Aiou Cost & Management Accounting Assignment

Q.1 The December 31, 1996 trial balance of Rawal Company showed:

Sales	Rs.14,500,500	Sales returns and allowances	Rs.25,200
Purchases (net)	2,400,000	Factory overheads	1,885,600
Sales salaries	200,000	Advertising expenses	155,000
Transportation in	32,000	Delivery expense	65,000
Direct Labour	3,204,000

Inventories	December 31, 1995	December 31, 1996
Finished goods	Rs.567,400	Rs.620,000
Work in process	136,800	129,800
Materials	196,000	176,000

Required:

1. The total manufacturing cost of goods manufactured.

2. The cost of goods sold.

Answer

 Rawal Company

Statement of total manufacturing cost of goods manufactured

and cost of goods sold

For the year ended December 31, 1996

Direct Materials: Materials inventory Dec. 31, 95		Rs. 196,000
Purchases (net)	2,400,000
Add: Transportation in	32,000	2,432,000
Materials Available for use		2,628,000
Less: Materials inventory Dec. 31,96		176,000
Direct Materials consumed			Rs. 2,452,000
Direct Labour			3,204,000
Factory overhead			1,885,600
Total Manufacturing cost			7,541,600
Add: work-in-process inventory December 31, 1995			136,800
			7,678,400
Less: work-in-process inventory December 31, 1996			129,800
Cost of goods manufactured			7,548,600
Add: finished goods inventory December 31, 1995			567,400
Cost of goods available for sale			8,116,000
Less: finished goods inventory December 31, 1996			620,000
Cost of goods sold			7,496,000

Q.2 What is meant by economic order quantity and what factors should be considered in determining the size of an economic order?

Answer

Economic Order Quantity (EOQ)

This refers to the amount of inventory to be ordered at one time for the purposes of minimizing annual inventory cost.

This method is used for materials planning because if a company buys in large quantities, the cost of carrying the inventory is high because of the sizable investment and if purchases are made in small quantities the result will be frequent orders with correspondingly high ordering costs.

Factors for determining the size of an economic order:

There are two factors which are considered for determination of balancing the quantity to order at a given time. These are:

• the cost of possessing (carrying) materials; and

• the cost of acquiring (ordering) materials.

Carrying an Inventory:

There are six cost factors of carrying an inventory and are expressed as a percentage of the average inventory investment and can be estimated and measured as follows:

Cost of carrying inventory	Estimate
Interest or investment of working capital	10.00%
Property tax and insurance	1.25%
Warehousing or storage	1.80%
Handling	4.25%
Deterioration and shrinkage of stocks	2.60%
Obsolescence of stocks	5.20%
Total:	25.10%

Costs of processing order

These include preparing the requisition and the purchase order, handling the incoming shipment and preparing a receiving report, communicating in case of quantity/quality errors or delays in receipt of materials, and accounting for the shipment and the payment.

Tabular determination of the EOQ

This allows the determination of an approximate EOQ and thereby the number of orders that need to be placed annually. An illustration with assume data is as under:

Estimated requirements for next year	1200 units
Cost of the item per unit	Rs. 1.25
Ordering cost (per order)	Rs. 15.00
Inventory carrying cost (% of average inventory investment)	10%

Quantitative Data

Order size in units	200	400	600	1200
Number of orders	6	3	2	1
Average inventory (order size ∏2)	100	200	300	600

Cost Data

Average inventory investment	Rs. 125.00	Rs.250.00	Rs.375.00	Rs.750.00
Total carrying cost (10% of average inventory)	Rs. 12.50	Rs. 25.00	Rs. 37.50	Rs. 75.00
Total ordering cost	Rs. 90.00	Rs. 45.00	Rs. 30.00	Rs. 15.00
Cost to order and carry	Rs.102.50	Rs.70.00	Rs. 67.50	Rs. 90.00

In the calculation of order 600 is the most economical order size. This calculation can be seen in the form of a graph.

Graphic determination of the EOQ

Tabular or graphic method is not provided the most accurate answer and EOQ is also determined with the use of a formula which is given as under:

EOQ = 536.65 units

Q.3 A company uses a process costing system. The following data are available for one processing center for May:

The processing center started 12,000 units into production during the month and transferred 10,000 completed units into finished goods.

Required:

(a) Assuming the company uses FIFO method of accounting for units and costs, compute the equivalent units of production for May.

(b) Repeat the computations in (i) above, assuming the company uses the moving average method of accounting for units and costs.

Answer

Rawal Company

Processing Centre

equivalent units of production report - FIFO costing

For the month of may, 19__

Equivalent production	Material	Processing
Transferred out	10,000	10,000
Less: beginning inventory (all units)	4000	4000
Started and finished this period	6000	6000
Add: beginning inventory (work this period)	=1200	=2000
Add: still in process (work this period)	= 2400	= 900
	9600 units	8900 units

Rawal Company

Processing Centre

equivalent units of production report - Average Costing

For the month of may, 19__

Material: 10000 +

= 12400 units

Processing: 1000 +

= 10900 units

Q.4 Toys Limited produces toys for national distribution. The management has recently established a standard cost system to control costs. The standards on a particular toy are:

During the month of August 1996, the company produced 1,000 toys. Production data for the month follow:

1. Computer the materials price and quantity variances and the labour rate and efficiency variances for the month.

2. Prepare a brief memo for management, giving the significance and possible explanation of each variance.

Answer

Toys Limited

Materials Purchase Price Variance

	Pieces x	Unit Cost	= Amount
Actual quantity purchased	17500	Rs. 5.10 actual	Rs. 89,250
Actual quantity purchased	17500	Rs. 5.60 Standard	Rs. 98,000
Materials purchase price variance	17500	Rs.(0.50)	Rs. (8750) Favourable

Brief Memo

As per Standard Cost System established for the production in the month of August 1996 the Standard Materials Purchase Price was selected @ Rs. 5.60 per piece. But actual Materials Purchase Price paid @ Rs. 5.10 per unit which is less @ Rs.0.50. per units cost with the standard price. This variance is favourable and may be due to un-expected price changes by suppliers.

