Index (Dedicated CAF 3 ST Academy Book) : S No. Particulars of Topics Page No

3.
0 Introduction to basic concept SAUD TARIQ

CAF 3 CMA (For Query directly WhatsApp ST: 03212112963
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Index (Dedicated CAF 3 ST Academy Book)

S No. Particulars of Topics Page No.
1 Syllabus 01
2 Topical Past Paper Analysis 04
3 Introduction to Basic Concepts 09
4 Inventory Valuation 22
5 Overheads 31
6 Marginal and Absorption Costing 49
7 Process Costing Basics 60
8 Process Costing Advanced 64
9 Activity Based Costing 83
10 Joint and By-Products 104
11 Materials (EOQ and Safety stock) 117
12 Cost Volume Profit (CVP) Analysis 133
13 Relevant Costing & Decision Making 167
14 Learning Curve 215
15 Standard Costing (Variance Analysis) 226
16 Cost flow in Production 260
17 Job Order Costing and Entries 271
18 Labour 275
19 Target Costing and Pricing 284
20 Solutions to some practice questions 289
Lectures: sta.saudtariq.com/Course/Detail/5116 1 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
3.0 Introduction to basic concept SAUD TARIQ
ST Academy
Background:
Financial Accounting
Financial accounting is concerned with providing information about the financial performance of an
entity in a given period and the financial position of the entity at the end of that period.
The information is often provided to a wider range of stakeholders (those with an interest in the
business) than those who have access to management information. The most important of these are the
owners of a business who may not take part in the day to day running of the business.
Management Accounting
Management accounting is concerned with providing information to management that can be used to
help run the business.
The purpose of management accounting is to provide detailed financial information to management, so
that they can plan and control the activities or operations for which they are responsible. Management
accounting information is also provided to help managers make other decisions. In other words,
management accounting provides management information to assist with planning, control and ‘one-
off’ decisions.
Management accounting includes cost accounting as one of its disciplines but is wider in scope.
Cost Accounting
Cost accounting is concerned with identifying the cost of things and accounting for those costs. It
involves the calculation and measurement of the resources used by a business in undertaking its various
activities.
Cost accounting is concerned with gathering data about the costs of products or services and the cost of
activities.
Cost Accounting
Direct Material
3 Components of Cost Direct Labour
Overheads
Cost
Variable Cost Fixed Cost

Cost which varies with changes in the level of Cost which do not varies with changes in the level
production or level of activity of production or level of activity. It remains
constant for certain activity level.
For example: Direct Materials, Direct Labour, For example: Rent, Insurance payment,
Fuel, etc. Depreciation, etc.
Illustration:
Units Total Variable cost Fixed cost
1,000 5,000 5,000
1,001 5,005 5,000
999 4,995 5,000
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Cost Behavior
Q1)
Product: Sigma
Sales price per unit $10
Variable cost per unit $6
Total fixed Cost: $ 40,000 per period
P–1 P–2 P- 3 P-4 P-5
Production (units) 1 5,000 10,000 15,000 20,000
Sales units 1 5,000 10,000 15,000 20,000
$ $ $ $ $
Total Variable cost
Variable cost per unit
$ $ $ $ $
Total fixed cost
F.C per unit
$ $ $ $ $
Total cost
Total cost per unit
$ $ $ $ $
Total sales
Sales price per unit
Q2) For sales man
Basic salary: $ 500 per month

Commission: $ 2 per unit sold.
During the month Mr. Smith sold 3,000 units
Required:
i) Total earnings
ii) Graph showing total earnings, taking, sales units as independent variable.
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Q3) Radio Cab Service
Fare
Fixed: Rs. 150 up to 10 km.
Variable: After 10 km each km is charged @ Rs. 15 km.
Mr. Asad traveled 40 km through cab
Required:
i) Total fare
ii) Graph showing fare, taking km as independent variable.
Q4)
Bonus: where actual performance exceeds standard.
For production worker:
Standard production: 200 units per week
If actual production exceeds standard, then each extra unit produced is paid bonus @ $ 3 per unit. MR.
R Rojer produced 240 units in the week.
Required:
i) Bonus amount only
ii) Graph showing bonus trend only, taking production units as independent variable.
Q6) Electric Charges

