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COST CLASSIFICATION
Cost may be classified under three categories;
i.) Fixed and variable cost
ii.) Direct and indirect cost
iii.) Cost classification by function
FIXED AND VARIABLE COST. (FIXED COST)
FIXED COST:
Is the cost which remains the same at various level of output. This cost does not change with the change in output i.e. Remain the same even at Zero level of output
-This cost incurred mostly in periodic basis
e.g.; – Rent of premises and salaries of permanent employees
VARIABLE COST
Is the cost which changes with the level of production or output.
When production increases, variable cost also increases
Example of variable cost is raw materials, direct wages and other related.
DIRECT AND INDIRECT COST.

DIRECT COST
Is that cost which can be identified on the production of some ‘specific’ products. Example of direct cost is raw material and labor cost. Since they can be charged and identified to the production of some specific outputs, this is why we say raw materials and labour cost are good examples of direct cost.
Cost associated directly with the production of goods/outputs.
INDIRECT COST.
Is the cost which cannot be identified to the production of some specific products or outputs. Examples of this are; water charges, interest rate, indirect
Materials, communication charges etc.
Cost classification by function
Cost may be classified by its functions or activities such as that or consist of production cost, administration cost and selling and distribution cost
-Production cost consists of raw materials, labor, rent of factories etc.
-Administration cost involves office cost such as office rent, postage, telephone, electricity etc
-Selling and distribution cost; this consist of cost which are incurred to promote the selling of goods and delivery these goods to the customers E.g. Advertisement, salesmen commission, depreciation of delivery van, carriage outward, carriage inward.
ANALYSIS OF COST
The cost (total) incurred by the manufacturing firm may be analyzed by cost accountant as under such that;
-Direct raw materials (D.R.M) xx
-Direct labor/Direct wages xx
-Direct any other cost xx
Total direct cost = prime cost xx
Add;
Production overhead (manufacturing overhead)
  • Indirect wages xx
  • Indirect factory wages xx xx
Manufacturing/production cost xxx
In case of profit or loss
COST STATEMENT FOR THE YEAR ENDED
Total Direct Cost
Raw materials (R.M)
xx
Direct labor ( D.L)
xx
Prime cost of production
xxx
Add Manufacturing over head
Factory rent xx
Power xx
Supervision expenses xx
xxx
Production cost of goods produced
xxx
Add Administration cost and distribution
Office rent xx
Depreciation office xx
Promotion xx
Advertisement xx
Carriage outward xx
xxx
Cost of goods sold
xxx
Add Profit margin
xx
Total sales
xxx
Selling price ─ total costs = profit/loss on production
-Direct raw materials involves cost of raw materials, opening stock of raw materials, closing stock of raw materials, carriage inwards of raw materials etc.
ILLUSTRATION 1
Prepare a cost statement from the following information;
Raw material 300,000
Direct labor 80,000
Factory rent 15,000
Supervision salary 20,000
Administration expenses 40,000
Selling and distribution expenses 15,000
NOTE; Profit margin is 50% on cost, calculate selling price.
COST STATEMENT FOR THE YEAR ENDED
Total Direct Cost
Raw material
300,000
Direct labor
80,000
PRIME COST
380,000
Total M.O.H (Total Manufacturing overhead)
Factory rent 15,000
Supervision salary 20,000
35,000
Production cost of goods produced
415,000
Administration expenses 40,000
Selling and distribution 15,000
55,000
Cost of goods sold
470,000
Add 50% margin
235,000
Selling price
705,000
Since profit = cost x 50%
= 470,000 x 50%
= 235,000
Cost of goods sold = 470,000
Add; profit margin = 235,000
Selling price 705,000
ILLUSTRATION 2
From the following information prepare a cost statement
R.M 80,000
D.L 35,000
Factory rent 5,000
Power 3,000
Indirect wages 2,000
Administration expenses 4,000
Selling and distribution expenses 3,000
Profit is 25% on sales
COST STATEMENT FOR THE YEAR ENDED
materials
80,000
Direct labor
35,000
PRIME COST
115,000
MOH / FOH
Factory rent
5,000
Power
3,000
Indirect wages
2,000
10,000
Production cost of goods produced
125,000
Distribution expenses
4,000
Selling &distribution expenses
3,000
7,000
Cost of goods sold
132,000
Add; profit margin
33,000
Total sales

