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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
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Valuing by-products and joint products
By-products
Either of the following methods may be adopted when valuing by-products:
(a) The proceeds from the sale of the by-product may be treated as pure profit
(b) The proceeds from the sale, less any handling and selling expenses, may be applied in reducing
the cost of the main products.
If a by-product needs further processing to improve its marketability, such cost will be deducted in
arriving at net revenue, treated as in (a) or (b) above.
Recorded profits will be affected by the method adopted if stocks of the main product are
maintained.
Accounting for joint products
Joint products are by definition, subject to individual accounting procedures. Joint costs may
require apportionment between products if only for joint valuation purposes.
The main bases for apportionment are as follows:
Physical measurement of joint products
When the unit of measurement is different, e.g. liters and kilos, some method should be found of
expressing them in a common unit. Some joint costs are not incurred strictly equally for all Joint
products: such costs can be separated and apportioned by introducing weighting factors.
Market value
The effect is to make each product appear to be equally profitable. Where certain products are
processed after the point of separation, further processing costs must be deducted from the market
values before joint costs are apportioned.
Technical estimates of relative use of common resources
Apportionment is, of necessity, an arbitrary calculation and product costs which include such an
apportionment can be misleading if used as a basis for decision-making.
Problems of common costs
Even if careful technical estimates are made of relative benefits, common costs apportionment will
inevitably be an arbitrary calculation. When providing information to assist decision-making,
therefore, the cost accountant will emphasize cost revenue differences arising from the decision.
Here are some examples of decisions involving joint products:
withdrawing, or adding, a product
Special pricing
Economics of further processing.
Apportioned common costs are not relevant to any of the above decisions although a change in
marketing strategy may affect total joint costs, e.g. withdrawing a product may allow capacity of the
joint process to be reduced.
In the short or medium term, it is probably impractical and/or uneconomic to alter the processing
structure. The relative benefit derived by joint products is, therefore, irrelevant when considering
profitability or marketing opportunities.
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PRACTICE QUESTION
Q. 1
Physical quantity method
Cost Allocation at Split off Point
1960 liter fresh milk put in the process
Skim Milk
1,000 Liter
Cream
500 Liter
Butter
200 Liter
Ghee
100 Liter
Yogurt
60 Liter
Miscellaneous 100 Liter
Cost incurred for 1,960 liters of milk is Rs. 15,680
Solution
Skim Milk
= 15,680 / 1960 x 1000 = 8,000
Cream
= 15,680 / 1960 x 500 = 4,000
Butter
= 15,680 / 1960 x 200 = 1,600
Ghee
= 15,680 / 1960 x 100 = 800
Yogurt
= 15,680 / 1960 x 60  = 480
Miscellaneous
= 15,680 / 1960 x 100 = 800
Q. 2
Cost incurred in the department Rs 70,000
Drum sticks
Rs. 4 per gram
Breast pieces
Rs. 6 per gram
Wings
Rs. 3 per gram
Miscellaneous Rs. 2 per gram
Drum stick
20,000 X 4
= 80,000
Breast pieces
10,000 X 6
= 60,000
Wings
6,000 X 3
= 18,000
Miscellaneous
4,000 X 2
= 8,000
1,66,000
Solution
Drum stick
= 70,000 / 1,66,000 x 80,000 = 33,735
Breast pieces
= 70,000 / 1,66,000 x 60,000 = 25,300
Wings
= 70,000 / 1,66,000 x 18,000 = 7,590
Miscellaneous
= 70,000 / 1,66,000 x 8,000 = 3,375
70,000
Physical Quantity Ratio
Total quantity produced 40,000 grams
Drum stick
20,000
Breast pieces
10,000
Wings
6,000
Miscellaneous
4,000
40,000
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Drum stick
= 70,000 / 40,000 x 20,000
= 35,000
Breast pieces
= 70,000 / 40,000 x 10,000
= 17,500
Wings
= 70,000 / 40,000 x 6000
= 10,500
Miscellaneous = 70,000 / 40,000 x 4000
= 7,000
70,000
Q. 3. ABC limited produces three products O, P and Q by the operation. Cost accumulated during
the operation.
