to products.
Just In Time (JIT) inventory control by major companies reduces inventory
holding and handling charges, through managed supplier relationships.
Standard cost accounting (SCA) provides engineering standards of product
cost and allows variances with actual cost to be associated with price, efficiency
and volume analysis. "Backflush" accounting uses standards to simplify
accounting for work in progress and finished goods, and relies heavily on
physical controls of efficiency e.g. number of defective parts, waste quantities
etc.
Waste reduction audits (WRA) investigate material inputs and outputs for each
process, to identify waste and achieve cost savings by reduction, re-use and
recycling.
Strategic cost control (SCC) starts with the cost structure of the enterprise in
terms of fixed and variable costs to reinforce only those activities that "add
value" to the operations of the enterprise. It creates "environmental motivation"
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within the organization which motivates managers to seek higher levels of cost
efficiency and effectiveness.
The key to cost accounting, control and reduction is "management motivation".
IRT helps us to learn efficiently and effectively.
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2. COST REDUCTION PROGRAMMES
Every cost can be reduced over time by: economy, technological advance,
cutting operations and planning. Compare activity five years ago with today to
indicate the past potential for cost savings. Then treat cost saving as a normal
part of management. Costs grow "naturally" unless controlled. Managers
should not be "happy" but "motivated towards increasing efficiency.
Develop attitudes for cost control and reduction every year. Budget for cost
reduction every year. Examine each area of operations for possible:
elimination, combination, changing sequence and simplification. Revise
standards to enforce technical improvements every year.
Set up cost reduction teams using such tools as: O & M, operations research,
ABC, JIT, standard costs, strategic cost management etc. to cut costs. Use a
creative approach to avoid routine blocks; use lateral thinking and brain
storming to develop new ideas for cost control problem solving.
Other cost reduction techniques include:
1.
New standard costs - related to market needs rather than engineering,
thus requiring simplification and change in: materials, number of parts,
number of set-ups, processes, products, packaging etc.
2.
Direct labour and overhead cutting by adopting increased automation.
3.
Development of profit centers for manufacturing, marketing and sales
units, with transfer prices to motivate "profit orientation"
4.
Strategic purchasing management to get benefit from "make v buy"
opportunities from design to distribution of all products.
Cost reduction may use the "six C's" approach involving:
1.
Controls - timely reporting of actual and against target
2.
Compensation - reward and punishment systems that provide economic
incentives
3.
Change process - welcome for change in materials, processes, plant,
products, marketing, distribution and disposal of products
4.
Continuous education for management to stimulate new ideas and ways
of thinking about problems
5.
Champions - publication of results by specific units that achieve
exceptional results.
184
6.
Commitment - to cost reduction every year as a normal task of every
operating manager
185
Cost accounting should be action-oriented with "timely data" to support cost
reduction by: score-keeping, focussing attention on critical areas and providing
relevant data to assist in problem solving.
Such timely "feedback" motivates cost reduction by change of: goals, methods,
forecasts, processes, rewards and it stimulates managers to find new
alternatives (CCI's).
Financial crises may require "crash" programmes whereby: less essential
departments are eliminated, staff are reduced by a flat 20% to force managers
to rethink activities that "add value".
Action teams get specific targets to perform "miracles" of cost cutting, and a
strategy of "cost surgery" cuts rapidly and clearly so as to quickly re-establish
confidence in the organization.
For cost reduction programmes the routine cost accounting reports are never
adequate; thus special relevant cost studies and reports must be prepared to
help with decision-making.
Write down and justify the answers to following questions (true/false):
1.
2.
Cost reduction is much harder in older industries.
Standards set by good engineers should not be changed by market
considerations.
3.
The five C's are: compensation, champions, change process, continuous
training, controls and commitment.
Waste reduction benefits the environment and company profits.
4.
5.
6.
7.
8.
Management training for cost reduction is "cost-effective" in all
industries.
All fixed costs are variable over time.
Cost reduction under financial crisis must be perceive by management
as fair.
All costs grow naturally over time.
Answers: F T T T F T
186
3. ACTIVITY BASED COSTING (ABC)
ABC recognizes that with increasing automation, direct labour may be only 10%
of manufacturing cost and thus other "cost drivers" should be used to allocate
overhead cost to products.
ABC is justified when management is not motivated by other cost control
systems and there is significant variation in: product volume, mix, size,
complexity, materials, set-up, parts etc. such that direct labour or machine
hours are not good "cost drivers".
ABC starts by defining the critical activities that "add value"; it then defines "cost
categories" and "cost drivers" to allocate overhead to product cost. Product cost
then changes from: direct material plus direct labour plus overhead, to material
plus a series of conversion costs.
This avoids the traditional overhead allocation based on direct labour or
machine hours, and tries to focus management attention on activities that "add
value" to the product, with a series of "cost drivers e.g. number of parts, number
of set-ups, automated operation per part, manual operation per part etc.
187
Simple example:
Labour based cost:
ECU
Direct materials per unit
Direct labour
Manufacturing overhead. @ 250% DL
400
100
250
Manufacturing cost per unit
750
Activity based cost (ABC):
Direct materials per unit
Materials handling
70 parts
Machining
2 hours
Assembly
70 parts
Inspection
1 unit
Manufacturing cost per unit
@ ECU
@ ECU
@ ECU
@ ECU
.30
34.00
1.90
20.00
ECU
400
21
68
133
20
642
In highly automated manufacturing direct labour may be only 5% of
manufacturing cost and thus inappropriate for overhead allocation.
Where different products and volumes require special set-ups, direct labour
based cost drivers tend to:
under-cost small complex runs (many different parts) and
over-cost simplified (standardized parts) high volume products.
188
Write down and justify the answers to the following questions (true/false):
1.
Part No. 111 costs ECU 10 and can be used for only one product, is
cheaper than part No. 112, which costs ECU 12 but can do the same job
in all of the product range.
2.
JIT and ABC always go together.
3.
For most manufacturing enterprises ABC is now better than labour
based cost accounting.
4.
For relevant cost analysis ABC probably gives better data than labour
based cost accounting.
5.
Cost reduction is motivated by ABC.
Answers: F F F T T
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4. JUST IN TIME (JIT) INVENTORY CONTROL
JIT inventory control seeks to reduces inventory holding and material handling
charges, through managed supplier relationships. Inventory levels of four
weeks supply are often been reduced to the level of four hours, with subcontracted parts moving from transport directly to production lines.
JIT systems require stable suppliers and delivery systems to avoid shut-downs
due to lack of parts. This involves special selection of major and back-up
suppliers and quality control arrangements, to enable delivery within hours.
Thus distant suppliers unable to deliver within fixed time limits (say 48 hours)
may be excluded.
JIT may well force suppliers to hold the inventory levels formerly held by their
major client companies.
JIT usually leads to simplification of parts, materials handling, packaging and
quality control procedures as well as cutting inventory levels.
Write down and justify the answers to the following questions (true/false):
1.
In 2007 every company should adopt JIT systems.
2.
The major cost reduction of JIT systems is savings in interest on
inventory levels.
3.
The major cost reduction of JIT systems is savings in material handling.
4.
JIT requires a new costing system.
5.
The major risk of JIT is shut-down due to lack of parts.
Answers: F F T F T
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5. STANDARD COST ACCOUNTING
Standard cost accounting provides engineering standards of product cost and
allows variances with actual cost to be associated with price, efficiency and
volume analysis. "Backflush" accounting uses standards to simplify accounting
for work in progress and finished goods.
