DEPARTMENT OF ACCOUNTING
UNIVERSITY OF CALABAR
CALABAR, NIGERIA
Prof. Sunday A. EFFIONG
Email:
[email protected];
[email protected]ACC 321: COST ACCOUNTING
COURSE UNITS: 3 HOURS
COURSE OBJECTIVE
This course intends to broaden the students’ knowledge of costs
and costing methods for different users of Cost Accounting
information.
EXPECTED OUTCOME
At the end of the course the students should be able to prepare
the different cost accounts for different users of cost accounting
information.
REFERENCES:
(1) Charles T. H., Datar, S. M., Rajan, M., Ittner, C. & George F.,
(2009). Cost Accounting – A Managerial Emphasis
13th edition. Prentice Hall Ltd..
(2) Charles T. H., & George F., (1990). Cost Accounting – A
Managerial Emphasis. Prentice Hall Ltd. 6th edition.
(3) Colin D. (1997). Management and Cost Accounting, 3 rd
edition. VNR.
(4) Effiong, S. A. (2004). Cost Accounting. Wusen Press Ltd.
(5) Effiong, S. A. (2021). Analytical Costing. University of Calabar
Press.
(6) ICAN, (2006). Intermediate cost accounting. VI Publishing
(7) Lucey, T. (1990). Costing. Guernsey Press Co. Ltd, or latest
edition
(8) Ronald H. (1997), Managerial Accounting. McGraw-Hill, or
current edition.
Methodology
The teaching methodology for the course will be a combination of
lectures, class discussions, problem solving, case survey and term
paper writing. The work, load spread in fourteen weeks, is shown
in the outline below:
COURSE OUTLINE
WEEK 1, 2
INTRODUCTION
- Review of History, principles and objectives of cost
accounting information (in terms of users).
- Preparation of Cost Accounting Information
- Presentation of Cost Accounting Information
JOB COST ACCOUNTING
- Recording the purchase of Raw Materials
- Recording the issue of materials
- Accounting Procedure for labour costs
- Accounting Procedure for Manufacturing Overheads
- Non-Manufacturing Overheads
- Accounting Procedure for Jobs Completed and Products
Sold
- Costing Profit and Loss Account
- Batch Cost Accounting
- Contract Costing
WEEK 3
PROCESS COST ACCOUNTING
- Flow of Cost in process costing system
- Normal and Abnormal Losses
- Accounting for the sales of scrap
- Abnormal gains
- Opening and Closing Work-in-Progress
- Previous process cost
- Weighted Average Cost Method
- First-in-First-Out (FIFO) Method
- Equivalent production and normal losses
- Equivalent production and abnormal losses
- Process costing for decision making and cost control
WEEK 4
JOINT PRODUCTS AND BY-PRODUCT COST ACCOUNTING
- Methods of apportioning joint costs to joint products
- Limitations of joint cost allocations for decision-making
- Accounting for by-products
- By-products, scrap and waste
- Defective units
WEEKS 5 & 6
ABSORPTION COSTING AND MARGINAL COSTING SYSTEMS
- Terminologies
- Marginal costing and Absorption costing: A comparison of
their impact on profits.
- Arguments in support of Marginal costing
- Arguments in support of Absorption costing
- Relevant costing
- Relevant costs and Absorption costing
- Period costs and Marginal costing
WEEKS 7 & 8
COST-VOLUME PROFIT (CVP) ANALYSIS
- Terminologies
- Cost-Volume-Profit assumptions
- Interrelationships of cost, volume and profits
- The breakeven point
- Margin of safety
- The graphical method
- The equation and contribution margin methods
- Multiproduct breakeven analysis
- CVP and Operating Leverage
- CVP with Income Tax
WEEKS 9 & 10
STANDARD COSTING AND BUDGETARY CONTROL
- Establishing cost standards
- Types of cost standards
- Variance Analysis
- Material variances – price and usage variances
- Labour variances – wage and efficiency variances
- Overhead variances
- The budget period
- Stages in the budgeting process
- The Master budget
- Cash budget
WEEK 11
BEHAVIOURAL ASPECTS OF COST ACCOUNTING
WEEK 12
CONTEMPORARY ISSUES IN COST ACCOUNTING
WEEK 13 Examinations
Course Requirements:
ATTENDANCE - 5%
COURSE WORK - 25%
EXAMINATION - 70%
DEPARTMENT OF ACCOUNTING
UNIVERSITY OF CALABAR
CALABAR, NIGERIA
Prof. Sunday A. EFFIONG
Email:
[email protected];
[email protected]ACC 232: COST ACCOUNTING
COURSE UNITS: 3 HOURS
COURSE OBJECTIVE
This course broadens the students’ knowledge of costs and
costing methods for different users of Cost Accounting
information.
