FE DE IE DIE DIE IIE DIE EDIE DIE IC DIE IE DIE IE DIE DE DIE IK JK IE JIC FC TIC IE 0314-4646739 0332-4646739 (0336-4646739 ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD (Department of Commerce) Course: Cost Accounting (462) IKK Semester: Autumn, 2024 Level: B. Com /Associate Degree ASSIGNMENT No. 1 Q.1 a. What are the objectives of cost accounting? What are its advantages and limitations? b. Describe the various techniques of costing in detail. c. Enlist the various classifications of costs and describe them. Objectives of Cost Accounting Cost accounting aims to provide a detailed analysis of costs incurred by an organization. Its primary objectives include: 1. Cost Control and Reduction: It identifies inefficiencies and suggests ways to control or reduce costs 2. Profit Determination: By analyzing the costs of producing goods or services, cost accounting helps in determining the profitability of different operations or products. Pricing Decisions: It provides data essential for setting competitive and profitable prices. 4. Inventory Valuation: Cost accounting helps in determining the accurate valuation of inventory for financial reporting purposes. 5, Budget Preparation: It aids in preparing budgets and evaluating performance against them, 6. Decision-Making: Cost accounting equips management with data necessary for making strategie business decisions. Advantages of Cost Accounting Cost accounting has several advantages, such as: Skilling.pk Stamflay.com KK IKK SO GIGI GIGS OK IIIS SEIS EI I TK IK IK IK IE IE SE SK SE SE IE SE SIE SIE SE SK SK SIE SIE SE SIE SE SE SK SIC SIE EK kg Se Seep adie: ie sheng hehe wieder Sica Sip Slee “Siecle sie ie Wee Si ade siecle ene Si ea AFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 + Enhanced Efficiency: By identifying cost drivers, it promotes efficiency in operations. + Improved Decision-Making: It provides detailed cost-related data for informed decision-making. + Cost Control: It tracks costs, helping to reduce wastage and over- expenditure, + Profit Maximization: By understanding the cost structure, businesses can focus on profitable products and services. Limitations of Cost Accounting Despite its advantages, cost accounting has limitations: + Complexity: It requires detailed and accurate data, which can be time- consuming and complex to gather. + Subjectivity: Allocation of indirect costs can sometimes be arbitrary and subjective. + High Costs: Implementing a cost accounting system can be expensive for small businesses. + Dependence on Estimates: Some aspects, like overhead allocation, rely on estimations that might not always be precise. Techniques of Costing Several techniques are employed in cost accounting to meet diverse business needs: 1. Job Costing: Costs are assigned to specific jobs or batches. It is common in industries like construction and custom manufacturing. 2. Process Costing: Suitable for continuous production processes, such as chemical or textile industries, where costs are accumulated for each process or department. y-Based Costing (ABC): This technique allocates overheads based on activities that drive costs, leading to more accurate cost allocation. 4. Marginal Costing: This method focuses on variable costs, excluding fixed costs, for decision-making and profitability analysis. Skilling.pk Stamflay.com HII LS ek a ae I eR EK EK ICR CS 3 3 * 3K * x * * 3K 3K aS * * * * x BE IK IK TE IK IK I I SE IE IK SKE SK OKO SE OE KE IKFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 5. Standard Costing: Pre-determined costs are set as benchmarks, and actual costs are compared to identify variances. 6. Batch Costing: Used when identical products are produced in batches, with costs calculated per batch. 