The best performance target should be the standard cost from engineering
studies on a "Standard Cost Sheet" indicating:
1. standard hours at standard labour rate
2. standard material quantities at standard material costs
3. standard overhead allocations
The standard cost system is only as good as the standards set each year.
Product cost is standard cost. Standards are set by the engineering department
together with purchasing, personnel and operating managers. They are not
normally changed during the year.
Variances are developed not by products but by departments responsible
operations, in terms of:
for
1.
price - difference in actual and standard price for the actual quantity
purchased
2.
efficiency - difference between actual quantity of material and labour
used
3.
volume - difference in fixed overhead due to actual volume being more
or less than standard.
Do not change standards too frequently: associate variances with managers
responsible; control the "material" (significant) variance very carefully.
Some multi-nationals are beginning to set revised (lower) standard costs every
year, with "market" pressures for lower costs" rather than from what engineers
say is "necessary"; this is to motivate engineers and managers towards
continuing efforts in cost reduction, every year!
Standard cost reports show total sales, standard cost of sales, standard gross
profit, variances (price, efficiency and volume), to show actual gross profit.
Departmental reports analyze operational inefficiencies in terms of price,
efficiency and volume. Variances may also be due to: poor standards, poor
191
accounting, changes in product mix.
"Backflush" cost accounting is a new development, which use simplifies
accounting for work in progress and finished goods, and relies heavily on
physical controls of efficiency e.g. number of defective parts, waste quantities
etc. Product cost then becomes direct material plus conversion costs, to
achieve the finished product.
Now write down and justify the answers to the following questions (true/false):
1.
Every manufacturing enterprise could have better cost accounting with
standard costs.
2.
Price variances are usually due to purchasing inefficiencies.
3.
Standards should be changed frequently to ensure that the are accurate.
4.
Standards may well tend to reflect engineering values rather than
competitive market needs.
5.
Standard cost accounting enables variances to be analysed into price,
efficiency and volume causes.
6.
Backflush accounting is more complex than normal standard cost
accounting.
Answers: T F F T T F
192
6. WASTE REDUCTION AUDIT
Waste reduction audit (WRA) investigates material inputs and outputs for each
process, to identify waste and achieve cost savings by waste reduction, re-use
and recycling.
WRA is essentially a "materials balance" conducted at an individual industrial
facility, to see what comes into the plant, to see what goes out, and to make
sure that resources are not being wasted.
The "materials balance" demonstrates the opportunities for reducing the use of
resources: water, chemicals, materials, gases, energy etc.
Waste and cost reduction is achieved by: changes in materials, processes,
products, recycling and on/off-site disposal arrangements, and above all by
better "housekeeping".
WRA is a highly cost-effective technique which follows material inputs into the
production process and accounts for them quantatively, in any form (solid,
liquid, air) to identify losses due to waste which can then be reduced.
The "Phases" of a WRA are described in Exhibit A (which follows).
In a new area start with pilot project with five enterprises, and carefully
DEMONSTRATE that WRA can be cost effective and profitable to both the
"highly efficient" and "less efficient" companies.
Advantages - often immediately profitable for the enterprise and most
appropriate at plant level.
Disadvantages - some changes may require excessive capital investment at
high risk; not a substitute for annual external environmental compliance
auditing.
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Exhibit A
PHASES OF WASTE REDUCTION AUDIT
A.
PHASE 1 - PRE-ASSESSMENT:
1.
2.
3.
Audit focus and preparation.
Listing unit operations
Constructing process flow diagrams
B.
PHASE 2 - MATERIAL BALANCE: PROCESS INPUTS AND OUTPUTS
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Determining inputs
Recording water usage
Measuring current levels of waste reuse/recycling
Quantifying process outputs
Accounting or waste water
Accounting for gaseous emissions
Accounting for off-site wastes
Assembling input and output information for unit operations
Deriving a preliminary material balance for unit operations
Evaluating the material balance
Refining the material balance
PHASE 3 - SYNTHESIS
15.
16.
17.
18.
19.
20.
Examining obvious waste reduction measures
Targeting and characterizing problem wastes
Segregation
Developing long term waste reduction options
Environmental/economic evaluation of waste reduction options
Developing and implementing an action plan: reducing wastes and
increasing production efficiency
194
Write the answers to the following questions (true/false):
1.
WRA confirms the environmental concept that pollution prevention
always pays.
2.
Many multi-national companies are achieving significant cost savings
through continuous WRA's.
3.
Cost reduction in WRA is achieved by changes in materials, processes,
products, and recycling.
4.
Significant waste and cost reduction can be achieved with improved
"housekeeping".
5.
When governments introduce PPP (polluting party pays) legislation, then
WRA will be profitable both for business and environment.
Answers: F T T T T
195
7. STRATEGIC COST MANAGEMENT
Strategic cost management (SCC) starts with the cost structure of the
enterprise in terms of fixed and variable costs to identify and reinforce only
those activities that "add value" to the operations of the enterprise.
SCC seeks motivating "cost drivers" for these critical "added value" activities
thereby seeking "competitive advantage" for the enterprise in the market.
Under SCC cost accounting should be action-oriented with "timely data" to
support cost reduction by: score-keeping, focussing attention on critical areas
and providing relevant data to assist in problem solving.
Such timely "feedback" motivates cost reduction by change of: goals, methods,
forecasts, processes, rewards and it stimulates managers to find new
alternatives (CCI's).
SCC sets a clear organization structure of cost, profit and investment
responsibility centers. It sets standards and reporting with a "free-flow
information system" whereby information is not "filtered" before it reaches all
levels of management, but goes directly from the controller to the managers
concerned.
SCC creates "environmental motivation" within the organization which
motivates managers to seek higher levels of cost efficiency and effectiveness.
In SCC the key to cost accounting, control and reduction is "management
motivation".
Special studies of the cost structure of a product may reveal useful data for
management decision-making, such as the cost analysis which tries to
associate all costs (from research to distribution) very directly with a particular
product or product group:
R & D - ECU
Design
Manufacture
Marketing
Distribution
Variable
20
15
90
30
25
Fixed
60
35
30
15
10
Total product cost
250
170
Total
80
50
120
45
35
400
196
197
Write down and justify the answers to the following questions (true/false):
1.
The critical issue in strategic cost accounting is to identify the critical
activities that add-value.
2.
Under SCC cost control reports may have to be delayed until six weeks
after the month end, to ensure that they are "absolutely accurate"
because "inaccurate cost data is dangerous".
3.
Company buys containers but the normal supplier quotes price
increases of 25%; the company now has at least eight alternatives
courses of action.
4.
Under SCC the analysis of the cost structure of an enterprise, may
indicate whether ABC would be more appropriate than labour based cost
accounting.
5.
Strategic cost accounting requires both routine cost reports and special
cost analyses for particular purposes.
Answers: T F T T T
198
8.
INSTANT
LEARNING
RELAXATION
TECHNIQUE
FOR
1. This a simple useful CRE technique to give you confidence to learn naturally.
If you don't believe you can learn ... you won't learn! ... If you are tense, anxious
and stressed ... you won't learn! If you have no confidence ... you won't learn.
But with instant relaxation, your mind and body become clear, confident and
ready to learn. So do the exercise now ... and again before every CRE
session. It takes only three minutes, and with practice, it becomes a powerful
tool for you. The only "equipment" you need is an "open mind" and a marble (or
similar small object) in your "right" (major) hand.
