FA1334 Management Accounting

TUTORIAL 2: COST CLASSIFICATION

Question 1
AX Sdn. Bhd. produces a product incurring the following cost:
Direct material RM8 per unit
Direct labour RM5 per unit
Indirect material RM2,100
Indirect labour RM4,500
Indirect expenses RM3,700
Production unit 3,540 units

Required:
Calculate the following:
(a) The total prime cost
(b) The total overhead cost
(c) The total cost of production
(d) The unit cost of production

Answer
(a) Total prime cost = Direct material + Direct labour
= (RM8 × 3,540 units) + (RM5 × 3,540 units)
= RM46,020

(b) Total overhead cost = Indirect material + Indirect labour + Indirect expenses
= RM2,100 + RM4,500 + RM3,700
= RM10,300

(c) Total cost of production = Total prime cost + Total overhead cost
= RM46,020 + RM10,300
= RM56,320

(d) Unit cost of production = Total cost of production / Production unit

= RM56,320 / 3,540 units
= RM15.91

Question 2
Classify each of the following in terms of direct cost or indirect costs.
(a) Glass used in spectacles Direct cost
(b) Wages of machine operator Direct cost
(c) Cloth used in making a dress Direct cost
(d) Salaries of costing clerks Indirect cost
(e) Manager’s salary Indirect cost
(f) Rental of factory Indirect cost
(g) Telephone charges Indirect cost
(h) Water used in making ice cream Direct cost
(i) Water used in making ice Direct cost
(j) Salesmen’s salaries Indirect cost

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Question 3
Classify each of the following in terms of prime cost, production overhead, administration
overhead, selling overhead and distribution overhead.
(a) Production manager’s salary Production overhead
(b) Depreciation (machinery) Production overhead
(c) Insurance for office building Administration overhead
(d) Assemblers wages Prime cost
(e) Hire of computer in office Administration overhead
(f) Delivery expenses Distribution overhead
(g) Toilet supplies (office) Administration overhead
(h) Toilet supplies (works) Production overhead
(i) Repairs to machinery Production overhead
(j) Expenses of factory canteen Production overhead
(k) Chief accountant’s salary Administration overhead
(l) Advertising Selling overhead
(m) Royalty per unit of production Prime cost
(n) Office salaries Administration overhead
(o) Wages of store clerks Production overhead
(p) Travelling expenses by salesmen Selling overhead
(q) Carriage-in-wards of raw material Prime cost
(r) Wages of office boy in general office Administration overhead
(s) Salesmen’ salaries Selling overhead
(t) Warehouses rent and rates Distribution overhead

Question 4
The following information is made available:
RM
Production manager’s salary 30,000
Wages and salaries of employees (70% is direct labour) 100,000
Production royalties 30,000
Haulage costs on raw materials bought 1,000
Carriage-in-wards on raw materials 2,000
Hire of computers for production control 10,000
Depreciation for plant and machinery 15,000
Depreciation for factory building 20,000
Canteen costs (60% used by factory workers) 15,000
Salesmen’s salaries and commission 10,000
Travelling expenses 2,000
Other factory indirect expenses 10,000
Salary of store clerks 5,000
Salary of costing clerks 8,000
Interest on loan (loan used for factory expansion) 1,000

Required:
From the information given above, calculate the:
(a) Prime cost
(b) Production overhead cost
(c) Total production cost

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Answer
(a)
RM
Direct labour (70% × RM100,000) 70,000
Production royalties 30,000
Haulage costs on raw materials bought 1,000
Carriage-in-wards on raw materials 2,000
Prime cost 103,000

(b)
RM
Production manager’s salary 30,000
Indirect labour (30% × RM100,000) 30,000
Hire of computers for production control 10,000
Depreciation for plant and machinery 15,000
Depreciation for factory building 20,000
Canteen costs (60% × RM15,000) 9,000
Other factory indirect expenses 10,000
Salary of store clerks 5,000
Salary of costing clerks 8,000
Interest on loan (loan used for factory expansion) 1,000
Production overhead cost 138,000

(c) Total production cost = Prime cost + Production overhead cost

= RM103,000 + RM138,000
= RM241,000

Question 5
Classify each of the following as being usually fixed cost (FC), variable cost (VC), semi – fixed
cost (SFC) or semi – variable cost (SVC):
(a) Direct labour VC
(b) Depreciation on machinery FC
(c) Factory rental FC
(d) Supplier and other indirect materials VC
(e) Advertising FC
(f) Maintenance of machinery SVC
(g) Factory manager’s salary FC
(h) Supervisory personnel SFC
(i) Royalty payments based on unit produced VC

Question 6
The total cost for output of 8,400 units in a period is RM106,250 and the total period fixed cost
is RM41,990.

Required:
Using the above information, calculate:
(a) The variable cost per unit
(b) The total cost for output of 8,660 units in a period
(c) The cost per unit for output of 8,500 units in a period.

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Answer
(a) Total cost = Fixed cost + Variable cost
RM106,250 = RM41,990 + Variable cost
Variable cost = RM106,250 – RM41,960
= RM64,260

Variable cost per unit = RM64,260 / 8,400 units = RM7.65

(b) Total cost = Fixed cost + Variable cost

= RM41,990 + (RM7.65 × 8,660 units)
= RM108,239

(c) Total cost = Fixed cost + Variable cost

= RM41,990 + (RM7.65 × 8,500 units)
= RM107,015

Cost per unit = RM107,015 / 8,500 units = RM12.59

Question 7
The following information is available:

Activity level (units) Total costs (RM)

2,000 9,000
10,000 25,000

Required:
Using the high-low method, resolve the following semi-variable costs into its variable and fixed
components.

Step 1
Variable cost per unit = Changes in cost / Changes in units
= (RM25,000 – RM9,000) / (10,000 – 2,000)
= RM2

Step 2
Total cost = Fixed cost + Variable cost

Let say for activity level of 2,000 units ….

RM9,000 = Fixed cost + (RM2 × 2,000)
RM9,000 = Fixed cost + RM4,000

Fixed cost = RM9,000 – RM4,000 = RM5,000

OR

Let say for activity level of 10,000 units ….

RM25,000 = Fixed cost + (RM2 × 10,000)
RM25,000 = Fixed cost + RM20,000

Fixed cost = RM25,000 – RM20,000 = RM5,000

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Question 8
A company has recorded information of one of its products for two consecutive periods:

Period 1 Period 2
Production units 12,000 9,000
Costs: RM RM
Direct materials 36,000 27,000
Direct labour 60,000 45,000
Production overheads 64,000 58,000
Administrative overheads 21,000 21,000
Selling & distribution overheads 27,000 24,000

Required:
(a) Identify the cost behaviour of each cost item
(b) Determine the variable cost per unit
(c) Determine the total fixed cost for a period.

Answer
(a)
Period 1 Period 2
Costs: RM RM
Direct materials per unit 3 3
Direct labour per unit 5 5
Production overheads per unit 5.33 6.44
Administrative overheads 21,000 21,000
Selling & distribution overheads per unit 2.25 2.67

Fixed cost = Administrative overheads

Variable cost = Direct materials and direct labour
Semi – variable cost = Production overheads and selling & distribution overheads

(b)
(W1) High low method for production overheads
Step 1
Variable cost per unit = Changes in cost / Changes in units
= (RM64,000 – RM58,000) / (12,000 – 9,000)
= RM2

Step 2
Total cost = Fixed cost + Variable cost

Let say for Period 1 ….

RM64,000 = Fixed cost + (RM2 × 12,000)
RM64,000 = Fixed cost + RM24,000

Fixed cost = RM64,000 – RM24,000 = RM40,000

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(W2) High low method for Selling & distribution overheads

Step 1
Variable cost per unit = Changes in cost / Changes in units
= (RM27,000 – RM24,000) / (12,000 – 9,000)
= RM1

Step 2
Total cost = Fixed cost + Variable cost

Let say for Period 1 ….

RM27,000 = Fixed cost + (RM1 × 12,000)
RM27,000 = Fixed cost + RM12,000

Fixed cost = RM27,000 – RM12,000 = RM15,000

Variable cost per unit = RM3 + RM5 + RM2 + RM1 = RM11

(c) Total fixed cost = RM21,000 + RM40,000 + RM15,000 = RM76,000

Question 9
The costs and production volume of a certain department making a single product during the
months of January to March 2016 are given below. Efficiency of the department remained
consistent during the period.

Month Prime costs Production overheads Production volume

(RM) (RM) (units)
Jan 120,000 130,000 30,000
Feb 180,000 160,000 45,000
Mar 140,000 140,000 35,000

Required:
(a) Analyse the costs according to their behaviour.
(b) Predict the total cost for the month of April when 55,000 units were produced.

Answer
(a)
Month Prime costs per unit Production overheads per unit
(RM) (RM)
Jan 4 4.33
Feb 4 3.56
Mar 4 4

Variable cost = Prime costs

Semi – variable cost = Production overheads

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(b)
(W1) High low method for production overheads
Step 1
Variable cost per unit = Changes in cost / Changes in units
= (RM160,000 – RM130,000) / (45,000 – 30,000)
= RM2

Step 2
Total cost = Fixed cost + Variable cost

Let say for Jan ….

RM130,000 = Fixed cost + (RM2 × 30,000)
RM130,000 = Fixed cost + RM60,000

Fixed cost = RM130,000 – RM60,000 = RM70,000

In the month of April,

Total cost = Fixed cost + Variable cost
= RM70,000 + (RM6 × 55,000 units)
= RM400,000

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