Toys Limited

Materials Quantity Variance

	Pieces x	Unit Cost	= Amount
Actual quantity used	14000	Rs. 5.60 Standard	Rs. 78,400
Actual quantity allowed	12000	Rs. 5.60 Standard	Rs. 67,200
Materials quantity variance	2000	Rs. 5.60 Standard	Rs. 11,200 unfavourable

Brief Memo

As per Standard Cost System established for the production in the month of August 1996 the Standard Materials Quantity was fixed 12 pieces per toy. But actual Materials Quantity used in production is higher than the standard. This variance is unfavourable and may be due to faulty materials.

Toys Limited

Labour Rate Variance

	Time x	Rate	= Amount
Actual hours worked	2500	Rs. 42.0 Actual	Rs. 105,000
Actual hours worked	2500	Rs. 37.5 Standard	Rs. 93,750
Labour rate variance	2500	Rs. 4.5 Standard	Rs. 11,250 unfavourable

Brief Memo

As per Standard Cost System established for the production in the month of August 1996 the Standard Labour rate was fixed @ Rs.42.0 per hour. But actual labour worked in production is higher than the standard. This variance is unfavourable and may be due to rescheduling of work assignments.

Toys Limited

Labour Efficiency Variance

	Time x	Rate	= Amount
Actual hours worked	2500	Rs. 37.5 Standard	Rs. 93,750
Actual hours allowed	2000	Rs. 37.5 Standard	Rs. 75,000
Labour efficiency variance	500	Rs. 37.5 Standard	Rs. 11,200 unfavourable

Brief Memo

As per Standard Cost System established for the production in the month of August 1996 the Standard Labour efficiency time was allowed @ 2 hours per toy. But actual time worked by labour in production is higher than the standard. This variance is unfavourable and may be due to faulty materials, poor equipment, breakdowns, changes in production methods, incorrect scheduling or faulty blue prints.

Q.5 (a) What are the possible causes of raw material variance? Illustrate your answer with reference to an industry with which you are familiar.

Answer

CAUSES OF RAW MATERIAL VARIANCE

Standard costs leads to savings and increased accuracy in the performance. Variance is the standards is a symptom whether it is favourable or unfavourable and must be investigated and critically analyzed, either because performance has deviated from the standard or the standard itself is wrong.

Variance in raw material is based on many causes. Materials may be poor in quality, workers may be inexperienced or inefficient, poor equipment, changes in production methods, or faulty blueprints.

Causes of this variance may be responsibility of the individual who prepared the purchase requisition information to the purchasing department about the quality of materials to be purchased or this may lie with the purchasing department or perhaps the faulty materials went unnoticed during inspection when received. Management should scrutinize the variance to determine why this occur, what corrective action is required to be taken, and how efficient and effective performance can be rewarded.

Illustration with reference to industry

If a Law Furniture manufacturer company uses 12 meters of aluminum pipe as standard for the production of its lawn chair and during one month’s operations, 100,000 meters of the pipe were purchased and 7,200 chairs were produced using 87,300 meters of pipe so there will be a variance in the use of materials quantity. As 100,000/7200 = 13.89 meters pipe per chair. But standard is set @ 12 meters pipe per chair which is less than the actual quantity used.

Variance in this operation may be based on certain causes i.e., either the individual who prepared the purchase requisition information to the purchasing department about the quality of materials to be purchased is responsible or the pipe purchased for production is in poor quality and this faulty materials went unnoticed during inspection when received.

Q. (b) Distinguish between job order and processing costing.

Answer

JOB ORDER COSTING

Job order procedure keeps the costs of various jobs or contracts separate during their manufacture or construction. This method is applicable to job order work in factories, workshops, and repair shops as well as to work by builders, construction engineers, shipbuilders and printers. The cost unit is the job, the work order, or the contract; and the records will show the cost of each. This method presupposes the possibility of physically identifying the jobs produced and of charging each with its own cost. A variation of the job order cost method is that of costing orders by lots. A lot is the quantity of product that can conveniently and economically be produced and costed.

PROCESS COSTING

Process costing consists of computing an average unit cost for production by dividing the total manufacturing cost by the total number of units produced in the factory over a specific period of time. This method is used when units are not distinguishable from one another during one or more manufacturing processes. Other conditions they may also exist are (i) the product of one process becomes the material of the next process; and (ii) different products, or even by products, are produced by the same process.

This method is applicable to industries such as flour mills, breweries, chemical industries, textile factories, and may other like these. Because of the nature of the output,, it is necessary to compute a unit cost for each process. A process is often identifiable with a department. Such a computation is prepared on a process cost sheet or a cost of production report.

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