2. So, get into that comfortable position, in which you know ... you really can
relax. Be aware that marble gets warm as it absorbs heat from contact with
your right hand. Open you hand and allow the warmth to evaporate. Close the
hand again, and recognize the marble ... as a physical external symbol ... of the
internal function of your mind and body. Allow it to receive and evaporate not
just heat ... but emotion, anxiety and stress ... leaving you free, relaxed,
confident and ready to learn.
3. Relax with the hands on the lap, and fix your eyes on the marble as you
repeat aloud ... the following sentence ... four times, feeling free to change the
wording a little ... to fit your style ... four times ... aloud ... in all:
"I AM, I CAN, I WILL, I BELIEVE ... I WILL LEARN TO SPEAK AND ENJOY
THE NEW COST CONTROL LANGUAGE … NATURALLY ... RAPIDLY ...
AND EASILY ... WITHOUT EFFORT"
4. With the eyes fixed on the marble ... or closed if you wish ... start to take
three slow and very deep breaths ... and be sure to pause ... on each inhalation
*... and imagine ... each exhalation ... as evaporating all the anxiety and stress
from your mind and body ... through the marble in your hand.
5. After the third breath, let your whole mind and body relax completely for two
minutes ... thinking ONLY of your breathing ... nothing else ... no self talk at all
... just concentrate on the BREATHING ... very important.
6. Then bring yourself back, by simply counting up from 1 to 5, feeling well,
relaxed, confident and ready to learn. The marble is now your very personal
symbol ... of your confidence to learn and speak the natural language with a
beautiful accent.
Note: This simple CRE "Instant Relaxation Technique" can be used anywhere
(eyes open or closed) to achieve a calm mind ... without anger, anxiety or
stress ... ready and confident to learn .. or deal with any new problem ... that
you face … with a code word “IRT”!.
199
B – Quiz
AGL NO 4 COST CONTROL FOR MANAGERS
Choose if possible the most correct answer and mark the answer sheet (a), (b), (c), (d) with an “X”.
1.
If we buy a whole sheep for 10.00, the cost of the sheep’s wool:
(a)
(b)
(c)
(d)
2.
Cost Accounting is a technique for calculating the:
(a)
(b)
(c)
(d)
3.
50.00
45.00
55.00
100.00
In computing the profit of a manufacturing business, the inventory (stocks) of raw material,
work in process, and finished goods left at the end of the period are normally:
(a)
(b)
(c)
(d)
6.
2.00
impossible to compute
8.00
4.00
If we manufacture 5½ units (one only half completed) for 55.00 and sell five units for 100.00,
our profit to date is:
(a)
(b)
(c)
(d)
5.
cost of a unit of production
price at which a business could be bought
selling price of a product
overall profit or loss of a business
If we buy goods for 4.00 and sell half of them immediately for 6.00 retaining the remainder for
sale later, our profit to date is:
(a)
(b)
(c)
(d)
4.
may be computed scientifically
is related to the selling price of the sheep
depends on why we buy the sheep
is nil
valued at selling price less profit margin
valued at cost or lower
ignored
valued at selling price
Cost accounting usually divides costs into:
(a)
(b)
(c)
(d)
direct material, selling and manufacturing overhead
direct material and labour, selling and administrative
direct labour and direct material, manufacturing, selling and administrative overhead
direct labour and general overhead
200
AGL NO 4 COST CONTROL FOR MANAGERS
7.
The system of cost accounting chosen for a particular business should:
(a)
(b)
(c)
(d)
8.
A cost centre is:
(a)
(b)
(c)
(d)
9.
rapidly with reasonably accuracy
semi-annually
monthly with absolute accuracy
annually with absolute accuracy
Job costing is similar to:
(a)
(b)
(c)
(d)
12.
to assist in the calculation of profit
to provide a basis for fixing selling prices
to find out how much work has still to be done
something else
Cost reports may be more useful in controlling costs if such reports are submitted:
(a)
(b)
(c)
(d)
11.
the middle cost
a section of the business which can be used conveniently for accumulating costs, so
that all work done in that cost centre may be charged for on a uniform basis
an intermediate - as opposed to a high or low — cost
something else
The purpose of valuing work in process is:
(a)
(b)
(c)
(d)
10.
be the same as that for other firms in the same industry
relate to the product
relate to the organisation of the business
relate to the product and the industry organisation
standard costing
marginal costing
process costing
batch costing
For cost accounting purposes, the overhead costs of a business organisation are normally
divided into:
(a)
(b)
(c)
(d)
management and workers
manufacturing, selling, distribution and administrative costs
buying and selling
direct and variable costs
201
AGL NO 4 COST CONTROL FOR MANAGERS
13.
The direct labour and material cost of a job may be:
(a)
(b)
(c)
(d)
14.
When valuing work in process, distribution costs should be:
(a)
(b)
(c)
(d)
15.
monthly, based on actual data for a past month
on some other basis
annually, based on data for a past year
annually, based on data for a future period.
In cost accounting the total profit computed for all the jobs completed during the period will
be:
(a)
(b)
(c)
(d)
18.
mount of direct labour cost
quantity of direct material
amount of selling and administrative overhead
number of machine hours
To charge manufacturing overhead to jobs, the overhead rate is best computed:
(a)
(b)
(c)
(d)
17.
included
deducted from the selling price
partially included
excluded
he charging of assembly shop overhead to a product may be based on the:
(a)
(b)
(c)
(d)
16.
more easily computed than the overhead for that job
computed scientifically
allocated on a time basis
the basis for computing administrative overhead for that job
absolutely accurate
equal in total to the amount of the balance sheet
reconcile with the profit of the income statement
exactly equal to the normal and abnormal profit of the income statement
To determine what is “direct labour”, as opposed to “indirect labour”, we must ask the
question:
(a)
(b)
(c)
(d)
does the labour work regularly?
can the labour be conveniently associated with a unit of production?
is the labour employed in the machine shop?
is the labour done by a worker or by an engineer?
202
AGL NO 4 COST CONTROL FOR MANAGERS
19.
If there is uncharged manufacturing overhead at the end of the year:
(a)
(b)
(c)
(d)
20.
In computing the cost of a unit of production, normally:
(a)
(b)
(c)
(d)
21.
direct material
selling and administrative overhead
manufacturing overhead
indirect material
The total cost of a new machine purchased during the year is normally:
(a)
(b)
(c)
(d)
25.
manufacturing overhead
direct labour
selling and administrative overhead
indirect material
The cost of sales literature is normally:
(a)
(b)
(c)
(d)
24.
direct labour
manufacturing overhead
administrative overhead
indirect material
The cost of factory heat and power is normally:
(a)
(b)
(c)
(d)
23.
once the overhead rate is fixed, the direct costs may be calculated
all costs depend upon broad assumptions
the indirect costs are more definite than the direct costs
direct costs are fairly definite and overhead costs depend upon allocations and
assumptions
The cost of the foreman’s salary is normally:
(a)
(b)
(c)
(d)
22.
overhead was definitely abnormally high
job costs will show too much charge for overhead
job costs will show too little charge for overhead
actual activity was definitely greater than the estimated activity
something else
manufacturing overhead
selling and administrative overhead
direct material
The depreciation of the managing director’s motor car is normally:
(a)
(b)
(c)
(d)
direct material
manufacturing overhead
indirect material
selling and administrative overhead
203
AGL NO 4 COST CONTROL FOR MANAGERS
26.
The director’s fees are normally:
(a)
(b)
(c)
(d)
27.
Dividends and income tax payable by a company are normally:
(a)
(b)
(c)
(d)
28.
simply to compute a fair cost
to set selling prices
to do both of these things
something more
The wages of an inspector of production in a factory should be treated as:
(a)
(b)
(c)
(d)
31.
