Introduction to Cost and Management Accounting

UNIT ONE
INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING

Cost: as a resource sacrificed or forgone to achieve a specific objective. It is usually measured
as the monetary amount that must be paid to acquire goods or services.
 It Is all disbursement of cash (the commitment to pay cash in the future for the
purpose of generating revenue.)
Definition of Cost accounting and Managements accounting

Management Accounting
 Measures and reports financial and non financial information that helps managers to
fulfil the goals of the organization.
 Concerned with providing information to mangers, i.e. people inside the organization
who direct and control its operations.
 Focuses on internal reporting.
Financial Accounting
 Concerned with providing information to stockholders, creditors and other who are
outside the organization?
 Focuses on reporting to external parties.
 It measures and records business transactions and provides financial statements that are
based on GAAPs/IFRS.
Cost accounting is an accounting information system that records, measures and reports
information about cost.
Scope of cost accounting
1. Cost book- keeping : it is maintaining complete records of all costs incurred from
their incurrence to their charge to department, products and services
2. Cost system : systems and procedures are devised for proper accounting for costs
3. Cost ascertainment: ascertaining / determining cost of products, process or services.
it is basis for decision making such as pricing, planning and controlling
4. Cost analysis : is the process of finding out the casual factors of actual costs varying
from the budgeted costs and fixation of responsibility for cost increases
5. Cost reports : presentation of cost is ultimate function of cost accounting
Objectives of cost accounting (use of cost accounting information)

Cost accounting has the following main objectives to serve
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Prepared by inst. Tilahun Girma (MSc) 2022 G.C
 Determining selling prices  Analyzing profitability
 Meeting Competition  Bidding on contracts
 Controlling cost  Meeting competition
 Providing information for decision making
 Determination of cost-volume-profit relationship
 Make or buy a component
 Shut down or continue operation
 Continuing with existing machinery or replacing them by improved and
economical machines
 Facilitating preparation of financial and other statements
Classification of costs
A single cost can be classified and used in several ways depending on the purpose of the
analysis
1. Based on activity : Manufacturing and none manufacturing cost
A. Manufacturing cost
Manufacturing: is the process of transferring raw materials into finished goods by using
labor and other factory facilities.
Manufacturing cost: are all costs incurred in the manufacturing of products up to the point
at which the product is ready for sale.
Manufacturing costs are divided in two: direct cost and indirect cost (MOH)
 Direct cost is a cost that can be directly traced to a cost object / production process. A
cost object is anything for which managers need a separate breakdown of its
component of costs
Direct costs are classified into two parts: direct material cost and direct labor cost
i. Direct material cost : the acquisition of costs of those materials that become an
integral part of the finished product and whose costs can be conveniently traced to
the finished products
ii. Direct labor cost: consists of compensations to workers who directly and
physically involved in the conversion process. Labor costs that can be easily
traced to individual units of product. Direct labor is sometimes called touch labor
because direct labor workers typically touch the product while it’s being made.
 Indirect costs/ manufacturing over head cost(MOH)
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 Are costs that cannot be traced directly to a cost object. Indirect costs are required to
make finished products but are not as easy / cost effective to track to one specific
finished product
 Various names are used for MOH such as indirect manufacturing cost, factory over
head and factory burden. All of these are synonyms for manufacturing over head
 MOH costs are divided into three: indirect materials, indirect labour and other
MOH costs
i. Indirect materials: are materials that will not become an integral part of the
finished product but used in factory.
ii. Indirect labor : labor costs that cannot physically traced to particular
products
iii. Other manufacturing over head cost: includes maintenance and repair on
production equipment and heat and light etc
Variable factory over head
 Supplies  Spoilage
 Fuel  Communication cost
 Power  Over time payment
Fixed factory over head
 Salaries of production
 Depreciation
 Property tax
 Insurance. etc
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Predetermined overhead rate = Estimated total manufacturing overhead cost
Estimated total units in the allocation base
 The predetermined overhead rate is based on estimated rather than an actual figure.
This is because the predetermined overhead rate is computed before the period begins
and is used to apply overhead cost to jobs throughout the period. The process of
assigning overhead cost to jobs is called overhead application.
Overhead applied to a particular job = Predetermined * Amount of the allocation

