Cma - Chapter One
Cma - Chapter One
CHAPTER ONE
INTRODUCTION
Management accounting measures and reports financial information as well as other type
information that assists managers in fulfilling the goals of the organization. The
followings are some of the purposes of management accounting.
Formulating over all strategies and long range plans
Resource allocation decision such as product and customer emphasis pricing.
Cost planning and cost control of operations and activities.
Performance measurement and evaluation.
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2. Types of accounting systems Double entry system Not restricted to double entry
system; any system can be used
6. Frequency of reporting Periodical on a regular basis When ever needed; may not be
on a regular basis
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It measures and reports financial and other information related to the organization’s
acquisition or consumption of resource.
Cost accounting is applied in any type of organization but primarily applied in
manufacturing organization that combine and process raw martial in to finished product.
Cost accounting provides information for both management accounting and financial
accounting.
It is a subfield of managerial accounting that interfaces with both managerial and
financial accounting
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Cost terminologies
Many accounting reports contain several cost terminologies. A good understanding of the
different cost terminology is essential at least for the following two reasons.
It enables accounting information users to best use the information provided.
Uses of common terminology avoids confusion and misunderstanding
The following are some of the terms used in cost accounting:
Costs, Expenses and losses: Accountants usually define cost as resource scarified or
forgone to achieve a specific objective. It refers to an out lay or expenditure of money to
acquire goods and services in the course of generating revenue. For instance purchase of
raw martial represent a cost as the raw material is used to produce finished goods that
generate revenue when sold.
How ever some disbursements are not costs .For example, the payment of dividend is
disbursement but it does not help to generate revenue, hence it is not a cost.
All costs initially represent an asset. As the asset is used in generating revenue, the
amount consumed becomes an expense. There for expense is an expired cost. The cost of
asset used should then be recognized as expense to properly match revenue and expense
in the process of determining the income of the organization over a given period. For
instance, insurance premium paid in advance to serve the coming period are initially
recognized as asset, but as time passes on, the asset is continually converted in to an
expenses. Another example may be a motor vehicle bought for uses for the coming five
years is an asset when initially purchased. How ever, as the asset is used up in the process
of generating revenue, the cost gradually becomes an expense. Thus, expenss are expired
costs or costs used up in the course of generating revenue.
Some times a firm may incur a cost that produces neither immediate nor future benefit.
This is called a loss. For example damage caused by fir or flood on property held is a
loss.
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Cost object: is any thing for which a separate measurement of cost is desired. In
manufacturing company, the cost object is the unit of finished goods produced.
Cost accumulation and cost assignment: A costing system typically account for costs in
two basic stages, accumulation followed by assignment. Cost accumulation is the
collection of cost data in some organized means of accounting system and cost
assignment is a general term that encompass both (1) tracing accumulated cost that have
direct relation ship to the cost object and (2) allocating accumulated costs that have an
indirect relation ship to a cost object. For example a publisher that purchase paper rolls
for printing magazines collect the cost of paper bought and used in any one month to
obtain the total monthly cost of paper used. Beyond accumulating costs ,the cost
accountant assign cost to the different magazines the publisher publish to help decision
making
Cost driver: is any factor that affects total cost. That is a change in the cost driver will
cause a change in the level of the cost of a related cost object. Example
Mile driven for transport cost
Length of time of call for telephone cost
Meter cub of water consumed for water cost
Unite sold for cost of goods sold
Cost management: is the set of actions that a manager takes to satisfy customers while
continuously reducing and controlling cost. Cost reduction efforts frequently focus on
two key areas
Doing only value added activities, that is, those activities that customers perceive
as adding value to the product or service they purchase
Efficiently managing the use of the cost drivers in the value added activities.
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Classification of cost
Cost may be classified in different ways from different point of view. The same cost may
be included in several or in all of the following classification.
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Distribution cost
Customer service cost
4. Generally accepted accounting treatment point of view
The alternatives in accounting for cost are to expense it or to capitalize it. Costs that
are expensed in the period in which they are incurred are called non capitalized costs
or periodic cost. These costs possess no future benefit and are generally associated
with a non manufacturing area such as advertising, distribution, sales commission etc.
Capitalized costs are costs incurred to manufacture a product (product cost) or to
acquire long term assets. These costs are recorded as an as asset at the beginning and
expensed periodically.
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Relevant cost is useful for decision making where as irrelevant costs are not uses full for
decision making .Relevant cost is usually future cost which change among alternative
courses of actions, and irrelevant cost is past or sunk cost which was already incurred.
Example 1: Student association has hired a musical group for graduation party. The
fixed cost of hiring a band for the party is birr 4000.The hall in which the graduation
ceremony is celebrated can afford up to 2000 attendee It has been determined that the
cost of refreshment consumed by each person attending the party will be birr 8.
Required: a) Fill the following table using the information provided.
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Manufacturing cost
There are three types of inventories in manufacturing .These are
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Direct material inventory: are raw materials in stock and waiting to be used in
manufacturing process.
Work in process inventory: are goods partially processed but not yet completed .
Finished goods inventory: are goods fully completed but not yet sold.
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Example2: Consider the following account balance for ABC manufacturing company in
the year 2004.
Beginning balance End balance
Direct material inventory $22,000 $26,000
WIP inventory 21,000 20,000
Finished goods inventory 18,000 23,000
Purchase of direct material 75,000
Direct labor cost 25,000
Indirect labor cost 15,000
Plant insurance 4,000
Insurance- administrative 5,000
Depreciation - plant building and equipment 9,000
Depreciation - administrative building 3,000
Repair and maintenance – factory equipment 4,000
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PRINCIPAL’S COLLEGE OF HEALTH AND BUSINESS
ADAMA 022-2114-688, A.A 0911-061389, 522 code 1033 A.A Ethiopia
ADAMA CAMPUS 2ND YEAR 3rd semester for Degree Students
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PRINCIPAL’S COLLEGE OF HEALTH AND BUSINESS
ADAMA 022-2114-688, A.A 0911-061389, 522 code 1033 A.A Ethiopia
ADAMA CAMPUS 2ND YEAR 3rd semester for Degree Students
Assignment
Problem 1: The cost department of Randall manufacturing company collected the
following cost data for financial statement presentation for the year ended on
December31, 2005.
Inventories January1,2005 December31,2005
Direct material $34,500 $49,300
Work in process $ 81,500 $42,000
Units of Finished goods 300unit 420 units
Cost of Finished goods $48,600 ?
Additional information.
Sales during the year are 3,880 units at $220 per unit
Direct material purchased ------- $364,000
Prime cost -------------- $511,700
MOH cost -------------------- 48% of conversion cost
Operating expense ---------------- 50%of gross profit
All units in the ending finished goods inventory are from current period
production.
Requirements:
Compute the following based on the above information.
1. Cost of direct material used
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Problem 2: The following selected data are for ABC plastic company for the month of
January 2004.
Work in process inventory January 1, 2004 $200.000
Direct material inventory January 1, 2004 90,000
Direct material purchased in January 360,000
Direct material used in January 375,000
Variable manufacturing overhead cost 250,000
Total manufacturing overhead cost 480,000
Total manufacturing cost incurred in January 1,600.000
Cost of goods manufactured 1,650,000
Cost of goods sold in January 1,700,000
Finished goods inventory January 1, 2004 125,000
Gross profit for January 150,000
Operating income for January 50,000
Requirements: For the month of January calculate the following
a) Direct material inventory on January 31, 2004
b) Fixed manufacturing overhead cost for January
c) Direct manufacturing labor cost for January
d) Work in process inventory on January31, 2004
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ADAMA CAMPUS 2ND YEAR 3rd semester for Degree Students
Problem 3: Ato Alemu was graduated from Teferi Mekonnen School ten years ago. He
was working in ABC Company for the last seven years under different positions. 15
months ago he started his own furniture factory called JIMER office and House hold
furniture. After 3 months since he started operation, he learnt that maintaining an
accounting record is essential. He thought he know how to establish an accounting
system, maintain an accounting record and prepare financial statements by virtue of his
high school book keeping. He prepared the following income statement at the end of the
current year sene30, 1998
JIMER Office and House hold furniture
Income statement
For the year ended sene 30, 1998
Sales Br.135,000
Cost of goods sold
Beginning inventory
Direct material 9,000
Work in process 3.000
Finished goods 12,000
Direct material purchase 30,000
Direct labor 45,000
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Rent 14,000
Light, heat, and power 5,000
Telephone 1,500
Depreciation 4,000
Indirect labor 6,000
Marketing and administrative 9,000
Insurance 8,000
Miscellaneous MOH cost 2,000
Miscellaneous marketing and adm. 1,800
Total 143,100
Net loss 8,100
Problem 4: Supply the missing data for each of the following companies
A B C D
Unit produced 45,000 unit 60,000 unit K 75,000 unit
Total cost E $450,000 $240,000 N
Fixed cost $157,500 H $90,000 O
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ADAMA CAMPUS 2ND YEAR 3rd semester for Degree Students
Fixed cost per unit F $1.2 $9 P
Variable cost per unit $16.5 I L $11.1
Total cost per unit G J M $15.3
Problem 5: Supply the missing data for each company listed below:
W X Y Z
Sales $300,000 D 390,000 660,000
DM Beginning 27,000 30,000 21,000 J
DM purchased 42,000 45,000 48,000 63,000
DM ending A 24,000 27,000 24,000
Direct labor 75,000 E 51,000 95,500
MOH cost 60,000 54,000 76,500 95,500
WIP beginning 57,000 18,000 G 36,000
WIP ending 48,000 24,000 45,000 30,000
FG beginning 60,000 F 51,000 48,000
FG ending 69,000 33,000 H 54,000
Cost of goods manufactured B 126,000 210,000 K
Cost of goods sold C 132,000 I 300,000
Gross margin 129,000 144,000 162,000 L
Problem 6: Han plc is nine month old since established to manufacture different parts of
a manual irrigation pump. The company owners failed to maintain a formal accounting
record for the nine months of operation with the presumption that the volume of activity
is small and can thus be effectively administered by them. Lately, they have discovered
the importance of maintaining an accounting rescored. Assume that the firm hires you
and your first duty is to prepare a six month income statement covering the period from
January1, to june30. The company management is capable of supplying actual data on
some items but the rest are estimates. You are given the following actual data.
1 Sales for the first six month is Br.240, 000
2. Inventory january1.
Direct material --------------- 12,000
Work in process -------------- 8,800
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PRINCIPAL’S COLLEGE OF HEALTH AND BUSINESS
ADAMA 022-2114-688, A.A 0911-061389, 522 code 1033 A.A Ethiopia
ADAMA CAMPUS 2ND YEAR 3rd semester for Degree Students
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