Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury © 2000 Colin Drury Part Two: Cost accumulation for inventory valuation and profit measurement Chapter Four: Accounting entries for a job costing system

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.1a © 2000 Colin Drury Pricing the issue of raw materials 1.The issue of raw materials involves: reducing the value of raw material stocks recording the cost of the materials issued to the appropriate job or overhead account. 2.Difficulty arises in determining which costs should be assigned to material issues. Example 1 February :1000 units purchased at £1 per unit 1 March :1000 units purchased at £2 per unit 30 March :1000 units sold at £4 per unit

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.1b © 2000 Colin Drury Three alternative issue prices: First-in, first-out (FIFO) = £1.00 per unit Last in, first out (LIFO) = £2.00 per unit Average cost = £1.50 per unit A summary of the transactions Raw materials Gross Sales Cost of sales closing stock profit ££££ FIFO × £1.00 = × £2.00 = LIFO × £2.00 = × £1.00 = Average cost × £1.50 = × £1.50 =

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.2a © 2000 Colin Drury ACCOUNTING ENTRIES FOR AN INTEGRATED ACCOUNTING SYSTEM Example The following are the transactions of AB Ltd for the month of April. 1.Raw materials of £ were purchased on credit. 2.Raw materials of £2 000 were returned to the supplier because of defects. 3.The total of stores requisitions for direct materials issued for the period was £ The total issues for indirect materials during the period was £

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.2b © 2000 Colin Drury 5.Gross wages of £ were incurred during the period consisting of: Wages paid to employees £ PAYE due to Inland Revenue £ National insurance contributions due £ All the amounts due in transaction 5 were settled by cash during the period. 7.The allocation of the g oss wages for the period was as follows: Direct wages £ Indirect wages £ The employer ’s contribution for national insurance deductions was £

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.2c © 2000 Colin Drury 9.Indirect factory expenses of £ were incurred during the period. 10.1Depreciation of factory machinery was £ Overhead expenses charged to jobs by means of factory overhead absorption rates was £ for the period. 12.Non-manufacturing overhead incurred during the period was £ The cost of jobs completed and transferred to finished goods stock was £ The sales value of goods withdrawn from stock and delivered to customers was £ for the period. 15.The cost of goods withdrawn from stock and delivered to customers was £ for the period.

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.3a © 2000 Colin Drury Example 1. Purchase of raw materials Dr Stores ledger control account Cr Creditors control account Return of raw materials Dr Creditors control account Cr Stores ledger control account Issue of direct materials Dr Work in progress control account Cr Stores ledger control account Issue of indirect materials Dr Factory overhead control account Cr Stores ledger control account

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.3b © 2000 Colin Drury Stores ledger control account 1.Creditors a/c Creditors a/c Work in progress a/c Factory overhead a/c Balance c/d Balance b/d 5 000

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.4a © 2000 Colin Drury 1. Recording labour costs payable Dr Wages control account Cr Inland Revenue account Cr National insurance contribution account Cr Wages accrued account Note the above accounts will be cleared by crediting cash and debiting each of the accounts. 2. Recording the allocation of labour costs Dr Work in progress account Dr Factory overhead control account Cr Wages control account

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.4b © 2000 Colin Drury 3. Recording the employer ’s national insurance contribution Dr Factory overhead control account Cr cash/bank Wages control account 5. Wages accrued a/c Work in progress a/c PAYE tax a/c Factory overhead a/c National Insurance a/c

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.5a © 2000 Colin Drury 1.Recording the overheads incurred Dr Factory overhead control account Cr Expense creditors control account Cr Provision for depreciation Recording the allocation of overheaads to production Dr Work in progress control account Cr Factory overhead control account

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.5b © 2000 Colin Drury

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.6 © 2000 Colin Drury 1. Recording non-manufacturing overheads incurred Dr Non-manufacturing overheads account Cr Expense creditors Dr Profit and loss account Cr Non-manufacturing overheads account Production completed during the period Dr Finished goods stock account Cr Work in progress control account Recording sales and cost of goods sold Dr Debtors control account Cr Sales account Dr Cost of sales account Cr Finished goods stock account

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.7a © 2000 Colin Drury BACKFLUSH COSTING Illustration Purchase of raw materials £ Conversion costs £ Finished goods manufactured units Sales for the period units No opening stocks Standard unit cost is £25 (£15 materials and £10 conversion cost) Zero material variances

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.7b © 2000 Colin Drury Method 1 Trigger point 1 =Purchase of raw materials and components Trigger point 2 =Manufacture of finished goods

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.8 © 2000 Colin Drury BACKFLUSH COSTING Method 2 1. Only one trigger point =Manufacture of finished product 2. Conversion costs are debited as the actual costs are incurred. 3. Dr Finished goods inventory ( × £25) Cr Creditors Cr Conversion costs Dr Cost of goods sold Cr Finished goods inventory

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.9a © 2000 Colin Drury CONTRACT COSTING 1.Contract costing is applied to relatively large cost units which take a long time to complete (e.g.civil engineering projects). 2.A separate account is maintained for each contract. The first section is used to determine cost of sales. In the second section cost of sales is compared with sales to derive the profit to date. The third section records future expenses and accrued expenses.

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.9b © 2000 Colin Drury 3.Guidelines for determining profit to date on contracts. No profit is taken if the contract is at an early stage. Prudence concept applied and losses recorded as incurred or anticipated. If the contract is near completion a proportion of the profit should be recognized based on the following formula: Cash received to date× Estimated profit Contract Price

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.9c © 2000 Colin Drury Within the 35 –85%stage of completion,the following formula is recommended to determine profit to date: *Notional profit = Value of work certified – Cost of work certified

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.10 © 2000 Colin Drury CONTRACT COSTING EXAMPLE Use overhead as transparency

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.11 © 2000 Colin Drury CONTRACT COSTING BALANCE-SHEET ENTRIES Use overhead as transparency

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.12a © 2000 Colin Drury CONTRACT COSTING - BALANCE SHEET ENTRIES

Management and Cost Accounting, 6 th edition, ISBN © 2004 Colin Drury 4.12b © 2000 Colin Drury