EXPECTED OUTCOME
At the end of the course the students should be able to prepare
the different cost accounts for different users of cost accounting
information.
REFERENCES:
(1) Charles T. H., Datar, S. M., Rajan, M., Ittner, C. & George F.,
(2009). Cost Accounting – A Managerial Emphasis
13th edition. Prentice Hall Ltd..
(2) Charles T. H., & George F., (1990). Cost Accounting – A
Managerial Emphasis. Prentice Hall Ltd. 6th edition.
(3) Colin D. (1997). Management and Cost Accounting, 3 rd
edition. VNR.
(4) Effiong, S. A. (2004). Cost Accounting. Wusen Press Ltd.
(5) Effiong, S. A. (2021). Analytical Costing. University of Calabar
Press.
(6) ICAN, (2006). Intermediate cost accounting. VI Publishing
(7) Lucey, T. (1990). Costing. Guernsey Press Co. Ltd, or latest
edition
(8) Ronald H. (1997), Managerial Accounting. McGraw-Hill, or
current edition.
Methodology
The teaching methodology for the course will be a combination of
lectures, class discussions, problem solving, case survey and term
paper writing. The work, load spread in fourteen weeks, is shown
in the outline below:
COURSE OUTLINE
WEEK 1 & 2
INTRODUCTION
- Review of History, principles and objectives of cost
accounting information (in terms of users).
- Preparation of Cost Accounting Information
- Presentation of Cost Accounting Information
JOB COST ACCOUNTING
- Recording the purchase of Raw Materials
- Recording the issue of materials
- Accounting Procedure for labour costs
- Accounting Procedure for Manufacturing Overheads
- Non-Manufacturing Overheads
- Accounting Procedure for Jobs Completed and Products
Sold
- Costing Profit and Loss Account
- Batch Cost Accounting
- Contract Costing
WEEK 3
PROCESS COST ACCOUNTING
- Flow of Cost in process costing system
- Normal and Abnormal Losses
- Accounting for the sales of scrap
- Abnormal gains
- Opening and Closing Work-in-Progress
- Previous process cost
- Weighted Average Cost Method
- First-in-First-Out (FIFO) Method
- Equivalent production and normal losses
- Equivalent production and abnormal losses
- Process costing for decision making and cost control
WEEK 4
JOINT PRODUCTS AND BY-PRODUCT COST ACCOUNTING
- Methods of apportioning joint costs to joint products
- Limitations of joint cost allocations for decision-making
- Accounting for by-products
- By-products, scrap and waste
- Defective units
WEEKS 5 & 6
ABSORPTION COSTING AND MARGINAL COSTING SYSTEMS
- Terminologies
- Marginal costing and Absorption costing: A comparison of
their impact on profits.
- Arguments in support of Marginal costing
- Arguments in support of Absorption costing
- Relevant costing
- Relevant costs and Absorption costing
- Period costs and Marginal costing
WEEKS 7 & 8
COST-VOLUME PROFIT (CVP) ANALYSIS
- Terminologies
- Cost-Volume-Profit assumptions
- Interrelationships of cost, volume and profits
- The breakeven point
- Margin of safety
- The graphical method
- The equation and contribution margin methods
- Multiproduct breakeven analysis
- CVP and Operating Leverage
- CVP with Income Tax
WEEKS 9 & 10
STANDARD COSTING AND BUDGETARY CONTROL
- Establishing cost standards
- Types of cost standards
- Variance Analysis
- Material variances – price and usage variances
- Labour variances – wage and efficiency variances
- Overhead variances
- The budget period
- Stages in the budgeting process
- The Master budget
- Cash budget
WEEK 11
BEHAVIOURAL ASPECTS OF COST ACCOUNTING
WEEK 12
CONTEMPORARY ISSUES IN COST ACCOUNTING
WEEK 13 Examinations
Course Requirements:
ATTENDANCE - 5%
COURSE WORK - 25%
EXAMINATION - 70%
WEEK 1, 2
INTRODUCTION
There are many definitions of accounting, but the one which captures the theme of
this course is the definition given by the American Accounting Association, which
describes accounting as: The process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by users. In
other words, accounting provides information which will help decision makers to
make good decision. By definition, decision making in the purposeful choosing
from among a set of alternative courses of action in the light of some objectives.
