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Sunday, October 18, 2020

8:48 PM

MANAGEMENT INFORMATION Page 1

Sunday, October 18, 2020

3:51 PM

ACCOUNTING FOR
BEGINNERS :
MANAGEMENT
INFORMATION

MANAGEMENT INFORMATION Page 2

A
Sunday, October 18, 2020

3:49 PM

THE NATURE AND
PURPOSE OF COST
AND MANAGEMENT
INFORMATION

MANAGEMENT INFORMATION Page 3

BUSINESS ORGANISATIONS AND ACCOUNTING
Saturday, October 17, 2020

12:30 PM

Office organisation and functions
- The office in an organisation is a centre for information and administration
- The most common functions in an office are purchasing ,personnel (human resources),general administration, finance and sales and
marketing
- Organisation charts are a traditional way of depicting the various roles and relationships of the formal structure
...


Advantages of a centralised administration office include the following
...
Everyone uses the same data and information
...

(c) It gives better security/control over operations and it is easier to enforce standards
...
Senior managers in an organisation
can take a wider view of problems and consequences
...

(f) Senior management can keep a proper balance between different departments or functions eg by
deciding on the resources to allocate to each
...

(h) Crisis decisions are taken more quickly at the centre, without need to refer back, get authority
etc
...

(j) Administration staff are in a single location and more expert staff are likely to be employed
...

(k) Standardisation of policies, systems, procedures and documentation
...

(m) Duplication of services can be avoided and thus costs reduced
...

(a) Local offices do not have to wait for tasks to be carried out centrally
(b) No reliance on head office
...
Geographically dispersed
organisations should often be decentralised on a regional/area basis
(f) Decisions can be made more quickly because no need for head office approval
(g) Local managers are able to make their own decisions, which may help motivate them
(h) More opportunities for junior managers to take on responsibility – important since job challenge
and entrepreneurial skills are highly valued in today's work environment
(i) There may be greater continuity between functional and general management, which may enable
junior managers to make the transition to senior management more smoothly
(j) Top managers are free to focus on matters affecting the organisation as a whole, and are not
overly burdened or stressed with local concerns
(k) Easier to identify separate spheres of responsibility, which may result in improved controls,
performance measurement and accountability

Policy manual
MANAGEMENT INFORMATION Page 4

Policy manual
- A policy manual should help to ensure that all personnel follow procedures and best practices
...

- In order for the purchase of non-current assets to be put in motion the manager of the department which
- requires the asset must firstly fill out a purchase requisition
...
If a sale is made on credit the goods are sent out with a
promise from the customer to pay in the future therefore the management of the business must
be as certain as they can be that this new customer can, and will, pay for the goods
...

- (b) Purchases of goods or non-current assets and payments for expenses
...

- (c) One of the largest payments made by most organisations is that of the wages bill for their
employees
...

- Debit entries in ledger accounts are increases in assets or expenses and decreases in liabilities and
income
...

- one of the basic principles of double entry is that for every debit entry there is an equal and opposite credit entry
...

THE ACCOUNTING EQUATION IS:

Assets – liabilities = Capital + profit – drawings

- So here is a brief reminder of the basic double-entry that you are likely to come across
...

- Cost accounting is the accumulation of costs for inventory valuation in order to meet the requirements of
external reporting and also for internal profit measurement
...

- The ledger accounts will only contain the totals from the day books, so to find individual transactions one has to look to th e day books
...
The journal keeps a record of unusual movement between accounts
...

- The main types of transaction and their related books of prime entry are given below:
Sales invoices sent out – Sales day book
Credit notes sent out – Sales returns day book
Purchase invoices received – Purchases day book
Credit notes received – Purchases returns day book
Cash/cheque receipts – Cash received book
Cash/cheque payments – Cash payments book
Petty cash receipts/payments – Petty cash book
- An integrated system is one which combines the cost accounting and financial accounting functions in
one system of ledger accounts
...
However it has the disadvantage of trying to fu lfil two purposes
with one set of ledger accounts despite the differences between financial accounting and management accounting requirements
- An interlocking system has a separate cost ledger for the cost accounting function and a separate
financial ledger for the financial accounting function
...

