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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
Total cost
414,840
Unit Cost of Units Transferred out:
Rs. 414,840
= 25.9256
16,000 units
The logic of charging cost of normal loss at the end of process only to completed units is that
these units have goon through quality inspection, whereas, units still in process are yet to pass the
inspection, of-course, units till in process include spoiled units as well. Therefore, units in work in
process ending inventory shall be charged with the cost of spoiled units, .1cluded therein, only
after these units will have goon through quality inspection. In many industries units being
processed in a department are checked at a definite stage before the end of process, say at 75% or
90% stage of completion. In this case cost of normal loss is charged only to those nits which have
passed through the stage at which quality check is made. These units may be still in process or may
have been completed and transferred out.
Abnormal Loss
Abnormal loss is the loss of units not expected to arise under efficient operating conditions. It is
not inherent in the manufacturing process; instead, it is on account of some accident or
carelessness. The reasons of abnormal loss include defective materials or poor workmanship,
machine breakdown or some other contingency. Abnormal loss represents inefficiencies in the
manufacturing process; therefore, it is improper to treat it as a part of product cost of good units.
Cost of abnormal loss is treated as separate unfavorable item and is shown as such in cost of
production report. It is debited to factory overhead control account or to a separate expense
account to be charged directly against revenues of the period and is credited to the departmental
work in process control account. Being an indicator to inefficiency, abnormal loss requires
immediate attention of management.
For the purpose of computing unit cost, units of abnormal loss are, included in equivalent
production after adjustment for degree of completion. Consequently unit cost represents, cost per
unit as if there were no loss.
PRACTICE QUESTION
Q. 3
Mini Soap Manufacturing unit completed and transferred out 600 soaps to department-11 at the
end of the week. In department-11 450 soaps completed and transferred to finished goods. Units
which were still in process 100 and 50 units lost (Normal). Units in process 100% with the
reference of material and 60% with conversion cost.
Rs.
Cost received from preceding department
540
Following costs were incurred by department-II:
Direct Material
150
Direct Labor
112
Factory overhead
168
430
970
Required: Prepare cost of production report
Solution:
Cost of Production Report
Department-II
I-Quantity Schedule:
Units received previous department
600
144
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Cost & Management Accounting (MGT-402)
VU
Units completed and transfer to
Finished goods
450
Units still in process
100
Units lost (Normal)
50
600
II-Cost Accumulated in the Department / Process:
Rs.
Cost received from preceding department
540
Cost added by department-11:
Direct Material
150
Direct Labor
112
Factory overhead
168
430
970
III-Calculation of Equivalent Units Produced:
(100% of completed units + % of units in process)
Units completed in department-I = 450 + 100 = 550
Direct Material:
450+(100x100%)
= 550
Direct Labor  :
450+(100x60%)
= 510
F.O.H
:
450+(100x60%)
= 510
IV- Unit Cost:
Previous department = 540 / 550 = 0.98182
Direct Material
150 / 550 = 0.272727
Direct Labor
112 / 510 = 0.21961
F.O.H
135 / 510 = 0.32941
1.80357
V- Apportionment of the Accumulated Cost :
Transferred to finished goods
450
x
1.80357
812
Work in process:
Cost of preceding department
(100 x 0.98182)
98
Direct Material
(100 x0.272727)
27
Direct Labor
(60 x 0.21961)
13
F.O.H
(60 x 0.32941)
20
158
970
Transfer to Finished Goods
Cost of preceding department (450 x 0.98182)
442
Direct Material
(450 x0.272727)
123
Direct Labor
(450 x 0.21961)
99
F.O.H
(450 x 0.32941)
148
812
145
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Cost & Management Accounting (MGT-402)
VU
Q. 4
Mini Soap Manufactures Co. started to incurring cost in first department for 1000 soaps. At the
end of the week 600 soaps were completed and 300 still in process . 100% of direct material had
been incurred. But 75% conversion cost was yet incurred on the incomplete work. Remaining 100
units were abnormally lost (completed 100% material, 50% conversion cost)
Following in the detail of cost incurred:
Direct material Rs.
500
Direct labor
225
Factory Overhead
135
860
Required: Prepare cost of production report
Cost Of Production Report
Department-I
III-Calculation of Equivalent Units Produced:
Direct material:
600+(400x100%)+(100x100%) = 1000
Direct labor  : 600+(300x75%)+(100x50%) = 875
F.O.H
:
600+(300x75%)+(100x50%) = 875
IV- Unit Cost:
Direct material:
500/1,000
= 0 .50
Direct labor  :
225/875
= 0.25714
F.O.H
:
135/875
= 0.15428
0.91142
V- Apportionment Of the Accumulated Cost to Finished Goods:
Cost of units transferred to the next department
600
x
0.91142
=
547
Closing W.I.P Inventory:
Direct Material
300 x 0.50
= 150
Direct Labor
300 x 75% x 0.25714
= 58
F.O.H
300 x 75% x 0.15428
= 34
242
Abnormal Loss
Direct Material = 100 x 0.5
= 50
Direct Labor  = 50 x 0.25714
= 13
FOH
= 50 x 0.15428
= 8
71
860
Problem Question
Q. 1
Orient Industries. Limited produces a product that passes through two departments. Production
data for the first month of its operations are as follow:
Department A  Department B
Production Costs:
Rupees
Rupees
Direct materials
140,000
28,000
Conversion costs
200,000
70,000
Units
Units
Production units:
Started / received in process
23,000
13,000
Transferred out
18,000
13,000
Still in process
2/3 complete
3,000
146
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Cost & Management Accounting (MGT-402)
VU
1/5 complete
2,500
In department B there is an abnormal loss of 1,500 units when 1/3 complete.
Required: Prepare cost of production report for the month
Q. 2
Delight Food Products produces 'Squash Cubes" by continuous processing. During February 19 -'
producing department XYZ received 8,000 cubes from the preceding department aI1d after
processing, transferred 5,500 cubes to next department. During the month there was normal loss
of 400 cubes at the end of process. 600 cubes, 75% converted, were lost due to negligence of a
worker. There was no work in process beginning inventory, the ending inventory was estimated as
60% converted. Following product costs were charged to the department during February:
Rs.
Cost from preceding department
16,400
Direct materials
2,000
Direct labor
3,625
Factory overhead
5,075
Rs. 27,000
In department XYZ all materials are added at the start of process.
Required: Cost of production report for February 2006
Q. 3
Quantity schedule of Mirza and Company shows that 12,000 units were started in process during
the month of June. 7,000 units were completed and transferred to next department. 4,000 units,
25 % complete as to materials and 50% complete as to labor and factory overhead, were in
process at the end of June. The remaining units were lost during processing. Costs incurred by the
department were materials Rs. 90,000 labor Rs. 70,000 and factory overhead Rs. 50,000. .
Required: Cost of production report for the month.
Q. 4
Tahir Manufacturing Company uses process costing. Costs of direct materials, direct labor and
factory overhead incurred by department A during April 2000, were Rs. 25,000, Rs. 30,000 and Rs.
20,000 respectively. The quantity schedule shows that 8,000 units were started in process. 5,000
units were transferred to next department. 2,000 units were still in process (all materials, 50%
labor and 25 % factory overhead). The remaining units were lost, in process.
Required: Cost of production report for April, 2000.
Q. 5
During April, 20,000 units were transferred in from Department A at a cost of Rs. 39,500.
Materials cost of Rs. 6,500 and conversion cost of Rs. 9,000 were added in Department B. On
April 30, Department B had 5,000 units of work in process 60% complete as to conversion costs.
Materials are added in the beginning of the process in Department B.
Required: Cost of production report.
147
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