Management Accounting Study notes

Week 1 Lecture 1

Introduction and basic costs and terms

What is management accounting?

-The process of resource organisation for supporting managers tasks, in order to improve
efficiency and effectiveness therefore providing optimal value to stakeholders.

Cost concepts
-Cost object, an item for which management wants a separate measure of costs.
-Cost driver, A factor of activity that causes a cost to be incurred.
-Activity level, level of work being performed in an organisation

Costs classifications and Basis classifications

Management accounting Study notes
Week 1 Readings
Management accounting systems- information system that produces the information
required by managers to create value and manage resources.

Management accounting information-managers who have responsibility for

manufacturing activities in manufacturing firms, or for service delivery areas in service firms.

Difference between management and financial accounting-financial

accounting the practice of preparing and reporting accounting information for parties outside
the organisation. costing system (or cost accounting system) a system that estimates the cost
of goods and services, as well as the cost of organisational units, such as departments. -

Process and techniques of Management accounting

 -supports the organisation’s formulation and implementation of strategy, and

contributes to improving sources of competitive advantage
  provides information to help manage resources, through systems for planning (such as
budgets) and control (such as performance measures)

 provides estimates of the costs of the organisation’s output (goods and services), to
support both the strategic and operational decision needs of managers.

Management accounting and strategy

 vision
 mission statement
 objectives and strategies
 profitability
 growth
 cost minimisation
 product leadership
 innovation
 product quality
 quality of service
 community service
 employee welfare
 environmental responsibility.

Organisational strategy’s

corporate strategy -decisions about the types of businesses in which to operate, which
businesses to acquire and divest, and how best to structure and finance the organisation.
business (or competitive) strategy-the way a business competes within its chosen market.
strategy implementation -putting plans into place to implement and support a chosen
business strategy. Competitive advantage-the advantages that a business may have over
another that are difficult to imitate.

Contingency theory- assumes that the design of an organisation’s management

accounting system may be influenced by (is contingent on) a range of factors including the
external environment, technology, organisational structure, organisation size, strategy, and
organisational and national culture.

Institutional theory- states that the design of an organisation’s management accounting

system may be influenced by the need for legitimacy and
the tendency for firms to imitate the ‘good practice’ from other organisations.
ACCG 2000 Week 1 Homework Questions (Due in Week 2) Discussion
Questions: NOTE: Answers are underlined.

1. Explain the difference between a cost and an expense.

Cost- A cost is money needed to be spent for producing a product or service. For
example, a company that sells towel will come into direct costs of purchasing
fabrics and material needed to create the towels. Without these materials the
product cannot be produced.

Expense-An expense is a is money spent on amenities that are not directedly

needed to produce the product. However, these expenses are required to support
the product creation and customer fulfilment. For example, a Towle company
needs a factory and plant equipment to produce Towles. This factory has ongoing
expenses such as electricity and Strata fees.

2. What is meant by meant by the phrase different costs for different purposes.

In organisations managers will face different problems which will require

different solutions. Meaning that different information will require different costs.
For example, when deciding how to calculate the pricing on a cost-plus basis, both
fixed and variable cost are to be considered. However, when calculating the price
on producing additional units only variable may need to be considered.

Exercises:

1. Classify the following items as either product costs or period costs:

1. a)  depreciation on a vehicle used by the entity’s general manager -Period cost

2. b)  containers used to package finished goods -Product cost
3. c)  salaries of workers handling inventory during production-Product cost
4. d)  general manager’s salary -Period cost
5. e)  lease payments on a motor vehicle used by sales representatives -Period costs
6. f)  superannuation contributions for production workers by the entity. Product costs

Problems:

1. Swan Ltd is a manufacturer with the following information available at year-end:

Direct material used $400,000

Salary of managing director $70,000
 Direct labour $180,000
Administrative cost $140,000
Manufacturing overhead $40,000

1. a)  Calculate the total prime costs for the year. $400,000 + $180,000 = $580,000
2. b)  Calculate the total conversion costs for the year. $180,000+ $40,000=$220,000
3. c)  Calculate the total period costs for the year. $70,000 +$140,000= $210,000
4. d)  Calculate the total product costs for the year. $400,000 + $180,000 + $40,000 =
$620,000

2. Information from the records of Kerley & Co. for the year ended 30 June 2021 is given

below.

Factory overhead, 100% of direct labour $120,000

cost

Direct labour $109,091

Raw materials inventory, 1 July 2020 $18,000

Cost of goods manufactured $520,800

Raw materials inventory, 30 June 2021 $15,500

Work in process inventory, 30 June 2021 $50,500

Raw materials purchased during the year.

$210,000

Prepare the Cost of Goods manufactured Statement and calculate the cost of work in process
inventory on 1 July 2020.

Kerley & Co.

Schedule of cost of good

manufactured for the
year ended 30 June 2021
Direct material:
Beginning raw materials $18,000
Raw materials purchased during year $210,000
RM available for use $228,000
($15,500)
$212,500
$109,091
 $120,000
$441,591
$129,709
$571,300
(50,500)
$520,800

Cost of work in process for inventory in July 2020

Jetboats Ltd uses the high‐low method to estimate the cost function. Jetboat operates jetboat
rides on Sydney Harbour. The number of hours the engines are run in each month is provided
below along with the labour costs for maintaining the jet boats for 2021.

