MODULE:
MANACC2-1
(MAC2601)
LECTURE NOTES
ACADEMIC HEAD:
Sharon Eckert
LECTURER:
Patricia Herselman
Sandton City Office Towers, Mezzanine level, 83 Rivonia Rd, Sandhurst, 2196
Postnet Suite #448, Private Bag x10010, Edenvale, 1610 • www.ebs.co.za • Company Registration 2012/018470/0
, Table of Contents
TOPIC 1: Nature and behaviour of costs ........................................................................... 1
SU 1 - Cost objects, classification and behaviour ........................................................ 1
Introduction ......................................................................................................................1
Cost objects and traceability ........................................................................................1
Classification of costs according to their nature or origin .........................................1
Further classification of manufacturing costs according to its components .........2
Classification of costs according to cost behaviour ..................................................4
A closer look at relevant range and specific time frame..........................................5
Classification of cost as product or period cost .........................................................6
SU 2 - Estimation techniques and the linear equation ................................................. 7
Introduction ......................................................................................................................7
The linear equation .........................................................................................................7
The high-low method ......................................................................................................9
The scatter diagram method.......................................................................................10
Simple regression analysis (least squares method) ...................................................11
SU 3 - Cost volume profit analysis................................................................................ 13
Introduction ....................................................................................................................13
Cost volume profit analysis (CVP) ...............................................................................13
Assumptions of the CVP analysis .................................................................................13
Contribution ...................................................................................................................14
Breakeven analysis ........................................................................................................15
Margin of safety .............................................................................................................16
Target profit analysis......................................................................................................16
Breakeven graph ...........................................................................................................17
TOPIC 2: Accounting for material, labour and overheads ............................................ 19
Introduction ................................................................................................................... 19
SU 4 - Material ............................................................................................................... 20
Introduction ....................................................................................................................20
Accounting entries ........................................................................................................20
Inventory planning and control ...................................................................................21
Reasons for holding inventory......................................................................................21
Inventory carrying and ordering costs .......................................................................21
Determining economic order quantity (EOQ) ..........................................................22
SU 5 - Labour ................................................................................................................. 23
Introduction ....................................................................................................................23
Types of remuneration ..................................................................................................23
MANACC2-1
© Edge Business School
, Important terms and formulas .....................................................................................24
Direct, indirect and non-manufacturing labour cost ...............................................25
Accounting entries ........................................................................................................26
Labour recovery rate ....................................................................................................27
SU 6 - Overheads .......................................................................................................... 28
Introduction ....................................................................................................................28
Why do manufacturing overheads present a problem? ........................................28
Budgeted, applied and actual manufacturing overheads ...................................30
Accounting entries ........................................................................................................31
Flow of costs ...................................................................................................................32
Multiple range of product ............................................................................................34
Appropriate activity (capacity) level to use for the selected basis (denominator)
..........................................................................................................................................35
Multiple range of products: departmentalisation/allocation of overheads ........36
Examples of cost drivers: ..............................................................................................36
TOPIC 5: The activity-based costing (ABC) system........................................................ 41
SU 11 – Comparing ABC and the traditional costing method ................................... 41
Introduction ....................................................................................................................41
Optimal environment for the ABC method ...............................................................41
Comparison of the two stage allocation process ....................................................41
Differences between ABC and traditional costing: .................................................42
Advantages of the ABC method ................................................................................42
Disadvantages of the ABC method ...........................................................................42
SU 12 – ABC system design and application .............................................................. 43
Designing an ABC system .............................................................................................43
TOPIC 3: Methods of inventory valuation ........................................................................ 47
SU 7 - First in first out (FIFO) method............................................................................. 47
Introduction ....................................................................................................................47
Categories of inventory ................................................................................................47
The FIFO method............................................................................................................48
SU 8 - Weighted average (WA) method ..................................................................... 50
Introduction ....................................................................................................................50
Weighted average method ........................................................................................50
Tips ...................................................................................................................................52
TOPIC 4: Valuing completed inventories – Direct costing versus absorption costing
method .............................................................................................................................. 53
SU 9 - Direct costing method versus the absorption costing method ...................... 53
Introduction ....................................................................................................................53
