ACCA

FIA - FMA
Management
Accounting
 Exam Pattern
FMA/F2 is a two-hour paper
The exam is structured as follows:
Marks
• Thirty-five 2-mark questions(MCQs) 70
(abc, figure calculation, T/F)
• Three 10-mark questions(OTQs) 30
(case study- 3 core areas)
100

All questions are compulsory

Pass mark – 50%
 Tackling Multiple Choice
Questions
• Start with the easier questions.
• Read the requirements carefully.
• Be aware that distractors are designed in numerical
questions to confuse candidates.
• If you are stuck on a question, eliminate any obviously
wrong answers and consider the most likely to be correct.
• Don’t waste time, if still unsure then make a note and
continue to the next question but never leave it unanswered!
 Qualification Structure

Diploma
in
F1/ F2/ F3/
Accounti
FAB FMA FFA
ng and
Business
 Syllabus structure
F2 (Management Accounting)
Basic/introductory(K)

F5 (Performance Management)
Intermediate(S)

P5 (Advanced Performance Management)

Professional(P)
 (A)
Management
Information

Core 5 (B)
Cost (C)

Areas
Accounting Budgeting
Techniques

(18 chapters are

divided in 5 main
areas)
(E)
(D)
Performance
Standard
Measuremen
Costing
t
 Approach to examining the
syllabus
The syllabus is assessed by a 2 hour paper or computer based
examination. It will cover all parts of the syllabus. It will consist of 2
sections. Section a contain 35 two mark objective questions. Whereas
section b will contain 3 ten mark multi-task questions which will be
testing three core areas of the syllabus i.e. standard costing, budgeting
and performance measurement.
 Syllabus A:
The Nature And Purpose Of
Management Information

Ch#1. Accounting for Management

Ch#2. Sources of Data
Ch#3. Cost Classification
Ch#4. Presenting Information
 Cost accounting and
Management accounting
These terms are often used interchangeably. In general, cost
accounting information is unsuitable for decision-making. Therefore,
management accounting goes beyond cost accounting. So it is a
further revolution of what was traditionally known as cost accounting.
Cost accounting is mainly concerned with:
• Cost data collection
• Applying costs to inventory, products and services
• Preparing statements (e.g. budgets, costing)
But management accounting is also concerned with the generation of
revenues, relationship between cost and revenues & further dimension
of investment spending.
 The purpose of cost and management accounting

1. The job of management accountant is to help management to run and improve

the business. Management has to make a lot of decisions like they have to decide
– what selling price should be charged for a product.
2. Management accountant should provide them with information they need to
assist the in planning, control and decision-making. These are the three main
tasks of management.
3. If a multi-national company wants to know , what % of our sales in UK, France, &
so on. There is no use of giving management a list of each individual sale. They
don’t want a long list- say 50,000 sales. Its the job of management accountant is
to turn data(record of each individual sale) into information(processed), reports,
charts, graph, simply showing in total-what we are selling.
 Example
• Which of the following best describes the purpose of cost
and management accounting?
1) To detect fraud
2) To comply to regulatory authority
3) To provide information for planning, control and decision
making.
4) None of the choices
 Example
• Management accounting produces information:
1. To meet internal users’ needs
2. To meet a user’s specific needs
3. Often focusing on the future
4. All of these.
 Data v.s information

• Data is the raw material for data processing.

• Data relate to numbers, raw facts, events and transactions
which have been recorded but not yet processed into a
form suitable for use.
• Data on its own is meaningless.
• Information is data that has been processed in such a way
as to be meaningful to the person who receives it.
 Example
Data is information that has been processed in such a way
as to be meaningful to its recipients.
Is this statement true or false?

1. True
2. False.
 Types of information

Most organizations require the following types of

information
• Financial (e.g. costs of heat and light, capital costs, etc)
• Non-financial (e.g. attendance records, details of the number of
meals served each day, etc)
• A combination of financial and non-financial information
It is the management accountant who is expected to provide
the information to management.
 Attributes of good information

Good information should be ACCURATE.

Accurate - Information should be accurate because using incorrect information
could have serious and damaging consequences.
Complete - An information user should have all the information he needs but it
should not be excessive.
Cost-effective - The benefits from the information must exceed the costs of
acquiring it.
Understandable - Information must be clear to the user. If the user does not
understand it properly he cannot use it properly.
Relevant - Information must be relevant to the purpose for which a manager wants
to use it.
Accessible – Information should be accessible via the appropriate channels of
communication and to the right people. (verbally, via a report, a memo, an email
etc.)
Timely - Information which is not available until after a decision is made, may
become useless.
Easy to Use
 Example
1. Information must be relevant to the purpose for
which a manager want it.
2. Information should be accessible via the
appropriate channels of communication and to the
right people.
a) Both are true.
b) Both are false
c) 1 is false
d) 2 is false
 Limitations of management information

It may fail to assist management in the decision making

process. Why?
• Failure to meet the requirements of good information-
If information supplied to managers is deficient, then
inappropriate management decisions may be made.
• Non-financial information-Is often more difficult to
estimate and quantify.
• The problem of relevant costs and revenues-Not all
information produced by accounting systems is relevant to
the decisions made by management.
• External information-The organization needs external
information as well as internal information.
 Example
True or false.
There is a possibility that management accounting
information may fail to meet the objective of assisting
management in the decision making process due to its
failure to meet the requirements of good information.
1) True.
2) False
 Costing
• Costing- which is terribly important, that if a company
produces goods, suppose we are making desks. We need
to work out how much each desk costs to make. Eg. If a
desk costs $20 to make then obviously we want to set a SP
above $20.
• A desperately important and a big page of syllabus-as
we’ll go through later ch#-we will see , there are different
approaches, methods that we can use for costing. It very
much depends upon what we are producing or what
services we are giving.
 Tasks of management
Decisio
n
Control
Planning Making
Planning Actual Implemen
involves performanc t
establishin e is Decision;
g compared e.g.
objectives against decide on
and plans; the selling
selecting Any price to
appropriat deviations charge for
e from the a new
strategies plans are product
to achieve identified introduce
these and d on the
objectives corrective market.eg
 INPUT SYSTEM OUTPUT

PLAN/
CONTROL BUDGET

Here, management prepare a plan, which is put into action by the

managers with control over the input resources (labour , money,
materials, equipment and so on). Output from operations is
measured and reported (‘fed back’) to management, and actual
results are compared against the plan in control reports. Managers
take corrective action where appropriate, especially in the case of
exceptionally bad or good performance. Feedback can also be used
to revise plans or prepare the plan for the next period.
 Example
• _____establishing objectives and selecting
appropriate strategies to achieve these objectives.
1. Planning.
2. Organizing
3. Controlling
4. directing
 Example
• _____ is process by which actual performance of the
organisation is compared against defined organisational
plans.
1. Controlling.
2. Planning
3. Organizing
4. None of the choices
 Different levels of planning

• Strategic Planning
Senior management formulate long-term (e.g. 5 to 10 years) objectives and plans for an organisation.
Such plans include overall profitability, the profitability of different segments of the business, capital
equipment needs and so on.(Provision of resources).It concerned with qualitative and quantitative
matters. e.g Cut costs by 15% in domestic markets, Expand into markets in Asia.

