MA1-Study Guide (Student Copy) - Updated For July 2021

MA1 MANAGEMENT INFORMATION
Sunway TES
MA1 MANAGEMENT
INFORMATION
Sunway TES
STUDY GUIDE
(Student Copy)
Version: July 2021
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Sunway TES
CONTENTS
CHAPTER 1: THE NATURE OF BUSINESS ORGANIZATION AND ACCOUNTING SYSTEMS.......................... 7
1a. Organization and Main Functions of an Office ...................................................................................... 8
Topic Review (TLO 1a) ..................................................................................................... 16
Topic Review Answers..................................................................................................... 18
1b. Function and Use of a Manual of Policies, Procedures, and Best Practices ...................................... 19
Topic Review (TLO 1b) ..................................................................................................... 23
1c. Main Types of Business Transactions and the Key Personnel ............................................................ 25
Topic Review (TLO 1c) ..................................................................................................... 30

1d. Effective Control Over Transactions ..................................................................................................... 33
Topic Review (TLO 1d) ..................................................................................................... 34

1e. Double Entry Bookkeeping .................................................................................................................... 36
Topic Review (TLO 1e) ..................................................................................................... 43

1f. Use of Ledgers and Prime Entry Records in Accounting Systems ...................................................... 45
Topic Review (TLO 1f)...................................................................................................... 50
1g. Computerised Accounting System ........................................................................................................ 52
Topic Review (TLO 1g) ..................................................................................................... 55

Chapter 1 Summary ......................................................................................................................................... 57
CHAPTER 2: MANAGEMENT INFORMATION .................................................................................... 58
2a. The Purpose of Management Information ........................................................................................... 59
2b. Comparison between Financial and Management Accounting ......................................................... 62
Topic Review (TLO 2b) ..................................................................................................... 64

2c. Data and Information ............................................................................................................................. 66
Topic Review (TLO 2c) ..................................................................................................... 68
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2d. Features of Useful Management Information ..................................................................................... 70
Topic Review (TLO 2d) ..................................................................................................... 71

2e. Sources and Categories of Information ................................................................................................ 73
Topic Review (TLO 2e) ..................................................................................................... 75

2f. The Limitations of Cost and Management Accounting Information .................................................. 77
Topic Review (TLO 2f)...................................................................................................... 78

2g. The Role of the Trainee Accountant...................................................................................................... 80
Topic Review (TLO 2g) ..................................................................................................... 81

Chapter 2 Summary ......................................................................................................................................... 83
CHAPTER 3: SOURCE DOCUMENTS AND CODING ............................................................................. 84
3a. The Materials Control Cycle and Documentations .............................................................................. 85
3b. Direct and Indirect Labour and Expenses: Procedures and Documentation .................................... 97
Topic Review (TLO 3b)....................................................................................................103

Topic Review Answers....................................................................................................104
3c. Recording Sales: Procedures and Documentation ............................................................................ 105
Topic Review (TLO 3c) ....................................................................................................107
3d. Use of Codes in Transactions ............................................................................................................... 109
Topic Review (TLO 3d)....................................................................................................113

3e. Methods of Coding Data ...................................................................................................................... 115
Topic Review (TLO 3e) ....................................................................................................118

3f. Correcting Coding Errors in Revenue and Expenses.......................................................................... 120
Topic Review (TLO 3f) ....................................................................................................122

Chapter 3 Summary ....................................................................................................................................... 124
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CHAPTER 4: COST CLASSIFICATION............................................................................................... 125
4a. Variety of Class Classification and The Nature of Cost ...................................................................... 126
Topic Review (TLO 4a,b,c) ...............................................................................................134

Chapter 4 Summary ....................................................................................................................................... 137
CHAPTER 5: COST UNITS, COST CENTRES, PROFIT CENTRES AND INVESTMENT CENTRES.................... 138
5a. Concepts of Cost unit, and Cost, Profit and Investment Centres ............................................................................... 139
Topic Review (TLO 5a) ....................................................................................................142

5b. Measuring Performances..................................................................................................................... 144

Chapter 5 Summary ....................................................................................................................................... 164
CHAPTER 6: ACCOUNTING FOR MATERIALS .................................................................................. 165
6a. Types of Materials ................................................................................................................................ 166
6b. Accounting for Materials Costs ........................................................................................................... 170
6c. Materials Requirements....................................................................................................................... 174

6d. Different Methods for Pricing Materials ............................................................................................ 179

Chapter 6 Summary ....................................................................................................................................... 186
CHAPTER 7: ACCOUNTING FOR LABOUR ....................................................................................... 187
7a. The Accounting for Labour Cost .......................................................................................................... 188
7b. Analysis of Gross and Net Earnings ..................................................................................................... 196

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7c. Labour Remuneration Methods .......................................................................................................... 199
7d. Effect of Changes in Remuneration Methods .................................................................................... 208

Chapter 7 Summary ....................................................................................................................................... 211
CHAPTER 8: ACCOUNTING FOR OTHER EXPENSES .......................................................................... 212
8a. Cost Apportionment Process ............................................................................................................... 213
8b. Over / Under-Absorption Costing ....................................................................................................... 222

Chapter 8 Summary ....................................................................................................................................... 226
CHAPTER 9: PROFIT REPORTING .................................................................................................. 227
9a. The Nature and Purpose of Absorption and Marginal Costing......................................................... 228

Chapter 9 Summary ....................................................................................................................................... 251
CHAPTER 10: ACCOUNTING FOR PRODUCT COST........................................................................... 253
10a. Job Costing ............................................................................................................................................ 254
Topic Review (TLO 10a) ..................................................................................................258
10b. Batch Costing ........................................................................................................................................ 260
Topic Review (TLO 10b) ..................................................................................................264

10c. Process Costing ..................................................................................................................................... 266
Normal Loss...................................................................................................................267
Cost per Unit .................................................................................................................267
Process Account – Format ..............................................................................................268
Completed Output .........................................................................................................268
Incomplete Output ........................................................................................................272
Topic Review (TLO 10c) ..................................................................................................280
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Chapter 10 Summary ..................................................................................................................................... 282
CHAPTER 11: SPREADSHEETS ....................................................................................................... 283
11a. Spreadsheet Overview ......................................................................................................................... 284
11b. Creating and Using Spreadsheets ....................................................................................................... 291
11c. Presenting and Printing Spreadsheet Data / Information ................................................................ 311
Chapter 11 Summary ..................................................................................................................................... 333
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CHAPTER 1: THE NATURE OF BUSINESS ORGANIZATION AND ACCOUNTING SYSTEMS Sunway TES
CHAPTER 1: THE NATURE OF BUSINESS ORGANIZATION AND ACCOUNTING SYSTEMS
Learning Outcomes
At the end of the chapter, you should be able to:
TLO A1a. Describe the organisation, and main functions of an office as a centre of information and
administration.
TLO A1b. Describe the function and use of a manual of policies, procedures, and best practices.
TLO A1c. Identify the main types of transactions undertaken by a business and the key personnel
involved in initiating, processing and completing transactions.
TLO A1d. Explain the need for effective control over transactions.
TLO A1e. Explain and illustrate the principles and practices of bookkeeping.
TLO A1f. Describe and illustrate the use of ledgers and prime entry records in both integrated and
interlocking accounting systems.
TLO A1g. Identify the key features, functions and benefits of computerised accounting systems.
Why are these learning outcomes important?
Whether you aim to start your own business or may want to work in the business or accounting sectors,
being able to understand the nature of businesses and make decisions that helps you or your organisation
starts by first comprehending how such systems work.
This chapter has antecedent and precedent components in FA1 corresponding to:
• Types of business transactions (Topic A1a)

• Books of prime entry (Topic B1a - d)
• Double entry system (Topic B2a - d)
• The journal (Topic B3a)
• Prepare ledger accounts (Topic E1a – c)
The corresponding topics in FA2 may provide better understanding to the MA1- Chapter 1 learning
outcomes in the following areas:
• The key accounting principles and characteristics of double entry (Topic A1a (iv))
• The principles and process of basic bookkeeping (Topic B1 a – b) to (Topic B2 a)
• The preparations of journals and ledger accounts (Topic C1a - b) to (Topic C2a – c)
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1a. Organization and Main Functions of an Office

Learning Outcome (ACCA Study Guide Area A, Topic A1a):
Describe the organisation, and main functions of an office as a centre of information and administration.
A Business Organization
An organization is any group of people that tries to do something
together in an organized way. As long as there is more than one
person trying to get something done together, it could count as an
organization.
Not all organisations have the same objectives, for example non- NPOs, Charities, non-
profit organisations (NPO) are established to provide goods and governmental organizations
(NGOs) and private voluntary
services without seeking profits for private gain.
organizations (PVOs) fall under the
A business organization is different from NPOs because its primary same category. Examples include
United Nations Children’s Fund
objective would be to earn profit from its organized activities.
(UNICEF), Doctors Without Borders
and World-Wide Fund for Nature
An Office
(WWF)
An office is not just a room but also defines the arrangement of work
within an organisation such that the activities are allocated among
its personnel. It comprises the formal interrelationship among the
personnel by virtue of their duties and responsibilities. The best
description of an office would be a group of people involved in
administration and processing information. Depending on the size of
the organisation, offices have the same basic components:
Illustration 1a.1: Office Components
Office Components
1) People:
An office must have people.
2) Administration:
The activities involved in running
an organisation.
3) Information Processing:
Making sure that people know
what they need to know.
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Case Study 1a.2: Balloones Limited

Jerry is an employee for Balloones Ltd. His job scope includes event
planning. Here is how his office helps him do his job.
People An office needs people to manage

the processes, regardless of
Balloones' office has people to plan and
whether computers are used.
implement tasks like event management. It
also has other units providing support to
events management.
Computers may be used to

Administration automate some of these functions
The Marketing Manager sends Jerry to a new for more efficiency. Like
customer to follow up on a customer’s enquiry. forwarding the task and location
to Jerry via emails.
Another supporting unit gathers

information of the client’s request
Information Processing
and raise a quotation that can be
The office informs Jerry of the quotations for
also forwarded to Jerry via his
different promotional packages that may suit hand phone.
the client.
Organisational Functions (Departments / Units)

In order to do its job effectively and efficiently, offices are usually Specialization means becoming
organized into functions (also called departments). very good at doing one thing.
A function is a specialized group of people dedicated to performing Examples:

specific tasks for the organization. To understand functions, you will • An Accountant (accounting)
• Lawyer
need to understand the term specialization.
• Professional Trainer
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Most offices share certain common functions, Balloone Ltd is one

such example as shown in Example 1a.3: Organizational Functions.
Example 1a.3: Organizational Functions The Purchasing Department for

Balloone Ltd would buy
• Controls spending to purchase things balloons in bulk, trying to get
Purchasing for the organization, like inventory, or the best price.
a new machine.
Human Resource would
calculate the payroll of
Balloone Ltd, and also inform
• Handles the issues that involve the employees on their available
Human employees working in the
Resource organization. paid leave.
Sales and Marketing would

consider buying advertising to
promote Balloone Ltd, and
Sales and • Focuses on generating sales of the
offer a discount for this
Marketing organization’s goods and services.
season’s wedding balloons.
Administration would inform

• Deals with inquiries to the the CEO of Balloone Ltd that he
Administration
organization, and provides has an appointment at 5pm,
(General) information on projects. and answer a call asking about
birthday packages.
• Creates new ideas and products for R & D created a totally new
Research and sale, or new processes to improve “floating palace” concept the
Development efficiency and effectiveness. Balloone Ltd will offer to
customers next month.
Balloone Ltd.’s in-house

• Produces the goods and services that production function produces
Production the organization sells. custom-made balloons for
customer special requests.
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Organizational Chart
An organizational chart shows in graphical form the formal
relationships between thepersonnel in the organization. Some of the
key characteristics of an organizational chart are illustrated below:
Case Study 1a.5: Organizational Chart

• It shows who is in command (superior – subordinate relationship).
The head of operations is Jennifer,
Louis takes over in her absence.
Ben, John, and Claire are of the same

rank.
• It shows the formal communication structure.

If Ben wanted to increase production on product X, he would to
formally send an email to Louis or Jennifer for permission. If
approved, he would need to inform John of his materials
requirements.
• It indicates specific responsibilities for each individual.
Claire is in charge of Quality, while Ben is

in charge of Production. They need to
coordinate to satisfy the primary
objectives given to them by Jennifer. If a
subordinate has an issue relating to
quality, he should talk to Claire.
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• It shows the positions and the possible career pathway.
If Jennifer is promoted out of the

department, Louis is most likely to
assume her position, while his own
position may be filled by his
subordinates or an individual from
outside the department.
• It shows potential weaknesses in the organization, or capacity

for expansion.
Recently the organization has had big success with product X,
and the production department has been tasked to increased
output. As Ben, John, and Claire are overworked, the
organization may decide to hire deputy supervisors.
• It shows the number of management layers in the

organization.
In this organization, it has 3 management layers.
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Centralization
Centralisation refers to the hierarchical level within an organisation
that has authority to make decisions.
Model 1a.6: Centralized Structure
When decision making is kept at

the top level. Example: When the
Productions Manager is the only
person empowered to approve
decisions, the organisation is
centralised. A centralised
structure has a greater degree of
control.
Model 1a.7: Decentralized Structure
When authority is delegated to

mid-level or lower organisational
levels (example all the supervisors
are given autonomy to make
certain decisions within their own
units), it is decentralised.
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Case Study 1a.7: Jorky Ltd (Centralization and Decentralization)

Jorky Ltd is a restaurant franchise that operates several similar restaurants throughout Country A. It is
considering whether to adopt a centralized or decentralized approach to its operations. Below is an
illustration of a potential centralized and decentralized approach to its purchasing function:
Purchasing
Centralisation Decentralisation
Functions
Budget and strategy are Budget and strategy are created by
Long-term
created by senior management senior management at the head
Budget &
at the head office and office and communicated to the
Strategy communicated to the branches. branches.
Head office will decide what

Head office will decide what qualities of ingredients are
Selecting
qualities of ingredients are required, and will inform branch
Raw
required, and will investigate managers on the minimum
Materials potential suppliers. standard of quality they must use
when selecting suppliers.
Head office will evaluate Branch managers will evaluate

potential suppliers and will theirown potential suppliers and
Selecting
choose the suppliers that will will choose the supplier that best
Suppliers deliver the material to the suits the needs of their particular
branches. branch.
Delivery of Head office will coordinate with Branch managers will coordinate
Raw the supplier which deliveries of their delivery schedules with their
Material material are for which branch. own suppliers.
Quality If a branch manager receives The branch manager may discuss

Control material of unsatisfactory with their supplier or choose a new
quality, he will inform the head supplier if material received is of
office for them to take action. unsatisfactory quality.
Branch managers will use branch

funds to pay the supplier, or
Payment to Head office will pay the request from head office for
Suppliers supplier. funding if they have insufficient
funds. They may also find sources
of alternative funding.
Legend: Head Office Branch Manager
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Model 1a.8: Advantages and Disadvantages of Centralized and Decentralised Structures
Centralized Structure Decentralized Structure

Advantages Disadvantages Advantages Disadvantages
Variations or
Standardization: do Micro-management Reduces burden on inconsistencies in
things the same way reduces initiative from senior management as output may lead to
everywhere. junior staff. tasks are delegated. customer and staff
confusion.
Delays in decision- Experience gained by Comparison between
Specialization is
making as junior staff as they sections is difficult due
encouraged at head
communication takes make operational to different methods or
office level.
time to travel vertically. decisions. standards used.
Head office aware of
happenings at Excessive management Higher motivation for Duplication of
operational level, layers lead to junior staff as they gain resources increases
contribute to better inefficiencies. responsibility. costs.
strategic decisions.
Potentially better and
Economies of scale are Lack of knowledge on Potential conflict
faster customer service
realized, lowering operating environment with strategy due to
due to fast and
costs. leads to bad decisions. lower manager's
effective decisions.
decisions.
Lower operational Cost of mistakes

risks, as decisions are increases due to poor
made by seniors with decisions by lower
more experience. managers.
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Topic Review (TLO 1a)

Describe the organisation, and main functions of an office as a centre of information and administration.
Organizational Functions
1. Which is an EXAMPLE of the word “administration”?

A. Jerry gets a cup of coffee for his boss.
B. Jerry prints out a list of clients for Sandy to meet today.
C. Jerry sells some bubble gum to a client.
D. Jerry develops a machine to produce better bubble gum.
2. Which of the following would be an activity of the sales department?

A. Explaining the features of a product to the customer.
B. Processing bills that are due that month.
C. Hiring new workers.
D. Calculating the benefit of buying a new vehicle for the company.
3. Which of the following would be an activity of the human resource department?

A. Evaluating which material would be best to buy in bulk.
B. Evaluating the strengths and weaknesses of a new location for a branch.
C. Deciding on the number of products to produce today.
D. Evaluating suitable candidates to fill the vacant purchase manager position.
1. What is the purpose of an organizational chart?

A. To demonstrate the filing and coding systems used.
B. To demonstrate formal relationships and communication flows.
C. To map where each department and function is located.
D. To set out production schedules for a period.
2. Which of the following problems would be solved by the organizational chart?

A. Claire is unsure who she is supposed to submit her report to.
B. Claire is unsure how many days of leave she has left.
C. Claire is unsure what her company insurance policy is like.
D. Claire is unsure what the appropriate response to a client’s question is.
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Centralization / Decentralization
1. In which of the following scenarios would a centralized management approach be most feasible?
A. The weather conditions in the country that QQ Ltd operates vary greatly by location.
B. The work that is done by QQ Ltd is easy to standardize.
C. QQ Ltd.’s customers are very diverse with big differences in demands.
D. The workers required to deliver QQ Ltd.’s service to the customer are highly skilled and specialized.
2. Which of the following represents a key characteristic of centralization?

A. XYZ Ltd allows its franchisees to select their own employees.
B. All branches of XYZ Ltd sell the same types of product.
C. XYZ’s branch managers have the power to purchase advertising in their surrounding area.
D. XYZ’s branches have different designs, based on the needs of individual managers.
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Topic Review Answers
Organizational Functions
1. B
2. A
3. D
1. B
2. A
Centralization/ Decentralization
1. B
2. B
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1b. Function and Use of a Manual of Policies, Procedures, and Best Practices
Learning Outcome (ACCA Study Guide Area A, Topic A1b):
Describe the function and use of a manual of policies, procedures, and best practices.
Policies and Procedures

An organization carries out organized activities. In order to organize
something, the following defining processes should be present:
What do you want

to achieve?
How are you
going to do it? Policies and Procedures are
often used to ensure that
Step-by-Step stakeholders follow best
actions to do it. practices for desired behaviour
or results. Such best practices
are usually codified (put into
writing) as procedures.
As H&M is a retailer, it is crucial

that it maintains a good
Case Study 1b.10: H&M reputation.
H&M is one of the world’s most prominent retail One way to do this is to ensure
fashion brands. It runs a network of retail outlets all customers are satisfied with
around the globe. their products and services.
Ensure Customer
Satisfaction H&M flexible sales returns
policy allows customers a 30-
Flexible Sales day return period as long as the
Return Policy item is in “saleable” condition
*30 Days
*Saleable Condition with a valid receipt (even if tags
*Valid Receipt are removed).
H&M’s sales return

procedures, involve sighting
the original receipt, inspecting
the item and its tags, writing a
sales return note, and
processing the funds back to
the customer.
https://www.hm.com/my/customer-service/payments-and-returns
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Class Activity 1b.11

How would the activity of requiring workers in a restaurant wash
their hands fit into an Objective, Policy, and Procedure?
Best practice would include:
• Informing all staff about the procedure.

• Putting up signs about this best practice.
• Provide hand sanitizer units throughout the restaurant.
• Ensure that managers supervising workers caution their workers
on the policy and the procedures.
• Penalize those who do not sanitize their hands.
• Identify high risk areas such as garbage disposal, contact with
meat, etc.
Objectives:
• (Example) Ensure a healthy working environment.
Policy:
Procedure:
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Policy Manual
A policy manual is a document that lists down the policies and
procedures that are to be used by an organization. Usually, the users
of the policy manual are internal.
Example
Internet and Email Policy for Employees of XY Organisation
Voice mail, email, and internet usage assigned to an

employee’s computer or telephone extensions are solely for
the purpose of conducting Company’s business. Some job
responsibilities at the Company require access to the internet
and the use of the software in addition to the Microsoft Office
suite of products.
Only people appropriately authorised, for Company

purposes, may use the internet to access and download
additional software. This authorisation is generally exclusive
to decisions that the IT department makes in conjunction with
the Human Resources Department.
Example: Excerpt from Petronas Anti-Bribery & Corruption (ABC) Manual:
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A Policy Manual has the Following Purposes:
1. To INFORM the staff of the organization on the existence of the All Petronas employees would be
important policies and procedures. aware of the “no gift” rule.
This is to ensure the staff are aware of the policies and
procedures and will act according to them.
2. To provide a RECORD of the policies and procedures of the The Petronas ABC manual would be
organization. a record of the “no gift” rule.
This will help if a particular employee fails to follow procedure:
the company may discipline him based on the content of the
policy manual. Also, any updates to the policies will also be
recorded.
3. To promote BEST PRACTICES among staff.

The manual prescribes the
To encourage adherence among employees, the procedures in
procedures to follow when gifts are
the manual would be the prescribed procedure when dealing offered and the circumstances
with such circumstances. The policy should include the whereby staff should not make
consequences if the rule is violated. direct or indirect reference to third
parties to provide gifts.
4. To assist in TRAINING of employees.

Employees will be trained in the “no
The manual would allow staff to quickly read and learn the gift” rule and its procedures.
organization’s policies.
5. To help SOLVE disputes and problems. In the event of an incident involving

Such as in the case of unclear duties and responsibilities, or gifts, the issue will be resolved by
ethics issues. The policy manual would provide guidance on following the “no gift” rule.
resolving these issues.
6. To inform external stakeholders on company policies, as part External parties are aware of
of PUBLIC RELATIONS. Petronas’ “no gift” rule and will not
offer its employees gifts.
7. To provide GUIDANCE for employees to perform certain tasks.

This is to ensure they follow all the necessary procedures and
documents, and inform the appropriate people, using the
appropriate channel.
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Topic Review (TLO 1b)

Describe the function and use of a manual of policies, procedures, and best practices.
1. Which of the following represents a policy?

A. ABC Ltd aims to achieve market share of 60% in 1 years’ time.
B. Before ABC Ltd can close a sale, the goods must be delivered, and a delivery note completed by
the customer and returned.
C. ABC Ltd will offer limited credit terms to customers with good credit ratings.
D. ABC Ltd will organize a company trip to Paris for all staff this November.
Policy Manuals
1. Which of the following items best presents a record of company policies to interested parties?
A. Accounting department
B. Advertising
C. Policy Manual
D. Organizational chart
2. Which of the following is a disadvantage of policy manuals?

A. Reduces the quality of employee activities.
B. Reduces effective communication between senior management and subordinates.
C. Provides guidelines for best practice and appropriate employee behaviour.
D. Strict interpretation reduces creativity and flexibility.
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1. C
Policy Manual
1. C
2. D
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1c. Main Types of Business Transactions and the Key Personnel

Learning Outcome (ACCA Study Guide Area A, Topic A1c):
Identify the main types of transactions undertaken by a business and the key personnel involved in
initiating, processing and completing transactions.
The Main Transactions Handled by an Entity and the Key Personnel

Entities enter into many different transactions that are unique for
each organization’s needs. We will be focusing on the transactions
that the majority of organizations commonly perform.
• SALES (Transactions)
Overview
The sales cycle recognizes 2 economic movements:
Gain of asset Loss of asset

Payment Sales Inventory
received from supplied to
customer customer
Key Personnel
1. Customer: Entity that is purchasing the goods.
2. Salesperson: Individual providing who will service the
customer and initiate the sale.
3. Stores Department Personnel: Individuals who will process
and deliver the goods ordered by the customer to them.
4. Accounting Personnel: Individuals responsible for
processing the documents, payments, and evaluating credit
terms for the customer.
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Example 1.13: Scorny Ltd.
Scorny Ltd is in the business of

growing and selling plants to retail
nurseries and landscaping firms.
Jessica is a salesperson working for

Scorny. Her duties involve maintaining
a positive relationship with Scorny’s
customers, receiving and processing
orders, and providing customer
service.
When a customer makes a purchase order, Jessica will forward

the appropriate documents to Scorny’s personnel who
processes the orders.
Billy is an inventory executive for Scorny Ltd. His responsibility it

to ship the right plants to Scorny’s customers and ensure they
arrive in good condition and on time, accompanied by a delivery
order.
Elaine is an accountant for Scorny Ltd. Her duties involve

producing invoices for Scorny’s customers, checking to see if
they may be offered credit terms, and processing payments.
Note:
A Credit Controller is a specific individual that manages the
credit terms and background of customers.
When Scorny makes a sale, it will lose assets in the form of

plants (inventory) given to the customer.
Scorny will simultaneously gain assets in the form of payment

from customers for the plants delivered.
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• Purchases
Overview
The purchase cycle recognizes 2 economic movements:
Gain of asset Loss of asset

Inventory Payment
received from Purchases made to
supplier supplier
Key Personnel
1. Stores Personnel: Will make requisitions to purchase
inventories that are running low to the purchases function.
Will also receive the inventories that have been delivered.
2. Purchase function personnel: will make purchase orders to

suppliers to buy the inventory required. Will also make
payments for purchases to the supplier.
3. Supplier: Entity from which supplies are purchased from.
Example 1.14: Poolz Sdn Bhd:
Poolz Ltd. is in the business of

building custom-designed
swimming pools.
Claire Matthew Cement Supplier

Inventory Manager Accountant
Purchase Purchase Order Purchase Order

Document (Negotiate credit (Process order)
term & send to
Receives Delivery supplier)
(Sign & return
supplier copy of
Invoice
invoice, update (Make delivery)
inventory, send Invoice
invoice to (Make payment)
Accountant)
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• Expenses
Overview
Paying expenses involves the following operations:
Receiving Check
Process
the invoice amount
payment
or bill payable
Key Personnel
Usually the task of checking and paying bills will be performed by
the accounts function. Key Personnel include:
Account payable clerk who reviews the vouchers / invoices to

ensure that payments are processed in accordance with the
company.
• Paying Employees
Overview
Paying employees is a complicated process which involves the

following actions:
Calculate the Calculate the

amount for each Calculate amount
employee, deductions, payable to
Pay the
including such as tax the
employee
bonuses, or insurance employee
overtime, etc. (Net Pay)
(Gross Pay)
These processes involve lots of paperwork as employee

activities and pay schemes may be different.
Key Personnel
Usually the task of paying employees falls under the

responsibility of the payroll department, key personnel include:
1. Payroll Manager: manages and reviews the preparations of

all payroll records, reports to ensure compliance with
regulations and company policy.
2. Payroll Administrator: maintains payroll information by
collecting, calculating, and entering data into systems.
Or a payroll clerk in the accounts function if in a smaller entity.
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• Purchasing Non-Current Asset

Overview
A non-current asset is an asset that is used over a long period of

time.
Examples:
Assets like company vehicles, plant equipment or computers
that have been used for more than a year and have depreciated
in value.
The following processing are usually involved:
Evaluate the non-current Authorization of the

asset and fill in a purchase purchase by senior
requisition management
After the purchase, Purchasing function will

accounts function will make evaluate potential
payment and verify all the suppliers, usually with
relevant documents feedback the requestor
Key Personnel
1. Head of Department: submit purchase requests with
proper authorisation.
2. Purchasing Personnel: evaluate suppliers at the best price
and quality. Raises a purchase order.
3. Facilities: bar-codes all non-current assets that are received
and record details in the asset management system.
29
Topic Review (TLO 1c)

Identify the main types of transactions undertaken by a business and the key personnel involved in
initiating, processing and completing transactions.
Transactions
1. Which of the following is the correct accounting equation for the Statement of Financial Position?
A. Assets + Liabilities = Capital
B. Capital + Assets = Liabilities
C. Capital - Assets = Liabilities
D. Capital + Liabilities = Assets
2. Which of the following describes John as gaining an asset?

A. John received $200 from his mom as a gift.
B. John owes Matthew $72 for using his bike.
C. John borrowed his dad’s car to take his friends out on a road trip.
D. John paid Matthew back the $72 that was owed to him.
3. Revenue - expenses = Losses.
Which of the following answers correctly result in this equation?
(There may be more than 1 answer. Select all that apply)
A. Revenue is less than expenses.

B. Revenue is more than expenses.
C. The result is a decrease in net assets (capital).
D. The result is an increase in net assets (capital).
30
Types of Transactions
1. Which of the following would be key personnel in a sales transaction?

A. Payroll clerk
B. Supplier of materials
C. Warehouse personnel
D. Purchase clerk
2. Which of the following is the correct description of a purchase?

A. There will be a loss of capital.
B. Goods will be received from the customer.
C. There will be no change in capital.
D. An obligation to pay will be destroyed.
31
Transactions
1. D
2. A
3. A,C
Types of Transaction
1. C
2. C
32
1d. Effective Control Over Transactions

Learning Outcome (ACCA Study Guide Area A, Topic A1d):
Explain the need for effective control over transactions.
Example 1.13: Control Failure
Barry decided to take some of his

Control Over Transactions
company’s goods for his own use.
Controls are implementations like policies, processes or desired

Ronald took some cash from the
behaviours to facilitate effective operation of transactions,
cash register when his supervisor
including safeguarding the assets (e.g. income) and managing was not looking.
liabilities (e.g. expenditure) of an entity. Controls are implemented
by the controlling entity that makes up of senior management staff
or a committee. This attitude of senior management towards
controls is called the control environment.
Control need to be exercised over transactions to discourage

fraudulent practices and to provide reasonable assurance to
stakeholders. Since transactions involve money, control failure
usually results in the loss of money, or worse, bankruptcy!
In other words, control is something done to manage risk. Risk is the

Example 1.14:
chance that something undesirable will happen.
Ralph is going to bank in a large sum

Another reason why controls have to be implemented in of money from his shops’ weekend
organizations is because of management limitations. In a small sales.
organization (less than 5 people), it may be possible for the manager
(or boss) to personally supervise each employee. However, in a large RISK: He may get robbed.
organization, senior management cannot keep track on all the

CONTROL: Ralph engages the
activities of employees. services of a security company.
To monitor these employees on their tasks and to safeguard the

assets and reduce liabilities, senior management needs to Example 1.15: Control
implement a series of controls to safeguard transactions and Activities
monitor activities.
Barry can only take goods from
One such control could be AUTHORIZATION whereby senior warehouse after receiving an
authorized delivery note.
management are required to approve transactions initiated by
subordinates. This common control maintains EFFECTIVE control Ronald’s supervisor compares the
over INCOME and EXPENDITURE. Some entities require fewer layers closing cash balance to the cash
of authorisation depending on the amount involved. transactions in the register every
day.
33
Topic Review (TLO 1d)

Explain the need for effective control over transactions.
1. Which of the following is a correct description of the control environment?
A. Locks, guards, fences, other physical protection.
B. Management attitude towards effective controls.
C. Good control policies and procedures.
D. Latest in control technology and training.
2. Which one of the following statements are false?

A. Controls are necessary because management has constraints.
B. Authorisation is necessary in every single operation to ensure consistency.
C. Controls are implemented by senior management to strategize activities.
D. Risk management and encryption are forms of control.
34
1. B
2. B
35
1e. Double Entry Bookkeeping

Learning Outcome (ACCA Study Guide Area A, Topic A1e):
Explain and illustrate the principles and practices of bookkeeping.
Double Entry System (Double Entry Bookkeeping)
Bookkeeping is the recording of financial transactions. Double entry

system, also called double entry bookkeeping, is an accounting
system that collects the entire group of similar accounts. Regardless
of whether it is a manual or digital system, the ledger (book of final
entry) records the summarised final information from journals (books
of first entry) as DEBITs and CREDITs.
The basic principle of double entry bookkeeping is that there are

always two entries for every transaction. Every DEBIT (DR) entry that
is recorded must be *matched with a CREDIT (CR) entry. In a transaction, value of debits must
equal value of credits.
Debit vs Credit *Dr Cash $300
*Cr Sale $300
While every debit is an expenditure, every credit is a gain.
A DEBIT will be a transaction whereby amounts are withdrawn from a

company’s balance sheet.
A CREDT results in incoming revenue.
You can have any name according to

the transaction.
This is a ledger account format: They will always be classified
according to the accounting
“Name”
equations.
DR $ CR $
Debits are left

Credits are right
36
Example 1e.16: Sample Ledger Accounts for “ABC Ltd.”

