Introduction to Management Accounting

Introduction to Management Accounting

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No. of Words: 1500

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Introduction to Management Accounting

Executive Summary

This research paper deals with the importance of identification and calculation of

cost of the product along with the purpose of the product costing system. The report is mainly

prepared to follow own product costing system rather to follow pricing policy of competitor.

Pricing of the product plays a major role to boost the company revenue and profit. If the

company know the price of its different product, then he is in better position to negotiate the

price of the product with the buyer.

Accountant Play a major role in finding / determining the Product cost. Today in this modern era

almost every company requires an accountant to fulfill there accounting needs. Accounting is not

just adding up the total revenue and deducting the expenditure. The Account has also other

aspect from maintain the inventory, maintenance of purchase bill, issue of sale bill, debtor,

creditor reconciliation bank reconciliation all this activity is only possible if there is a good

accountant otherwise everything is found to be clumsy.

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Introduction to Management Accounting

Table of Contents

Particulars Page No.

Purpose of a product costing system 4

Preparation of a Schedule of Cost of Goods Manufactured and Cost of Goods 5

Sold for last year

An Income Statement for last year assuming that tax is charged at 30% on 6
Income before tax

Over or under absorption of overhead 9

References 10

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Introduction to Management Accounting

Answer to Question 1

There is a great importance of Producing Costing system in a Manufacturing Industry. Product

Costing is basically to identify the Cost of the Product to the company. There are various method
through which product cost can be identified some of them are standard cost, Marginal Costing
Method or Actual Cost Method. (Thomas, 2012)

To Identify the Product Cost first of all we have to identify the direct cost, overhead cost, basis
of cost allocation and then we have to calculate the Overhead Cost. This production manager
wants per unit cost of the product in order to identify the performance and product sourcing. This
helps the manager in identifying the wastage made by the worker if the cost per product is higher
than the industry average. (Calpan, 2012)

Further, if the Management knows the cost of his product than h is in better position to negotiate
the price of its product with the buyer of the goods and increase its sale volume. Product Costing
also helps the top management in evaluating the performance of the production Manager. It also
help them to give focus on such factory which costing is high and also necessitate the top
management to identify the reason for such high cost and take measures to reduce the wastages
to reduce the product cost.

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Introduction to Management Accounting

Answer to question 2

Particulars Amount Amount

Raw Material at the Beginning 2,100
Add: Purchase of Raw Material 14,600
Less: Raw material at the end (3,200)
Cost of Material Consumed 13,500
Add: Direct Labour Cost 21,900
Add: Factory Overhead
Depreciation - Factory Building 800
Depreciation - Factory Equipment 1,600
Indirect Labour Cost 11,800
Insurance on Factory 1,400
Repairs and Maintenance Factory 900
Taxes on Factory 450 16,950
Factory Cost 52,350
Add: Opening stock of WIP 1,670
Less: Closing Stock of WIp (1,110)
Cost of Goods Manufactured 52,910
Add: Opening stock of Finished Goods 46,980
Less: Closing Stock of Finished Goods (44,410) 2,570
Cost of Good Sold 55,480

While calculating Cost of Goods Manufactured we will consider all the direct and indirect cost
which has been incurred in the factory for manufacturing the goods along with the portion of
deprecation. This is mainly the Factory Cost

However if we calculate the cost of goods sold, then we will have to also consider the opening
and closing inventory of goods. All the other expenses will be consider as operating Expenses
and we will form Part of Income Statement.

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Answer to Question 3:

Income Statement is as follows:

Particulars Amount Amount

Sales 110000
Less: Cost of Goods Sold (As In Answer2) (55,480)
Gross Profit 54,520
Less: Operating Expenses
Administrative Expenses
Administrative Salary 2,400
Travel and Entertainment Expenses 1,410
Depreciation - Office Equipment 180
General Liability Insurance 240 (4,230)
Selling & Distribution Expenses
Advertisement Expenses 1200
Sales Salary 2000 (3,200)
Income from Operation / Income before Tax 47,090
Tax Expenses @ 30% (14,127)
Net Income 32,963

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Introduction to Management Accounting

Answer to Question 4:

A) Work in Progress at the End of April

Overhead Cost = 180,000

Direct Labour = 60,000

Overhead Rate = 180,000/60,000 = 3 per hour

Particulars Amount

Opening Stock of WIP 4,500

Add: Material 2,600

Add: Direct Labour Hour (300*6) 1,800

Add: Overhead (300*3) 900

Closing Stock of WIP 9,800

B) Raw Material Purchased in April

Particulars Amount

Account Payable as on 30th April 8,000

Add: Payment mad during April 40,000

Less: Opening Account Payable on 1st April (6,000)

Purchase Made during the Month 42,000

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Introduction to Management Accounting

C) Overhead Applied in April

Labour Hours Worked in April = 5,200

Overhead Rate = 3 per hour

Total Overhead Expenses = 5200 * 3 = 15,600

D) Cost of Goods Sold in April

Particulars Amount Amount

Cost of Goods Manufactured (Given) 89,000

Add: Opening stock of Finished Goods 11,000

Less: Closing Stock of Finished Goods (16,000) (5,000)

Cost of Good Sold 84,000

E) Raw Material Used in April

Particulars Amount Amount

Raw Material at the Beginning 12,000

Add: Purchase of Raw Material 42,000

Less: Raw material at the end NIL

Cost of Material Consumed 54,000

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F) Over or Under Allied Overhead

Overhead Applied = 15,600

Actual Overhead = 14,800

Overhead Over applied = (15600 – 14800) = 800

Answer to Question 5

All the cost incurred in the factory other than Direct Material and Direct Labour is called
overhead. In Standard / Marginal Costing we will predetermined the Overhead Expenses that
would likely to be incurred in the given period of time. Then we will determine the appropriate
cost driver to determine the recovery rate of the overhead. After determining the appropriate cost
driver we will divide the overhead expenditure with the cost pool to get the recovery rate.

Overhead recovery rate is just estimation. This may differ from the Actual Expenditure. If the
actual expenditure is more than the overhead applied than this is the situation of under recovery
of overhead. However, if the actual expenditure is less than it is case of over recovery.

In case of Over / Under recovery of the overhead the same should be debited / credited in the
profit & loss a/c so that it impact will reflect on the company balance sheet.

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Introduction to Management Accounting

Reference:

Calpan, D. (2012). Management Accounting: Concept & Technique. 10.

Thomas, J. (2012). Overview to Product Costing and Manufacturing Accounting. 8.

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