Line rent Rs. 200 per month
Consumption Units Rate per Unit
1 – 100 units Rs. 1 per unit
101 – 200 units Rs. 1.5 per unit
201 -300 units Rs. 2 per unit
301 – onward Rs. 3 per unit
During Feb 400 units are consumed
Required:
i) Total charges
ii) Graph showing electric charges, taking electric units as independent variable.
Q7)
Discount on bulk purchase
Purchase price: $20 per kg
20% discount on purchase price is available if quantity purchased is 1,000 kg or multiple of 1,000. Mr.
Thoma purchased 4,500 kg of material
Required:
i) Cost of purchase
ii) Graph, showing discount on each 1,000 or multiple of 1,000. Taking kg as independent
variable
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Basic Definitions
Variable cost:
Costs whose total changes in direct proportion to change in business activity. (Cost per unit remains
constant).
Fixed Cost:
An operating cost whose total remains constant over a range of business activity. Within that range
fixed cost can change, but not because of changes in business activity.
Example: Insurance, depreciation, property tax, administrative salaries, research and development,
supervisor salaries.
Mixed Costs OR Semi- Variable Cost

Costs that contain both a variable element and a fixed element are called mixed costs or semi- variable
cost. (For example Electricity Bill, Telephone Bill, etc contains both variable and fixed element. If we
consume more resources, our charges will increase and vice versa however, we still have to pay some
amount even if we are not using services at all for example electricity meter rent and line rent)
Other Examples:
The compensation of a sales representative who receives a basic salary of $ 10,000 per year plus a 10%
commission on each sales dollar he or she generates a mixed cost. (for e.g Medical Representatives)
Step Cost:
A step cost is a cost that is fixed over a short range of activity, but then rises abruptly and remains fixed
over another short range (For Example,Rent or Supervision cost).
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Cost Accounting
Costing is the process of determining the costs of products, services or activities.
Cost accounting is used to determine the cost of products, jobs or services (whatever the organisation happens to be
involved in). Such costs have to be built up using a process known as cost accumulation.
CLASSIFICATION OF COSTS: Manufacturing

We first classify costs according to the three elements of cost:
a) Materials b) Labor c) Expenses
Product and Period Costs: We also classify costs as either

1. Product costs: the costs of manufacturing our products; or
2. Period costs: these are the costs other than product costs that are charged to, debited to, or
written off to the income statement each period.
The classification of Product Costs:

Direct costs: Direct costs are generally seen to be variable costs and they are called direct costs
because they are directly associated with manufacturing. In turn, the direct costs can include:
• Direct materials: plywood, wooden battens, fabric for the seat and the back, nails, screws,
glue.
• Direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers
• Direct expense: this is a strange cost that many texts don't include; but (International
Accounting Standard) IAS 2, for example, includes it. Direct expenses can include the costs of
special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of
buying or hiring special machinery to make a limited edition of a set of chairs.
Total direct costs are collectively known as Prime Costs and we can see that Product Costs are the sum
of Prime costs and Overheads.
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Indirect Costs:
An indirect cost or overhead is a cost that is incurred in the course of making a product, providing a service
or running a department, but which cannot be traced directly and in full to the product, service or
department. Again these costs are classified according to the three elements of cost, materials labour and
overheads.
• Indirect materials: Some costs that we have included as direct materials would be included here.
• Indirect labour: Labour costs of people who are only indirectly associated with
manufacture: management of a department or area, supervisors, cleaners, maintenance
and repair technicians
• Indirect expenses: The list in this section could be infinitely long if we were to try to include
every possible indirect cost. Essentially, if a cost is a factory cost and it has not been included in
any of the other sections, it has to be an indirect expense.
Here are some examples include:
• Depreciation of equipment, machinery, vehicles, buildings
• Electricity, water, telephone, rent, Council Tax,
insurance Total indirect costs are collectively known as Overheads.
Finally, within Product Costs, we have Conversion Costs: these are the costs incurred in the factory that
are incurred in the conversion of materials into finished goods.
The classification of Period Costs:

The scheme shows five sub classifications for Period Costs. When we look at different organisations,
we find that they have period costs that might have sub classifications with entirely different names.
Unfortunately, this is the nature of the classification of period costs; it can vary so much according
to the organisation, the industry and so on. Nevertheless, such a scheme is useful in that it gives us
the basic ideas to work on.
Administration Costs: Literally the costs of running the administrative aspects of An organisation.
Administration costs will include salaries, rent, Council Tax, electricity, water, telephone, depreciation, a
potentially infinitely long list. Notice that there are costs here such as rent, Council Tax, that appear in
several sub classifications; in such cases, it should be clear that we are paying rent on buildings, for
example, that we use for manufacturing and storage and administration and each area of the business
must pay for its share of the total cost under review.
Without wishing to overly extend this listing now, we can conclude this discussion by saying that the
costs of Selling, the costs of Distribution and the costs of Research are all accumulated in a similar way
to the way in which Administration Costs are accumulated. Consequently, our task is to look at the
selling process and classify the costs of running that process accordingly: advertising, market research,
salaries, bonuses, electricity, and so on. The same applies to all other classifications of period costs that
we might use.
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Finance Costs: Finance costs are those costs associated with providing the permanent, long term and short
term finance. That is, within the section headed finance costs we will find dividends, interest on long term
loans and interest on short term loans.
COST SHEET – FORMAT

Particulars Amount Amount
Opening Stock of Raw Material ***
Add: Purchase of Raw materials ***
Add: Purchase Expenses ***
Less: Closing stock of Raw Materials ***
Raw Materials Consumed ***
Direct Wages (Labour) ***
Direct Charges ***
Prime cost (1) ***
Add :- Factory Over Heads:
Factory Rent ***
Factory Power ***
Indirect Material ***
Indirect Wages ***
Supervisor Salary ***
Fuel ***
Factory Insurance ***
Factory Asset Depreciation ***
Total Manufacturing Costs ***
Add: Opening Stock of WIP ***
Less: Closing Stock of WIP ***
Cost of Production ***
Add: Opening stock of Finished Goods ***
Less: Closing stock of Finished Goods ***
Cost of Goods Sold ***
Add:- Selling and Distribution OH:-
Sales man Commission ***
Sales man salary ***
Traveling Expenses ***
Advertisement ***
Delivery man expenses ***
Sales Tax ***
Bad Debts ***
Add:- Administration Over Heads:-
Office Rent ***
Asset Depreciation ***
General Charges ***
Audit Fees ***
Bank Charges ***
Counting house Salary ***
Other Office Expenses ***
Total Cost (5) ***
Profit (balancing figure) ***
Sales ***

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3.

0 Introduction to basic concept SAUD TARIQ

Index (Dedicated CAF 3 ST Academy Book)

3 Components of Cost Direct Labour

Variable Cost Fixed Cost

P–1 P–2 P- 3 P-4 P-5

Production (units) 1 5,000 10,000 15,000 20,000

Sales units 1 5,000 10,000 15,000 20,000

Total Variable cost

Variable cost per unit

Total fixed cost

F.C per unit

Total cost per unit

Sales price per unit

Q2) For sales man

Basic salary: $ 500 per month

Q6) Electric Charges

Mixed Costs OR Semi- Variable Cost

CLASSIFICATION OF COSTS: Manufacturing

Product and Period Costs: We also classify costs as either

The classification of Product Costs:

The classification of Period Costs:

COST SHEET – FORMAT

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