When company ABC Ltd. borrows money from Bank XY to purchase
a car, the transaction is entered into 2 accounts. As the car is
considered an EXPENDITURE, it will be shown in the “Motor
Vehicles” account as a DEBIT.
ABC Ltd.
Motor Vehicles
DR $ CR $
Bank XY 8000
8000
Since the company owes the bank, in the second entry (remember the
double entry requirement) records the borrowings as a CREDIT under
the Bank XY account (gain for the bank).
ABC Ltd.
BANK XY
DR $ CR $
Motor Vehicles 8000
8000
Company ABC uses $2000 of its cash to pay for the first payment, in
the CASH account, it is recorded as balance brought down (bal b/d).
ABC Ltd.
CASH
DR $ CR $ *In a ledger, the total value of debits

must equal the total value of credits.
Bank XY 8000
8000
37
Accounting Equations
Each component of the accounting equation has either a credit or
debit balance.
Balance Sheet equation (Statement of Financial Position):
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (𝐶𝑅) = 𝐴𝑠𝑠𝑒𝑡𝑠 (𝐷𝑅)– 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (𝐶𝑅)
Income Statement equation (Statement of Profit and Loss):
𝑃𝑟𝑜𝑓𝑖𝑡 (𝐶𝑅) = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝐶𝑅) − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝐷𝑅)
Classifying Debits and Credits
Legend:
Increase in ledger balance
Decrease in ledger balance
38
Class Exercise 1.16: ABC Ltd

This will need to be accounted for as
ABC Ltd has a cash balance of $10000 at the beginning of January.
a balance brought down (bal b/d)
Account for the following transactions of ABC Ltd for the month of
January:
There is a recognition of asset (car
1st: ABC Ltd bought a car on credit from XYZ Ltd for $4000. purchased) and liability (owes
money to XYZ Ltd).
5th: ABC Ltd paid XYZ Ltd $1000 on the car purchase.
10th: ABC Ltd paid XYZ Ltd an additional $2000 for the car purchase. There is a loss of asset (cash paid to
XYZ Ltd) and liability reduced (owe
Required: less money to XYZ Ltd).
a) Prepare the journal entries for ABC Ltd of all the above
mentioned transactions.
b) Account for all the above mentioned transactions in the
ledger accounts of ABC Ltd and close them for the month
of January.
Class Exercise 1.16: ABC Ltd (Guided Template)
Journal (ABC Ltd)
Ledger account $ Note
The name of the account which is

1st January: Purchase of car on credit
debited or credit is written in the
journal.
Dr Increase asset
Cr Increase liability
The total $ value of debits and
5th January: Payment of $1000 to XYZ Ltd credits in a double entry must be the
same.
Dr Decrease liability
Cr Decrease asset
10th January: Payment of $2000 to XYZ Ltd
Dr Decrease liability
Cr Decrease asset
39
Motor Vehicles (Asset Account; Dr Balance)
Dr $ Cr $ The name of the corresponding

account which is debited, is
written here on the credit side.
Balance
carried down Balance carried down is the
balance of the ledger which is
carried over to the next period
when the account is closed.
Balance
brought down
XYZ Ltd (Liability Account; Cr Balance)

The name of the corresponding
account which is credited, is
Dr $ Cr $
written here on the debit side.
Bal c/d The total of all transactions on

the debit and credit side must
be equal to each other when
the account is closed.
Bal b/d
Balance brought down is the
amount brought over from the
previous period after closing
the accounts.
Cash (Asset Account; Dr Balance)
It is always on the opposite side
Dr $ Cr $ as balance carried down.
Bal c/d
Bal b/d
40
Class Exercise 1.16: ABC Ltd (Complete Answer)

Journal (ABC Ltd)
Ledger account $ Note
st
1 January: Purchase of car on credit
Dr Motor Vehicles 4000 Increase asset
Cr XYZ Ltd 4000 Increase liability
th
5 January: Payment of $1000 to XYZ Ltd
Dr XYZ Ltd 1000 Decrease liability
Cr Cash 1000 Decrease asset
10th January: Payment of $2000 to XYZ Ltd
Dr XYZ Ltd 2000 Decrease liability
Cr Cash 2000 Decrease asset
Motor Vehicles (Asset Account; Dr Balance)

Dr $ Cr $
XYZ Ltd 4000 Bal c/d 4000
4000 4000
Bal b/d 4000
XYZ Ltd (Liability Account; Cr Balance)

Dr $ Cr $
Cash 1000 Motor Vehicles 4000
Cash 2000
Bal c/d 1000
4000 4000
Bal b/d 1000
Cash (Asset Account; Dr Balance)

Dr $ Cr $
Bal b/d 10000 XYZ Ltd 1000
XYZ Ltd 2000
Bal c/d 7000
10000 10000
Bal b/d 8000
41
Example 1.17: Basic Double Entry:
Sale of Goods on Credit Sale of Goods with Cash
Increase Increase
Dr Receivables Dr Cash
Asset Asset
Increase Increase
Cr Sales Cr Sales
Revenue Revenue
Increase Increase
Dr Cost of Goods Sold Dr Cost of Goods Sold
Expense Expense
Decrease Decrease
Cr Finished Goods Cr Finished Goods
Asset Asset
Purchase of Goods on Credit Purchase of Goods on Cash
Purchases / Increase Purchases / Increase

Dr Dr
Materials Control Asset Materials Control Asset
Increase Decrease
Cr Payables Cr Cash
Liability Asset
Payment Received on Receivables Payment Made on payables

Increase Decrease
Dr Cash Dr Payables
Asset Liability
Decrease Decrease
Cr Receivables Cr Cash Asset
Asset
Payment for Expenses Payment of Wages
Increase Increase
Dr Expenses Dr Wages Expense
Expense Expense
Decrease Decrease
Cr Cash Cr Cash
Asset Asset
42
Topic Review (TLO 1e)

Explain and illustrate the principles and practices of bookkeeping.
Double Entries: Practice Question

ABC Ltd has accounts as follows:
ABC Ltd.
Cash (Balance Sheet, Asset, Dr balance)
DR $ CR $
Balance Brought Down 10000 XYZ Ltd 1000
ABC Ltd.
XYZ Ltd (Balance Sheet, Liability, Cr balance)
DR $ CR $
Cash 1000 Motor Vehicles 4000
ABC Limited has decided to pay an additional $2000 to XYZ Ltd for the car.
What would be the correct Journal Entry for this transaction?
A. Dr XYZ Ltd $2000

Cr Cash $2000
B. Dr Cash $2000
Cr XYZ Ltd $2000
C. Cr Cash $2000
Cr XYZ Ltd $2000
D. Dr Cash $2000
Dr XYZ Ltd $2000
43
1. A
44
1f. Use of Ledgers and Prime Entry Records in Accounting Systems

Learning Outcome (ACCA study Guide Area A, Topic A1f):
Describe and illustrate the use of ledgers and prime entry records in both integrated and interlocking
accounting systems.
Books of Prime Entry and Ledgers Explained

Organizations have books of prime entry (books of first entry) or
journals to record the details of financial transactions.
Books of prime entry or “day books” are the lowest level of

documentation of transactions. The purpose of the books of prime
entry is to record the details of financial transactions so that the
financial information can be categorised and summarised as Credit
and Debit entries in ledgers (books of final entries). The Ledgers will
not be too cluttered by excessive information and make them
suitable for summaries viewing.
Examples of Books of Prime Entry for your Working Knowledge:
Transaction Book of Prime Entry
Sales to customers on
credit Sales Day Book
Purchases of goods on
Purchase Day Book
credit
Return of goods sold on

Sales Returns Day Book
credit
Return of goods bought Purchase Returns Day

on credit Book
All bank and cash

Cash Book
transactions
All small cash

Petty Cash Book
transactions
All other transactions Journal
45
Flow of Transactions to the Financial Statements
Transactions
Receipt
Source Documents
Details retrieved from:

Examples:
• Receipts
• Invoice
• Purchase Orders
• Sales Order
Books of Prime Entry (Journals)
Details will be captured in:

Examples:
• Cash Book
• Petty Cash Book
• Sales Day Book
• Purchases Returns Day Book
Ledgers
TOTALS of Day Books recorded in:

Examples:
• Cash Ledger
• Sales Ledger
• Purchase Ledger
• General Ledger
Trial Balance (Show TOTALS of all Ledgers)
Financial Statements
(Show ADJUSTED Totals from Trial Balance)
Statement of Financial Position
Examples:
• Statement of Financial Position
• Statement of Comprehensive Income
46
Differences between INTEGRATED and INTERLOCKING Accounting Systems

• Integrated Accounting System
In an integrated accounting system, Cost Accounts and Financial
Accounts are combined. So, there will only be one Statement of
Comprehensive Income. Its effects are usually at the beginning
(Purchasing) and end (Sales) of operations.
The system records transactions based on double entry and provides

the information regarding cost of each product, job or operation
from the Cost Account without any distortion to the Financial
Accounting Information.
Integrated systems are advantageous for the following reasons:
• The maintenance of one set of accounts avoids the duplication

of efforts and substantial time and expense is saved.
• Integrated systems expedite information from the accounting
records for financial and costing purposes as costing information
is generated from the books of original entry. There is less delay
in obtaining information.
• It provides all information about the profit or loss of the whole
organization and financial position of the concern and help the
management in better control over the operations.
Such systems are only

advantageous only if
operated in computerised
environment and
mechanized accounting.
With the integration of cost and financial accounts,

centralization of accounting and information is possible
and it saves both time and expense as necessity of
preparation of reconciliation statement does not arise.
47
• Interlocking Accounting System

In an interlocking accounting system, cost accounts and financial
accounts are separate. This separation affects transactions which
have entries in both cost and financial accounts.
The interlocking system has a key feature whereby when a

transaction occurs it affects both the cost and financial accounts in
the following ways:
The reason for this so that financial

and cost information are kept
separate to satisfy the needs of their
users better.
o The double entry will be recorded in the cost control account

and the cost ledger control account (CLCA) on the cost account
side.
o The double entry will be recorded in the financial account and
the financial ledger control account (FLCA) on the financial
account side.
o This means that every transaction will be recorded TWICE.
o At the end of an accounting period, the profit figure in the CLCA
and the FLCA will be reconciled.
48
• Differences between Integrated and Interlocking Accounting Systems

The following example illustrates the differences between the integrated and interlocking system (based
on transactions affected with a journal). Notice in interlocking, each transaction is recorded twice!
INTEGRATED INTERLOCKING
Transaction Combined Account Cost Accounts Financial Accounts
Purchase of Dr Material Control DR Material Control DR FLCA

Material CR Cash or Payables CR CLCA CR Cash or Payables
Payment of DR Wages Control DR Wages Control DR FLCA

Wages CR Cash or Payables CR CLCA CR Cash or Payables
Direct DR FLCA
DR Work in Progress DR Work in Progress
Expenses
CR Cash or Payables CR CLCA CR Cash or Payables
Incurred
Indirect DR Production
DR Production Overhead DR FLCA
Expenses Overhead
CR Cash or Payables CR Cash or Payables
Incurred CR CLCA
Finished Goods DR Cost: Cost of Goods DR Financial: Cost of
DR Cost of Goods Sold
Sold; Cost of Sold Goods Sold
CR Finished Goods
Goods. CR Finished Goods CR Finished Goods
Finished Goods DR Cash or Receivables DR CLCA DR Cash or Receivables
Sold; Sales CR Sales CR Cost: Sales CR Financial: Sales
Interlocking systems allow easier access to cost information, but result in the duplication of accounts. Most
modern, computerized accounting systems use the integrated system.
49
Topic Review (TLO 1f)

Learning Outcome (ACCA study Guide Area A, Topic A1f):
Describe and illustrate the use of ledgers and prime entry records in both integrated and interlocking
accounting systems.
1. What is the main purpose of prime entry records?

A. Calculate the cash received and spend by business.
B. Prevent a large volume of unnecessary detail in ledgers.
C. Provide a monthly check on the double entry book keeping.
D. Separate the taxable & exempt VAT transactions.
2. Which of the following is NOT a book of prime entry?

A. Fixed asset register
B. Journal
C. Sales day book
D. Petty cash book
3. Match the Books of Prime Entry with the appropriate prime entry record.
Prime Entry Record
Name of Customer of a sales transaction on credit
Name of Supplier for purchase of fixed asset
Details of Small amount of cash paid for stationery
Details of Items purchased for sale, on credit terms
Name of Customer that returned a purchase, and the date
Sales to Customer who paid with cash.
Wages of Employees paid via bank transfer
Prime Entry Record. Book of Prime Entry
Sales Day Book
Journal
Petty Cash Book
Purchases Day Book
Sales Return Day Book
Cash Book
Cash Book
50
1. B
2. A
3.
Prime Entry Record. Book of Prime Entry
Name of Customer of a sales transaction on

Sales Day Book
credit
Name of Supplier for purchase of fixed asset Journal
Details of Small amount of cash paid for
Petty Cash Book
stationery
Details of Items purchased for sale, on credit
Purchases Day Book
terms
Name of Customer that returned a
Sales Return Day Book
purchase, and the date
Sales to Customer who paid with cash. Cash Book
Wages of Employees paid via bank transfer Cash Book
51
1g. Computerised Accounting System

Learning Outcome (ACCA Study Guide Area A, Topic A1g):
Identify the key features, functions and benefits of computerised accounting systems.
Key Features of a Computerised Accounting System

Computerized accounting systems follow the same concepts as
manual accounting, but are faster and more accurate.
Example 1.19: Relationship between Files, Records, and Fields:

File:
A collection of records with similar
characteristics.
Record:
A logical set of business
information.
Field:
Specific item of information.
Examples: Name, Credit Limit,
Items purchased
Example 1.20: Computer Data Processing Cycle
Collection:
A process of gathering and
Processing measuring information on targeted
• Sales • Sales report used
transaction is • A monthly sales to forecast variables in an established and
keyed into report is created. future demand. systematic manner.
system.
Processing:
Collection Communication
Changing data into meaningful
information which is presented
within context that gives it meaning.
Communication:
Parties involved not only exchange
Processing information, news, ideas, and
• Data is input • Information is
into system. • Data is changed given to users feelings but also create and share
into meaningful that need it. meaning in reaching mutual
information. understanding
Collection
Communication
52
Types and Functions of Computerised Accounting Systems

Some of the computerised accounting systems commonly used in management accounting:
Name Description Functions & Benefits

Accounting system that records all the
Transaction details of all financial transactions as • Used in operations to record financial
Processing they occur. transactions.
System (TPS) • Used by operators.
Example: The terminal at the counter of • Replaces manual daybooks.
a fast food restaurant.
A database is a collection of
information organized to provide
efficient retrieval. The collected
information can be presented in the • May be accessed by multiple users at
the same time.
Database form of rows and columns and in
• Easy to update.
different formats like text, graphics, • Security restrictions prevent
audio or combinations. unauthorized changes to information.
Example: text database, relational

database, SQL database
Database System that that creates, stores and • Controls flow of information through
and from database.
Management manages database.
• Makes using database easier with
System
reporting and search features.
(DBMS) Examples: Microsoft ACCESS, Oracle
• Prevents unauthorized access with
and MySQL (open sources)
password and username controls.
System that collects information from • Used by all levels of management

Management
other computer systems and provides • Produces reports as requested by
Information
management.
System (MIS) reports that help management make
• Supported by Database and DBMS
decisions. systems.
• Types of Controls
There are 2 basic types of controls that are present in computerized accounting systems. These controls
help to maintain the integrity of the information flowing through these systems.
General controls are controls that operation surrounding the information system. They have nothing to
do with the data going through the applications directly.
• Example: passwords, firewalls, locks on the doors, policies and procedures.
Application controls are controls, usually within the application itself, that help maintain the integrity of
the data entering and exiting the computer system.
• Example: training for staff using the system, checklists, arithmetic controls, fixed information
forms.
53
Batch processing
Batch processing collects all the transactions over a period of time
• Clearing Credit Card Transactions
and organise such data into batches for processing. Transaction
each day
files are created to store the data temporarily before updating the • Generation of Bills or Invoices
master file at scheduled periods. • Daily Cheque Clearing
Example 1.21: Batch Processing Flow Chart Advantages:

• Easier to correct errors.
• Many transactions can be completed
at one time in a single process.
Transactions Transaction
File created
Disadvantages:
collected
and Master File • Master File may be temporarily out
updated at of date.
organised
into Batches Transaction scheduled • Data takes time to be processed.
File stored periods
A Master File is final record of all the
transactions to date. It is periodically
updated from the batch transaction
files.
Real Time Processing

Real-time processing updates the master file immediately when a
transaction occurs. However, such updating can only be processed
• Automated Teller Machines (ATM)
if the system’s network connection (usually online) is functioning.
• Reservation Systems (Online
Ticketing)
Example 1.22: Real-Time Processing Flow Chart
• Point of Sales terminals (POS)
Online databased
Advantages:
updating
• Automated, fast and up-to-date.
Master File
Transaction event • Users have the latest information.
updated
occurring
immediately Disadvantage
• Errors difficult to correct in Master
File.
• Suitable only for repetitive tasks,
unable to accommodate special cases.
54
Topic Review (TLO 1g)

Identify the key features, functions and benefits of computerised accounting systems.
1. In real-time processing, the master file is updated at the end of a period of time.
A. True
B. False
2. Match the data object with the correct classification.
Field
File
Record
Data Object Classification

Name of customer
Date of a sales transaction by a customer
List of customers
Document recording all the details of a

purchase that a customer made
List of products for sale
Number of units available in warehouse of a

product for sale
ID number of a product for sale
All the details of a single product for sale
55
1. B
2.
Data Object Classification

Name of customer Field
Date of a sales transaction by a customer Field
List of customers File
Document recording all the details of a

Record
purchase that a customer made
List of products for sale File
Number of units available in warehouse of a

Field
product for sale
ID number of a product for sale Field
All the details of a single product for sale Record
56
Chapter 1 Summary
1. An organisation is a group of people that tries to do something together in an organized way.
2. A function is a specialized group of people dedicated to performing specific task for the organization.
3. An organization chart shows in graphical form the formal relationships between the personnel in the
organization.
4. Centralization is a form of management approach where decision making capability is retained by

senior management while decentralization decision making capability is delegated to lower
management.
5. Policies and procedures are used to ensure that stakeholders follow best practices for desired
behaviour or results. A policy manual lists down the policies and procedures that are to be used by an
organisation.
6. Double entry bookkeeping is an accounting system that collects the entire group of similar accounts.
7. There are two accounting systems, namely integrated and interlocking accounting systems.
57
CHAPTER 2: MANAGEMENT INFORMATION Sunway TES
CHAPTER 2: MANAGEMENT INFORMATION
Learning Outcomes
TLO A2a. State the purpose of management information.
TLO A2b. Compare cost and management accounting with external financial reporting.
TLO A2c. Distinguish between data and information.
TLO A2d. Describe the features of useful management information.
TLO A2e. Describe and identify sources and categories of information.
TLO A2f. Explain the limitations of cost and management accounting information.
TLO A2g. Describe the role of a trainee accountant in a Cost and Management Accounting System.
The ability to manage information that flows through the accounting systems puts you in the
knowledgeable position whether as a trainee manager or managing your own business. Also understanding
the limitations that you or your staff can manage cost and management accounting information helps you
to identify the challenges in such roles.
This chapter has precedent components in MA2 corresponding to:
• Purposes of management information (Topic A1a)

• Features of useful management information (Topic A1b)
• Nature, source and importance of both financial and non-financial information (Topic A1c)
• Effects of management responsibilities on management information (Topic A1d)
• Role of information technology on management information (Topic A1e)
• Role of trainee accountant in management information
58
2a. The Purpose of Management Information

State the purpose of management information.
The purpose of management information is to provide a

comprehensive overview of management’s activities to enable
management to perform tasks efficiently and productively including
decision-making and performing in-depth analysis.
Key Management Tasks
Management usually involves the

control of resources in order to
accomplish an objective.
Example 2.1
The following graphic illustrates the management tasks that Lucy will
need to do for her bakery. What management information would
she need?
Lucy would need to know how

many cakes would be made
tomorrow, or how much of each
ingredient goes into a cake.
Lucy would need to know the

measurements of ingredients and
steps of the recipe, and make sure
her employees are following those
measurements and steps.
Lucy would need to how whether

her customers would prefer
chocolate or vanilla, and whether
the ingredients are available.
59

State the purpose of management information.
1. The management accountant compares the profitability of 2 products, P and Q and concludes that P is
the best product to make. He writes a report of his findings for Board of Directors.
This report will primarily aid management in:
A. Decision making
B. Planning
C. Controlling
D. Implementing
2. The basic purpose of an accounting system is to:

A. Develop financial statements in conformity with generally accepted accounting principles.
B. Provide as much useful information to decision makers as possible, regardless of cost.
C. Record changes in the financial position of an organization by applying the concepts of double
entry accounting.
D. Meet an organization’s need for accounting information as efficiently as possible.
3. Cost accounting information can be used for:

(There may be more than one answer)
A. Budgetary control and evaluation
B. Inventory valuation
C. Pricing and cost control
D. Setting of selling prices
60
1. A
2. D
3. A,B,C,D
61
2b. Comparison between Financial and Management Accounting

Compare cost and management accounting with external financial reporting.
Financial Accounting (FA) and Management Accounting (MA)

Financial accounting focuses on the financial statements which are distributed externally, whilst
management accounting focuses on providing information to internal users (staff) so that its management
can operate the company more effectively. The primary difference between financial and management
accounting information, is in WHO uses the information.
Differences in Financial and Management Accounting

Financial Management
Explanation Explanation
Accounting Accounting
Financial statements aim to Reflects on the

Helps MA data and information are
report the “true and fair view” of organisation’s
management aimed at running the organisation,
the organisation’s most recent financial
activities for management purposes.
financial performance. performance
The primary users are: These data are relatively

• investors (shareholders) Prepared primarily Prepared solely for classified, and are not accessible
• government for external use internal use to people outside the
• trade partners organisation.
Mandatory:
• financial statements at the
The necessary documents may be
end of the financial (fiscal) Specific reporting
Reported as and prepared according to a specific
year time
when necessary timeline, or whenever required to
• tax reporting ("reporting period") serve daily operations.
• Statements need to be
audited before being finalised
Although there is no legal

Failure to adhere will result in
Not required by requirement for MA documents,
heavy fines and penalties by Required by law
law organisations still require them
government.
for effective management.
International standards
governing the format of these Document formats greatly
statements. Standardized
House style depend on user requirement and
(Will be elaborated in FA format also the content being presented.
subjects.)
Running an organisation requires

Only requires past data and Only historical Historical, future effective management of all
information for purposes of data and and current data available resources to generate
presenting final performance. information and information historical reports and also
forecasts.
62
Differences in Financial and Management Accounting (Continued)

Financial Management
Explanation Explanation
Accounting Accounting
Only type of data and Both financial and Data to be collected ranged from
Only financial data
information required would be non-financial data operational to financial
monetary ones. and information information.
and information
Final documents generated are

The level of detail required in the
primarily SOPL, SOFP and Cash Information may MA reports depend on many
flow statement. These contains Information is
be detailed or factors, primarily the purpose of
summary of all the data collected usually summarized
summarized the report, the requestor and/or
throughout the entire
the user.
accounting period.
63

Compare cost and management accounting with external financial reporting.
1. All of the following are characteristics of managerial accounting, EXCEPT:

A. Reports are used primarily by insiders rather than by persons outside of the business entity.
B. Its purpose is to assist managers in planning and controlling business operations.
C. Information must be developed in conformity with generally accepted accounting principles or
with income tax regulations.
D. Information may be tailored to assist in specific managerial decisions.
2. Although accounting information is used by a wide variety of external parties, financial reporting is
primarily directed toward the information needs of:
A. Investors and creditors
B. Government agencies such as the Internal Revenue Department
C. Customers
D. Trade associations and labour unions
3. Financial statements are prepared:

A. Only by publicly owned business organizations.
B. By companies, but not by sole proprietorships or partnerships.
C. Primarily for the benefit of persons outside of the business organization.
D. In either monetary or non-monetary terms, depending upon the need of the decision maker.
4. In comparison with a financial statement prepared in conformity with generally accepted accounting
principles, a managerial accounting report is more likely to:
A. Be used by decision makers outside of the business organization.
B. Focus upon the operation results of the most recently completed accounting period.
C. View the entire organization as the reporting entity.
D. Be tailored to the specific needs of an individual decision maker.
64
1. C
2. A
3. C
4. D
65
2c. Data and Information

Distinguish between data and information.
Data and Information
Data refers to raw facts, figures, events and transactions which

need processing before being used in decision making. Generally,
they are presented as codes until some form of sorting, analysis or
summarising is done. They are not exactly understandable and
meaningful enough for management purposes.
Common examples include invoice numbers, sales figures and order
volumes.
Information refers to processed data, which are more meaningful

and are presented in meaningful forms or media to make the
necessary decisions.
Examples include: graphs and charts depicting sales figures and
trends over a period of time, and reports generated based on a
selected data set.
Information can, however, be processed further to produce finer
results to facilitate decision making needs.
Data Information
Information is meaningful if the
• Raw facts, figures • Data which has bn user is able to use it effectively
and observations processed and made when taking action or making a
"meaningful"
decision.
Example 2.2
Below is an example obtained by from a soup manufacturing
company:
Data Information
• Total litres of • Average $ per Information is often formed

soup produced litre of soup through the relationship of one
• Total $ spent on produced . data object with another.
ingredients
66
Management Information
Management information refers to processed data which are
meaningful and understandable enough to be used for planning,
controlling and making decisions, without which management
activities cannot proceed.
Data Processing Cycle (DPC)

The DPC is a continuous process of converting or transforming
data into more meaningful forms, until the processed data is
refined to an appropriate form for decision makings.
DATA process INFORMATION
Further
refinement
Garbage-In-Garbage-Out (GIGO)
The underlying concept of GIGO is that the quality of output greatly
depends on the quality of input supplied. If the input were of
inferior quality or inaccurate, the output will be similarly presented.
This simply means for effective output, the quality, accuracy and
right input is crucial.
INPUT process OUTPUT
It must be duly noted that the process has to be efficient too. This
means that input goes through the correct method or channel of
conversion in order to produce the needed output.
67

Distinguish between data and information.
1. Which of the following statements is TRUE?

A. Information consists of raw facts that have not been processed.
B. Data consists of information.
C. Data consists of processed information.
D. Information consists of data which has been processed in a predefined way.
2. Data consists of processed information.

A. True
B. False
3. Information consists of data which has been processed in a predefined way.

A. True
B. False
4. Information consists of raw facts that have not been processed.

A. True
B. False
5. Information consists of data.

A. True
B. False
68
1. D
2. B
3. A
4. B
5. B
69
2d. Features of Useful Management Information

Describe the features of useful management information.
Features of Useful Management Data and Information
It is critical that management data and information have value to

their users. They need to be useful enough to satisfy their users’
needs. Otherwise, the entire process of generating these data and
information would be a wasted effort.
The following are the key features or qualities of good data and information:
FEATURES EXPLANATION
It had been clearly established that data and information need to
Sufficiently be correct at all times. However, they just need to be accurate
Accurate enough. Too much detail may cloud the intended meaning of the
information and therefore defeats the purpose of producing it.
Only when data and information are correct AND come from
reliable sources, they can be depended upon to make sound
Reliable decisions. Management accounting depends a lot on estimations
and forecasts which aggressively demand reliable information.
Informed decisions exist only when the data set is complete. For
Complete example, a financial year’s statements cannot be produced even if
one business day’s data were missing!
The data and information concerned with the management

activity must be relevant or necessary to the objective of the
Relevant activity. Irrelevant data would only cloud the clarity of the entire
situation and cause unnecessary delays in actions.
Information can only have value to the users when they can be
clearly understood. The information generated and reported must
Understandable use an appropriate channel (or a good combination of channels) to
ensure that they reach the target users with the correct meaning.
Timely / Late information cannot fulfil the management needs in time, and
Regular therefore cannot be used for informed decisions appropriately.
The benefit derived from the information should always be more

Cost-efficient than the cost of generating them-data collection and processing.
It is critical that information should never fall into the wrong

Communication hands and communicated only to the right people as that can
defeat the entire goal of the organisation.
70

Describe the features of useful management information.
1. Information is cost effective when:

A. The information aids management in controlling costs.
B. The information is based upon historical costs, rather than upon estimated market values.
C. The value of the information exceeds the cost of producing it.
D. The information is generated by a computer-based accounting system.
2. Which one of the following is true with regard to management information?

A. It consists of only non-financial information.
B. It should be produced by a computer.
C. It should be completely accurate, regardless of cost.
D. It should be produced if its cost is less than the increased revenue it leads to.
71
1. C
2. D
72
2e. Sources and Categories of Information

Describe and identify sources and categories of information.
Sources of Information
Sources of important management information may be internal or
external.
Internal sources refer locations of data collection from within the

organisation, such as the management information system (MIS),
the accounting system, departments and employee recordings.
External sources refer to locations outside the organisation, such as

government, trade partners (customers and suppliers),
shareholders, news channels and even the Internet.
Categories of Data and Information

Data and information can be broadly categorised according to point
of generation, where it comes from, organisational setting and
frequency of reporting.
The following table provides more explanation:

Data Category Explanation Example
Data obtained directly from the source or point Data gathered on the
of generation. Such data can be gathered via production floor,
Primary questionnaires (survey), interviews or weekly sales figures,
conversations, observations and individual and number of
recordings or logs. employees.
Data not obtained directly from the users or
Point of sources. In many cases, organisations obtain
generation them from intermediaries.
An intermediary is an entity that has already
Newspapers,
collected the primary information. Most
Secondary magazines, journals
companies do not have the resources to get
or the Internet.
primary data, so they rely a lot on
intermediaries. However, intermediaries need
to be checked on the trustworthiness and
reliability of the information supplied.
Products’ selling
These data come from within the organisation, prices, production
Internal
and are communicated internally. volumes, and defect
Where the
rates.
information
comes from The data comes from outside the organisation, New law, accounting
External such as government, industrial associations and standards, and tax
the general environment. rates.
73
Data Category Explanation Example
Practice and
Such data come from formal settings like
procedures in an
Formal meetings, and formal documentations. They are
operation, and HR
stated in policies and organisation procedures.
benefits to staff.
Organisational
setting Common going-home
Common channel is via grapevine (rumours).
time, unacceptable
Informal data can come from casual
Informal practices to
conversations and exchange of ideas outside a
managers, and
formal setting.
rumours.
These are data which are collected on a routine

Daily production
basis, without being told or reminded to do so.
Routine volumes, and weekly
These may be common MA reports which are
sales figures.
very much relevant to running daily operations.
Frequency of
reporting Data gathered to
The need for such data arises when there is a one-off analyse the viability
Non-routine or an extra-ordinary request for a specific type of of starting up a new
information or decision or action. sales outlet in a new
residential area.
74

Describe and identify sources and categories of information.
1. Which one of the following is an EXAMPLE of internal information for the wages department of a
large company?
A. A Code of Practice issued by the Institute of Directors.
B. A new national minimum wage.
C. Changes to tax coding arrangements issued by Inland Revenue Board.
D. The company’s employees’ schedule of hours worked.
2. Data and information collected in a regular meeting with the manager can primarily be considered as:
A. Informal.
B. Formal.
C. Financial.
D. Ad hoc.
75
1. D
2. B
76
2f. The Limitations of Cost and Management Accounting Information

Learning Outcome (ACCA Study Guide Area A, Topic A2f):
Explain the limitations of cost and management accounting information.
Limitations of Cost and Management Accounting Information

Limitations Consequences of the Limitations
Constantly changing prices of resources. Difficult to produce standard estimate.
Management information has to satisfy many Information presented differently may not be
different needs and purposes. useful for comparison and decision making.
To maintain an effective cost accounting system,

resources and manpower are required. The
Costs may exceed benefits.
expenses to analyse in ascertaining the costs may
be more than the profit derived.
Management information are often based on

No guarantee of right decision.
forecasts or estimates.
Management information is often highly technical

Not understood by non-accountants.
and may contain coding for specific departments.
The data may be generated by systems or Information may be subjected to different

personnel that can be presented in different interpretation and would require experienced
formats. judgement for effective interpretations.
Different industries have different needs. Lack of Leads to requirement of more complex and
uniform procedures as the concepts and methods complicated system and more resources to
are applied differently by different industries. maintain it.
Many industries can function and control costs

effectively with just financial accounting. Preparing
Duplication of work.
cost accounting would be duplication of accounting
work.
77

Learning Outcome (ACCA Study Guide Area A, Topic A2f):
Explain the limitations of cost and management accounting information.
1. The main limitation of cost accounting is that:

A. Prices of resources constantly change and that cannot be ignored.
B. International standards cannot be applied easily in every situation.
C. Historical data are not encouraged to be applied in forecasting.
D. The extensive coding does not help in ease of understanding of the information being
delivered.
2. Which statement is true with regard to limitations of management accounting?

A. Benefits must exceed the costs to overcome the limitation.
B. Changing prices of raw materials is an unavoidable limitation.
C. To minimize the effect of limitations, it is best to generate data and information using
automated systems.
D. The main reason for the limitations is that management accounting uses data from all time
periods – past, present and future.
78
1. A
2. B
79
2g. The Role of the Trainee Accountant

Describe the role of a trainee accountant in a Cost and Management Accounting System.
The primary role of the trainee accountant would be to process data

and report relevant information to users that need that information.
This means that trainee accountants prepare lots of reports!

Trainee accountants do not have
However, they do not make decisions for the organization.
the authority to make decisions.
Tasks Performed by a Trainee Accountant
Management Information Requests
• Trainee accountant task
What is the current month's sales?
• Prepare sales report.
What is the cost of current month sales?
• Prepare cost of goods sold report. Exam note: questions on this topic
often ask whether a particular task is
supposed to be done by a trainee
What is the value of closing inventory?
accountant.
• Calculates value and prepares inventory summary
What is the gross margin of this product?