• Tactical Planning
Senior management make medium-term, more detailed plans for the next year, for e.g. decide how
the resources of the business should be employed, and to monitor how they are being and have been
employed.(Allocation of resources) E.g. Carry out a cost reduction program next year.
Establish business relationships with customers in Asia and carry out marketresearch,
productivity measurement.

• Operational Planning
All managers are involved in making day-to-day decisions. 'Front-line' managers such as foremen or
senior clerks have to ensure that specific tasks are planned and carried out properly within a factory
or office. Operational information is derived almost entirely from internal sources. It is prepared
frequently and is highly detailed. (Use of resources)e.g. Offer a bulk purchase discount of 10%
to a major customer.
 Example
Which of the following statements are correct?
(i) Strategic information is mainly used by senior management in an
organisation.
(ii) Productivity measurements are examples of tactical information.
(iii) Operational information is required frequently by its main users.
1. i and ii
2. i and iii
3. i, ii and iii.
4. ii and iii only
 Financial accounting V.S Management
accounting.
Management acco Financial accounti
unting ng
1. Users internal use external use

2. Purpose to aid in planning, decision- to record the financial

making and control performance and position of
the business
3. Legal requirements none limited companies must
produce financial statements
4. Formats management decide the best according to company law
way to present information.
5. Nature of information financial and non financial mainly financial

6. Time period historical and forward- mainly historical

looking
 A1. Accounting for
Management

Questions?
A2. Sources of Data
 Primary v.s Secondary Data
• data collected especially for a
Primary specific purpose, e.g. raw data. It
is obtained directly from first-
data hand sources by means of
surveys, observation or
experimentation.
• data which have already been
Second collected elsewhere, for some other
purpose but which can be used or

ary data adapted for the survey being

conducted,
• e.g. official statistics, data obtained
from financial newspapers, trade
journals, etc.
 Discrete v.s Continuous data

Discrete • Data which can only take a finite

or countable number of values

data within a range, e.g. you cannot

have 1.25 units but 1 unit, 2 units
etc.

Continuo • Data which can take on any value.

They are measured rather than

us data counted, e.g. a person can be

1.585m tall.
 Sample v.s Population data

Sample • data arising as a result of

investigating a sample. A sample

data is a selection from the population.

Where its not possible to survey
whole population, a sample is
selected.
Populatio • data arising as a result of
investigating the whole

n data population. A population is the

group of people or objects of
interest to the data collector. The
survey is called census.
 Example
____ are data collected especially for a specific purpose.
1. Primary.
2. Sample
3. Discrete
4. continuous
 Example
• __are data which can take on any value.
1. Secondary
2. Primary
3. Sample
4. Continuous.
 Information within and outside the organisation

Internal External
• Accounting system • Government sources
• Businesses contacts like
• Payroll system
customers and suppliers.
• Strategic Planning system
• Trade associations and
journals
• Financial press, Business
press & other media
• Internet
 Limitations of published
information/data
• External information is not under the control of the
organisation - they may not be aware of any limitations in
its quality.
• Information on the internet is not necessarily good
information. The reliability and reputation of the provider
is important.
 Example
• Which of the following are external sources of data.
i. Government statistics.
ii. The Financial Times.
iii. Data collected for a survey which was commissioned in order
to determine whether the company should launch a new
product.
iv. Historical records of expenditure on light and heat in order
to prepare current forecasts.
a) i and ii.
b) i, ii and iv
c) i, ii and iii
d) All of above
 The impact of general economic environment on
costs/revenues

• Both in the general level of economic activity and in particular

factors, e.g. inflation, interest rates and exchange rates.
• Inflation affects the decisions taken by businesses. An increase in
interest rates affects cash flow especially for those businesses
which carry a high level of debt. Exchange rates affect the imports
and exports of the company.
• In times of boom, consumer demand and consumption increases.
• In times of recession, the company has to focus on its survival
through cost effectiveness and competition.
 Sampling
• A sample is a group of items drawn from that population.
• The term population is used to mean all the items under
consideration in a particular enquiry.
The purpose of sampling is to gain as much information as
possible about the population by observing only a small
proportion of that population.
 Sampling Techniques
• Probability – there is a known chance of each member of the
population.
o Random – any member of population has equal chance of being
chosen, suitable for small populations. It eliminates selection bias.
o Systematic –(quasi random),random initial number then regular
number after, not used in repetitive pattern.eg. Every 9 th member
of population is selected.
o Stratified – population is ‘grouped’(strata/layers) and sample
randomly chosen in each group. i.e sampling with probability
proportional to size of group.
So if 20% of the population are over 60 years of age 65% between 18 and
60 and 15% are under 18, then a sample of 200 people should contain 40
(20% x 200) who are over 60 years old, 130 (20% x 65) people between
18 and 60 and 30 (20% x 15) under 18 years of age.
o Multi-stage – large population, broken down into smaller chunks,
sample chosen at random from chunk( applied if the population
is particularly large) e.g. The country is divided into areas and
randomly sampled then subdivided into roads and randomly
sampled then further divided into houses and randomly sampled,
for example, in selecting a sample for a national opinion poll.
o Cluster – as multi-stage but all of small chunk is sample e.g.
every house in each area will be visited instead of just a random
sample of houses.
• Quota – (Non probability), known number to sample i.e. the
chance of each member is not known. e.g. 20 males, aged 20 to 30
years, 15 females, 25 to 35; 10 males, 55 to 60, etc. The
interviewer can use any method to obtain such people until the
various quotas are filled.
 Example
The population is divided into several groups and a sample
is chosen to represent the make-up of the population. A
sample from each age group is selected in the same
proportion as the estimate of the population as a whole.
What is this approach to sampling known as?
1. Quota
2. Systematic
3. Stratified.
4. cluster
 Example
The population is divided into smaller and smaller groups
until small enough to sample all of the people in the final
group.
What is this approach to sampling known as?
1. Quota
2. Systematic
3. Stratified.
4. Cluster.
 A2. Sources of Data

