CMA PART 1 SATURDAY 9/7/2022

DIRECT COST= PRIME COST

DIRECT COST= DIRECT MATERIAL(RAW MATERIAL)+DIRECT WAGES

+DIRECT EXPENSES

INDIRECT COSTS =SUPPORTING/AUXILLIARY COSTS FOR TO MAKE

PRODUCT MARKETABLE/SALEABLE

INDIRECT COSTS = OVERHEADS

OVERHEADS = 1. PRODUCTION OH(FACTORY OH OR

MANUFACTURING OH) & 2.NON PRODUCTION OH

NON PRODUCTION OH= SELLING & DISTRIBUTION OH + OFICE &

ADMINISTRATION OH

*SELLING & DISTR OH= DISTRIBUTION OH= EXAMPLE SALESMAN

COMMISSION, SALEMAN SALARY, DISCOUNT ALLOWED TO
CUTOMERS,ADVT, MARKETING EXPS, CUSTOMER CARE EXPS ,
WARRENTY CHARGES , GIFT HAMPER TO CUSOMERS , EXHIBITION
EXPS ,TRAVELLING EXPS , DEPRE ON SALES OUTLET ETC

*OFFICE & ADMIN OH= ADMIN OH= EXAMPLE OFFICE SALARY,

CONVEYANCE EXPS , ACCOUNT CHARGES , AUDIT FEES , DIRECTORS
REMUNERATION , POSTAGE & TLEGRAM, ETC

PRODUCTION COSTS = DIRECT COSTS + PRODUCTION OVERHEADS

CONVERSION COSTS = PRODUCTION COSTS (-) RAW MATERIAL

OR = DIRECT WAGES + DIRECT EXPS +MANUFACTURING OH

IN CONVERSION COSTS > NOT INCLUDES DISTR OH & ADMIN OH

PRODUCTION OH= EXAMPLE POWER & FUEL , INDIRECT MATERIAL,

INDIRECT WAGES , REPAIRES & MAINTENCE,QUALITY CONTROL
CHARGES , INSPECTION CHARGES , OVERHAULING CHARGES ,
FACTORY RENT , INSURANCE PREM ON PLANT & MACHINERY,
WORK SUPERVISORS SALARY,ETC

DIRECT COSTS/RRIME COSTS ALWAYS VARIABLE NATURE .

TOTAL COSTS= VARIABLE COSTS + FIXED COSTS

VARIABLE COSTS = THOSE COSTS WHICH ARE VARY/CHANGE

ACCORDING TO PRODUCTION /SALES QTTY OR FACTORY
CAPACITY, EXAMPLE RAW MATERIAL, DIRECT LABOUR , POWER &
FUEL, SALESMAN COMMISIION ETC

VARIABLE COSTS IS CONSTANT/FIXED PER UNIT DURING THE

RELEVENT RANGE .

FIXED COSTS /COMMITTED COSTS ARE THOSE THOSE COSTS

WHICH ARE NOT RELATED TO PRODUCTION OR SALES QTTY OR
FACTORY CAPACITY, THEY ARE PERIOD COSTS
(MONTHLY/QTRLY/YEARLY INCURRED) EXAMPLE RENT,
SALARY,INSURANCE PREMIUM, DEPRECIATION ETC

FIXED COSTS ARE FIXED/CONSTANT IN TOTALLITY DURING THE

RELEVENT RANGE .

RELEVENT RANGE IS SHORT TERM PERIOD ( WHEN ALL FACTORS OF

PRODUCTION ARE FIXED, LAND
/LABOUR/CAPITAL/ENTREPRENUER/TECHNOLOGY)

DURING LONGTERM PERIOD ALL COSTS BECOME VARIABLE

NATURE

ABSORPTION COSTING = FULL COSTING= TOTAL COSTING . IT IS

TRADITIONAL METHOD OF COSTING . IN THIS CASE , TOTAL COSTS
= PRODUCTION COST + NON PRODUCTION COSTS
VARIABLE COSTING/DIRECT COSTING IS NOT METHOD OF COSTING
, IT IT TECHNIQUE TO EVALUATE TOTAL COSTS ,IT IS USE BY
MANAGEMENT ACCOUNTANT/FIN
ANALYSTS/ECONOMIST/CONSULTANT TO TAKE DECISION ABOUT
VIABLITY OF PRODUCT .IN THIS CASE , TOTAL COSTS= VARIABLE
COSTS + FIXED COSTS

INVENTORY COSTS ALSO CALLED AS PRODUCT COSTS

INVENTORY COSTS AS PER ABSORPTION COSTING & VARIABLE

COSTING , BOTH EXCLUDES DISTREIBUTION OH & ADMIN OH.