Month Machine engine hours Labour costs

January 180 $4,300
February 110 $2,510
March 140 $3,040
April 120 $2,780
May 80 $1,750
June 50 $1,200
July 60 $1,500
August 110 $2,470
September 155 $3,480
October 160 $3,590
November 170 $3,800
December 175 $3,950

1. a)  What is the cost function? The cost function is a common accounting formula that
is used to calculate the cost of production at a particular level in an activity. It is often
required to be adjusted for accuracy when implementing new information for
increased activity level of cost differentiation. The formula is expressed as
C(x)=Fc + V(x) C (Total production costs) Fc(Fixed costs) V(Variable costs)
X(n. of units)
2. b)  What is the estimate of Jetboats’ labour costs when:
 i) 130 machine hours are used?

180 hours-$4,300 Labour cost 50 hours-$1,200 Labour cost

$4,300-$1,200/180-50= $3,100/130=$23.8461538 Variable cost per unit

$23.8461538x 130=$4,292.30769. $4,300-$4,292.30769=$7.69231

$7.69231 +$23.8461538 x 130=. $3,107.6923

ii) ii) 300 machine hours are used? CAN NOT BE CALUCLATED IT IS
OUTSIDE RELEVANT RANGE

Management Accounting Study notes

Week 2 Lecture 2

Cost volume profit analysis (CVP)

CVP is used to determine the effects of changes in an organisations sales volume on cost,
revenue, and profit.

The aim of CVP is to assist managers in making decisions to improve profitability and to
create shareholder value.

Key terms

 Contribution margin variables

 Break-even point (Sales units)
 Break even point (Dollars)
 Safety margin
 Weighted average contribution margin (WACM)

Contribution margin variables

 Unit contribution margin (UCM)=Unit sales price-Unit variable costs

 Total contribution margin (TCM)=Total sales revenue-Total variable costs or
UCM * number of units sold
 Contribution margin ratio (CMR)=Unit contribution margin-unit sales price
 Contribution margin percentage (CMP)=CMR * 100

Break-even point-When total revenue-total cost=0

To breakeven total sales must cover both variable and fixed to be able to breakeven

Types of costs

2. Variable
3. Fixed

CM approach to calculate break-even point.

1. Calculate (UCM)
2. Calculate breakeven point by using:

 Break-even point in units- Fixed costs/UCM

 Break-even point in dollars-Fixed costs/CMR

Safety margin

=Budgeted sales revenue-break-even sales revenue

Target net profit

Break even formula determines sales volume required to achieve target for net profit.

1. Target sales volume in units=Fixed costs + target profit/UCM

2. Target sales volume in dollars=Fixed costs + target profit/CMR

Including income taxes in CVP analysis

Sales volume (in units) required to earn target net after tax profit.

 FC + Target profit before tax Unit contribution margin

Sales volume (in dollars) required to earn target net after tax profit.

 FC + Target profit before tax Contribution margin ratio

Target profit before tax = Net profit after tax / (1- tax rate)

CVP analysis with multiple products

Key terms:

• Sales mix
The relative proportions of each type of product sold by the organisation

• Weighted average unit contribution margin

The average of the products’ unit contribution margins, weighted by the sales
mix.
e.g. The sales mix for Product A and B are 40% and 60% respectively. UCM = $10 for
A and $15forB. 40%* 10 + 60% *15=13

Break-even point for multiple products

Step 1:
Breakeven point (in units) =

Fixed costs

Weighted average UCM*

* To calculate the weighted average UCM, you should always calculate the UCM for each
product first, then take the sales mix into account.

Step 2:
Breakeven point for each product (in units):

The total breakeven point needs to be split up in proportion to the expected sales mix.

Limitations of CVP

CVP analysis is merely a simplified model.

The usefulness of CVP analysis may be greater in less complex smaller firms, or stand-alone
projects.

For larger firms, CVP analysis can be valuable as a decision tool for the planning stages of
new projects and ventures.

CVP analysis is based on several assumptions which limits its usefulness for decision
making.

30 PER HOUR, 37.5 OVERTIME HOUR, 43 HOURS WORKED, INSTEAD OF 38

NORMAL HOURS

187.5 + 1140=$1,327.5(TOTAL WAGES)

1290=DIRECT LABOUR COST. MO=37.50(overtime premium)

IF TIME WORKED WAS IDLE TIME IN WHICH WORKING HOURS WAS NO

LONGER PRODUCING PRODUCTS THROUGH PRODUCTION.
ACCG 2000 Week 2 Homework Questions (Due in Week 3) Discussion
Questions: NOTE: Answers are underlined.

Discussion Questions

1. What is the meaning of the term unit contribution margin? Contribution to what?

Unit contribution margin refers to the unit cost subtracting variable cost. This formula
creates the unit contribution margin in which the contribution is the variable cost to
the unit cost which shows the profit margin of the product.