7. Contract Costing: Applied in long-term contracts, where costs are accumulated over the duration of the contract. 8. Uniform Costing: A common costing approach used by similar organizations in an industry for comparability. Classifications of Costs Costs can be classified based on their nature, behavior, and function: 1, By Nature: o Material Costs: Costs of raw materials tised in production. Labor Costs: Wages and salaries paid to workers. o Overhead Costs: Inditect costs, including utilities and rent. 2. By Behavior: © Fixed Costs: Costs that remain constant regardle: rent). of output (e.g., © Variable Costs: Costs that vary with production levels (¢. materials). © Semi-Variable Costs: Costs that have both fixed and variable components (e.g., electricity). 3. By Function: © Production Costs: Costs related to manufacturing a product. o Administrative Costs: Costs incurred in managing the organization. «Selling and Distribution Costs: Costs associated with marketing and delivering products. 4. By Time: Skilling.pk Stamflay.com 3 3 * * * x * * 3K 3K aS * * * * x BEAK TK IK OK SK EK IK SK SK SK OK OK SE KEK IG ICICI KOKI SI IIIFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE *x K cS DEIR IK IK IK AE IE IE SE OE SK IK IK IK IK 0314-4646739 0332-4646739 0336-4646739 o Historical Costs: Costs incurred in the past. Future Costs: Costs expected to be incurred in the future. 5. By Decision-Making Use: o Relevant Costs: Costs that affect decision-making, like opportunity costs o Irrelevant Costs: Costs that do not impact decisions, such as sunk costs, Q.2 The following data is extracted from the books of Usman & Brothers Corporation for the period ended on 31st December 2023. You are required to (a) Prepare cost of goods manufactured and sold statement and (b) Income statement Sales 1,075,400 | Factory Overheads: Direct Labour 180,400. | Factory Insurance | 18,000 Purchases 288,000 | Heat & Light Costs | 9,600 Office Expenses 60,000 Depsawionan 13,200 Machinery Advertisement Expenses | 72,000 Factory Rent 34,000 Inventories at 1 January Inventories at 31 Dec 2023: 2023: Raw Materials 76,800 Raw materials 67,200 Work in Process 60,000 Work in Process 37,600 Finished Goods 125,200 Finished goods 144,800 Solution: (a) Cost of Goods Manufactured and Sold Statement Skilling.pk Stamflay.com 3 3 * * * x * * 3K BEAK TK TK OK I EK IK IE SK SK OK 3K OE IG ICICI KOKI SI IIIFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 Usman & Brothers Corporation Cost of Goods Manufactured and Sold Statement For the Year Ended December 31, 2023 Particulars Direct Costs: Direct Labour Raw Materials Consumed: Opening Inventory of Raw Materials Add: Purchases Raw Materials Available for Use Less: Closing Inventory of Raw Materials Raw Materials Consumed Prime Cost Factory Overheads: Factory Insurance Heat and Light Costs Depreciation on Machinery Factory Rent ‘Total Factory Overheads Total Manufacturing Costs Add: Opening Work in Process Inventory Total Costs to Account For Less: Closing Work in Process Inventory Cost of Goods Manufactured Skillin Amount (PKR) 180,400 76,800 288,000 364,800 (67,200) 297,600 478,000 34,000 74,800 552,800 60,000 612,800 (57,600) 555,200 Stamflay.com pk CS SS OH HEH HAIER HH ICOM SEER IS 3 3 * * * x * * 3K BEE IK TE IK IK SE IK IK SK SK SK SK 3K SEFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 Particulars Amount (PKR) Add: Opening Finished Goods Inventory 125,200 Goods Available for Sale 680,400 Less: Closing Finished Goods Inventory (144,800) Cost of Goods Sold 535,600 (b) Income Statement Usman & Brothers Corporation Income Statement For the Year Ended December 31, 2023 Particulars Amount (PKR) Sales Revenue 1,075,400 Less: Cost of Goods Sold (535,600) Gross Profit 539,800 Operating Expenses: Office Expenses 60,000 Advertisement Expenses 72,000 Total Operating Expenses (132,000) Net Profit 407,800 Explanation: 1. Raw Material Consumed is calculated by adding the opening raw material inventory to purchases and subtracting the elosing inventory of raw materials. 