MPA 602: Cost and Managerial Accounting
MPA 602: Cost and Managerial Accounting
MPA 602: Cost and Managerial Accounting
Managerial Accounting
Materials
Introduction
• Inventory in a company includes stock of raw
materials, work-in-progress, finished & semi-
finished products, spare components and by-
products,etc
• Inventory control is an important feature of cost
accounting system
Material control procedures
Purchase
Receipt
Storage Stocktaking
Issue
Material control procedures
• Establishing optimal stock levels is of vital importance of in controlling
of stock
• Once the optimal stock levels are established, the store department is
responsible for ensuring that optimal stock levels are maintained for
each item of materials in stock. Normally, a bin card is used to record
the quantity of materials in stock for each item
• First-in-first-out(FIFO)
• Last-in-first-out(LIFO)
• Weight average cost (WAVCO)
• Specific identification/unit cost method
First-in-first-out
• This method assumes that the first stock to be
received is the first to be sold
• The cost of materials used is based on the oldest
prices
• The closing stock is valued at the most recent prices
Last-in-first-out (LIFO)
• Carriage inwards
Required:
EOQ = 2xOCxQ
CUxCC
120
Total cost
Minimum cost
80
Carrying cost
40 Ordering cost
• The formula:
Re-order level
= (Maximum usage * Maximum lead time )
Re-order quantity
• Reorder quantity is the size of each order
• The formula:
Maximum level
= re-order level + Re-order quantity(EOQ) –Minimum
anticipated usage in Minimum lead
Minimum level/Safety stock
• The minimum level is that level of stock that provides a safety
buffer in the event of increased demand or reduced receipt of
stock caused by the lengthening of lead time
• The stock level should not be allowed to fall below the safety
stock
• The formula:
Minimum level=
Re-order level – Average usage in average lead time
Units
Maximum level
1500
Reorder level
1000
Minimum level
500
Weeks
Example
Average usage 100 units per week
Minimum usage 70 units per week
Maximum usage 140 units per week
Lead time (the time 3-5 weeks
between ordering and
replenishment of goods)
Ordering cost per order Tk.180
Annual cost of carrying a Tk.5.2
unit in stock
• Calculate:
• Economic Order Quantity (EOQ)
• Reorder level
• Reorder quantity
• Minimum level
• Maximum level
• Economic Order Quantity (EOQ)
EOQ = 2xOCxQ
C
Re-order level
= (Maximum consumption * Maximum re-order period )
= 140 units *5
= 700 units
• Minimum level
Minimum level
= Re-order level – Average usage in average lead time
= 700 units – (100 units *4)
= 300 units
• Maximum level
Maximum level
= re-order level + EOQ –Minimum anticipated usage
in Minimum lead
= 700 units +600 units – (70 units *3)
= 1090 units
• Reorder quantity
= 600 units
IAS 2 - INVENTORIES
Objective and Scope
OBJECTIVE:
SCOPE:
Applies to all inventories, expect:
a) Work in progress arising under construction contracts, including directly
related service contracts (see IAS 11 Construction Contracts)
b) Financial instruments (see IAS 39 Financial Instruments)
c) Biological assets related to agricultural activity and agricultural produce at
the point of harvest (see IAS 41 Agriculture)
Definitions
Inventories
c) Administrative overheads
d) Selling costs
IAS 2
Revised
Differences:
• IAS 2 does not permit exchange differences arising directly on the recent
acquisition of inventories invoiced in a foreign currency to be included in
the costs of purchase of inventories.
• The Standard does not permit the use of the last-in, first-out (LIFO)
formula to measure the cost of inventories.
Cost Formulas
• An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity.
For inventories with a different nature or use, different cost formulas
may be justified.
Net Realisable Value
Become
Direct material Expenses when
Direct labour Initially applied
The inventory
Variable manufacturing To inventory
Is sold
overhead As product costs
LO-1
Production, Sales, and Income Relationships
8-66
Absorption and Variable Costing
Unit product cost is determined as follows:
Absorption Variable
Costing Costing
Direct materials, direct labor, and
variable mfg. overhead $ 10 $ 10
Fixed mfg. overhead
($150,000 ÷ 25,000 units) 6 -
Unit product cost $ 16 $ 10
Selling and administrative expenses are always treated as period expenses and
deducted from revenue.
8-67
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory
Add COGM
Goods available for sale
Ending inventory
Gross margin
Less selling & admin. exp.
Variable
Fixed
Net income
8-68
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory $ -
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 400,000
Ending inventory (5,000 × $16) 80,000 320,000
Gross margin $ 280,000
Less selling & admin. exp.
Variable
Fixed
Net income
8-69
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory $ -
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 400,000
Ending inventory (5,000 × $16) 80,000 320,000
Gross margin $ 280,000
Less selling & admin. exp.
Variable (20,000 × $3) $ 60,000
Fixed 100,000 160,000
Net income $ 120,000
8-70
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.
Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM
Goods available for sale
Ending inventory
Variable cost of goods sold
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-71
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.
We exclude the
Variable
fixed Costing
manufacturing
Sales (20,000 × $30) $ 600,000
Less variable expenses: overhead.
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-72
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.
Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses (20,000 × $3) 60,000 260,000
Contribution margin $ 340,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net income $ 90,000
8-73
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000
Fixed mfg. costs 120,000
$ 320,000
Variable costing
Variable mfg. costs $ 200,000
Fixed mfg. costs -
$ 200,000
8-74
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000 $ 50,000 $ -
Fixed mfg. costs 120,000 30,000 -
$ 320,000 $ 80,000 $ -
Variable costing
Variable mfg. costs $ 200,000 $ 50,000 $ -
Fixed mfg. costs - - 150,000
$ 200,000 $ 50,000 $ 150,000
8-75
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000
Fixed mfg. costs 120,000 30,000 - 150,000
$ 320,000 $ 80,000 $ - $ 400,000
Variable costing
Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000
Fixed mfg. costs - - 150,000 150,000
$ 200,000 $ 50,000 $ 150,000 $ 400,000
8-76
Reconciling Income Under Absorption
and Variable Costing
We can reconcile the difference between absorption and
variable net income as follows:
Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead $ 10 $ 10
Fixed mfg. overhead
($150,000 ÷ 25,000 units) 6 -
Unit product cost $ 16 $ 10
8-80
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 x $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 480,000
Ending inventory - 480,000
Gross margin $ 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net income $ 230,000
Income Comparison
8-83
Summary
Income Comparison
8-84
Summary Comparison of Absorption
(AC) and Variable Costing (VC)
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect
Fixed mfg.
In the second period sales of 30,000 units Fixed mfg.
Produced were
= Sold Nothan
greater change costs
production expensed = costs expensed
of 25,000. AC = VC
AC VC
8-86
Summary Comparison of Absorption
(AC) and Variable Costing (VC)
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect
Emphasizes contribution in
Advantages
short-run pricing decisions.
External reporting
and income tax law
require absorption costing.
8-90
Throughput Costing
Example
Advantages
8-91