1. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY

2. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury © 2000 Colin Drury Part Two: Cost accumulation for inventory valuation and profit measurement Chapter Four: Accounting entries for a job costing system

3. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.1a © 2000 Colin Drury Pricing the issue of raw materials 1.The issue of raw materials involves: reducing the value of raw material stocks recording the cost of the materials issued to the appropriate job or overhead account. 2.Difficulty arises in determining which costs should be assigned to material issues. Example 1 February :1000 units purchased at £1 per unit 1 March :1000 units purchased at £2 per unit 30 March :1000 units sold at £4 per unit

4. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.1b © 2000 Colin Drury Three alternative issue prices: First-in, first-out (FIFO) = £1.00 per unit Last in, first out (LIFO) = £2.00 per unit Average cost = £1.50 per unit A summary of the transactions Raw materials Gross Sales Cost of sales closing stock profit ££££ FIFO 4000 1000 × £1.00 =1000 1000 × £2.00 =2000 3000 LIFO 4000 1000 × £2.00 =2000 1000 × £1.00 =1000 2000 Average cost 4000 1000 × £1.50 =1500 1000 × £1.50 =1500 2500

5. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.2a © 2000 Colin Drury ACCOUNTING ENTRIES FOR AN INTEGRATED ACCOUNTING SYSTEM Example The following are the transactions of AB Ltd for the month of April. 1.Raw materials of £182 000 were purchased on credit. 2.Raw materials of £2 000 were returned to the supplier because of defects. 3.The total of stores requisitions for direct materials issued for the period was £165 000. 4.The total issues for indirect materials during the period was £10 000.

6. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.2b © 2000 Colin Drury 5.Gross wages of £185 000 were incurred during the period consisting of: Wages paid to employees £105 000 PAYE due to Inland Revenue £60 000 National insurance contributions due £20 000 6.All the amounts due in transaction 5 were settled by cash during the period. 7.The allocation of the g oss wages for the period was as follows: Direct wages £145 000 Indirect wages £40 000 8.The employer ’s contribution for national insurance deductions was £25 000.

7. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.2c © 2000 Colin Drury 9.Indirect factory expenses of £41 000 were incurred during the period. 10.1Depreciation of factory machinery was £30 000. 11.Overhead expenses charged to jobs by means of factory overhead absorption rates was £140 000 for the period. 12.Non-manufacturing overhead incurred during the period was £40 000. 13.The cost of jobs completed and transferred to finished goods stock was £300 000. 14.The sales value of goods withdrawn from stock and delivered to customers was £400 000 for the period. 15.The cost of goods withdrawn from stock and delivered to customers was £240 000 for the period.

8. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.3a © 2000 Colin Drury Example 1. Purchase of raw materials Dr Stores ledger control account 182 000 Cr Creditors control account 182 000 2. Return of raw materials Dr Creditors control account 2 000 Cr Stores ledger control account 2 000 3. Issue of direct materials Dr Work in progress control account 165 000 Cr Stores ledger control account 165 000 4. Issue of indirect materials Dr Factory overhead control account 10 000 Cr Stores ledger control account 10 000

9. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.3b © 2000 Colin Drury Stores ledger control account 1.Creditors a/c 182 000 2.Creditors a/c 2 000 3.Work in progress a/c 165 000 4.Factory overhead a/c 10 000 Balance c/d 5 000 182 000 Balance b/d 5 000

10. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.4a © 2000 Colin Drury 1. Recording labour costs payable Dr Wages control account 185 000 Cr Inland Revenue account 60 000 Cr National insurance contribution account 20 000 Cr Wages accrued account 105 000 Note the above accounts will be cleared by crediting cash and debiting each of the accounts. 2. Recording the allocation of labour costs Dr Work in progress account 145 000 Dr Factory overhead control account 40 000 Cr Wages control account 185 000

11. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.4b © 2000 Colin Drury 3. Recording the employer ’s national insurance contribution Dr Factory overhead control account 25 000 Cr cash/bank 25 000 Wages control account 5. Wages accrued a/c 105 000 7.Work in progress a/c 145 000 5. PAYE tax a/c 60 000 7.Factory overhead a/c 40 000 5. National Insurance a/c 20 000 185 000

12. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.5a © 2000 Colin Drury 1.Recording the overheads incurred Dr Factory overhead control account71 000 Cr Expense creditors control account41 000 Cr Provision for depreciation30 000 2.Recording the allocation of overheaads to production Dr Work in progress control account140 000 Cr Factory overhead control account140 000

13. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.5b © 2000 Colin Drury

14. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.6 © 2000 Colin Drury 1. Recording non-manufacturing overheads incurred Dr Non-manufacturing overheads account 40 000 Cr Expense creditors 40 000 Dr Profit and loss account 40 000 Cr Non-manufacturing overheads account 40 000 2. Production completed during the period Dr Finished goods stock account 300 000 Cr Work in progress control account 300 000 3. Recording sales and cost of goods sold Dr Debtors control account 400 000 Cr Sales account 400 000 Dr Cost of sales account 240 000 Cr Finished goods stock account 240 000

15. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.7a © 2000 Colin Drury BACKFLUSH COSTING Illustration Purchase of raw materials £1 515 000 Conversion costs £1 010 000 Finished goods manufactured 100 000 units Sales for the period 98 000 units No opening stocks Standard unit cost is £25 (£15 materials and £10 conversion cost) Zero material variances

16. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.7b © 2000 Colin Drury Method 1 Trigger point 1 =Purchase of raw materials and components Trigger point 2 =Manufacture of finished goods

17. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.8 © 2000 Colin Drury BACKFLUSH COSTING Method 2 1. Only one trigger point =Manufacture of finished product 2. Conversion costs are debited as the actual costs are incurred. 3. Dr Finished goods inventory (100 000 × £25)2500 000 Cr Creditors 1 500 000 Cr Conversion costs 1 000 000 Dr Cost of goods sold 2 450 000 Cr Finished goods inventory 2 450 000

18. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.9a © 2000 Colin Drury CONTRACT COSTING 1.Contract costing is applied to relatively large cost units which take a long time to complete (e.g.civil engineering projects). 2.A separate account is maintained for each contract. The first section is used to determine cost of sales. In the second section cost of sales is compared with sales to derive the profit to date. The third section records future expenses and accrued expenses.

19. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.9b © 2000 Colin Drury 3.Guidelines for determining profit to date on contracts. No profit is taken if the contract is at an early stage. Prudence concept applied and losses recorded as incurred or anticipated. If the contract is near completion a proportion of the profit should be recognized based on the following formula: Cash received to date× Estimated profit Contract Price

20. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.9c © 2000 Colin Drury Within the 35 –85%stage of completion,the following formula is recommended to determine profit to date: *Notional profit = Value of work certified – Cost of work certified

21. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.10 © 2000 Colin Drury CONTRACT COSTING EXAMPLE Use overhead as transparency

22. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.11 © 2000 Colin Drury CONTRACT COSTING BALANCE-SHEET ENTRIES Use overhead as transparency

23. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.12a © 2000 Colin Drury CONTRACT COSTING - BALANCE SHEET ENTRIES

24. Management and Cost Accounting, 6 th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 4.12b © 2000 Colin Drury