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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 6
MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS
Conversion Cost
Most of the times during solving the problems direct labor cot and factory overhead costs are not
given, instead an amount named as conversion cost appears in the question. Conversion cost is
combination of these two costs i.e. Conversion Cost = Direct labor + Factory overhead cost.
These are the two costs which converts the raw material into the finished goods therefore these are
named as conversion cost.
Production Cost
Direct Material Cost
Conversion cost
It consists of both direct labor cost
It represents heavy proportion in product
and FOH cost. It is used to convert
cost. The management should be
the direct material cost into finished
vigilant about the control of material cost.
goods.
Valuation of Closing Finish Goods inventory
Another problem that students often face while solving questions of cost of goods sold is non
availability of cost of finished goods inventory.
Cost of finished goods inventory is calculated by multiplying units of finished goods inventory
with the cost per unit. So to calculate cost of closing finished goods inventory following formula is
used:
Closing finished goods units x cost per unit
Some times cost per unit is not given in the question, the question becomes more complex. In this
situation some information will be given that can be used to find out the cost per unit.
Cost per unit is calculated through the following formula:
Cost of goods manufactured = cost per unit
Number of units manufactured
This is also known as per unit manufacturing cost. There are two components to this formula
which need to be determined before its application.
1. Cost of goods manufactured
2. Number of units manufactured
Cost of goods manufactured is calculated in the way as we have already discussed. Where as
number of units manufactured will be obtained through the following working:
Units sold
****
Add  Units closing finished goods inventory
****
Less  Units opening finished goods inventory
****
Units manufactured
****
This can also be understood through the following algebraic manner:
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Cost & Management Accounting (MGT-402)
VU
Opening finished goods units + Units produced ­ Closing finished goods units = Units sold
Units produced = Units sold + Closing finished goods units - Opening finished goods units
PRACTICE QUESTIONS
Q. 1
The information relating to cost department of BETA Corporation is as follows
Inventory
Jan 1
Dec 31
Material
34,000
49,000
Work in process
82,000
42,000
Finish goods
48,000
?
Finish goods inventory
Jan 1
300 units
Dec 31
420 units
Sold during the year
3,380 units at Rs. 220 per unit.
Rupees
Material Purchased
360,000
Conversion cost
214,400
Freight In
8,600
Purchase discount
8,000
Opening material inventory
34,000
Closing material inventory
49,000
Prepare Cost of Goods Sold Statement from the above information
Solution
Rupees
Direct material opening inventory
34,000
Add Net purchases
Material Purchased
360,000
Add Freight Inward
8,600
Less Purchase discount
8,000
360,600
Material available for use
394,600
Less raw material closing stock
49,000
Direct Material consumed
345,600
Add Conversion cost
214,400
Total factory cost
560,000
Add Opening Work in process inventory
82,000
Cost of goods to be manufactured
642,000
Less Closing Work in process
42,000
Cost of goods manufactured
600,000
Cost of Goods Sold
Cost of goods manufactured
600,000
Add Opening finished goods inventory
48,000
Cost of goods to be sold
648,000
Less Closing finish goods
(working)
63,000
Cost of goods sold
585,000
(working)
37
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Cost & Management Accounting (MGT-402)
VU
Units sold
3,880
Add
Units closing finished goods inventory
300
Less
Units opening finished goods inventory
420
Units manufactured
4,000
This can also be understood through the following algebraic manner:
Opening finished goods units + Units produced ­ Closing finished goods units = Units sold
300 + X ­ 420 = 3880
Units produced = Units sold + Closing finished goods units - Opening finished goods units
X = 3,880 + 420 ­ 300 = 4,000
Cost per unit
=
Cost of goods manufactured
Number of units manufactured
=
600,000
4,000
=
150
Value of Closing Finish Goods Inventory
Closing finish goods = Closing finish goods units X Cost Per unit
= 420 x  150
= 63,000
ASSIGNMENT QUESTIONS
Q. 1
Following is the information pertaining to the production cost of Revolving Chair Company for
the year ending on March 31 2006;
Direct material consumed
440,000
Direct labor
290,000
Indirect labor
46,000
Light and power
4,260
Depreciation
4,700
Repairs to machinery
5,800
Other factory expenses
29,000
Work in process inventory; April 1, 2005
41,200
Finished goods inventory; April 1, 2005
34,300
Work in process inventory; March 31, 2006
42,500
Finished goods inventory; March 31, 2006
31,500
During the year 18,000 units were completed.
Factory overhead cost is applied @ 30% of the direct labor cost.
Required:
1. Cost of goods manufactured statement
2. Cost of goods sold statement identifying at normal and at actual
3. Cost per unit
4. Amount of over or under applied factory overhead cost
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Cost & Management Accounting (MGT-402)
VU
Q. 2
Records of Younas Fans show the following information for the first quarter of the year 2006:
Direct material purchased
1,946,700
Direct labor
2,125,800
Factory overhead (40% variable and 60% fixed)
764,000
Marketing expenses (80% fixed)
516,000
Administrative expense (100% fixed)
461,000
Sales (12,400 Fans)
6,634,000
Inventory opening
Finished goods (100 fans)
43,000
Direct material
268,000
Inventory closing
Finished goods (200 fans)
not known
Direct material
167,000
There was no opening and closing work in process inventory.
Required:
1.
Number of units manufactured during the quarter
2.
Cost of goods manufactured statement for the quarter
3.
Value of closing finished goods inventory
4.
Income statement for the quarter
5.
Gross profit per unit
6.
Net profit per unit
7.
Gross profit to sales ratio
8.
Cost of goods sold to sales ratio
9.
Fixed production cost per unit
10.
Variable production cost per unit
11.
Fixed expenses per unit sold
12.
Variable expenses per unit sold
39
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