165,000
NOTE; 1.WIP- Is the cost of those items which remain incomplete at the end of the specific period
2. These are semi-finished goods
3. WIP may be valued at prime cost or factory cost
ILLUSTRATION 3
From the following information prepare a cost statement
Stock on 1st. 1 2006 R.M 45,000
W.I.P 22,000
Stock on 31st.12.2006 R.M 65,000
W.I.P 19,000
Purchases of R.M 670,000
Carriage inward 25,000
Returns of R.M 15,000
Direct wages 280,000
Factory rent 60,000
Factory power 48,000
Depreciation of plant 15,000
Supervision salary (factory) 55,00
0
Office salaries 70,000
Office expenses 12,000
Depreciation of office equipment 5,000
Salesman salaries 68,000
Delivery van expenses 27,000
Depreciation of delivery van 18,000
Advertisement 12,000
NOTE
i.) If there is office salary and supervisor’s salary here normally supervisor’s salary is for factory
ii.) If the question is silent then the amount of W.I.P is very little compare to R.M
or purchase of R.M then it means it is in the final stage so should be finalized in the factory overhead level
iii.) But another time you may be informed if W.I.P is in prime level (early stage) or factory overhead level (final stage)
SOLUTION FOR ILLUSTRATION 3
COST STATEMENT FOR THE YEAR ENDED 31.12.2006
Opening stock of (R.M)
45,000
Add : Purchases of (R.M)
670,000

Add: Carriage inwards
25,000
695,000
Less: Returns outward (R.M)
15,000
680,000
Cost of R.M available for use
725,000
Less : Closing stock of (R.M)
65,000
Cost of R.M used/consumed

660,000
Add : Direct wages
280,000
Prime cost
940,000
Add :Manufacturing over head (M.O.H)
Factory Rent
60,000
Factory power
48,000
Supervision salary
55,000

Depreciation of plant
15,000
178,000
1,118,000
Add : W.I.P (opening)
22,000
1,140,000
Less : W.I.P (closing)
19,000
PRODUCTION COST

1,121,000


ILLUSTRATION 4.
ABC manufacturing co provides the following information for the month of October 2011
1st October 2011.
Raw materials 40,000
W.I.P 12,000
Finished goods 20,000
Stock on 31st October 2012
Raw materials 35,000
Work in progress 17,000
Finished goods 23,000
Purchases of raw materials 250,000
Factory wages 80,000
Salaries of supervisors 30,000
Factory rent 10,000
Fa
ctory power 5,000
Sundry factory expenses 15,000
Office salary 13,000
Sundry office expenses 7,000
Salesmen salary 18,000
Sundry selling expenses 6,000
Sales 500,000
Required;
  1. Prepare a production cost statement
  2. Prepare a profit/loss statemen
I) COST STATEMENT FOR 30th SEPT 2012
Opening stock of (R.M)
40,000
Add : purchases of (R.M)
250,000
cost of R.M available for use
290,000
less : Closing stock of (R.M)
35,000
Cost of R.M used
255,000
Add : Factory wages
80,000
PRIME COST
335,000
Add : Manufacturing overhead (M.O.H)
Supervisor’s salary
30,000
Factory rent
10,000
Factory power
5,000
sundry factory expenses
15,000
60,000
395,000
Add: W.I.P(01.10.2011)

12,000
407,000
Less: W.I.P(31.09.2012)
17,000
PRODUCTION COST
390,000

II) PROFIT/LOSS STATEMENT FOR 30th SEPT 2012
Sales
500,000

Less: Cost of good sold
Opening stock of finished goods
20,000
Add: Production cost
390,000
410,000
Less: closing stock finished goods
23,000
387,000
Gross profit
113,000

Less: Administration cost/expenses
Office salary
13,000
Sundry office expenses
7,000
Selling and distribution cost/expenses
Salesmen salary
18,000
Sundry selling expenses
6,000
44,000

Net profit
69,000
BREAK EVEN POINT (B.E.P)
This is level of activity at which total sales revenue is equal to total cost (TR = TC). This means that profit = 0 which means there will be no profit and no loss.
EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - COMPANY ACCOUNT 1.7
ASSUMPTION OF B.E.P CHART
Selling price and variable cost per unit remain the same at various levels of output
  1. Fixed cost remain constant at all levels of activity within the given range
  2. It is possible to distinguish between the cost and sales of a single product only
  3. This chart shows the relationship between the cost and sales of a single product only
  4. The techniques of production remain unchanged.
ILLUSTRATION
  • You are required to prepare from the following information;
  1. a break even chart
  2. contribution /sales graph or profit volume graph
  3. show the margin of safety in this chart if actual level of output is 20’000 units
Selling price per unit is 100/=
Variable cost per unit is 50/=
Fixed cost is 600’000/=
BREAK EVEN CHART
LEVEL OF OUTPUT PER UNIT
FIXED COST
VARIABLE COST Tshs 50 per unit
T.COST
SALES Tshs 100 per unit
P & L
5000
600,000
250,000
850,000
500,000
-350,000
10,000
600,000
500,000
1,100,000
1,000,000
-100,000
15,000
600,000
750,000
1,350,000
1,500,000
150,000