2. Total Manufacturing Costs include direct costs (labour and raw materials) plus factory overheads Skilling.pk Stamflay.com 3 3 * * * x * * 3K BEAK TK TK OK I EK IK IE SK SK OK 3K OE IG ICICI KOKI SI IIIDEDEDE DE FE DIE IE DE IE FE DIE IK FE FE IE DE DIE DICK DK DIE FE DK DIE IK FE IE x * cS FEE SK IK IK IK TE IE EE IK IK IK 3K SKIKE TK IE EK EK 0314-4646739 0332-4646739 0336-4646739 3. Cost of Goods Sold accounts for finished goods inventories at the beginning and end of the period. 4. Net Profit is derived by subtracting operating expenses from gross profit. Q.3 Roshan Milling Corporation manufactures a product requiring processing in three departments, with all materials put into process in the first department. During December 220,000 units were completed in department 1 at the total cost of Rs. 352,000 and were transferred to the next department. From this lot, department 2 completed and transferred out 170,000 units incurring direct labour cost of Rs. 52,360 and factory overhead cost of Rs. 26,180. The December 31. work in process inventory of department 2 is 44,000 units which were 25% complete as to direct labour and factory overhead cost. The spoilage occurs at the end of the process and is considered as normal loss. Required: - Prepare a cost of production report for department 2, Solution: Cost of Production Report for Department 2 Roshan Milling Corporation Cost of Production Report Department 2 For the Month Ended December 31 Particulars Units me Units Accounted For: Transferred In (From Department 1) 220,000 352,000 Less: Spoilage (Normal Loss) (6,000) - ‘Total Units Transferred to Department 2 214,000 Units Completed and Transferred to Dept. 3 170,000 Closing Work-in-Process Inventory 44,000 Skilli Stamflay.com ling.pk Diya.pk SEI SII ESIC IORI ICSI IESE OR SIC IE IOI SISSIES HEISE 3 3 * * * x * * 3K BEAK TK TK OK I EK IK IE SK SK OK 3K OEFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE Explanation: 1. Units Transferred In and Spoilage: Spoilage occurs at the end of the process and is considered a normal loss, reducing the units available for transfer and wip. BEAK TK IK OK SK EK IK SK SK SK OK OK SE KEK Skilling.pk Stamflay.com HII BGI OIOIIR I III I Ie II *K 0314-4646739 0332-4646739 0336-4646739 3K 3 . | cot OK c Particulars Units Rey * Costs Incurred in Department 2: i cS P * Pia Transferred-in Costs 352,000 * ‘i Direct Labour Costs 52,360 x 3 Factory Overhead Costs 26,180 3 x ‘Total Costs in Department 2 430,540 *K * Cost Allocation: %* *K * 3 Transferred Out: 170,000 3 x Cost per Unit Transferred Out (430,540 + 214,000) 2.012 x Sc 3 Cost of Units Transferred to Dept. 3 (170,000 * 2.012) 341,980 3 : Closing WIP Inventory: 44,000 Se Fauivalent Units of Production (Direet Labour and Overhead, x 259 11,000 x 25%) 3 Cost per Equivalent Unit (Direct Labour + Overhead: 78,540 + 0367 se 214,000) . * WIP Inventory Cost (Transferred-In + Labour/Overhead: iRi8e Ke 44,000 x 0.367) . a: Total Costs Accounted For: 430,540 x eS aK 3K 3K x aDEDEDE DE FE DIE IE DE IE FE DIE IK FE FE IE DE DIE DICK DK DIE FE DK DIE IK FE IE *x K cS DEIR IK IK IK AE IE IE SE OE SK IK IK IK IK 0314-4646739 0332-4646739 0336-4646739 2. Costs Incurred: Includes transferred-in costs from Department 1, direct labour costs, and factory overhead incurred in Department 2 3. Cost Allocation: The costs are divided between