- In a full ledger computerised system the computer system will normally maintain the following ledgers:
• General or main ledger (for all asset, liability, income and expense accounts)
• Receivables ledger – accounts for each customer
• Payables ledger – accounts for each supplier
• Cash books – including the main cash book and the petty cash book
- Computerised accounting therefore follows a data processing cycle of input, process, and output
...
A
collection of similar records makes up a file
...
A field is an item of data relating to a record
...

- A transaction file is a file containing records that relate to individual transactions
...
The sales day book
entries are examples of transaction records in a transactions file
...

- Both manual and computer data processing can be divided into two broad types: batch processing and
real-time processing
...
Because data is not input as soon as it is received the
system will not always be up-to-date
...


QUESTIONS
1 Which one of the following is a potential advantage of decentralisation?
A Less control by senior management
B Duplication of services can be avoided
C Local offices are more self sufficient
D Consistency of decision-making across the organisation

2 Which one of the following is a potential disadvantage of a policy manual?
A It may lead to inflexibility
B Personnel follow best practices
C Procedures are formalised
D It acts as a form of control over activities of employees
3 Which of the following personnel in an organisation would not be involved in the sale of goods on credit?
A Credit controller
B Payables ledger clerk
C Sales person
D Warehouse operative

4 What document should normally be completed if a purchase of a non-current asset is required?
A A purchase requisition
B A despatch note
C A goods received note
D An invoice
5 What is the correct accounting equation?
A Assets + Liabilities = Capital + profit – drawings
B Assets + Liabilities = Capital - profit – drawings
C Assets – Liabilities = Capital + profit + drawings
D Assets – Liabilities = Capital + profit – drawings
6 What is the double entry for the purchase of materials on credit?
A Dr Materials control Cr Payables
B Dr Payables Cr Materials control
C Dr Materials control Cr Receivables
D Dr Receivables Cr Materials control

7 An integrated system combines the cost accounting and financial accounting functions into one system
of ledger accounts
...

2 A Although a policy manual is to be recommended, care must be taken that strict adherence to the
rules does not create inflexibility and in cases of doubt, a more senior member of staff should be
consulted
...


4 A A purchase requisition will need to be completed and as non-current assets are relatively
expensive, it will usually have to be authorised by senior management
...

8 (a) Dr Work in progress control account
(b) Dr Finished goods control account

Cr Production overhead account
Cr Work in progress control account

MANAGEMENT INFORMATION Page 8

INTRODUCTION TO MANAGEMENT INFORMATION
Saturday, October 17, 2020

2:03 PM

Data and information
- Raw data may be processed to produce meaningful information
...
Data are the raw materials for data
processing
...
Information is anything that is communicated
...

- Management information can therefore be described as information that is given to the people who are
in charge of running an organisation
...

- Management information is often classified into two types:
• Financial information (measured in terms of money)
• Non-financial information (not measured in terms of money)

The purpose of management information
- The purpose of management information is to help managers to manage resources efficiently and
effectively, by planning and controlling operations and by allowing informed decision-making
...

• Planning
• Control
• Decision making

Planning
...


Control
...


Decision making
...
Decision making
always involves a choice between alternatives
...

- Management information is used for a wide variety of purposes
...

- Reporting information requires the active co-operation of the following groups
...

- Data and information come from sources both inside and outside an organisation
...


Management accounting and financial reporting
- Computer systems and coding structures help to sort the information into the categories and formats
required for both financial and management accounting
...

- Cost accounting is the accumulation of costs for inventory valuation in order to meet both the
requirements of external reporting and also for internal profit measurement
- The purpose of financial accounting is to provide accurate financial information for the company
accounts, which will be used by both senior management and external parties (for example, investors)
...

• There is a legal requirement for limited companies to prepare them and presentation is dictated
by accounting standards
...

• They usually include only financial information
...


The trainee accountant's role in a cost and management
accounting system
- In a cost and management accounting system, the role of the trainee accountant is to provide answers
to questions on costs and revenues
...

- The questions a trainee accountant is going to provide answers for are;
(a) What has the cost of goods produced or services provided been?
(b) What has the cost of operating a department been?
(c) What have revenues been?