DISTRIBUTION OH & ADMIN OH ARE CONSIDERED IN BOTH

COSTING SYSTEM AS EXPENSES ( THIS IS NOT CHARGED TO
CUSTOMERS) BUT INVENTORY COSTS ARE CHARGED TO
CUSOMERS)

IN VARIABLE COSTING …SALES LESS VARIABLE COSTS ( INCL DISTR

ADMIN OH) = CONTRIBUTION MARGIN

IN ABSORPTION COSTING …..SALES LESS MANUFACTURING COSTS (

VARIABLE AS WELL AS FIXED MFG OH) =GROSS MARGIN/GROSS
PROFIT

INVENTORY HERE …COST OF GOODS SOLD.

Q PREPARE INCOME STATEMENT AS PER ABSORPTION COSTING AND VARIABLE COSTING
....
OP INVENTORY 100 UNITS , CURRENT PRODUCTION QTTY= 1000 UNITS , SALES QTTY= 800
UNITS
PRIME COSTS /DIRECT COST PER UNIT 50$
VARIABLE MFG COST PER UNIT = 10$
FIXED MFG COST PER UNIT 1$
VARIABLE SELLING EXPS PER UNIT 2$
FIXED DISTRIBUTION OH = 500$ FIXED ADMIN OH =300$
SELLING PRICE 200$ PER UNIT
ANSWER = MISSING FIG IS ENDING INVENTORY , ENDING INVENTORY= OP INVENTORY+ CURRENT
PRODUCTION QTY (-) SALES QTTY= 100 + 1000 – 800 = 300 UNITS

INVENTORY/PRODUCT COSTS (COGS) IS ABSORBED COSTS = DIRECT COSTS 50$ +VARIABLE MFG
OH 10$ + FIXED MFG OH 1$ = DIRECT MATERIAL+ DIRECT WAGES + DIRECT EXPS + VARIABLE MFG
OH+ FIXED MFG OH = 61$ PER UNIT

VARIABLE MFG COSTS = DIRECT COSTS 50$ + VARIABLE MFG OH 10$=DIRECT MATERIAL+ DIRECT
WAGES + DIR EXPS + VARIABLE MFG COSTS = 60$ PER UNIT

INCOME STATEMENT AS PER ABSORPTION COSTING :

PARTICULARS AMOUNT$ AMOUNT$

SALES (800@200$) 1,60,000

LESS: COST OF GOODS SOLD(COGS):

OP INVENTORY (100@61$) 6,100

+PRODUCTION COSTS (1000@61$) +61,000

=COST OF FINSHED GODS AVAIALABLE FOR SALE 67,100

(-) ENDING INVENTORY(300@61) (18,300) (48,800)

=GROSS PROFIT/GROSS MARGIN 1,11,200

LESS: NON PRODUCTION OVERHEADS :

VARIABLE SELLING EXPS(800@2$) 1,600

+DISTR OH 500

+ADMIN OH 300 (2,400)

NET PROFIT/NET INCOME 1,08,800

INCOME STATEMENT AS PER VARIABLE/DIRECT COSTING :

PARTICULARS AMOUNT$ AMOUNT $

SALES 1,60,0000

LESS : VARIABLE COSTS :

1. COGS@60$PER UNIT):

OP INVENTORY ( 100@60$) 6,000

+PRODUCTION COSTS (1000@60$) 60,000

=COST OF FG AVAIL FOR SALE 66,000

(-) ENDING INVENTORY(300@60) (18,000) (48,000)

LESS: 2. VARIABLE SELLING EXPS(800@2$) (1,600)

= CONTRIBUTION MARGIN 1,10,400

LESS : FIXED COSTS :

FIXED MFG OH ( 1000@1$) 1,000

FIXED DISTR OH 500

FIXED ADMIN OH 300 (1,800)

= NET PROFIT /NET INCOME 1.08.600