Overhead rate base incurred by the job
o A predetermined overhead rate is calculated using the projected overhead cost and
some activity base that has a cause and effect relationship with manufacturing
overhead costs. For instance, assume that the projected overhead cost for the
upcoming year is Birr 80,000.00, and the direct labor hour is estimated to be 4,000
hrs, the predetermined overhead rate can thus be calculated as follows:
Predetermined overhead cost = Estimated overhead cost
Estimated activity base (direct labor hr)
POR = 80,000 = 20 per direct labor hour.

4,000
If we assume that the direct labor hours spent on the job are 90, the manufacturing over head
applied will therefore be 90 X 20 =1800. The entry to record the manufacturing overhead
applied is as follows:
B. None- Manufacturing Cost (Period Cost or Selling and Administrative Cost)

Period costs are those costs that are expensed in the period in which they are incurred.
Therefore period costs are expenses that are not part of inventor able product cost. They are
divided into two categories
A. Selling or marketable costs
Selling cost/marketing cost:
 all costs that are incurred to secure customer orders and get the finished product to
the customer
 sometimes called order getting and order filling costs
B. Administration costs
 All costs associated with the general management of a firm (running the firm as a
whole)
 Are aggregate of the costs of formulating the policies, directing the organizations and
controlling the overall operations of the organizations
NB. Selling and administrative costs are called operating cost
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Nonmanufacturing costs incurred in order to get operating funds are called financing costs
and are not operating cost
2. Based on Behavior: Variable cost and fixed cost
A. Variable cost:
 Costs that vary in total in direct proportion to changes in the level of activity
 Is constant if expressed on per unit basis
 Example direct material, the cost of direct materials used during period will vary in
total, in direct proportion to the number of that are produced
B. Fixed cost
 Costs that remain constant in total regardless of changes in the level of activity
 Fixed cost per units increases and decreases inversely with change in activity
 Example : rent is good example of fixed cost
Common cost related terminologies
a. Cost: scarified resource to achieve a specific objective
b. Actual cost : a cost that are occurred
c. Differential cost (incremental cost): a difference in cost between any two
alternatives
d. Opportunity cost : is selected over another, the potential benefit that is given up
when one alternative
e. Sunk cost : a cost that has already been incurred and that cannot be changed now or
in the future
f. Budgeted cost : is the predicted cost or forecasted (future) amount of cost
g. Cost accumulation : is the collection of cost data in some organized manner by
means of an accounting system
h. Cost tracing : is the process of assigning costs to a cost object
i. Prime cost(PC) : is the summation of direct material and direct labour
PC= DL +DM
j. Conversion cost (CC): is direct labour plus factory over head. It is cost of converting
the materials into a finished product
CC= DL + FOH
k. assets (inventory) until they are sold and transferred to cost of goods sold
Chapter: JOB ORDER COSTING SYSTEM
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Two costing systems are commonly used in manufacturing and in many service companies;
these two systems are known as process costing and job-order costing.
A process costing is used in situations where the company produces many units of a single
product for long periods at a time. In this system, the cost object is masses of identical or
similar units of a product or service.
A job-order costing is used in situations where many different products are produced each
period.
General journal entry
When raw materials are purchased
Raw material xx
Cash (A/P) xx
Example1. Raw materials are purchased during the month at a cost of birr 180,000 on credits
Raw material 180,000
A/P 180,000
When the material moved from warehouse to production process (factory)
A. For direct material
WIP xx
Raw material xx
B. For indirect material
FOH xx
Raw material xx
Example2. During September raw materials costing birr 135,000 were used of which birr
15,000 are the cost of indirect cost
WIP 120,000
FOH 15,000
Raw material 135,000
When goods are produced
Finished goods xx
WIP xx
When finished goods are sold
Two journal entries are required
1. To record sales
Cash (A/R) xx
Sale xx
2. To record cost of goods sold
CGS xx
FG xx
Finished goods sold and shipped to customers birr 198,000 and birr 297,000 all sales were on
credit.
Cost of goods sold 198,000
Finished goods 198,000
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Account receivable 297,000
Sales 297,000
To record labour cost incurred in the production process
To record direct labour cost
WIP xx
Wage payable xx
To record indirect labour cost
MOH xx
Wage payable xx
General formula
 DM used : BDM+ Purchase -EDM
 Total manufacturing cost (TMC): = DM + DL + FOH
 Cost of goods manufactured (CGM)= BWIP + TMC – EWIP
 Cost of goods available for sale = BFG +CGM
 Cost of goods sold (CGS)= BFG +CGM- EFG
 GP= sales – CGS
 NIBT= GP- operating expense
Superior manufacturing co. Has the following cost and expense data for the year ending
December 21, 2005
 Raw materials 1/1/05 $30,000 insurance factory $ 14,000
 Raw materials 12/31/05 $20,000 Raw materials purchased $ 205,000
sales (net) $1,500,000
 Indirect materials $15,000 delivery expense $100,000
 Work in process 1/1/05 $ 80,000 sales commission 150,000
 Work in process 12/31/05 $50,000 indirect labour $90,000
 Finished goods 1/1/05 $110,000 factory machinery rent $ 40,000
 Finished goods 12/31/05 $120,000 factory utilities $65,000
 Direct labour $ 350,000 depreciation factory building $24,000
 administrative expense $300,000
Calculate
A. DM used D. Cost of goods available for
B. Total manufacturing cost sale
(TMC E. Cost of goods sold (CGS
C. Cost of goods manufactured F. GP
(CGM) G. NIBT=
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Chapter 3: Process Costing
 A process costing is most commonly used in industries that produce essentially
homogeneous (i.e. uniform) products on a continuous basis
 Process costing system accumulate costs by department for a period of time, just as a
job order costing system accumulate costs by job, and the total cost then will be
assigned to the units produced during that period.
Similarities between job-Order and Process Costing
1. The same basic purposes exist in both systems, which are to assign material, labor,
and overhead cost to products and to provide a mechanism for computing unit costs.
2. Both systems maintain and use the same basic manufacturing accounts, including
Raw Materials, MO, Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts is basically the same in both
systems.
Differences between Job-Order and Process Costing
Base of comparison Job order costing Process costing