• Calculates gross margin of the product and prepares
report.
How many units do we need to sell?
• Prepares cost-volume-profit report.
How good are our salespeople?
• Prepares report showing sales units per salesperson.
80
Topic Review (TLO 2g)

Describe the role of a trainee accountant in a Cost and Management Accounting System.
1. One of the fundamental roles of a trainee management accountant is:

A. To prepare year-end financial statements.
B. To value inventory according the international accounting standards.
C. To reconcile management and financial accounts.
D. To assist in profitability assessment of a product line.
2. Inventory valuation is a primary task of a trainee:

A. Management accountant.
B. Financial accountant.
C. Both financial and management accountants.
D. Neither financial and management accountants.
81
1. D
2. C
82
Chapter 2 Summary
1. Management information enables management to plan, control and make decisions more effectively
and efficiently.
2. Financial accounting focuses on the financial statements which are distributed externally, whilst
management accounting focuses on providing information to internal users so that its management
can operate the company more effectively.
3. Data refers to raw facts, figures, events and transactions while information refers to processed data.
4. Key features of good data and information:

a. Sufficiently accurate
b. Timely/regular
c. Complete
d. Cost-efficient
e. Communicated to right people
f. Relevant
g. Reliable
h. Understandable/clear
5. Information could also be obtained from internal and external sources but there will always be
limitations to management information.
83
CHAPTER 3: SOURCE DOCUMENTS AND CODING Sunway TES
CHAPTER 3: SOURCE DOCUMENTS AND CODING
Learning Outcomes
TLO B1a. Describe the material control cycle (including the concept and calculation of “free” inventory,
but excluding control levels and EOQ) and the documentation necessary to order, receive,
store and issue materials.
TLO B1b. Describe the procedures and documentation to ensure the correct authorisation, analysis
and recording of direct and indirect material costs.
TLO B1c. Describe the procedures and documentation to ensure the correct authorisation, coding,
analysis and recording of direct and indirect labour and expenses.
TLO B1d. Describe the procedures and documentation to ensure the correct analysis and recording of
sales.
TLO B2a Explain and illustrate the use of codes in categorising and processing transactions.
TLO B2b. Explain and illustrate different methods of coding data (including sequential, hierarchical,
block, faceted and mnemonic).
TLO B2c. Identify and correct errors in coding of revenue and expenses.
The ability to talk in the same Lingo or Jargon as qualified accountants enables aspiring accounting
technicians or new business owners to communicate correctly by using universally common codes and the
processes. This ability also makes fresh graduates easier to train and quickly inducted into established
organisations.
This chapter on the different types of coding and their sources introduces learners to not only how such
codes are used in transactions but also includes ways to identify and correct errors in common transactions.
This chapter prepares students for precedent components in MA2 corresponding to:
• Document required for different cost accounting transactions (Topic A2c)

• Use of codes in categorising and processing transactions (Topic A2d)
84
3a. The Materials Control Cycle and Documentations

Learning Outcome (ACCA Study Guide Area A, Topic B1a):
(TLO B1a) Describe the material control cycle (including the concept and calculation of “free” inventory,
but excluding control levels and EOQ) and the documentation necessary to order, receive,
store and issue materials.
(TLO B1b) Describe the process and documentation to ensure the correct authorisation, analysis and
recording of direct and indirect materials costs.
Classification of Materials
Materials are all the physical resources are purchased and used to produce products and services.
Basically, they are classified into 2 types:

Direct Materials
Direct materials refer to all materials involved in production, which are easily traceable to the end product.
The cost of these material can be easily calculated. Common examples include the raw materials used in
production, such as wood for furniture and ingredients for food products.
Indirect Materials
Indirect materials refer to other materials directly related to production for which their costs cannot be
easily determined. Common examples include supporting materials such as nails, screws, glue and even
lubricant for machinery.
*Full explanations on direct and indirect materials are available in Chapter 4 (ACCA Area C, 1a)
Materials Control Cycle

The materials control cycle is the process by which materials are purchased, stored, and issued.
Such processes are required to reduce in-process inventories. Proper planning of storage and control
contributes to efficiency especially in manufacturing.
85
Documents Required to Order, Receive, Store and Issue Materials
Document Description Function

A document sent by the stores keeper to the
Purchase Requisition purchasing department to request the purchase Order Materials
of listed items.
The Purchase Order is a commitment from the
buyer to the supplier. This document establishes
Purchase Order Order Materials
a contractual relationship between buyer and
seller.
A seller-generated document that authorizes Ordered Materials (from
Sales Order sale of the specified item(s), issued after receipt
of a customer's purchase order. Seller)
A document to advise a buyer in advance of the
Advice Note/Despatch despatch of goods of delivery details such as the
Advice despatch of Materials
Note quantity despatched, despatch date and
transportation method.
A document accompanying goods for delivery. It
Delivery Note Delivery of Materials
acts as proof of delivery.
A document prepared by the stores keeper to
Goods Received Note Store Materials
record receipt of goods.
A document sent by the seller to the buyer to
notify the buyer that his account is being Return of Materials (to
Credit Note
reduced due to returned goods, cancellation or Buyer)
allowance.
A document sent by buyer to seller to inform the
seller that the invoice amount is being reduced
Debit Note Return of Materials (to Seller)
due to returned goods, cancellation or
allowance.
A bill sent by supplier with a description of
Invoice quantity of goods, price and value, and terms of Request Payment
payment.
An invoice sent by seller to purchaser requesting
Pro-forma Invoice Request Advance Payment
payments in advance of delivery of goods.
Material Requisition A document which requests and authorises issue
Issue Materials
Note of materials from stores.
A document recording return of unused material
Materials Returned Note Return of Materials to Stores
to stores.
A document recording quantity of materials
Bin Card Records of Materials
received and issued from warehouse only.
Note: Key features of such documents are illustrated in the following samples:
86
Samples of Materials Documentation

• Purchase Requisition
Serial
number and
Units to date of
be requisition.
purchased
Item ID
number
Requesting
department Approving
officer’s
signature
87
• Purchase Order
Serial Number
Address to
deliver goods
to.
Supplier
address &
Address to
details
send invoice to
Item ID Item quantities

numbers
Item prices
Item
description Purchase price
Authorized
officer’s
signature
88
• Invoice (from supplier to customer)
Serial
number
Terms of
payment
Unit price
Item ID
numbers
Item
description
89
• Bin Card
Closing daily
balance
Units
received Units issued
• Goods Received Note
Purchase
order for
Supplier
goods
name
received
Receiving
Quantity personnel
of item
Item
description
Item ID
number
90
• Materials Requisition
Serial number
Job or batch
number
Item description
Item quantity
Authorized
requisition
officer
91
Procedures and Documentation (Direct and Indirect Materials Costs)

Accounting procedures for material purchase and use involve forms and records necessary for general
ledger financial accounting as well as those necessary for costing a job, process or department, and for
maintaining perpetual inventories. Below are general descriptions of the basic procedures and
documentation:
Document(s) Procedures
Performed By:
Used
Purchase Purchases should be initiated only by appropriate supervisory
Requisitioner
Requisition personnel, in accord with budgets. Prepare Purchase Requisition
Review the requisition for compliance with approval requirements,
accuracy and completeness. Obtain the approximate price of items or
Purchase services desired by reviewing past purchases, consulting catalogues,
Purchasing
Order reviewing requirements with prospective vendors. Should be
undertaken by trained purchasing personnel who know how to
negotiate the best terms. Issue Purchase Order
Forward a copy of the purchase order to (1) the requisitioner, (2) the
Purchase
Purchasing Budget Office, (3) Receiving and Stores, (4) Accounts Payable, and the
Order
(5) the Department Manager.
Immediately review the purchase order once issued, checking it
Purchase against the retained copy of the requisition, ensuring accuracy of
Requisitioner detail, consistency with expected impact on the departmental budget,
Order
and all other relevant information. Contact the Purchasing Department
immediately if cancellation or modification is required.
• Purchase
Inspects and matches the goods to an open purchase order. The
Order
receiving department prepares a goods received note, indicating
• Goods Receiving and
that goods have been received in good order. Storekeeper checks that
Received Stores
each item has the correct stock code before updating the stock
Note
system.
• Bin Card
Goods
Requisitioner Upon receiving supplies, sign the appropriate receiving documents,
Received
authorizing payment through the Accounts Payable Department.
Note
Accounts payable checks invoices against purchase order, goods
Accounts
Invoice received note and delivery order to ensure they are properly authorized
Department and checked before payment.
Raises materials requisition note (MRN) to Stores department
Materials Production requesting stocks for production. The form requires the correct job
Requisition
Department number, task code/description and item description to be filled out and
Note (MRN)
properly authorized before stocks can be issued.
Materials Issues materials and fills out the correct inventory code in the MRN.
Stores
Requisition Inventory records are updated and a copy is sent to accounts
Note (MRN) Department department.
The MRN is used to update job cards and/or cost ledgers based on task
Materials
Accounts code/description.
Requisition
Department Direct materials are charged to work in progress control accounts and
Note (MRN)
indirect materials to production overhead accounts.
92
Recording Material Costs

Generally, the data for these costs come from the range of the material-related documents already
mentioned in the earlier pages, namely material requisition note, bin card and stores ledger. It would be
the cost accounting function to select the necessary data or numbers to process and classify as direct and
indirect.
The relevant cost accounts are as follows:
Materials (or Stores) control account – represents the Stores department which manages ONLY materials
Work in Progress (or Process) (WIP) account – records all direct material costs (and other direct costs)
Production overhead control (POHC) account – records all indirect material costs (and other indirect costs)
The appropriate transactions for materials’ movements are as follows:
• When materials are purchased:
Debit Materials Control a/c xx

(Credit the necessary financial accounts)
• When (direct and indirect) materials are issued to Production:
$ $
Credit Materials Control a/c xxx

Debit WIP a/c xxx
Debit POHC a/c xxx
• When there are returns to the Stores from Production:
$ $
Debit Materials Control a/c xxx

Credit WIP a/c xxx
Credit POHC a/c xxx
93

Learning Outcome (ACCA Study Guide Area B, Topic B1a, b):
Describe the procedures and documentation to ensure the correct authorisation, analysis and recording of
direct and indirect material costs.
1. Accounts department has received an invoice from supplier. Which documents will you need to
check the details of the invoice to?
A. Delivery note & purchase requisition

B. Advice note & dispatch note
C. Purchase order & GRN
D. Purchase requisition and GRN
2. The following documents are used in the process of purchasing and using raw materials:
1) Despatch note
2) Goods received note
3) Materials requisition
4) Purchase order
5) Purchase requisition
Which of the documents would be used to update the stores ledger accounts?
A. 2 only
B. 2 and 3
C. 1, 2, 4 and 5
D. 1, 3, 4 and 5
3. The will be used to record the receipt of materials from stores by a production cost
centre, ready for use in production.
A. Bin Card
B. Material Requisition
4. Which member of staff is most likely to raise a GRN?
A. Store clerk
B. Delivery driver
C. Sales ledger clerk
D. Finance director
94
5. Which of the following documents would best supply the necessary financial details when charging
direct material costs to cost units?
A. Material requisition
B. Goods received note
C. Purchase order
D. Purchase requisition
6. The main purpose a letter of enquiry is prepared and submitted to the supplier, is to:
A. Get as much discounts possible.

B. Obtain as much information as possible about an input material.
C. Secure relevant details about input material, namely quality, trade discounts and delivery
arrangements.
D. Prepare the purchase order.
7. Which of the following documents is not prepared by the production manager?
A. Material requisition
B. Goods received note
C. Purchase requisition
D. Purchase order
95
1. C
2. B
3. A
4. A
5. A
6. C
7. B, D
96
3b. Direct and Indirect Labour and Expenses: Procedures and Documentation
Learning Outcome (ACCA Study Guide Area B, Topic A1c):
Describe the procedures and documentation to ensure the correct authorisation, coding, analysis and
recording of direct and indirect labour and expenses.
Labour Costs
Labour costs comprises of the following:
• Salaries
Salaries are usually fixed payments to staff that are paid
monthly or fortnightly. The amount is not affected by the
level of output / amount of hours worked.
• Wages
Wages take the form of weekly or hourly pay to usually
production or part-time workers based on either the
number of hours worked/level of output.
• Bonuses
• Overtime allowance
• Fringe Benefits
Documents to Record Labour Costs

(a) Payroll is the financial record of employees' salaries, wages,
bonuses, net pay and deductions.
(b) Pay slips are records showing the calculation of each worker’s
pay.
(c) Clock cards are records showing employees’ arrival and
departure times every day. They do not contain descriptions of
work done by employees.
(d) Time sheets are a weekly/daily record of time spent on
particular activities/jobs. They are used to calculate the cost of
a particular job and for calculating pay.
(e) Job cards / Job sheets / Job tickets are records of time spent
(including idle time) by employees on particular
jobs. The data from these records are used for job costing
purposes.
97
Examples of Documents Used to Record Labour Costs:
• Piecework Ticket
The piecework ticket should be retained by employee as proof of work done.
Piecework tracking
attached to lot
(production batch), to
track work-in-
progress.
Lot number and other

details like size,
description, number
of units in lot.
• Clock Card / Time Card and Mechanical Time Clocks/ Punch Card System
Arrival and
departure times
recorded.
• Time Ticket / Job Card
98
• Timesheet (Weekly)
Working times
recorded.
Authorizing
officer’s signature.
• Timesheet (Daily)
Unique jobs and

clients are
identified.
99
Procedures and Documentation (Direct and Indirect Labour Costs)

• Direct Labour Costs
Example for those employees
Direct Labour Costs are labour charges that can be easily traced
directly involved in the
to a particular job. The basis for charging the cost is the number manufacturing process, (assembly
of hours of labour actually used in the production process. line or operating machinery).
• Indirect Labour Costs Example the mechanic repairing

Indirect labour costs are the overhead of a business that is assembly line machinery, for
needed to support any level of operations Indirect labour instance, is indirect labour and a
manufacturing overhead cost.
charges that cannot be traced directly to any job.
Procedures and Documentation

Documentation
Procedures Type of Labour Costs
(Using Systems)
Worker:
Workers are required to record their starting and
ending time spent on the tasks by inserting a heavy
Mechanical time
paper card, called a time card, into a slot on the time
clocks/ punch card Indirect labour costs
clock. The machine would print the day and time
system
information (a timestamp) on the card.
Accounting Department (Payroll):
Calculates and pay employees
Worker:
Workers records their starting and ending time spent Direct: When assigned to a
on the tasks manually (written) on time sheets and sign particular task. Summarise
off at the end of the task. hour by hour spent on task
Supervisor:
Manual time
Signs on the time sheet to verify the information
tickets/time sheets
(Weekly/Daily)
Collects the timesheets at the end of the day/week,
Indirect: When NOT assigned
calculates and pay employees
to a particular task (such as
• Direct labour cost
clean-up and maintenance)
Enters the direct labour hours and costs into
costing payroll records.
Worker:
Workers taps, scan or swipe their ID tags (with
Computerised electronic sensors/ chips) when clocking in/out/lunch
electronic time and breaks. Information are recorded electronically via an Direct labour costs
attendance system electronic system.
Process payment via the Payroll software.
Software Based Time and Attendance Systems

These systems are similar to paper-based systems, but they rely on computers and check-in terminals. They
are backed up with software that can be integrated with the human resources department and in some
cases payroll software.
100
• Example of Systems Using Biometrics

More advanced systems include
Biometrics like thumb print or iris
recognition to identify the user,
Biometric readers are often used in
conjunction with an access control
system, granting the user access to
a building, and at the same time
clocking them in recording the
time and date.
Payroll Processing Cycle
Function Description Details
Master Holds all the records regarding • Status (active, retired

Employee the details of employment for suspended, etc.
File all employees. • Rate of pay
• Leave taken
• Leave available
• Benefits due
• Current position
• Name
• ID
Payroll • Data recorded from labour • Hours worked

source documents is input • Hours to be Paid
into payroll. • Bonuses calculated
• Rates and other measures • Chargeable hours
are extracted from the • Deductions
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master employee file to • Labour costs

calculate wages costs.
Recording Labour Costs in the Cost Accounts

The labour costs’ data would directly come from the range of the labour-related documents already
mentioned in the earlier pages, namely timesheet and job card. It would again be the cost accounting
function to select the necessary data or numbers to process and classify as direct and indirect.
The relevant cost accounts are as follows:
Wages (or Salaries) control account – represents total wages or salary payouts
Work in Progress (or Process) (WIP) account – records all direct labour costs (and other direct costs)
Production overhead control (POHC) account – records all indirect labour costs (and other direct costs)
The cost accounts’ recording for a wages payout would appear like this:
$ $
Credit Wages Control a/c xxx

Debit WIP a/c xxx
Debit POHC a/c xxx
Other Operating Expenses and Procedures

Examples of other Operating Expenses include cost incurred in administrative tasks involving purchases
and maintenance of materials.
Procedures and controls are similar to the purchasing cycle for materials for expenses not mentioned
earlier. Acquisition of goods and services by the business should be governed by the following principles:
• Proper authorisation and approvals must be obtained for all expenses.
• Required approvals and signatures are on the documents. The payment voucher is used to present
evidence of the documentation and control over a transaction, and contains areas for coding and
authorising each transaction.
• The employee responsible for creating or managing the expense writes the code for the appropriate
general ledger account on the invoice and compares the invoice to the remaining budget for that
expense account. If the general ledger account will be over the budgeted amount, the employee should
include an explanation for the coverage of the invoice.
• Managers are responsible for reviewing and approving all expense invoices that fall within their area
of control. The manager reviews the coding on the invoice for accuracy and any explanation of budget
overage for thoroughness. The manager then initials and dates the invoice so that the accountant
knows the manager has approved the invoice for payment.
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Learning Outcome (ACCA Study Guide Area B, Topic A1c):
Describe the procedures and documentation to ensure the correct authorisation, coding, analysis and
recording of direct and indirect labour and expenses.
1. What is a time sheet used for?

A. To calculate pay and to charge cost centres for work done.
B. To calculate pay only.
C. To charge cost centres for work done only.
D. To record attendance time.
2. Which document does not serve the same fundamental purpose as the time sheet?
A. Job card.
B. Clock card.
C. Pay advice.
D. Job ticket.
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1. A
2. C
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3c. Recording Sales: Procedures and Documentation

Learning Outcome (ACCA Study Guide Area B, Topic A1d):
Describe the procedures and documentation to ensure the correct analysis and recording of sales.
Recording Sales
If a customer purchases goods at a sales counter and takes possession of the goods immediately, the sales
invoice or cash register receipt is the only source document needed to record the sale. However, if
merchandise is shipped to the customer, a delivery note or shipping document is matched with the invoice
to prove that the merchandise has been shipped to the customer.
Sales invoices provide a record for each sale. For control purposes, sales invoices should be sequentially
pre-numbered to help the accounting department keep track of every invoice.
Procedures and Documentation

The following procedures should be in place to ensure accurate preparation and coding of invoices and
credit notes and entering details in a manual and/or computerised system:
• Checking delivery notes to sales orders.

• Using sales orders to prepare invoices.
• Checking details and calculations e.g. correct coding, sales tax/VAT, discounts, coding of invoices and
credit notes and entering them in manual or computerized systems.
• Producing statements of account for customers.
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The Sales Cycle

The course of time between the initial contact being make with a customer, the identification of services
or goods to be procured, the acceptance of the intended purchase, and the transaction that completes the
sale. It is a measure of the efficiency of a sales department within an organization when compared with
industry standards. Refer to the example below:
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Learning Outcome (ACCA Study Guide Area B, Topic A1d):
Describe the procedures and documentation to ensure the correct analysis and recording of sales.
1. The following are activities involved in the recording of sales transactions
i) Preparing delivery notes to accompany goods delivered.

ii) Preparing Sales Order to send to customers.
iii) Receiving Purchase Order from Customer
iv) Preparing Invoice to send to customer with payment terms and amount.
v) Preparing Sales requisition to pick goods that need to be delivered to customer.
Arrange the activities above in sequence from first to last.
2. What one of the following is not part of the sales cycle?

A. Checking the stores for available materials.
B. Checking the warehouse for available goods to sell.
C. Sending out a dispatch note.
D. Preparing a sales invoice.
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1. iii, ii, v, i, iv
2. A
108
3d. Use of Codes in Transactions

Learning Outcome (ACCA Study Guide Area B, Topic B2a):
Explain and illustrate the use of codes in categorising and processing transactions.
Use of Codes in Accounting Systems

A code is a combination of words, letters, figures or symbols used to
represent data.
• Coding of information is necessary as some information must be

separately identified for regulatory purposes like Value Added
Tax, UK VAT (GB999 9999 73) or Malaysia GST (ZRE – Zero
Rated).
• Codes can be alphabetical, numeric or alphanumeric. The choice
and length of coding system will depend on the organisation’s
policy.
Coding Systems
CIMA Official Terminology defines a coding system as a “system of
symbols designed to be applied to a classified set of items to give a
brief, accurate reference, facilitating entry, collection and analysis.”
In other words, a coding system is:
(a) Used to classify cost data to provide efficiency of data capture,

entry and analysis.
Example:
The supplies expense account might be coded as 8000, with
additional department digits that look like this:
• 8000-100 = Supplies expense, accounting department
• 8000-200 = Supplies expense, production department
• 8000-300 = Supplies expense, marketing department
(b) Used to reduce error in data capture and retrieval as similar

items can be related by means of a coding system. If data is
going to be captured and stored on a frequent basis, then coding
makes sense because it helps to standardise procedures and can
be learnt quickly.
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Key Terms (Coding Used in Transactions)

• Cost Codes
They are used to identify types of expenditure and charge the cost
to the correct account in the cost accounting system. For example,
01 for Material cost and 02 for Labour cost, or MRN to indicate
material requisitions from Production and GRN newly arrived goods
into the Stores.
• Code Length
A code can be made up of any number of characters and/or spaces,
but the category itself must have uniformed codes. For example, if
direct costs have 2 digits, then direct material, direct labour and
direct expense MUST all have only 2 digits, or if material items’
codes are supposed to have 3 Alphabets followed by 4 digits, then
ALL materials should be coded the same way.
• Accounting Manual
A document that gives details of a business's accounting policies
and procedures. It often includes a list of account codes or a chart
of accounts.
• Account Code
An account code is a number given to an account from a chart of
accounts. Such numbers are assigned to an employee, customer,
vendor or product for identification. Although it may contain only
numeric digits, account numbers are often defined and stored as a
character field, also known as a "string" or "alphanumeric field," so
that parts of the number can be searched independently.
• A Chart of Accounts
A detailed listing of all the accounts used by an organisation’s
accounting system, showing classifications and sub-classifications.
Each account in the chart is assigned a unique identifier, typically
an account code or number. Each account in the chart is classified
into one of the five categories: assets, liabilities, equity, income
and expenses.
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Account Code
Sample Coding: Charts of Accounts

• Asset Accounts and Current Assets
1001 Cash in Bank
1003 Petty Cash Account
1005 Inventory
1008 Accounts Receivable
1012 Prepaid Expense
• Long Term Assets

1200 Land
1300 Buildings
1301 Accumulated Depreciation, Buildings
1400 Vehicles
1401 Accumulated Depreciation, Vehicles
1600 Shop Equipment
1601 Accumulated Depreciation, Shop Equipment
1700 Office Equipment
1701 Accumulated Depreciation, Office Equipment
• Other Assets
1800 Deposits
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• Liability Accounts and Current Liabilities

2002 Accounts Payable
2100 Employment Tax Payable
2300 Short Term Loan Payable
2350 Customer Deposits
2385 Current Portion of Long Term Debt
2400 Suspense
System Codes
Costing systems use system codes to represent items of costs or revenue. The codes facilitate easy
classification of costs by grouping individual costs based on their nature or function. For effective
classification, the following are guidelines for a single system that is applicable to all items:
• Each code must be unique but simple.
• Each code must identify that cost or revenue item with a particular cost classification, cost
centre, location, department, function, activity or general ledger account.
• Codes must have room for expansion and be flexible enough to enable small changes to be
made to classifications without having to redesign the entire coding system.
• Code length must not be too long but can accommodate coding of all items.
• All codes must be the same length so that missing characters are easily spotted.
• Codes should, if possible, be meaningful to improve accuracy in input and make it easier to
identify, store and retrieve physical items like files, stock.
• Issue of new codes must be controlled by one person or department so that it is consistent with
the entire coding system and no duplication occurs.
• The system must be designed to save time and improve accuracy in data capture e.g. use of
drop down menus when part of a code is typed in.
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Learning Outcome (ACCA Study Guide Area B, Topic B2a):
Explain and illustrate the use of codes in categorising and processing transactions.
1. Which of the following are features of an efficient and effective coding system?
1) Each item should have a unique code

2) Each code should contain a combination of letters and numbers
3) Each code should completely disguise the item being coded
4) Codes should not be uniform in length and structure
A. 1 only
B. 1 and 2
C. 2, 3 and 4
D. 1, 3 and 4
2. A coding system serves in the following ways except:
A. Increased efficiency of data capture and analysis.

B. Minimizing input errors.
C. Quick comprehension of data and information.
D. Adherence to data representation standards.
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1. A
2. D
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3e. Methods of Coding Data

Learning Outcome (ACCA Study Guide Area B, Topic 2b):
Explain and illustrate different methods of coding data (including sequential, hierarchical, block, faceted
and mnemonics).
Different Coding Methods

• Numerical Codes
Codes which contain only numbers (like the cheque sample below).
Cost accounting systems use

numeric or alphanumeric codes
to make it easier to manage
large volumes of cost data.
• Alphanumeric Codes
Codes which contain a combination of letters and numbers. EXAMPLEs of alphanumeric codes:
Supplier Code
Mr Peter PE 007
Mr Smith SM 014
Ms Allie AL 021
• Sequential Codes
Codes which are created in numeric sequence, and may not have an obvious link to its underlying item.
Sequential codes are good for recording transactions which need to be in sequence (such as sales
transactions)
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• Block Codes
Block codes are very common in accounting software and they commonly form the basis of charts of
accounts, as depicted below:
1000 to 1999 - Fixed assets

2000 to 2999 - Quick assets
3000 to 3999 - Stocks
4000 to 4999 - Long term liabilities
5000 to 5999 - Current liabilities
6000 to 6999 - Equity
7000 to 7999- Revenues
8000 to 8999- Expenditures
The first digit indicates the classification of an item. The 1000 “Block” is allocated to Fixed Assets and only
fixed assets. This means that it is possible to classify up to 1,000 different fixed assets using this block.
• Faceted Codes
A faceted code is one that is broken down into a number of facets or fields, each of which signifies a unit
of information. It is a refinement of the block coding system. Let’s work through the faceted code of a
furniture manufacturer dealing with direct materials, direct labour, and indirect costs.
For example:
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
Facet 1: 00 Preparation
01 Carpentry
02 Assembly
03 Finishing
04 Upholstery
Facet 2: 00 Direct materials

01 Direct labour
02 Direct expenses
03 Indirect costs
Facet 3: 0000 Oak batten 2 cm x 4 cm

0003 Oak plank 20 cm x 4 cm
0020 Seat covering, plain
0025 Seat covering, striped
0040 Foam padding
0111 Carpentry department labor grade 1
0112 Carpentry department labour grade 2
0151 Factory rent
0152 Factory rates
The code for grade 2 labour costs incurred by the carpentry department would be 01010112.
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• Hierarchical Codes
A type of hierarchical code where each digit to the right is a lower subset in a hierarchy.
Hierarchical code for classification of parts
Code 1 Code 2 Code 3 Code 4 Description

001 XX XXX XXX Screws
001 01 XXX XXX Round head, phillip
001 01 001 XXX Steel
001 01 002 XXX Stainless Steel
001 01 002 001 Measurement in mm
001 01 003 XXX Aluminium
001 02 XXX XXX Flat head, slotted
002 XX XX XX Bolt
• Mnemonic Codes
Codes which are created in alphabets and provide an indication to what is the underlying item.
Airport IATA codes
Airport Code
Kuala Lumpur
KUL
International Airport
Beijing Capital
PEK
Heathrow Airport LHR
Tokyo International
HND
Airport
John F Kennedy
JFK
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Learning Outcome (ACCA Study Guide Area B, Topic 2b):
Explain and illustrate different methods of coding data (including sequential, hierarchical, block, faceted
and mnemonics).
1. Which of the following coding system most likely has the most amount of information compared to
the rest?
A. Numerical code.
B. Block code.
C. Faceted code.
D. Alphanumeric code.
2. The simplest coding system is probably:
A. Alphanumeric code.
B. Sequential code.
C. Hierarchical code.
D. Block code.
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1. C
2. B
119
3f. Correcting Coding Errors in Revenue and Expenses

Learning Outcome (ACCA Study Guide Area B, Topic 2c):
Identify and correct errors in coding of revenue and expense.
Common Errors
The most common coding error would be a misclassification of the
item with the wrong code. For instance, a direct labour cost coded
as indirect, or the other way around.
Another error is using a wrong structure of the code (too many or

too few digits. For example, if all direct and indirect costs have 4
digits, then ALL these costs MUST have 4 digits, and NOT some with
3 and some with 4, or some have alphabets in them.
Example
The following chart of accounts is provided, relevant to questions 1
to 3:
Code Account
1000-1999 Non-current assets
2000-2999 Current assets
3000-3999 Expense
4000-4999 Revenue
5000-5999 liabilities
Consider the following questions:
1. A loan has been credited to account 4123. The correct account

to be credited should be:
a. Account 2334
b. Account 5920
c. Account 2111
d. Account 4123
2. A motor vehicle purchase has been debited to account 3445.
The correct account to be debited should be:
a. Account 3445
b. Account 4123
c. Account 1844
d. Account 5999
3. A receipt of cash has been debited to account 2770. The correct
account to be debited should be:
a. Account 3445
b. Account 4123
c. Account 5999
d. Account 2770
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Example Answer
1. B
The loan has been wrongly credited to a revenue account. It should

be credited to a liability account.
2. C
The motor vehicle has been wrongly debited to an expense account.

It should be debited to a non-current asset account.
3. D
The cash has been correctly debited to a current asset account.
121

Learning Outcome (ACCA Study Guide Area B, Topic 2c):
Identify and correct errors in coding of revenue and expense.
1. An extract from the list of accounts of a chemical processor follows:
Cost codes
Direct materials 001 to 099
Direct labour 100 to 199
Indirect materials 200 to 299
Indirect labour 300 to 399
Which of the following items is coded INCORRECTLY?
A. Code 061: Chemical C6 used in process

B. Code 106: Wages of process supervisor
C. Code 229: Chemicals used for cleaning
D. Code 345: Wages of maintenance engineer
2. The following is an extract from the list of accounts of a motor vehicle manufacturer:
Cost codes
Direct materials 1000 – 1999

Indirect materials 2000 – 2999
Direct labour 3000 – 3999
Indirect labour 4000 – 4999
Which of the following is coded INCORRECTLY?
A. Code 4262: Wages of materials stores personnel

B. Code 4131: Wages of canteen supervisor
C. Code 1008: Metal for vehicle body
D. Code 1361: Cleaning materials
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1. B
2. D
123
Chapter 3 Summary
1. Direct materials refer to all materials involved in production, which are easily traceable to the end
product. Indirect materials refer to other materials directly related to production for which their
costs cannot be easily determined.
2. Material control cycle is the process by which materials are purchased, stored and issued.
a. Storekeeper raises purchase requisition to inform the Purchasing department to order stock.
b. Purchasing department raises a purchase order to purchase the required stock from the
supplier.
c. Stores will raise a goods received note after receiving the goods and inspecting them.
d. Amount to be paid by the Accounts department will depend on the invoice received from
the supplier after being cross checked to all other documents.
3. Direct labour are labour charges that can be easily traced to a particular job while indirect labour are
the labour charges that cannot be traced directly to any job.
4. Payroll processing cycle is the process by which employees are hired, promoted and paid accordingly.
a. The master employee file includes all the employee’s details, employment contract,
promotion letter, resignation letter, etc.
b. Clock cards, time sheets and computerised electronic attendance systems are used to record
the number of hours worked which would be connected to the payroll system.
c. The payroll system would calculate the necessary pay and deductions and subsequently
allow the Accounts department to record the labour costs and pay employees.
5. Sales cycle is the process by which sales is made and recorded accordingly.
6. Codes are used in accounting system to provide efficiency of data capture, entry and analysis as well
as reduce error.
7. There are different coding methods such as:

a. Numerical codes
b. Alphanumeric codes
c. Sequential codes
d. Block codes
e. Faceted codes
f. Hierarchical codes
g. Mnemonic codes
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CHAPTER 4: COST CLASSIFICATION Sunway TES
CHAPTER 4: COST CLASSIFICATION
Learning Outcomes
TLO C1a. Define cost classification and describe the variety of cost classifications used for different
purposes in a cost accounting system, including by responsibility, function, behaviour,
direct/indirect.
TLO C1b. Describe and illustrate the nature of variable, fixed and mixed (semi-variable, stepped-
fixed) costs.
TLO C1c. Describe and illustrate the classification of material and labour costs.
125
4a. Variety of Class Classification and The Nature of Cost

Learning Outcome (ACCA Study Guide Area C, Topic C1a, b, c):
(TLO C1a) Define cost classification and describe the variety of cost classifications used for different
direct/indirect.
(TLO C1b) Describe and illustrate the nature of variable, fixed and mixed (semi-variable, stepped-fixed)
costs.
(TLO C1c) Describe and illustrate the classification of material and labour cost.
Cost Unit and Cost Object

A cost unit is a quantitative unit of product or service in relation to
which costs are ascertained. In manufacturing, cost units will be
units of output produced within production cost centres.
Cost Classification
Cost classification is the logical grouping of similar cost. The
following are the various different cost classifications:
• Function – production, financing, and selling, distribution and

administration (SDA)
• Direct or indirect
• Element – materials, labour and expenses
• Behaviour – fixed, variable, mixed and stepped
• Relationship to inventory valuation/ profit reporting
• Controllable or non-controllable
• Relevance
Functional Costs
Production costs relate to all costs involved in production.
Production costs can be categorised as material, labour and
expenses, or as prime costs and production overheads.
Production costs = Prime costs + Production overheads
or
Production costs = Material costs + Labour costs + Expenses

Financing costs are costs which are related to obtaining funds and
capital investments.
Selling, Distribution Expenses or non-production overheads are

costs which incur due to non-production related activities which are
essential in a business organisation –
126
Administration Expenses
Costs incurred in the administration of the company’s operations.
EXAMPLE:
Some of the administration expenses for the sale of cakes:
• Rental expenses for the head office.
• Wages of administrative personnel, like the CEO, and other
managers at head office.
• Water, heating, electricity expenses of head offices.
• Depreciation on equipment / machines used for by head office.
• Costs incurred by support systems, such as accounting, HR,
marketing, etc.
Distribution Expenses
Costs incurred in the distribution of the company’s products.
EXAMPLE:
Some of the distribution expenses for the sale of cakes:
• Costs related to transport vehicles (such as lorries or vans).
• Wages of transport personnel such as despatchers and drivers.
• Insurance related to transport of goods.
• Costs related to distribution warehouses.
Direct and Indirect Costs

Direct costs are costs which are easily traceable to the product. Costs
of raw materials and wages of workers who actually spend time
making the product are examples of direct costs. It is convenient to
identify the amount (or cost) of input per unit of product. The sum
of all direct costs is known as prime costs.
Prime costs = Direct material costs + Direct labour costs + Direct

expenses
Indirect costs (materials, labour and expenses) cannot be

economically identified with the cost unit but need to be allocated
to the cost unit because they are related to its manufacture. This
would include property tax, maintenance and the factory manager’s
salary and all manufacturing costs except prime cost (direct
material, direct labour and direct expenses).
Overheads = Indirect material costs + Indirect labour costs + Indirect

expenses
127
Relationship to Inventory Valuation / Profit Reporting

Product costs are production or manufacturing costs which are
included in the valuation of a cost unit for the purpose of preparing
financial statements. This includes direct and indirect production
costs but excludes non-production costs.
In a manufacturing firm, these costs are attached to the product and
included in stock valuation for finished goods or work-in-progress,
until they are sold. When the product is sold these costs are matched
against sales as cost of goods sold.
Period costs are those which are not included in the calculation of
the cost of one unit of inventory. Period costs are more closely
associated with a particular time period and are written off against
profit in the period in which they are incurred. Most non -
production costs are classified as period costs.
Table 1 presents examples of costs and their classification.
Examples of costs Cost classification
Royalty for each item manufactured Direct expense
Rent of factory Indirect expense
Depreciation of equipment in factory Indirect expense
Supervisors’ wages in factory Indirect labour
Wages of a clerk in office Administration expense
Salesman salaries Selling expense
Raw material incorporated in goods sold but too difficult to Indirect material
trace to goods being made
Work manager’s salary: ¾ factory indirect expense
he spends ¾ of his time in factory, and ¼ administration expense

¼ in administration works
128
Cost Behaviour
Fixed Costs
(a) Costs which are unaffected by fluctuations in the volume of
output/activity levels within the relevant range.
(b) Many fixed costs are related to providing production capacity,
such as fixed monthly salaries, factory rental.
(c) Fixed costs/unit varies inversely with production volume
changes.
TABLE EXAMPLE:
Activity (units) Total Fixed Costs ($) Fixed cost per unit ($ / unit)
100 $1000 $10 / unit
110 $1000 $9.09 / unit
120 $1000 $8.33 / unit
GRAPH EXAMPLE
$ $/ unit
Total $
$ per unit
Level of Activity Level of Activity
129
Variable Cost
(a) Total variable cost varies in direct proportion with volume of
output.
(b) This means variable cost/unit will remain constant but total
variable cost increases as the volume of output increases.
(c) EXAMPLEs of variable costs are raw material costs (without bulk
purchasing discounts), direct labour cost, and sales
commissions.
TABLE EXAMPLE:
Activity (units) Variable Cost per unit Total Variable Cost
100 $10 / unit $1000
110 $10 / unit $1100
120 $10 / unit $1200
GRAPH EXAMPLE:
$ $/ unit
Total $
$ per unit
130
Semi-Variable / Semi-Fixed / Mixed Cost

(a) Consists of both fixed and variable elements.
(b) Partly affected by changes in the level of activity.
(c) EXAMPLEs of semi-variable costs are electricity and gas bills
(which include a fixed basic charge and a variable charge per unit
of consumption), a salesperson’s salary plus commission.
TABLE EXAMPLE:
Activity (units) Variable Cost Total Fixed Total Total Cost Total Cost per
per Unit Cost ($) Variable Cost ($) Unit
($)
100 $10 / unit $1000 $1000 $2000 $20.00 / unit
110 $10 / unit $1000 $1100 $2100 $19.09 / unit
120 $10 / unit $1000 $1200 $2200 $18.33 / unit
GRAPH EXAMPLE
$ $/ unit
Total $
$ per unit
Fixed Cost
131
Step Fixed Cost

(a) This cost can be classified as fixed or variable. Step variable costs
have small steps while step fixed costs have large steps.
(b) This cost is fixed over a range of activity, then increases in steps
once a certain level of activity is reached.
(c) Examples of step costs are warehousing, supervisory staff costs.
TABLE EXAMPLE:
Activity (units) Total Fixed Costs Fixed Cost per Unit
100 1000 $10 / unit
110 1000 $9.09 / unit
120 1200 $10 / unit
130 1200 $9.23 / unit
140 1200 $8.57 / unit
GRAPH EXAMPLE:
$ $/ unit
Total $
$ per unit
132
Why Is Cost Behaviour Analysis Important?