QUESTIONS
1 Two statements follow about information:
1
...

2
...

Are the above statements true or false?
A Both statements are true
B Both statements are false
C Statement 1 is false but statement 2 is true
D Statement 1 is true but statement 2 is false
2 Which one of the following is not usually considered to be one of the purposes of management
information?
A Implementing
B Planning
C Control
D Decision making
3 What is the main factor to consider when designing a management report?
A The needs of the user
B The length of the report
C Confidentiality
D Neat handwriting
4 Which one of the following does not appear in the mnemonic 'accurate'?
A Accurate
B Communication
C Complete
D User-targeted
5 Which one of the following sources of information would you expect to be an internal source of
information for a business?
MANAGEMENT INFORMATION Page 10

information for a business?
A The government
B Tax consultants
C The internet
D The receivables ledger
6 Two statements follow about the format and content of information
...
There are no external rules governing the format and content of management information
2
...
It is data which is the term for facts, figures and processing
...


2 A Implementing
...

3 A The needs of the user
...

4 B Communication
...
It is worth memorising the
mnemonic for the exam
...
The question says 'usually' because a tax specialist company would
probably not need to use external tax consultants so their source of tax information would be
internal
...
Statement 2 is false as
financial information is subject to external rules and regulations
...
Questions
on business strategy would normally be discussed at board level
...


MANAGEMENT INFORMATION Page 11

MANAGEMENT INFORMATION Page 12

B
Saturday, October 17, 2020

2:31 PM

COST
CLASSIFICATION AND
MEASUREMENTS

MANAGEMENT INFORMATION Page 13

COST UNITS , COST CLASSIFICATION AND PROFIT REPORTING
Saturday, October 17, 2020

2:34 PM

Introduction to costs
- The amount paid to the wholesaler can be split in a similar way: there will be a profit element and
amounts to cover the costs of running a wholesaling business
...


Cost units
- A cost unit is a unit of product or service to which costs can be related
...

• Room (in a hotel)
• Batch of 1,000 shoes
• Patient night ( the cost of a patient staying in a hospital for a night)
- Cost information is needed to aid price setting, decision making, planning and budgeting, control and
reporting
...
Examples include direct or
indirect costs, fixed or variable costs
...

Costs can be classified as direct or indirect
...

Direct materials – which form part of the end product
Direct labour – involved directly in making the product
Direct expenses – it is rare for expenses to be directly traceable to the product
The sum of the direct costs is known as the prime cost
...

Indirect materials – such as lubricants for machinery
Indirect labour – such as supervisors and maintenance workers
Indirect expenses – such as heating and lighting for the factory
There are also non-manufacturing overheads in a manufacturing business
...

- Cost behaviour is the way that costs change as the level of activity changes
...

- The basic principle of cost behaviour is that as the level of activity rises, costs will usually rise
...
The variable cost
per unit is the same amount for each unit produced whereas total variable cost increases as volume of
output increases
...


MANAGEMENT INFORMATION Page 14

- The cost will be the same for each unit produced giving the following graph for variable cost per unit
...
In other words, constant rate and efficiency levels are implied in variable costs
...

(a) The cost of raw materials, because the volume of raw materials purchased relates to the volume
used in production
...
This is due to the ability to increase or decrease the number of workers and
therefore the total cost
...

- A variable cost is not just another name for a direct cost
...

(a) Costs are either variable or fixed, depending upon whether they change in total when the
volume of production changes
...


Fixed costs
- A fixed cost is a cost which tends to be unaffected in total by increases or decreases in the volume of
output
...


Graph of total fixed cost

- The following are fixed costs
...


Graph of fixed cost per unit
MANAGEMENT INFORMATION Page 15

Graph of fixed cost per unit

Stepped-fixed costs
- Stepped-fixed costs are costs which are fixed in nature within certain levels of activity
...

(a) Rent, where accommodation requirements increase as output levels get higher
...
One supervisor may be able to supervise a maximum of ten employees
...