2. What are the assumptions of cost-volume-profit (CVP) analysis?

Examples of assumptions include:

 Fixed costs do not change in a relevant range of business activity.

 Costs can be classified into two behavioural costs such as fixed and variable.
 Selling prices per unit will stay constant.
 Fixed costs remain constant.

Exercises

1. Territory Ltd sells a single product, an electric drill. The drill sells for $160 per unit.
Annual fixed costs are $618,000, and the contribution margin rate is 40%.

Required:

1. a)  What are the variable costs per unit?

40%=$160-VC

40%*$160=$64 Variable cost is $64

2. b)  How many units must the company sell to break even?

$160-$64=$96

$618,000/$96=6,437.5 To break even the company must sell 6,438 units

3. c)  What is the break-even point in sales dollars?

$96 * 6,438= $618,048

 4. d)  If the company wants to earn a before-tax profit of 115,000, how many units must
be sold?

$115,000/96=1,197.9 rounded to 1,198

6,438 + 1,198= 7,636 units to be sold for profit of $115,056

What sales dollar level is required? What is the company’s safety margin at this?

sales level? 7,636 * $96= $733,056

Fixed cost = $618,000 Safety margin = $733,056-$618,000=$115,056

5. e)  If the company wants to earn a before-tax profit of 20% of sales, how many units
must be sold?

20% * $618,000= $123,600

$123,600/$96=1,287.5 round to 1,288

1,288 +6,438=7,726 units to be sold for 20.02% profit before tax

Problems

1. Pristine Co has provided the following production and sales information for each pair of its
dress shoes:

Direct materials $22

Direct labour $35
Variable factory overhead $15
Selling price $180
Sales commissions. 10% off selling price.

The fixed costs for the period are $1,345,000.

Required:

1. a)  Calculate the beak-even point.

$180*10%=$18

$180-$35-$22-$18-$15=$90

$1,345,000/$90=14,944.4 units rounded to 14,945 units to sell for break even

2. b)  Calculate the number of pairs that must be sold to achieve a profit of $63,000.
What is the margin of safety at the sales level?

$63,000/$90=700 units
 700 +14,945=15,645 units to sell for a profit of $63,000

Margin of safety = $1,408,000-$1,345,000=$63,000

3. c)  Would it be better to sell 16,000 pairs at a selling price of $180 each or 19,000
pairs

at a selling price of $160?

$180*10%=$18

$180-35-22-18-15=$90

$90*16,000=$1,440,000 better to sell for $180 16,000 times

$160 *10%=$16

$160-35-22-16-15=$72

$72*19,000=$1,368,000

4. d)  If an additional $63,270 is spent on fixed advertising costs, what level of dollar
sales must be attained to earn a new profit of $36,000? Assume that there has been no
change in the sales price.

Fixed costs=$1,345,000 + $63,270=$1,408,270

$1,408,270/$90=15,647.4 rounded to 15,648 break even

$36,000/$90=400

400+ 15,648 =16,048 units to sell for a profit of $36,050

5. e)  Assume an income tax rate of 30%. Using the given information, how many pairs
of shoes need to be sold to earn an after-tax profit of $37,800.

$90*30%=$27

$90-$27=$63

$1,408,270/$63=22,353.49 rounded to 22,354 units to sell for break even

$37,800/$63=600 units

600 units + 22,354= 22,954 units to sell for a profit of $37,832

2. Kipper Ltd sells three models of heaters – the Standard, the Deluxe, and the Pro. Selected
information on the rackets is given below:

Standard Deluxe Pro

 Sales in units p. a 10000 5000 7000
Unit selling price $50 $100 $250
Variable $20 $35 $50
manufacturing cost
per unit
Variable selling cost $4 $10 $15
per unit

All sales are made through the company’s own retail outlets. The company has the following
fixed costs:

Per annum
Fixed manufacturing costs $250,000
Fixed selling and administrative costs $227,000
Total $477,000

a) Calculate the unit contribution margin for each product type. b) Determine the
weighted-average unit contribution margin.

Standard- $50-$20-$4=$26 10000/22000=45.45%

Deluxe- $100-$35-$10=$55. 5000/22000=22.73%

Pro-$250-$50-$15=$185 7000/22000=31.82%

45.45% *$26 + 22.73% * $55 +31.82% *$185=$83.1855 rounded to $83.19

b) Compute the break-even point in units for the company.

$477,000/$83.19=5733.86 units rounded to 5734 units to sell for break even

d) Compute the break-even point in units for each product.

Standard

$477,000/$26=17,666,66 rounded to 17,667 units to break even

Deluxe

$477,000/$55=8672.73 rounded to 8673 units for break even

Pro

$477,000/$185=2578.38 rounded to 2579 units for break even

e) Determine the total number of units that must be sold to obtain a target profit of
$90,000 for the company.

$90,000/$83.19=1081.86 rounded to 1082

 1082+5734=6816

6816* $83.19=$567,023.04

$567,023.04-$477,000=$90,023.04

6816 units to sell for a profit of $90,023.04.

Management Accounting Study notes

Week 3 Lecture 3

Product costing system

A system that accumulates product-related costs and uses a series of procedures to assign
them to the organization's final products.

Why product costing: - Pricing

- Performance evaluation
- Planning and controlling costs

Different product costs for different purposes

For external reporting purpose:

Only manufacturing / production costs are included in product costs.

For managerial decisions:

➢ Short-term decisions – variable manufacturing and downstream costs

➢ Long-term decisions – total costs (both manufacturing and upstream & downstream costs)
associated with the product
Cost flow in manufacturing businesses

Allocating MOH costs to products

Electricity costs Gas costs

No. of meals produced.

Allocating MOH costs to products

Four steps to allocate MOH costs to products: 1. Aggregate the overhead costs into cost
pools.

2. Identify the overhead cost driver.

3. Calculate a predetermined overhead rate:

Pre. OH rate =

Total budgeted overhead costs /Total budgeted level of activity.

4. Apply overhead costs to products at the predetermined overhead rate:

Applied OH costs = pre. OH rate × actual level of activity.

Accounting for MOH

Two types of MOH are recorded in an accounting system:

➢Actual manufacturing overhead

 Manufacturing overhead costs incurred throughout the accounting period.

 Debited to the manufacturing overhead account.

 Credited to various accounts.

  Applied manufacturing overhead.

 Estimate of the overhead resources used to manufacture a product (calculated as pre.

OH rate × actual level of activity)

 Credited to the manufacturing overhead account Debited to the WIP account.

Accounting for MOH

Wage Payable (W/P)

MOH2000

Actual MOH (i.e., unpaid indirect labour) incurred was $2000.

Dr Cr

MOH applied $1800.

Dr Cr

Job costing system – a costing system that assigns manufacturing (or product-related) costs to
individual jobs.

Process costing system – a costing system that assigns all production costs to processes or
departments and averages them across all units produced.

Note: as required by AASB only manufacturing costs are assigned to products for external
reporting purpose.
Job costing: calculation of job costs

1. Identify the direct costs of the job.

- Direct materials - Direct labour

2. Allocating overhead costs to the Job

1. Aggregating the overhead costs into cost pools

2. Identifying overhead cost driver (allocation base)

3. Calculate a predetermined overhead rate.

4. Applying manufacturing overhead costs to products

ACCG 2000 Week 3 Homework Questions (Due in Week 4) Discussion

Questions: NOTE: Answers are underlined.

Discussion Questions

1. The production of 100 cartons of cans of soft drinks could be costed as part of a job
costing system or a process costing system. Do you agree? Explain.

This activity can and should be costed as a process costing system. By analysing the
continuum of conventional costing systems, the activity meets the production
 environments and product features of the process costing system. The production of
cans may be considered as mass production and repetitive. The activity will produce
100 cartons of the same drink.

Exercises

1. Winc Pty Ltd bases its predetermined overhead rate on direct labour hours. Estimates and
actual results for 2020 are shown below:

Required:

Estimated overhead $150,000

Actual overhead $110,000

Estimated direct labour hours $30,000

Actual direct labour hours. $20,500

Actual direct labour cost $60,000

1. a)  What is the predetermined overhead rate? $150,000/$30,000=$5 machine hour

2. b)  How much overhead would have been applied by Winc Pty Ltd to Work in
Process during 2020? $5* $20,500=$102,500
3. c)  What is the amount of underapplied or overapplied overhead at the end of 2020 for

Winc Pty Ltd? Actual overhead=$110,000. Estimated overhead=$150,000

Therefore, the amount of overapplied overhead at the end of 2020 for Winc Pty Ltd is
$40,000.

Problems

1. Avaya uses a job costing system. The March cost data were as follows:

Raw materials purchased on credit $400,800

Direct labour cost $417,250

Raw materials issued to production $368,030

Actual manufacturing overhead cost $319,680

Cost of goods manufactured $1,185,700

 Sales (all on credit) $1,351,200

Machine hours for March were 65,000 hours, and the business applies overhead to production
at a rate of $6.00 per machine hour. The beginning raw materials inventory was $46,080. The
beginning work in process inventory was $75,870. The beginning and ending finished goods
inventories were $121,300 and $100,560 respectively.

Required:

a) Prepare general journal entries to record the March transactions.

b) Was overhead overapplied or underapplied for the month of March? Overapplied
c) Calculate the ending balances of raw materials and work in process. (Hint: Prepare T

accounts for inventories.)