Questions?
A3. Cost Classification
 Classifying costs
What is a cost?
• Function: production + non-production
• Elements: material + labour + overheads.
• Nature: direct + indirect
• Behaviour: variable + semi-variable + fixed + stepped-
fixed
(i.e. how costs change with the level of
output/activity)
For the preparation of financial statements, costs are
often classified

Production Non-production
costs
• Costs identified with • Not directly associated with
COGS. production of goods.
• Directly associated with the • They are taken directly to
production of goods the income statement as
expenses in the period in
which they are incurred.
Examples of production costs for a construction
company

• • Direct materials – bricks, cement

• • Direct labour – builders, plasterers, electricians
• • Direct expenses – the cost of a subcontracted crane and
driver
• • Variable production overheads – electricity
• • Fixed production overheads – site managers salary.
 Examples of non-production
costs
Administrative costs – the costs involved in running the general
• administration departments of an organisation, for example, the
• accounts department.
Selling costs – costs associated with taking orders from customers
• who wish to buy an organisation’s products (sales department costs)
• and also marketing costs.
Distribution costs – the costs involved in distributing an
• organisation’s finished products, such as the cost of running the
• warehouse or delivery costs.
Finance costs – the costs that are incurred in order to finance an
• organisation, for example, loan interest.
 Elements of production cost
Material • This includes all costs of materials purchased for
production or non-production activities

s • e.g. raw materials and components.

Labour • This includes all staff costs relating to

employees.

Overhea • Overheads include all other costs which are not

materials or labour.
• These include rent, telephone, and depreciation
ds of equipment.
Examples of administrative costs include:
These include all the costs involved in running the general
administration department of an organisation.
• Depreciation of office buildings and equipment.
• Office salaries, including salaries of directors, secretaries
and accountants.
• Rent, rates, insurance, lighting, cleaning, telephone
charges and others.
Examples of selling costs are:
Selling costs include all costs incurred in promoting sales
and retaining customers.
• Salaries and commission of salesmen and sales
department staff.
• Advertising and sales promotion, market research.
• Rent, rates and insurance of sales offices and showroom.
Examples of distribution overhead are:
Distribution costs include all costs incurred in making the
packed product ready for dispatch and delivering it to the
customer.
• Delivery costs
• Wages of packers, drivers and dispatch clerks.
• Insurance charges, rent, rates and depreciation of
warehouse.
Finance costs

• Finance costs include all the costs that are incurred in

order to finance an organisation, for e.g. loan interest.

Note: Non-production costs are taken directly to the income

statement as expenses in the period in which they are
incurred and are not included in the COGS.
 Example
• Which of the following costs are Production costs:
a. Direct material
b. Direct labour
c. Variable production overheads
d. Fixed production overheads
1) A and B
2) A, B and C
3) A, B and D
4) All of above.
 Direct & Indirect Costs

• Direct are costs which can be • Indirect are costs which cannot be
directly identified with a specific cost directly identified with a specific cost
unit or cost center. There are 3 main unit or cost center.
types of direct cost • Indirect materials: E.g. oil for
• Direct materials: e.g. raw material, machine in a production line.
packing material. • Indirect labour: These include wages
of non-productive personnel in the
• Direct labour: the specific costs of production department, example
the workforce used to make a supervisor.
product or provide a service.
• Indirect expenses: Examples are
• Direct expenses: e.g. depreciation rent, rates and insurance of a factory,
of machine used in the production of depreciation, fuel, power, maintenance
the goods. of plant, machinery and buildings.
 Total of direct costs =
Direct Materials + Direct labour + Direct expenses =
Prime Cost
Indirect costs =
Indirect Materials + Indirect labour + Indirect
expenses =
Overheads
 Example
• Identify whether the following costs are direct or indirect
materials, labour or expenses.
i. Wages of factory production workers
ii. Salaries of factory supervisors
iii. Rent of a factory
iv. Oil for lubricating machines
v. Packing material
A. (i) dir labour (ii) indir labour (iii) indir expense (i) indir
material (ii) dir material.
B. (i) indir labour (ii) dir labour (iii) dir expense (i) dir material
(ii) indir material
C. (i) dir labour (ii) dir labour (iii) indir expense (i) dir material
(ii) indir material
 Cost Behaviour- variable cost
• A variable cost is a cost which tends to vary directly with
the volume of output but the variable cost per unit
remains constant. Examples of variable costs include raw
materials and direct labour.
•
Cost Behaviour- fixed cost
A fixed cost is incurred for an accounting period, irrespective
of activity levels but the fixed cost per unit falls as the level of
activity increases but never reaches zero. Examples of fixed costs
include the salary of the managing director, the rent of a
building and straight line depreciation of machinery.
Cost Behaviour- stepped fixed cost
• Fixed costs increase in steps as activity level increases beyond a
certain limit. The depreciation of a machine may be fixed if
production remains below 1,000 units per month. If production
exceeds 1,000 units, a second machine may be required, and the
cost of depreciation (on two machines) would go up a step.
 Cost Behaviour- semi
• variable
It contains both cost
fixed and variable components and are
therefore partly affected by changes in the level of activity,
also called semi-fixed or mixed cost. Examples includes
Salesman's salary(basic + commission), Electricity and gas
bills(standard + usage), Costs of running a car(insurance +
petrol/oil)
This graph represents a semi-variable cost which
is variable with output, subject to a minimum
(fixed) charge upto a certain level of activity.
The two main methods to split semi-variable costs into their fixed
and variable elements are High/low method & Least squares
regression

High/Low analysis
Step1
Select highest and lowest activity levels and their associated costs.