The analysis of total costs into its behavioural elements is essential
for effective cost and management accounting. Behavioural analysis
of costs is important for planning, control and decision making. It
helps to plan and control costs on an ongoing basis and also helps
identify incremental costs that may be incurred by decision
alternatives.
133
Topic Review (TLO 4a,b,c)

Learning Outcome (ACCA Study Guide Area C, Topic C1a, b, c):
(TLO C1a) Define cost classification and describe the variety of cost classifications used for different
direct/indirect.
(TLO C1b) Describe and illustrate the nature of variable, fixed and mixed (semi-variable, stepped-fixed)
costs.
(TLO C1c) Describe and illustrate the classification of material and labour costs.
1. Give 2 suitable examples of the following costs in a chemical manufacturing company:
a. Fixed – and
b. Variable – and
c. Semi-variable – and
d. Stepped – and
2. Give 2 examples of direct and indirect material and labour costs in an electrical good manufacturing
factory.
a. Direct material – and
b. Indirect material – and
c. Direct labour – and
d. Indirect labour – and
3. A product requires 2.5 kg of direct materials costing $4.85 and 6 hours of total direct labour hours
costing $24.50. Packaging costs $3 per unit. Fixed production overhead is averaged at $120,000 per
year for an estimated yearly production of 50,000 units. What is the prime cost? The production cost?
A. Prime cost = $32.35 and production cost = $32.35.
B. Prime cost = $29.35 and production cost = $34.75.
C. Prime cost = $32.35 and production cost = $34.75.
D. Prime cost = $34.75 and production cost = $34.75.
4. Cost of transporting materials into the factory is part of the , while cost of transporting the
finished product to the customers is part of .
A. Prime cost; distribution cost.
B. Production cost; SDA expense.
C. Distribution cost; selling cost.
D. Production cost; administration cost.
5. Which of the following statements about total cost is false?

A. The cost that varies with volume of activity is variable cost.
B. The cost that increases per unit of output is fixed cost.
C. The cost that varies but not proportionately with activity volume, is semi-fixed cost.
D. The cost that decreases only when a certain chunk of activity is reduced, is stepped fixed cost.
6. Which of the following statements about unit cost is true?

A. Fixed cost per unit doubles when activity volume halves.
B. Variable cost per unit doubles when activity volume doubles.
C. Mixed cost per unit increases when activity volume increases.
D. Stepped cost per unit is unaffected by changes in activity volumes.
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7. A railway company deals with a lot of indirect costs, with various cost behaviours. Which one is
incorrectly matched?
A. Station master salary – fixed.
B. Printed season pass – variable.
C. Cost per coach – semi-variable.
D. Ticket counter staff salary – stepped.
8. Given a phone assembly plant, which one of the following is wrongly matched?
A. Assembly worker – direct labour.
B. Factory manager – indirect labour.
C. Machinery lubricant – direct material.
D. Screws bought in bulk – indirect material.
9. Packaging such as plastic container and box for end-product is an example of:
A. Direct material
B. Indirect material
C. Direct expense
D. Indirect expense
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(1) a. total depreciation per year of the equipment and factory yearly rental
b. raw material cost and labour cost
c. salary of full time workers who also do overtime and fixed telephone line charges
d. machinery purchases and supervisory cost
(2) a. printed circuit board (PCB) and plastic cover/packaging

b. wire and shouldering iron
c. salary of full time workers who also do overtime and fixed telephone line charges
d. machinery purchase and supervisory cost
(3) C
(4) B
(5) B
(6) A
(7) D
(8) C
(9) C
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Chapter 4 Summary
1. A cost unit is a quantitative unit of product or service in relation to which costs are ascertained.
2. Cost can be classified into logical grouping of similar nature:

a. Function
b. Direct or indirect
c. Element
d. Behaviour
e. Relationship to inventory valuation/profit reporting
f. Controllable or uncontrollable
g. Relevance
3. Functional costs are based on their nature such as production, financing, selling, distribution and
administration costs.
4. Cost which are related to inventory valuation or profit reporting are:

a. Product costs – production or manufacturing costs which are included in the valuation of a
cost unit for the purpose of preparing financial statements.
b. Period costs – costs which are not included in the calculation of the cost of one unit of
inventory.
5. Costs can also be divided according to their behaviour:

a. Fixed costs – costs which are unaffected by fluctuations in the volume of activity within the
relevant range.
b. Variable costs – costs which are in direct proportion to the volume of activity.
c. Mixed costs – costs which consists of both fixed and variable elements.
d. Step costs – costs which are fixed over a range of activity, then increases in steps once a
certain level of activity is reached.
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CHAPTER 5: COST UNITS, COST CENTRES, PROFIT CENTRES AND INVESTMENT CENTRES Sunway TES
CHAPTER 5: COST UNITS, COST CENTRES, PROFIT CENTRES AND INVESTMENT CENTRES
Learning Outcomes
TLO C2a. Explain and illustrate the concept of cost units.
TLO C2b. Explain and illustrate the concept of cost centres.
TLO C2c. Explain and illustrate the concept of profit centres.
TLO C2d. Explain and illustrate the concept of investment centres.
TLO C2e. Describe performance measures appropriate to cost, profit and investment centres (cost /
profit per unit / % of sales; efficiency, capacity utilisation and production volume ratios;
ROCE / RI, asset turnover).
TLO C2f. Apply performance measures appropriate to cost, profit and investment centres.
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5a. Concepts of Cost unit, and Cost, Profit and Investment Centres
Learning Outcome (ACCA Study Guide Area C, Topic C2):
(TLO C2a) Explain and illustrate the concepts of cost units.
(TLO C2b) Explain and illustrate the concepts of cost centres.
(TLO C2c) Explain and illustrate the concepts of profit centres.
(TLO C2d) Explain and illustrate the concepts of investment centres.
Cost Units
Cost units are specialized units in a company that tracks costs incurred by various departments as also
estimates and cost saving measures for different departments. Such units usually operate from finance or
administration departments of a company and informs of the about costs incurred on various activities in
comparison to profits generated by such activities.
NOTE:
Cost unit should not be confused with unit cost, which is the cost per unit item manufactured in the
company.
ACCA-X definition
In cost accounting, a cost unit is a unit of a product or service to which costs can be related. Different
organisations use different cost units.
For example, a cost unit for:
a train company might be a mile travelled,

a university it might be a full-time student,
a restaurant it might be a meal served.
A cost unit is not always a single item. It might also be calculated in batches. For example, for an
organisation that manufactures bricks, a single cost unit might be a batch of 1,000 bricks. A cost unit is
linked to the product or service delivered to the customer. There is a link between how a unit of production
is costed and how it is eventually priced.
The same organisation may also have different cost units. For example, a baker might treat a batch of 30
loaves of bread as one cost unit, and an order for a wedding cake as another cost unit.
139
Type of Centres
To understand the concept of Cost centres and the different types of centres that will be discussed in this
chapter, the reader needs to view the entire structure within the organisation to appreciate the conceptual
roles they play.
Costs, Profit and Investment centres are hierarchically linked in an accounting system called Responsibility
Accounting. Responsibility accounting is a system of accounting that segregates revenue and costs into
areas of personal responsibility in order to monitor and assess the performance of each part of the
organisation.
This means that whatever happens in a particular responsibility centre, there will be a person in charge of
the performance of that centre. The whole Idea is about making managers responsible for the performance
of their centre.
Besides the three Costs, Profit and Investment Centres, the responsibility accounting system also monitors
the performance of Revenue Centres. The following illustrates the functions of each centre:
Functions of Responsibility Centres
140
Concepts of Responsibility Centres (Using a Fast Food Enterprise as an Example)
Responsibility Centres Illustrated Hierarchically
141

(TLO C2a) Explain and illustrate the concepts of cost units.
(TLO C2b) Explain and illustrate the concepts of cost centres.
(TLO C2c) Explain and illustrate the concepts of profit centres.
(TLO C2d) Explain and illustrate the concepts of investment centres.
1. Which statement is false?

A. The owner of a small trading company is an investment centre manager.
B. The general manager of a fast food outlet is a revenue centre manager.
C. The manager of the sales department is a revenue centre manager.
D. The executive director of the A-levels programme in a college is an investment manager.
2. Jacqueline makes all decisions on production volume and sales targets in her organization. However,
she is not in charge of the machinery purchases. She is regarded as a:
A. Cost centre manager.
B. Profit centre manager.
C. Investment centre manager.
D. Responsibility unit manager.
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1. D
2. B
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5b. Measuring Performances

(TLO C2e) Describe performance measures appropriate to cost, profit and investment centres (cost /
profit per unit / % of sales; efficiency, capacity utilisation and production volume ratios; ROCE
/ RI, asset turnover).
(TLO C2f) Apply performance measures appropriate to costs, profit and investment centres.
Performance Measure
Performance Measure is a method which is used to measure the
performance of a responsibility centre. Example:
If the branch manager can achieve
Often, manager remuneration is linked to specific performance a certain profit margin and
measures of his responsibility centre. Performance for each centre revenue growth target, she will get
additional bonuses.
may be assessed by comparing against similar performance
measures from other sources, such as:
• previous periods
• other departments within the same organisation
• targets
• competitors
• similar organisations
Performance Measures for Cost Centres

List of Performance Measures for Cost Centres:
Productivity
• Volume of output
• Output / Input
Cost per Unit

• Production Cost / Cost units
Index
• Current Value / Base Value x Base Index
Efficiency Ratio (%)

• Standard hours worked / Actual Hours Worked
Capacity Utilization Ratio (%)

• Actual Hours Worked / Budgeted Hours
Production Volume Ratio (%)

• Standard Hours Worked / Budgeted Hours
Relationship between Ratios:

• Efficiency x Capacity Utilization = Production Volume
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Productivity
Volume of Output
Total units produced
Output v Input
An indicator of how efficiently resources are being used.
For example:
Given a certain amount of resources, the units of output a cost
centre is able to produce based on:
(i) Number of units per hour
(ii) Number of units per employee
(iii) Number of units per tonne of material
Cost per Unit

The cost per unit measure is used to measure the total cost of a
unit of output.
Reducing cost per unit too far
A cost centre manager would try to lower to cost per unit as might lead to a reduction in
much as possible to increase the profitability of each product quality, which might affect sales of
the product.
sold.
Formula:
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠

𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 =
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑂𝑢𝑡𝑝𝑢𝑡
Example of calculation and workings for above formula
In a particular month, total production costs were $100,000 to manufacture 25,000 units. What
was the production cost per unit?
Production cost per unit = $100,000

25,000
= $4 per unit
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Index
An index is usually used to show trends and changes in activity
levels or values. It measures changes from a base value.
Base value – the starting value against which all later activity
levels are measured against
(usually expressed as 100 or 1000).
An index number measures the % change in the value of some

economic commodity over a period of time. It shows the
changes in price, quantity, wages, productivity, expenditure and
others at a point of time compared to the base year.
Therefore, measurements of index are not concerned with
absolute values but the movement of values.
Formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
𝑰𝒏𝒅𝒆𝒙 𝑵𝒖𝒎𝒃𝒆𝒓 = × 𝐵𝑎𝑠𝑒 𝐼𝑛𝑑𝑒𝑥
𝐵𝑎𝑠𝑒 𝑉𝑎𝑙𝑢𝑒
There are 2 ways of using an index:
i) Fixed base (where the base item is fixed and all other
items are compared to it)
ii) Moving base (where the base item moves when
different current items are selected)
Example: Calculate the Index and Change (%) of Prices
QUESTION: The following data is available for the price of product A:
Year Price ($)

1 0.50
2 0.60
3 0.80
4 0.94
Required
a) Calculate the index and change (%) of the prices of product A over the 4 years, using a base index of
100:
i. Using Year 1 as the base item;
ii. Using year 3 as the base item;
iii. Using a moving base of the previous year of the current item.
146
ANSWER:
a) Calculate the index and change (%) of the prices of product A over the 4 years, using a base index of
100:
i. If using Year 1 as a base (which means that year 1 is assigned a base value of 100):
Year Price ($) Index (base 100) Change %

1 0.50 *100 NA
2 0.60 **120 ***+20%
3 0.80 160 +60%
4 0.94 188 +88%
* Since Year 1 is the base year, it is assigned the base value of 100.
** $0.60 ÷ $0.50 × 100 (Refer to formula)
*** (120 – 100) ÷ 100
ii. If using Year 3 as a base (which means that year 3 is assigned a base value of 100):

1 0.50 62.5 -37.5%
2 0.60 75 -25%
3 0.80 100 NA
4 0.94 117.5 +17.5%
iii. If using a moving base of the previous year:

1 0.50 *NA NA
2 0.60 **120 +20%
3 0.80 ***133.3 33.3%
4 0.94 117.5 17.5%
* No index available as there is no prior year data.

** $0.60 ÷ $0.50 [year 1 price is base year for comparison to year 2 price] × 100
*** $0.80 ÷ $0.60 [year 2 price is base year for comparison to year 3 price] × 100
Efficiency Ratios
The efficiency ratio shows how efficient the operations were at
producing the product, compared to what was budgeted.
The higher the %, the more efficient the operation was than
planned.
Formula
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝑹𝒂𝒕𝒊𝒐 (%) =
𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
147
Standard Hours Worked:

The standard hour is the quantity of work achievable at
standard performance, expressed in terms of a standard unit of
work done in a standard period of time.
It is important to be able to convert standard hours into

standard time, which is the planned amount of time needed to
produce a unit of output, considering normal efficiency levels.
𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒉𝒐𝒖𝒓𝒔 𝒘𝒐𝒓𝒌𝒆𝒅 (ℎ)

= 𝐴𝑐𝑡𝑢𝑎𝑙 𝑢𝑛𝑖𝑡 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑡𝑖𝑚𝑒
Capacity Utilization Ratio (%)

The capacity utilization ratio indicates the extent to which
budgeted resources have been utilised. The higher the ratio,
indicates the more resources are being utilized (operation is
bigger).
Formula
𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 (%) =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
Budgeted Hours
Budgeted hours worked is the number of standard hours it takes to make planned production.
𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝒉𝒐𝒖𝒓𝒔 𝒘𝒐𝒓𝒌𝒆𝒅 (ℎ) = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑡𝑖𝑚𝑒
Production Volume Ratio (%)

The production volume ratio compares the actual activity of the
cost centre to budgeted activity. It indicates whether production
volumes were higher or lower than expected.
The higher the ratio (%), the more output were produced than
planned.
Formula
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝑽𝒐𝒍𝒖𝒎𝒆 𝑹𝒂𝒕𝒊𝒐 (%) =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
148
Worked Example for Production Ratios

ABC Ltd manufactures three types of electrical appliances
microwave ovens, oven toasters and blenders the following output
was produced during the month of June:
Product Type Actual Output Budgeted Output

(units) (units)
Microwave Oven 150 140
Toasters 355 300
Blenders 115 130
Total output 520 570
Additional data from ABC Ltd is available is follows:
Product Type Standard Total Total Actual

Hours per Budgeted Hours
Unit Hours
Microwave 3 hours 420 480
Oven
Toasters 1 hour 300 318
Blenders 1.5 hours 195 172.5
Required:
Using the data available in the above scenario, calculate the

following production ratios for EACH of the products of ABC Ltd for
the month of June:
1. Efficiency Ratio
2. Production Volume Ratio
3. Capacity Utilization Ratio
149
Worked Example for Production Ratios (Answer)

For Microwave Oven
Budgeted Standard Actual
Units produced 140 150 150
Hours / unit 3 3 3.2
Total hours 420 450 480
Production Ratios (Microwave Oven)

Production Capacity Efficiency
Volume
÷
= 107% 114% 94%
For Oven Toasters

Units produced
Hours / unit
Total hours
Production Ratios (Oven Toasters)

Volume
÷
=
For Blenders
Units produced
Hours / unit
Total hours
Production Ratios (Blenders)

Volume
÷
=
150

Volume Utilization
Microwave 107% 114% 94%
Oven
Toasters 118% 106% 112%
Blenders 88% 88% 100%
Performance Measures for Revenue Centre

List of Performance Measures for Revenue Centre:
Traditional measures (quantitative)

• Actual sales ($ or number of units) vs budgeted sales
• Actual market share (by country, region, product, salesperson, etc) vs target market share
Customer focused organisations (qualitative)

• Manufacturers
▪ Late deliveries vs on-time deliveries
▪ Time of approval to launch of new products
▪ Customer rejects/returns vs total sales
• Airlines
▪ Flight delays vs departures on schedule
▪ Customer satisfaction surveys
▪ Average length of flight delays
▪ Check in time per passenger
▪ Customer complaints vs compliments
• Banks/supermarkets
▪ Length of time in queue per customer
▪ Number of customers served per hour per staff
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Performance Measures for Profit Centre

List of Performance Measures for Profit Centre:
Gross Profit Margin

• Gross Profit ($) / Sales ($)
Operating Profit Margin

• Operating Profit ($) / Sales ($)
Net Profit Margin

• Net Profit ($) / Sales
Cost Sales Ratio

• Cost element ($) / Sales ($)
Gross Profit Margin

Gross profit margin shows the relationship between production
costs and sales.
It measures the efficiency of generating gross profit from sales.
Formula
If an exam question asks whether
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 ($)
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 (%) = a cost centre measure is the
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ($) responsibility of a profit centre
manager, the answer is yes!
152
Operating Profit (or Net Profit)

A basic performance measure would be comparing actual operating
Operating Profit would be profit
profit to budgeted operating profit. before interest, dividends and tax.
Formula Interest dividends and tax not

included as they are not in the
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 ($) control of a profit centre manager.
= 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ($) − 𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝑠 ($)
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 ($)

= 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 ($)
− 𝑁𝑜𝑛-𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠 ($)
Net Profit Margin

An operating profit margin is the difference between operating
profit and revenue in percentage.
Formula
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 ($)

𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 (%) =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ($)
153
Calculation Format (Relationship between Gross Profit and Net Profit)
Revenue X
Cost of Sales (X)
Gross profit Net profit

Gross Profit X
margin margin
SDA (X)
Net Profit X
Cost to Sales Ratio (C/S ratio)

This ratio measures the size of a cost element in relation to sales.
The larger the ratio, the larger proportion of revenue is used to pay for that cost.
Formula
𝐶𝑜𝑠𝑡 ($)
𝑪𝒐𝒔𝒕 𝒕𝒐 𝑺𝒂𝒍𝒆𝒔 (%) =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ($)
Combined Worked Example

The following is the income statement for Hiyo Enterprises:
$
Sales 5,000
Cost of Sales 3,800
Gross Profit 1,200
Selling Expenses 300
Administrative Expenses 200
Operating Profit 700
Required:
Calculate the following ratios:
1. Gross Profit Margin

2. Operating Profit Margin
3. Selling Expenses to Sales Ratio
4. Cost of Sales to Sales Ratio
154
Combined Worked Example (Answer)
Gross Profit ($) 1,200

1. Gross Profit Margin (%) = = = 24%
Sales ($) 5,000
Net Profit ($) 700
2. Net Profit Margin (%) = = = 14%
Sales ($) 5,000
Selling Expenses ($) 300
3. Selling Expenses to Sales Ratio (%) = = = 6%
Sales ($) 5,000
Cost of Sales ($) 3,800
4. Cost of Sales to Sales Ratio (%) = = = 76%
Sales ($) 5,000
155
Performance Measures for Investment Centre

List of Performance Measures for Investment Centre:
Return on Investment (ROI) or Return on Capital Employed (ROCE)

• Operating Profit ($) / Capital Employed ($)
Residual Income (RI)

• Operating Profit ($) – (Notional Interest Rate (%) x Capital
Employed ($))
Asset Turnover
• Sales ($) / Capital Employed ($)
Return on Investment (ROI) or Return on Capital Employed (ROCE)

Return on investment is a measurement of profit as a percentage of
money invested.
Capital employed usually involves only operational capital (items The higher the return on
like goodwill or investments should not be included). investment, the better!
Formula
Operating profit would be
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 ($)
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (%) = Earnings before Interest and Tax
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ($) (EBIT).
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅 ($) Capital employed is also known as

= 𝑁𝑜𝑛 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ($) Net Assets.
+ 𝑁𝑒𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ($)
If Capital Employed or Net Asset is

𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝($)
not given, Average Capital
(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ($) + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ($)
= Employed can be used.
2
If Opening Capital is not provided,
then closing capital can be used.
156
Worked Example
A company has the following annual figure for the year 20X8:
$
Sales 50,000
Cost of Sales (10,000)
Gross Profit 40,000
Expenses (including taxes of $5,000) (15,000)
Net Profit 25,000
Non-current Assets 100,000
Current Assets 150,000
Current Liabilities 150,000
Required:
Calculate the Return on Capital Employed (ROCE) for the year 20x8.
Worked Example (Answer)
Operating Profit ($) = Net Profit ($) + Tax Expense ($)

= $25,000 + $5,000
= $30,000
Capital Employed ($) = Non-current Asset ($) + Net Current Asset ($)
= $100,000 + $0
= $100,000
ROCE ($) = Operating Profit (%)

Capital Employed ($)
= 30%
157
Residual Income (RI)

Residual income is usually used in
Residual income measures a centre’s profits after deducting a assessing a situation where the
notional or imputed interest cost on capital employed. investment centre does not
borrow directly from the bank but
Formula is funded by Head Office.
Therefore, Head Office would
𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 ($) want the investment centre to
= 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 ($) earn a minimum profit to cover at
− 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑠𝑡 ($) least the Head Office borrowing
cost (notional interest)
𝑵𝒐𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒔𝒕 ($)
= 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 ($)
× 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ($) Notional interest does not involve
any cash payment to Head Office.
It is merely an accounting
adjustment.
Worked Example
A division with capital employed of $450,000 currently earns a ROI of 20%. It is considering making an
additional investment of $50,000 on a project with a 4-year life and no residual value. The average net
profit from this investment would be $12,500 per annum. A notional interest charge amounting to 12% per
annum of the amount invested is to be charged to the division each year.
Required:
1. Calculate the Residual Income (RI) for the year for the following:
a. The division before the additional investment
b. The additional investment
c. The division after the additional investment
2. Calculate the Return on Investment (ROI) for the year for the following:
a. The division before the additional investment
b. The additional investment
c. The division after the additional investment
158
Worked Example (Answer)
Description Operating Capital Notional Notional Residual

Profit ($) Employed ($) Interest Rate (%) Interest ($) Income ($)
Before 90,000 450,000 12 54,000 36,000
investment
Investment 12,500 50,000 12 6,000 6,500
After 102,500 500,000 12 60,000 42,500
investment
Description Operating Capital Return on

Profit ($) Employed ($) Investment (%)
Before 90,000 450,000 20
investment
Investment 12,500 50,000 25
After 102,500 500,000 21
investment
The above calculations indicate the follows:
1. Residual Income
a. The existing division is RI positive, so it is generating wealth.
b. The investment is RI positive, so it is also generating wealth.
c. The division after investment is RI positive, so it means the new investment will generate increased
wealth for the division.
2. Return on Investment
a. The existing division is ROI positive, so it is generating wealth.
b. The investment is ROI positive and higher than the existing division, so it is more efficient in
generating wealth.
c. The division after investment is ROI positive and is higher than the existing division, so it means
that with the new investment, the division will be more efficient in generating wealth for the
division.
159
Asset Turnover
Asset turnover measures the organisation’s ability to generate sales
from utilising existing assets.
Formula
𝑆𝑎𝑙𝑒𝑠 ($) The higher the asset turnover, the

𝑨𝒔𝒔𝒆𝒕 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 (𝒎𝒖𝒍𝒕𝒊𝒑𝒍𝒆𝒔) =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ($) better!
Relationship between Net Profit, Asset Turnover and Return on Investment
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (%) = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (%) × 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 (%)
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 ($) 𝑆𝑎𝑙𝑒𝑠 ($)

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (%) = ×
𝑆𝑎𝑙𝑒𝑠 ($) 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ($)
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 ($)
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (%) =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ($)
160

(TLO C2e) Describe performance measures appropriate to cost, profit and investment centres (cost /
profit per unit / % of sales; efficiency, capacity utilisation and production volume ratios; ROCE
/ RI, asset turnover).
(TLO C2f) Apply performance measures appropriate to costs, profit and investment centres.
1. In March 20x7, the production costs of 5,000 units were $30,000. In April 20x7, the production volume
increased by 1,000 units resulting in an increase of $5,000 in the production cost. Calculate the change
in unit cost.
Change in unit cost =
2. Given the following data:
Budgeted/standard time per unit 5 hours

Budgeted production volume 1,000 units
Actual production volume 1,200 units
Actual hours 5,400 hours
Calculate the following ratios:
Activity –
Capacity –
Efficiency –
3. Given that the sales revenue generated is $500,000. The production costs were $280,000 while the
SDA expenses were $76,000. What is the GPM, NPM and the total costs to sales ratio?
GPM =
NPM =
Costs to sales ratio =
4. For the data given below, calculate ROI, RI and AT.
A business invests $100,000 into a new project that returned a sales revenue of $250,000 and a net
income before interest and tax of $40,000. The notional interest rate was 8% per annum.
ROI =
RI =
AT =
5. With reference to question 4, an increase in capital of $50,000 resulted a $100,000 increase in revenue
and a $25,000 increase in net income before interest and tax. What would the new ROI, RI and AT be?
ROI =
RI =
AT =
161
6. Given that, the GPM is 45% while the NPM is 32%. The SDA expenses are $26,000. What is the sales
revenue?
A. $200,000
B. $130,000
C. $100,000
D. $87,000
7. A production process’ efficiency ratio was 80% while its activity ratio was 120%. What was the capacity
ratio?
A. 40%
B. 67%
C. 150%
D. 200%
8. An investment of $1.5 million returned a revenue of $3.3 million and an RI of $70,000 at an interest
rate of 12%. What is the ROI, AT and NPM?
A. ROI = 4.67%, AT = 2.2 times and NPM = 7.58%
B. ROI = 16.7%, AT = 2.2 times and NPM = 7.58%
C. ROI = 16.7%, AT = 4.5times and NPM = 7.58%
D. ROI = 16.7%, AT = 2.2 times and NPM = 12%
162
1. $0.167
2. Activity – 120%
Capacity – 108%
Efficiency – 111%
3. GPM = 44%
NPM = 28.8%
Costs to sales ratio = 71.2%
4. ROI = 40%
RI = $32,000
AT = 2.5 times
5. ROI = 43%
RI = $53,000
AT = 2.33 times
6. A
7. C
8. B
163
Chapter 5 Summary
1. Responsibility accounting is a system of accounting that segregates revenue and costs into areas of
personal responsibility in order to monitor and assess the performance of each part of the
organisation.
2. There are four centres:

a. Cost centre
b. Revenue centre
c. Profit centre
d. Investment centre
3. Performance measures based on responsibility centres:

a. Cost centre
i. Productivity
ii. Cost per unit
iii. Index
iv. Efficiency ratio
v. Capacity ratio
vi. Production volume ratio
b. Revenue centre
i. Sales performance
ii. Customer satisfaction/efficiency
c. Profit centre
i. Gross profit margin
ii. Operating profit margin
iii. Net profit margin
iv. Cost to sales ratio
d. Investment centre
i. Return on investment/return on capital employed
ii. Residual income
iii. Asset turnover
164
CHAPTER 6: ACCOUNTING FOR MATERIALS Sunway TES
CHAPTER 6: ACCOUNTING FOR MATERIALS
Learning Outcomes
TLO D1a. Distinguish different types of material (raw materials, work in progress and finish goods).
TLO D1b. Describe and illustrate the accounting for materials costs.
TLO D1c. Calculate materials requirements making allowance for sales and product / material
inventory changes (control levels and EOQ are excluded).
TLO D1d. Explain and illustrate different methods used to price materials issued from inventory (FIFI,
LIFO and periodic and cumulative weighted average costs.
165
6a. Types of Materials

Learning Outcome (ACCA Study Guide Area D, Topic D1a):
Distinguish different types of material (raw materials, work in progress and finish goods).
Type of Materials
Examples:
Materials are a primary resource in an organisation, especially so include construction materials,
when the organisation deals with manufacturing as materials cost chemicals, fabrics, baking
could be the main part of total cost of production. ingredients and even completed
goods like bags and shoes.
TYPES OF MATERIAL
Materials can be classified into 3 categories:
Raw Materials
Basic material or substance in its natural, modified, or semi-processed state, used as an input to a
production process for subsequent modification or transformation into a finished good.
It includes direct materials like parts, subcomponents, packing materials, unprocessed material still in its
natural or original state, or indirect materials like lubricants.
EXAMPLE
The raw materials required to be kept for the production of cakes include:
• Flour
• Eggs
• Sugar
Work in Progress
Partially completed goods moving through production.
EXAMPLE
A bakery may have cakes that are not yet ready to be sold, at various stages of completion:
• A wedding cake that has not yet been iced with cream.
• Muffins that haven’t been put into the oven to bake.
• Bread that has not yet been packed into plastic wrappers for sale.
166
Finished Goods
Completed goods ready for sale.
EXAMPLE
A bakery’s completed goods are baked products that need no further work for sale:
• A fully baked, iced, sliced, and packaged cake.
• Muffins that are on the serving trays in the show room, ready to eat.
Materials may also be called inventories.
Materials are considered to be assets of the business.
The relationship between Raw Materials, Work in Progress, and Finished Goods is as follows:
167

Explain and illustrate the concepts of cost, profit and Investment centres.
1. Which of the following does not match correctly?

A. Vegetables for soup – raw material.
B. Steel door for cars – finished good.
C. Computer motherboard in a computer assembly line – work in progress.
D. Packaged soft drink – finished good.
2. Where are these stored?