General journal entry for

March 2020
Purchase of material
Raw material inventory $400,800
Accounts payable $400,800
Transferring DM to jobs
Work in process inventory $368,030
Raw material inventory $368,030
Charging direct labour to
jobs
Work in process inventory $75,870
Wages payable $75,870
Applied MOH
Work in process inventory $390,000
MOH $390,000
Completion of production
Finished goods inventory $121,300
Work in process inventory $121,300
Sale of goods
Cost of goods sold $100,560
Finished goods inventory $100,560
MOH actual incur
MOH $390,000
Wage payable $75,870
Office supplies inventory $314,130
Adjusted underapplied
overhead
Cost of goods sold $75,870
MOH $75,870

Raw Materials Inventory Work in Process Inventory

O/B $46,080 WIP $368,030 DM used. O/B $78,850 FG’s. $121,300
Purch. $400,800 C/B $78,850 DM $368,030 C/B $1,254,130
DL $417,250
MOH $390,000

2. Swin Co. uses a job costing system, and manufacturing overhead is applied based on
machine hours. At the beginning of the year, management estimated that the company would
incur $1,200,000 of manufacturing overhead costs and use 60,000 machine hours.

Swin Co recorded the following events during the month of October.

1. (a)  Beginning balances:

Raw materials inventory (RM): $150,000 Work in process inventory (WIP): $170,000
Finished goods inventory (FGs): $50,000
2. (b)  Purchased 250,000 kilograms of raw materials on account. The cost was $5.00
per kilogram.
3. (c)  Issued 200,000 kilograms of materials to production. Assume all materials issued
are at $5 per kilogram.

(d) Incurred $280,000 of direct labour costs and $60,000 of indirect labour costs. (e)
Recorded depreciation on equipment for the month, $23,000.
(f) Recorded $41,500 of insurance costs for the manufacturing property.

(g) Recorded $36,800 for utilities and other miscellaneous items for the manufacturing plant.

(h) Completed job B20 costing $190,000 and job B21 costing $790,000 during the month and
transferred them to Finished Goods inventory account.

(i) Shipped job B21 to the customer during the month. (j) Used 11,000 machine hours during
October. Required:

Complete the relevant T- accounts to show the flow of costs through the company’s
manufacturing accounts.

Raw Materials Inventory Work in Process Inventory

O/B $150,000 DM used$1,000,000 O/B $170,000 FG B20 $190,000
Purch$1,250,000 (WIP) DM $1,000,000 FGB21 790,000
C/B $400,000 DL. $280,000

Finished Goods Inventory Cost of Goods Sold

O/B $50,000 COGS $980,000 FG’s $790,000
FG B20 190,000 CB 240,000 MOH
FG B21 790,000

Manufacturing Overhead
IDL $60,000 WIP $96,800-COGS
Office supply $36,800
Dep 23,000 COGS
(Adjustment). Insu.

Management Accounting Study notes

Week 5 Lecture 5

Recall from Week 3: Types of product costing systems.

Base on the nature of production environment

Job costing system – a costing system that assigns manufacturing (or product-related)
costs to individual jobs.

Process costing system – a costing system that assigns all production costs to processes
or departments, and averages them across all units produced.
Note: Many businesses use a combination of job and process costing, which is called
hybrid costing

Process costing: calculation of product costs

Process costing system accumulates the cost of each process then average

these costs across all units produced. .

Two scenarios:

1. 1)  Process costing with zero beginning and ending WIP inventory;

2. 2)  Process costing with some beginning and ending WIP inventory

Process costing with no beginning and ending WIP inventory

Two main steps to calculate product costs

1. Accumulates total costs of the production processes Cost in each production process =
DM +DL+MOH;

Total costs= costs from all production processes.

2. Calculate the average cost per unit by dividing total costs of the processes by the
number of units produced

Average cost/unit = Total costs/Total no. of units produced

Lecture Example 2

Stanmore Chemicals Ltd produces chemical called Super Clean, in two- litre containers. In
July the company produced 140 000 liters of Super Clean mixture, which was packed into 70
000 containers. Production takes place in two departments: Mixing and Packing. The
manufacturing costs for each department for July were provided in the table. There is no
beginning and ending WIP inventory. All finished inventories in July were sold out.

Cost item Mixing Packing

Direct Materials $50 000 $10 000
Direct Labour 24 000 8 000
Manufacturing Overhead 14 400 4 800

Required:
 1. What is the cost per container for Super Clean?

2. Complete the T-accounts provided and prepare journal entries to record the
production costs for

July. 9

Lecture example 2 solutions

1. Calculate the cost per container

Step1: cost in mixing department

= 50000 + 24000 +14400=88400

cost in packing department = 10000 +8000+4800=22800

Total cost = 88400+22800=111200

Step 2: Average cost per unit = total cost/ total units produced = 111200/70000

= $1.59/container

Lecture example 2 solutions

2. Journal entries

a). Usage of raw materials, direct labour and overhead in Mixing dept.

b). Completion and transfer of super clean mixture from Mixing to Packing Dept.

Lecture example 2 solutions

c). Usage of raw materials, direct labour and overhead in Packing dept.
Dr. Work in process – packing
Cr. Raw material inventory.

Wage payable Manufacturing overhead

22 800
10 000

8 000 4 800

d). Completion and transfer of completed Super Clean from Packing Dept to Finished Goods.

Process costing with some beginning and ending WIP inventories

When there are partially completed units on hand at the beginning or end of the period,
product costs will relate to units that are:

Units started in the previous period (beginning WIP) and completed in the current period;

Units started and completed during the period;

Units that are incomplete at the end of the period (ending WIP).