Type of product Diversified, heterogeneous and Homogeneous products produced
unique products continuously
Cost accumulation By job for a specified number of By department or cost center for a specified
units period of time
Work in process One for each job One for each department
Basic document Job cost sheet for each job Cost of production report for each
department or cost centers
Cost per unit Cost accumulated by job, divided Cost accumulated by cost centers divided by
by units in job equivalent unit of production during a period
of time
Reporting By job By cost center or department
Nature of costs for each Each job may use different amount Each units produced uses the same standard
cost object of material, labor and overhead amount of materials, labor and overhead cost
cost
Illustrating Process Costing

Assumptions: ABC Manufacturing Company manufactures thousands of Products A.
These components are assembled in the Assembly Department, upon completion the units
are completely transferred to the Testing Department. The process-costing system for
Product A has a single direct cost category (direct materials) and a single indirect-cost
category (conversion costs). Direct materials are added at the beginning of the process in
Assembly. Conversion costs are added evenly during Assembly.
Case 1: Process costing with zero beginning and zero ending work in process inventory
that is all units are started and fully completed by the end of the accounting period.
Data for the Assembly Department for January 2001
Physical Units for January 2001
Work in Process, beginning inventory (January 1) 0 units
Started during January 400 units
Completed and transferred out during January 400 units
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Work in Process, ending inventory (January 31) 0 units
Total Costs for January 2001
Direct materials costs added during January Br.32, 000
Conversion costs added during January 24,000
Total Assembly Department costs added during January 56,000
Solution:
Direct Material costs per unit (32,000/400) Br. 80
Conversion costs per unit (24,000/400) 60
Assembly Department costs per unit 140
Case 2: Process Costing with zero beginning but some ending work in process
inventory
Data for the Assembly Department for February 2001

Physical Units for February 2001
Work in Process, beginning inventory (February 1) 0 units
Started during February 400 units
Completed and transferred out during February 175 units
Work in Process, ending inventory (February 28) 225 units
Total Costs for February 2001
Direct materials costs added during February Br.32, 000
Conversion costs added during February 18,600
Total Assembly Department costs added during February 50,600
In addition, the Assembly Department estimates that the partially assembled units are on
averages 60% complete as to conversion costs.
Physical units and Equivalent units (Step 1&2)

Equivalent units is a derived amount of output units that takes the quantity of each input
(factor of production) in units completed or in work in process, and converts it into the
amount of completed output units that could be made with that quantity of input.
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 0
Started during current period 400
To account for 400
Completed and transferred out during current
period 175 175 175
Work in process, ending 225
225*100%; 225*60% 225 135
Accounted for 400
Work done in current period 400 310
Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Productio Materials Costs
n Costs
(Step 3) Costs added during February divided by 50,600 Br.32,000/ Br.18,600/
equivalent units of work done incurrent period 400 310
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Cost per equivalent unit Br. 80 Br. 60
(Step 4) Total costs to account for Br. 50,600
(Step 5) Assignment of costs:
Completed & transferred out (175 units) Br. 24,500 (175*80) (175*60)
Work in process, ending (225 units)
Direct Materials 18,000 225*80
Conversion costs 8,100 135*60
Total work in process 26,100
Total costs accounted for Br.50,600
Case 3: Process costing with some beginning and ending work in process inventory.
Data for the Assembly Department for March 2001
Physical Units for March 2001
Work in Process, beginning inventory (March 1) 225 units
Direct Materials (100% complete)
Conversion costs (60% complete)
Started during March 275 units
Completed and transferred out during March 400 units
Work in Process, ending inventory (March 31) 100 units
Total Costs for March 2001
Work in process, beginning inventory
Direct materials (225 equivalent units * Br. 80/unit) Br. 18,000
Conversion costs (135 equivalent units * Br.60/unit) 8,100 Br. 26,100
Direct materials costs added during March 19,800
Conversion costs added during March 16,380
Total costs to account for Br.62, 280
 Weighted-Average process costing method
 This method calculates the equivalent unit cost of the work done to date
(regardless of the period in which it was done) and assigns this cost to
equivalent units completed and transferred out of the process and to equivalent
units in ending work in process inventory.
 The weighted average cost is the total of all costs entering in the work in
process account (regardless of whether it is from the beginning work in
process or from work started during the period) divided by total equivalent
units of work done to date.
Equivalent Units
To account for 500
period 400 400 400
Work in process, ending 100
100*100%; 100*50% 100 50
Accounted for 500
Work done in current period 500 450
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Production Materials costs
Costs
(Step 3) Work in process, beginning Br.26,100 Br.18,000 Br.8,100
Costs added during the current period 36,180 19,800 16,380
Costs incurred to date divided by Br. 37,800/ Br. 24,480/
Equivalent units of work done to date 500 450
Cost per equivalent unit of work done Br.75.60 Br.54.40
(Step 4) Total costs to account for Br.62,280
(Step 5) Assignment of Costs
Completed and transferred out (400 units) 52,000 (400*75.60) (400*54.40)
Direct Materials 7,560 100*75.60
Conversion costs 2,720 50*54.40
Total costs accounted for Br. 62,280
 First-in, First-out Method