Step 2 :
Variable cost per unit
=
Change in cost / Change in level of activity

Step 3 :
Find the fixed cost by substitution
Fixed cost per unit
=
Total cost – (Variable cost per unit × Number of units)
 Example
What are the fixed and variable elements of the total cost using
the High-Low method? The total costs of a business for differing
levels
output of output are as follows: total costs
units $'000
500 70
200 30
300 50
800 90
1000 110

a) VC/unit $100 FC $10000

b) VC/unit $150 FC $11000
c) VC/unit $60 FC $12000
d) VC/unit $70 FC $14000
Situations involving semi-variable
and stepped fixed costs and
changes in variable cost per unit.
 Limitations of the High-Low Method

1.It relies on historical cost data – predictions of future costs

may not be reliable
2.It assumes that the activity level is the only factor
affecting costs
3.It uses only two values to predict costs
4.Bulk discounts may be available at large quantities
 Cost equations
Cost equations are assumed to have a linear function and therefore the
equation of a straight line can be applied:

y = a + bx
Where:
y = total cost (dependent variable)
a = fixed cost (the intercept)
b = variable cost per unit ( the gradient)
x = activity level (independent variable)
 Example
Consider the linear function y = 2,000 + 40x.
The line would cross the y axis at which point ?
a) 3000
b) 1000
c) 2000
d) 3500
A cost center is a production or service location, function, activity or item of equipment for
which costs can be ascertained. E.g. a department, a project, a machine or room service,
reception, cleaning in hotels.
A cost unit is a unit of product or service in relation to which costs are ascertained. E.g. a
student in uni, chargeable hour in consultancy , a telephone call in call center.
A cost object is any activity for which a separate measurement of cost is undertaken. E.g. a
product, service, centre, activity, customer or distribution channel.

Cost
centre

Cost
object
Cost
unit
 Example
A _____ is any activity for which a separate measurement of
cost is undertaken e.g cost of a product, cost of a service,
cost of a particular department.
a) Cost center
b) Cost unit
c) Cost object.
d) Cost card
 Distinguisg between Cost, profit, investment and revenue
centers
• An area of responsibility of managers may be structured as: Cost
centres, revenue centres, profit centres and investment centres &
are also known as responsibility centres.

Cost Centre is a production or service location, function, activity or item of

equipment whose costs are identified and recorded e.g. manufacturing
department, purchasing department and paint shop. A cost center manager is
responsible for, and has control over, the costs incurred in the cost centre. The
manager has no responsibility for earning revenue.
Important points about the performance report:
• - it should distinguish between controllable costs and uncontrollable costs
• - the actual costs are compared with a budget that has been flexed to the
actual activity level achieved.
Revenue Center is accountable for revenues only. Revenue centre
managers should normally have control over how revenues are raised e.g. retail
outlet, sales department and airline reservation department. Revenue centre
managers will want information on markets and new products and they will look
closely at pricing and the sales performance of competitors

Profit Center is a part of the business for which both costs and revenues
are identified e.g. product division. The budget for the sales revenue and variable
cost of sales will be flexed according to the activity level achieved. Profit centre
managers will want information regarding both revenues and costs.

Investment Center is a profit centre with additional responsibilities

for capital investment and possibly for financing, and whose performance is
measured by its return on capital employed (ROCE), RI and ROI. e.g. subsidiary
company. Managers of subsidary companies will often be treated as investment
centre manager and will be accountable for profits and capital employed. The
amount of capital employed in an investment centre should consist only of directly
attributable non-current assets and working capital (net current assets)
 Example
For which of the following is each centre manager
responsible?
a) Costs only
b) Revenues only
c) Costs and revenues
d) Costs, revenues and investments
 Coding System

• A code is “a system of symbols designed to be applied to a

classified set of items to give a brief accurate reference,
facilitating entry, collation and analysis ”. It provides a
way of expressing the classification of each cost in a
shortened symbolized form.
• For example, 5 cm brass plates may be coded as
05677 and no other class of item should be coded
the same.
The advantages of a coding system
• Some of the advantages of a well-designed coding system
are:

1.It is more suitable than a description in

computerized system.
2.A code reduces ambiguity.
3.A code is usually briefer than description.
Types of Code
Composite codes The first three digits in the composite
code indicate the nature of expense
whereas the last three digits might
indicate the cost centre or the cost
unit to be charged.eg. Symbol
892.133

Sequence (or progressive) codes A sequential code simply follows a

sequence, the first employee being
assigned the number 00, the second
employee is assigned the number 01
and so on.
Group classification codes Group classification (block) codes are
very common in accounting circles in
that they commonly form the basis of
charts of accounts, as depicted
below:

1000 – Non-current assets

2000 - Current assets
Faceted codes Facet 1 is the department or cost centre,
and is 2 digits long
Facet 2 is the cost heading, and is 2 digits
long
Facet 3 is the cost item, and is 4 digits
long
e.g. the code for buildings insurance for
the upholstery department is: 04 03
0161
Significant digit codes Digits specifically part of the description of
the item being coded.
Example:
4000 = Nails
4010 = 10mm nails
4020 = 20 mm nails

Hierarchical codes 657 Accounting

657.01 Financial accounting
657.02 Financial management
657.03 Management accounting
657.03.001 Management accounting,
standard costing , and so on ...
 Future
Incremen
tal

Cashflo
ws

Relevant costs and

revenues
A3. Cost Classification

Questions?
A4. Presenting Information
 Different ways how information can be
presented
1) Tables
2) Charts and graphs
The following are the principal types of diagrams:
• Bar charts
• Line graphs
• Pie charts
• Scatter graphs
Simple bar chart
Component bar chart Percentage component bar chart
Compound (multi) bar chart
Line graph and multiple line
graph
Scatter diagram (with line of
best fit)
Pie chart
 Example
• Which of these are types of bar chart?
i. Component bar chart
ii. Composite bar chart
iii. Percentage component bar chart
iv. Simple bar chart
A. i and ii
B. i and iii
C. ii and iii
D. i, iii and iv.
Questions?
A4. Presenting Information
 Syllabus B:
Cost Accounting Techniques
Ch# 5,6&7. Accounting for Material, Labour
and Overheads
Ch#8. Absorption and Marginal Costing
Ch#9. Job, batch and process costing
Ch#11. Alternative Cost Accounting
B1. Accounting for Material,
Labour and Overheads
 Standard Cost Cards
A cost card lists out all the costs involved in making one unit of a
product
 Accounting for Materials
. When to
buy?