Key concept: Equivalent units

Definition: the number of whole units that could have been completed if all the work during
the period had been used to produce whole units.

For example, two units that are 50% complete are the equivalent of one unit of fully
completed.

No.
% of completion Equivalent units
units
150 30% 45
1000 80% 800

Partially completed goods need to be converted to equivalent units.

Key concept: Equivalent units

DM, DL and MOH costs are incurred at different stages of the production process.

Partially completed goods that remain in process are generally at different stages of
completion with respect to direct material and conversion (i.e. the sum of DL and MOH)

For instance, at the beginning of the period company A has 100 incomplete units. The
completion percentage for DM is 80% while for conversion is 50%. What are the equivalent
units?

For DM: 100*80% = 80 units

For conversion: 100*50% = 50 units

Lecture example 3

During January 10 000 cameras are placed into production. Only 9000 cameras are fully
completed and transferred out at the end of the month. Percentage of completion of remaining
1000 cameras is: Direct material (DM) cost - 100% and conversion cost – 50%.

What are the total equivalent units for DM and conversion cost?

Lecture example 3 solutions

% of completion Equivalent units

Item Physical units
DM Conversion DM Conversion
Completed units 9000 100% 100% 9000 9000
Ending WIP 1000 100% 50% 1000 500
Total equivalent units 10000 9500

Weighted average method to calculate product costs

Weighted average method – averages the cost of opening WIP inventory with current
production costs to determine the cost of completed production and closing WIP

Four steps:

Step one: analyse the physical flow of units

Physical units in Physical Physical units completed beginning WIP units started
+ –
and transferred out =

Physical units in ending WIP

Weighted average method to calculate product costs

Step two: calculate the equivalent units

The equivalent units in beginning WIP are not identified separately; this is a key feature of
the weighted average cost method

Equivalent units
Equivalent units in completed and +
ending WIP

transferred out

= Total equivalent units DM? Conversion?

20

Weighted average method to calculate product costs

Step three: calculate the unit costs

The cost per equivalent unit for direct material is the total direct material costs divided by the
total equivalent units for direct material;

The cost per equivalent unit for conversion cost is the total conversion cost divided by the
total equivalent units for conversion.

Note: Under the weighted average method the cost per equivalent unit is based on the total
costs incurred including the cost of beginning WIP

Step four: Analyse the total costs

i) cost of goods completed and transferred out; ii) cost of ending WIP
21

Lecture example 4

ABC Ltd produces toys with the following information relating to activities in March:

Beginning WIP: 4000 units (Degree of completion: DM – 100% and conversion cost-75%).
Costs include: DM $220,000; Conversion cost $66,000.

Production started: 25,000 units

Production completed and transferred out: 24000 units
Ending WIP inventory: DM- 100% completed and conversion cost 40% completed. During
March DM used $1404,000; Conversion cost incurred: $506,000.
The company uses weighted average cost to allocate costs to production.

Determine the cost of goods completed during the month and cost of the WIP
inventory on 31March.

Lecture example 4

Step 1: analyse the physical flow of units

Equivalent units
physical % of DM % of conversion
DM Conversion
units completion completion
Units completed &
transferred out during 24000 100% 100% 24000 24000
month
Ending WIP units 5000 100% 40% 5000 2000
Total equivalent units 29000 26000

Lecture example 4

Step 3: Calculate the unit costs

DM Conversion Total
WIP inventory, 1 March $220,000 $66,000
Costs incurred during the month 1404,000 506,000
Total costs accounted for (a) 1624,000 572,000 2,196,000
Equivalent units (b) (from step 2) 29000 26000
Cost per equivalent unit (a)/(b) $56 $22 $78

Lecture example 4

Step 4: analyse the total costs (using equivalent units)

Cost of goods completed and transferred during the month

= 24000 units × $56 +24000 units × $22 = $1872,000 or 24000 units × $78 = $1872, 000

Cost of WIP inventory on 31 March = DM cost + Conversion cost

= 5000 units × $56 + 2000 units × $22 = $324,000

Hence, total costs assigned to inventories are $2,196,000.

Lecture example 5

Smith Toys Ltd manufactures wooden toys. The following information relate to its
production activities in May.

WIP on 1 May: 225 units (DM 100% completed; Conversion costs 60% completed); Costs
include: DM $1800, Conversion cost $810.

Production started: 275 units

Production completed and transferred out: 400 units
Ending WIP inventory: DM 100% completed; Conversion costs 50% completed. During May
DM used $1980; Conversion costs incurred $1638;

Required: Determine the cost of goods completed during the month and cost
of the WIP inventory on 31st May.

Equivalent
units
physical % of DM % of conversion
DM Conversion
units completion completion
Units completed
400 100% 100% 400 400
during month
WIP units,31 May 100 100% 50% 100 50
Total equivalent
500 450
units

Lecture example 5 solutions

Step 3: Calculate the unit costs

 DM Conversion Total
WIP inventory, 1 May $1800 $ 810
Costs incurred during the month 1980 1 638
Total costs accounted for 3780 2448
Equivalent units 500 450
Cost per equivalent unit $7.56 $5.44 $13

28

Lecture example 5 solutions

Step 4: analyse the total costs

Cost of goods completed and transferred during the month

= 400 units × $13 = $5 200

Cost of WIP inventory on 31 May

= DM cost + Conversion cost
= 100 units × $7.56 + 50 units × $5.44 = $1028
ACCG 2000 Week 5 Homework Questions (Due in Week 6) Discussion
Questions: NOTE: Answers are underlined.