A. Wood for furniture – Warehouse.
B. A completed table – Stores.
C. Packaged soft drink – Warehouse.
D. 80% complete canned food – Stores.
168
1. B
2. C, D
169
6b. Accounting for Materials Costs

Learning Outcome (ACCA Study Guide Area D, Topic D1b):
Describe and illustrate the accounting for materials costs.
Types of Material Costs

For cost accounting, there are two types of materials costs – direct
and indirect material costs.
Direct material cost are cost of materials that can be directly traced
back to the product with minimal difficulty.
Indirect material costs refer to cost of materials which cannot be

identified for individual products.
Due to their various physical properties, they are measured in

various measurements units. For examples in kilogrammes (kg),
litres (fluids), pieces and pairs (finished products).
Raw materials are good examples of direct materials. They are

purchased specifically to be made into finished products. Machinery
lubricant, varnish and glue are examples of indirect materials
because it is difficult to identify the volume used per unit of finished
product. Usually, manufacturing organisations use more direct
materials than indirect ones, whereas in service organisations, use
of indirect materials are usually more than the use of direct
materials.
170
Describe and Illustrate the Accounting for Material Costs.

It is important to distinguish direct materials from indirect materials
because direct materials are accounted for in a different manner
from indirect materials in profit calculation and stock valuation.
MATERIAL COST JOURNAL ENTRIES:
PURCHASE OF MATERIALS (BOTH DIRECT AND INDIRECT):
DEBIT MATERIALS CONTROL ACCOUNT
CREDIT CREDITORS ACCOUNT / COST LEDGER CONTROL A/C
ISSUES OF MATERIALS TO PRODUCTION:
Direct Materials
DEBIT WORK IN PROGRESS ACCOUNT
CREDIT MATERIAL CONTROL ACCOUNT
Indirect Materials
DEBIT PRODUCTION OVERHEADS CONTROL ACCOUNT
CREDIT MATERIAL CONTROL ACCOUNT
RETURN OF MATERIAL TO STORES:
Direct Materials
DEBIT MATERIAL CONTROL ACCOUNT
CREDIT WORK IN PROGRESS ACCOUNT
Indirect Materials
DEBIT MATERIAL CONTROL ACCOUNT
CREDIT PRODUCTION OVERHEADS ACCOUNT
171

Describe and illustrate the accounting for materials cost.
1. A total of $40,000 worth of materials were issued to production, of which three quarter of that value
were direct materials. What would be the accounting entries for this transaction?
A. Debit Materials control a/c $40,000
Credit Work in progress a/c $30,000
Credit Production overhead control a/c $10,000
B. Debit Materials control a/c $30,000

Credit Work in progress a/c $40,000
Credit Production overhead control a/c $10,000
C. Credit Materials control a/c $40,000

Debit Work in progress a/c $30,000
Debit Production overhead control a/c $10,000
D. Credit Materials control a/c $40,000

Debit Work in progress a/c $10,000
Debit Production overhead control a/c $30,000
2. On a certain occasion, the amounts in the work in progress a/c did not correspond with the direct
material amounts recorded in the materials control a/c. What might be the reason?
A. Presence of indirect materials.
B. Presence of only direct materials.
C. Returns of direct materials not recorded in the work in progress a/c.
D. Returns of all materials not recorded in the work in progress a/c.
172
1. C
2. C
173
6c. Materials Requirements

Learning Outcome (ACCA Study Guide Area D, Topic D1c):
Calculate materials requirements making allowance for sales and product / material inventory changes
(control levels and EOQ are excluded).
ORDERING STOCK (MATERIALS)
The amount of stock to order depends on 4 things:
1. The amount of confirmed and expected sales or production units.
2. The current amount of available stock (opening inventory).
3. Stock that is in transit (on the way).
4. Desired closing stock or level of buffer stock/safety stock required.
Order Quantity Format

Order Quantity:
units
Forecast usage
Minus opening stock
Add closing stock
Order Quantity
Order Quantity is the amount of units that need to be ordered for

the next order.
Free Stock
units
Stock on hand
Add stock on order
Minus stock reserved for use or sale
Free Stock
Free stock is the amount of stock available for use. That means the
stock has not yet been committed for use or sale.
174
EXAMPLE:
Calculation of Order Quantity
Danish Delights buys and sells chocolates. At the beginning of

January, there are only 40 boxes of a product, Loving Bunny, in stock
and an order has to be placed to ensure there would be enough
supplies to meet the demand for Valentine’s Day and Easter.
The company orders stocks at the beginning of each quarter.

According to the sales department, the budgeted sales for next 3
months are as follows:
Month January February March

Budgeted Sales [units] 140 330 300
The company has a policy of holding stock of 60 boxes in case of

extra demand.
Required:
How many boxes of Loving Bunny must company order?
ANSWER:
units
forecast usage 770
Minus opening stock (40)
Add closing stock 60
Order Quantity 790
NOTE 1: Opening stocks units are deducted as they are already in

stock and do not have to be bought. Closing stock is added as this is
the amount of safety stock required by management.
175
EXAMPLE:
Calculation of Free Stock
Continued from above:
An order was placed by Danish Delights for 790 boxes of Loving

Bunny. The stock is due to arrive in the third week of January.
However, on 10 January, a customer placed an order for 250 boxes
of Loving Bunny for the Chocolate Lover’s Convention to be held on
30 January. Other gift shop customers have also pre-ordered the
Loving Bunny for Valentine’s Day. These amounted to 300 boxes.
Required:
Will Danish Delights have sufficient stock to meet the estimated

demand for March?
ANSWER:
units
Stock on hand 40
Add stock on order 790
Minus stock reserved for use or sale (550)
Free Stock 280
There will not be enough to meet the estimated demand of 300 boxes in March.
176

Calculate materials requirements making allowance for sales and product/material inventory changes
(control levels and EOQ are excluded).
1. A production process requires 2,500 kilograms of material X. The current inventory level of X is 1,300
kilograms. Preferred buffer inventory is 1,800 kilograms. How much X must now be ordered?
A. 2,000 kilograms
B. 2,500 kilograms
C. 3,000 kilograms
D. 4,300 kilograms
2. Next quarter’s sales demand for Product Z is 5,000 units. Each unit contains 1.6 kilograms of raw
material Q, after a 20% expected loss in the production process. Current volume in the warehouse is
2,800 units, which is 300 units higher than the intended closing inventory. The amount of Q available in
the stores is 4,000 kilograms, which is double the safety stock level set. How much of Q needs to be
purchased?
A. 5,520 kilograms
B. 7,400 kilograms
C. 9,520 kilograms
D. 11,400 kilograms
177
1. C
2. B
178
6d. Different Methods for Pricing Materials

Learning Outcome (ACCA Study Guide Area D, Topic D1d):
Explain and illustrate different methods used to price materials issued from inventory (FIFI, LIFO and
periodic and cumulative weighted average costs).
It is common for material prices to vary according to market demand

and supply. The same material can be purchased at different times
at different prices. So, one of the cost accounting concerns is the
stock valuation when it comes to costing of materials and
assessment of closing inventory.
There are basically three valuation methods:

1. First in first out (FIFO);
2. Last in first out (LIFO);
3. Weighted average – cumulative weighted average (CWA) and
periodic weighted average (PWA).
First-In-First-Out (FIFO)
Issues are valued at the price of the oldest batch in stock until all
units of that batch are issued out, after which the price of the next
oldest batch would be used. That means, the remaining stock –
closing inventory – will be valued at the prices of the more recent
purchases. The assumption is that materials are issued out in the
order they were delivered in.
Basically, issues to production are charged oldest prices and the

closing inventory are valued at the most recent price.
The best way to understand this valuation method is via an example.
Let’s look at the following transactions in Teelo Ltd’s stores
department during October 2016.
Date Details Quantity (units) Unit cost ($)

Oct 1 Opening inventory 100 2.00
2 Purchases 400 2.10
5 Issues 200
12 Issues 400
22 Issues 100
179
The recommended way to present the values of the inventory

movement and balances in the stores is to use the stores ledger
format.
PURCHASES ISSUES BALANCE

Date
$ per Total $ per Total $ per Total
(Oct) Units Units Units
unit ($) unit ($) unit ($)
1 100 2.00 200
2 400 2.10 840 100* 2.00 200
400 2.10 840
5 100* 2.00 200 300 2.10 630
100 2.10 210
10 300 2.12 636 300** 2.10 630
300 2.12 636
12 300** 2.10 630 200 2.12 424
100 2.12 212
15 100 2.40 240 200*** 2.12 424
100 2.40 240
22 100*** 2.12 212 100 2.12 212
100 2.40 240
Each time there is an issue, the stock issued out is valued at the price
of the oldest stock. The total cost of all issues would be $1,464 – all
values concerned are bolded in the ledger above.
The closing inventory volume is determined by adding all purchases

to opening inventory, and then deducting the issues – 100 + (400 +
300 + 100) – (200 + 400 + 100) = 200 units. The value of the closing
inventory is (100 × $2.12) + (100 × $2.40) = $452.
Note:
(1) The total volume of closing inventory and issues must equal to
the total volume of opening inventory and purchases.
Otherwise, there is reason to investigate the discrepancy, as
there is always room for fraud.
Closing inventory + Issues = Opening inventory + Purchases
(2) Similarly, the total value of closing inventory and issues must
equal to the total value of opening inventory and purchases.
Value of closing inventory + Value of issues = Value of opening

inventory + Value of purchases
180
Last-In-First-Out (LIFO)
The value of the issues are the prices of the most recent purchases.
This means, issues are valued at the price of the most recent batch
until a new batch is received. The remaining stock will be valued at
the prices of the oldest batches. This method assumes that materials
are issued out of stock in the reverse order to which they were
delivered – the most recent deliveries are issued prior to the earlier
ones.
Product costs are based on current prices and remaining inventory

valued at oldest prices.
The stores ledger for Teelo Ltd using LIFO method should look like
this:

Date
$ per Total $ per Total $ per
(Oct) Units Units Units Total ($)
unit ($) unit ($) unit
1 100 2.00 200
2 400 2.10 840 100 2.00 200
400* 2.10 840
5 200* 2.10 420 100 2.00 200
200 2.10 420
10 300 2.12 636 100 2.00 200
200 2.10 420
300** 2.12 636
12 300** 2.12 636 100 2.00 200
100 2.10 210 100 2.10 210
15 100 2.40 240 100 2.00 200
100 2.10 210
100*** 2.40 240
22 100*** 2.40 240 100 2.00 200
100 2.10 210
Each time there is an issue, the stock issued out is valued at the price
of the most recent stock. The total cost of all issues would be $1,506.
The value of the closing inventory is (100 × $2.00) + (100 × $2.10) =
$410.
181
Cumulative Weighted Average (CWA)
The issue price is based on the average stock price calculated each
time new stock is purchased. The product costs and value of closing
inventory would lie between the values computed using FIFO and
LIFO.
At Teelo Ltd, when CWA method is used, the stores ledger should
look like this:

Date
$ per $ per $ per
(Oct) Units Total ($) Units Total ($) Units Total ($)
unit unit unit
1 100 2.00 200
2 400 2.10 840 500 2.08 1,040
5 200 2.08 416 300 2.08 624
10 300 2.12 636 600 2.10 1,260
12 400 2.10 840 200 2.10 420
15 100 2.40 240 300 2.20 660
22 100 2.20 220 200 2.20 440
Each issue is valued at the average price computed every time there
is a purchase. For instance, on Oct 2nd, the total value of the new
balance is $1,040. To find the material price per unit, take the value
of the new balance and divide it by the new volume, which gives
$1,040 ÷ 500 units = $2.08. That exercise has to be done after each
purchase, until the end of the period.
For the example above, the total cost of all issues would be $1,476.
The value of the closing inventory is 200 × $2.20 = $440.
Value of issues to production Value of closing inventory

FIFO $ 1,464 $ 452
LIFO $ 1,506 $ 410
CWA $ 1,476 $ 440
PWA $1,490 $ 426
(Refer
below)
182
Periodic Weighted Average (PWA)
The stock price per unit is not calculated until the end of a given
period. This method is very easy as it goes by the following formula:
Average issue price =

Value of all receipts or purchases + Value of opening inventory
Volume of all receipts or purchases + Volume of opening inventory
For Teelo Ltd’s October 2016 store’s transactions, the PWA stock
price would be:
($840 + $636 + $240) + $200 = $2.129 (correct to 3 decimal places)

(400 + 300 + 100) + 100
When the unit costs of an organisation’s purchases change over

time, the different inventory methods can result in significant
differences in cost of sales, and in values of closing inventory. These
differences are important because they affect the organisation’s
financial statements. A note to remember is that the cost of sales is
usually the largest expense on a business organisation’s income
statements and the closing inventory is usually one of the large
assets on their balance sheets. Furthermore, the differences
between the valuation methods can have a significant effect on the
amount of cash the organisation has for use.
183

Explain and illustrate different methods used to price materials issued from inventory (FIFI, LIFO and
periodic and cumulative weighted average costs).
1. In times of declining process, LIFO values closing inventory:
A. Same as FIFO.
B. Lesser than FIFO.
C. Higher than CWA.
D. Same as PWA.
2. When prices are consistently fluctuating, but within a relatively small range, the best valuation method
would be:
A. FIFO
B. LIFO
C. CWA
D. PWA
184
1. C
2. C
185
Chapter 6 Summary
1. Order quantity is the number of units that need to be ordered for the next order.
2. Free stock is the amount of stock available for use. That means the stock has not yet been committed
for sale or use.
3. Three valuation methods:

a. FIFO – Issues are valued at the price of the oldest batch in stock until all units of that batch
are issued out, after which the price of the next oldest batch would be used.
b. LIFO – Issues are valued at the price of the most recent batch until a new batch is received.
c. CWA and PWA:
i. CWA – The issue price is based on the average stock price calculated each time new
stock is purchased. The product costs and value of closing inventory would lie
between the values computed using FIFO and LIFO.
ii. PWA – The stock price per unit equals to value of total inventory (opening and
purchased) divided by volume of total inventory.
186
CHAPTER 7: ACCOUNTING FOR LABOUR Sunway TES
CHAPTER 7: ACCOUNTING FOR LABOUR
Learning Outcomes
TLO D2a. Describe and illustrate the accounting for labour costs (including overtime premiums and idle
time).
TLO D2b. Prepare an analysis of gross and net earnings.
TLO D2c. Explain and illustrate labour remuneration methods.
TLO D2d. Calculate the effect of changes in remuneration methods and changes in productivity on unit
labour costs.
187
7a. The Accounting for Labour Cost

Describe and illustrate the accounting for labour costs (including overtime premiums and idle time).
Introduction
Manpower is an important resource of an organisation, because it is

people who play the key role in converting raw materials into
finished product. People ensure plans are carried out in compliance
with the standards set, and controls are in place to ensure that
everything that happens is in line with goals set. People are also the
ones that make relevant decisions in almost every instance, with or
without the assistance of computers and machines.
There are basically two categories of people in an organisation – the

ones who actually make the product (or provide the service in
service organisation), and the ones who are involved in other ways
in production and operations of an organisation.
The people who actually make the product or provide the service in
a service organisation are said to be directly involved in production,
hence, they come under the category of direct labour. That includes
production workers in a manufacturing organisation, carpenters in a
furniture company, chefs and cooks in a restaurant, and ticket sales
agent in an airline agency. The cost of direct labour can be easily
traced to products made.
The others come under the category of indirect labour, as they are
part of production in some other form. Supervisors, managers and
assistant managers, and even accountants are people who are
indirectly involved in the production. They play a different yet crucial
role in ensuring products are made, accounted for and delivered to
customers. However, the time spent on individual products may not
be as visible as of direct workers. As such, it is usually difficult to
trace the cost of indirect labour to products. So, such costs are
included in calculation of total overheads, which are subsequently
absorbed into the products.
To calculate the labour costs of work done, it important to ascertain

the wages payment method (time-related or piecework based
system), and all the relevant rates (such as basic wage rate and
overtime rate).
Before continuing to examples, it is important to review the

commonly used terms in labour costing.
188
Terminology and Illustrations

Basic Pay
Basic pay of a worker is calculated based on total hours worked and

basic rate of pay.
Basic pay = Total hours worked × Basic rate of pay
For example, if an individual named Jack worked a total of 45 hours

a week at a basic rate of $5 per hour, then his basic pay would be 45
hours × $5 = $225.
Normal Pay
Normal pay is calculated based on the normal or usual hours of work.
Normal pay = Normal hours of work × Basic rate of pay
If Jack’s normal working hours per week is only 40, then his normal
pay is 40hours × $5 per hour = $200.
Overtime Pay
Often, people have to clock in extra hours to finish up work. The

extra time taken is called overtime. It can also be defined as the time
worked in excess of normal hours. The overtime pay is calculated
based on extra hours worked and the overtime rate.
Overtime pay = Overtime hours × Overtime rate
Take note that the overtime rates are usually higher than the basic
rate. Only then, will individuals be motivated to work the extra
hours. Besides that, it is only fair to pay a greater amount when extra
work needs to be done.
If Jack worked an extra 5 hours (apart from the normal 40 hours) on

a certain week, and his overtime rate is $7.50 per hour, then his
overtime pay would be 5 hours × $7.50 = $37.50.
It is, however, important to note that in reality, not all overtime

hours are paid. A lot of executives and managers are not usually
rewarded with overtime pay for the needful extra working hours (on
weekdays and weekends). Then again, they are rewarded in other
ways and means, which includes replacement leaves, performance
bonuses and similar incentives.
The overtime rates are usually quoted with terms like a time and a
half. This simply means that the overtime rate is 50% greater than
189
the basic rate. For instance, if basic rate is $5, then the overtime rate
is $5 × 150% or $5 × 1.5, which would be equal to $7.50. The extra
amount paid above the basic rate is called overtime premium. That
means, the overtime premium rate is $5 × 50% = $2.50.
In Jack’s case, if the overtime is paid at a time and a half, then the
overtime premium would be $5 × 50% × 5 overtime hours = $12.50,
which is the extra earned simply because he chose to complete the
5-hour task during the current week, exceeding his normal working
hours. If the 5-hour task is completed as part of the normal working
hours, then he would not have earned the premium.
Then again, it must be noted that overtime pay is made up of two

main parts – basic pay of the overtime hours, and the overtime
premium.
Overtime pay = Basic pay of overtime + Overtime premium
The basic pay for Jack’s overtime would be $5 × 5 overtime hours =

$25. With the overtime premium, his overtime pay would be $5 ×
150% × 5 overtime hours = $37.50.
Overtime premium of a direct worker is usually treated as indirect

cost (to be discussed further in a later section). But overtime
premium is treated as direct cost in the following situation:
(1) Overtime is worked to meet a specific production demand

Basically, the overtime performed is simply to meet a specific
production demand. That means, all the extra hours of work are
for a specific production demand only, and for no other reason.
Hence, the overtime pay can be directly traced to the products
being made (or service being provided). As such, here, the
overtime premium is treated as direct cost of production.
[Note: Based on the current interpretation by the examiner,

overtime worked to meet a request from customer is only to be
considered a direct cost]
For direct workers, the basic wages for overtime hours should be
charged directly to jobs or tasks in the same way as the normal hours
of direct workers. The charging of the overtime premium will
depend on the circumstances.
190
Idle Time Pay
The time that is paid for but no productive results are obtained.
Possible causes of idle time include machine breakdown, lack of
sales demand and poor scheduling. Disruptions in production such
as malfunction of machinery often result in workers being present,
and paid for, but not being able to produce the desired products.
Idle time may be avoidable or unavoidable.
It is avoidable when production disruptions due to inefficient

scheduling and machine breakdown can be prevented by more
efficient management and regular maintenance services
respectively. Avoidable costs should not be treated as product costs
and as such, be written off to profit or loss accounts.
Idle time may be unavoidable due to normal working conditions or

external factors. This includes shortage of material supplies and/or
machine hours. In such cases, the idle time pay will be treated as
part of production costs.
Idle time is time paid for non-productive activities. It is important

that the amount of idle time and the reasons for it are monitored,
acted upon and idle time pay is paid at basic rate.
Idle time pay = Idle time hours × Basic rate of pay
So, if the basic rate is $5 and there were 6 hours of idle time, then
the idle time pay would be $5 × 6hours = $30.
Direct Labour Cost
Direct labour cost relates to all cost that can be easily identified with
a product. It is usually calculated for direct workers, by deducting
their idle time pay from their basic pay. Where relevant, overtime
premium is treated as part of the direct labour cost.
Direct labour cost = Basic pay of direct workers

– Idle time pay of direct workers
+ Overtime premium (if necessary)
Direct labour costs are credited from the Wages Control account
and debited into the Work in Progress (WIP) account.
191
Indirect Labour Cost
Every other costs related to workforce basically come under indirect

labour cost. Usually, the elements of indirect labour cost include:
✓ Gross wages of indirect workers
✓ Idle time pay of direct workers
✓ Overtime premium of direct workers
✓ Bonuses, allowances and incentives
Indirect labour cost = Gross wages of indirect workers

+ Idle time pay of direct workers
+ Overtime premium of direct workers (if
necessary)
+ Bonuses, allowances and incentives, if any
Indirect labour costs are credited from the Wages Control account
and debited into the Production Overhead Control account.
Labour Cost Journal Entries

RECORDING AND PAYMENT OF TOTAL LABOUR COST
DEBIT WAGES CONTROL ACCOUNT (gross pay)
CREDIT BANK ACCOUNT (net pay)
CREDIT ACCOUNTS PAYABLE (PAYE, NIC and Pension Fund deductions)
ALLOCATION OF DIRECT LABOUR COST TO WORK-IN-PROGRESS

DEBIT WORK IN PROGRESS ACCOUNT
CREDIT WAGES CONTROL ACCOUNT
ALLOCATION OF INDIRECT LABOUR COST TO WORK-IN-PROGRESS

DEBIT PRODUCTION OVERHEADS CONTROL ACCOUNT
CREDIT WAGES CONTROL ACCOUNT
192

Describe and illustrate the accounting for labour costs (including overtime premiums and idle time).
1. Last month, 20 direct workers clocked a total of 4,300 hours, of which 500 were overtime hours and 80
were idle time. Basic rate is set at $12 per hour. During the same period, 3 indirect workers recorded a
total of 520 hours, excluding 80 overtime hours. Their basic rate is set at $15 per hour. All overtime
hours are paid at a time and a half, and were worked to meet general production requirements. What
is the gross pay of the direct workers?
A. $9,000
B. $9,600
C. $51,600
D. $54,600
2. With reference to question 1, what is the indirect workers’ gross pay?

A. $9,000
B. $9,600
C. $51,600
D. $54,600
3. With reference to question 1, what is the direct workers’ basic pay?

A. $3,000
B. $6,000
C. $51,600
D. $54,600
4. With reference to question 1, what is the direct workers’ overtime premium?

A. $3,000
B. $6,000
C. $51,600
D. $54,600
5. With reference to question 1, what is the direct workers’ normal pay?

A. $45,600
B. $51,600
C. $54,600
D. $57,600
6. With reference to question 1, what is the direct workers’ overtime pay?

A. $3,000
B. $6,000
C. $9,000
D. $12,000
7. With reference to question 1, what is the direct labour cost?

A. $50,640
B. $51,600
C. $53,640
D. $54,600
193
8. With reference to question 1, what is the indirect labour cost?

A. $3,960
B. $9,600
C. $9,960
D. $13,560
194
1. D
2. B
3. C
4. A
5. A
6. C
7. A
8. D
195
7b. Analysis of Gross and Net Earnings

Prepare an analysis of gross and net earnings.
Gross Wages
Gross wages are total wages paid out to all employees, which are
debited into the Wages Control account.
Gross wages can be seen as a total of either:

✓ Direct labour cost and indirect labour cost, or
✓ Basic pay of all workers and overtime premium of all workers,
and also bonuses, allowances and incentives, if any, or
✓ Normal pay of all workers and overtime pay of all workers, and
also bonuses, allowances and incentives, if any.
Net Wages
Net wages refer to all amounts payable to employees after

deducting employees’ National Insurance Contribution (NIC) and
Pay As You Earn (PAYE) tax.
Net wages = Gross wages – PAYE Tax – Employee’s NIC
Labour Cost to Employer
This will include employer’s National Insurance Contribution (to all

employees) to the gross wages payable to all employees.
Labour cost to employer = Gross wages + Employer’s NIC
196

Prepare an analysis of gross and net earnings.
1. A particular worker’s gross pay, including his meal and travel allowances were $500 per week. Employee
NIC and PAYE deductions amounted to 10% and 20% (of the gross pay) respectively. What is his net pay
for the week?
A. $350
B. $470
C. $500
D. $650
2. With reference to question 1, what would the weekly labour cost to the employer be, if the Employer
NIC amounted to 15% of the gross pay?
A. $425
B. $485
C. $515
D. $575
197
1. A
2. D
198
7c. Labour Remuneration Methods

Explain and illustrate labour remuneration methods.
Minimum Wage Rate

The lowest hourly wage that an employee may be paid as mandated
by law or stipulated in an employment agreement. Inflation and
other factors necessitate periodic adjustments to the actual number.
EXAMPLE:
The Minimum wage rate in Peninsular Malaysia is RM1,000 per

month.
The Minimum wage rate in Sabah, Sarawak and Labuan is RM920 per
month.
Shift Allowances
Additional allowances given to employees on shift work whose shift
is outside of normal working hours.
EXAMPLE:
A security guard working the midnight shift might earn additional

income through shift allowances.
199
Piecework Pay Scheme

Piecework pay is sometimes called output-related pay, simply
because workers are paid based on their productivity or output
levels. The greater the production volume, the higher the pay. But
there will be a schedule to follow in the payment scheme. Often,
there are different rates for different blocks or levels of production,
such as:
First 100 units paid at $5.50 per unit

Next 50 units $6.20 per unit
Next 30 units $6.80 per unit
With the example schedule given, if a worker, Sam, makes 170 good
units, the piecework pay would be calculated like this:
$
100 × $5.50 = 550.00
50 × $6.20 = 310.00
20 × $6.80 = 136.00
170 996.00
So, Sam makes a total of $996 for his 170 good units.
The main problem here is the quality of the output. Naturally, the
faulty or defect outputs will not be paid for. The fact that employees
can control their income by adjusting their production levels
sometimes results in higher production volume but with poorer
quality of output.
So, to discourage and prevent corrective work and wastage, the

management needs to set an appropriate schedule of volumes and
rates. On top of that, sometimes, there will be minimum wages as
well.
Piecework pay may work in these three ways:
(1) Pay is solely based on productivity, which means volume

production. The gross wages are purely piecework pay.
(2) There is a guaranteed minimum wage, which means is the pay

according to volume of production does not meet a certain
minimum level, the worker is paid the minimum wage. If Sam,
the worker in the above example, should earn a minimum of
$1,000, as per his company policy, then his wages would be
$1,000, and not $996.
(3) There is a basic wage that is paid with the piecework pay. So, if
Sam has a basic wage of $300, then his wage would be $996 +
$300 = $1,296.
200
A pay system based on the number of units produced by the

employee. The system is suited to simple, low skill, repetitive tasks
where quality of output is determined does not vary much among
employees’ skill. There are two types of piecework systems:
1. Standard / simple piecework (flat rate per completed unit)

All unit produced are paid at the same rate. Variable in
nature.
$
Total $
Units Produced
2. Differential piecework (where rate per unit increases at

higher levels of output).
Payment scheme would have different rate strata for
different levels of output.
EXAMPLE:
Output Level < 100 units 101 < 200 units > 200 units
Piecework Rate per Unit $1 $1.2 $1.5
$
Total $
Units Produced
201
3. Piecework Scheme with Guaranteed Minimum Wage

Many piecework schemes provide a guaranteed minimum
wage for employees for occasions when there is not enough
work due to a seasonal slowdown in orders so as to
encourage staff loyalty. This scheme may be incorporated
with standard or differential piecework schemes.
EXAMPLE:
Output Level < 100 units 101 < 200 units > 200 units
Piecework Rate per Unit $1 $1.2 $1.5
Guaranteed Minimum Wage $80
This would mean that if a worker made only 60 units, he will

still earn the guaranteed minimum wage of $80.
$
Total $
Units
Straight Piecework and Differential Piecework
Straight piecework is where a standard rate is agreed for the

production of each unit. This will be based upon an expected time to
produce one unit and the normal rate per hour. The guaranteed
minimum wage provides some security of wages when production is
below a certain level. Beyond that, wages are based upon the level
of output multiplied by a piecework rate per unit and thus the higher
the level of output, the higher the wages paid.
When differential piecework scheme is employed, wages are based

upon level of output multiplied by a piecework rate per unit. The
rate per unit increases on additional units produced when certain
output levels are reached. Three different piecework rates apply in
this case depending upon output levels reached.
Differential piecework scheme does not provide the security of a

guaranteed wage but has the enhanced incentive of increased rates
for higher production.
202
Time-Related Pay
This is a specific term for wages being calculated based on hours
worked, regardless of productivity levels. Here, it is relevant to know
the basic rate and the overtime rates.
Bonuses may be paid on time saved as well. Time saved refers to the
difference between time allowed and time taken, where time taken
is lesser than time allowed (or standard hours of production).
Simple Time-Based Scheme
A flat rate per hour is suitable for temporary workers who are not
entitled to overtime pay. The flat rate system is easy to understand
and to calculate. Workers like cleaners, catering staff and security
personnel are paid under this scheme.
$
Total $
Hours worked
Time-Based Scheme with Overtime
Hourly wages are based on the number of hours worked multiplied

by a basic hourly rate. Total wages may include a premium for
overtime worked. For e.g. overtime hours are paid at 120% of the
basic rate.
EXAMPLE:
Hours Worked Normal Hours Overtime Hours

Rate per Hour $4 $4.8
Overtime Premium --- 20%
203
Premium Bonus Scheme
Premium bonus scheme is where a bonus paid based upon time

saved in doing a job when compared to the standard time allowed.
EXAMPLE:
Budget Actual
Units Produced 40 50
Hours Worked 20 20
Bonus Rate 30% of basic hourly rate of $10
The employee with the above results would have saved the company
5 hours of standard time, so he would be paid and additional $15 as
a bonus.
204
Hybrid Pay Scheme

A remuneration system where pay is calculated based on output and
includes situations where are paid a basic wage plus a bonus based
on output. It combines the elements of piecework and time-based
schemes.
For example, where workers receive an extra $200 if output exceeds

1500 units per day. Increase in output will benefit the workers whilst
reduction in output causes wages to fall. Care must be taken as
quality of output may fall as quantity increases.
High Day Rate

A high day rate is an increased hourly rate given to employees if they
achieve and are able to sustain superior performance. This is to
encourage employees to perform better and earn at a higher rate.
Profit Sharing Scheme

A bonus scheme which allows an employee or a group of employees
to share in the overall profits earned by the employer. The
advantages are increased long term commitment to the company
and encouraging a stable workforce.
Collective or Group Bonus Schemes

Based upon output of a team (not an individual employee). A team
may comprise all employees in an organisation. The disadvantage is
that some members in the team may not work as hard or contribute
as much as other members.
205

Explain and illustrate labour remuneration methods.
1. A company employs the differential piecework scheme in its assembly department. Last month, a total
of 420 units were assembled, of which 25 units failed the inspection and stress test. How much would
the piecework pay be, if the workers were paid by the following schedule?
1 – 150 units $4 per unit
151 – 280 units $4.35 per unit
> 530 units $5 per unit
A. $1,515.60
B. $1,694.50
C. $1,814.50
D. $1,915.75
2. With reference to question 1, if the 420 units were produced in 35 hours by 3 workers paid at a flat rate
of $15 per hour, how much would the individual time-related labour cost be?
A. $525
B. $1,050
C. $1,575
D. $6,300
206
1. B
2. C
207
7d. Effect of Changes in Remuneration Methods

Calculate the effect of changes in remuneration methods and changes in productivity on unit labour costs.
EXAMPLE
Effect on Total Labour Cost and Unit Labour Cost
A chocolate factory has 100 employees who are paid at an hourly

rate of $5.20/hr for a 35-hour week. Overtime rate is $7.00/hr. Each
bar of chocolate takes an average of 1 hour to produce. In an average
week, each employee works 2 hours of overtime.
Management has decided to buy a new machine to improve

productivity which will reduce production time for each unit by 10
minutes. No overtime is expected in future.
Required:
Calculate total labour costs and labour cost/unit underold and new
scheme.
ANSWER:
Scheme Old New
$ $
Normal Hours 18,200 18,200
Overtime Hours $1,400 ---
Total Labour Cost 19,600 18,200
Scheme Old New

Total Units Produced [units] 3,700 4,200
Total Labour Cost / Unit [$ / unit] 5.30 4.33
208

Calculate the effect of changes in remuneration methods and changes in productivity on unit labour
costs.
1. A factory employs 50 workers who are paid $10 per hour for a 38-hour work-week. All overtime is paid
at a time and a half. It is common for each worker to clock 2 overtime hours per week. A fully completed
product requires 4 hours of labour. Assuming, each worker works at the same standard efficiency, how
many units can be made by one worker per week?
A. 10 units
B. 12.5 units
C. 200 units
D. 500 units
2. With reference to question 1, what is the total time-related labour cost?