MATERIAL
S

How much to
buy?
Procedures for Ordering, Receiving and
issuing materials from inventory
 Documents for ordering, recieving and issuing materials

1. materials requisition note (Materials can only be issued to production departments against a
materials requisition. )
2. Purchase requisition (Current inventories run down to the level where a reorder is required. )
3. purchase order (The purchasing department draws up a purchase order which is sent to the
supplier with copies sent to accounts department and storekeeper)
4. Delivery note (The supplier delivers the consignment of materials, and the storekeeper signs a
delivery note for the carrier. )
5. GRN (If the delivery is acceptable, the storekeeper prepares a goods received note (GRN) to
purchase department with copy sent to accounts department, where it is matched with the copy
of the purchase order. )
6. materials returned note (This is used to record any unused materials which are returned to
stores.)
7. materials transfer note (This document is used to transfer materials from one production
department to another.)
 Systems of inventory control

Control procedures used to monitor ‘book’ and physical

inventory
Perpetual inventory is the recording as they occur of receipts, issues and
the resulting balances of individual items of inventory in both quantity and
value. These inventory records are updated using stores ledger cards and
bin cards.
Stocktaking The process of stocktaking involves checking the physical
quantity of inventory held on a certain data with the balance on the stores
ledger cards or bin cards.
1. Periodic stocktaking (checking the balance of every item at a set point in time,
usually at the end of an accounting year.)
2. Continuous stocktaking (counting and valuing selected items of
inventory on a rotating basis. Each item is checked at least once a year.)
Control procedures to minimize discrepancies and losses
Such control procedures would include
1. physical security procedures, regular stocktaking and recording
of all issues to eliminate unnecessary losses from inventory;
2. separation of ordering and purchasing activities to eliminate
fictitious purchases
3. quotation for special order to reduce the probability of ordering
goods at inflated prices.
Inventory losses arising from theft, pilferage or damage
must be written off against profits as soon as they occur.
 Material Inventory Account
Materials held in store are asset and are therefore recorded in the statement
of financial position of a company.

Opening inventory xx issues to production

x
material purchased x returned to suppliers
x
materials returned to stores x materials w/off - i/s
x

closing inventory c/d

xxx
xxx
 Costs of carrying inventory
Purchase price
Holding costs – cost of storage, space, insurance,
obsolescence, Stores labour costs and interest on capital
tied up in inventory)
Ordering costs –Clerical and administrative expenses,
delivery costs
Stock-out costs – Lost sales, Reputation damage,
Production stoppages, Emergency orders
 TAC

TAC = purchasing costs + ordering costs + holding

costs
Purchase cost = purchase price per unit x annual
demand
Total annual cost = (Price per unit x Demand for year)
+ (Co × D/Q) + (Ch × Q/2 + Buffer)
Where Q = the reorder quantity (EOQ)
 +
Buffer
invent
ory
 Example
Calculate the annual holding cost and the annual
ordering cost
XYZ Ltd uses components at the rate of 10,000 units per
annum, which are bought in at $1.50 each. It orders 1,000
units each time it places an order. The average inventory
held is 500 units. It costs $50 each time to place an order,
regardless of the quantity ordered.
The total holding cost is 20% per annum of the average
inventory held.
• If order size then holding
cost and vice versa
• If order size then ordering
cost as number of orders
decreased
Reorder level: The pre-determined level of inventory when
reached an order is placed, to avoid stock-outs.
Reorder quantity: This is the quantity of inventory which is
to be ordered when inventory reaches the reorder level.
Re-order level = (maximum usage per day × maximum
lead time in days) + buffer inventory.

The maximum lead time is the time between placing an

order with a supplier, and that order arriving.
 Example
• A business uses 5,000 units of raw material per week and
it takes 3 weeks to receive the goods after the order has
been placed. The business also keeps additional inventory
of 2,500 units in reserve.

Calculate the re-order level.

 Establishing reorder levels
• Minimum level- This is a warning level to draw management’s attention to
the fact that inventories are approaching a dangerously low level and that
stock outs are possible.
= reorder level – (average usage × average lead time)
• Maximum level- This also acts as a warning level to signal to management
that inventories are reaching a potentially wasteful level .
= reorder level + reorder quantity – (minimum usage ×
minimum lead time)

• The average inventory- assumes that inventory levels fluctuate evenly

between the minimum (or safety) inventory level and the highest possible
inventory level, i.e. the amount of inventory immediately after an order is
received (safety inventory + reorder quantity).
= safety inventory +½ reorder quantity
 Economic order quantity (EOQ)
If the re-order quantity is set so as to minimise the total costs
associated with holding and ordering inventory, then it is known as the
economic order quantity. Also called optimal re-order quantity.

At this quantity, holding costs are equal to ordering costs.

 EOQ formula

Where:
Ch = cost of holding one unit of inventory for one time
period
C0 = cost of ordering a consignment from a supplier
D = annual demand
Q = the reorder quantity (EOQ)
 EOQ – The assumptions made

The EOQ formula is based on certain assumptions,

including
• constant purchase price
• constant demand and constant lead-time
• holding-cost dependent on average stock
• order costs independent of order quantity
 Example
A business uses 3,125 units of raw material per annum. It costs $20
to place an
order and $0.50 to hold one unit of inventory for one year.
Calculate the EOQ.
EOQ/Optimal reorder quantities with
discounts
When bulk orders are placed, it is often
possible to negotiate a quantity discount on
the purchase price.
If a quantity discount is accepted this will have the
following effects:
• The annual purchase price will decrease.
• The annual holding cost will increase.
 Economic batch quantity (EBQ)
• The number of manufactured items to produce in a batch,
to minimise inventory costs when inventory is gradually
replenished

Where :
D = annual demand
Co = Cost of setting up one batch
Ch = cost of holding one unit per year
R = Annual replenishment (annual production) rate
Annual setup costs = Co x D/Q
Annual holding cost = Ch × Q/2 (1-D/R)
 Example
A company has demand for 50,000 units p.a. They produce
their own units at a cost of $30 per unit, and are capable of
producing at rate of 500,000 units p.a.
Machine set-up costs are $200 for each batch. Stock holding
costs are 10% p.a. of stock value.
Calculate the Economic Batch Quantity and
the cost involved p.a. for that quality.
 Inventory valuation methods
The methods looked at here are:
 FIFO (First in, first out) – issues are priced at the cost of the
earliest delivery remaining in inventory. FIFO adheres to IAS2
Inventories.
 LIFO (Last in, first out) –the last items of material received are
the first items to be issued. LIFO is not accepted for financial
accounting purposes (IAS 2). The items remaining in inventory are
the first which were produced or purchased
 AVCO (weighted average) – Issues are priced at this average
cost, and the balance of inventory remaining would have the same
unit valuation. Hence, fluctuations in prices are smoothed out,
making it easier to use the data for decision making.
 Advantages and disadvantages of each
method
Method Advantages Disadvantages

FIFO Up to date closing inventory value

as the recent priced items remain
Out of date valuation on issues to
production as old prices are used
in inventory. to value issues to production.
Identical jobs may have different
costs.

LIFO Up to date valuation on issues as

the recent priced items are used
Out of date closing inventory
value as old prices as used to
to value issues to production. value inventory.