MANACC 2 -1
© Edge Business School
, Allocating manufacturing cost ...................................................................................53
Different costing concepts...........................................................................................54
Presentation formats of the different statements of comprehensive INCOME ....54
Direct costing .................................................................................................................55
Absorption costing ........................................................................................................55
Impact of weighted average method and the FIFO method on both costing
methods ..........................................................................................................................56
Study unit 10 - Reconciling differences between net profits ..................................... 57
Introduction ....................................................................................................................57
Reconciliation ................................................................................................................57
Direct costing method ..................................................................................................59
TOPIC 6: The job costing system ...................................................................................... 67
SU 13 – The job costing system .................................................................................... 67
Job (Topic 6) versus process costing (Topic 7) system .............................................67
Job costing .....................................................................................................................67
TOPIC 7: The process costing system .............................................................................. 73
SU 14 – The process costing system – all units completed ........................................ 73
Introduction ....................................................................................................................73
Production by means of a single process ..................................................................74
Production by means of consecutive processes ......................................................74
Recording process cost flows in the general ledger ................................................74
Reporting process cost flows .......................................................................................75
SU 15 – Work in process, equivalent units and the quantity statement .................... 75
Work in process (WIP) ....................................................................................................75
Calculating of equivalent units for WIP ......................................................................76
Inventory valuation methods .......................................................................................77
Quantity statement .......................................................................................................77
SU 16 – Losses ................................................................................................................ 79
Introduction ....................................................................................................................79
Normal versus abnormal losses ....................................................................................79
Place and size of normal wastage (losses) ................................................................79
Normal losses and the FIFO quantity statement .......................................................84
Calculation of abnormal loss in units, depending on the wastage point .............84
Normal loss value ...........................................................................................................85
SU 17 – Production cost statement .............................................................................. 85
Introduction ....................................................................................................................85
Production cost statement preparation ....................................................................85
SU 18 – Allocation statement ....................................................................................... 89
MANACC 2 -1
© Edge Business School
MANACC2-1
(MAC2601)
LECTURE NOTES
ACADEMIC HEAD:
Sharon Eckert
LECTURER:
Patricia Herselman
Sandton City Office Towers, Mezzanine level, 83 Rivonia Rd, Sandhurst, 2196
Postnet Suite #448, Private Bag x10010, Edenvale, 1610 • www.ebs.co.za • Company Registration 2012/018470/0
, Table of Contents
TOPIC 1: Nature and behaviour of costs ........................................................................... 1
SU 1 - Cost objects, classification and behaviour ........................................................ 1
Introduction ......................................................................................................................1
Cost objects and traceability ........................................................................................1
Classification of costs according to their nature or origin .........................................1
Further classification of manufacturing costs according to its components .........2
Classification of costs according to cost behaviour ..................................................4
A closer look at relevant range and specific time frame..........................................5
Classification of cost as product or period cost .........................................................6
SU 2 - Estimation techniques and the linear equation ................................................. 7
Introduction ......................................................................................................................7
The linear equation .........................................................................................................7
The high-low method ......................................................................................................9
The scatter diagram method.......................................................................................10
Simple regression analysis (least squares method) ...................................................11
SU 3 - Cost volume profit analysis................................................................................ 13
Introduction ....................................................................................................................13
Cost volume profit analysis (CVP) ...............................................................................13
Assumptions of the CVP analysis .................................................................................13
Contribution ...................................................................................................................14
Breakeven analysis ........................................................................................................15
Margin of safety .............................................................................................................16
Target profit analysis......................................................................................................16
Breakeven graph ...........................................................................................................17
TOPIC 2: Accounting for material, labour and overheads ............................................ 19
Introduction ................................................................................................................... 19
SU 4 - Material ............................................................................................................... 20
Introduction ....................................................................................................................20
Accounting entries ........................................................................................................20
Inventory planning and control ...................................................................................21
Reasons for holding inventory......................................................................................21
Inventory carrying and ordering costs .......................................................................21
Determining economic order quantity (EOQ) ..........................................................22
SU 5 - Labour ................................................................................................................. 23
Introduction ....................................................................................................................23