100% of direct labour cost
200% of direct labour cost
250% of direct labour cost
40% of direct labour cost
The objectives of cost accounting are:
(a)
(b)
(c)
(d)
0.
direct labour
something else
selling and administrative overhead
manufacturing overhead
If a cost centre has direct labour of 2,000.00 against specific overhead of 4,000.00 and a
share of general manufacturing overhead of 1,000.00, the overhead rate for the cost centre is:
(a)
(b)
(c)
(d)
29.
non-productive labour
manufacturing overhead
indirect labour
selling and administrative overhead
direct labour
part of material cost
manufacturing overhead, even if it can be conveniently associated with a unit of
producti
indirect labour, unless conveniently associated with a unit of production.
Selling prices depend on the:
(a)
(b)
(c)
(d)
amount that potential customers are prepared to pay
efficiency of the sales force
cost of the product plus a fair profit
efficiency of the cost accounting system
204
AGL NO 4 COST CONTROL FOR MANAGERS
32.
The elements of cost of a company making only one product are direct labour 10.00, direct
material 60.00, variablle manufacturing overhead 12.00, fixed manufacturing overhead 15.00
and fixed selling and administrative overhead 13.00. If the company produced and sold 50%
more items, what would be the total cost?
(a)
(b)
(c)
(d)
33.
Salaries and indirect wages are:
(a)
(b)
(c)
(d)
34.
direct labour
selling overhead
manufacturing overhead
administrative overhead
Product A sells for 20.00, involves 12.00 of variable cost. Product B sells for 25.00, involves
15.00 of variable cost. What will be the company’s profit is it sells 100 items of product A and
200 items of Product B, when its fixed cost is 2,500.00?
(a)
(b)
(c)
(d)
37.
attendance cards only
job time cards
wages sheets only
something else
Direct workers’ time not spent on manufacturing the product is normally charged to:
(a)
(b)
(c)
(d)
36.
direct labour
recorded on job cards
manufacturing overhead
manufacturing, sales or administrative overhead
Direct labour on specific jobs or on overhead accounts is recorded on:
(a)
(b)
(c)
(d)
35.
the same
plus 10%
151.00
something else
300.00
2,000.00
1,700.00
something else
The most useful analysis of costs for decision making purposes is into:
(a)
(b)
(c)
(d)
relevant and not relevant
direct and indirect
present and past
manufacturing and selling
205
AGL NO 4 COST CONTROL FOR MANAGERS
38.
Overtime premium is:
(a)
(b)
(c)
(d)
39.
Responsibility accounting is particularly concerned with:
(a)
(b)
(c)
(d)
40.
gross profit
excess of sales revenue over variable cost
net profit
difference between fixed and variable cost
The costs of internal transport, repairs, maintenance, power sections in a factory are normally
charged:
(a)
(b)
(c)
(d)
43.
machine hours
number of workers
prime costs
labour hours
The “contribution” of a job is the:
(a)
(b)
(c)
(d)
42.
historical accounting
storekeeping
controllable costs
indirect costs
The most suitable cost centre overhead rate for an assembly shop is based on:
(a)
(b)
(c)
(d)
41.
the amount paid for time worked in excess of normal hours
extra payment to workers, in addition to their normal rates, when working overtime
always charged to direct labour
illegal
to specific productive cost centres
initially to various service cost centres and subsequently to other cost centres on a
reasonable basis
initially to one service centre and-subsequently to selling and administrative overhead
initially to one service cost centre and subsequently to productive cost centres only
Manufacturing overhead should be recovered (charged to jobs).net
(a)
(b)
(c)
(d)
at different rates for each cost centre
at one rate for the whole factory
on the basis of selling and administrative overhead
in some other way
206
AGL NO 4 COST CONTROL FOR MANAGERS
44.
If we compute manufacturing overhead rates for individual cost centres:
(a)
(b)
(c)
(d)
45.
A factory had a total manufacturing overhead of 20,000.00 against a direct labour cost of
10,000.00 and used an overhead rate of 200%. A new cost accountant set up two separate
cost centres: in Cost Centre “A”, direct labour was 8,000.00 and overhead 8,000.00 and in
Cost Centre “B”, direct labour was 2,000.00 and overhead 12,000.00. When we compare the
new cost system with the old system:
(a)
(b)
(c)
(d)
46.
the old overhead rate of 200% will be replaced by two new rates of 100% and 200%
respectively
it will make no difference to the total cost of the product where the direct labour cost
is the same in Cost Centre “A” as it is in Cost Centre “B”
it will make no difference to the total cost of the product where the direct labour cost
in Cost Centre “A” is sis times as much as the direct labour cost in Cost Centre “B”,
but it will make a difference to the cost of other products
it will make no difference to the total cost of the product where the direct labour cost
in Cost Centre “A” is four times as much as the direct labour cost in Cost Centre “B”,
but it will make a difference to the cost of other products.
A centre whose performance targets are set as profit in relation to assets employed is a:
(a)
(b)
(c)
(d)
47.
there is not likely to be much difference between the various cost centre rates
the overhead rates for the various cost centres will be related to the actual cost
incurred by these cost centres
there is more clerical work but little benefit
the manufacturing overhead rates are more complicated and less accurate
Cost centre
Profit centre
Service centre
Investment centre
If we decide to charge selling and administrative expenses to contracts, we normally use as a
basis:
(a)
(b)
(c)
(d)
direct material
something else
manufacturing overhead
direct labour
207
AGL NO 4 COST CONTROL FOR MANAGERS
48.
The manufacturing overhead rate for the current year is best computed from:
(a)
(b)
(c)
(d)
49.
If a company bases its overhead rate on direct labour hours and the actual labour hours turn
out to be less than estimated labour hours, there will be:
(a)
(b)
(c)
(d)
50.
direct costs were not charged to jobs
the estimated volume of production was not achieved
manufacturing overhead was less than forecast
manufacturing overhead was not charged to jobs because the rate was computed
inaccurately
The method of charging manufacturing overhead to products should always be a:
(a)
(b)
(c)
(d)
52.
revised manufacturing overhead rates
over charged overhead
neither under charged nor over charged overhead
under charged overhead
Uncharged manufacturing overhead is most likely to arise because the
(a)
(b)
(c)
(d)
51.
this year’s estimated manufacturing overhead divided by the actual direct labour
hours last year.
last year’s manufacturing overhead divided by the actual direct labour hours last year
this year’s estimated manufacturing overhead divided by the estimated direct labour
hours this year
last year’s manufacturing overhead divided by the estimated labour hours this year
percentage of direct labour cost if all jobs involve different amounts of direct labour
and the wage rates payable vary
machine hour rate if some parts of the factory are mechanised
machine hour rate for department using extensive machines and labour hour rates for
departments where most of the work is done manually
percentage of prime costs because no method of allocating overhead is accurate
Which cost may be charged to cost centres on the basis of space occupied?
(a)
(b)
(c)
(d)
managers’ salaries
lighting and heating
machine depreciation
rent
208
AGL NO 4 COST CONTROL FOR MANAGERS
53.
Which of the follosing should not be included in selling and distribution overhead?
(a)
(b)
(c)
(d)
54.
The first consideration when deciding how much detailed work should be involved when
analysing costs by product should be the:
(a)
(b)
(c)
(d)
55.