20,000
600,000
1,000,000
1,600,000
2,000,000
400,000
MARGIN OF SAFETY
Margin = profit
  • Margin of safety This represents the difference between the actual level of activity and the breakeven level of activity e.g If 80% is actual level of activity and Break even is 30%, calculate marginal safety
=Margin of safety= Actual sales-BED sales
=Margin of safety = 80% – 30%
Margin of safety = 50%


ANGLE OF INCIDENCE
This shows at the breakeven point between the sales curve and total cost curve.
  • This angle indicates the rate of increase in profit after the Breakeven point
  • If this angle is wider, then profit will be increased at a higher rate afte
    r the breakeven point
CALCULATION OF BREAK EVEN POINT
ILLUSTRATION 1
State the formula to calculate breakeven point in terms of unit to be produced and sold.
We are going to use the following abbreviations;
S.P = Selling price
C.P = Cost price
P = Profit
C.M = Contribution margin & contribution margin per unit = CM/U
S.P = C.P +P
C.P = F.C + V.C
Contribution margin = S.P – V.C
B.E.P In terms of unit produced = (F.C)/(Contribution margin per unit) =EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - COMPANY ACCOUNT 1.7
B.E.P in terms of sales value= (F.C)/(CM/C) x (S.P)/U
Contribution margin per unit = (S.P)/U – (V.C)/U
Sometimes; variable cost = material + labour
Contribution margin ratio =(C.M)/(S.P) or (F.C)/(1-V.C/SP)
ILLUSTRATION 2
Star manufactures a product called plate, in his own factory. Fixed cost per month is 45’000, each unit of plate cost 8/= by way of material and 17/= by way of direct labor. The selling price per unit is 40/=. How many units must he manufactures and sale per month in order to Break even
SOLUTION
GIVEN DATA
Fixed cost = 45’000
Selling price/unit = 40/=
Unit of plate by way of material = 8/=
Unit of plate by way of direct labor = 17/=
Contribution margin = selling price – variable cost
Variable cost = material + labor
Variable cost = 8 + 17
Variable cost = 25
Contribution margin = 40 – 25
15
EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - COMPANY ACCOUNT 1.7
=15
STATEMENT OF PROFIT / LOSS
Sales (3000 x 40/=) 120,000
Less; variable cost
Unit of plate by way of material ( 8 x 3000)= 24,000
Unit of plate by way of direct labor(17 x 3000)= 51,000
Fixed cost 45,000 (120,000)

B.E.P (Break Even Point) 0
The above presentation verify that sales of 120,000, profit will be ‘0’.
ILLUSTRATION 3
Basic facts as from the above problem assume that the company wishes to make a profit of 6000 per month. Calculate the number of units that she must produce and sale to attain this profit also calculate the amount of sales revenue that can generate this profit.
Solution;
(Fixed cost+desired profit)/(contribution margin unit)

Sales revenue = Quantity to be produced x SP/U
Let DM/U = 8
DL/U = 17
F.C = 45,000
Desired profit = 6000
Contribution margin = 15
SP/U = 40/=
Quantity to be produced = F.C + D.F/CM/U(Fixed cost+Desired profit) ⁄ Contribution margin per unit
(45,000 + 6000)/ 15
(51,000/15) = 3400
Quantity to be produced = 3400
Sales revenue = Quantity to be produced x SP/U
= 3400 X 40
= 136,000
STATEMENT OF PROFIT/LOSS
Sales
136,000
less variable cost
unit of plate by way of material (8 x 3400)
27,200
unit of plate by way of direct labour (17×3400)
57,800
Fixed cost
45,000
-130,000
PROFIT
6,000
ILLUSTRATION 4.
P.LTD manufactures a standard product called Pipi. The following is a summary of their cost incurred in 2008.
Fixed factory cost 24,000
Fixed administration cost 10,800
Direct labour 48,000
Depreciation of plant (variable cost) 8,000
In 2008, a total of 40’000 units of pipi were produced/ manufactured at a standard price of 5.20£ per unit.
The company has been approached by manufacturer/producer to supply annually 5000 units of pipi at 4.50£ per unit, At present the whole of P.LTD’s Plant capacity is being used, so to produce the additional 5000 units, the company will need to acquire plants at a cost of 20’000£ that will have a useful life of 10 years and no residual value. Additional production will also increase the factory cost by 5% and selling distribution cost by 10%.
Required:
Would you recommend that P.LTD should accept the order?
Solution:
STATEMENT OF PROFIT OR LOSS BEFORE ACCEPTING ORDER
Sales (40’000 x 5.20)
208,000
Less; variable cost
Material
54,000
Direct labor
4,000
Depreciation of plant
8,000
FIXED COST
Fixed factory cost
24,000
Fixed administration cost