 The FIFO process costing method assigns the cost of the previous period’s
equivalent units in beginning work-in process inventory to the first units
completed and transferred out of the process, and assigns the cost of
equivalent units worked on during the current period first to complete
beginning inventory, then to start and complete new units in ending work in
process inventory.
 This method assigns that the earliest equivalent units in the work in process-
Assembly account are completed first.
 A distinct feature of the FIFO process-costing method is that work done on
beginning inventory before the current period is kept separate from work done
in the current period.
 Costs incurred in the current period and units produced in the current period
are used to calculate costs per equivalent unit of work done in the current
period.
 In contrast equivalent unit and cost per equivalent unit calculations in the
weighted average method merge the units and costs in beginning inventory
with units and costs of work done in the current period.
Equivalent Units
To account for 500
From beginning work in process
225*(100%-100%); 225*(100%-60%) 225
Started and Completed 0 90
175*100%, 175*100% 175
Work in process, ending 175 175
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100*100%; 100*50% 100
Accounted for 500 100 50
Work done in current period
275 315
Costs
(Step 3) Work in process, beginning Br.26,100
Costs added current period 36,180 19,800/ 16,380/
Divided by equivalent units of work 275 315
done in current period
Costs per equivalent unit of work done in the Br. 72 Br. 52
current period
Completed and transferred out (400 units)
Work in process, beginning (225 units) Br. 26,100
Direct Materials added in current period 0 0*72
Conversion costs added in current period 4,680 90*52
Total from beginning inventory 30,780
Started and completed (175 units) 21,700 175*72 175*52
Total costs of units completed & transferred 52,480
Conversion costs 2,600 50*52
Total work in process, ending 9,800
Total costs accounted for Br. 62,280
Chapter 4: Accounting for spoilage, defective units and scrap

1. Terminology
Spoilage is unacceptable units of production that are discarded or are sold for reduced prices.
Both partially completed or fully completed units of output can be spoiled.
Rework is unacceptable units of production that are subsequently repaired and sold as
acceptable finished goods..
Scrap is material left over when making a product(s). It has low sales value compared with
the sales value of the product(s).
2. Types of Spoilage
Normal Spoilage
Normal Spoilage is spoilage that is an inherent result of the particular production process and
arises even under efficient operating conditions. For a given production process, management
must decide the rate of spoilage it is willing to accept as normal. Costs of normal spoilage are
typically treated as component of the costs of good unit manufactured because good units
cannot be made without the simultaneous appearance of spoiled units
Abnormal Spoilage
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Abnormal Spoilage is spoilage that should not arise under efficient operating conditions. It is
not an inherent result of the particular production process. Abnormal spoilage is regarded as
avoidable and controllable.
Abnormal spoilage costs are written off as losses of the accounting period in which detection
of the spoiled units occurs.
Example: Anzio Co. manufactures a wooden recycling container in its Forming Department.
Direct materials for this product are introduced at the beginning of the production cycle. At
the start of production, all direct materials required to make one output unit are bundled in a
single kit. Conversion costs are added evenly during the cycle. Some units of this product are
spoiled as a result defects only detectable at inspection of finished units. Normally spoiled
units are 10% of the goods output. Summary of data for July 2004 are:
Physical Units for July 2004
Work in Process, beginning inventory (July 1) 1,500 units
Started during July 8,500 units
Completed and transferred out during July 7,000 good units
Work in Process, ending inventory (July 31) 2,000 units
Total Costs for July 2004
Work in process, beginning inventory
Direct materials (1,500 equivalent units * Br. 8) Br. 12,000
Conversion costs (900 equivalent units * Br.10) 9,000 Br. 21,000
Direct materials costs added during July 76,500
Conversion costs added during July 89,100
Total costs to account for Br.186, 600
Step 1: Summarize the Flow of Physical Units of Output. Identify units of both normal
and abnormal spoilage.
Spoiled Units= (Beginning units + Units started)-(Goods units transferred out+ending units)
= (1,500+8,500) – (7,000 + 2,000)
= 1,000 units
Normal Spoilage is 10% of the 7,000 units of good output, or 700 units. Thus,
Abnormal Spoilage = Total Spoilage – Normal Spoilage
= 1,000-700
= 300units
Step 2: Compute output interims of Equivalent Units.
Step 3: Compute Equivalent unit costs.
Step 4: summarize Total Costs to Account for.
Step 5: Assign Total Costs to units completed, to spoiled units, and to units in ending work-
in process.
A. Weighted Average
Equivalent Units
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Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Goods units completed and transferred out
during current period: 7,000 7,000 7,000
Normal Spoilage 700 700 700
700*100%; 700*100%
Abnormal Spoilage 300 300 300
300*100%; 300*100%
Work in process, ending 2,000 2,000 1,000
2,000*100%; 2,000*50%
Accounted for 10,000
Work done in current period 10,000 9,000