The accounting system is the major quantitative information system in almost
every organization. The Accounting system provides information for three main
purposes:
a. Internal reporting to management for planning and controlling routine
operations
b. Internal reporting to management for nonroutine operations and major policy
formulation.
c. External reporting to shareholders, government, other parties, etc for uses in
investment, tax and other applications.
The third purpose of accounting, external reporting lays emphasis on historical,
custodial and stewardship accounting. This area is normally referred to as
financial accounting, which is prepared based on General Accepted Accounting
Principles (GAAP). The internal reporting aspect of accounting, the first two
purposes are mostly concerned with management planning and control of
operations. This is normally referred to as cost and management accounting,
which are prepared based on the objectives of the organization.
Management Accounting is the identification, measurement, accumulation,
analysis, preparation interpretation and communication of information that assists
management to fulfil organizational objectives.
Cost Accounting is concerned with the accumulation of product/service costs in
order to determine performance in relation to established standards and objectives.
Historical Background of Cost Accounting
The use of money as a medium of exchange, which replaced the barter system,
brought about the concern for cost. The concentration of manufacturing facilities
into factories gave impetus to the development of recognizable costing systems.
Kaplon (1982) suggests that product costs which were constructed for financial
accounting were being used by operating executives for decision making. During
the 1950s, emphasis shifted from external users to internal users of costs
accounting data which resulted in cost data for use of management being
accumulated in different manner from that which was used for financial
accounting.
Whilst the early developments were entirely related to manufacturing concerns,
nowadays costing is used very widely is hospitals, transport undertakings, local
authorities, offices, banks as well as every manufacturing concern.
PREPARATION AND PRESENTATION OF COST INFORMATION FOR
VARIOUS PURPOSE:
Cost objectives
The activity for which a separate measurement of costs is desired is described as
cost objective. In other words, if the user of accounting information wants to
know the cost of producing a bottle, the bottle is the cost objective. Cost
objectives include the cost of a product, the cost of a service, the cost of operating
a department or sales territory, or indeed anything for which one wants to measure
the resources used.
Costing is the process of determining the cost of doing something, e.g. the cost of
manufacturing an article, rendering a service or performing a function. The article
manufactured, service rendered, or function performed is called object of costs.
Classification of costs
The cost collection system accumulates costs and classifies them into certain
categories such as labour, material or overhead cost, and then allocates these costs
to cost objectives. Cost objectives could be divided into three board categories, viz
costs for stock valuation, costs for decision making, and costs for control. For
instance, the cost of operating an existing machine is a cost object which may be
required for comparison with the costs of operating a replacement machine.
This information will fall under the broad category of costs for decision making:
Cost objectives Possible method of costs classification
1. Costs for stock valuation Product and period costs, elements of
manufacturing costs, job and process costs
2. Costs for decision making Cost behaviour
Relevant costs
Sunk costs
Opportunity costs
Marginal and incremental costs
3. Costs for control Controllable and uncontrollable costs
Cost behaviour
Students at this level are assumed to have a good understanding of introduction to
cost and management accounting.
JOB COSTING
Manufacturing costs consists of direct materials, direct labour and manufacturing
overhead. The product costing systems used by manufacturing firms employ
several manufacturing accounts.
FLOW OF COSTS
When production begins, all costs incurred in the manufacture of the product is
added to the work-in-process inventory account. Work-in-process is the partially
completely inventory. Work-in-process is an asset of inventory and a debit to this
account increases the value based on the cost incurred. When production is
completed, the total product costs are transferred from the work-in-process account
to finished goods inventory account. Entries required at this stage are:
Dr. Finished Goods Inventory a/c
CR work-in-process inventory a/c
When sales occur, the product cost of the inventory sold is removed from finished
goods inventory account and added of costs of goods sold account, which is an
expense of the period in which the sales occurred. Entries required are:
Dr. cost of goods sold a/c
Cr. finished goods inventory a/c
Costs of goods sold is closed to income statement at the end of the accounting
period, along with other expenses and revenues of the period.
Ledger accounts required to record the costs flows in a manufacturing account are
as follows;
Work-in-process inventory A/C
DR CR
Direct materials Finished goods inventory a/c xx
xx
Direct labour
xx
Manufacturing overhead
xx
xxx
xxx
Finished Goods Inventory A/C
Dr Cr
Work-in-process xx Cost of goods sold xx
Costs of goods sold A/C
Dr Cr
Finished goods inventory xx Income statement xx
Income statement
Dr Cr
Cost of goods sold xx Sales xx
Other operating expenses xx
Illustration of manufacturing cost flows.