A. $4,100
B. $10,250
C. $19,500
D. $20,500
3. With reference to question 1, what is the unit labour cost?

A. $8.20
B. $40
C. $41
D. $82
4. With reference to question 1, the remuneration scheme is now fully changed to piecework scheme. The
first 300 units are paid $35 per unit, the next 150 are paid $38 per unit, and all excess units are paid $42
per unit. There are no changes in number of workers nor in total working hours. What is the average
unit labour cost now?
A. $36.60
B. $38.33
C. $40.20
D. $41.85
209
1. A
2. D
3. C
4. A
210
Chapter 7 Summary
1. Basic pay of a worker is calculated based on total hours worked and basic rate of pay.
2. Normal pay is calculated based on the normal or usual hours of work.
3. The overtime pay is calculated based on extra hours worked and the overtime rate. It is made up of
two main parts – basic pay of the overtime hours., and the overtime premium. Overtime premium of
a direct worker is usually treated as indirect cost, except in two situations, where:
a. Overtime is clocked regularly.
b. Overtime is worked at a specific request of a customer.
4. Idle time pay is the amount paid for time not used for production and is paid at basic rate.
5. Direct labour cost is usually calculated for direct workers, by deducting their idle time pay from their
basic pay. Overtime premium is included where relevant.
6. Every other cost related to workforce come under indirect labour cost.
7. Gross wages are total wages paid out to all employees, which is a total of either:
a. Direct labour cost and indirect labour cost, or
b. Basic pay of all workers and overtime premium of all workers, and bonuses, allowances and
incentives, if any, or
c. Normal pay of all workers and overtime pay of all workers, and bonuses, allowances and
incentives, if any.
8. Net wages refer to all amounts payable to employees after deducting employees' National Insurance
Contribution (NIC) and Pay As You Earn (PAYE) tax.
9. Labour cost to employer is made up of employer's NIC and total gross wages.
10. Time-related pay refers to wages being calculated based on hours worked, regardless of productivity
levels.
11. Piecework pay refers wages paid based on workers' productivity levels. It may work in these three
ways:
a. Pay is solely based on productivity.
b. There is a guaranteed minimum wage.
c. There is a basic wage that is paid with the piecework pay.
12. Straight piecework is one where a standard rate is agreed for the production of each unit.
13. When differential piecework scheme is employed, wages are based upon level of output multiplied
by a piecework rate per unit.
211
CHAPTER 8: ACCOUNTING FOR OTHER EXPENSES Sunway TES
CHAPTER 8: ACCOUNTING FOR OTHER EXPENSES
Learning Outcomes
TLO D3a. Explain the process of charging indirect costs to cost centres and cost units and illustrate the
process of cost apportionment for indirect costs (excluding reciprocal service).
TLO D3b. Explain and illustrate the process of cost absorption for indirect costs including the analysis
and interpretation of over/under absorption.
212
8a. Cost Apportionment Process

Explain the process of charging indirect costs to cost centres and cost units and illustrate the process of
cost apportionment for indirect costs (excluding reciprocal service).
Introduction
Overheads refer to the cost of material, labour and expenses that

cannot be economically identified with a product, which is the
saleable cost unit. It encompasses costs such as building rental,
machinery depreciation and salaries of managers.
Overheads may be fixed or variable, and of course, may be semi-

variable as well. Variable overheads change (usually increase) as
activity level increases, such as overtime premium and machine
servicing costs. Fixed overheads, in general, remain constant
regardless of activity level, such as salary of factory manager and of
the accountant.
However, directly attributable fixed overheads (also known as

specific overheads) may change according to activity level too. Full-
time employees fixed salaries would be good examples of directly
attributable fixed overheads, because these costs can be avoided if
activity levels decrease or become zero.
Not all overheads are production overheads. Some are non-

production overheads – such as SDA and finance costs. Production
overheads relate to only production related activities. Non-
production overheads include costs such as sales commission,
salespersons transportation allowance and utility bills. Naturally,
non-production overheads are not included in the production costs
of goods, thus, not included in the valuation of inventory.
Overhead Absorption Rate (OAR)
The overhead absorption rate is computed to absorb the overheads

into the products – to ensure all costs of production and sales are
included in total costs, so that an appropriate selling price can be set.
Production overheads can be absorbed on the basis of:
✓ volume or percentage of machine hour or direct labour hour
✓ percentage of machine hour or direct labour hour
✓ percentage of factory costs
✓ percentage of prime costs
In order to compute the OAR, overheads need to be allocated,

apportioned and re-apportioned first.
213
The Overhead Absorption Process
The process of calculating overhead absorption rates is as shown in

Figure 8.1 below.
Step 1
Allocation and apportionment of overheads to all cost centres
Step 2
Re-apportionment of service cost centre overheads to production cost centres
Step 3
Absorption of overheads
(Computing OAR)
Figure 8.1 Calculating overhead absorption rate
Allocation and Apportionment
Allocation refers to charging an entire expense to a single cost

centre. If an overhead incurs in only a particular cost centre, then
that cost centre is allocated that cost. Usually the cost of indirect
material and labour are allocated to cost centres which incur these
costs. For instance, a Finishing department supervisor’s salary will
be charged to only Finishing department and no other departments.
Apportionment refers to sharing out total overheads to all cost

centres according to a certain basis of apportionment and rate of
utilisation by the cost centre. Overheads like building rental and
lighting will be shared out to all cost centres based floor area
occupied by each cost centre.
214
Table 8.1 shows some examples of overheads and their common

bases of apportionment.
Costs Basis of apportionment

Indirect labour Number of indirect employees
Holiday pay and national insurance Number of employees
Machine maintenance Machine operating hours
Insurance of machinery Net book value of machines
Depreciation of machinery Net book value of machines
Insurance of building Net book value of building or floor area
Depreciation of building Net book value of building or floor area
Rent and rates Floor area
Heat and light Floor area
Table 8.1 Overheads and bases of apportionment
Re-Apportionment
Re-apportionment refers to sharing out the overheads of the

service cost centres to the production cost centres. This is done
according to production cost centres’ utilization percentage of the
service cost centres. Re-apportionment depends on the extent of
services provided. Questions like “How often does Assembly make
requisitions from the Stores?” and “How many employees are there
in assembly who eat at the canteen?” have to be asked and
answered in order to determine the utilisation rate.
All overheads of service cost centres are eventually re-apportioned

to production cost centres because of two reasons:
1. Service cost centres exist to provide support to production cost
centres, and not the other way around.
2. Revenue is generated by production cost centres’ efforts, and
therefore all overheads are borne by production cost centres for
convenience of costing and pricing.
There are three methods of re-apportionment:

1. Direct
2. Step-down
3. Reciprocal (FMA)
Direct Re-Apportionment Method
When this re-apportionment method is employed, overheads of

each service cost centre are re-apportioned to only the production
cost centres. The direct method of re-apportionment is only
applicable in situations where (it is assumed that) the service cost
centres in question are not utilised by other service cost centres. As
such, the service cost centres overheads are conveniently shared
among only the production cost centres.
215
Let’s take a look at the following example:
A manufacturing business has two production cost centres, Alpha

and Beta, and two service cost centres, Gamma and Lamda. The
service cost centres are only utilised by the production cost centres.
The expenses expected to incur in the forthcoming year are as

follows:
Expense Items $
Indirect Alpha 25,000

Materials Beta 10,000
Lamda 5,000
Indirect Alpha 20,000

Labour Beta 15,000
Gamma 25,000
Lamda 35,000
Machinery Depreciation 15,000

Rent and Rates 80,000
Heat and Light 18,000
Power 25,000
Insurance of Machinery 12,000
Extra information required to compute overhead absorption rate

are:
Item Alpha Beta Gamma Lamda Total

Floor Area (sq m) 2,000 1,500 800 700 5,000
Power Usage (%) 50 35 10 5 100 %
Net Book Value of
55,000 30,000 10,000 5,000 $100,000
Machinery ($)
The following information reflects on usage of Gamma and Lamda

by Alpha and Beta.
Alpha Beta
Gamma 55% 45%
Lamda 30% 70%
Applying the direct re-apportionment method would require an

overhead analysis sheet to be prepared. This sheet would show the
allocated, apportioned, re-apportioned and the final amounts of
overhead in each cost centre.
216
Overhead analysis sheet
Basis of
Apportionme Lamda
nt Alpha ($) Beta ($) Gamma ($) ($) Total ($)
Allocation:
Indirect
25,000 10,000 5,000 40,000
Materials
Indirect Labour 20,000 15,000 25,000 35,000 95,000
Apportionment:
Machinery NBV of
8,250 4,500 1,500 750 15,000
Depreciation Machinery
Rent & Rates Floor Area 32,000 24,000 12,800 11,200 80,000
Heat & Light Floor Area 7,200 5,400 2,880 2,520 18,000
Power Power Usage 12,500 8,750 2,500 1,250 25,000
Insurance of NBV of
6,600 3,600 1,200 600 12,000
Machinery Machinery
TOTAL 111,550 71,250 45,880 56,320 285,000
Re-apportionment:
Re-apportion Lamda to: (56,320)

Alpha 16,896
Beta 39,424
Re-apportion Gamma to: (45,880)
Alpha 25,234
Beta 20,646
TOTAL 153,680 131,320 0 0 285,000
Step Down Method
In the step down method, the cost is re-apportioned from one

service centre to another service centre. This is in contrast with the
direct method, where cost of the service centre is only
reapportioned to the production centre.
Steps to re-apportion overheads following the step down method:

1) Find out the service centre that serves all other centres.
2) Apportion the cost of that service centre first to other service
centres.
3) Subsequently, re-apportion the cost of other service centres.
217
Example
A factory consists of two production cost centres (A and B) and two
service cost centres (C and D).
The total overheads allocated and apportioned to each centre are as
follows:
A B C D
40,000 50,000 30,000 18,000
A B C D
Percentage of service centre C 30% 70% - -
Percentage of service centre D 50% 40% 10% -
The company apportions service cost centre costs to production cost

centres using a method that fully recognizes any work done by one
service cost centre to another.
What are the total overheads for production cost centre A after the
reapportionment of all service centre costs?
Answer
1) From the sentence, the company apportions service cost centre

costs to production cost centres using a method that fully
recognizes any work done by one service cost centre to another,
we know we have to use step down method.
2) Find the service cost centre that serves all others, the answer is
Service Centre D, as service centre D serves service centre C also.
3) Re-apportion service centre D first.
D to A 0.5 x 18000 9,000

D to B 0.4 x 18000 7,200
D to C 0.1 x 18000 1,800
4) Next re-apportion service centre.
Note: Service centre C has increased overheads of 1,800, so the

total overheads is $31,800.
C to A 0.3 x 31800 9540

C to B 0.7 x 31800 22260
5) The total cost to Production Centre A is $40,000 + $9,000 +

$9,540 = $58,540
218
Overhead Absorption
Once overheads have been re-apportioned, it is time to absorb the

overheads into the products. The OAR has to be determined by
dividing the adjusted overheads in each production cost centre by
either the machine hours or the labour hours, according to the
absorption criteria set.
If a production cost centre is a machine intensive one, usually, the

OAR is adjusted overheads divided by machine hours. If the
production cost centre is a labour-intensive department, then the
OAR equals to adjusted overheads divided by labour hours.
Overhead absorption rate (OAR) =

Overheads after re-apportionment
Total machine hours or labour hours
Note:
The decision to use total machine hours or total labour hours

depends on:
• Whether the department is more machine intensive or labour
intensive
• The preference of the cost accountant or managers
The OAR being calculated here is in fact, the predetermined

overhead absorption rate (also known as the predetermined
recovery rate). This value is computed based on budgeted figures.
The overheads for actual production volume based on the

predetermined overhead absorption rate is called absorbed
overhead.
Absorbed overhead = Actual production ×

Predetermined overhead absorption rate
For example, if the predetermined overhead absorption rate per

unit is $12, and 500 units are produced, the absorbed overhead is
$12 × 500 = $6,000.
But in reality, the actual overheads are usually not the same as the
absorbed overheads. We will look at it in the Over- or Under-
Absorption section of this chapter.
219

Explain the process of charging indirect costs to cost centres and cost units and illustrate the process of
cost apportionment for indirect costs (excluding reciprocal service).
1. Which one of the following steps in overhead absorption is not matched with the correct explanation?
A. Allocation – the overhead incurred only in a particular cost centre is charged only to that cost
centre.
B. Apportionment – a particular overhead incurred because a few cost centres cause it, has to be
shared among them according to appropriate proportions.
C. Re-apportionment – all the production cost centre overheads are channelled solely to service cost
centres for costing purposes.
D. Absorption – the overheads are included in the product cost estimations according to machine
and labour hours consumed pro unit of product.
2. Which statement is true with regard to the direct re-apportionment method?
A. The overheads allocated and apportioned to one service cost centre may be re-apportioned to
another service cost centre.
B. Sequencing of the re-apportionment exercise is not necessary.
C. All cost centres overheads are shared among all cost centres.
D. There may be errors in computations if the overheads of one service cost centre is re-apportioned
prior to another centre.
220
1. C
2. B
221
8b. Over / Under-Absorption Costing

Explain and illustrate the process of cost absorption for indirect costs including the analysis and
interpretation of over/under absorption.
Over- and Under-Absorbed Overhead
Over- and under-absorbed overheads are results of differences

between actual overheads and absorbed overheads.
Over/(Under)-Absorbed Overheads = Actual Overheads versus

Absorbed Overheads
Over-absorbed overheads are obtained when the actual overheads

are lesser than absorbed overheads. There is unexpected savings of
money here. On the other hand, under-absorbed overheads are
obtained when the actual overheads are greater than absorbed
overheads. So, there is unexpected extra cost.
The over-absorbed overhead is written off as a credit in the P/L

Account, and the under-absorbed overhead is written off as a debit.
The Journal entries for recognition of fixed production overheads

are as follows:
RECOGNITION OF ACTUAL PRODUCTION OVERHEADS INCURRED
DEBIT PRODUCTION OVERHEADS ACCOUNT (actual

overheads incurred)
CREDIT MATERIALS CONTROL ACCOUNT (indirect materials)
CREDIT WAGES CONTROL ACCOUNT (indirect labour)
CREDIT CASH / BANK (indirect expenses)
RECOGNITION OF ABSORBED PRODUCTION OVERHEADS TO

WORK IN PROGRESS
DEBIT WORK-IN-PROGRESS ACCOUNT (overheads absorbed)

RECOGNITION OF UNDER / OVER ABSORPTION TO INCOME

STATEMENT
If over-absorbed (overheads absorbed > actual overheads)

DEBIT PRODUCTION OVERHEADS ACCOUNT
CREDIT STATEMENT OF PROFIT OR LOSS (gain)
222
If under-absorbed (overheads absorbed < actual overheads)

DEBIT STATEMENT OF PROFIT OR LOSS (loss)
To understand the over- and under-absorption better, let’s look at

QT Ltd’s production budget and actual results for quarter 2 of year
2005:
QT Ltd budgeted to make 200units of Product L. Its unit costs are as

follows:
Direct material $4
Direct labour $5
L will be sold at $16 per unit. The budgeted production overheads

were $420.
The actual results were as follows:

Units of Production 220 units
Direct Material Cost $380
Direct Labour $400
Overheads Incurred $450
Now, the predetermined overhead absorption rate is $420 ÷ 200

units = $2.10 per unit.
The absorbed overheads were $2.10 × 220 units = $462. The actual
overheads are lesser than absorbed overheads by $462 - $450 = $12.
That means, there is an over-absorption of $12.
223

Explain and illustrate the process of cost absorption for indirect costs including the analysis and
interpretation of over/under absorption.
1. Overheads can be absorbed on all the following bases, except:

A. Sales price.
B. Direct material costs.
C. Prime costs.
D. Production costs.
2. Which of the following statements is false?

A. Actual overheads are based on actual levels of activity.
B. Absorbed overheads are based on actual levels of activity.
C. Budgeted overheads are based on budgeted levels of activity.
D. Budgeted overheads can be based on actual levels of activity.
3. Given that the actual overheads were $28,500 for 4,150 actual machine hours worked. The budgeted
overheads were $30,000 for an estimated 4,000 machine hours. The following deductions can be
made, EXCEPT:
A. The absorbed overheads were $31,125.
B. The actual overhead absorption rate was $6.867 per machine hour.
C. The predetermined overhead absorption rate was $7.50 per unit.
D. The over-absorbed overhead was $2,625.
224
1. A
2. D
3. C
225
Chapter 8 Summary
1. Overheads refer to the cost of material, labour and expenses which cannot be economically
identified with a product.
2. Production overheads relate to only production related activities, and non-production

overheads relate to financing and SDA activities. Non-production costs are not included
in the valuation of inventory.
3. OAR is computed to absorb the overheads into the products. In the traditional
absorption costing method, production overheads are absorbed on the basis of:
a. volume or percentage of machine hour or direct labour hour
b. percentage of machine hour or direct labour hour
c. percentage of prime costs factory costs
d. percentage of prime costs
4. Four steps of the overhead absorption process:

a. Allocation – charging an entire expense to a single cost centre.
b. Apportionment – sharing out total overheads to all cost centres according to a certain basis
of apportionment and rate of utilisation by the cost centre.
c. Re-apportionment – sharing out the overheads of the service cost centres to the production
cost centres according to production cost centres' utilization percentage of the service cost
centres.
d. Absorption – total overheads in prod cost centres are absorbed into individual
units of production.
5. Overheads of service cost centres are re-apportioned to production cost centres because:
a. Service cost centres exist to provide support to production cost centres.
b. Revenue is generated by production cost centres' efforts. So, all overheads are borne by
production cost centres for convenience of costing and pricing.
6. Two methods of reapportionment:

a. Direct – overheads of each service cost centre are re-apportioned to only the production
cost centres.
b. Step-down – overheads of each service cost centre to be re-apportioned to all other cost
centres, where mutual utilisation of services does not exist among service cost centres.
7. Over/(under)-absorbed overheads are results of differences between actual overheads and absorbed
overheads.
a. Over-absorbed overheads are obtained when the actual overheads are lesser than absorbed
overheads.
b. Under-absorbed overheads are obtained when the actual overheads are greater than
absorbed overheads.
226
CHAPTER 9: PROFIT REPORTING Sunway TES
CHAPTER 9: PROFIT REPORTING
Learning Outcomes
TLO C1d. Prepare, and explain the nature and purpose of, profit statements in absorption and marginal
costing formats.
TLO C1e. Calculate the cost and profit of a product or service.
227
9a. The Nature and Purpose of Absorption and Marginal Costing

Learning Outcome (ACCA Study Guide Area C, Topic C1d):
Prepare, and explain the nature and purpose of, profit statements in absorption and marginal costing
formats.
What is Profit Reporting?

For stock valuation and profit calculation purposes, a management
accountant has to ascertain the cost of cost units produced.
In stock valuation, there are two different ways of treating fixed

manufacturing overhead - absorption costing (the traditional
approach) and marginal costing.
The primary difference between the two methods lies in the

treatment of fixed production costs.
The Absorption Costing Approach

Absorption Costing is also known as full costing.
Its main feature is that inventory is valued at full production costs

(including a share of fixed production overheads).
Non-production overheads (selling, distribution and administration)

are deducted below gross profit as period costs.
228
In this method, fixed production cost is absorbed into each product.

It is attached to individual units of production. It is part of product
cost. Costs of production are the total of variable cost of production
and fixed cost of production.
Costs of production = Variable costs of production

+ Fixed cost of production
The absorption costing product cost is the total of variable

production cost per unit and fixed production cost per unit.
Absorption costing product cost = Variable production cost/unit

+Fixed production cost/unit
To calculate fixed production cost per unit, the total fixed cost is
divided by standard or normal production volume.
Fixed production cost per unit = Fixed production cost

Standard production volume
Closing inventory must be valued at full production cost. In the

presence of opening inventory, there is bound to be an increase in
fixed cost computation due to fixed production costs that are
transferred from previous accounting period.
The gross profit is then computed this way:
Gross profit = Sales revenue – ALL production cost of sales
After that,
Absorption costing profit = Adjusted gross profit

– Non-production costs
However, the gross profit might need to be adjusted for over /

(under)-absorption of overheads.
229
Over / (Under)-Absorption
If the actual fixed overheads for the term exceed absorbed fixed
overheads, then there will under-absorption, and that value
becomes part of cost of sales. But if the actual fixed overheads are
lesser than absorbed fixed overheads, there will over-absorption,
and that will be part of gross profit.
Under-absorbed overhead also incurs when actual production

volume is lesser than normal production volume. That means the
fixed costs were not fully utilised to produce up to normal
production volume. It implies that the difference volume (between
actual production and normal production) has to be produced with
another set of fixed costs. So, there is an unnecessary increase in
overall costs, thus lowering profit in the form of under-absorbed
overhead.
Similarly, over-absorbed overhead incurs when actual production

volume is greater than normal production volume. Fixed costs have
been over-utilised to produce more units compared to normal
production volume. As such, the fixed costs of producing in another
batch or term can be avoided. So, overall total costs decrease,
resulting in an increase in profit in the form of over-absorbed
overhead.
In chapter 8, the concept of over/(under)-absorbed overheads has

been explained this way:
Over / (under) absorbed overheads =

Difference between Actual overheads and Absorbed overheads
However, in the absence of data to compute absorbed overheads,

the over/under-absorbed overheads can be computed as the
product of fixed production cost per unit and difference between
actual and normal production volumes.
Over / (under) absorbed overheads =

Fixed production cost/unit × (Difference between Actual and
Normal production volumes)
230
Absorption Costing Format:
$
𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑈𝑛𝑖𝑡𝑠 𝑆𝑜𝑙𝑑
× 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
Sales Revenue XXX
𝑪𝑶𝑮𝑺
= 𝑈𝑛𝑖𝑡𝑠 𝑆𝑜𝑙𝑑
× 𝐹𝑢𝑙𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Less Cost of Goods Sold (COGS) (XXX)
𝑭𝒖𝒍𝒍 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
= 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
+ 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑏𝑠𝑜𝑟𝑝𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 (𝑂𝐴𝑅)
Gross Profit XXX 𝑶𝑨𝑹

= 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
÷ 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Less (Under) / Over-absorption (XXX) or XXX − 𝐶𝑂𝐺𝑆
𝑼𝒏𝒅𝒆𝒓/ 𝑶𝒗𝒆𝒓-𝒂𝒃𝒔𝒐𝒓𝒑𝒕𝒊𝒐𝒏
Adjusted Gross Profit XXX = 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑
− 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅𝒔 𝒂𝒃𝒔𝒐𝒓𝒃𝒆𝒅
= 𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
Less Non-Production Costs × 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐴𝑏𝑠𝑜𝑟𝑝𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
(Selling, Distribution, (XXX)
Administration)
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
= 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Net Profit XXX − 𝑁𝑜𝑛-𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠
231
The Marginal Costing Approach

Also known as variable costing or direct costing.
Production overheads are separated into fixed and variable costs.
Fixed production costs are treated as period costs and are charged
to the profit and loss account in full in the period they are incurred.
Opening and closing stocks are valued at variable production cost.
In marginal costing, contribution instead of gross profit is calculated.
Why do we use Marginal Costing?
For any given period of time, fixed costs will be the same, for any
volume of sales and production (provided that the level of activity is
within the ‘relevant range’).
Therefore, by selling an extra item of product or service the following

will happen:
• Revenue will increase by the sales value of the item sold.
• Costs will increase by the variable cost per unit.
• Profit will increase by the amount of contribution earned from

the extra item.
This means that the more you sell,
Similarly, if the volume of sales falls by one item, the profit will fall the more contribution, and profit
you will make!
by the amount of contribution earned from the item.
Key understanding for Cost-
Profit measurement should be based on an analysis of total
Volume-Profit Analysis in MA2
contribution. Since fixed costs relate to a period of time, and do not
change with increases or decreases in sales volume, it is misleading
to charge units of sale with a share of fixed costs. 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
= 𝑆𝑎𝑙𝑒𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
When a unit of product is made, the extra costs incurred in its
manufacture are the variable production costs. All fixed costs would be considered
period costs.
Example 9.2
Revenue
Lucy sells a cake: Increase by
$3 Contribution
Selling Price: $3 Increase by
Costs
Variable Costs: $2 $1!
Increase by
$2
232
The method treats fixed cost as period cost, which means that the
fixed cost is applied in full for the accounting period. The cost is not
carried forward to the next accounting period. That means the fixed
cost is not attached to the units of production. As such, the product
cost comprises only of variable production costs; closing stock is
valued at variable production costs.
The marginal costing product cost is equivalent to only the variable

production cost per unit.
Marginal costing product cost = variable production cost per unit
Its variable cost of sales would be:
Variable cost of sales = Variable production cost of sales

+ Variable non-production cost of sales
Variable cost of sales=

(Variable production cost per unit × Sales volume)
+ Variable non-production cost of sales
Variable cost of sales (VCOS) can be referred to as marginal cost of

sales, because this cost directly reflects the increase in sales volume.
Unit marginal cost of sales is the extra cost that incurs when an
extra unit is sold.
In order to compute the marginal costing profit, contribution must

be calculated. Contribution reflects on how much of sales revenue
can cover fixed cost after deduction of all variable costs.
Contribution = Sales revenue – ALL Variable costs
The marginal costing profit is then computed by deducting all fixed

cost from contribution.
Marginal costing profit = Contribution – Fixed costs
233
Principles of Marginal Costing
There are four principles.
(1) Fixed cost is the same throughout the entire accounting period.
Selling an extra unit increases:
✓ Revenue by selling price;
✓ Costs by variable cost per unit;
✓ Profit by contribution per unit.
Note:
Fixed cost is not affected by increase in sales volume.
(2) Profit is directly affected by contribution per unit. Increase and

decrease in sales volume reduces profit according to
contribution earned. A decline in sales volume results in a
decline in profit, which equals to the amount of contribution
lost.
(3) Profit should be measured only by analysing total contribution.
(4) Extra cost of production is variable costs of production.
The principles are summarised in Table 9.1.
FC is constant within the relevant range of activity.

ONE extra item sold → revenue + selling price.
Principle 1
→ cost + variable cost/unit.
→ profit + contribution/unit.
Sales volume drops → Profit drops by
Principle 2
contribution lost.
Profit adjusted according to total contribution.
Principle 3
(FC same).
Extra costs of production = variable production
Principle 4
costs.
234
Marginal Costing Reporting Format
$
𝐒𝐚𝐥𝐞𝐬 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 = Units Sold
× Selling Price
Sales Revenue XXX 𝐂𝐎𝐆𝐒

= Units Sold
× Variable Production Cost per unit
𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭

Less Cost of Goods Sold = Prime Costs
(XXX)
(COGS) + Variable production overheads
All non-production variable costs

Less Non-Production Variable
(XXX) would be included here ABOVE
Costs
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧
= Sales − Variable Costs of Sales
Contribution XXX − Variable Non-production Costs
If no change in inventory;
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧
= Sales − Total Variable Costs
Less Fixed Costs (XXX)
𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭𝐬
= Fixed Production Overheads
+ Fixed Non-Production Costs
Marginal Profit
XXX
(Variable Profit)
𝐌𝐚𝐫𝐠𝐢𝐧𝐚𝐥 𝐏𝐫𝐨𝐟𝐢𝐭
= Contribution − Total Fixed Costs
235
EXAMPLE 1: Calculate Absorption and Marginal costing profits
Nilu Ltd that makes and sells a household product, Superbrush,

which is sold for $20 per unit. Its variable cost per unit is $12 and the
fixed production overhead was $40,000 for a normal production
volume of 10,000 units.
The production and sales data for January and February 20X5 are as
follows:
January February
Production (units) 12,000 9,000
Sales (units) 8,000 10,000
Required:
Prepare the absorption and marginal costing statements.
236
ANSWER
Absorption costing
January February
$ $
Sales 160,000 200,000
Cost of sales (128,000) (160,000)
Gross profit 32,000 40,000
Over/(under) absorption* 8,000 (4,000)
Adjusted/net profit 40,000 36,000
Workings:
a. Sales
January February
Units sold 8,000 10,000
Selling price per unit $20 $20
Sales revenue $160,000 $200,000
b. Cost per unit
$
Variable production cost per unit 12
Fixed production cost per unit (OAR) 4
Absorption cost per unit 16
c. Fixed production cost per unit (OAR)
Budgeted overheads $40,000

Budgeted activity 10,000
Fixed production cost per unit (OAR) $4
d. Cost of sales
January February
Units sold 8,000 10,000
Absorption cost per unit $16 $16
Cost of sales $128,000 $160,000
237
e. Over/(under) absorption
January February
Fixed cost per unit (OAR) $4 $4
Units produced 12,000 9,000
Absorbed fixed production $48,000 $36,000
overhead
Actual fixed production $40,000 $40,000
overhead
Over/(under) absorption $8,000 ($4,000)
Marginal costing
January February
$ $
Sales 160,000 200,000
Variable cost of sales (96,000) (120,000)
Contribution 64,000 80,000
Fixed production overhead (40,000) (40,000)
Net profit 24,000 40,000
Workings:
a. Cost per unit
$
Variable production cost per unit 12
Marginal cost per unit 12
b. Variable cost of sales
January February
Units sold 8,000 10,000
Marginal cost per unit $12 $12
Variable cost of sales $96,000 $120,000
238
EXAMPLE 2: Calculate absorption and marginal costing profits
Blue Bottle Ltd. produces Product A, which is budgeted to use 2kg of

materials, and 1 hour of labour to produce. Materials is purchased
at $5 per kg, while labour is paid at a rate of $3 per hour. Product A’s
selling price is $40 per unit.
Variable production overheads have been calculated to be $2 per

unit, while the budgeted fixed production overhead is $75,000 in
total, at a normal production capacity of 10,000 units per month.
For the month of January and February 20X8, the actual fixed
production overhead was as budgeted.
The variable component of the actual selling expenses for both

January and February were 10% of sales, while the fixed component
of actual selling and administration expenses were $12,000 and
$23,000 respectively.
There were no opening stocks of product A at the beginning of

January 20X8.
Actual production and inventory figures are as follows:
January February
Production (units) 11,000 9,000
Closing inventory (units) 3,000 1,000
Required:
Calculate for Blue Bottle Ltd, for both the months of January and
February 20X8 respectively:
a. The absorption costing profit

b. The marginal costing profit
239
ANSWER
Absorption costing
January February
$ $
Sales 320,000 440,000
Cost of sales (180,000) (247,500)
Gross profit 140,000 192,500
Over/(under) absorption 7,500 (7,500)
Adjusted gross profit 147,500 185,000
Non-production costs (67,000) (79,000)
Net profit 80,500 106,000
Workings:
a. Unit sold
January February
(units) (units)
Opening inventory - 3,000
Closing inventory (3,000) (1,000)
Units sold 8,000 11,000
b. Sales
January February
Units sold 8,000 11,000
Selling price per unit $40 $40
Sales revenue $320,000 $440,000
c. Cost per unit
$ per unit
Direct labour (1 hour per unit x $3 per hour) 3
Direct material (2kg per unit x $5 per kg) 10
Prime cost 13
Variable production overhead 2
Fixed production overhead 7.50
Absorption cost per unit 22.50
240
d. Fixed production cost per unit (OAR)
Budgeted overheads $75,000

Budgeted activity 10,000
Fixed production cost per unit (OAR) $7.50
e. Cost of sales
January February
Units sold 8,000 11,000
Absorption cost per unit $22.50 $22.50
Sales revenue $180,000 $247,500
f. Over/(under) absorption
January February
Fixed cost per unit (OAR) $7.50 $7.50
Absorbed fixed production $82,500 $67,500
overhead
Actual fixed production $75,000 $75,000
overhead
Over/(under) absorption $7,500 ($7,500)
g. Non-production costs
January February
$ $
Selling expenses – variable 32,000 44,000
– fixed 12,000 12,000
Administrative expenses 23,000 23,000
Total non-production costs 67,000 79,000
241
Marginal costing
January February
$ $
Sales 320,000 440,000
Variable cost of sales (120,000) (165,000)
Variable non-production costs (32,000) (44,000)
Contribution 168,000 231,000
Fixed production overhead (75,000) (75,000)
Fixed non-production costs (35,000) (35,000)
Net profit 58,000 121,000
Workings:
a. Cost per unit
$ per unit
Direct labour (1 hour per unit x $3 per hour) 3
Direct material (2 kg per unit x $5 per kg) 10
Prime cost 13
Variable production overhead 2
Marginal cost per unit 15
b. Cost of sales
January February
Units sold 8,000 11,000
Absorption cost per unit $15 $15
Cost of sales $120,000 $165,000
c. Variable non-production costs
January February
$ $
Selling expenses 32,000 44,000
d. Fixed non-production costs
January February
$ $
Selling expenses 12,000 12,000
Administrative expenses 23,000 23,000
Total non-production costs 35,000 35,000
242
Comparison of Profit under Absorption Costing and Marginal

AC inventory:
Costing methods
The difference between Absorption Costing and Marginal Costing Full Production Cost
profit is the treatment of production overheads. (Variable Production Costs
+ OAR)
Marginal Costing expenses off production overheads as a period cost
in the period incurred.
Absorption Costing capitalizes production overheads into unsold MC Inventory:

inventory, and then expenses these overheads when the inventory Variable Production Cost
is sold. only
In the long term, there is no difference between Absorption Costing (Variable Production Costs)
and Marginal Costing profit.
Relationship between Change in Inventory and the Absorption

Costing and Marginal Costing Profit Difference
Sales Units Sales Units

< >
Production Units Production Units
Why does this effect happen?
When using Absorption Costing,

and production is more than sales,
a lot of production overheads are
capitalized into unsold inventory.
Opening Inventory Opening Inventory When this inventory is sold, the