AVCO A compromise on inventory

valuation and issues.
The average price rarely reflects
the actual purchase price of the
material.
Accounting for Labour
Direct and
indirect

Remunera
tion Labour
ratios
methods

Account
ing for
Labour
Direct and indirect costs of labour

Direct labour Indirect labour

 basic pay of indirect workers (for example,
 basic pay of direct workers maintenance staff, factory
(including the basic pay for any supervisors and canteen staff).

overtime)  indirect labour costs make up part

of the overheads (indirect costs)
 overtime premiums when  indirect labour costs also include the following:
worked at a customer’s specific – overtime / shift premiums when due to general
request pressures
– bonus payments
Therefore, they are part of – benefit contributions
the prime cost of a product – idle time
– sick pay
– time spent by direct workers doing ‘indirect jobs’
 Overtime and overtime premiums
When employees work overtime, they will receive a basic
pay + an overtime premium. Is the overtime premium a
direct or indirect cost?
 Example
For the four-week period just ended, calculate the
gross wages and net wages.
A company employs 100 direct workers in the factory, who
are paid a basic rate of $5 per hour for a 35 hour week. In
addition to working their normal hours last month, each
worker was asked to work an additional 5 hours overtime
per week to meet general production requirements. All
overtime hours are paid at time and a half. As a result of
some faulty material, 150 hours of direct labour time were
registered as idle. Employee deductions total 30% of gross
wages.
Therefore,
1. When gross wages are paid (gross = net pay + National
Insurance + PAYE) to employees, they are accounted for as
Dr Labour A/c
Cr Bank A/c
2 Dr Production/WIP, Cr Wages with direct labour costs
3 Dr Non-Production/Overheads, Cr Wages with Indirect
labour costs.
 Remuneration Methods
• Time-based systems
Employees are paid a basic rate per hour, day, week or month.
Total Wages = (hours worked x basic rate of pay per hour) +
(overtime hours worked x overtime premium per hour)
Basic time-based systems do not provide an incentive for employees to
improve productivity / efficiency. Therefore, close supervision is necessary.

• Piecework systems
A piecework system pays a fixed amount per unit produced.
Total wages = units produced x rate of pay per unit
There are two main piecework
systems
• Straight piecework systems
– these are almost extinct. Today, it is normal for pieceworkers to be offered
a guaranteed minimum wage, so that they do not suffer loss of earnings
when production is low through no fault of their own.
• Differential piecework systems
– these systems involve different piece rates for different levels of
production.
They offer an incentive to employees to increase their output by paying
higher rates for increased levels of production. For example:
up to 80 units per week, rate of pay per unit = $1.00
80 to 90 units per week, rate of pay per unit = $1.20
above 90 units per week, rate of pay per unit = $1.30
 Example
How much would be paid to Matthew who achieved an
output of 570 units and Simon whose output was 800
units?
A company operates a differential piecework system and the
following weekly rates have been determined: -
Weekly production Rate of pay per unit
1 to 500 units 0.20
501 to 600 units 0.25
601 units and above 0.55
Each employee is guaranteed a minimum wage of $130 per week.
 Incentive (bonus) schemes
• Incentive (bonus) schemes can also be in place which pay a basic time rate,
plus a portion of the time saved as compared to some agreed allowed time.

1-Halsey – the employee receives 50% of the time saved

Bonus =
Time allowed – Time taken x Time rate
--------------------------------------------------------
2
2-Rowan – the proportion paid to the employee is based on the ratio of time taken to
time allowed
Bonus =
Time taken x Time saved x Time rate
------------------
Time allowed
 Example

Labour remuneration methods have an effect on

morale and efficiency of employees and cost of
finished products and services.
1. True.
2. False
 Example

____these systems involve different piece rates

for different levels of production.
1. Incentive bonus scheme
2. Straight piecework system
3. Differential piecework system.
4. None of the choices
 Labour ratios-Labour turnovers
Labour turnover is the rate at which employees leave a company relative
to the average number of people employed. This rate should be kept as
low as possible.
Labour turnover =
Number of leavers who require replacement x 100%
-----------------------------------------
Average number of employees
The reasons for their turnover could be avoidable (poor remuneration,
working condition, lack of promotion or bullying) or unavoidable (illness,
death, accident, retirement, marriage, pregnancy or relocation).
The cost of labour turnover may be divided into the following
• Preventative costs (costs incurred in order to prevent employees
leaving )
• Replacement costs (costs incurred as a result of hiring new employees)
 Other Labour ratios
• Labour Efficiency Ratio
The labour efficiency ratio measures the performance of the
workforce by comparing the actual time taken to do a job
with the expected time.
Labour Efficiency Ratio =
Expected hours to produce output x 100%
----------------------------------
Actual hours to produce output
• Labour Capacity Ratio
The labour capacity ratio measures the number of hours
spent actively working as a percentage of the total hours
available for work.
Labour Capacity Ratio =
Number of hours actively spent working x 100%
---------------------------------------
Total hours available
• Labour Production Volume Ratio
The labour production volume ratio compares the number of hours
expected to be worked to produce actual output with the total hours
available for work.
Labour Production Volume Ratio =
Expected hours to produce actual output x 100%
----------------------------------------
Total hours available

Efficiency ratio x capacity ratio = production volume ratio

 Methods used to relate input labour costs to work
done
• Different methods can be used to determine the time
spent doing jobs.
These include time sheets (activity time records), time cards
(clock cards) and job sheets.
The payroll department carries out functions that
relate input labour costs to the work done.
It calculates the gross wages from time and activity records
and makes the required deductions, e.g. NI contributions
 Accounting for Overheads
Overheads = indirect materials + indirect labour + indirect expenses.
An overhead cost is defined as ‘expenditure on labour, materials or services that
cannot be economically identified with a specific saleable cost unit’.

Types of overhead:
Production overhead (concerned with the physical production of the product and
are included in the COGS. These are further related to production and service
cost centers. These are part of the prime cost of a product and are absorbed in
the product cost using absorption costing.)
Non production overhead (concerned with the selling and distribution and with
the general administration of the organisation e.g. factory rent, factory light
and heat and are included in expenses for the period)
 PRODUCTION OVERHEADS

Production Production Service Service

Department A Department B Department C Department D

• Some cost centers are directly involved with the production

process and are called production cost centers.
• Some cost centers are not directly involved with the
production process but provide support services to production
cost centers and are called service cost centers.
 Absorption costing
• Absorption costing is a method of absorbing production
overheads by absorbing them into the cost of a
product/unit.
PRODUCTION OVERHEADS
Absorption costing involves 3 stages
Production
Production Service Service
Departmen
Departmen Departmen Departmen
tA
Step1 : Overhead tB tC tD
(processing
allocated or )
(packaging) (store) (payroll)
apportioned to cost
centres using
suitable
Step basescost
2 : Service A B
centres
reapportioned to
production cost
centres
Step 3 : Overheads
absorbed into output Cost Unit
 Stage 1: - Allocation and apportionment of
overheads