Direct Material 1000 kg @ Rs 2 =
Rs. 2,000
Direct Labor
5,000
FOH
8,000
15,000
Output
O
500 Kg
Sold at split off point for Rs 20 / kg
P
300 kg
Enters into a second process
Q
200 kg
Enters into a second process
Second process for product P
Cost incurred: Total
Per Unit
Direct Labor cost
Rs. 6,000
Rs. 20
FOH
Rs. 3,000
Rs. 10
Product P is 100% complete & sold for Rs 70 / kg
Second process for product Q
Cost incurred: Total
Per Unit
Direct Labor cost
Rs. 1,400
Rs. 7
FOH
Rs.  600
Rs. 3
Product Q is 100% complete & sold for Rs 30 / kg
Solution
Method # 1
Physical Quantity Ratio
Process-1
Quantity Schedule
Units put in the process 1,000 kg
Completed units of product "O"
500 kg
Transfer to further process
Product "P"
300
Product "Q"
200
1000
Cost Accumulated as follow:
Direct Material
2,000
Direct Labor
5,000
FOH
8,000
15,000
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Cost Allocation / Accounting Treatment
Product O
=
15,000 x500 / 1000 = 7,500
Product P
=
15,000 x 300 / 1000 = 4,500
Product Q
=
15,000 x 200 / 1000 = 7,500
Product O
No further process is required
Completed & Sold
Sold 500 x 20 = 10,000
Cost 500 x 15 = 7,500
Gross Profit
2,500
Product P
Cost Accumulated
Cost received from Process 1
Rs. 4,500
Direct Labor
6,000
FOH
3,000
13,500
Unit Cost = 13,500 / 300 = 45 / Kg
Transfer to finished goods = 300 x 45 = 13,500
Sales  300 x 70
= 21,000
Less Cost 300 x 45
= 13,500
7,500
Product Q
Cost Accumulated
Cost received from Process 1
Rs. 3,000
Direct Labor
1,400
FOH
600
5,000
Unit Cost
5,000 / 200 = 25 / Kg
Transfer to finished goods = 200 x 25 = 5,000
Sales  200 x 30
= 6,000
Less Cost 200 x 25
= 5,000
1,000
Method # 2 Hypothetical market Value Basis
O
P
Q
Rs
Rs
Rs
Final Price
20
70
30
Additional Cost per kg
In further processing
Direct Labor
-
20
7
Factory Overhead
-
10
3
Hypothetical Market Value
At split off point
20
40
20
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Cost Allocation in the Process-1
Product O (Finished) 15,000 / 80 x 20
= 3,750
Product P Transferred to process II 15,000 / 80 x 40
= 7,500
Product Q Transferred to process II 15,000 / 80 x 20
= 3,750
15,000
Product P
Process -II
Quantity Schedule
Received From process-I
300
Completed and transfer out
300
Cost Accumulated
Cost received from process-1
7,500
Cost added
Direct Labor
6,000
FOH
3,000
9,000
16,500
Cost Apportionment / Accounting Treatment
Cost transfer to finished good
Rs 16,500
16,500 / 300 = 55 per kg
300 x 55 = 16500
Sales
300 x 70
= 21,000
Less Cost
300 x 55
= 16,500
Gross Profit
4,500
Product
Q
Process -II
Quantity Schedule
Received From process-I
200
Completed and transferred out
200
Cost Accumulated
Cost received from process-1
3,750
Cost added
Direct Labor
1,400
FOH
600
5,750
Cost Apportionment / Accounting Treatment
Cost transfer to finished good
Rs 5,750
5750 / 200 = 28.75 per kg
200 x 28.75 = 5,750
Sales 200 x 30
= 6,000
Less Cost 300 x 55
= 5,750
250
By Products
Some examples of by products are given below:
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Main Product
By Product
Soap
Glycerin
Meat
Hides & Fats
Flour
Bran
Classification of by product
By product can be classified into two categories:
1. Requiting no further process, for example Bran
2. Requiting further processing, for example Hides
Accounting for By Products
Income Approach
Costing Approach
Sales Income
Credit the cost of main product with the:
1- Treat as other income
1- Replacement cost / Opportunity
2- Treat as a deduction form
Cost of By Product
Cost goods sold
3- Treat as a deduction form
2- Predetermined price / Standard
Cost goods manufactured
Cost
Realizable Income
1- Treat as a deduction form
Cost goods manufactured
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PRACTICE QUESTION
Following is a question on by product:
Main product
By product
Opening stock
-----
-----
Production during the year
4,000
800
Closing stock
400
100
Cost incurred
64,000
-----
Cost of 3600 units (64,000/4000x3600)
57,600
-----
Sales price (Per unit)
30
2.50
Further processing cost
0.50
Solution
Method # 1
Rupees
Treat as an other income
Sales (3600 x 30)
108,000
Less Cost of goods sold
Opening stock
----
Production cost
64,000
Less Closing stock (16 x 400)
(6,400)
57,600
Gross Profit
50,400
Add other income
1,400
51,800
Sales of By Product
(700 x 2.5)
1,750
Less Further Processing cost (700 x 0.5)
350
1,400
Method # 2
Rupees
Treat as a deduction from cost of goods sold
Sales (3600 x 30)
108,000
Less Cost of goods sold
Opening stock
----
Production cost
64,000
Less Closing stock (16 x 400)