No, if petrol and oil cost more than .04 a mile
No
Yes, if petrol and oil cost more than .04 a mile
Yes
Which of the following costing systems would you expect to find in a chemical works:
(a)
(b)
(c)
(d)
58.
produce a scientifically accurate cost
compute the “contribution” of the product to the final profit
co-ordinate the cost and financial accounts
avoid unallocated overhead and compute total product cost
If we own and operate a car at an overall cost of .10 per mile, would it pay to hire a car for .04
a mile for one journey of 10 miles?
(a)
(b)
(c)
(d)
57.
cost of getting the data
skill of the cost accountant
reliability and usefulness of the analysis when completed
legal requirements
The objective of allocating all costs to products is to:
(a)
(b)
(c)
(d)
56.
the small cartons in which all the company’s products are packed and which the
ultimate consumer receives when buying a product
showroom and finished goods warehouse costs
salesman’s salaries, commission and expenses
the packing cases into which the small cartons are sometimes packed
process costing
batch costing
contract costing
job costing
Where a product passes through a series of operations in sequence, cost accounting is
normally done by:
(a)
(b)
(c)
(d)
process costing designed to produce the cost of a product
some other way
job costing designed to produce the cost of each job
process costing designed to produce the cost of each process
209
AGL NO 4 COST CONTROL FOR MANAGERS
59.
Costs that are the same per unit of production but increase in total when the volume of
production increases are:
(a)
(b)
(c)
(d)
60.
Cost reports for management should show:
(a)
(b)
(c)
(d)
61.
when the management decides to do so
as the work progresses
when it is absolutely certain
at the end of the contract
A job has direct labour costs of 10.00. direct material costs of 20.00, fixed manufacturing
overhead of 15.00, variable manufacturing overhead -of 10.00, and fixed selling and
administrative overhead of 12.00. Its selling price is 75.00. What is the profit and
“contribution” of the job?
(a)
(b)
(c)
(d)
64.
40.00
60.00
something else
80.00
The profit on a contract is normally taken:
(a)
(b)
(c)
(d)
63.
as much detail as possible to all levels of management
cost data and comparable data useful to management for decision mkaing,
pyramided for higher levels of management
details of non-controllable expenses appropriate to the level of management for which
the report is prepared
only summary figures
A contract has direct labour cost of 20.00, direct material cost of 20.00 and four hours of
machine time. The normal machine hour overhead rate is 10.00 per hour. The variable cost of
the contract is probably:
(a)
(b)
(c)
(d)
62.
fixed costs
semi-variable costs
standard costs
variable costs
8.00 and 30.00
8.00 and 35.00
8.00 and 20.00
something else
Cost accounting data:
(a)
(b)
(c)
(d)
must be specially prepared in relation to each particular decision
is usually difficult to prepare and is seldom of great value
if accurately prepared is always suited to many different purposes
is a scientific fact and cannot be disputed
210
AGL NO 4 COST CONTROL FOR MANAGERS
65.
If a company has been operating at a high level of capacity and on this basis has computed
overhead rates for estimating purposes, its estimates tend to be:
(a)
(b)
(c)
(d)
66.
If the same company experiences a recession and it recomputes its manufacturing overhead
rate on the assumptions that only a small proportion of its capacity will be utilised, its cost
estimates will tend to be:
(a)
(b)
(c)
(d)
67.
charged to product cost
charged to the income statement
charged to finished goods
charged to work in process
The actual cost of a product may vary according to all of the following except one:
(a)
(b)
(c)
(d)
70.
1,500.00
9,000.00
more than 1,500.00 but less than 9,000.00
more than 9,000.00
At the end of the year the amount under allocated manufacturing overhead is normally:
(a)
(b)
(c)
(d)
69.
high
low
average
unpredictable as far as accuracy is concerned
The purchase of a machine costing 1,500.00 with working life of 3 years, is expected to lead
to a reduction of 500.00 per year in the labour cost. The manufacturing overhead recovery
rate is 500% of direct labour cost. The total gross savings over a period of three years from
the purchase of the machine will probably be:
(a)
(b)
(c)
(d)
68.
low
high
average
unpredictable as far as accuracy is concerned
time it is produced
standard cost
volume of production
assumptions used by the cost accountant
A key advantage of using standard rather than actual rates for labour and overhead standard
costing is:
(a)
(b)
(c)
(d)
control is better
pricing is easier
cost accounting is less complicated
costs are more accurate
211
AGL NO 4 COST CONTROL FOR MANAGERS
71.
“Only large companies can afford a standard costing system”. This statement is:
(a)
(b)
(c)
(d)
72.
Standard costing can be used with:
(a)
(b)
(c)
(d)
73.
absolutely accurate
sub-divided into as many sub-variances as possible
should be quickly reported to managers responsible
kept confidential
The variance between actual and standard cost of materials:
(a)
(b)
(c)
(d)
76.
cost of perfect technical efficiency
cost of reasonable efficiency
an average of past performances
cost of a higher level of efficiancy
Standard cost variance should be:
(a)
(b)
(c)
(d)
75.
any cost system
any costs but not process costing
mass production costs only
job or process costing
Standard cost usually represents:
(a)
(b)
(c)
(d)
74.
true but not important
true and important
false
generally true
should never be sub-divided
depends only on the price of the raw material
is entirely the responsibility of the buying department
can usefully be divided into a price variance and efficiency variance
The materials price variance is calculated by multiplying:
(a)
(b)
(c)
(d)
the difference between the actual and standard prices by the standard materials used
the difference between the actual and standard prices by the actual materials used
the difference between the actual and standard materials used by the actual price
the difference between the actual and standard materials used by the standard price
212
AGL NO 4 COST CONTROL FOR MANAGERS
77.
The direct labour rate variance is calculated in a similar way to the:
(a)
(b)
(c)
(d)
78.
Standard costing variance analysis is:
(a)
(b)
(c)
(d)
79.
Yes
No, if overhead is fixed
No
yes, if overhead is fixed
The cost of the managing director’s salary should:
(a)
(b)
(c)
(d)
82.
costs expected to change in the future as between alternative courses of action
always fixed
the same as standard costs
always variable
If a job has direct labour costs of 10.00, direct material costs of 20.00, a manufacturing
overhead rate of 200% of direct labour cost, and a selling and administrative overhead rate of
10% of manufactu cost, should we subcontract it for 45.00?
(a)
(b)
(c)
(d)
81.
too difficult mathematically for non-accountants
exactly the same as budgetary control
intended mainly for shareholders
an example of management by exception
Relevant costs are:
(a)
(b)
(c)
(d)
80.
materials efficiency variance
materials price variance
total materials variance
none of the above
be spread over all departments as part of an administrative overhead rate
always be ignored when deciding whether or not to close a department
be regarded as a fixed cost in the short run
be regarded as irrelevant to cost accounting
A cost control report to a foreman:
(a)
(b)
(c)
(d)
can be in terms of quantities only
should be absolutely accurate even if late
should deal with facts only and should therefore not contain budgeted figures
serves no useful purpose
213
AGL NO 4 COST CONTROL FOR MANAGERS
83.
“Accounting data alone cannot provide all the information necessary to enable a manager to
make a business decision”. This statement is:
(a)
(b)
(c)
(d)
84.
