National Institutes of Studies Financial Management First Assignment Level 6

1.... What are the costs? Are the terms cost and expense synonymous? Explain. Ans. A business has many different costs. In business, retail, and accounting, the cost is the value of money that has been used to produce anything and hence is not available for use anymore but In economics, the cost is different that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. 2.... Describe the three components of manufacturing costs. Ans. Manufacturing Costs are the cost that are directly involved in manufacturing of products. Examples of manufacturing costs include raw materials costs and charges related workers. Manufacturing cost is divided into three broad categories which is following: *Direct materials cost. *Direct labour cost and *Manufacturing overhead cost. 3.... Describe the following costs with example: Fixed cost ,Variable cost and Mixed costs Ans.Fixed costs are those costs that are not dependent on the level of goods or services produced by the business; they tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related. In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period.

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unitlevel costs as they vary with the number of units produced.

Mixed costs often refers to the behavior of costs and expenses. Mixed costs consist of a fixed component and a variable component. The annual expense of operating an automobile is a mixed cost. Some of the expenses are fixed, because they do not change in total as the number of annual miles change. Think insurance, parking fees, and some depreciation. Other expenses are variable, because they will increase for the year when the miles driven increase (and will decrease when the miles driven decrease). Think gas, oil, tires, and some depreciation.

Ans ...4: Cost of goods manufactured

Add

Direct Materials Direct Labour Add Factory rent Less Depreciation Factory Equip 5,800 12,900

34,500 58,900 93,400

86300 Add cost of goods sold (400 * 28) Cost of goods sold 11,200 97500

Income Statement Sales Revenue 1,34,400 Less cost of goods sold 97,500 Gross Profit 36,900 Less Office equipment depreciation 1,200 Less Marketing Exp 7,400 Less Adm Exp 12,000 Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

16,300 Prime cost = (Direct material + Direct Labour) Prime cost = (34,500 + 58900) Prime cost = 93,400 Conversion cost = ( Direct labour + Material overhead) Conversion cost = (58,200 + 86,300) Conversion cost = 1,45,200 Answer 5:

Absorption Costing Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Variable Costing Direct Material Direct Labour Variable Manufacturing Overhead Total

12 6 4 12 34

12 6 4 22

Answer 6:
A. Actual Overhead Actual direct labour hours Overhead rate B. Overhead applied Expected direct labour hours Overhead applied 2,800,000 5,45,000 2,800,000/5,45,000=5.13 2,937,550 600,000 2,937,550/600,000 =4.8 its under applied

7.. Describe the term equivalent units of production. Ans. Number of units of an item that could have been produced with the given material and processing costs in an accounting period. This measure is used as a benchmark in allocating departmental costs. A term used in cost accounting to arrive at the cost per unit. The term is associated with the units that are not completed at the end of an accounting period. For example, Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

if 400 units are completed as far as materials, but are only 30% completed as far as direct labour and manufacturing overhead, the equivalent units are 400 for materials and 100 (30% of 400) for direct labour and manufacturing overhead. An approximation of the number of whole units of output that could have been produced during a period from the actual effort expended during that period; used in process costing systems to assign costs to production

Answer 8:
Beginning work in progress (50,000) Materials 50,000 (90%) So 10% is left i.e. 10% is 5,000 3,60,000 70% is already finished So 30% is left which amounts to be 21,000 5,000(10%) 360,000(units) 21,000(70%) 386,000 50,000 390,000 440,000 410,000 30,000 Conversion 60% is already completed So 40% is left which amounts to be 20,000(40% of 50,000) 3,60,000 50% is already completed So 50% is left which amounts to be 15,000 20,000(40%) 360,000(units) 15,000(50%) 395,000

Units Ending work in progress (30,000)

Total

The beginning work in progress Add : started into the production Less : transfer to the next department process

So equivalent units of production tend to be like this 390,000-30,000=360,000

Answer 9:
1. Direct material price variance (AP-SP)AQ 2. Direct material Usage or variance (AM-SM)SP 3. Direct labour rate variance (AR-SR)AH (1.40-1.50)1200 =120 (990-1200)1.50 =315 (12-12)2400 =0