10,800
Fixed selling and distribution cost
3,200
(148,000)
PROFIT BEFORE ACCEPTING ORDER
60,000
STATEMENT OF PROFIT/LOSS AFTER ACCEPTING THE ORDER
Sales revenue (40,000 x 5.2)
208,000
(5000 x 4.5)
22,500
230,500
less TOTAL COST
Material (45,000 x 1.35)
60750
Direct labour (45,000 x 1.2)
54,000
Depreciation of plant old plant 8000
new plant 2000
10,000
Fixed factory cost (24,000 x 5% )+24,000
25,200
Fixed admin. Cost

ecolebooks.com
10,800
Fixed selling and distribution cost (32000 x 10%)
3,200
163,950
PROFIT MADE BY BOTH NEW AND OLD ORDER
66,330

Recommendations:
P Ltd should accept the order since it’s results to additional profit of Tshs. 6,550 (66,550-60,000)
WORKINGS
RAW MATERIALS
Material before order = 54,000
Units produced before order = 40,000
54,000/40,000 =1.35 units
= (Units produced before order + Additional units for order)
= (40,000 + 5000)
= 45,000
DIRECT LABOUR
Direct labor before order = 48,000
Units produced before order = 40,000
= 48,000/40,000 = 1.2 units
(Units produced before order + Additional units for order)
= 40,000 + 5,000
= 45,000

CASH BUDGET


CONCEPT;
BUDGET
A budget is a plan of action expressed in quantitative terms ‘’OR’’ is a financial and quantitative statement prepared and approved prior to a defined period of time, it may include income, expenditure and the employment of capital.
-Budget may be prepared for the business as a whole for the departments, for functions such as;
– Sales and production
– Financial and resource items such as; cash, capital, expenditures, purchases, man power etc.
– Examples of budget are;
Sales budget
Production budget
Purchases budget
Production cost budget
Selling and distribution cost budget
Cash budget
Budgeted profit and loss a/c and balance sheet
Benefits of budget
i.) These are a way of compiled planning, that is, in the presence of s budgets, a firm has clear guidelines and the financial and human resources can be utilized to achieve some specific targets or objectives.
ii.) The budget helps to improve communication and co-ordination among the management and employees.
iii.) These are used to determine and evaluate performance of the business enterprise.
iv.) The budgets help to clarify the authority and responsibility of departmental managers and other staff members.
CASH BUDGET
What is it?
Cash budget is prepared to show the expected cash receipts and payments in next few months or one year period.
The main functions of cash budget are to such that;
i.) Ensure that cash is available for revenue expenditure.
ii.) To indicate when, where and how much cash will be needed and whether , this is permanent or temporary
iii.) Preserve liquidity throughout the year
iv.) Reveal surplus cash for investment or expansion of facilities
v.) Guide management on financing capital expenditure internally or externally
MONTH/YEAR
SALES
PURCHASES
April, 2008
150,000
100,000
May
160,000
110,000
June
160,000
90,000
July
170,000
90,000
August
200,000
80,000
September
200,000
130,000
October
180,000
140,000
November
180,000
60,000
December
200,000
60,000
March
April
May
June
July
August
September
October
November
December
130
100
120
145
200
150
175
200
195
200
March
April
May
June
July
August
September
October
November
December
120
135
150
160
175
185
190
170
155

125
July
August
September
October
November
December
Sales units
100
160
145
200
150
175
Selling price (Tsh)
20
20
20
20
20
20
Collections
2000
3200
2900
4000
3000
3500
Legacy
1250
Total Receipt
2000
3200
2900
4000
3000
4750


COMPUTERIZED ACCOUNTING


AUDITING

INTERNAL AUDIT
EXTERNAL AUDIT
Is conducted by the internal auditor who is an employee of an organization
Is an audit which carried out by an independent auditor who is not an employee of the organization
The main objective is to find out whether the internal control system is working successfully or not.
The main objective is to determine the accuracy of financial statement or accounts and form an independent opinion or whether or not financial statements show true and fair view of all financial position and operation.


AUDIT REPORT AND OPINION
Audit report: Is a report prepared by an independent auditor to the management after examining the company’s financial statements. It includes the auditors opinion regarding the true and fair view of the company’s financial statement representation.
Audit opinion: This is the view given as a recommendation by an auditor after auditing the company’s financial statement.

TYPES OF AUDIT OPINION
1.Unqualified opinion
This is given when the auditor is satisfied with the presentation of the company’s financial statement, i.e the company’s financial statement shows the true and fair view. The company’s financial statement is prepared with the compliance of international accounting standards.

2.Qualified opinion
Given when an auditor fail to give out his or her opinion regarding the true and fair view of company’s financial statement. Some of the items in the financial statement are not presented in the way in which they are supposed to be presented.

3. Disclaimer opinion
Given when there is the limitation of scope i.e If the management limit an auditor to audit some of the documents or to do physical stock of the company’s assets as a part of audit sampling.


EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - COMPANY ACCOUNT 1.7

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