Discussions

ACCG 2000 Week 5 Homework Questions

1. “Both a job costing system and a process costing system enable the calculation of the
unit cost of a product. However, process costing provides a more accurate unit cost.”
Do you agree? Discuss.

I Disagree with this statement. Process costing provides a more efficient information
retrieval process then job costing systems. However due to averages being applied
estimations will often be less accurate. Job costing adopts a perpetual system which
means every unit cost is accounted for as it occurs. Therefore, some units may incur
extra costs associated with idle times, delays etc. Job costing is a less efficient process
then process costing when considering timeliness. Nevertheless, results from job
coting will be more accurate per unit cost.

2. “It is difficult to understand how costs can be assigned to equivalent units when such
units do not really exist in a physical form.” Discuss.

It is less difficult to understand when considering this, Costs are assigned to

equivalent units in terms of the percentage used for conversion and direct material
(Percentage of completion). For example, for two products that are 80% and 20%
 completed respectively. The equivalent unit is 1 as both products added together
equal=100% which is equivalent to 1 completed unit. Another example is there are 4
products each completed to 50%. this is equal to 2 equivalent 100% completed units.

Exercises

1. Foamtastic Ltd is calculating equivalent units for conversion costs. Determine equivalent
units using the weighted average method.

Units completed Ending work in Ending work in Weighted average

during the month process process equivalent units
Units %Complete
1. 10,000 0 - A)10,000
2. 36,000 6000 50% B)39,000
3. 48,000 4000 30% C)49,200
4. 15,000 5000 20% D)16,000

Problems

1. Arona Co. produces a liquid cleaner for floors. At the beginning of March, 30,000 litres of
liquid cleaner were in process. 100% complete as to raw material and 60% complete as to
conversion costs. During the month, the company started 320,000 litres of liquid cleaner in
production. At the end of the month, 40,000 litres of liquid cleaner were in work in process
inventory, 100% completed as to raw materials and 40% completed in terms of conversion
costs.

Assume that following costs were recorded by Arona Co. for the beginning work in process
and the production performance for March:

Beginning inventory:

Raw materials costs $12,000

Conversion costs $15,800

March production costs:

Raw materials costs $163,000

Conversion costs $310,200

a) Prepare a schedule analysing the physical flow of units and calculating the
equivalent units of both direct material and conversion for March. Use
 Physical units % of Equivalent units
completion
with respect to DM Conversion
conversions
Beginning WIP, March 1 30,000 60%
Units started in Marc1 320,000
Total units accounted for 350,000
Units completed and transferred 310,000 100% 310,000 310,000
during March
Ending WIP Inventory 40,000 40% 40,000 16,000
Total units accounted for 350,000
Total equivalent units 350,000 326,000
 b) Calculate the unit cost for each litre of liquid cleaner.

DM Conversion Total
WIP Inventory, 1 $12,000 $15,800
March
Costed incurred $163,000 $310,200
during March
Total costs $175,000 $326,000 $501,000
accounted for

Equivalent units 350,000 326,000

Costs per $0.5 $1 $1.50
equivalent unit

c) Determine the total costs of the litres of liquid cleaner finished during
March. What? is the balance of the ending work in process inventory?

Total
Cost of goods completed 310,000*$1.5 $465,000
and transferred out during
October
Cost remaining WIP 40,000*$0.5 $20,000
(DM)
Conversion 16,000*$1 $16,000
Total costs of October 31 $36,000
WIP
Cost of goods completed $465,000
and transferred out
Cost of 31 October WIP $36,000
Total cost accounted for $501,000

2. MacCheese Ltd produces cheese topping for the fast pizza industry. At the beginning of
October 50,000 kilograms of cheese topping was in process, 100% complete as to raw
materials and 50% complete as to conversion costs. During the month, the company started
200,000 kilograms of cheese topping in production. At the end of the month, 30,000
kilograms of cheese topping was in work in process inventory, 100% completed as to raw
materials and 40% completed in terms of conversion costs.

Assume that the following costs were recorded by MacCheese Ltd for the beginning work in
process and the production performance for October:

Beginning inventory:

Raw materials costs $50,000

 Conversion costs $18,000

October production costs:

Raw materials costs $200,000

Conversion costs $190,800

a) Prepare a schedule analysing the physical flow of units and calculating the equivalent
units of both direct material and conversion for October.

Physical units % of Equivalent units

completion
with respect to DM Conversion
conversions
Beginning WIP, October 1 50,000 50%
Units started on October 1 200,000
Total units accounted for 250,000
Units completed and transferred 220,000 100% 220,000 220,000
during October
Ending WIP Inventory, October 30,000 40% 30,000 12,000
31
Total units accounted for 250,000
Total equivalent units 250,000 232,000

b) Calculate the unit cost for each kilogram of cheese topping.