Types of remuneration ..................................................................................................23
MANACC2-1
© Edge Business School
, Important terms and formulas .....................................................................................24
Direct, indirect and non-manufacturing labour cost ...............................................25
Accounting entries ........................................................................................................26
Labour recovery rate ....................................................................................................27
SU 6 - Overheads .......................................................................................................... 28
Introduction ....................................................................................................................28
Why do manufacturing overheads present a problem? ........................................28
Budgeted, applied and actual manufacturing overheads ...................................30
Accounting entries ........................................................................................................31
Flow of costs ...................................................................................................................32
Multiple range of product ............................................................................................34
Appropriate activity (capacity) level to use for the selected basis (denominator)
..........................................................................................................................................35
Multiple range of products: departmentalisation/allocation of overheads ........36
Examples of cost drivers: ..............................................................................................36
TOPIC 5: The activity-based costing (ABC) system........................................................ 41
SU 11 – Comparing ABC and the traditional costing method ................................... 41
Introduction ....................................................................................................................41
Optimal environment for the ABC method ...............................................................41
Comparison of the two stage allocation process ....................................................41
Differences between ABC and traditional costing: .................................................42
Advantages of the ABC method ................................................................................42
Disadvantages of the ABC method ...........................................................................42
SU 12 – ABC system design and application .............................................................. 43
Designing an ABC system .............................................................................................43
TOPIC 3: Methods of inventory valuation ........................................................................ 47
SU 7 - First in first out (FIFO) method............................................................................. 47
Introduction ....................................................................................................................47
Categories of inventory ................................................................................................47
The FIFO method............................................................................................................48
SU 8 - Weighted average (WA) method ..................................................................... 50
Introduction ....................................................................................................................50
Weighted average method ........................................................................................50
Tips ...................................................................................................................................52
TOPIC 4: Valuing completed inventories – Direct costing versus absorption costing
method .............................................................................................................................. 53
SU 9 - Direct costing method versus the absorption costing method ...................... 53
Introduction ....................................................................................................................53
MANACC 2 -1
© Edge Business School
, Allocating manufacturing cost ...................................................................................53
Different costing concepts...........................................................................................54
Presentation formats of the different statements of comprehensive INCOME ....54
Direct costing .................................................................................................................55
Absorption costing ........................................................................................................55
Impact of weighted average method and the FIFO method on both costing
methods ..........................................................................................................................56
Study unit 10 - Reconciling differences between net profits ..................................... 57
Introduction ....................................................................................................................57
Reconciliation ................................................................................................................57
Direct costing method ..................................................................................................59
TOPIC 6: The job costing system ...................................................................................... 67
SU 13 – The job costing system .................................................................................... 67
Job (Topic 6) versus process costing (Topic 7) system .............................................67
Job costing .....................................................................................................................67
TOPIC 7: The process costing system .............................................................................. 73
SU 14 – The process costing system – all units completed ........................................ 73
Introduction ....................................................................................................................73
Production by means of a single process ..................................................................74
Production by means of consecutive processes ......................................................74
Recording process cost flows in the general ledger ................................................74
Reporting process cost flows .......................................................................................75
SU 15 – Work in process, equivalent units and the quantity statement .................... 75
Work in process (WIP) ....................................................................................................75
Calculating of equivalent units for WIP ......................................................................76
Inventory valuation methods .......................................................................................77
Quantity statement .......................................................................................................77
SU 16 – Losses ................................................................................................................ 79
Introduction ....................................................................................................................79
Normal versus abnormal losses ....................................................................................79
Place and size of normal wastage (losses) ................................................................79
Normal losses and the FIFO quantity statement .......................................................84
Calculation of abnormal loss in units, depending on the wastage point .............84
Normal loss value ...........................................................................................................85
SU 17 – Production cost statement .............................................................................. 85
Introduction ....................................................................................................................85
Production cost statement preparation ....................................................................85
SU 18 – Allocation statement ....................................................................................... 89
MANACC 2 -1
© Edge Business School