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

4. Direct labour efficiency variance (AH-SH)SR

(2400-2400)12 =0

10.... Explain the advantages of standard costing. Ans. Standard costs are predetermined costs namely they are calculated in advance of actual production based on a specification of all relevant factors. They are also target costs which should be achieved under efficient conditions of operations. 11..... What are the assumptions of CVP analysis? Ans. Costs and revenues are linear with in the relevant range. All costs are identifiable as a variable or fixed Costs are affected only by changes in activity level. All units produced are sold. Sales mix is constant if there is more than one product. y The behaviour of both sales revenue and expenses (costs) is linear throughout the entire relevant range of activity. y Sales mix is constant if there is more than one product. y Inventories do not change significantly from period to period. y Volume is the only factor affecting sales and expenses. y Costs are affected only by changes in activity level. y All units produced are sold. Standard costing System has the following main advantages or benefits: a) The use of standard costs is a key element in a management by exception approach. If costs remain within the standards, Managers can focus on other issues. When costs fall significantly outside the standards, managers are alerted that there may be problems requiring attention. This approach helps managers focus on important issues. b) Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance. c) Standard costs can greatly simplify bookkeeping. Instead of recording actual co0sts for each job, the standard costs for materials, labour, and overhead can be charged to jobs. d) Standard costs fit naturally in an integrated system of responsibility accounting. The standards establish what costs should be, who should be responsible for them, and what actual costs are under control.

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

Answer 12: (A) Cost Of Goods Manufactured Beginning Raw Material Add Purchased Raw Materials Less Ending Raw Materials Add Direct Labour Total Add Manufacturing Overhead Indirect Labour Rent Of Factory Factory Supplies Insurance On Factory LESS Factory Depreciation Total ADD Work In Progress In Beginning Less Work In Progress At The End Total Cost Of Good Manufactured 10000 125000 17000 118000 75000 193000

40000 30000 11000 12000 20000 73000 Total Manufacturing 20000 31000 -11000

73000 266000

-11000 255000

(B)cost of goods sold Cost of Goods Manufactured Less: ending balance of finished goods 255,000 25,000 230,000

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

(C) Selling and administrative expenses are not considered while calculation cost of goods sold as they are not directly related with the production process and is an indirect expense .

Answer13:
Journal Entries 1. Material Inventory Account Payable (For Raw Material Purchased On Credit ) 2. Work In Progress Inventory Materials Inventory (For Direct Materials Incurred For Production) 3. Manufacturing Overheads Materials Inventory (For Indirect Materials Incurred ) 4. Manufacturing Wages Wages Payable (For The Manufacturing Wages Or Labour Payable ) 5. Work In Progress Inventory Manufacturing Wages (For The Direct Labour Incurred For Production ) 6. Manufacturing Overheads Manufacturing Wages (For Indirect Wages Or Labour Incurred ) 7. Work In Progress Inventory Manufacturing Overheads (For Allocation Of Manufacturing Overheads ) 8. Manufacturing Overheads Factory Depreciation Factory Supplies (For Manufacturing Overheads Incurred ) 9. Finished Goods Inventory Work In Progress Inventory Debit 45,000 Credit 45,000

30,000 30,000

4,200 4,200

42,000 42,000

25,000 25,000

17,000 17,000

20,000 20,000

8,700 8,700

79,600 79,600

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

Dr To balance c/d To purchases

Raw Material Account on March 2007 7,600 By Production 45,000 By manufacturing inventory By balance b/d 52,600 Dr work in progress account on march 2007 To balance b/d 9,800 By finished goods To purchases 30,000 To wages 25,000 To factory overheads 20,000 By balance c/d 84,800 Dr Finished Goods Account on march 2007 To balance b/d 11,500 To work in progress 79,600 By balance c/d 91,100 Dr factory Overhead account on march 2007 To depreciation 5,800 By factory overheads (80%) To supplies 12,900 To raw material overheads 4200 By Balance c/d To overhead wages 17,000 39,900

Cr 30,000 4,200 52,600 Cr 79,600\

5,200 84,800 Cr

91,100 91,100 Cr 20,000

39,900

Answer 14: Contribution Margin= Selling Price per Unit Variable cost Selling price =200 Variable Cost =?=V Contribution Margin =40% Putting these values into the equation We get 200-v=80 V=120 (2) Break Even Point =Fixed Cost /Contribution margin Per Unit 510,000/80=6367

15.... What is relevant cost?

