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Block No. 13, Sector H-8, Allama Iqbal Open University, Islamabad.
Submitted by:
Muhammad Hammad Manzoor MBA (HRM) 2nd Semester
Roll No. 508195394 508, 5 Floor, Continental Trade Centre (CTC) Block 08, Clifton, KARACHI (0321-584 2326, 0322-555 5901)
th
Cost & Management Accounting (568) Q. No. 01(a) Accountant of M/S ABC industries submitted the following income statement at the end of its 1st financial year ended the December 31, 1983. Sales 7000 Units @ Rs. 5/Cost of Goods sold Direct Materials Direct Labor Factory overhead Total Less Finished goods Inventory (3000 units @ Rs. 2.25) Gross Profit Less selling & administration expenses Net Profit Rs. 35000/Rs. 10000/Rs. 7500/Rs. 5000/Rs. 22500/Rs. 6750/- Rs. 15750/-
Disturbed by low profit, M.D of the industries asked you to check the statement. Your examination revealed that the following manufacturing cost were included in selling & administrative expenses: Heat light & Power Rs. 500/Salary of foreman Rs. 4000/Tax on Factory Building Rs. 400/Depreciation of Machinery Rs. 2600/There was no ending inventory of work in process. You are required to prepare a revised income statement and explain the reasons of variation with the help of working notes.
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Less:
Cost of Goods Sold Direct Material: Direct Labor: Foreman Salary: Factory Overhead:
Heat, Light & Power:
Tax on Factory Building: Depreciation of Machinery: Other Overhead:
Less:
Finished Goods Inventory (3000 units @ Rs. 3.00/-) W-2 9000
Less:
Cost of Goods Sold: Gross Profit: 21000 14000
Less:
Selling & Admin Expenses: (18000 7500) W-3 Net Profit: W-4 10500 3500
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Head Light & Power: Salary of Foreman Tax on Factory Building Depreciation of Machinery
Rs. 7500/-
Old per unit cost = CGM / Products CGM= 22500/Product = 7000 Sales + 3000 Finished Goods = 10, 000 = 22500 10000 = 2.25 Rs (Which is Given) Old Given = 2.25 Rs. New Per Unit Cost =30000 Products =10000 = 30000 10000 = 3 Rs. Per unit cost (which is New)
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
We can check it through this method: Old Per Unit Cost New per unit Cost 2.25 3.00 = .75 3000 x .75 = 2250 This all working show that the profit with effect the closing inventory and the manufacturing cost will also affect the closing inventory. If manufacturing cost will rises then closing inventory of finished good will do rise. If manufacturing cost will be less than the closing inventory of finished goods will also be less.
Working No: 03
Manufacturing cost of Rs. 7500/- were wrongly included in selling and administration expenses. But this amount is part of FOH. Thats why we will deduct this amount of selling & admin expeses. These manufacturing cost are as under: Heat Light & Power Tax on Factory Building Depreciation of Machinery Rs. 500/Rs. 400/Rs. 2600/-
Total
Selling & Admin Expense Manufacturing Cost Working No: 04 18000 7500 10500
Rs. 3500/-
Before revised income statement profit was Rs. 1250 but after checking & examine of income statement profit is Rs. 3500/-
Reason:
Due to less cost of inventory over profit reduced & due to rise cost of inventory over profit increased.
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Q. No. 02(a) What edges activity based costing has on other traditional costing systems? Answer: Activity Based Costing:
Activity-Based Costing (ABC) is an Information System developed in the 1980s to overcome some of the limitations of traditional cost accounting and to enhance its usefulness to strategic decision-making. An ABC/M system can serve as a useful information system to support effective operations decision-making processes. Gupta proposed a conceptual framework, Operations Hexagon, to discuss the managerial implications of an ABC/M system for various operations management decisions related to product planning and design, quality management and control, inventory management, capacity management and work force management. By viewing an ABC system as an enabler to improve the operations decision-making, they demonstrate that these systems enable an operations manager to enhance the quality of the decision-making process. Operational Hexagon
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Under the methods of costing, the cost data is collected for various activities separately i.e. production, purchase sales further it could be based even on item to item base.
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Q. No. 02(B) Are the projected financial statements helpful in decision making. Discuss in detail? Answer:
Decision Making Process: 1. The nature of decisions and the decision-making process Decisions have to be made by all individuals every day. Decision making arises because of the need to choose between alternatives. Careful consideration must be given to all information available at the time because of the long-term consequences a decision made now will have. There are four main steps in the decision-making process: (1) Identify each situation in which a decision is needed and determine the goals we wish to achieve. (2) Identify the relevant information needed to determine possible available alternatives. (3) Identify and obtain information needed to assess the consequences or outcomes of the alternatives. (4) Choose a course of action which will achieve the goals established in step 1. 2. The wide range of economic decisions made in the marketplace Usually, decision making involves the use of scarce economic resources which are traded in the marketplace at a price. However, many factors apart from the monetary impact, such as personal taste, social factors, environmental factors, religious and/or moral factors, and government policy, must be considered. Economic decisions usually involve an inwards or outwards flow of money or monetary equivalents. Economic decisions are made in many different markets, be they retail, wholesale, the stock market, local or international. Hence, if decision makers are to make informed decisions then some knowledge of accounting measurement systems, concepts and standards is desirable. 3. The nature of accounting and its main functions Accounting is a service activity. It uses words and symbols to communicate financial information useful for decision making. The terminology and symbols used have developed from the earliest known accounting records. As a profession, accounting has evolved in response to societys need for economic information to help people make economic decisions. Accounting is often called the language of business. To
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Whether the company's operational activities are up to the mark If the company is well equipped financially Condition of the market- if the market is in the process of growth, is at equilibrium or shriveling up. The status of the company in relation to the other companies in the industry. Strengths, weaknesses prevailing in the management of the company, type of product produced by the company, economic cycle of the company, accompanying hazards in the production of goods, Role of the management's performance in company growth Risks associated with operational activities Company's past performance records.
By carefully studying the various trends in the company's past performances, the analyst tries to predict the company's performance in future. Even if the financial health of a company has remained fairly stable over the years and the projected financial statements forecast a still better growth trend in the financial statement, any unforeseen event may change the course, in the projected financial statement. The unforeseen events may occur in any part of the globe thereby impacting global economy in an adverse manner. An analyst keeps provision for such events and prepares details of a contingency fund, which can be made use of, if the above mentioned circumstances are encountered by any company.
11
By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Q. No. 03(a) During the first week of April the workman Mr. Khalid manufactured 300 articles. He receives wages for a guaranteed 48 hours week at rate of Rs. 4/- per hour, the estimated time to produce one article is 10 minutes and under incentive scheme the time allowed is increased by 20%. Calculate his gross wages according to: Piece work with guaranteed weekly wages Rowan premium plan Halsey premium plan Solution: Calculation of Gross Wage under Price Work Plan:
Standard Time to Produce One Article Standard Production for one hour Standard Production for 48 Hours Or One Week Actual production for a week Price Rate
Wage Per Hour Standard Production per Hour Price Rate= 4/6 = Gross Wages = Actual Production Gross Wages of Mr. Khalid = = = Rs. 4 6
= =
10 Minutes 60 / 10 =
6 Articles
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Calculation of Gross Wages under Premium Plan:
Time allowed for one Article Time allowed for 300 Articles Time allowed for 300 Articles Time Taken Times Saves Basic Rate Per House Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
12 Hours
Add Bonus:
Time Saved / Time allowed x time take x rate 12 / 60x48x4 Total Gross Wages = Basic Wages + 192 + Basic Bonus 38.4
38.4
230.4
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Calculation of Gross Wages under Hasley Premium Plan:
Time allowed for one Article Time allowed for 300 Articles Time allowed for 300 Articles Time Taken Times Saves Basic Rate Per House Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
12 Hours
Add Bonus:
Time Saved x rate 1/2 12 / 4 x 1/2 Total Gross Wages = Basic Wages + 192 + Basic Bonus 24
24
216
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Q. No. 03(b) What are the causes & effects of labour turnover & what remedies are available to this problem. Answer)Labour / Employees turnover is a much studied phenomenon Shaw et al. (1998).But there is no standard reason why people leave organization. Employee turnover is the rotation of workers around the labour market; between firms, jobs and occupations; and between the states of employment and unemployment Abassi et al. (2000). The term turnover is defined by Price (1977) as: the ratio of the number of organizational members who have left during the period being considered divided by the average number of people in that organization during the period. Frequently, managers refer to turnover as the entire process associated with filling a vacancy: Each time a position is vacated, either voluntarily or involuntarily, a new employee must be hired and trained. This replacement cycle is known as turnover Woods, (1995). This term is also often utilized in efforts to measure relationships of employees in an organization as they leave, regardless of reason. Unfolding model of voluntary turnover represents a divergence from traditional thinking (Hom and Griffeth, 1995) by focusing more on the decisional aspect of employee turnover, in other words, showing instances of voluntary turnover as decisions to quit. Indeed, the model is based on a theory of decision making, image theory Beach, (1990). The image theory describes the process of how individuals process information during decision making. Sources of employee turnover Job related factors Most researchers (Bluedorn, 1982; Kalliath and Beck, 2001; Kramer et al., 1995; Peters et al., 1981; Saks, 1996) have attempted to answer the question of what determines people's intention to quit by investigating possible antecedents of employees intentions to quit. To date, there has been little consistency in findings, which is partly due to the diversity of employed included by the researchers and the lack of consistency in their findings. Therefore, there are several reasons why people quit from one organisation to another or why people leave organisation. The experience of job related stress (job stress), the range factors that lead to job related stress (stressors), lack of commitment in the organisation; and job dissatisfaction make employees to quit Firth et al. (2004). This clearly indicates that these are individual decisions which
15
By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Question. No. 04 (a) Cost accountant of a manufacturing company computed the following factory overhead variances at the end of a period. Spending variance Rs. 1000/favourable Idle capacity variance Rs. 1500/unfavourable Total estimated F.O.H for capacity attained was Rs. 10000/Required: a. Factory overhead applied b. Actual F.O.H incurred Solution: A)- Calculation of Applied Factory Overhead: Method 1
Formula: Idle capacity variance applied
Idle capacity Variance = Rs. 1500 Estimated FOH for Capacity attained 10000 By putting the values: 1500 = FOH Applied = FOH Applied = 10000100008500 FOH applied 1500
Method 2
Applied FOH Estimated FOH Idle Capacity Variance = = = = 8500 10000 10000 1500
8500
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) B)- Calculation of Actual Factory Overhead: Method 1
Formula: Spending variance=
Spending Variance = 1000 Estimated FOH for Capacity attained 10000 By putting the values: 1000 = Actual FOH = Actual FOH = 10000100009000 Actual FOH 1000
Method 2
Actual FOH Estimated FOH Spending Variance = = = = 9000 10000 10000 1000
9000
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Question. No. 04 (b) The average daily requirement of iron sheet is 50 sheets. The maximum monthly requirement of iron sheet do it exceed 2500 sheets and minimum requirement during any month is not likely to fall below 1000 sheets. The time required to secure delivery from the supplier is usually 15 days. Economic order quantity is 1200 sheets.
Required:
Determine minimum and maximum limits & also the order level. If three days are sufficient to receive emergency supply, determine the danger level as well. Solution: Input Data: Average Requirement Maximum Requirement
Minimum Requirement
EOQ Emergency Time Required 1.Order Level 2.Danger Level 3.Minimum Level 4.Maximum Level
= 50 Sheets / day =1500 sheets / months (50 x 30=1500) = 2500 Sheets / Month 2500 / 30 83.33 = 1000 sheets / Month 1000 / 30 33.33 = 1200 sheets = 3 days
23
By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Question. No. 05 (a) Ahsan Corporation reported the following data for its department 2. Received in from department 27500 Units Transferred out to department 19750 Units In process (1/3 Lab & O/H) 5250 Units All mat were put in process in department 1. Costing department collected the following figures form department 2. Unit cost of units received in Lab cost in department 2 Applied F.O.H Rs. 1.80 Rs. 27520 Rs. 15480
Required:
A cost of production report for department 2. Solution: Quantity Schedule:
Units Units Units Units Received from Dept. 1 Transferred Out in Process loss in process Dept. 2 27500
Units
19750 5250 2500
Units
27500
49500 27520
15480 43000 92500
78605
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
13985
Computation Explained
Units Transferred + Still in process x stage of completions 19750 Units + (5250 x 1/3) 19750 Units + 1750 Units Units Produced = 21500
Unit Cost
Labor = Total Cost / Unit Produced Labor = 27520 / 21500 = 1.28 FOH = Total Cost / Unit Produced FOH = 15480 / 21500 = 0.72
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Cost & Management Accounting (568) Question. No. 05 (b) Process costing? Answer)JOB ORDER COSTING VS PROCESS COSTING
Job Order Costing. Used by manufacturers who make special orders, customized products, or standard products produced in batches. Process Costing. Used by manufacturers who mass produce large quantities of identical units in a continuous flow.
Both systems determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhad costs. Both systems allocate overhead using a predetermined overhead rate(s). Both systems maintain perpetual inventory records with subsidiary ledgers for materials, work in process, and finished goods.
Cost & Management Accounting (568) FLOW OF COSTS IN A PROCESS COST SYSTEM
Assume that Advanced Technologies, a computer manufacturer, makes its product in three departments: Assembly, Testing, and Packing. Materials and component parts are added in the Assembly Department. Packing materials are added in the Packing Department.
SOLUTION:
STEP 1: Determine the units to be assigned costs.
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
Dr. Amir Hussain Shah Block No. 13, Commerce Department, AIOU, H-8 ISLAMABAD. (0300-970 4138)
M. Hammad Manzoor 508195394 # 508, 5th Floor, CTC Continental Trade Centre, Block-08 08, KARACHI. (0321Clifton 584 2326) Cost & Management Accounting 01 568
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)