• If the overheads relate to one department, then they are allocated directly to specific
departments (both production and service)
• If the overheads relate to more than one department, then they must be apportioned /
shared between these departments using a fair basis.
Possible bases of apportionment include
Factory rent, heat and light overheads – Floor area
Depreciation and insurance of machinery –Cost or net book value of non-current assets
Canteen costs; personnel office, welfare, wages, first aid – Number of employees or labour
hours worked in each cost centre
Electricity – Machine hours
Cleaning – Floor area
Human resource costs – Staff numbers
 Stage 2: - Reapportionment of service cost centre
overheads to production cost centres
Examples : - stores, canteen, maintenance and payroll
departments.
Since service cost centres are not directly involved in making the products,
the fixed production overheads apportioned to them must be reapportioned
to the production cost centers.
Two methods are used to reapportion service cost centre costs to
production cost centres
1. Basic method – when one service department does work of another service
department but not vice-versa
2. Reciprocal method – when both service departments do work for each other
Regardless of the method used, the total overheads for production
departments will be the same.
 Stage 3:- Absorption of Overheads
Costs within production cost centres are charged to a cost unit,
using overhead absorption rates (OAR)

OAR = Budgeted
overheads / Budgeted
• Budgeted level of level
activityof activity
– Most common are total labour
hours, machine hours or units.
• Overheads absorbed = Budgeted OAR x actual level of activity.
• This OAR is calculated for each department.
• Blanket OAR means a single factory-wide OAR (only one OAR for
all).
 Example
• ___________means charging overheads directly into specific
departments (both production and service).
1. Allocation.
2. Direct costing
3. Variable costing
4. None of above
 Example
The process of cost apportionment is carried out so
that:
1. Costs may be controlled
2. Cost units gather overheads as they pass through cost
centres.
3. Whole items of cost can be charged to cost centres
4. Common costs are shared among cost centres
 Under and over absorption of overheads
Over and under absorption of overheads occurs because the Actual
overhead costs and actual activity level differ from the budgeted costs
and level
Overhead Under- or
Absorbed Actual
over-
overhead
• OAR × absorbed
Actual incurred
overhead
activity

• Over-absorption (over-recovery)
overheads absorbed > actual overheads incurred.
• Under-absorption (under-recovery)
overheads absorbed < actual overheads incurred.
 Example
Calculate the over/under-absorption of overheads for
20x8

The following data relate to RP Ltd for the year 20x8: -

Budget Overheads $100,000
Labour hours worked 20,000
Actual Overheads $120,000
Labour hours worked 25,000
1. $5
2. $7
3. $9
4. $10
 Overheads Account
• The direct costs of production (prime • Debited to Cr from
production production
cost) are debited in the work-in-progress overheads Absorbe overheads
(WIP) account. account d account &
Producti Producti
• Indirect production costs (production Dr to the
on work in
on
overheads) are debited in the production Overhea progress
ds Overhea
overheads account.
ds
• Absorbed production overheads are Over- or Non-
credited from the production overheads under- producti
absorpti
account and debited to the WIP on
• Transferre on • Debited as
account(cost of the unit/COGS) overhead Overhea expenses
d to
s ds for the
• over- or under- absorption under statement
period in
of profit or
absorbed (debit I/S – credit under loss at the I/S.
absorption account) or over absorbed end of the
(credit I/S – debit over absorption period
account).
Questions?
B2. Absorption and Marginal
Costing
 Absorption and marginal
costing
Marginal Costing
Marginal costing is an alternative method of costing to absorption
costing.
In marginal costing, only variable costs are charged as a cost of sale.
Therefore, the cost of a unit =
Direct materials + direct labour + direct expenses +
variable production overheads
Fixed costs are treated as a period cost, and are charged in full to
the income statement of the accounting period in which they are
incurred.
 Contribution
How do we calculate contribution?
Contribution per unit = Sales price – variable costs
per unit
Total contribution = contribution per unit x sales
volume
Profit = Total contribution – Fixed overheads
Contribution is of fundamental importance in marginal
costing.
 The effect of absorption and marginal costing
on inventory valuation and profit
Marginal costing Absorption costing
• Closing inventories are valued at • Closing inventories are valued at full
Marginal production cost (vc) Production cost
• Fixed costs are period costs • Fixed costs are absorbed into unit
costs
• Cost of sales does not include a
share Of fixed overheads • Cost of sales does include a share of
fixed overheads
• is appropriate for short-term pricing
decisions & not for long-term • Inventory values are therefore
decision-making, since it does not greater than marginal costing.
include all costs that may apply to a • Since inventory values are different,
longer-term decision profits in (I/S) will also be different.
• is appropriate for one-off pricing In the long run, total profit for a
decisions company will be the same.
 Illustration
What is the Gross profit for Product A, using marginal and
absorption costing?
A company produced 1,000 units of Product A.
The opening and closing inventory was 100 units and 500 units
respectively.
The selling price and production costs for Product A were as follows:
Selling price $30 per unit
Direct costs $10 per unit
Variable production overhead costs$6 per unit
Total Fixed production overhead costs 4,000
Solution(MC)
Number of units sold = (OP + Produced - CL) = (100 + 1,000 - 500) =
600 units
Contribution per unit = 30 - 10 - 6 = $14 per unit
Contribution = 600u x Contribution $14= $8,400
Gross Profit = $8,400 - Fixed OH $4,000 = $4,400
Solution(AC)
Number of units sold = (OP + Produced - CL) = (100 + 1,000 - 500) =
600 units
Gross Profit = 600u x Gross profit $10 = $6,000
• If inventory level constant - there will be no difference in calculated
profits using the costing methods.
• If inventory levels increase - absorption costing will report the higher
profit than marginal costing because some of the fixed production
overhead will be carried forward in closing inventory (which reduces cost of
sales and therefore increases the Profit).
• If inventory levels decrease - absorption costing will report the lower
profit than marginal costing because as well as the fixed overhead
incurred, fixed production overhead which had been carried forward in
opening inventory is released and is also included in cost of sales.
Remember!
Profit = Sales - COS
Cost of Sales (COS) = Opening inventory + Purchases (Production) - Closing
Inventory
Adjusting for over- or under-absorption in absorption costing in I/S
but not needed in marginal costing
Reconcile the profits or losses calculated
under absorption and marginal costing.