< > capitalized overheads are
expensed as Cost of Goods Sold.
Closing Inventory Closing Inventory
Also examined in MA2
MC Profit MC Profit
< >
AC Profit AC Profit
243
The values of units sold and closing inventory greatly depend on the
profit reporting method used.
With marginal costing, it has been made clear that the cost of
production comprises of only variable costs, and that fixed costs of
sales are applied in full for the accounting period. As such, the value
of closing inventory will comprise only of variable costs too.
However, it is not the same with absorption costing. The value of all
goods produced and sold comprise of both the variable and the fixed
cost elements. So, there is a portion of fixed costs in every sold
product, in every unsold product – closing inventory comprises of
both variable and fixed costs.
When an accounting period records no opening inventory, but has

closing inventory, the absorption costing profit will be greater than
that of marginal costing. This is because, with absorption costing, the
fixed costs of sales applied for that term is only the fixed costs of the
goods sold. The fixed costs attached to the closing inventory are not
charged in the current term, instead are charged in the term where
the closing inventory is sold off. As such, the total costs recorded for
the accounting term is lower than the total costs recorded using the
marginal costing method. When total costs are lower, naturally,
profit recorded would be higher.
If there were opening and closing inventory, then the inventory

volumes must be compared to see which costing method results in
higher profit. The assumption here is that the fixed costs per unit
and variable costs per unit are the same for both previous and
current accounting period. With absorption costing, when closing
inventory exceeds opening inventory, the total fixed cost attached
to the products in closing inventory are greater than the total fixed
cost of opening inventory. So, net fixed cost recorded in the current
term will be lower than the budgeted fixed cost for the term. Again,
part of the total cost (which is the fixed cost) gets transferred to the
forthcoming accounting period. As such, profit reported under
absorption costing method will be greater than the marginal costing
profit.
However, if opening inventory exceeds closing inventory, owing to

recording of fixed costs from the previous term, the net fixed costs
for the term would be higher than that of marginal costing fixed
costs. As a result, total cost recorded with absorption costing would
be greater and the profit lower than those of marginal costing.
In summary, when closing inventory exceeds opening inventory,

absorption costing profit is greater than marginal costing profit, and
vice-versa.
244
Absorption Costing Profit and Marginal Costing Profit

Reconciliation Format
$ 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
= 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠
− 𝑆𝑎𝑙𝑒𝑠 𝑢𝑛𝑖𝑡𝑠
Marginal Costing Profit XXX
OR;
Add Fixed Production
Overheads Capitalized 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
XXX or (XXX) = 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ×
𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐴𝑏𝑠𝑜𝑟𝑝𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Absorption Costing Profit XXX
At the same time, the following formula can be used to find

a missing value:
Marginal costing profit = Absorption costing profit

+ [Fixed cost/unit
x (opening inv – closing inv)]
For instance, if the absorption costing profit is $25,000

when closing inventory exceeds opening inventory by 2,000
units, and the fixed production overhead per unit is $5, then
the marginal costing profit would be:
$25,000 + $5 × (–2,000) = $15,000
245
Advantages of Absorption Costing

1. Absorption Costing recognizes the importance of fixed costs.
Marginal Costing focuses only on contribution and ignores the fact

that fixed costs must be met in long term.
If decision is based on variable costs only, sales may be insufficient

to cover all the costs, including fixed costs.
Absorption Costing ensures fixed costs are covered.
2. Absorption Costing follows matching concept.
This is important for business with products facing seasonal

demand. In Marginal Costing, fixed overheads incurred will be
charged regardless of sales level. This results in a low profit or even
loss in period with low demand.
By contrast, in Absorption Costing, fixed overheads will be carried

forward in closing stock and matched with sales in year of sales.
(See Example 9.8)
3. Fixed overheads are essential.
It is argued that production of goods is not possible without fixed

overheads. Thus, fixed overheads must be part of stock valuation.
4. Consistency with external reporting.
Directors may prefer an internal accounting system that does not

conflict with external financial reporting requirements.
Example 9.7 Example 9.8
Lucy uses the AC cost per Recognizing inventory using

unit as guidance on AC costing allows Lucy to
setting selling prices for accurately report her
her cakes, because she financial performance
knows that the selling according to the standards
price must cover a portion of financial reporting, where
of the fixed costs. costs are matched with
corresponding revenues.
246
Disadvantages of Absorption Costing She now finds ways

Cost-Volume-Profit a e
to beismor
Analysis
1. Not suitable for decision-making. efficient at using
management these
accounting
As absorption costing emphasized on total cost nam ely both variable expensivethat ingredients
technique examines the (less
relationship between volume
wastage) or finds cheaper of
and fixed, it is not so useful for management to use to make
sales to costs andand
alternatives profits.
suppliers o f
decisions, planning and control.
similar quality.
(example, if a firm sells 10 more
2. Cost-Volume-Profit Relationship is ignored. units, how much does profit
Absorption costing’s focus is for the full cost of inve ntory to be increase by?)
recognized, and ignores cost behaviour.
Key topic in MA2
Advantages of Marginal Costing
1. Useful for decision making.
How does this happen?
Marginal Costing analyses costs into fixed and variable behaviour.
The cost analysis will help to determine relevant costs for decision A manager of a business that is
making. Besides that, projections of future revenue and costs for making losses may try to capitalize
fixed overheads into unsold
different levels of activity are possible. (See Example 9.9)
inventory. This leads to an
2. Reflection of real profits. increasing pile of unsold inventory,
but the loss is not recognized on
Absorption Costing may result in manipulation of profit. In
the SOPL.
Absorption Costing, when stock level fluctuates significantly, profit
will be distorted. Managers may deliberately alter stock levels to IAS 2: Inventories prescribes the
influence the profit, especially when bonus is based on profits. treatment for this problem, in that
inventory must be valued at the
Marginal Costing avoids this problem.
lower of cost or net realizable
3. No capitalisation of fixed overheads in unsold stock. value.
In Marginal Costing, fixed overheads are expensed to profit However, this valuation is often
statement in the period they are incurred. arbitrary until it’s too late.
With Absorption Costing, only some fixed overheads are expensed

while another portion will be carried forward in following period.
As such, Absorption Costing’s profit for the current period will be

distorted.
4. No need for arbitrary apportionment of overheads.
Avoids the problem of determining suitable basis for apportionment

and absorption which is needed in Absorption Costing.
Example
By using MC, Lucy realizes that some of the ingredients she uses in her
cakes are variable and make up a lot of her variable costs.
247
Disadvantages of Marginal Costing

The separation of costs into fixed and variable is difficult and
sometimes gives misleading results.
Under marginal costing, stocks and work in progress are

understated. The exclusion of fixed costs from inventories affect
profit and true and fair view of financial affairs of an organization
may not be clearly transparent.
Marginal cost becomes unrealistic in case of highly fluctuating levels

of sales, e.g. in case of seasonal factories. In practice, sales price,
fixed cost and variable cost per unit may vary. Thus, the assumptions
underlying the theory of marginal costing sometimes becomes
unrealistic.
For long term profit planning, absorption costing is the only answer.
248

Learning Outcome (ACCA Study Guide Area C, Topic C1d, e):
TLO C1d Prepare, and explain the nature and purpose of, profit statements in absorption and
marginal costing formats.
TLO C1e Calculate the cost and profit of a product or service.
1. With which costs is cost of sales in absorption costing concerned?
A. Direct material only

B. Variable and fixed production costs
C. Direct labour only
D. Fixed production costs only
2. Which of the following costs is not included as a production cost in marginal costing?
A. Direct material
B. Direct labour
C. Fixed overheads
D. Variable overheads
3. Which of the following statements is true?
A. Differences between MC profits and AC profits always reverse in following period.

B. AC profits are always greater than MC profits.
C. MC profits are always greater than AC profits
D. In long term, there will be no difference between MC profit and AC profit.
4. The overhead absorption rate for product T is $4 per machine hour. Each unit of T requires 3 machine
hours. Inventories of product T last period were:
Units
Opening inventory 2,400
Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption costing profit for product T will
be:
A. $1,200 higher
B. $3,600 higher
C. $1,200 lower
D. $3,600 lower
249
1. B
2. C
3. D
4. B
250
Chapter 9 Summary
Profit Reporting
Glossary
AC MC Absorption Costing: Method of
Profit reporting that values
Calculates inventory at full production cost
Values Under / Values and calculates Gross and Net
Calculates Calculates
Inventory at Over- Inventory at
Gross Profit Contribution Profit.
Full absorption Variable
and Net of and Marginal
Production
Profit Product Cost Contribution: Amount earned
Cost Production only Profit
Overheads from sale of inventory that covers
fixed costs, with the remainder
AC & MC Profit Reconciliation being profit earned.
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 $ = 𝑆𝑎𝑙𝑒𝑠 $ − 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 $
Gross Profit: Amount earned from sales after deduction cost of goods sold.
Shows earnings from primary economic activity.
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 $ = 𝑆𝑎𝑙𝑒𝑠 $ − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 $
Inventory Valuation: Inventory is valued differently under AC and MC.
AC values inventory at full production cost.
𝑭𝒖𝒍𝒍 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑂𝐴𝑅
MC values inventory at variable production costs only. Marginal Costing: Method of profit reporting that
values inventory at variable production cost and calculates Contribution and Marginal Profit.
Also called variable or direct costing.
Marginal Profit: Amount earned using the marginal costing approach.
251
Calculated by deducting fixed costs from contribution.
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 $ = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 $ − 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 $
Net Profit: Amount earned after deducting non-production costs from Gross Profit.
Indicates amount that may be taxed, issued as dividends, or recognized as retained earnings.
Non-production Overheads: Overheads related to Selling, Distribution, and Administration activities
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 $ − 𝑁𝑜𝑛 − 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠 $
Overhead Absorption Rate (OAR): A rate at which overheads are absorbed into output, usually to units.
𝑂𝐴𝑅 = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 ÷ 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
Production Overheads: Overheads incurred in the manufacturing or production of output.
Profit Reporting: Methods in which an organization can report profit.
Under / Over-absorption: The difference between fixed production overheads absorbed and actual fixed
overheads. Used to account for fixed overheads incurred for production in the income statement.
𝑈𝑛𝑑𝑒𝑟 /𝑂𝑣𝑒𝑟-𝑎𝑏𝑠𝑜𝑟𝑝𝑡𝑖𝑜𝑛 = 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑎𝑏𝑠𝑜𝑟𝑏𝑒𝑑 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 × 𝑂𝐴𝑅
252
CHAPTER 10: ACCOUNTING FOR PRODUCT COST Sunway TES
CHAPTER 10: ACCOUNTING FOR PRODUCT COST
Learning Outcomes
TLO D4a. Job Costing.

(i) Describe the characteristics of job costing.
(ii) Calculate unit costs using job costing.
TLO D4b. Batch Costing.

(i) Describe the characteristics of batch costing.
(ii) Calculate unit costs using batch costing.
TLO D4c. Process Costing.

(i) Describe the characteristics of process costing.
(ii) Calculate unit costs using process costing. (note: split of losses into normal and abnormal
is excluded).
(iii) Describe and illustrate the concept of equivalent units for closing work in progress.
(iv) Calculate unit costs where there is closing work-in-progress.
(v) Allocate process costs between finished output and work-in-progress.
(vi) Prepare process accounts.
253
10a. Job Costing

Job Costing.
Introduction
A costing system is a system that collects cost information for
business activities. The system helps determine profits, and also
provides a wide range of management data and information.
One way to categorise the costing system is by the nature of the

activity. Different methods of costing will be used according to the
way products are manufactured or processed or how services are
provided.
Job Costing
The purpose of a job cost accounting system is to assign and
accumulate costs for each job – costs are tracked for each individual
order, contract, unit of production, or a batch (job costing applied to
a batch of identical products is known as batch costing).
EXAMPLE:
Brien’s Engineering is a company that specializes in electrical
installations. Its crew may work on multiple project simultaneously,
with resources and overheads allocated as required.
Brien’s Engineering uses job costing to determine the costs

attributable to each job, to help control costs and set quotations.
Job costing should be used if the production of goods or services is

being performed to meet unique customer specifications or
requirements.
The main aim is to find profit (or loss) on each completed job, and
also to value incomplete jobs.
Firstly, a job number has to be assigned to the job or cost unit. Then
a job cost card is created and be filled in with all cost details – direct
material, direct labour and direct expenses and overheads.
254
A typical job cost card would include the following details:

• Direct Material Costs – computed based on stores issues
valuation methods and material-related bills.
• Direct Labour Costs - computed according to the employee
payment system, either time-related or output-related.
• Direct Expenses – such as special tools, equipment or machine
hire specially for the particular job, royalty and costs of
specialised tasks (such as designing and machine-setting).
• Overheads – assigned to the job based on a predetermined
overhead absorption rate.
Job costing is a technique to apply when each job can be uniquely

identified and can be completed in a relatively short duration of
time.
Each job has code number, such as Job 1103. This is to clearly identify
the job order, tasks and resources related to it. The job card follows
the job through the entire production process and is updated with
the relevant cost information as resources are used and costs are
incurred.
Overheads based on predetermined absorption rates are charged on

the job card in order to determine the total cost of the job. The
estimated costs of the job will help set selling prices based on the
profits desired, or, determine the profits based on the selling prices
quoted.
Job Cost Card

Data or information for the job costing system is best collected using
the job cost card, with a typical format shown below:
$
Direct Materials
Direct Labour
Direct Expenses
Prime Cost
Factory Overhead
Total Production Cost
SDA Overheads
Total Cost
Profit
Selling Price
255
EXAMPLE: Preparing a Job cost card

Job 2106 has the following details:
Direct Material: Chemical AA 500 kg used at $12 per kg

Chemical BB 200 litres used at $25 per litre
Direct Labour: Skilled 300 hrs worked at $7.50 per hour
Semi-skilled 250 hrs worked at $6.50 per hour
Hire of a Special 50 hrs used at $20 per hour
Tool
The production overheads are absorbed at a rate of 150% of total

labour cost. Selling and administration overhead estimated at $500.
Prepare a job cost card for Job 2106.
ANSWER:
Job cost card for Job2106:
$ $
Direct Material Chemical AA 6,000.00
Chemical BB 5,000.00
Total of direct 11,000.00
material
Direct Labour Skilled 2,250.00

Semi-skilled 1,625.00
Total of direct 3,875.00
labour
Direct Expense: 1,000.00
Hire of Special Tool
Prime Cost 15,875.00
Production 5,812.50
Overhead
Production Cost 21,687.50
Selling & 500.00
Administration
Overhead
Total Cost 22,187.50
256
EXAMPLE: Calculate the cost of the job
Gillian Ltd is tendering for the manufacture of a specialist tool. The

following information relates to the job:
Direct 4 kg at a cost of $6 per kg

Material
Machining 12 labour hours at a basic rate of $4 per hour
Department
Production overhead is absorbed at a rate of $2.50 per direct labour

hour.
Administration overheads are absorbed at 25% of production cost.
Calculate the cost of the job.
ANSWER:
Unit Cost ($)

Direct Material (4kilos x $6/kilo) 24.00
Direct Labour (12hours x $4/hr) 48.00
Production Overheads (12hours x
30.00
$2.50/hr)
Production Cost 102.00
Administration Overheads (25%) 25.50
Total Costs 127.50
257

Job costing.
1. Which statement is false with regard to job costing?

A. Job cost card must be prepared in the order of prime costs listed first followed by overheads.
B. Job costing is employed when the entire task is designed and executed according to specific
requirements of the customer.
C. Job costing can be applied in construction, food preparation and also in the various service
industries.
D. Selling price of a job can be calculated by simply taking a proportion of the variable costs and adding
it to the total costs.
2. Which one of the following cannot be seen in a job cost card?

A. Prime cost.
B. Production overhead.
C. Profit.
D. Variance.
258
1. A
2. D
259
10b. Batch Costing

Batch costing.
Batch costing is applied for the production of a group of identical

product units, i.e. the cost unit is a batch of products.
A batch is a group of identical or similar products. Batch costing is

used in many instances – in shoe making factories, printing, clothing
manufacture, and even bakeries.
In a shoe making factory, naturally the products are shoes, but they
come in different designs, sizes and colours. Each production run to
meet a customer demand would be considered as a batch.
Methods and techniques of batch costing are very similar to that of

job costing. Each batch has a number or a code. Utilisation of
material, labour and overheads are charged to each batch on a job
cost card.
Specific order costing is a collective term for job and batch costing.
The distinguishing feature of all specific order costing systems is that
work is separated as opposed to a continuous flow.
Job costing is used to cost individual orders undertaken to a

customer’s special requirements. Costs are charged to each separate
cost unit.
Businesses which manufacture a variety of products for stock, on

multi-purpose machinery, will manufacture in batches and operate
batch costing. Costs are charged to individual production order
which covers a batch of units. The unit cost is found by dividing the
quantity into the total batch cost.
The thing about batch costing is that, where possible, cost per unit
of the batch of identical products can be calculated in this way:
Total cost of the batch production

Cost per unit =
Total units in the batch
260
EXAMPLE 1: Calculate cost per unit

Teekee Ltd needs to calculate the cost of a batch of 300 units of
component Y, which is manufactured in department Lamda. It is
known that direct material costs come up to $12,000, and direct
labour per unit is $8 per hour.
According to standards set, three units of Y can be manufactured in

an hour. At the same time, Teekee Ltd has to hire a special device at
a cost of $2,300 from its vendor to mould a design on Y.
The overhead absorption rate in Lamda is $4 per direct labour hour.

The selling and administration overheads are usually 20% of
production cost.
Calculate the cost per unit of component Y.
ANSWER:
Direct labour hours required = 300 units ÷ 3 units per hour = 100
Production overheads = $4 × 100 direct labour hours = $400
Job Cost Card
$
Direct Material 12,000
Direct Labour (100 hours * $8) 800
Direct Expenses 2,300
Prime Cost 15,100
Production Overheads 400
Production Cost 15,500
Selling and Administration
3,100
Overheads
Total cost 18,600
$18,600
Cost per unit = = $62 per unit
300 units
261
EXAMPLE: Calculate total and additional costs
A printing and publishing company has been asked to provide an

estimate for the production of 100,000 catalogues, of 64 pages (32
sheets of paper) each, for a potential customer. Four operations are
involved in the production process: photography, set-up, printing
and binding.
Each page of the catalogue requires a separate photographic

session. Each session costs $150.
Setting up the printing job would require a plate to be made for each
page of the catalogue. Each plate requires four hours of labour at $7
per hour and $35 of materials. Overheads are absorbed on the basis
of labour hours at an hourly rate of $9.50.
In printing, paper costs $12 per thousand sheets. Material losses are
expected to be 2% of input. Other printing materials will cost $7 per
500 catalogues. 1,000 catalogues are printed per hour of machine
time. Labour and overhead costs incurred in printing are absorbed
at a rate of $62 per machine hour.
Binding costs are recovered at a rate per machine hour. The rate is
$43 per hour and 2,500 catalogues are bound per hour of machine
time.
Required:
a) What is the total cost per catalogue produced in this job?
b) Calculate the additional costs that would be charged to the
job if the labour efficiency ratio for set-up is 90% (i.e.
expected idle time will be included in the labour charge).
262
ANSWER:
a)
$ $
Photography 9,600
Set-up: Labour 1,792
Materials 2,240
Overhead 2,432
6,464
Printing: Materials (Paper) 39,184

Materials (Other) 1,400
Labour & overheads 6,200
46,784
Binding: Labour & overheads 1,720
Total cost 64,568
$64,568
Cost per catalogue = = 64.57 cents
100,000
b) Estimated hours in Set-up = 64 plates × 4 hours a plate = 256
Based on the labour efficiency ratio provided,
Actual hours = 256 = 284.4 × 90%
Additional costs that would be charged

= (284.4 – 256.0 hours) × ($7 + $9.50) = $468.60
263

Batch costing.
1. Which of the following is not a feature of batch costing?

A. Separate identifiable units in groups.
B. Unit cost can be calculated.
C. There is always a minimum volume when manufacturing in batches.
D. Can be applied in food industry, namely bakery and biscuit manufacturing.
2. All the following are similarities between job and batch costing methods, except:
A. The production volume.
B. Customized requirements.
C. Highly traceable resources.
D. Unit cost calculations are relatively easy.
264
1. C
2. A
265
10c. Process Costing

Process costing.
(ii) Calculate unit costs using process costing. (note: split of losses into normal and abnormal is
excluded).
Introduction
Process costing is used where units of production come from a
continuous process or a series of linked processes. It is the method
to use when it is almost impossible to identify distinctive units of
production. Process costing is most appropriate when there is a
continuous stream of processes, making it difficult to identify
production units separately or easily. Common industries that apply
process costing are manufacturers of soap, food and beverages,
paint, chemicals and cement, and also oil refineries.
Features of Process Costing

1. Output is in the form of continuous stream of identical and/or
different units of production. As such:
(a) It is (almost) impossible to identify separate units of
production.
(b) It is very difficult or (almost) impossible to compute the
unit production cost.
2. Again, owing to the nature of the process, which is continuous,

input materials may be added at different stages of processing.
That may require added direct labour work, and incurrence of
additional overheads.
3. It is common to have losses in the process due to reasons such as

defects, spoilage, wastage and evaporation. Sometimes, where
possible, the losses can be sold as scrap.
4. The input goes through a series of processing stages resulting in

the output of one process becoming the input of another, until
finished units are obtained.
266
Normal Loss
A normal loss is an expected loss of output in a process. It is
anticipated before production commences. Usually, the loss units
are not given a value, which means that the cost per unit of the loss
units is nil.
However, sometimes, these losses can be sold as scrap, and so, they
are valued at scrap value. Losses that can be sold as scrap reduces
the cost of production. Their value is a credit entry in the process
account.
Cost per Unit

Basically, cost per unit refers to total costs of production divided by
total volume of production. But when there is normal loss,
Cost per unit of good output =

Total costs of production – Scrap value of normal loss
Total input – Normal loss volume
The costs of production computed after deducting the scrap value of

normal loss is the net production costs, and total output less normal
loss is the expected output. So,
Cost per unit of good output = Net production costs

Expected output
EXAMPLE (WORKING BACKWARDS)

340 litres of Chemical X were produced in a period. There is a normal
loss of 10% of the material input into the process. There was an
abnormal loss in the period of 5% of the material input. How many
litres of material were input into the process?
A. 357 litres.
B. 374 litres.
C. 391 litres.
D. 400 litres.
ANSWER:
340 litres is equivalent to 85% (100% - 10% normal loss – 5%
abnormal loss)
So, input of 100% = (100% /85% )× 340 = 400 litres (Option D)
267
Process Account – Format

A process account is a T account with two columns on each side, one
for volume and one for the monetary value of the quantity or the
item entry. Figure 11.1 shows the format and common entries in a
typical process account.
Process account
Units Value ($) Units Value ($)
Input: Finished Goods account X Y
Direct Material X Y Output to Next Process X Y
Direct Labour X Y Normal Loss/Scrap account X Y
Overheads X Y Abnormal Loss account X Y
From Previous Process X Y
Abnormal Gain account X Y
XX YY XX YY
Figure 11.1 Format of Process account
Completed Output
The output of production may be complete or may not be complete at any one time, for a simple reason –
processes are continuous in nature. At any one time in an on-going activity, there will be finished products
and there will be semi-finished products.
This section looks at preparing process account(s) and other relevant accounts when all output is complete.
There are four primary steps, which are:
Step 1 : Determine good output and losses (in units)
Units
Input X
Less: Normal loss (X)
Expected good output XX
268
Step 2: Calculate cost per unit of good output and losses
Total costs of production – Scrap value of normal loss

Total input – Normal loss volume
A more detailed calculation layout would look like this:
$
Direct Material
Direct Labour
Direct Expenses
Overheads
FROM <previous process>
Total Costs
Less: Scrap Value of Normal Loss
<Net Production Costs>
 Expected Output
COST PER UNIT
Step 3 : Calculate total cost of good output and losses
Units Value ($)

Input X Y Input units x cost per unit
Less: Normal loss (X) (Y) Normal loss units x scrap value
Expected good output XX YY
Step 4 : Complete process account and all relevant accounts
Process account
Input: Finished Goods account X Y
Direct Material X Y Output to Next Process X Y
Direct Labour X Y Normal Loss/Scrap account X Y
Overheads X Y Abnormal Loss account X Y
From Previous Process X Y
Abnormal Gain account X Y
XX YY XX YY
269
EXAMPLE: Preparing Process Account
Ed Chemicals (EC) Ltd converts a raw material KP into a finished product, KQ, all units measured in litres.
The normal loss is 10% and losses can be sold at $1 per litre. During December 20X5, 5,000 litres of KP were
used at a cost of $1.80 each. Direct labour costs amounted to $7,500 and overheads incurred totalled
$6,500.
Required:
Prepare the process account for EC Ltd.
270
ANSWER
Step 1: Units computation
Units
Input 5,000
Less: Normal loss (500)
Expected good output 4,500
Step 2: Cost per unit of good output
= Total Cost of Production – Scrap value of Normal Loss

Total Input units – Normal Loss units
= ($1.80 X 5,000 litres + $7,500 + $6,500) – ($1 X 500 litres)
(5,000 – 500)
= $5.00 per unit of good output
Step 3: Total cost of good output and losses
Units Value ($)

Input 5,000 23,000
Less: Normal loss (500) (500)
Expected good output 4,500 22,500
Step 4: Process account and all relevant accounts
Process account
Material 5,000 9,000 Finished Goods 4,500 22,500
Labour 7,500 Normal Loss 500 500
Overhead 6,500
5,000 23,000 5,000 23,000
271
Incomplete Output
What happens when there is closing work in progress? Closing work
in progress (WIP) refers to partially completed units in the
production process at the time the process account is prepared. The
closing WIP units and the respective monetary values must be
shown clearly in the process accounts.
But first, the equivalent units of production must be computed.

Closing WIP must be valued based on equivalent unit concept. This
is based upon the principle that costs are incurred at an even rate
throughout processing.
Equivalent unit refers to notional whole units which represent

incomplete work. It is used to apportion costs between closing WIP
and completed units.
Equivalent units = Incomplete Units × % of Completion
Step 1: Statement of equivalent units
Material Cost Labour Cost Overhead

Input Total
Output
Units Units Eq. Unit % Eq. Unit % Eq. Unit %
Completed
Closing Stock
TOTAL EQ. UNITS
Step 2: Statement of cost per equivalent units
Input Total Cost ($) Equivalent Units Cost per Eq. Unit ($)
Material
Labour
Overhead
TOTAL COST PER UNIT
272
Step 3: Statement of evaluation
Eq. Units Cost per Eq. Unit ($) Total Cost ($)
Completed
Closing Work-in-Progress
Material
Labour
Overhead
TOTAL COST
Step 4: Complete process account and all relevant accounts
Process account
Material X Y Finished Goods X Y
Labour Y Closing Work-in-Progress X Y
Overhead Y
XX YY XX YY
273
EXAMPLE: Prepare Process 2 account
A company manufactures a product by means of two successive processes, Process 1 and Process 2. The
following relates to the period just ended:
Process 2
Units Value ($)
Opening work in progress Nil Nil
Transfer from Process 1 2,160 22,032
Material added 5,295
Conversion costs 8,136
Transfer to finished goods warehouse 1,950
The work in progress at the end of the period was 80% complete with respect to material added and 40%
complete with respect to conversion costs in Process 2.
Required:
Prepare the Process 2 account for the company.
274
ANSWER
Step 1: Statement of equivalent units
Process 1 Cost Material Cost Conversion Cost

Input Total
Output
Units Units Eq. Unit % Eq. Unit % Eq. Unit %
Completed 1,950 1,950 100 1,950 100 1,950 100

2,160
Closing Stock 210 210 100 168 80 84 40
TOTAL EQ. UNITS 2,160 2,118 2,034
Process 1 22,032 2,160 10.20
Material 5,295 2,118 2.50
Conversion 8,136 2,034 4.00
TOTAL COST PER UNIT 16.70
275
Step 3: Statement of evaluation
Completed 1,950 16.70 32.565
Closing stock/WIP
Process 1 210 10.20 2,142
Material 168 2.50 420
Conversion 84 4.00 336
TOTAL COST 35,463
Process account
Process 1 2,160 22,032 Finished Goods 1,950 32,565
Material 5,925 Closing Work-in-Progress 210 2,898
Conversion 8,136
2,160 35,463 2,160 35,463
276
EXAMPLE: Calculate unit cost and prepare process account
The following data is provided for a chemical process for a period:
Materials 29,000 kg at $162,342

Conversion costs $74,700
Opening work-in-progress Nil
Closing work-in-progress 3,000 kg, 60% complete as to conversion costs
There is a preparation loss at the start of the process operation. Actual losses in the period were at a normal
level of 10% of the materials input.
Required:
For the period:
a. Calculate the cost per kg of production.

b. Prepare the process account for the company.
277
ANSWER
a. Step 1: Statement of equivalent units
Material Cost Conversion Cost

Input Total
Output
Units Units Eq. Unit % Eq. Unit %
Completed 23,100 23,100 100 23,100 100

29,000
Closing Stock 3,000 3,000 100 1,800 60
26,100* TOTAL EQ. UNITS 26,100 24,900
*29,000 kg input x 0.9. Therefore, completed output = 26,100 – 3,000.
Material 162,342 26,100 6.22
Conversion 74,700 24,900 3.00
TOTAL COST PER UNIT 9.22
278
b. Step 3: Statement of evaluation
Completed 23,100 9.22 212,982
Closing stock/WIP
Material 3,000 6.22 18,660
Conversion 1,800 3.00 5,400
TOTAL COST 237,042
Process account
Material 29,000 162,342 Finished Goods 23,100 212,982
Conversion 74,700 Closing Work-in-Progress 3,000 24,060
Normal Loss 2,900 -
29,000 237,042 29,000 237,042
279

Process costing.
(ii) Calculate unit costs using process costing. (note: split of losses into normal and abnormal is
excluded).
1. Which one of the following is not a feature of process costing?

A. Output may be complete or incomplete.
B. There may be losses, expected and/or unexpected throughout the production line.
C. Output of one process can become input of another.
D. All inputs are usually added in the beginning of the process.
2. One of the following does not employ process costing?

A. Car repairer.
B. Potato chips manufacturer.
C. Producer of tar for roads.
D. 24-hour laundry service.
3. When 2,000 units are input into a certain production process, at a cost of $5,000, only 1,800 units were
obtained as output, due to normal loss. There is a scrap value of $1 per loss sold. What is the cost of
one good unit?
A. $2.50
B. $2.67
C. $2.76
D. $2.78
4. A particular manufacturing process output 3,600 finished units, while holding another 400 units in its
production line, 80% complete. The materials cost is $12,000, and the conversion cost thus far is $9,800.
What are the respective cost of per equivalent unit with respect to materials and conversion?
A. $2.45; $3.00
B. $2.50; $3.00
C. $3.00; $2.50
D. $3.00; $5.50
280
1. D
2. A
3. B
4. C
281
Chapter 10 Summary
1. Process costing is used where units of production come from a continuous process or a series of
linked processes. In such a process, it is almost impossible to identify distinctive units of production.
2. Common features of process costing are:

a. Output is in the form of continuous stream of identical and/or different units of production.
b. Input materials may be added at different stages of processing. That may require added
direct labour work, and incurrence of additional overheads:
c. It is common to have losses in the process, which can be sold as scrap.
d. Output of one process may become input of another.
3. Normal loss is an expected output loss, expected before production starts. It can be sold as scrap at
scrap value and are credited from process account. Scrap value of normal loss reduces production
cost.
4. Values of normal losses are credit entries in the process account.
5. Unit production cost is equals to net production costs divided by expected output.
6. Four steps to prepare process account for completed units:

a. Determine good output and losses (in units)
b. Calculate cost per unit of good output and losses
c. Calculate total cost of good output and losses
d. Complete process account and all relevant accounts
7. Four steps to prepare process account when there are incomplete units:
a. Statement of equivalent units
b. Statement of cost per equivalent unit
c. Statement of evaluation
d. Complete process account and relevant accounts
282
CHAPTER 11: SPREADSHEETS Sunway TES
CHAPTER 11: SPREADSHEETS
Learning Outcomes: At the end of the chapter, you should be able to:
Spreadsheet overview
TLO E1a. Explain the purposes of a spreadsheet.

TLO E1b. Describe the components of a blank spreadsheet screen.
TLO E1c. Describe methods to use/activate spreadsheet features.
TLO E1d. Describe methods of selecting ranges of cells.
TLO E1e. Explain the role of spreadsheets in management accounting.
TLO E1f. Describe the advantages and limitations of spreadsheets.
Creating and using spreadsheets
TLO E2a. Explain factors which influence spreadsheet design and the features of a well-structured
worksheet / workbook.
TLO E2b. Explain how to enter values, text and dates including automatically filling a range of cells and
capturing data from another source.
TLO E2c. Identify and use formulae incorporating common arithmetic operators, use of brackets,
absolute / relative cell references and simple functions (Sum, Average, Round, IF).
TLO E2d. Identify and use formulae in a workbook containing multiple worksheets and link cells from
different workbooks.
TLO E2e. Describe how to move / copy and paste data and formulae.
TLO E2f. Describe, and select as appropriate, ways to edit data in a cell including the Find and Replace
feature.
TLO E2g. Explain the causes of common error messages and how errors are corrected.
TLO E2h. Describe how to save, password protect and open spreadsheets.
Presenting and printing spreadsheet data/information
TLO E3a. Describe and illustrate appropriate formatting features for the display of numbers, text, cell
borders and patterns and for cell/worksheet protection.
TLO E3b. Describe features which can be applied to rows or columns (changing height/width, inserting,
deleting and hiding).
TLO E3c. Describe features which affect the on-screen view and can be particularly useful when
working with large worksheets/workbooks.
TLO E3d. Use Sort and Filter to manipulate data.
TLO E3e. Describe how charts (line, column, bar, pie, scatter, area) can be created from spreadsheet
data and interpret the data shown.
TLO E3f. Describe and illustrate the appropriate use of adding comments to a cell.
TLO E3g. Describe how to select the output to be printed.
TLO E3h. Select the combination of page layout/set-up options to achieve an effective, user-friendly
printed output, especially for worksheets containing large amounts of data.
283
11a. Spreadsheet Overview

Learning Outcome (ACCA Study Guide Area E, Topic E):
(TLO E1a) Explain the purposes of a spreadsheet.
(TLO E1b) Describe the components of a blank spreadsheet screen.
(TLO E1c) Describe methods to use/activate spreadsheet features.
(TLO E1d) Describe methods of selecting ranges of cells.
(TLO E1e) Explain the role of spreadsheets in management accounting.
(TLO E1f) Describe the advantages and limitations of spreadsheets.
What is a Spreadsheet?
• A spreadsheet system is a general purpose software package

that simulates a paper accounting worksheet. It presents a
screen divided into columns and rows. The intersection of rows
and columns creates a giant table, and each individual box (cell)
can be used to input text, formulae, numbers or symbols.
Powerful editing functions and simple but extremely useful
presentation tools make the spreadsheet an indispensable tool
to many business organisations, especially in the field of
accounting.
• Each cell can contain alphanumeric text, numeric values or

formulas.
• A formula defines how the content of that cell is to be calculated

from the contents of any other cell (or combination of cells) each
time any cell is updated.
• Spreadsheets are frequently used for financial information

because of their ability to re-calculate the entire sheet
automatically after a change to a single cell is made. This
eliminates the chances of human error when analysing “what if”
scenarios (see below).
What is the Purpose of a Spreadsheet?