Costs
(Step 3) Work in process, beginning Br.21,000 Br.12,000 Br.9,000
Costs added during the current period 165,600 76,500 89,100
Costs incurred to date divided by Br. 88,500/ Br. 98,100/
Equivalent units of work done to date 10,000 9,000
Cost per equivalent unit of work Br.8.85 Br.10.90
done
(Step 5) Assignment of Costs Goods
units completed and transferred out (7,000
units)
Costs before adding normal spoilage 138,250 (7,000*8.85) (7,000*10.9)
Normal Spoilage (700 units) 13,825 700*8.85 700*10.9
Total cost of goods completed and transferred 152, 075
out
Abnormal Spoilage(300 units) 5,925 300*8.85 300*10.90
Work in process, ending (2,000 units)
Direct Materials 17,700 2,000*8.85
Conversion costs 10,900 1,000*10.90
Total costs accounted for Br186,600
B. FIFO Method
Equivalent Units
Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Good units completed and transferred out
during current period
From beginning work in process 1,500
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1,500*(100%-100%); 1,500*(100%-60%) 0 600
Started and Completed 5,500
5,500*100%, 5,500*100% 5,500 5,500
Normal Spoilage 700
700*100%;700*100% 700 700
Abnormal Spoilage 300
300*100%; 300*100% 300 300
Work in process, ending 2,000
2,000*100%; 2,000*50% 10,000 2,000 1,000
Accounted for 8,500 8,100
Work done in current period

Costs
(Step 3) Work in process, beginning Br.21,000
Costs added current period 165,600 76,500/ 89,100/
Divided by equivalent units of work 8,500 8,100
done in current period
Costs per equivalent unit of work done in the Br. 9 Br. 11
current period
Good units completed and transferred out
(7,000 units)
Work in process, beginning (1,500 units) Br. 21,000
Direct Materials added in current period 0 0*9
Conversion costs added in current period 6,600 600*11
Total from beginning inventory before 27,600
spoilage
Started and completed BNS(5,500units) 110,000 5,500*9 5,500*11
Normal Spoilage (700 units) 14,000 700*9 700*11
Total costs of goods units transferred out 151,600
Abnormal Spoilage (300 units) 6,000 300*9 300*11
Conversion costs 11,000 1,000*11
Total work in process, ending 29,000
Total costs accounted for Br.186,600
Journal Entries
Weighted Average FIFO
Finished Goods 152,075 151,600
Work-in Process-Forming 152,075 151,600
(To transfer good units completed in July)
Loss from Abnormal Spoilage 5,925 6,000
Work-in Process-Forming 5,925 6,000
(To recognize abnormal spoilage detected in July)
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Chapter Five: Cost Allocation: Joint Products and Byproducts
Terms
 Joint costs are the costs of a single production process that yields multiple products
simultaneously.
 The Split-off point is the juncture in a joint production process where one or more
products become separately identifiable.
 Separable costs are all costs of manufacturing, marketing, distribution, and so on.
Incurred beyond the split off point those are assignable to one or more individual
products.
At or beyond the split off point, decisions relating to sale or further processing of individual
products can be made independently of decisions about other products.
 A joint product has relatively high sales value compared to other products yielded by
a joint production process
 When a joint production process yields only one product with a relatively high sales
value, the product is termed as main product.
 A byproduct has a relatively low sales value compared with the sales value of a joint
or main product.
Approaches to Allocating Joint Costs