Direct costing is:
(a)
(b)
(c)
(d)
85.
increase per unit as volume increases
decrease per unit as volume increases
are the same per unit as the volume increases
are always controllable
Direct costing and standard costing are:
(a)
(b)
(c)
(d)
88.
absorption costing
direct costing
contract costing
fixed costing
Variable costs are costs that:
(a)
(b)
(c)
(d)
87.
the same as standard costing
a method of fixing prices
a method of recording and reporting cost data which distinguishes between fixed and
variable costs
the only method of costing acceptable for tax purposes in mose countries
If fixed costs are all written off to the income statement in the period incurred, a company is
using:
(a)
(b)
(c)
(d)
86.
an indication of the uselessness of cost accounting
false
the accountant’s excuse when things go wrong
true
the same thing
impossible to combine in one costing system
both too complicated for non-accountants to understand
often found together in the same company
Fixed costs
(a)
(b)
(c)
(d)
are the same as variable costs
can usefully be divided into “committed costs” and “managed costs”
are non-controllable even in the long run
never give rise to variances
214
AGL NO 4 COST CONTROL FOR MANAGERS
89.
Advertising expense is usually:
(a)
(b)
(c)
(d)
90.
The control of fixed overhead costs:
(a)
(b)
(c)
(d)
91.
the costs of the previous period
the costs of similar companies in the same industry
future costs
standard costs
The main objective of cost accounting is:
(a)
(b)
(c)
(d)
95.
is identical with that needed for control
is not necessarily recorded as part of the routine costing system
depends upon tax legislation
should be firmly based upon past transactions objectively recorded
For control purposes, actual costs are best compared with:
(a)
(b)
(c)
(d)
94.
are the same as standard costs
are automatically reported in a direct costing system
are out-of-pocket costs
relate to alternatives foregone
Cost data needed for decision-making:
(a)
(b)
(c)
(d)
93.
is best achieved by budgets
should be based on overhead rates
is impossible
is easier than that of variable overhead costs
Opportunity costs:
(a)
(b)
(c)
(d)
92.
variable cost
irrelevant to pricing decisions
non-controllable
a “managed” fixed cost
to confuse non-accountants
cost estimation and control
to provide figures for the tax authorities
to provide employment for cost clerks
Management control is usually:
(a)
(b)
(c)
(d)
intermittent
continuous and rhythmic
the accountant’s main job
easier as time goes on
215
AGL NO 4 COST CONTROL FOR MANAGERS
96.
For effective control of costs we need:
(a)
(b)
(c)
(d)
97.
Cost reduction may usually be achieved by all but one of the following techniques:
(a)
(b)
(c)
(d)
98.
a voluntary basis from time to time
blitzrieg every fifteen years
an attitude of continuous sustained effort
technological breakthrough
Cost of a product is:
(a)
(b)
(c)
(d)
100.
elimination
simplification
combination
direct costing
Cost reduction is best achieved by:
(a)
(b)
(c)
(d)
99.
accurate costs
scientific standards
good accountants
something else
a scientific concept
true or false
precisely what we define it to be
useful or useless
The people who know most about how to use cost accounting are always:
(a)
(b)
(c)
(d)
accountants
work study analysts
effective managers
engineers
216
ANSWERS TO THE QUIZ
1
2
3
4
5
6
7
8
9
10
C
A
D
A
B
C
D
B
A
A
26
27
28
29
30
D
AorD
C
A
D
51
52
53
54
55
C
D
A
C
D
76
77
78
79
80
B
D
D
A
B
31
32
33
34
35
B
C
D
B
C
56
57
58
59
60
C
A
D
D
B
81
82
83
84
85
C
AorD
D
C
B
11
12
13
14
15
D
B
A
D
A
36
37
38
39
40
A
A
B
C
D
61
62
63
64
65
D
A
B
A
A
86
87
88
89
90
C
D
B
D
A
16
17
18
19
20
B
C
B
C
D
41
42
43
44
45
B
B
A
B
C
66
67
68
69
70
A
C
B
B
C
91
92
93
94
95
D
B
D
B
A
21
22
23
24
25
B
A
B
A
D
46
47
48
49
50
D
B
C
BorD
B
71
72
73
74
75
C
A
B
C
D
96
97
98
99
100
D
B
C
D
C
Note:
Some of these answers may be wrong ... you can decide
which ones ... if the whole SG agrees …
217
FOR THE TEACHER
Programmed learning is designed to simulate an individual tutor. In designing this
programme, we have analysed in detail what knowledge and skills we are trying to
teach, and what behaviour we expect of the student, when he has completed the
programme.
The advantages of the programme are:—
1. Each student can learn at the pace most suitable for him.
2. The student studies advanced material only when he has mastered the
elementary material.
3. The programme is designed to prompt a correct answer from the student. The
aim is to reward the student as much as possible. If he is rewarded, he will be
motivated to continue paying attention.
4. The student cannot daydream. He is continuously active and receives immediate
and continuous confirmation of his success in learning the material.
5. Frames are designed to bring the critical point to the attention of the student, and
to establish his understanding of each critical point.
The record of responses made by the student highlights areas where the
programme might well be reconsidered. No programme is perfect, and consistent
errors in any one frame by many students, may indicate that the frame should be
redesigned.
218
FINAL NOTE
We hope that you have enjoyed this programme and that you have finally solved
to your satisfaction the many puzzles that we have presented to you. We believe that
learning of accounting can be both intriguing and entertaining.
You will retain and expand the knowledge you have acquired from this
programme, if you seek out every opportunity to use it in your day-to-day work. Have
we stimulated you to be a little curious about accounting in the future?
219
C. Further Study
EXERCISES 1-8
CREATIVE COST CONTROL
1. SUMMARY
Cost reduction is a key objective of cost accounting an control, with new CCI's
(Cost Control Initiatives) becoming continually evident.
Every cost can be reduced over time by: economy, technological advance,
cutting operations and planning. Compare activity five years ago with today, to
indicate the past potential for cost savings. Then treat cost saving as a normal
part of management.
Costs grow "naturally" unless controlled. Managers should not be "happy" but
"motivated towards increasing efficiency. Set up cost reduction teams using
such tools as: O & M, operations research, ABC, JIT, standard cost accounting,
strategic cost management etc.
Activity based costing (ABC) recognizes that with increasing automation, direct
labour may be only 10% of manufacturing cost and thus other "cost drivers"
should be used to allocate overhead cost to products.
Just In Time (JIT) inventory control by major companies reduces inventory
holding and handling charges, through managed supplier relationships.
Standard cost accounting (SCA) provides engineering standards of product
cost and allows variances with actual cost to be associated with price, efficiency
and volume analysis. "Backflush" accounting uses standards to simplify
accounting for work in progress and finished goods, and relies heavily on
physical controls of efficiency e.g. number of defective parts, waste quantities
etc.
Waste reduction audits (WRA) investigate material inputs and outputs for each
process, to identify waste and achieve cost savings by reduction, re-use and
recycling.
Strategic cost control (SCC) starts with the cost structure of the enterprise in
terms of fixed and variable costs to reinforce only those activities that "add
value" to the operations of the enterprise. It creates "environmental motivation"
within the organization which motivates managers to seek higher levels of cost
220
efficiency and effectiveness.
The key to cost accounting, control and reduction is "management
motivation". IRT helps us to learn efficiently and effectively.
2. COST REDUCTION PROGRAMMES
Every cost can be reduced over time by: economy, technological advance,
cutting operations and planning. Compare activity five years ago with today to
indicate the past potential for cost savings. Then treat cost saving as a normal
part of management. Costs grow "naturally" unless controlled. Managers
should not be "happy" but "motivated towards increasing efficiency.
Develop attitudes for cost control and reduction every year. Budget for cost
reduction every year. Examine each area of operations for possible:
elimination, combination, changing sequence and simplification. Revise
standards to enforce technical improvements every year.
Set up cost reduction teams using such tools as: O & M, operations research,
ABC, JIT, standard costs, strategic cost management etc. to cut costs. Use a
creative approach to avoid routine blocks; use lateral thinking and brain
storming to develop new ideas for cost control problem solving.