ASORPTION COSTING
PROFIT

(Opening inventory – Closing inventory) ×

OAR

MARGINAL COSTING
PROFIT
 Examples
The opening and closing The opening and closing
inventory was 200 units and inventory was 200 units and
400 units respectively. 100 units respectively.
OAR = $2 OAR = $2
Calculate the difference in the Calculate the difference in the
Profit. Profit.
(400 - 200) x $2 = $400 (200 - 100) x $2 = $200
AC Profit > MC Profit by $400 MC Profit > AC Profit by $200
 Advantages and disadvantages
absorption costing marginal costing
• complies with IAS 2 • highlights contribution so
“inventories” appropriate for decision-making
•  better cost control due to •  no over- or under- absorption &
analyzing under-/over- absorption simple to operate

•  recognizes that selling price •  profit depends on sales and

efficiency not on production levels
must cover all costs
• contribution may not cover fixed
• profits can be manipulated by costs
changing production levels
• does not comply with IAS 2
• it is based on the assumption
•  fixed production overheads are not
that overheads are volume-related
shared between units of production
 Example
Which of the following is an advantage of absorption
costing?

1. recognize the selling price must cover all costs.

2. does not comply with IAS 2
3. simple to operate
4. no over or under absorption
Questions?
B3. Cost Accounting
Methods
 JOB
BATCH

PROCE
SS

Cost Accounting
Methods
 Job costing

• The main aim of job costing is to identify the costs associated with
completing the order, production is usually carried out in accordance with
the special requirements of each customer. Therefore, it is usual for each
job to differ in one or more respects from another job.
• Individual jobs are given a unique job number and the selling prices of jobs
are calculated by adding a certain amount of profit to the cost of the job.
• The job is the cost unit
• E.g. ship building, civil engineering, construction, aero plane manufacture,
and vehicle repairs
• may be used by: plumbers, electricians, builders, engineering companies,
architectures, tile layers etc.
 Batch costing

• Batch costing is similar to job costing. It is also treated as a cost unit.

• Each batch is different, but items within batch are identical. So Each
batch of production will have different costs but each unit within the
batch should have the same cost
• Cost per unit in batch = Total production cost of batch
-------------------------------
Number of units in batch
• E.g. a clothing manufacturer may have a production run for a batch of
men’s white shirts of collar size 16 inches. It may then have a production
run for a batch of men’s trousers with a waist size of 34 inches.
• May be used by: engineering component industry, footwear and clothing
manufacturing industries.
 Example
_______ is a costing method applied where work is
undertaken to customers' special requirements and each
order is of comparatively short duration.
1. job costing.
2. batch costing
3. variable costing
4. none of the choices
 Process costing

• Process costing is used when a company is mass

producing the same item and the item goes through a
number of different stages. i.e. Production is continuous.
Difficult to identify units of production
• Examples are chemical, paper, oil refinery, paint and food
& drink industry.
Output of one
Closing WIP
Period 1
process =
=
input of next
process Opening WIP
Period 2
 Losses in a process
It is normal that the total input units may differ from the total output units.
This usually happens when there are losses or gains in the process.

Normal loss --- expected in a process – is a percentage of the materials input

Average cost per unit = Total cost of inputs Normal
---------------------------- Losses
Units input – Normal loss
• If normal loss is sold as scrap, the revenue is used to reduce the input costs of the process.
If normal loss does not have a scrap value, it is valued in the process account as $Nil.
• Average cost per unit = Total cost of inputs – Scrap value of normal loss
-------------------------------------------------------
Units input – Normal loss units
• Scrap value ----- Cr process a/c Dr scrap a/c , then Cr scrap a/c Dr cash/bank with the
scrap proceeds
 The cost per unit of process outputs
STEPS

1. Draw the process account, and enter the inputs, i.e. units and values.
2. Enter the normal loss – units and scrap value if any.
3. Enter the good output – units only.
4. Balance the units. The balancing figure is either abnormal loss or gain.
5. Calculate the average cost per unit
Average cost per unit = Total cost of inputs – Scrap value of normal
loss
---------------------------------------------------------
Units input – Normal loss
6. Value the good output and abnormal loss or gain at this average cost
per unit.
 Scrap value
1. The value of the normal loss reduces the total cost of the
process as we get some revenue to net off the input
costs.
2. If normal losses have a scrap value:
 abnormal loss can be sold at the scrap value & reduces
the loss in I/S.
 abnormal gain reduces the availability of scrap to be sold
& reduces the gain in I/S.
Closing work in progress (CWIP)
• At y/e there may be some units that have entered a
production process but the process has not been
completed, called closing work in progress (or CWIP)
units. We need to value any work in progress and for this
we use the concept of equivalent units.(EU) because it
would be unfair to allocate a full unit cost to WIP units.
• Closing work in progress units become opening work in
progress units in the next accounting period.
(EU)Equivalent units = CWIP units × percentage
completion.
 Example
Calculate the number of equivalent units at the end of the period & the
cost per EU.
EM Ltd is a manufacturer. Information for period 1 is as follows:
Completed units = 800
Closing work in progress (CWIP) = 200 units which are 35% completed
Costs incurred in the period = $11,832
EU
Completed units 800 × 100% = 800
Closing WIP 200 × 35% = 70
Total EU 870
Cost per EU = $11,832 ÷ 870 = $13.60 per EU
 Different degrees of completion

• Since material is input at the start of the process,

it is only the addition of labour and overheads
that will be incomplete at the end of the period.
• This means that material cost should be spread
over all units
• But conversion costs (labour + overheads) should
be spread over the equivalent units(EU).
 Opening work in progress
(OWIP)
Finished goods = OWIP + Completed in the period
There are 2 different techniques that need to be considered for
OWIP.
AVCO FIFO

2 Methods OWIP values are This means that if

Opening WIP
values are added NOT added to opening WIP units
to current costs to current costs to are 100% complete
calculate the calculate cost per with respect to
Process
unit costs materials and 30%
average cost per
Therefore, no allocated with respect to
unit
distinction is made between : conversion costs
between units in • OWIP units then only 70%
process at the • Units conversion cost
start of a period completed in added in
and those added period(finished calculating cost per
during the period – OWIP) unit.
• CWIP Units
 The rules are:

1. FIFO method- Used when the units are separable and

identifiable e.g. cars on a production line, toys.
2. Weighted average method- Used when the units of
product are all mixed together and are inseparable e.g.
liquids such as paint, soft drinks.
 WIP

Openi Closin
ng g
(EU)Equivalent
Either FIFO or units = CWIP
AVCO used to find units ×
the cost per unit. percentage
completion.