DM Conversion Total
WIP Inventory, 1 $50,000 $18,000
October
Costed incurred $200,000 $190,800
during October
Total costs $250,000 $208,800 $458,800
accounted for

Equivalent units 250,000 232,000

Costs per $1 $0.9 $1.90
equivalent unit
 c) Determine the total costs of the kilogram of cheese topping finished during
October. What is the balance of the ending work in process inventory?

Total
Cost of goods completed 220,000*$1.9 $418,000
and transferred out during
October
Cost remaining WIP 30,000*$1 $30,000
(DM)
Conversion 12,000*$0.9 $10,800
Total costs of October 31 $40,800
WIP
Cost of goods completed $418,000
and transferred out
Cost of 31 October WIP $40,800
Total cost accounted for $458,800

ACCG 2000 Week 6 Homework Questions (Due in Week 7) Discussion

Questions: NOTE: Answers are underlined.

1. Describe the process of two-stage cost allocation in the development of departmental

overhead rates, using the terms overhead cost distribution, support department cost
allocation and overhead application.

Stage 1 represents the assignment of overhead costs to production departments. Stage

1 is made up of two steps:

 Step 1-Genral manufacturing overheads are distributed to all departments.

 Step 2-Support department costs are allocated to production departments.

Stage 2 is the final stage in which the overhead costs are assigned to products.

2. “The reciprocal method is the most appropriate method of support department cost
allocation as it takes into account all service flows between departments.” Do you
agree? Explain your answer.

The reciprocal method focuses on support department cost allocation between all
departments that use support department outputs. Being that is the only method that
accounts for the provision of services among departments it is in most scenarios the
most appropriate method of support department cost allocation.
MAC. Ltd manufacturers sheet music stands in two separate departments, cutting and
welding. The following data relate to the year just ended:

Cutting department Welding department Total plant

Budgeted $60 000 $140 000 $200,000
manufacturing
overhead

Actual manufacturing 54 000 108 000 162,000

overhead

Budgeted machine 50 000 110 000 160,000

hours

Actual machine hours 27 000 90 000 117,000

Budgeted direct labour 30 000 20 000 50,000

hours.

Actual direct labour 29 400 11 700 41,100

hours

One of MAC’s major products, the B Frame, has the following production requirements:

Cutting department Welding department Total plant

Machine hours 3.5 5.0 8.5
Direct labour hours 5.0 2.0 7.0

Calculate the manufacturing overhead cost of the B Frame using:

a) a predetermined plantwide rate based on direct labour hours 200,000/50,000=$4.0
b) a predetermined plantwide rate based on machine hours 200,000/160,000=$1.25

$4*7=$28. $1.25*8.5=$10.625 MOH cost of B Frame =$10.625*$28=$38.625

c) predetermined departmental rates based on direct labour hours for the cutting department and on
machine hours for the welding department. Which of these three estimates of overhead cost is likely
to be the most accurate? Explain.

1. 60,000/30,000=$2 $2*5=$10
2. 140,000/110,000=$1.273. $1.273*5=$6.364
 3. The estimate from the previous question (MOH cost of B Frame =$10.625*$28=$38.625) is
arguably the most accurate as it takes both departments into account. Therefore, the estimate
will more accurately represent the MOH cost of the B frame.

Hoolloo manufactures two types of piggy banks, a kangaroo-shaped piggy bank, and a
platypus-shaped piggy bank, in two separate production departments. The plant is highly
automated and contains only two other support departments: (1) engineering and design
(ED); and (2) information systems (IS). Hoolloo allocates support department costs according
to estimated service use. Information for the year just ended was as follows.

Support Production
ED IS K-shaped P-Shaped
Direct costs $6,200 $9,500 $15,000 $22,000
Service used
ED 0 10% 50% 40%
IS 20% 0 20% 60%

Using the information provided:

a) Determine the total cost of operations for each production department under the direct
method.

Service Service provided to

provided by ED IS K-Shape P-Shape

$6,200 $9,500 $15,000 $22,000

Allocate ED $6,200 $3,444.44 $2,755.56
Allocate IS $9,500 $2,375 $7,125
Total OH cost $20,819.44 $31,880.56
for
Production
Department

b) Determine the total cost of operations for each production department under the step-down
method.

Service Service provided to

provided by: ED IS K-Shape P-Shape

$6,200 $9,500 $15,000 $22,000

Allocate ED $7,440 $4,750 $3,800
Allocate IS $1,240 $9,500 $1,860 $5,580
Total OH cost $21,610 $31,380
of production
department.
c) Determine the total cost of operations for each production department under the reciprocal
method.

Service Service provided to

provided by: ED IS K-Shape P-Shape

$6,200 $9,500 $15,000 $22,000

Allocate ED $7,440 $950 $7,500 $8,800
Allocate IS $1,240 $10,450 $3,000 $13,200
Total OH cost $25,500 $44,000
of production
department.