the units transferred out and the closing WIP inventory using equivalent units for partially completed work, 4, Normal Loss: Costs of normal spoilage are absorbed by good units, reflected in the cost per unit calculation. This ensures an accurate and fair allocation of costs in Department 2. Q.4 a. Describe the Job Order costing system and the nature of industries which can make use of it. b, Dell Company uses Job Order Cost System. The manufacturing operations for the year ended December 31, 2022 were as follows: i, Purchased raw materials on account Rs. 140,000. ii. Materials issued to factory of Rs. 120,000 of which Rs 20,000 was indirect materials. rect labour cost incurred Rs.90,000 and Rs. 10,000 indirect labours. . Factory overhead application rate was 90% on direct labour cost. v. Factory overhead cost ineurred.on account Rs.80,000 vi. Cost of jobs completed Rs 250,000. vii. Cost of goods sold Rs. 180,000 vii. Sales on account Rs 230,000. REQUIRED: Record all the above transactions in the General Journal & give an entry to close the factory overhead account. Solution: (a) Job Order Costing System The Job Order Costing System is a method used to assign costs to specific jobs or batches of products. Each job is treated as a unique entity, and costs are tracked Skilling.pk Stamflay.com 3 3 * * * x * * 3K BEAK TK TK OK I EK IK IE SK SK OK 3K OE IG ICICI KOKI SI IIIFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 individually. This system is ideal for industries where products are customized or produced in limited quantities, such as: + Construction and engineering projects + Furniture manufacturing + Custom machinery production + Printing and publishing + Professional services like accounting or consulting In this system, costs are categorized as direct materials, direct labor, and applied factory overhead, all of which are tracked for individual jobs. The key feature is that are accumulated per job rather than per process or time period. (b) General Journal Entries Dell Company General Journal For the Year Ended December 31, 2022 Debit Date Account Title and Explanation ie Credit (Rs.) i. Raw Materials Inventory 140,000 Accounts Payable ii. Work in Process Inventory (Direct) 100,000 Factory Overhead (Indirect Materials) 20,000 RaW Materials Inventory Work in Process Inventory (Direct Labor) 90,000 Factory Overhead (Indirect Labor) 10,000 Wages Payable ‘ Work in Process Inventory (Factory a Overhead Applied) 81,000 v Factory Overhead (Actual Costs) 80,000 Accounts Payable vi. Finished Goods Inventory 250,000 Werk in Process Inventory Skilling.pk Stamflay.com HII LS ek a ae I eR EK EK ICR CS 3 3 * 3K * x * * 3K 3K aS * * * * x BE IK IK TE IK IK I I SE IE IK SKE SK OKO SE OE KE IKFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE IKK SEI IK IK TK SK SE IE IE IE AE SE SE SE SE DIE SKE SIC SKE IIE KE SE SIE SE SE SIC DIC SIE ESE SIE SIE SE 0314-4646739 0332-4646739 0336-4646739 Date Account Title and Explanation to Credit (Rs.) vii. Cost of Goods Sold raging: Pinished Goods Inventory vill. Accounts Receivable 230,000 Sales Revenue Closing Factory Overhead Account The factory ovethead account needs to be adjusted to ensure that actual and applied costs are balanced, Factory Overhead Adjustment Entry: Date Account Title and Explanation Debit (Rs) Credit (Rs.) Closing Entry Factory Overhead 1,000 Cost of Goods Sold Explanation: 1. Direet and Indirect Costs: Direct materials and labor costs are charged to the Work in Process Inventory, while indirect costs are allocated to Factory Overhead, 2. Overhead Application: The overhead is applied using the rate of 90% on direct labor costs. . Actual vs. Applied Overhead: The actual factory overhead incurred (Rs. 80,000) is compared with the applied overhead (Rs. 81,000). The difference of Rs. 1,000 is closed to the Cost of Goods Sold account. 