Other cost reduction techniques include:
1.
New standard costs - related to market needs rather than engineering,
thus requiring simplification and change in: materials, number of parts,
number of set-ups, processes, products, packaging etc.
2.
Direct labour and overhead cutting by adopting increased automation.
3.
Development of profit centers for manufacturing, marketing and sales
units, with transfer prices to motivate "profit orientation"
4.
Strategic purchasing management to get benefit from "make v buy"
opportunities from design to distribution of all products.
Cost reduction may use the "six C's" approach involving:
1.
Controls - timely reporting of actual and against target
2.
Compensation - reward and punishment systems that provide economic
incentives
3.
Change process - welcome for change in materials, processes, plant,
products, marketing, distribution and disposal of products
Continuous education for management to stimulate new ideas and ways
4.
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5.
6.
of thinking about problems
Champions - publication of results by specific units that achieve
exceptional results.
Commitment - to cost reduction every year as a normal task of every
operating manager
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Cost accounting should be action-oriented with "timely data" to support cost
reduction by: score-keeping, focussing attention on critical areas and providing
relevant data to assist in problem solving.
Such timely "feedback" motivates cost reduction by change of: goals, methods,
forecasts, processes, rewards and it stimulates managers to find new
alternatives (CCI's).
Financial crises may require "crash" programmes whereby: less essential
departments are eliminated, staff are reduced by a flat 20% to force managers
to rethink activities that "add value".
Action teams get specific targets to perform "miracles" of cost cutting, and a
strategy of "cost surgery" cuts rapidly and clearly so as to quickly re-establish
confidence in the organization.
For cost reduction programmes the routine cost accounting reports are never
adequate; thus special relevant cost studies and reports must be prepared to
help with decision-making.
Write down and justify the answers to following questions (true/false):
1.
2.
Cost reduction is much harder in older industries.
Standards set by good engineers should not be changed by market
considerations.
3.
The five C's are: compensation, champions, change process, continuous
training, controls and commitment.
Waste reduction benefits the environment and company profits.
4.
5.
6.
7.
8.
Management training for cost reduction is "cost-effective" in all
industries.
All fixed costs are variable over time.
Cost reduction under financial crisis must be perceive by management
as fair.
All costs grow naturally over time.
Answers: F T T T F T
223
3. ACTIVITY BASED COSTING (ABC)
ABC recognizes that with increasing automation, direct labour may be only 10%
of manufacturing cost and thus other "cost drivers" should be used to allocate
overhead cost to products.
ABC is justified when management is not motivated by other cost control
systems and there is significant variation in: product volume, mix, size,
complexity, materials, set-up, parts etc. such that direct labour or machine
hours are not good "cost drivers".
ABC starts by defining the critical activities that "add value"; it then defines "cost
categories" and "cost drivers" to allocate overhead to product cost. Product cost
then changes from: direct material plus direct labour plus overhead, to material
plus a series of conversion costs.
This avoids the traditional overhead allocation based on direct labour or
machine hours, and tries to focus management attention on activities that "add
value" to the product, with a series of "cost drivers e.g. number of parts, number
of set-ups, automated operation per part, manual operation per part etc.
224
Simple example:
Labour based cost:
ECU
Direct materials per unit
Direct labour
Manufacturing overhead. @ 250% DL
400
100
250
Manufacturing cost per unit
750
Activity based cost (ABC):
Direct materials per unit
Materials handling
70 parts
Machining
2 hours
Assembly
70 parts
Inspection
1 unit
Manufacturing cost per unit
@ ECU
@ ECU
@ ECU
@ ECU
.30
34.00
1.90
20.00
ECU
400
21
68
133
20
642
In highly automated manufacturing direct labour may be only 5% of
manufacturing cost and thus inappropriate for overhead allocation.
Where different products and volumes require special set-ups, direct labour
based cost drivers tend to:
under-cost small complex runs (many different parts) and
over-cost simplified (standardized parts) high volume products.
225
Write down and justify the answers to the following questions (true/false):
1.
Part No. 111 costs ECU 10 and can be used for only one product, is
cheaper than part No. 112, which costs ECU 12 but can do the same job
in all of the product range.
2.
JIT and ABC always go together.
3.
For most manufacturing enterprises ABC is now better than labour
based cost accounting.
4.
For relevant cost analysis ABC probably gives better data than labour
based cost accounting.
5.
Cost reduction is motivated by ABC.
Answers: F F F T T
226
4. JUST IN TIME (JIT) INVENTORY CONTROL
JIT inventory control seeks to reduces inventory holding and material handling
charges, through managed supplier relationships. Inventory levels of four
weeks supply are often been reduced to the level of four hours, with subcontracted parts moving from transport directly to production lines.
JIT systems require stable suppliers and delivery systems to avoid shut-downs
due to lack of parts. This involves special selection of major and back-up
suppliers and quality control arrangements, to enable delivery within hours.
Thus distant suppliers unable to deliver within fixed time limits (say 48 hours)
may be excluded.
JIT may well force suppliers to hold the inventory levels formerly held by their
major client companies.
JIT usually leads to simplification of parts, materials handling, packaging and
quality control procedures as well as cutting inventory levels.
Write down and justify the answers to the following questions (true/false):
1.
In 2007 every company should adopt JIT systems.
2.
The major cost reduction of JIT systems is savings in interest on
inventory levels.
3.
The major cost reduction of JIT systems is savings in material handling.
4.
JIT requires a new costing system.
5.
The major risk of JIT is shut-down due to lack of parts.
Answers: F F T F T
227
5. STANDARD COST ACCOUNTING
Standard cost accounting provides engineering standards of product cost and
allows variances with actual cost to be associated with price, efficiency and
volume analysis. "Backflush" accounting uses standards to simplify accounting
for work in progress and finished goods.
The best performance target should be the standard cost from engineering
studies on a "Standard Cost Sheet" indicating:
1. standard hours at standard labour rate
2. standard material quantities at standard material costs
3. standard overhead allocations
The standard cost system is only as good as the standards set each year.
Product cost is standard cost. Standards are set by the engineering department
together with purchasing, personnel and operating managers. They are not
normally changed during the year.
Variances are developed not by products but by departments responsible
operations, in terms of:
for
1.
price - difference in actual and standard price for the actual quantity
purchased
2.
efficiency - difference between actual quantity of material and labour
used
3.
volume - difference in fixed overhead due to actual volume being more
or less than standard.
Do not change standards too frequently: associate variances with managers
responsible; control the "material" (significant) variance very carefully.
Some multi-nationals are beginning to set revised (lower) standard costs every
year, with "market" pressures for lower costs" rather than from what engineers
say is "necessary"; this is to motivate engineers and managers towards
continuing efforts in cost reduction, every year!
Standard cost reports show total sales, standard cost of sales, standard gross
profit, variances (price, efficiency and volume), to show actual gross profit.
Departmental reports analyze operational inefficiencies in terms of price,
efficiency and volume. Variances may also be due to: poor standards, poor
228
accounting, changes in product mix.
"Backflush" cost accounting is a new development, which use simplifies
accounting for work in progress and finished goods, and relies heavily on
physical controls of efficiency e.g. number of defective parts, waste quantities
etc. Product cost then becomes direct material plus conversion costs, to
achieve the finished product.
Now write down and justify the answers to the following questions (true/false):
1.
Every manufacturing enterprise could have better cost accounting with
standard costs.
2.