Approach1: Allocate costs using physical-measure-based data such as weight or volume
Approach21: Allocate costs using market based data such as revenues.
 Sales value at splitoff point
 Estimated net realizable value (NRV) method
 Constant gross-margin percentage NRV method
.
Example1: Farmers Dairy purchases raw milk from individual farms and processes it until
the splitoff point, where two products (cream and liquid skim) emerge. These two products
are sold to an independent company, which markets and distributes them to supermarkets and
other retail outlets.
 Raw milk processed 100,000 gallons. 10,000 gallons of raw milk are lost in the
production process due to evaporation, spoilage, and the like, yielding 100,000
gallons of good product.
Production Sales
Cream 25,000 gallons 20,000 gallons at Br. 8/gallon
Liquid skim 75,000 gallons 30,000 gallons at Br. 4/gallon
 Cost of purchasing 110,000 gallons of raw milk and processing it until the splitoff
point to yield 25,000 gallons of cream and 75,000 gallons of liquid skim, Br. 400,000.
How much of the joint costs of Br.400,000 should be allocated to the cost of goods sold
(20,000 gallons of cream and 30,000 gallons of liquid skim) and to the ending inventory
(5,000 gallons of cream and 45,000 gallons of liquid skim)?
1. Physical-Measure Method
 Allocates joint costs to joint products on the basis of the relative weight,
volume, or other physical measure at the splitofff point of the total production
of these products during the accounting period.
Cream Liquid Skim Total
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1. Physical measure of production (gall.) Br.200, 000 Br.300, 000 Br.500, 000
2. Weighting (25,000gall/100,000 gall; 0.25 0.75
75,000gall/100,000gall)
3. Joint cost allocated (cream, 0.25* Br.100, 000 Br.300, 000 Br.400, 000
Br.400, 000; liquid skim, 0.75*Br.400, 000
4. Joint production cost per gallon (cream, Br. 4 Br.4
Br.100, 000/25,000 gall; liquid skim,
Br.300, 000/75,000 gall.)
2. Sales value at splitoff point
 Allocates joint costs to joint products on the basis of a relative sales value at
the splitofff point of the total production of these products during the
accounting period.
Cream Liquid Skim Total

1. Sales value at splitoff point (cream, Br.200,000 Br.300,000 Br.500,000
25,000 gall.*Br.8; liquid skim, 75,000
Gall.*Br.4)
2. Weighting (Br.200,000/Br.500,000; 0.40 0.60
Br.300, 000/Br.500, 000)
3. Joint cost allocated (cream, 0.40* Br.160, 000 Br.240, 000 Br.400, 000
Br.400, 000; liquid skim, 0.60*Br.400, 000
4. Joint production cost per gallon (cream, Br. 6.40 Br.3.20
Br.160, 000/25,000 gall; liquid skim,
Br.240, 000/75,000 gall.)
Note that the method uses the sales value of the entire production of the accounting
period. The reason is that the joint costs were incurred on all units produced, not just
those sold in the current period.
3. Estimated Net Realizable Value (NRV) Method

 In many cases, products are processed beyond the splitoff in order to bring
them to a marketable form or to increase their value above their selling price at
the splitoff point.
 The estimated net realizable value is typically used in preference to the sales
value at splitoff point method only when market selling prices for one or more
products at the splitoff point are available.
Eample2: Assume the same situation as in Example 1 except that both cream and
liquid skim can be processed further:
 Cream Butter cream; 25,000 gallons of cream are further processed to yield
20,000 gallons of butter cream at additional processing (separable) costs of Br.280,
000. Butter cream, sold for Br.25 per gallon, is used in the manufacture of butter-
based products.
 Liquid skim Condensed Milk; 75,000 gallons of liquid skim are further processed
to yield 50,000 gallons of condensed milk at additional processing costs of
Br.520,000. Condensed milk is sold for Br.22 per gallon.
 Sales during the accounting period were 12,000 gallons of butter cream and 45,000
gallons of condensed milk.
Beginning Inventory Ending Inventory