• Computerised spreadsheets can be used for sensitivity analysis.
It is particularly useful for answering “what if” questions. It is
possible to see the effect of changing one variable on the final
result immediately. Examples of “what if” questions:
1. What if sales volumes drop by 5%?

2. What if marketing expenses rise by 10%?
284
• The mechanics of budget preparation can be made easier by

using spreadsheets or software packages to build financial
models to do planning forecasting.
• Spreadsheet packages like MS Excel are very valuable tools for

building budgets as related data can be linked using formulae.
• The same spreadsheet or spreadsheets can be used and

updated in a collaborative project by various staff members.
Specific permissions to limit which collaborators can change
which parts of the spreadsheet can be set. It enables co-
authoring, editing and reviewing of work done.
• Graphs and charts can be easily created from spreadsheets. This

is an important for presenting management accounting
information.
What are Some of the Components of a Blank Spreadsheet Screen?
285
Cut, Copy, Paste Alignment Formatting

Functions
Table Styles
Font Formatting Function tabs Cells Editing
Formatting
Clear Function
Name Box Insert Function Formula Bar Value Formatting Data editing
286
What are the Methods to Activate Spreadsheet Features?

• Features will usually apply changes or formatting to Active
Cells.
o An Active Cell has a dark black box around it. Multiple cells
could be active at the same time. There are different
methods to select cells.
▪ LEFT CLICK to activate a cell

▪ LEFT CLICK & DRAG to activate a range of cells
Single active cell
Range of active cells
▪ ARROW KEY+SHIFT to activate range of cells with keyboard
• A feature may be activated by LEFT CLICKING on it on the Ribbon.
Select active cell
Activate feature by LEFT CLICK
Feature turns darker Changes applied

orange when activated to active cell
287
• A feature may be applied through a keyboard shortcut.
Keyboard shortcut:
CTRL+B
Changes applied
to active cell
Select active cell
• A feature may be selected through the RIGHT CLICK Menu.
RIGHT CLICK menu

What are the Roles of Spreadsheets in Management Accounting?
Management accounting uses spreadsheets for many operations, tables, charts and formulae. Some
examples include:
• Creating budgets.
• Creating costing statements.
• Calculating formulae.
• Creating standard formats.
• Performing “what-if” analysis.
• Creating charts and graphics.
288
What are the Advantages and Limitations of Spreadsheets?

Advantages
Spreadsheet software are user–friendly and cheap to buy. It enables

users with little or no programming knowledge to create simple
computer models. The user of the package can decide what data or
information should be presented in the spreadsheet and how it
should be manipulated.
• Spreadsheets can process large amounts of data quickly.

Once a spreadsheet model has been set up, it becomes a
simple task for someone with little computer knowledge to
update it and use it over and over again, resulting in large
savings in clerical costs for repetitive tasks and calculations.
• They aid good presentation of results and contain software

for the production of graphs and tables.
• Computations are performed accurately, assuming the

spreadsheet is programmed correctly and the data is input
correctly.
Limitations
• Requires good mathematical skills and some computer

programming knowledge in order to build a useful
spreadsheet. Otherwise, many users will tend to use it as a
large table for storing data.
• Requires tedious attention to detail. Users have difficulty

remembering the meanings of hundreds or thousands of
cell addresses that appear in formulas.
• Spreadsheets can get so large that it is difficult to find

errors. Because they are loosely structured, it is easy for
someone to introduce an error, either accidentally or
intentionally, by entering information in the wrong place or
changing a formula incorrectly.
• Depending on the skill of the spreadsheet user, when rows

(or columns) are added to or deleted from a table, many
linked tables and cells may need to be adjusted. In large
spreadsheets, this can be extremely time consuming.
• The spreadsheet is unable to track or record changes made

to it. If someone can access a spreadsheet then that person
is able to modify it, so there is a lack of data security.
289
• Sometimes spreadsheets are created for operational use,

thus becoming a core business program containing static
and changing data, as well as all the calculations applied to
the data.
• One common application of operational spreadsheets is

maintaining business lists, such as inventories and
confidential customer information. Users usually have no
knowledge of the spreadsheet's underlying structure, and
will not be able to detect errors.
290
11b. Creating and Using Spreadsheets

Learning Outcome (ACCA Study Guide Area E, Topic E2):
(TLO E2a) Explain factors which influence spreadsheet design and the features of a well-structured
worksheet/workbook.
(TLO E2b) Explain how to enter values, text and dates including automatically filling a range of cells and
capturing data from another source.
(TLO E2c) Identify and use formulae incorporating common arithmetic operators, use of brackets,
absolute/relative cell references and simple functions (Sum, Average, Round, IF).
(TLO E2d) Identify and use formulae in a workbook containing multiple worksheets and link cells from
different workbooks.
(TLO E2e) Describe how to move/copy and paste data and formulae.
(TLO E2f) Describe, and select as appropriate, ways to edit data in a cell including the Find and Replace
feature.
(TLO E2g) Explain the causes of common error messages and how errors are corrected.
(TLO E2h) Describe how to save, password protect and open spreadsheets.
What are Some of the Factors that Influence Spreadsheet Design?
Spreadsheet design is influenced primarily by the objectives of the

user.
Spreadsheet is to calculate formulae

Data should be arranged in a logical manner to make it easy for Excel
formulae to calculate.
Spreadsheet is to be shared with other users

Formulae should be well-documented and data easy to read so that
other users may work with it easily. Protection should be applied to
critical formulae or data so that other users are not able to corrupt
it.
Spreadsheet is to be used for presentation

Data and values entered in the spreadsheet should be formatted to
look pleasing to the eye, and also to highlight key information.
Spreadsheet to be used for printing

Data should be arranged within the confines of the output paper.
Excel has features that make doing this easier.
291
What are the Features of a Well-Designed Worksheet / Workbook?

Data is should be arranged vertically abundant, rather than horizontally abundant. This makes the
worksheet easier to scroll and view, and easier to print. It is more difficult to scroll horizontally than
vertically.
Data should be well labelled and formatted for easy understanding.
Changes and descriptions should be included using comments for easy understanding.
292
Use multiple worksheets to hold tables that have different meaning and do different tasks, rather than a
single spreadsheet.
293
How do you Enter Values, Text, and Dates into a Spreadsheet?
There are 3 ways to enter and edit data in an active cell:
1. Type the data directly into an active cell.

a. DOUBLE LEFT CLICK the active cell to edit it.
b. Press F2 to edit it.
c. Press ENTER or TAB to confirm.
i. If you do not DOUBLE CLICK or press F2, and you press ENTER after entering
new data, the new data will replace the old data in the cell.
d. Press DELETE to clear cell of values. (Does not clear formatting).
2. Type data into the Formula Bar.
Selected Active Cell

Type; or DOUBLE ENTER after data has
LEFT CLICK or F2 to been entered, active
a. Select Active Cell

b. Type or edit in the Formula Bar
c. Press ENTER or TAB to confirm.
3. Using fill handle to Input sequential data.

a. For most common sequences, Excel is smart enough to create sequential data.
b. Sequential data includes the alphabet, multiplication tables, dates, etc.
c. After entering source data, just LEFT CLICK and drag the fill handle to fill the target cells.
d. The Fill handle will also copy formulae.
294
Move mouse over

bottom right corner
of active cell. Release mouse to
LEFT CLICK, hold and
complete fill.
drag over target cells.
295
Moving the Active Cell
To select a given cell or make it active, LEFT CLICK on that cell. Use the mouse or the arrow keys to move
around the worksheet. Refer to the table below for additional information on using the keyboard to
navigate a worksheet.
To move Press this key

One cell left Left Arrow
One cell right Right Arrow
One cell up Up Arrow
One cell down Down Arrow
To top of worksheet (cell A1) Control Home
To last cell containing data (bottom
Control End
right corner of your work data)
To end of data in a column Control Down Arrow
To beginning of data in a column Control Up Arrow
To end of data in a row Control Right Arrow
To beginning of data in a row Control Left Arrow
How do you Capture Data from Another Source?
1. Copy and paste the data into the spreadsheet.

a. Select the data to copy.
b. Press CTRL+C (Copy).
c. Select the target cell and press CTRL+V (Paste).
d. If you only want to past a certain aspect of the item that
has been copied, open the “Paste Special” dialog box:
i. From the Ribbon; OR
ii. Press ALT+E+S
iii. Dialog box:
296
What are Some of the Basic Operations I Should Know in Spreadsheets?

1. Using arithmetic operators (+, -, *, /)
All arithmetic operators and formulae in spreadsheets will start with the “=”
sign. If this sign is not written, the spreadsheet will not recognize it as
formulae.
Witihout “=” sign With “=” sign
2. Using brackets
Using brackets will be exactly the same as in arithmetic: brackets are calculated first.
3. Using cell references
Equations may be constructed using cell names instead of numbers. Remember cell names are created
with Columns first, then rows (Example: A2).
Cell reference tables may also be used in equations. The format is first the cell reference in the top left
of the table followed by the cell reference in the bottom right of the table (Example: A1:C7).
297
Absolute and Relative Cell References
a. When a formula is copied to another cell, the cell references move with it. This is called
relative cell references. The cell references maintain their relative position to the equation
cell.
Formula in Cell A4 is copied…

Equation with cell references is
created in cell A4.
…and pasted in cell B4. Pressing F2, we can see that the cell
references have also moved to the
left together with the equation.
298
b. If the equation is to be moved but without moving the cell references, absolute cell
references are used, by putting “$” signs in front of the row or column name of the cell
reference. This “locks” the positions of the original cell references.
Cell references in equation are converted to

Equation with cell references is
absolute references.
created in cell A4.
Pressing F2, we can see that the cell

Cell A4 is copied and pasted to cell B4. references remain “locked” in the A
Column.
299
Users may lock the row, column, or both together, in a cell reference. The unlocked portion of the cell
reference will move relatively with the equation.
Reference Description
Type
A1 Cell reference will move relatively with the equation in both rows and columns.
$A1 Column reference is locked; only the row of the cell reference will move relatively
with the equation.
A$1 Row reference is locked; only the Column of the cell reference will move relatively
with the equation.
$A$1 Cell reference is completely absolute (locked).
Simple Calculation Formulae
Remember that the rules involving absolute and relative cell reference still apply.
1. SUM
a. Use the SUM function to calculate the sum of a set of cells.
b. =SUM (“cells with values to be added”)
2. AVERAGE
a. Use the AVERAGE function to calculate the average of a range of cells.
b. =AVERAGE (“range of cells with values to be averaged”)
300
3. ROUND
a. Use the ROUND function to round numbers to a specific point.
b. The rounded numbers will be used further calculations if included in equations.
c. =ROUND (“number OR cell reference", num_digits)
Num_digits Original number Rounded number
-2 1756.8432 1800
-1 1756.8432 1760
0 1756.8432 1757
1 1756.8432 1756.8
2 1756.8432 1756.84
4. IF (logic function)
a. Use the IF function to insert a value into a cell if another value satisfies a condition.
b. The values that are inserted may be “text” or number values. Text must be in quotation
marks.
c. Logic can be >, <, =, ≤, ≥, or ≠
d. Cell can be compared to mathematical equations.
e. =IF (cell reference logic test, value_if_true, value_if_false)
301
302
How do I Use Formulae and Data that Link between Different Worksheets or Workbooks?
1. Linking data between worksheets in the same workbook.
To use a cell reference from another worksheet in an equation, just click on the cell reference you want
to link in the other worksheet while editing the equation.
When linking with other worksheets, all the cell references in the equation will have the worksheet name
in them.
The format of the reference will be as below: “sheet name! cell reference”
2. Linking data between different workbooks.
To use a cell reference from another worksheet in an equation, just click on the cell reference you want to
link in the other workbook while editing the equation.
Important to save the workbook from which your data comes from first, before referencing from it.
If the reference workbook is moved from its original saved location, the workbook with the referring
equation will show a “#REF!” error. The spreadsheet will request the user to locate the source workbook
again.
References from other workbooks will always be absolute cell references by default.
When linking with other worksheets, all the cell references from other workbooks in the equation will have
the workbook location address, workbook name, worksheet name, and cell reference in them.
303
How do I Move, Copy, and Paste Data in a Worksheet?

• Moving Data
To move data, select the range of cells you want to move, LEFT CLICK anywhere on the active cells’ black
border, and drag to the desired location. Once the drag is released, the moved cells will replace the data
and formatting of the destination cells.
• Copying Data
a. To copy data, select the range of cells to

copy, and press CTRL+C. The border of
the copied cells will be moving dashes.
b. To copy entire rows or column, click on
the row name or column name before
copying.
• Pasting Data
Copying and pasting cells using the CTRL+V key will copy all the attributes of the copied cell to the
destination cell (including formulae, values, text, formatting).
Formulae will maintain relative cell references unless they have been made absolute.
To paste only specific attributes of the copied cells, click on the paste special icons or open the “Paste
Special” menu.
304
How do I Edit Data in a Cell?

• Type over the cell, or paste values on the cell.
The new data will replace the old data in the cell.
• DOUBLE LEFT CLICK, or press F2, to edit within the cell.

This allows the user to edit the formulae or data within the cell. Press ENTER or TAB to confirm
changes.
• Changing multiple cells with the same data to new data, use the Find and Replace function.
This is a quick way to search for all the cells with the same data that the user wants to replace,
and changing the data.
• Press CTRL+F or click on the Find icon on the Home Tab.
In this table of cells, The cells containing

the cells having the “7800” have had their
Click on the “Find & Select” icon,
value “7800” have data replaced with
and choose “Replace; or press
errors. “4200”.
CTRL+F
In the “Find and Replace” dialog box, enter the value to be replaced in the “Find what:” field,
and enter the replacing value in the “Replace with:” field.
Clicking “Replace All” will replace all cells containing “7800” with “4200”; Clicking “Replace”
will change the values of the cells one at a time.
305
How are Errors Identified and Corrected in Spreadsheets?

Spreadsheets are programmed to detect and alert the user about errors in syntax or invalid cell
references. Some common error messages in Excel are listed in the table below:
Error Message Meaning
#DIV/0! Trying to divide by 0. The formula =D1/D2 will give the

#DIV0! Error if D2 equals zero.
#N/A! A formula or a function inside a formula cannot find the referenced data. This
error indicates that the data does not exist. It is common when using the
VLOOKUP (and other LOOKUP functions).
#NULL! A space was used in formulas that reference multiple

ranges; a comma separates range references. This error
indicates that Excel cannot determine which cell is being
referred to.
#NAME? Text in the formula is not recognized. This error indicates that a function is
trying to do a mathematical operation on text, or is referring to a cell that does
not exist.
#NUM! A formula has invalid numeric data for the type of operation. This error shows
that one of the arguments in a function is out of the valid range for that function.
For example, =SQRT(-1)
#REF! A reference is invalid.
#VALUE! The wrong type of operand or function argument is used. For example, this
message will appear when a cell value is the wrong data type for a function. The
user needs to take care when using some formula types. The formula
=1/”A1” will give the #VALUE error,
and the formula should read
=1/A1
306
Circular reference error
A circular reference error occurs when a cell in an Excel 2010 worksheet refers to itself, whether directly
or indirectly. For example, if =100+A2 is entered into cell A2, then a direct circular reference has been
created. An indirect circular reference is when the formula in a given cell refers to one or more other cells
that in return refer back to the original cell. For example, a formula in A1 refers to cell A2, A2 refers to A3,
and A3 refers back to A1.
When Excel encounters a circular reference in a worksheet, a Circular Reference Warning displays in
a dialog box.
Excel 2010 offers another approach to hunting down circular references. Click the arrow beside the Error
Checking button in the Formula Auditing group on the Formulas tab and point to the Circular References
option. The resulting menu displays the location of all circular references in the active worksheet. Clicking
on one of the listed cells will take you to the cell with the circular reference. This allows you to get to them
easily instead of having to review all your formulas.
307
How do I Save, Password Protect, and Open Spreadsheets?
• Saving a workbook
o Press CTRL+S to save a workbook. If saving for the first time, the spreadsheet will request the
user to select the location of the saved file and its name. Pressing CTRL+S subsequently will save
changes to that same file.
o To save an already saved file to a new file, press ALT+F+A to open the “Save As” menu.
Spreadsheets can be saved into many formats, including PDF. Any further saves will be made to
the new file.
• Protecting a workbook
The functions to protect certain parts of the workbook are found under the “Review” Tab.
308
• Protecting certain cells

To protect only certain cells, user has to unlock the cells first. All cells are locked by default.
o Press CTRL+A to select the entire spreadsheet.

o RIGHT CLICK and choose “Format Cells” from the menu.
o On the “Protection” tab, uncheck the “Locked” checkbox and press ok.
o Select the range of cells to protect.
o On the “Protection” tab in the “Format Cells” menu, check the “Locked” checkbox.
o Select “Protect Sheet” from the “Review” tab on the ribbon.
o Enter a password and press ok.
o To unlock, click on the locked cell and type in the password.
• Protecting a worksheet
Same procedure as above. Make sure all cells are locked (they are locked by default).
309
• Protecting a workbook
To prevent unauthorized access and viewing, the spreadsheet may be password-protected.

o Open the “File” Tab.
o Select the “Info” Menu.
o Click on the “Protect Workbook” icon in the “Permissions” menu and choose “Encrypt with
Password”.
• Opening spreadsheets
o Opening a new workbook: Double click on the Excel shortcut.
o Opening a saved workbook: Double click on the workbook at its location or select it from the
“Open” button in the “File” tab.
310
11c. Presenting and Printing Spreadsheet Data / Information

Learning Outcome (ACCA Study Guide Area E, Topic E3):
(TLO E3a) Describe and illustrate appropriate formatting features for the display of numbers, text, cell
borders and patterns and for cell/worksheet protection.
(TLO E3b) Describe features which can be applied to rows or columns (changing height/width, inserting,
deleting and hiding).
(TLO E3c) Describe features which affect the on-screen view and can be particularly useful when
working with large worksheets/workbooks.
(TLO E3d) Use Sort and Filter to manipulate data.
(TLO E3e) Describe how charts (line, column, bar, pie, scatter, area)
can be created from spreadsheet data and interpret the data shown.
(TLO E3f) Describe and illustrate the appropriate use of adding comments to a cell.
(TLO E3g) Describe how to select the output to be printed.
(TLO E3h) Select the combination of page layout/set-up options to achieve an effective, user-friendly
printed output, especially for worksheets containing large amounts of data.
How do I Format Data?
Formatting cells does not change the value of the cells. It changes the appearance of the cells for better
understanding or presentation.
1. Changing formats using the toolbar

Text fonts and styles in the worksheet can be changed using the buttons in the formula bar or the
formatting menu from the HOME tab.
The formatting toolbar has several tools you can use to change formats. The B button makes cells
bold, the I button italicizes cells and the U button underlines. Use these buttons to turn formats off
as well as on. For example, if cells are bold and you want to turn off that format, select the cells and
click the B button. The toolbar also has buttons to change font and size.
311
2. Changing Font
For a more complete selection of formatting options, use the Font tab in the Format Cells dialog
box.
In the Font section you can select Font, Size, Style, Color and Effects. The Preview area in the dialog
box shows a preview of the font and style you select before you click the OK button.
3. Formatting Numbers
To change the format of a number, choose the Cells command from the Format menu. To change
numeric formats, click the Number tab. Select the category you want and then the actual format.
For example, to display numbers as currency with two decimal places, select the Currency
category, enter 2 for the number of decimal places, and select the appropriate currency symbol.
Or to display a number as a percentage, choose the Percentage category and select the n umber
of decimals you want to display.
312
4. Placing borders around cells

Borders can be darkened or highlighted on selected cells. Select the cells requiring borders.
Choose the desired format from either the “Home” tab or the Format Cells dialog box.
5. Shading cells
To apply a specific pattern or colour to a range of cells, the Patterns section of the Format Cells dialog
box can be used or a solid colour can be applied using the Fill Colour tool on the Formatting toolbar.
313
6. Changing column/row width with the Format menu
➢ Using the Format Menu
To change column width using the Format menu,
• Select the column or columns to change;
• Then choose the Cell Formatting menu from the

Home tab.
• The column or row width may be set manually in

the “Row Height” or “Column Width” buttons.
• Choose Auto Fit to automatically widen a

column/row to accommodate the widest label,
• You can choose to hide or unhide columns or rows

in the “Hide & Unhide” menu.
• Hiding columns/row is useful when you have data

that you do not want to print.
• Note that if a cell is not wide enough to display its

contents, the cell will display a series of hashes
“#####”.
➢ By Dragging Column/Row Borders
• You can change column widths/row height by dragging column/row borders with the
mouse.
• To change column width, move the mouse pointer to the right-hand border of the
column you wish to change. To change row height, move the mouse pointer to the lower
border of the row you wish to change.
• The mouse pointer will change shape to a left and right pointing arrow as seen below for
column or an up and down pointing arrow for a row.
• Click and drag the mouse to adjust the column width/row height. Note that when you
are adjusting the width/height in this way, a numeric width/height indicator will appear
on the screen.
• You can also DOUBLE LEFT CLICK when the cursor is as above to auto-fit rows or columns
to the widest or longest item.
314
7. Inserting Rows and Columns

Do one of the following:
• To insert a single row or column, select either the whole row or a cell in the row above which
you want to insert the new row or column. For example, to insert a new row above row 5,
click a cell in row 5. To insert a column to the left of column B, Select Column B.
• To insert multiple rows or columns, select the rows above which you want to insert rows.
Select the same number of rows as you want to insert. For example, to insert three new rows,
you select three rows.
• To insert nonadjacent rows, hold down CTRL while you select nonadjacent rows.
• On the Home tab, in the Cells group, click the arrow next to Insert, and then click Insert
Sheet Rows.
•
• You can also right-click the selected rows to activate the shortcut menu and select Insert.
315
How to Create Charts from Data in Spreadsheets?
Step 1 Defining Data Series
A data series is a related set of data points. It is usually one row of data in an Excel worksheet with the
associated column headings; or one column of data with the associated row headings. All chart types can
plot both single and multiple data series except the Pie Chart. To create the chart, first select the data
series to be plotted.
We can select non-adjacent rows in the spreadsheet to chart by pressing and holding the Ctrl key as we
highlight the rows and/or columns.
Various useful charts can be created from the data in the table below:
Sales Report for January to June
Klang
Valley
District Jan Feb Mar Apr May June Total %
KL 5,264 2,463 4,236 3,335 5,465 6,654 27,417 11%
PJ 489 15,454 15,462 4,103 10,343 4,354 50,205 19%
USJ 15,468 15,546 17,243 18,433 15,133 15,145 96,968 37%
PD 12,245 12,433 7,344 8,433 14,633 8,466 63,554 25%
Bangi 6,554 1,446 2,453 1,453 4,545 4,223 20,674 8%
Total 40,020 47,342 46,738 35,757 50,119 38,842 258,818 100%
You have 2 options to insert charts:
a. Click “Insert” tab and choose a chart to insert.
316
b. Or click this button and choose from all the charts available.
c. Excel will insert a blank chart template. Click on the chart, and choose this button from the
Ribbon:
317
Step 2 Confirm or change data range or label x axis series
a. You will see this dialogue box:
b. Select the chart data range.

• Only include the data you want to show on the chart.
• To select individual columns and rows, hold CTRL while selecting new data cells.
• Separate different data ranges by using “,”.
• Applies for all chart types except for Pie chart.
318
319
20,000
18,000
16,000 Jan
14,000
Feb
12,000
Mar
10,000
8,000 Apr
6,000 May
4,000 June
2,000
0
KL USJ
320
• Change the perspective by pressing this button on the Ribbon:
• The Look of the chart can be changed using this button:
20,000
18,000
16,000
14,000
12,000
10,000 KL
8,000 USJ
6,000
4,000
2,000
0
Jan Feb Mar Apr May June
• Pie Charts
▪ In a Pie chart, the Denominator is always on the “Legend” side, and there can only be 1
Denominator.
▪ The Numerators are always on the “Horizontal Axis” side.
▪ If the pie chart doesn’t synthesize properly, try pressing this button:
321
Jan
KL
PJ
USJ
PD
Bangi
322
Apr
KL
PJ
USJ
PD
Bangi
323
Area Chart
• An area chart is an extension of the line graph.

• It shows overall totals as well as components from different sources.
Scatter Diagram
• It shows a relationship between two sets of data. (Example: Relationship between sales volume
and sales revenue).
• It helps determine whether there is a relationship between two sets of data.
How do I Sort and Filter Data in Excel?
(a) Sorting Data
You can quickly sort your data by using the A-Z and Z-A Sort buttons on the
Ribbon's Data tab. But, be careful, or one column may be sorted, while others are
not.
Only use this technique if there are no blank rows or columns within the data.
1. Select one cell in the column you want to sort.

2. On the Excel Ribbon, click the Data tab.
3. Click Sort A to Z (smallest to largest) or Sort Z to A (largest to smallest).
If you want to sort two or more columns in an Excel table, you can use the “Custom Sort” dialog box.
1. Click the Add Level button, to add the first sorting level.
2. From the Sort by dropdown, select the first column you want to sort. In this example, Gender will
be the first column sorted.
*Note: If the
dropdown is showing
Column letters instead
of headings, add a
check mark
324
3. From the Sort On drop down, select the option that you want. We're sorting on the values in the
Gender column, so leave the default setting of Values.
4. Next, from the Order drop down, select one of the options. The list of Order options will depend
on what you selected in the Sort On column. Because we selected values, the Order options are
A to Z, Z to A and Custom List.
5. If you are sorting on multiple columns, click the Add Level button, to add the next level, and select
options from its drop-down boxes.
6. After you have selected all the Sort levels, and their options, click OK.
(b) Filtering Data
The Auto filter in Excel is used to find data fast in a large spreadsheet with many columns and rows. This
happens when the table created in Excel starts to get too big over time and makes locating and analysing
information difficult.
325
Here's how to use the AutoFilter tool.
Step 1
Make sure the data type is the same in each column. For instance, do not mix text in a column with
numbers, or numbers in a column with dates.
In your worksheet, the top row of each column should have a heading that describes the contents of the
column, such as "Product Number" or "Customer." For example:
Step 2
Select a range of cells containing alphanumeric data. On the Data tab, in the Sort and Filter group,
click Filter.
Step 3
The AutoFilter arrows now appear to the right of each column heading.
Note: If you select an entire column instead of a single cell before clicking the AutoFilter command, an
AutoFilter arrow will appear only on the selected column, not on all columns of the data.
326
Step 4
Suppose your worksheet contains customer sales data. Each customer entry includes information about
the customer's location, products they purchase, purchase dates, and revenues and profits from each
purchase.
To view only the sales activity from customers in the West region, click the AutoFilter arrow in the column
with the Region heading. When you click an AutoFilter arrow, a list is displayed. The list contains each of
the items in the column, in alphabetical or numeric order, so that you can quickly find the item you want.
In this instance, you scroll to West, and click it.
When you click West, Excel hides all the rows on the worksheet except for those that contain that text in
this column.
Step 5
If you want to focus on even more specific information, you can filter again on another column, and then
again on another column, and so on. You can click the arrow next to any heading in any column to apply
a filter.
After filtering by Region, for example, you can click the AutoFilter arrow on the Product Number column
and filter that column to see only the West region customers who purchased product number 12-100.
327
Advanced filtering
This allows you to filter out numerical data that satisfies specified values.
In the criteria range for an Excel advanced filter, you can set the rules for
the data that should remain visible after the filter is applied. You can use
one criterion, or several. For example, you can use cells F1:F2 to contain
the criteria range.
The heading in F1 exactly matches a heading E1 in the database. Cell F2

contains the criterion. The > (greater than) operator is used, with the number
10000 (no $ sign is included).
After the Excel advanced filter is applied, orders with a total greater than
$10000 will remain visible.
How to Work with Large Worksheets?
1. The best way to work with large spreadsheets is to make use of summary tables, using
outlines. This hides unnecessary detail from being seen on the spread sheet.
To create a summary table:
• Select the rows or columns to be hidden.
328
• Click the “Data” tab on the Ribbon.
• Click “Group”.
• The selected rows or columns will be outlined. To hide, click on the “-“ sign. To expand, just click
the “+” sign.
2. Another way to help work with large sheets is to change the level of zoom or view.
• Adjust the zoom bar at the bottom right of the worksheet, or click a view layout.
• Hold CTRL, and scroll the mouse wheel to quickly zoom in and out of a spreadsheet.
329
3. Excel also allows the user to view different parts of the same worksheet in different
windows.
• Click on the “View” Tab
• Click on the “New Window” button to open the same workbook in multiple windows.
• Press ALT+TAB to change between windows.
4. Excel also allows multiple views of the same worksheet in the same window.
• Click on the “View” Tab
• Click on the “Split” Button to split the screen.
• Adjust the border to get the desired view and number of panels.
• Click the “Split” Button again to change back to single view.
330
How to Achieve a Successful Print of a Spreadsheet?
• To align data for easy printing, it’s a good idea to enable the correct layout.
▪ Click on the “Page Layout” tab .
▪ Choose the correct settings for your worksheet. It’s best to follow the type of paper the
printer is capable of printing.
▪ For working with unbroken spreadsheets, press the “Size” Button and choose the paper.
The paper’s limits will be drawn on the worksheet.
▪ For best printing results, use the “page view” to do work.
• Click this button on the bottom right of the screen.
• The payout will change to fit on a page.
331
• To print, fastest way is to press CTRL+P to open the print menu.
▪ To print only a selected range of cells, highlight the range, press CTRL+P, and choose this
option:
▪ There are also options to print the only active sheets or the entire workbook.
332
Chapter 11 Summary
1. A spreadsheet system is a general purpose software package that simulates a paper accounting
worksheet.
2. Spreadsheets can be used for:

a. Sensitivity analysis
b. Forecasting information
c. Co-authoring, editing and reviewing information
d. Presentation of information
3. Advantages of spreadsheets include:

a. Cheap
b. User-friendly
c. Easy to process quickly
d. Good for presentation
e. Accurate
4. Limitations of spreadsheets are:

a. Require some mathematical skills and programming knowledge
b. Requires tedious attention to detail
c. Difficult to find/detect errors
d. Time consuming to edit large information
e. Lack of data security
5. Functions of a spreadsheet include:

a. Simple calculation formulae
b. Linking worksheets or workbooks
c. Identifying errors
d. Presentation of information (table, graph, chart, filter)
333

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MA1 MANAGEMENT INFORMATION

Version: July 2021

Topic Review (TLO 1c) ..................................................................................................... 30

Topic Review (TLO 1d) ..................................................................................................... 34

Topic Review (TLO 1e) ..................................................................................................... 43

Topic Review (TLO 1g) ..................................................................................................... 55

Topic Review (TLO 2b) ..................................................................................................... 64

Topic Review Answers..................................................................................................... 65

Topic Review (TLO 2c) ..................................................................................................... 68

Topic Review (TLO 2d) ..................................................................................................... 71

Topic Review (TLO 2e) ..................................................................................................... 75

Topic Review (TLO 2f)...................................................................................................... 78

Topic Review (TLO 2g) ..................................................................................................... 81

Topic Review (TLO 3b)....................................................................................................103

Topic Review (TLO 3d)....................................................................................................113

Topic Review (TLO 3e) ....................................................................................................118

Topic Review (TLO 3f) ....................................................................................................122

Topic Review (TLO 4a,b,c) ...............................................................................................134

Topic Review (TLO 5a) ....................................................................................................142

Topic Review (TLO 5b)....................................................................................................161

Topic Review (TLO 6c) ....................................................................................................177

Topic Review Answers....................................................................................................178

Topic Review (TLO 6d)....................................................................................................184

Topic Review (TLO 7b)....................................................................................................197

Topic Review (TLO 7d)....................................................................................................209

Topic Review (TLO 8b)....................................................................................................224

Topic Review (TLO 9a) ....................................................................................................249

Topic Review (TLO 10b) ..................................................................................................264

CHAPTER 1: THE NATURE OF BUSINESS ORGANIZATION AND ACCOUNTING SYSTEMS

At the end of the chapter, you should be able to:

Why are these learning outcomes important?

• Types of business transactions (Topic A1a)

1a. Organization and Main Functions of an Office

Illustration 1a.1: Office Components

Case Study 1a.2: Balloones Limited

People An office needs people to manage

Computers may be used to

Another supporting unit gathers

Organisational Functions (Departments / Units)

A function is a specialized group of people dedicated to performing Examples:

Most offices share certain common functions, Balloone Ltd is one

Example 1a.3: Organizational Functions The Purchasing Department for

Sales and Marketing would

Administration would inform

Balloone Ltd.’s in-house

Case Study 1a.5: Organizational Chart

The head of operations is Jennifer,

Louis takes over in her absence.

Ben, John, and Claire are of the same

• It shows the formal communication structure.

• It indicates specific responsibilities for each individual.

Claire is in charge of Quality, while Ben is

• It shows the positions and the possible career pathway.

If Jennifer is promoted out of the

• It shows potential weaknesses in the organization, or capacity

• It shows the number of management layers in the

Model 1a.6: Centralized Structure

When decision making is kept at

Model 1a.7: Decentralized Structure

When authority is delegated to

Case Study 1a.7: Jorky Ltd (Centralization and Decentralization)

Head office will decide what

Head office will evaluate Branch managers will evaluate