Price variances are usually due to purchasing inefficiencies.
3.
Standards should be changed frequently to ensure that the are accurate.
4.
Standards may well tend to reflect engineering values rather than
competitive market needs.
5.
Standard cost accounting enables variances to be analysed into price,
efficiency and volume causes.
6.
Backflush accounting is more complex than normal standard cost
accounting.
Answers: T F F T T F
229
6. WASTE REDUCTION AUDIT
Waste reduction audit (WRA) investigates material inputs and outputs for each
process, to identify waste and achieve cost savings by waste reduction, re-use
and recycling.
WRA is essentially a "materials balance" conducted at an individual industrial
facility, to see what comes into the plant, to see what goes out, and to make
sure that resources are not being wasted.
The "materials balance" demonstrates the opportunities for reducing the use of
resources: water, chemicals, materials, gases, energy etc.
Waste and cost reduction is achieved by: changes in materials, processes,
products, recycling and on/off-site disposal arrangements, and above all by
better "housekeeping".
WRA is a highly cost-effective technique which follows material inputs into the
production process and accounts for them quantatively, in any form (solid,
liquid, air) to identify losses due to waste which can then be reduced.
The "Phases" of a WRA are described in Exhibit A (which follows).
In a new area start with pilot project with five enterprises, and carefully
DEMONSTRATE that WRA can be cost effective and profitable to both the
"highly efficient" and "less efficient" companies.
Advantages - often immediately profitable for the enterprise and most
appropriate at plant level.
Disadvantages - some changes may require excessive capital investment at
high risk; not a substitute for annual external environmental compliance
auditing.
230
Exhibit A
PHASES OF WASTE REDUCTION AUDIT
A.
PHASE 1 - PRE-ASSESSMENT:
1.
2.
3.
Audit focus and preparation.
Listing unit operations
Constructing process flow diagrams
B.
PHASE 2 - MATERIAL BALANCE: PROCESS INPUTS AND OUTPUTS
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Determining inputs
Recording water usage
Measuring current levels of waste reuse/recycling
Quantifying process outputs
Accounting or waste water
Accounting for gaseous emissions
Accounting for off-site wastes
Assembling input and output information for unit operations
Deriving a preliminary material balance for unit operations
Evaluating the material balance
Refining the material balance
PHASE 3 - SYNTHESIS
15.
16.
17.
18.
19.
20.
Examining obvious waste reduction measures
Targeting and characterizing problem wastes
Segregation
Developing long term waste reduction options
Environmental/economic evaluation of waste reduction options
Developing and implementing an action plan: reducing wastes and
increasing production efficiency
231
Write the answers to the following questions (true/false):
1.
WRA confirms the environmental concept that pollution prevention
always pays.
2.
Many multi-national companies are achieving significant cost savings
through continuous WRA's.
3.
Cost reduction in WRA is achieved by changes in materials, processes,
products, and recycling.
4.
Significant waste and cost reduction can be achieved with improved
"housekeeping".
5.
When governments introduce PPP (polluting party pays) legislation, then
WRA will be profitable both for business and environment.
Answers: F T T T T
232
7. STRATEGIC COST MANAGEMENT
Strategic cost management (SCC) starts with the cost structure of the
enterprise in terms of fixed and variable costs to identify and reinforce only
those activities that "add value" to the operations of the enterprise.
SCC seeks motivating "cost drivers" for these critical "added value" activities
thereby seeking "competitive advantage" for the enterprise in the market.
Under SCC cost accounting should be action-oriented with "timely data" to
support cost reduction by: score-keeping, focussing attention on critical areas
and providing relevant data to assist in problem solving.
Such timely "feedback" motivates cost reduction by change of: goals, methods,
forecasts, processes, rewards and it stimulates managers to find new
alternatives (CCI's).
SCC sets a clear organization structure of cost, profit and investment
responsibility centers. It sets standards and reporting with a "free-flow
information system" whereby information is not "filtered" before it reaches all
levels of management, but goes directly from the controller to the managers
concerned.
SCC creates "environmental motivation" within the organization which
motivates managers to seek higher levels of cost efficiency and effectiveness.
In SCC the key to cost accounting, control and reduction is "management
motivation".
Special studies of the cost structure of a product may reveal useful data for
management decision-making, such as the cost analysis which tries to
associate all costs (from research to distribution) very directly with a particular
product or product group:
R & D - ECU
Design
Manufacture
Marketing
Distribution
Variable
20
15
90
30
25
Fixed
60
35
30
15
10
Total product cost
250
170
Total
80
50
120
45
35
400
233
234
Write down and justify the answers to the following questions (true/false):
1.
The critical issue in strategic cost accounting is to identify the critical
activities that add-value.
2.
Under SCC cost control reports may have to be delayed until six weeks
after the month end, to ensure that they are "absolutely accurate"
because "inaccurate cost data is dangerous".
3.
Company buys containers but the normal supplier quotes price
increases of 25%; the company now has at least eight alternatives
courses of action.
4.
Under SCC the analysis of the cost structure of an enterprise, may
indicate whether ABC would be more appropriate than labour based cost
accounting.
5.
Strategic cost accounting requires both routine cost reports and special
cost analyses for particular purposes.
Answers: T F T T T
235
8. INSTANT RELAXATION TECHNIQUE FOR
LEARNING
1. This a simple useful CRE technique to give you confidence to learn naturally.
If you don't believe you can learn ... you won't learn! ... If you are tense, anxious
and stressed ... you won't learn! If you have no confidence ... you won't learn.
But with instant relaxation, your mind and body become clear, confident and
ready to learn. So do the exercise now ... and again before every CRE
session. It takes only three minutes, and with practice, it becomes a powerful
tool for you. The only "equipment" you need is an "open mind" and a marble (or
similar small object) in your "right" (major) hand.
2. So, get into that comfortable position, in which you know ... you really can
relax. Be aware that marble gets warm as it absorbs heat from contact with
your right hand. Open you hand and allow the warmth to evaporate. Close the
hand again, and recognize the marble ... as a physical external symbol ... of the
internal function of your mind and body. Allow it to receive and evaporate not
just heat ... but emotion, anxiety and stress ... leaving you free, relaxed,
confident and ready to learn.
3. Relax with the hands on the lap, and fix your eyes on the marble as you
repeat aloud ... the following sentence ... four times, feeling free to change the
wording a little ... to fit your style ... four times ... aloud ... in all:
"I AM, I CAN, I WILL, I BELIEVE ... I WILL LEARN TO SPEAK AND ENJOY
THE NEW COST CONTROL LANGUAGE … NATURALLY ... RAPIDLY ...
AND EASILY ... WITHOUT EFFORT"
4. With the eyes fixed on the marble ... or closed if you wish ... start to take
three slow and very deep breaths ... and be sure to pause ... on each inhalation
*... and imagine ... each exhalation ... as evaporating all the anxiety and stress
from your mind and body ... through the marble in your hand.
5. After the third breath, let your whole mind and body relax completely for two
minutes ... thinking ONLY of your breathing ... nothing else ... no self talk at all
... just concentrate on the BREATHING ... very important.
6. Then bring yourself back, by simply counting up from 1 to 5, feeling well,
relaxed, confident and ready to learn. The marble is now your very personal
symbol ... of your confidence to learn and speak the natural language with a
beautiful accent.
Note: This simple CRE "Instant Relaxation Technique" can be used anywhere (eyes
open or closed) to achieve a calm mind ... without anger, anxiety or stress ... ready
and confident to learn .. or deal with any new problem ... that you face … with a code
word “IRT”!.
236