MANAGEMENT AND COST ACCOUNTING

SIXTH EDITION

COLIN DRURY

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 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 1-84480-028-8 © 2004 Colin Drury

4.1a

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 1 March 30 March : : : 1000 units purchased at £1 per unit 1000 units purchased at £2 per unit 1000 units sold at £4 per unit

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.1b

Three alternative issue prices: First-in, first-out (FIFO) = Last in, first out (LIFO) = £1.00 per unit £2.00 per unit Average cost = £1.50 per unit

A summary of the transactions

FIFO cost Sales £ 4000 LIFO Average 4000 4000 Cost of sales £ 1000 × £1.00 =1000 1000 × £2.00 =2000 1000 × £1.50 =1500 Raw materials closing stock £ 1000 × £2.00 =2000 1000 × £1.00 =1000 1000 × £1.50 =1500 Gross profit £ 3000 2000 2500

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.2a

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 £182 000 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 £165 000.

4.

The total issues for indirect materials during the period was £10 000.

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.2b

5.

Gross wages of £185 000 were incurred during the period consisting of: Wages paid to employees £105 000 PAYE due to Inland Revenue National insurance contributions due £60 000 £20 000 6.

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 £145 000 Indirect wages £40 000 8.

The employer ’s contribution for national insurance deductions was £25 000.

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.2c

9.

Indirect factory expenses of £41 000 were incurred during the period.

10.

1Depreciation of factory machinery was £30 000.

11. Overhead expenses charged to jobs by means of factory overhead absorption rates was £140 000 for the period.

12. Non manufacturing overhead incurred during the period was £40 000.

13. The cost of jobs completed and transferred to finished goods stock was £300 000.

14. The sales value of goods withdrawn from stock and delivered to customers was £400 000 for the period.

15. The cost of goods withdrawn from stock and delivered to customers was £240 000 for the period.

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.3a

Example

1. Purchase of raw materials Dr Stores ledger control account Cr Creditors control account 2. Return of raw materials Dr Creditors control account Cr Stores ledger control account 3. Issue of

direct

materials Dr Work in progress control account Cr Stores ledger control account 4. Issue of

indirect

materials Dr Factory overhead control account Cr Stores ledger control account 182 000 2 000 165 000 10 000 182 000 2 000 165 000 10 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.3b

1.

Stores ledger control account

Creditors a/c 182 000 Balance b/d 182 000 5 000 2.Creditors a/c 2 000 3.Work in progress a/c 165 000 4.Factory overhead a/c 10 000 Balance c/d 5 000 182 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.4a

1. Recording labour costs payable Dr Wages control account Cr Inland Revenue account Cr National insurance contribution account Cr Wages accrued account 185 000 60 000 20 000 105 000 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 145 000 40 000 185 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.4b

3.

Recording the employer ’s national insurance contribution Dr Factory overhead control account Cr cash/bank 25 000 25 000 5. Wages accrued a/c 5. PAYE tax a/c 5. National Insurance a/c Wages control account 105 000 7.Work in progress a/c 60 000 7.Factory overhead a/c 20 000 185 000 145 000 40 000 185 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.5a

1.

Recording the overheads incurred Dr Factory overhead control account Cr Expense creditors control account Cr Provision for depreciation 2.

Recording the allocation of overheaads to production Dr Work in progress control account Cr Factory overhead control account 71 000 41 000 30 000 140 000 140 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.5b

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.6

1. Recording non-manufacturing overheads incurred Dr Non-manufacturing overheads account 40 000 Cr Expense creditors Dr Profit and loss account Cr Non-manufacturing overheads account 40 000 40 000 40 000 2. Production completed during the period Dr Finished goods stock account Cr Work in progress control account 3. Recording sales and cost of goods sold Dr Debtors control account Cr Sales account Dr Cost of sales account Cr Finished goods stock account 300 000 400 000 240 000 300 000 400 000 240 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.7a

BACKFLUSH COSTING

Illustration

Purchase of raw materials Conversion costs Finished goods manufactured Sales for the period £1 515 000 £1 010 000 100 000 units 98 000 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 1-84480-028-8 © 2004 Colin Drury

4.7b

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 1-84480-028-8 © 2004 Colin Drury

4.8

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 (100 000 × £25) Cr Creditors 2500 000 Cr Conversion costs Dr Cost of goods sold 2 450 000 Cr Finished goods inventory 1 500 000 1 000 000 2 450 000

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.9a

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 1-84480-028-8 © 2004 Colin Drury

4.9b

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 Contract Price × Estimated profit

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.9c

• 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 1-84480-028-8 © 2004 Colin Drury

4.10

CONTRACT COSTING EXAMPLE Use overhead as transparency

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.11

CONTRACT COSTING BALANCE-SHEET ENTRIES Use overhead as transparency

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.12a

CONTRACT COSTING - BALANCE SHEET ENTRIES

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury

4.12b

Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury