Fundamentals Of Management Accounting

Cost Bookkeeping

Fundamentals Of Management Accounting

Class Slides Ian Wilson



Your syllabus included the following:

Explain the principles of Manufacturing
Accounts & the integration of the Cost
Accounts with the Financial Accounting
System.
Prepare a set of Integrated Accounts,
showing Standard Cost Variances.

There is NO statutory requirement to keep

detailed costing records.
Many smaller companies will not bother,
instead relying on Financial records.
In a larger, more complex business however,
cost accounting records are vital to monitor
and control what is taking place.



What are they?.

Defined by CIMA as:
as
a set of accounting records that integrate

both financial and cost accounts, using

common input data for all accounting
purposes.

Principal accounts in an integrated system:

4 areas to deal with:
1. Resources Accounts Materials/Wages etc
2. Cost of Production Accounts costs from
start to end of manufacture, Stock, Labour,
WIP/Finished Goods/Cost of Sales
3. Sales Accounts for invoicing customers
4. Income Statement summary of Profit/Loss



Simple Rules:
Rules
A Flow into the Account is shown on the
DEBIT side:
A Flow out of the Account is shown on the
CREDIT side:
Both are Held in a T Account:
Obviously at the end of a period the account
needs to be balanced off.



Debit Entries:
Entries
Materials flowing into the Company, ie
Direct & Indirect Materials purchased by the
Company
Opening Inventory is a DEBIT Entry:
Credit Entries:
Entries
As materials are used in production, they are
shown as a CREDIT. Direct Materials are
allocated to the W.I.P. Account



Credit Entries:
Entries
Indirect Materials are allocated to the
Production Overhead Account
Closing Inventory values are the balancing
figure on the Credit side of the T account.



No Opening or Closing Stock here!

here
Debit Entries:
Entries
Reflect wages paid out to staff/operatives
Credit Entries:
Entries
Wages split into Direct & Indirect Labour
costs



Debit Entries:
Entries
Costs associated with producing Units of
output are built up on the debit side, likely to
be Materials, Labour & Production Overheads
Credit Entries:
Entries
This is the cost build up on the Debit side,
shown on the Credit side as an output to
Finished Goods

Used to build up the Indirect Costs incurred

by each production cost centre.
Debit Entries:
Entries
Overheads built up on the Debit side as they
are incurred in the period
Credit Entries:
Entries
Overheads Absorbed from the Prod O/H A/C
will be charged to the W.I.P. A/C based on the
OAR (BOAR)

As we saw earlier, we may OVER or UNDER

Absorb Overheads.
UNDER ABSORPTION shown on CREDIT side
of Production Overhead A/C balancing
figure
OVER ABSORPTION shown on DEBIT side of
Production Overhead A/C balancing figure
The other side of the Under/Over
Absorption entry is in the P/L A/C

Write up the relevant T entries:

You will need:
1. Calculate OAR per unit
2. Stock/Inventory Control
3. Labour Control
4. WIP
5. Production Overhead Control
6. Income Statement

Write up the relevant T entries:

You will need:
1. Calculate OAR per unit
2. Stock/Inventory Control
3. Labour Control
4. WIP
5. Production Overhead Control
6. Income Statement

In the last session we covered Standard

Costing, remember:
What is a Variance?.
Variance
Difference between a planned, budgeted or
standard cost and the actual cost incurred.
The same comparison can be made for
revenues.
The analysis of these differences is called
VARIANCE ANALYSIS.



Types of Variances:
Variances
FAVOURABLE VARIANCES: when actual results
are better than expected, producing higher
profits.
ADVERSE VARIANCES: when actual results are
worse than expected, producing lower than
planned profits

If a company uses Standard Costing

systems, account has to be taken of the
VARIANCES that occur:
Variances should be recorded in the account
in which they first appear:
Variance:

Account recorded in:

Material Price Variance

Stores/Materials Control

Labour Rate Variance

Wages Control

Materials Usage Variance

Work in Progress

Labour Efficiency variance

Work in Progress

Idle Time Variance

Work in Progress

Total Overhead Variance

Overhead Control



Variance Control Account (VCA):

(VCA)
The other side of the entry will appear in the
Variance Control Account
An ADVERSE variance is a DEBIT in the VCA
A FAVOURABLE variance is a CREDIT in the
VCA



Lets try this example:

Materials & Overhead costs are given:
You have specific details for the Labour costs
including rate & efficiency variances

This will test you relating to Materials with

some Labour Variances thrown in.

Advantages of integration:
integration
1. No duplication of effort
2. No need to reconcile financial & cost
accounts
3. Simplicity

Exam: you will be presented with T accounts on

screen with missing entries.
You will have to complete the accounts.