Assume that Everbrite Ltd incurred the following manufacturing costs during 2017
financial year.
Direct material - - N300,000
Direct labour - - N200,000
Manufacturing overhead - - N400,000
During 2017, products costing N600,000 were completed and products costing
N250,000 were sold for N320,000.
Required: show the necessary ledger entries to record the costs flow.
Suggested Solution
W.I.P inventory A/c
Dr Cr
N N
Direct Materials 300,000 Finished goods inventory
600,000
Direct Labour 200,000 Balance C/F 300,000
Manufacturing O/H 400,000
900,000 900,000
Balance b/f 300,000
Finished Goods Inventory A/c
Dr Cr
N N
Work-in-process a/c 600,000 Cost of goods sold 250,000
Balance C/F 350,000
600,000 600,000
Balance b/f 350,000
Cost of goods sold a/c
Dr Cr
N N
Finished goods inventory 250,000 P/L a/c 250,000
Costing Income Statement
Dr Cr
N N
Cost of goods sold 250,000 Sales 320,000
Gross profit c/f 70,000
320,000 320,000
Gross profit b/f 70,000
TYPES OF PRODUCT-COST SYSTEMS
There are basically two types of product costing systems, viz, job-order costing
and process costing.
Job-order costing: Job order costing system is used by companies where goods
are produced in distinct batches and there are significant differences between the
batches. Job-order costing is used by aircraft manufacturers, printers, furniture
makers, machining firms etc. In job-order costing, each distinct batch of
production is called a jobs or job-order. The cost accounting procedures are
designed to assign costs to each job. The costs assigned to each job are average
over the units of production in the job to obtain the cost per unit.
N/B process costing will be treated in week 3.
COSTS ACCUMULATION IN JOB-ORDER COSTING SYSTEM
A subsidiary ledger in normally maintained in a job-order costing system to
accumulate the cost of direct materials, direct labour and manufacturing overheads
for each job. This subsidiary ledger in called the job-cost sheet.
Illustration
Almarine (Nig) Ltd worked on two production jobs during November 2023.
Job No. C12, 80 Wooden Canoes
Job No. F16, 80 Aluminum fishing boats
The following events took place during November 2023:
1. Four thousand square feet of rolled aluminum sheet metal were purchased on
account for N100,000.
2. On November I, the following materials requisitions were filed;
Requisition No. 802 – 8,000 board feet of lumber,
(for job No. C12) at N20 per board foot for a total of N160, 000
Requisition No. 803 – 7200 square feet of
(for job No. F16) aluminum sheet metal at N25 per square feet, for a total
of N180,000
3. On November 15, the following material requisition was filed:
Requisition No. 804: 5 gallons of bonding glue at N1000 per gallon for a total
of N5,000
4. At the end of November, the cost accounting department uses the labour
time tickets filed during the month to determine the following direct-labour costs
of each job:
Direct labour: Job No. C12 N90,000
Direct labour: Job No. F16 120,000
N210,000
5. Analysis of the labour time card undertaken on November 30 revealed that
indirect labour (not charged to any particular job), amounted N140,000
6. The following manufacturing overhead costs were incurred during
November.
Rent on factory building N30,000
Depreciation on equipment 50,000
Utilities (electricity and natural gas) 40,000
Property taxes 20,000
Insurance 10,000
N150,000
7. The application of overhead to the firm’s products is based on a
predetermined overhead absorption rate. This rate was computed by the
accounting department at the beginning of 2023 as follows:
Predetermined overhead rate
Budgeted total manufacturing overhead for 2023
= Budget ed total machine hours for 2023
N 3 , 6 0 0,000
=N 9 0 .00 per hour
40,000
Factory machine usage records indicate the following usage of machine hours
during November 2023
Machine hours used: Job No. C12 - 1,200 hours
Machine hours used: Job No. F16 - 2,000 hours
The total manufacturing overhead applied to work-in-process inventory during
November is calculated as follows;
Job No. C12 1,200 x N90.00 N108,000
Job No.F16 2,000 x N90.00 180,000
N288,000
8. Job No. F16 was completed during November, whereas Job No. C12
remained in process.
Required;
1. Provide all relevant journal entries to record the transactions for the two
jobs.
2. Post to their ledgers
3. Prepare a job-cost sheet for Job F16