Professional Documents
Culture Documents
MANAGERIAL ACCOUNTING
DISCUSSION SET 1
Question 1
1.2 What is the meaning of the following concepts in cost/management accounting? Give
examples in each case.
(a) Direct material cost: They are the cost of raw materials and components that can be
conveniently traced to product. E.g., Fibre used to make clothes.
(b) Direct labor cost- They are labor cost that can be physically and conveniently traced to the
product. E.g., Wages paid to assembly line workers in a manufacturing company.
(c) Manufacturing overheads: These are all cost of manufacturing other than direct labor cost and
direct material cost. E.g., Indirect materials, Depreciation factory building and equipment.
(d) Non-manufacturing overhead: This refers to the indirect cost incurred by the company that is
not directly related to the manufacturing process. This includes the selling and administrative
cost. Examples include salaries of administrative staff, advertising expenses, sales commissions,
and office rent.
(e) Prime Cost: is the sum of direct materials cost and direct labor cost. It represents the total cost
directly attributable to the production of a specific product or the performance of a specific
service.
(f) Manufacturing Cost: Manufacturing cost is the sum of direct material cost, direct labor cost,
and manufacturing overheads. It represents the total cost incurred in the production of goods. It
includes all costs directly associated with the manufacturing process, whether they are directly or
indirectly attributable to specific products.
(g) Conversion Costs: Conversion costs refer to the costs incurred in converting raw materials
into finished products. It includes direct labor costs and manufacturing overheads.
1.3 For the purposes of external financial reporting, costs can be classified as product costs or
period costs. Distinguish between Product costs and Period costs.
Product Cost include all costs involved in acquiring or making a product. In the case of manufactured
goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Period costs are
not directly tied to the production or purchase of goods. They are incurred for the passage of time rather
than for the creation of products. They cannot be easily traced to specific units of products. Instead, they
are usually associated with specific time periods or activities, such as sales and marketing expenses or
administrative costs.
1.4 In a typical manufacturing firm product costs and manufacturing costs are synonymous.
If this statement is true, what then will be the composition of product costs in a
manufacturing firm?
Direct Material Cost, Direct Labor Cost, and Manufacturing Overhead cost
1.5 For each of the following, indicate whether the cost would typically be considered direct
or indirect cost for the cost object given.
Direct Indirect
a. In this case, the direct labor costs incurred in the factory for the manufacturing division
can be directly attributed to the products being produced.
b. The factory supervisor's salary, although related to overseeing the production process,
cannot be directly allocated solely to the product being produced. It is an overhead cost
that benefits the overall manufacturing process rather than a specific product.
c. The factory supervisor's salary for the entire manufacturing division is not specifically
attributable to any particular product. It is an overhead cost incurred for managing and
coordinating the manufacturing operations as a whole.
d. These costs cover the general expenses incurred to support the manufacturing
operations as a whole, and they cannot be directly assigned to specific products.
1.6 For each of the following, indicate whether the cost would typically be variable or fixed.
Part A
Variable Fixed
Direct materials -
Direct labor -
Rent on building -
Supervisor salaries -
Below are cost items of a manufacturing firm. Classify each of the costs as either period cost or
product cost and indicate as to whether the cost is fixed or variable. (Indicate by a tick in the
respective column).
Sales commission - -
Distribution costs - -
Debrah Limited manufactures major appliance. The company just had its most successful year
because of increased interest in its refrigerator line. While preparing the budget for next year,
Kingsley Taylor, the financial controller came across the following data related to the utility
costs:
Required:
i. variable cost per machine hour and the total variable cost for the six-month period.
Variable cost per unit = (Highest activity cost − Lowest activity cost) ÷ (Highest activity units −
Lowest activity units)
= 10500/1500
= GHC 7
= 91,000
ii. monthly fixed power cost and the total fixed cost for the six-month period.
Monthly fixed power cost = Highest power cost - (Variable cost per machine hour * Highest
machine hours)
= 30,000 - (7 * 3,000)
= 30,000 - 21,000
= GHC 9,000
Total fixed cost for the six-month period = Monthly fixed power cost * Number of months
= 9000 * 6
= 54000
c. Using the mixed cost function in (b) above, what would be the cost of 3,600 machine
hours on the assumption that fixed cost will not change at this level of activity.
= 9000 + 7(3600)
= 9000 + 25200
= GHC34,200
Question 3
The following costs were incurred in May:
Direct materials GHC 39,200
Direct Labor GHC 33,400
Manufacturing overhead GHC 25,100
Required: Calculate
1. Period Cost
Period Cost = Selling expenses + Administrative expenses
= GHC 23,600 + GHC 40,600
= GHC 64,200
2. Direct manufacturing cost
Direct Manufacturing Cost = Direct materials + Direct labor
= GHC 39,200 + GHC 33,400
= GHC 72, 600
3. Conversion Cost
Conversion Cost = Direct labor + Manufacturing overhead
= GHC 33,400 + GHC 25,100
= GHC 58,500
Question 4
Angel Furniture estimates that 64,000 direct labor hours will be worked, and 80,000 machine
hours will be incurred during the year. In addition, the company has developed the following
cost estimates for next year:
Sales commissions $600,000
Direct labor 440,000
Salary of production supervisor 280,000
Rent on factory equipment 128,000
Direct materials 120,000
Advertising expense 88,000
Indirect materials 40,000
If overhead is applied on the basis of direct labor hours, what is the company’s
predetermined overhead rate?
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead
Cost / Estimated Total Base Units
Estimated Total Overhead Costs = Salary of production supervisor + Rent on
factory equipment + Indirect materials
= 280,000 + 128,000 + C40,000
= 448,000
Estimated Total Direct Labor Hours = 64,000
Required:
i. Calculate the variable cost per unit of Product P and total fixed costs per month.
112,000 = 80
x = 100
x = 140,000 units
Fixed Cost
695,000 = 3(140,000) + c
695,000 = 420,000 + c
695,000 - 420,000 = c
GHC 275000 = c
Question 6
Details of the costs incurred by a manufacturing company that makes cell phones are as follows:
The screws used in the phone that are hard to keep track of cost $7,500 – MOHn
Glue used to put the back and front of the cell phone together cost $3,900 - MOH
Required.
Conversion Cost = 1,250,000 (DL) + (6,000 (DM Insurance) + 202,000 (Plant Management) +
7,500 (Screws) + 155,000 (Depreciation) + 132,000 (Utilities) + 3,900 (Glue))
Manufacturing Cost = 2,119,000 (Prime Cost) + 56,000 (DM Insurance) + 202,000 (Plant
Management) + 7,500 (Screws) + 155,000 (Depreciation) + 132,000 (Utilities) + 3,900 (Glue))
Question 7
Management of MAC Ltd is considering the replacement of one of its existing plants.
The existing plant was bought five years ago at the cost of GHS20,000. If it is replaced now, it
could be sold for GHS10,000. However, the firm will incur GHS1,000 to uninstall the existing
plant. The firm will incur GHS30,000 to buy the replacement plant and GHS2,000 to install it.
Currently, maintenance cost on the existing plant is GHS800 per month. If the replacement is
done, the firm will incur GHS200 per month on maintenance.
What is more, the firm will be able to reduce appraisal costs by GHS1,000 and internal
failure costs by GHS2,000 per annum as the new plant is expected to be more efficient than the
existing one. The existing plant currently produces 10,000 units of the firm’s product each
month, but the replacement plant will produce 11,000 units over the same period. Unit variable
cost is GHS0.85 and unit sale value are GHS1.55.
Required
Opportunity cost: Opportunity cost refers to the value of the best alternative forgone when a
particular decision is made. In other words, it is the cost of choosing one option over another.
Sunk cost: Sunk cost refers to costs that have already been incurred and cannot be recovered
regardless of the decision taken.
b. Which of the costs mentioned in the narrative above should not be considered in making
the replacement decision? Why?
The costs that should not be considered in making the replacement decision are the sunk costs. In
this scenario, the sunk costs include the initial cost of the existing plant (GHS20,000) and the
cost to uninstall it (GHS1,000). These costs have already been incurred and cannot be recovered
or changed by the decision to replace the plant. Therefore, they are irrelevant to the decision-
making process.
c. Which of the costs mentioned in the narrative above is/are opportunity cost(s)? Why?
1. Sale value of the existing plant: The existing plant could be sold for GHS10,000 if it is
replaced. This represents an opportunity cost because by replacing the plant, the firm is giving up
the potential revenue that could be generated from selling the existing plant.
2. Appraisal costs: The firm will be able to reduce appraisal costs by GHS1,000 per annum with
the new plant. This cost reduction represents an opportunity cost because the firm is forgoing the
potential savings that could be achieved by continuing with the existing plant and not investing
in the new plant.
3. Internal failure costs: The firm will be able to reduce internal failure costs by GHS2,000 per
annum with the new plant. This reduction represents an opportunity cost because the firm is
giving up the potential savings that could be realized by keeping the existing plant and not
incurring the costs associated with the new plant.
Question 8
The following data are actual cost information relating the manufacturing activity of Buttercup
Company during the just ended year:
Inventories:
Raw materials, beginning GHS20,000
Raw materials, ending GHS25,000
Work-in-process, beginning GHS15,000
Work-in-process, ending GHS23,000
Costs:
Purchases of raw materials GHS100,000
Direct labour cost (10,000 hours @ GHS7) GHS70,000
Utilities, factory GHS8,000
Factory supervisor’s salary GHS4,000
Depreciation of factory machinery GHS7,000
Insurance, factory GHS8,000
The company uses a plant-wide predetermined overhead rate to apply overhead to jobs on the
basis of direct labour hours. At the beginning of the year, the firm estimated that 50,000 direct
labour hours would be required for the period’s estimated production level. The firm also
estimated GHS100,000 in manufacturing overhead.
Required:
a. Prepare a schedule of cost of goods manufactured.
Schedule of Cost of Goods Manufactured:
Raw materials used:
Beginning raw materials inventory GHS20,000
Add: Purchases of raw materials GHS100,000
Total raw materials available GHS120,000
Less: Ending raw materials inventory GHS25,000
Raw materials used GHS95,000
Manufacturing overhead applied = Plant-wide predetermined overhead rate * Actual direct labor
hours
Manufacturing overhead applied = GHS2 * 10,000 hours
Manufacturing overhead applied = GHS20,000
Work-in-process inventory:
Beginning work-in-process inventory GHS15,000
Add: Total manufacturing costs GHS185,000
Total work-in-process inventory GHS200,000
Less: Ending work-in-process inventory GHS23,000
Cost of Goods Manufactured GHS177,000
…. a/ b+a = 25/125
= GHC 35400
Question 9
Goldie Company Limited uses a job-order costing system and applies manufacturing overhead to
Work in Process inventory using a predetermined overhead rate. The company had no beginning
or ending inventories in the current month. During the month, the company’s transactions
included the following:
Question 10
Victor Owusu uses a predetermined overhead rate to allocate overhead. Overhead is allocated on
the basis of direct labour hours in department 1 and on the basis of machine hours in department
2. At the beginning of the year, the following estimates are provided:
Actual Costs reported for all jobs during the year are as follows:
Department One Department Two
Direct Labour Hours 98,000 21,000
Machine Hour 11,000 32,000
Direct Labour Cost ¢748,000 ¢168,000
Overhead Cost ¢247,500 ¢175,000
The accounting records of the company show the following data for Job 60 which was done for
Naya Ltd.
Department One Department Two
Direct Labour Hours 125 50
Machine Hours 10 205
Direct Material Cost ¢1,580 ¢2,650
Direct Labour Cost ¢937 ¢400
Required:
a. Compute the predetermined overhead absorption rate (OAR) for each department.
Department One:
OAR = Total Overhead / Direct Labour Hours
=2,517 / 125
Department Two:
= 3,050 / 205
Total Cost = (Direct Material Cost + Direct Labour Cost) + (OAR Department One * Direct
Labour Hours) + (OAR Department Two * Machine Hours)
≈ GHC 8,096.2
= GHC 8,096.2 / 50
≈ GHC 161.92
d. If the firm anticipates a profit margin of 25%, determine the selling price for a unit of
Job 60
≈ GHC 40.48
≈ 161.92 + 40.48
≈ GHC 202.40