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Lecture notes AF2101 Intermediate Financial Accounting (AF2101)
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Lecture notes of 6 pages for the course AF2101 Intermediate Financial Accounting at City (a)
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AF2101: Management Accounting Notes RewrittenWeek 3: Job and Process Costing
Job Order Costing
In job costing, direct costs and factory overheads are allocated to individual units of
production for each job.
Costs can be identified per order (normally manufacturing large volume diversified
products) or contract (similar but for a small volume of products).
Cost Accounting Process
Factory overhead includes indirect labour, indirect materials and other
manufacturing overheads (such as depreciation).
EXAMPLE: 1st Feb 1000 units purchased at £1 per unit. 1st March 1000 units
purchased at £2 per unit. 30th March 1000 units sold at £4 per unit.
FIFO: £1000 cost of sales. (4000 – 1000) £3000 gross profit.
LIFO: (1000 x 2) £2000 cost of sales. (4000 – 2000) £2000 gross profit.
Average cost: £1500 cost of sales. £2500 gross profit.
Just in time
The amount of inventory we would have is 0 or close to 0 and inputs arrive just in
time for production (for example car parts arriving just before production starts).
This makes stock valuation less important and simplifies accounting for overhead
allocation between cost of sales and inventory. Due to the lack of inventory, we can
do backflush costing.
Process Costing
In order to carry out process costing, we need to understand the stages of the
process and accumulate the cost on each of the stages (including direct and
manufacturing overhead).
We then calculate the total cost by adding each process step costs and then divide
the total cost by units produced in order to get the average cost.
In process costing, no attempt is made to allocate costs to individual units of
production. Direct costs and factory overheads are allocated to their individual
processes and transferred to finished goods stock at average unit cost.
The finished goods stock contains ‘like units’ valued at the average unit cost of
production.
Cost per unit at the end of each process = Cost from previous process + material
cost + conversion costs. This is adjusted for losses.
Losses can be normal (uncontrollable) or abnormal (controllable) and in both cases
have scrap value.
Week 5: Pricing Decisions
, Previously Discussed
Correct pricing decisions are essential to ensure profitability. There are 2 types of
pricing decisions which are ‘strategic’ (long term) and ‘tactic’ (in response to market
actions).
Accounting information (especially cost) are important inputs.
Pricing decisions have both a financial and non-financial component.
Price Takers vs Price Setters
Depending on their position within their industry and the timing of the decisions
being made, a firm can be price setting or price taking facing either short-run or long-
run decisions.
Price takers have little to no control over the prices of their products and services
whereas price setters have some discretion over the setting of selling prices for their
products and services.
Some firms may be price setters for some products/services and price takers in
others.
Cost information is of vital importance to price takers in deciding output as well as
for price setters in making pricing decisions.
Price Setters and Long-term Decisions
Pricing customised products/services: These products tend to be unique with no
comparable market prices. Revenues must cover costs. Many companies use product
costs + desired profit (mark up) to establish price.
Pricing non-customised products/services: This involves selling large volumes to
many customers of a single product/service. Cost-plus pricing requires an estimate
sales volume to determine unit cost to derive the price.
Pricing non-customised products/services using target costing: There are 4 stages:
Determine a target price using market research, deduct a target profit, estimate the
actual cost, if the cost exceeds target cost we investigate ways to lower the actual
cost.
Price Setters and Short-term Decisions
This applies when companies are faced with the opportunity of bidding for one-time
special orders in competition with other suppliers. In this case, only the incremental
cost of undertaking the order should be taken into account.
Bids should be made at prices that exceed the incremental cost and: sufficient
capacity is available, the bid price doesn’t impact future selling prices and the
customer does not expect repeat business at short-term incremental cost, the order
will utilise unused capacity for a shirt period and capacity will be released for use on
more profitable opportunities.
Price Takers and Long-term Decisions
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