ZeePedia Add to Favourites   |   Contact us


Cost and Management Accounting

<<< Previous FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost Next >>>
 
img
Cost & Management Accounting (MGT-402)
VU
LESSON# 3
FINANCIAL STATEMENTS
Purpose of preparing financial statements
Financial statements are prepared to demonstrate financial results to the users of financial
information. These are the reports, which are prepared by the accounting department and are
used by the different people inclusive of the management.
According to IASB framework:
"Financial statements exhibit its users the financial position, financial performance, and cash
inflow and outflow analysis of an entity."
Components of Financial Statements
According to IASB framework there are five components of financial statements:
Balance Sheet:
Statement of financial position at a given point in
time.
Income Statement:
Incomes minus expenses for a given time period
ending at a specified date.
Statement of changes in Equity:
Also known as Statement of Retained Earnings or
Equity Statement.
Cash Flows Statement:
Summarizes inflows and outflows of cash and cash
equivalents for a given time period ending at a
specified date.
Notes (to the accounts):
Includes accounting policies, disclosures and other
explanatory information.
It is not possible for all the business entities to prepare all of the components of the financial
statements, it depends upon the size, nature and statutory requirements of each of the entities
that whether all components are to be prepared or not.
For example a small business entity (like a washer man) does not need to prepare statement of
changes in equity or notes to the accounts as the size of information is very little and not
complex
Financial statements prepared by the Cost Accountant
Cost accounting department prepares reports that help the accounting department in preparing
final accounts, these include;
 Cost of goods manufactured statement
 Cost of goods sold statement
Both of the statements represent production cost function or the function of expenses that are
incurred to make the goods or services available for sale. It depends upon the form of the
business entity whether what should be disclosed in these statements and what should be the
extent of the details to be given into these statements.
Forms of business entities
Manufacturing Entities
Manufacturing entities purchase materials and components and convert them into finished
goods.
15
img
Cost & Management Accounting (MGT-402)
VU
Costing department of these entities works very much efficiently, a complete cost accounting
system is followed in manufacturing concerns in which procedures of cost accumulation,
methods of product costing, process of calculating per unit cost and determining the cost of
inventories are defined.
Trading Entities
Trading entities purchase and then sell tangible products without changing their basic form.
Costing department of these entities is not involved in that much minute calculations and
procedures. It simply has to keep records of the cost of goods purchased and cost of inventory.
Servicing Entities
Servicing entities provide services or intangible products to their customers.
Costing department of these entities is also concerned with calculation of the cost of service
provided. Inventory of service is also determined in this type of concerns.
Inventory
It is the cost held in material & supplies, work in process and finished goods that will provide
economic benefits in future, it is also known as stock.
Adjustment for inventories is pivotal in calculation of cost of goods sold. The basic reason for
its adjustment is that profit and loss account is prepared on the basis of accrual concept.
Adjustments of opening and closing inventories in the cost of production (for manufacturing
entities), cost of purchases (for trading entities) is essential to match the cost with its revenue.
For manufacturing entities inventories are classified into three categories:
1. Material and supplies inventory
2. Work in process inventory
3. Finished goods inventory
Following is a self explanatory chart for different categories of inventories.
Inventory
Manufacturing
Trading
Services
Material & supplies
Work In Process
Finish Goods
Purchased Goods
Work In Process
Inventory
Inventory
Inventory
Inventory
Inventory
LOCATIONS
Godown/
Showroom/
Workplace/
Store
Work-shop
Warehouse
Godown
Office
16
img
Cost & Management Accounting (MGT-402)
VU
Standard format of the cost of goods sold statement:
Entity Name
Cost of Goods Sold statement
for the year ended_______
Rupees
Direct Material Consumed
Opening inventory
10,000
Add Net Purchases
100,000
Material available for use
110,000
Less Closing inventory
20,000
Direct Material used
90,000
Add Direct labor
60,000
Prime cost
150,000
Add Factory overhead Cost
80,000
Total factory cost
230,000
Add Opening Work in process
30,000
Cost of good to be manufactured
260,000
Less Closing Work in process
50,000
Cost of good manufactured
210,000
Add Opening finish goods
100,000
Cost of good to be sold
310,000
Less closing finish goods
10,000
Cost of good to sold
300,000
(Important tip for students)
To prepare cost of goods sold statement, firstly one needs to collect six elements. Three of these