6,400
57,600
Less Sales value of By Product
(1,400)
56,200
Gross Profit
51,800
Method # 3
Rupees
Treat as a deduction from cost of goods manufactured
Sales (3600 x 30)
108,000
Less Cost of goods sold
Opening stock
----
Production cost (64,000 ­ 1,400)
62,600
Less Closing stock (62,600 x 10%)
6,260
56,340
Gross Profit
56,660
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Cost & Management Accounting (MGT-402)
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Realizable Value Basis
Production cost on By Product
800 x 2.50 =
2,000
Additional cost on By Product
800 x 0.50 =
400
Realizable Value
1,600
Treat as a deduction from cost of goods manufactured
Sales (3600 x 30)
108,000
Less Cost of goods sold
Opening stock
----
Production cost (64,000 ­ 1,600)
62,400
Less Closing stock
(62,400/4,000=15.6 x 400)
6,240
56,160
Gross Profit
51,840
Further example of by product
Joint Cost Rs. 206,800
Further Cost
Sales Price Market Value
Incurred per
pound
Grade 1
20,000 lb
1
5
(5-1) = 4 x 20,000
80,000
Grade 2
40,000
0.2
4
(4-0.2) = 3.8 x 40,000
152,000
Grade 3
60,000
0.5
3
(3-0.5) = 2.5 x 60,000
150,000
Grade 4
80,000
0.2
2
(2-0.2) = 1.8 x 80,000
144,000
Grade 5
50,000
0.1
1
(1-0.1) = 0.9 x 50,000
45,000
Total
250,000
Multiple Choice Questions
A chemical compound is made by raw material being processed through two processes. The
output of Process A is passed to Process B where further material is added to the mix. The details
of the process costs for the financial period number 10 were as shown below:
Process A
Direct material
2,000 kilograms at Rs5 per kg
Direct labor
Rs 7,200
Process plant time 140 hours at Rs60 per hour
Process B
Direct material
1,400 kilograms at Rs12 per kg
Direct labor
Rs 4,200
Process plant time 80 hours at Rs72.50 per hour
The departmental overhead for Period 10 was Rs 6,840 and is absorbed into the costs of each
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Cost & Management Accounting (MGT-402)
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process on direct labor cost.
Process A
Process B
Expected output was
80% of input
90% of input
Actual output was
1,400 kgs
2,620 kgs
Assume no finished stock at the beginning of the period and no work-in-progress at either the
beginning or the end of the period.
Normal loss is contaminated material which is sold as scrap for Rs0.50 per kg from Process A and
Rs1.825 per kg from Process B, for both of which immediate payment is received.
Q. 1
For process A what is the scrap value of the normal loss?
A
Rs  200
B
Rs 2,000
C
Rs 1,000
D
Rs
0
Q. 2
What is the abnormal loss for process A in units?
A
100
B
200
C
300
D
400
Q. 3
What is the cost per kg for process A?
A Rs 18,575
B Rs 13,454
C Rs 14.575
D Rs 16,575
Problem Question
Q. 1
Kong CO. manufactures two products, one in process A, the other in process B. The following
information applies to the processes for Period.
All materials are input at the start of each process, conversion costs (labor and overhead) are
incurred evenly throughout the process, and losses are identified at the end of process A and can
be sold for 10p per liter. The dosing work-in-progress is % of the way through the process.
Write up the accounts for process A and for process B
Process A
Process B
Material input-1
4.000 liters costing
200 kg costing
Rs 3,000
Rs 2,000
Labor and overhead
Rs 3,440
Rs 3,900
Transfers to finished goods
13,000 liters
180 kg
Opening work-in-progress
Nil
Nil
Closing work-in-progress
Nil
20 kg
Normal loss as % of input
10%
Nil
Q. 2
Mineral Separators Ltd operates a process which produces four unrefined minerals known as W,
X. Y and Z. The joint costs for operating the process for Period V were as below.
Process overhead is absorbed by adding 25% of the labor cost. The output for Period V was as
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shown below.
There were no stocks of unrefined materials at the beginning of Period V, and no work-in-
progress, but the stocks shown below were on hand at the end of the period, although there was
no work-in-progress at that date.
The price received per ton of unrefined mineral sold is shown below and it is confidently expected
that these prices will be maintained.
You are required:
(a) To calculate the cost value of the closing stock, using sales value as the basis of your calculation.
(b) To calculate the cost value of dosing stock, using weight of output as the basis of your
calculation.
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Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS