Cost & Management Accounting

June 2023

Answer 1. Introduction

A financial summary of financial performance is an income statement. The

income statement shows the revenue and expenses that a company has incurred

during a given reporting period. It also shows the net profit or loss. The income

statement is a vital part of all financial statements that an organization

releases. The balance sheet and cash flow statement are also financial

statements. Classified income statements are the most common type. The income

statement can have subtotals for gross margin, operating expenses, and non-

operating costs. The Income Statement is used to consolidate information from

multiple revenue and expense accounts. Large businesses are the most likely to

use this format. The single-step income statements can be useful if a company

has few accounts from which to collect data. The format uses a single subtotal

for all revenue and a separate one for expenses. This single-step method is used

by many smaller organizations. Condensed income statements can be helpful if

you only have a few line items that are high-level. In a condensed presentation,

there is only likely to be one line for revenue, another line for cost of goods

sold, and a third line for operating expenses. Condensed formats can be helpful

when reporting to external users who are only interested in the general results of

the business. Comparative Income Statements are a common format. This format

lets you see the results from multiple periods in one column. Comparing reports

from different time periods is a great way to evaluate the results of an

organization. The income statement can be displayed as a single page or

combined with other comprehensive data. In this instance, the report format is

called a Statement Of Comprehensive Income.

Concepts and applications:

The marginal cost is the increase in production costs caused by production and

sales of additional units. Also known as the marginal price of

manufacturing. Calculating the margin price helps companies understand how

cost and volume affects cost and, ultimately, profits. Most companies have two

types of costs. Most fixed costs are related to the operation of the business. Rent,

standard utility costs, and salaries for core employees are required, regardless of

the production volume. Variables, on the other side, increase or decrease in

proportion to production. Variable costs, on the other hand, will usually increase

or decrease proportionally to an increase in production. In economics, this

concept is called economies of scale. It is easier for the producer to fill large

orders than it is for the buyer. Oft, producers can encourage buyers to place large

orders by offering them better prices. To reach a breakeven point, manufacturers

often have to produce a certain minimum quantity. A higher production volume

may lead to a rise in variable costs at a lower rate. Calculate the contribution per

unit to prepare the income statement under marginal costing for production of

80,000 units. The difference between selling and variable price per unit is what

we are calculating.

Contribution Margin per unit = Selling price per unit - Variable cost per unit

The selling price per unit = Sales / Number of Units Sold = R. 12,00,000 /

60,000 = Rs. 20 per unit

Variable cost per unit = Material cost per unit + Labour cost per unit +

Overheads cost per unit

Material cost per unit = Material cost/Number units manufactured = Rs. 2,40,000

/ 60,000 = Rs. 4 per unit

Labour cost per unit = Labour cost/number of units produced = Rs. 3,60,000 /

60,000 = Rs. 6 per unit

Cost of overheads per unit = Total overheads / number of units produced =

Rs. 1,80,000 / 60,000 = Rs. 3 per unit

Variable cost per unit = Rs. 4 + Rs. 6 + Rs. 3 = Rs. 13 per unit

Contribution Margin per unit = Rs. 20 - Rs. 13 = Rs. 7 per unit

Using the contribution margin per unit, we can calculate the total

contribution margin for 80,000 units by:

Total contribution margin = % total units x Contribution per unit

Total contribution margin = Rs. Total contribution margin = Rs. 5,60,000

The following information can be used to calculate the income statement based

on marginal costs for 80,000 units:

Sales revenue (80,000 x Rs. 20) = Rs. 16,00,000

Less: Variable costs:

Material (80,000 x Rs. 4) = Rs. 3,20,000

Work (80000 x Rs. 6) = Rs. 4,80,000

Overheads (80,000 x Rs. 3) = Rs. 2,40,000

Total variable expenses = Rs. 10,40,000

Contribution margin = Sales revenue - Total variable costs = Rs. 16,00,000 -

Rs. 10,40,000 = Rs. 5,60,000

Less: Fixed costs = Rs. 3,20,000

Profit = Fixed costs - Contribution margin = Rs. 5,60,000 - Rs. 3,20,000 =

Rs. 2,40,000

The income statement for 80,000 units shows a profit of Rs. 2,40,000.

Conclusion

A financial report that shows how profitable your business was during a certain

period is called an income report. It shows your income and subtracts any

losses. The income statement, also known as "net income statement" or

"statement of earnings", is one the most important financial reporting in financial

accounting. Along with the balance sheet and cash flow statement or statement of

cashflows, they are important financial reports. Investors and banks will

frequently request income statements to verify the financial performance of small

businesses. A income statement can be useful in many ways. An income

statement is useful in many different ways. Another way to use an income

statement is to look at the line items in it over time to see if there are any spikes

or dips.
Answer 2 Introduction:

One hour's work on the production of a product, service or cost unit by an

organization. Operators can directly trace their time to production. In some

cases, the direct labor hour is used to absorb manufacturing overheads. Direct

Labor Time is time spent by the customer during covered maintenance. This

includes waiting for work, travelling to and from the workplace, vacations, sick

leaves, and other activities that are time-related. Boeing's labor rate is the

average direct hourly wage during these Reporting Periods. Boeing has adjusted

rates in accordance with this Letter Agreement. Boeing excludes taxes and fringe

benefits. Calculated to absorb or recover factory overheads, the machine hour

rate is used for calculating the machine hour rate. This formula is used in firms

that are primarily machine-driven to recover overheads. The majority of the

factory costs are borne by these factories. The machine-hour rate is the cost of

using a machine for an hour. The machine hour rate includes all costs related to

the operation of a machine, including depreciation costs and

maintenance. Machine-hour rates are an important way to measure production

costs. It is used to determine the cost of producing a certain output.

Concepts and applications:

Direct labour hours is the number of hours that employees spend directly on

production. Included are tasks like assembly, welding and paint. Productivity is

measured by direct labour hours. It is used to determine how much labor it takes

to produce a certain output. For the calculation of the total direct labor hours,

you must count how much time each employee spent on the production line. You

can do this by either tracking the time spent on each task, or using a time
tracking system. Multiply the total hours worked by the wage rate per hour to

determine the direct labour cost. The percentage of direct earnings is the total

wage that is directly linked to production. Included are wages paid to workers on

production lines as well as to supervisors and managers who oversee

production. Calculating the machine-hour rate requires you to determine the total

costs of running the machine over a specified period, like a year. Included in this

are costs for maintenance, repairs and other expenses associated with the

operation of the machine. Divide the total cost of the machine by the total

number of hours it has been used to calculate the hourly rate. In order to create a

cost statement that is complete, you will need the breakdown of overhead

expenses based on the absorption method chosen. In this example there are three

choices: direct labor rates, percentages of wages or machine hour rate. Each

method will be explained in detail, and we'll show you how to calculate overhead

using each one.

Calculate overhead costs using direct labor hours: This method uses direct

labour hours from the order. To calculate overhead costs, use the following

formula:

Overhead Fee = Total number of hours worked / Cost of overheads charged

to the department. Overhead fee = Cost of overhead charged to the

department/ Total labour hours Overhead fee = Rs. 2 per labour hour

Cost of order = Direct wages and material plus overhead allocation. 2 x 1,650

= R. 3,300
Cost of direct labor hour method = Rs. 4,000 + Rs. 3,300 + Rs. 2,200 =

Rs. 9,500

 This method is based on a percentage of the direct wage earned for

each order. Calculating overhead costs is done using the following

formula:

Overhead rate = Total wage directly paid / Department's overhead charge

Overhead rate = Rs. 48,000 / Rs. 48,000 / Rs.

Overhead allocation = Payroll x Order Overhead = 80% x Rs. 3,300 = Rs. 2,640

The price of a product using the direct wage method is Rs. 4,000 + Rs. 3,300 +

Rs. 2,640 = Rs. 9,940

 Method of Machine-Hour Rate: This method is used to calculate

overhead costs based on the number of hours and type of work

performed for an order. How to calculate it?

Overhead fee = Additional charge for overhead to the department / Total hours

operated Overhead rate = Rs. Overhead rate = Rs. 2 per minute

Overhead allocation = x x x x y = Rs. 2.4x1200 = Rs. 2,880

The order cost calculated using the machine-hour rate method is Rs. 4,000 +

Rs. 3,300 + Rs. 2,880 = Rs. 10,180

Explanation:
This method is based on the assumption that overheads are directly related to the

number of hours spent on the order. This method is suitable for industries in

which labour costs are a major cost driver. It is not applicable in industries

where machinery and materials are major cost drivers.

Method of calculating the percentage of direct wage: This method assumes

overheads are related to the direct wages that were received for an order. This

method is most suitable for industries in which labour costs are a significant part

of the price. This method may not be suitable for industries where materials and

machinery costs are higher than labor costs.

Calculation of machine hour rates: The overheads are based on the amount

performed in the order. This is a useful tool for industries in which machinery

costs are a significant cost driver. It may not be applicable to industries in which

labour costs are higher than machinery.

Conclusion Choosing the absorption method will depend on both the industry

and the cost drivers. It is important to select a method that accurately reflects the

industry costs, and results in an accurate absorption.

3(a). Samsung Ltd. is the manufacturer of televisions. Here is a look at

upcoming products in 2022.

Answer 3(a) Introduction:

Economic Order Quantity is

The EOQ Formula will calculate the optimal quantity of inventory you should

order from your manufacturer to avoid stockouts. Many companies use EOQ to
better manage their inventory and reduce inventory costs. Economic Order

Quantity. The EOQ Formula calculates the amount of inventory you need to

order from your supplier. You can avoid stockouts and overstocking while also

minimizing your storage and setup costs. Many companies use EOQs to better

manage their inventory and reduce inventory costs.

The following are some concepts of application: Carrying charges or holding

expenses are the costs associated with keeping a blanket on a shelf for at least

one year in an warehouse. This is often expressed as a percentage. Holding costs

include depreciation and insurance costs. They also include logistics costs,

warehouse costs, and logistic costs. Chance costs are the costs you incur in order

to make an order. Cash that can be used in other ways is also

included. Depreciation can be different depending on the product that you

use. Write-offs are available for damaged or lost inventory and slow-moving

goods. If your inventory manager responds to shortages by constantly adding

small quantities of stock, then you may have too much in setup costs. If your

orders are big and you will hold them for a long time, then you may be paying

too much in holding costs. The EOQ helps you to balance your budgets and

increase cash flow. The formula also includes calculations that show you how

often and how many units you should order to satisfy the customer's demand ,

and to keep costs low over a given time period. Calculate the economic order

quantity (EOQ).

You can use this formula

Estimated order quantity = ((2x annual demand x order cost) / carrying cost

per unit)
Here,

Demand = 5000 units per year

Ordering cost = Rs.50 per order

Caring cost per unit = 10% = Rs.500 = R.50

By adding these values to the formula, we get:

Estimated order quantity = ((2x5000x50) / 50) = (707,007)

The economic order quantity for Product A is 707 units.

Use this formula to calculate 200 units:

Reorder Points = (Lead Time Demand x Lead Time) + Safety Stocks

Here,

Lead time is the amount of time needed to complete an order. It is typically

negligible.

Lead Time Demand = Average Daily Need x Lead Time = (5000/365 x 0, = 0)

(since lead times are negligible).

Safety stock is an inventory addition that buffers against unexpected fluctuations

in supply and demand. Imagine it's 10% of the EOQ.

When we replace the values we get:

Reorder Point = 1 + (10%-707) = 70.7

Conclusion The threshold for reordering Product A is 71 units if the company

has 200 inventory units. Once the inventory reaches 200-71 =129, the company

should order 707 units. The safety stock will be maintained.

Answer 3(b). Introduction:

The break-even analysis is used to determine the safety margin of an entity. The

calculation is based on the revenue and cost. The analysis shows the amount of

sales required to cover the costs associated with running a business. Break-even

analyses analyze the price levels in relation to the demand levels to determine

the number of sales needed to pay for the fixed costs. Demand side analysis

gives sellers valuable insights into their sales capabilities.

The break-even analysis will tell you the number of units that must be sold in

order to cover all costs, both fixed and variable.

The break-even point is used to determine the safety buffer.

Break-even analysis can be used in a broad sense. This can be used for stock and

options trading, or corporate budgeting.

The formula is used to calculate the breakeven point.

Breakeven point = Fixed costs / (Sales price per unit - Variable cost per unit)

Here,

Fixed Costs = Rs. 5,00,000

Sales price per unit = Rs. 300

Variable cost per unit = Rs. 280

You can use this formula to replace the values below.

Breakeven Point = 5,00,000./(300 - 288)= 25,000 units

New Corp Ltd. has a breakeven point of 25,000 units. Businesses view the

breakeven point as an important financial metric. The breakeven point allows

businesses to determine the minimum level of sales required to cover costs and

still earn profit. It's when all costs and total revenue are equal.

Understanding breakeven helps businesses in multiple ways:

Planning and Budgeting. Calculates the minimum amount of sales required to

cover fixed and variable costs. It helps to set sales goals and plan production

levels.

Analysis of Profitability. Breakeven is used to determine the profitability of an

enterprise. The business will make a profit if actual sales are higher than the

breakeven level. If sales exceed breakeven points then the business will make a

profit.

Sensitivity Analysis. The breakeven point can be used to perform a sensitivity

analysis. The breakeven point will help you to assess the profitability impact of

changes in variables like sales, variable costs or fixed costs.

Conclusion To summarize, breakeven analysis is an important financial metric

which can be used to plan, budget and analyze business operations. Breakeven

analysis can help you determine what level of production or sales mix is best for
your business. The data and calculations can only be used by the company for

internal purposes. Included are regulators, financial institutions, regulators and

investors. This type of analysis involves the calculation and report of the

breakeven points. Calculating the breakeven point involves dividing the total

fixed costs of production by the unit price less variable costs. The fixed costs

will remain the same no matter how many units are sold. Break-even analysis

compares the fixed costs with profit per unit. Companies with lower fixed cost

will generally have a more straightforward break-even point. A company with 0

fixed costs would have a point of break-even sale at the time of sale or

production of their first product. This assumes the variable costs are below the

sales revenue.