belong to the cost and three belong to the inventory.
Six Elements of Cost of Goods Manufactured and Sold Statement
Cost
Inventory
Material & Supplies
Material & Supplies
Labor
Work in Process
FOH
Finished goods
Following is the stepwise calculation of the information that is produced in the cost of goods sold
statement:
Material Consumed
Rupees
Direct material opening inventory
10,000
Add Net purchases
100,000
Material available for use
110,000
Less raw material closing stock
20,000
90,000
Note: Amount of net purchases comes up with the help of following calculation:
Purchases of direct material
Less trade discounts and rebates
Less purchases returns
Add carriage inward
17
img
Cost & Management Accounting (MGT-402)
VU
Add other receiving and handling cost
Prime Cost
Direct material Consumed
90,000
Add Direct labor
60,000
150,000
Total Factory Cost
Prime cost
150,000
Add Factory Overhead
Indirect material
30,000
Indirect labor
20,000
Electricity bill
15,000
Rent of factory
10,000
Depreciation of plant
5,000
80,000
230,000
Note:  Factory overhead cost includes all production costs except direct material, direct labor and other direct costs,
it is completely indirect production cost.
PRACTICE QUESTIONS
Q. 1
Following data relates to Zain & Co,
Rupees
Opening stock of raw material
80,000
Opening stock of work in process
51,000
Purchases of raw material
230,000
Direct labor cost
94,000
Factory overheads
79,000
Closing stock of raw material
66,000
Closing stock of work in process
44,000
Required:
1)  Prime cost
2)  Total Factory cost
SOLUTION:
1) Prime cost:
Rupees
Opening stock of raw material
80,000
Add: Purchases of raw material
230,000
Less: Closing stock of raw material
(66,000)
Cost of raw material consumed
244,000
Add: Direct labor cost
94,000
Prime cost/Direct cost
338,000
2) Total Factory Cost:
Prime cost
338,000
Add: Factory overheads
76,000
Total Manufacturing cost/Factory cost
407,000
18
img
Cost & Management Accounting (MGT-402)
VU
Q. 2
Usama manufacturing company submits the following information on June 30,2005.
Raw material inventory, July 1, 2004
25,000
Purchases
125,000
Power, heat and light
3,500
Indirect material purchased and consumed
5,500
Administrative expenses
24,000
Depreciation of plant
18,000
Purchases returns
7,000
Fuel expenses
29,000
Depreciation of building
8000
Carriage inwards
3,500
Bad debts
2,500
Indirect labor
4000
Other manufacturing expenses
15,000
Raw materials inventory, June 30,2005
26,000
Required:
1)Cost of raw material consumed.
2)  Factory overhead cost
SOLUTION:
1)
Cost of raw material consumed:
Raw materials inventory, July 1 2004
25,000
Add: purchases of materials
125,000
Less: purchase returns
(7,000)
118,000
Add: carriage inwards
3,500
Less: materials inventory, June 30,2005
(26,000)
Cost of materials consumed
120,500
3)
Factory overhead cost:
Power, heat and light
3,500
Indirect material purchased and consumed
5,500
Depreciation of plant
18,000
Indirect labor
4,000
Fuel expenses
29,000
Other manufacturing expenses
15,000
Total Factory cost
75,000
Q. 3 Following data relates to Qasim & Co,
Opening stock of raw material
52,000
Opening stock of work in process
46,000
Purchases of raw material
255,000
Direct labor cost
85,000
Factory overheads
76,000
Closing stock of raw material
61,000
Closing stock of work in process
36,000
Required: Prepare a statement showing total manufacturing cost.
19
img
Cost & Management Accounting (MGT-402)
VU
SOLUTION:
Qasim & Co.
Cost of goods manufactured statement
Opening stock of raw material
52,000
Add: Purchases of raw material
255,000
Less: Closing stock of raw material
(61,000)
Cost of raw material consumed
246,000
Add: Direct labor cost
85,000
Prime cost/Direct cost
331,000
Add: Factory overheads
76,000
Manufacturing cost/Factory cost
407,000
Q. 4
FNS manufacturing company submits the following information on June 30,2005.
Sales for the year
450,000
Raw material inventory, July 1,2004
15,000
Finished goods inventory, July 1,2004
70,000
Purchases
120,000
Direct labor
65,000
Power, heat and light
2,500
Indirect material purchased and consumed
4,500
Administrative expenses
21,000
Depreciation of plant
14,000
Selling expenses
25,000
Depreciation of building
7,000
Bad debts
1,500
Indirect labor
3,000
Other manufacturing expenses
10,000
Work in process, July 1,2004
14,000
Work in process, June 30,2005
19,000
Raw materials inventory, June 30,2005
21,000
Finished goods inventory, June 30,2005
60,000
Required
2)
Calculate cost of raw-material consumed
3)
Calculate prime cost
4)
Calculate total factory cost
20
img
Cost & Management Accounting (MGT-402)
VU
SOLUTION:
FNS manufacturing company
Cost of goods manufactured statement
For the year ended June 30, 2005
Raw materials inventory, July 1 2004
15,000
Add: purchases of materials
120,000
Less: materials inventory, June 30,2005
(21,000)
Cost of materials consumed
114,000
Add: direct labor
65,000
Prime cost/Direct cost
179,000
Factory overheads:
Power, heat and light
2,500
Indirect material purchased and consumed
4,500
Depreciation of plant
14,000
Depreciation of plant
3,000
Other manufacturing expenses
10,000
34,000
Total Manufacturing cost/Factory cost
213,000
21
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