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

Ans. Relevant cost (also called avoidable cost or differential cost) is a cost that differs between alternatives being considered. It is often important for businesses to distinguish between relevant and irrelevant costs when analyzing alternatives because erroneously considering irrelevant costs can lead to unsound business decisions. Also, ignoring irrelevant data in analysis can save time and effort. Non-cash items, such as depreciation and amortization, are frequently categorized as irrelevant costs, since they do not impact cash flows. Two common types of irrelevant costs are sunk costs and future costs that do not differ between alternatives. Sunk costs are unavoidable because they have already been incurred. Future costs that do not change between alternatives are also essentially unavoidable with respect to the alternatives being considered.

Answer 16: Sale Less: Variable cost Direct materials Direct Labour Less :variable Manufacturing Increase In Variable Cost 175

86 45 131 6 17 154

17.... Describe the following terms: a) Incremental cost ,Opportunity and cost Sunk cost Ans. Incremental cost is the cost associated with increasing production by one unit. Because some costs are fixed and other variable, the incremental cost will not be the same as the overall average cost per unit. The cost figure can be used for a variety of economic calculations, most notably the point at which increasing production ceases to be efficient very simple example would be a factory making widgets where it takes one employee an hour to make a widget. As a simple figure, the incremental cost of a widget would be the wages for the employee for an hour plus the cost of the materials needed to produce a widget. A more accurate figure could include added costs, such as shipping the additional widget to a customer, or the electricity used if the factory has to stay open longer. The incremental cost total is always made up of purely variable costs. It represents the added costs that would not exist if the extra unit was not made. That means that many fixed costs such as rent on a factory or buying a machine are not usually represented. However, if an economist wanted to be extremely precise, they might include some element of these fixed costs where they Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

could specifically link them to the production of the extra unit. For example, producing even one extra widget would cause a tiny bit extra wear and tear on the machine.

Opportunity cost is the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices. It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice." The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs. Sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume).In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that an economic actor not let sunk costs influence one's decisions, because doing so would not be rationally assessing a decision exclusively on its own merits. The decision-maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem and distinct from a sunk cost problem. Sunk costs should not affect the rational decision-maker's best choice. However, until a decisionmaker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making processes. For example, if one is considering preordering movie tickets, but has not actually purchased them yet, the cost remains avoidable. If the price of the tickets rises to an amount that requires him to pay more than the value he places on them, he should figure the change in prospective cost into the decision-making and reevaluate his decision.

Answer 18: 1. Irrelevant as the cost of the car is a sunk cost so it cannot be recovered and therefore can never differ between 2. Relevant as the cost of petrol used for travelling to the Auckland is crucial as if he takes a bus to the Auckland than this cost may be more or less. so the cost difference between the alternatives can prove to be relevant . 3. The annual insurance is not relevant. it is because whether he travels by bus or by car he had to pay his annual insurance premium . Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858

4. The cost of maintenance and repairs is relevant 5. it is not relevant cost as the cost of driving per mile certainly effects the total cost of driving also include many other components of the cost while determining the total cost of travelling . 6. it is relevant because if he drives than he dont have to pay the bus fare. 7. It is relevant cost as its impact cannot be measured in terms of the dollar. 8. It is relevant as if he travels by bus than he dont have to pay the Parking fees otherwise he had to pay for the parking fees and had to look for the parking spaces . 9. It is relevant as it adds to the total cost of travelling to the Auckland if he travels by the car , but not if he travels by the bus . 10. It is relevant as he might be missing out the opportunity of meeting the friends if he travels by bus but if he travels by car he will be having the opportunity of meeting.

Jagseer Singh Badesha Student Id: 4382 Unit Standard - 1858