Raw milk 0 gallons 0 gallons
17
Cream 0 gallons 0 gallons
Liquid skim 0 gallons 0 gallons
Butter cream 0 gallons 8000 gallons
Condensed milk 0 gallons 5,000 gallons
The estimated NRV method allocates joint costs to joint products on the basis of the relative
estimated NRV (expected final sales value in the ordinary course of business minus the
expected separable costs) of the total production of these products during the accounting
period. Joint costs would be allocated as follows:
Butter Condensed Total

Cream Milk
1. Expected final sales value of production
(Butter cream, 20000gall.*Br.25; condensed Br.500, 000 Br.1, 100,000 Br.1, 600,000
Milk, 50,000gall*Br.22)
2. Deduct expected separable costs to
Complete and sell Br.280, 000 Br.520, 000 800,000
3. Estimated NRV at splitofff point Br.220, 000 Br.580, 000 Br. 800,000
75,000gall/100,000gall)
4. Weighting (220,000/800,000; 580,000/
800,000) 0.275 0.725
5. Joint costs allocated (butter cream, 0.275*
400,000; condensed milk, 0.725*400,000) Br.110, 000 Br.290, 000 Br.400, 000
6. Production cost per gallon (butter cream,
[110, 000+280,000]/20,000 gall; condensed
Milk[290,000+520,000]/50,000gall) Br.19.50 Br.16.20
4. Constant Gross-Margin Percentage NRV Method

 Allocates joint costs to joint products in such a way that the overall gross
margin percentage is identical for the individual products. This method
requires three steps:
Step 1: Compute the overall gross-margin percentage.
Step 2: Use the overall gross margin percentage and deduct the gross margin from the
final sales values to obtain the total costs that each product will bear
Step 3: Deduct the expected separable costs from the total costs to obtain the joint-
cost allocation.
Step 1:
Expected final sales value of total production during the accounting period
(20,000gall.*Br.25) + (50,000gall*Br.22) Br.1, 600,000
Deduct joint and separable costs (Br.400, 000+Br.280, 000+
Br.520, 000) 1,200,000
Gross Margin Br. 400,000
Gross Margin percentage (400,000/1,600,000) 25%
Step 2:
Butter Condensed Total

Cream Milk
18
Expected final sales value of production
During the accounting period: (butter
Cream, 20000gall.*Br.25; condensed
Milk, 50,000gall*Br.22) Br.500, 000 Br.1, 100,000 Br.1, 600,000
Deduct gross margin, using overall
Gross margin percentage (25%) 125,000 275,000 400,000
Cost of Goods Sold 375,000 825,000 1,200,000
Step 3:
Deduct separable costs to complete and sell 280,000 520,000 800,000
Joint costs allocated Br.95, 000 Br.305, 000 Br.400, 000
19

Introduction to Cost and Management Accounting

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Introduction to Cost and Management Accounting

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UNIT ONE

INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING

Definition of Cost accounting and Managements accounting

Objectives of cost accounting (use of cost accounting information)

Overhead applied to a particular job = Predetermined * Amount of the allocation

POR = 80,000 = 20 per direct labor hour.

B. None- Manufacturing Cost (Period Cost or Selling and Administrative Cost)

Chapter: JOB ORDER COSTING SYSTEM

Base of comparison Job order costing Process costing

Illustrating Process Costing

Data for the Assembly Department for February 2001

Physical units and Equivalent units (Step 1&2)

Calculation of Product Costs (Steps 3, 4, and 5)

 First-in, First-out Method

Chapter 4: Accounting for spoilage, defective units and scrap

Calculation of Product Costs (Steps 3, 4, and 5)

Calculation of Product Costs (Steps 3, 4, and 5)

Approaches to Allocating Joint Costs

Cream Liquid Skim Total

3. Estimated Net Realizable Value (NRV) Method

Beginning Inventory Ending Inventory

Butter Condensed Total

4. Constant Gross-Margin Percentage NRV Method

Butter Condensed Total

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