4. Job Completion and Sales: Costs of completed jobs are transferred to the Finished Goods Inventory, and when goods are sold, costs are moved to the Cost of Goods Sold account. Sales are recorded in the Accounts Receivable and Sales Revenue accounts. This ensures all transactions are properly recorded and the factory overhead account is balanced. Skilling.pk Stamflay.com 3 3 * * * x * * 3K 3K aS * * * * x BEAK TK IK OK SK EK IK SK SK SK OK OK SE KEK KK 3K 3K BGI OIOIIR I III I Ie IIFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE 0314-4646739 0332-4646739 0336-4646739 Q.5 Yale Manufacturing Industries is considering setting up some suitable inventory procurement yardsticks so as to ensure continuous availability of materials but at least costs. The following data of Material "A" was gathered from the records. A) Monthly requirement of material "A" is 1850 units at cost of Rs. 10 each. B) Ordering cost is Rs. 200 per order. C) Carrying cost is 15% of the average inventory investment Required: 1) Calculate the Economic Order Quantity. 2) Compute the number of orders needed per year. 3) Frequency of order placement in days. 4) Annual Ordering Cost. 5) Annual Carrying Cost. 6) Annual Inventory Cost. DIK IK IK IK AE IE IE SE IE I SK I IK IK IE SE SE Solution: Yale Manufacturing Industries Inventory Analysis Given Data: Monthly requirement of material “A”: 7,850 units x + Unit cost: Rs. 10 + Ordering cost per order Rs. 200 HK + Carrying cost: 15% of average inventory investment aK ‘© Annual requirement: 1,850 x 12 = 22, 200 units Skilling.pk Stamflay.com KKK IK LS ek a ae I eR EK EK ICR CS 3 3 * * * x * * 3K BEE IK TE IK IK SE IK IK SK SK SK SK 3K SEFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 1. Economic Order Quantity (E0Q) Where: + D: Annual demand = 22,200 units +S: Ordering cost = Rs, 200 per order +H: Canrying cost per unit = 10 x 15% = 1.5 (2% 22,200% 200 /8,880,000 es BOQ= i= = pg — = v5, 920,000 = 2, 432.78 nits £0Q = 2,433 units (rounded) 2. Number of Orders Needed per Year Number of Ordei = Irders = —— E0Q Number of Orders = 22200 .. 9.13 orders per year 2, 433 Number of Orders = 9 (rounded down) 3. Frequency of Order Placement in Days 365. Fre (days) = reamency (day) — er of ORE Frequency (days) = = = 40.56 days Frequency = 41 days (rounded) 4. Annual Ordering Cost Annual Ordering Cost = Number of Orders x Ordering Cost per Order Annual Ordering Cost = 9 x 200 = 1,800Rs. Skilling.pk Stamflay.com EIR II IORI IORI SR IHS 3 3 * 3K * x * * 3K 3K aS * * * * x BE IK IK TE IK IK I I SE IE IK SKE SK OKO SE OE KE IKFE IE IE IE DHE IIE DIE IE IE DIE IC DIE IK DIE DE DIC DE DIE DK IK DIE IE DIC 3K DIC IC IE HIKE SEI IK TK IK SK TE IE IE IE IE SE SE SE SE DIE SIC SKE SKE IKE KE SE SIE SIE SE SIE SIE SIE SE SE SE 0314-4646739 0332-4646739 0336-4646739 5. Annual Carrying Cost = 1,216.5 units Et 2,4) Average'tnventory = 229 — As Carrying Cost per Unit = 1.5 Rs. Annual Carrying Cost = Average Inventory « Carrying Cost per Unit Annual Carrying Cost = 1,216.5 x 1.5 = 1,824.75 Rs, 6. Total Annual Inventory Cost Total Aunual Inventory Cost = Annual Ordering Cost + Annual Carrying Cost Total Annual Inventory Cost = 1,800 + 1,824.75 = 3,624.75 Rs. Summary of Results: 1. Economic Order Quantity (EOQ): 2,433 units Number of Orders Needed per Year: 9 orders Frequency of Order Placement: 41 days Annual Ordering Cost: Rs. 1,800 . Annual Carrying Cost: Rs. 1,824.75 aupun . Total Annual Inventory Cost: Rs. 3,624.75 Skilling.pk Stamflay.com IG ICICI KOKI SI III 3 3 * * * x * * 3K BEAK TK TK OK I EK IK IE SK SK OK 3K OE