Mixed costs (or semi-variable costs or semi-fixed costs)
- Mixed costs (semi-variable/semi-fixed costs) are partly fixed and partly variable, and therefore only partly
affected by changes in activity levels
...
An example of this is a telephone bill with a fixed charge for line rental and a
variable charge for calls made
...
For example, production, distribution and selling,
administration and financing costs
...

(a) Production costs
...

(b) Distribution and selling costs
...

(c) Administration costs
...
You might like to think of these costs as the materials
and labour used and the expenses incurred in co-ordinating the activities of the production
function and the distribution and selling function
...
The expenses incurred when a business has to borrow to purchase non-current
assets, say, or simply to operate on a day-to-day basis
...
If there are changes
in inventory levels during a period, marginal costing and absorption costing give different profit figures
...

Marginal costing: the cost of the product for inventory valuation is the variable production cost
only
...


Marginal costing and absorption costing compared
- Marginal costing and absorption costing are different
...

(ii) Fixed costs are charged in full against the profit of the period in which they are incurred
...

(ii) The effect of this is that cost of sales in a period will include some fixed overhead incurred
in a previous period (in opening inventory values)
...


Both methods are widely used for costing purposes, but marginal costing has the advantage of being
better for decision-making purposes
...


QUESTIONS
1 A unit of product or service to which costs can be related is known as?
A A cost centre
B A cost unit
C A product unit
D A service unit
2 Which one of the following cost elements does not form part of the overheads?
A Indirect expenses
B Indirect labour
C Indirect materials
D Direct labour

3 The basic principle of cost behaviour is that as the level of activity rises, total costs will usually
___________
...
Which one of the following is not an example of a
functional cost heading?
A Production costs
B Administration costs
C Financing costs
D Carriage out costs

i
...

iii
...


(i)
(ii)
(iii)
(iv)

7 XYZ Co produces a component W
...
70+ Variable $483
...
80 + Variable $75
...
40 = Selling price $1,000
...
70
$739
...
20
$227
...
50
$75
...
00
$124
...

2 D Direct labour is a direct cost and therefore not part of overheads
...

4 D The name given to cost unaffected by increases and decreases in the volume of output is fixed
MANAGEMENT INFORMATION Page 18

4 D The name given to cost unaffected by increases and decreases in the volume of output is fixed
costs
...
Options A, B and D are all usually fixed costs
...
These costs would normally come under the functional heading of 'distribution
and selling costs'
...
70 + $483
...
20
Selling costs are never included in inventory valuations
...

(b) $483
...
The valuation under a marginal costing
system is the variable production cost
...

- Responsibility accounting is a system of accounting that segregates revenue and costs into areas of
personal responsibility in order to monitor and assess the performance of each part of an organisation
...

- A cost centre is a production or service location, function, activity or item of equipment for which costs
are accumulated
...
Items of expenditure will be recorded with the app ropriate
cost code
...

- Information about cost centres might be collected in terms of total actual costs, total budgeted costs and total cost varianc es (the
differences between actual and budgeted costs)
...

Cost centres may include the following
...
Costs might include salary, company car and other expenses
incurred by the director)

Profit centres
- A profit centre is any section of an organisation to which both revenues and costs are assigned, so that
the profitability of the section may be measured
...

- Profit centre information is needed by managers who are responsible for both revenue and costs
...

- The manager of the profit centre has some influence over both revenues and costs, that is, a say in
both sales and production policies
...

- Investment centres refer to centres with additional responsibility for capital investment and possibly for
financing, and whose performance is measured by its return on capital employed
...

• Cost centres collect information on costs
• Profit centres collect information on costs, revenues and profits
• Investment centres collect information on costs, revenues and profits in relation to the value of
non-current assets and working capital

Performance measures
- Performance measurement aims to establish how well something or somebody is doing in relation to a
planned activity
...

- Performance measures for materials and labour include differences between actual and expected
(budgeted) performance
...

- Standard hours are useful in computing levels of efficiency, capacity utilisation and production volume
MANAGEMENT INFORMATION Page 20

- Standard hours are useful in computing levels of efficiency, capacity utilisation and production volume
(or activity)
...

- The three main control ratios are the efficiency, capacity utilisation and
production volume ratios
...

(b) The capacity utilisation ratio compares actual hours worked and budgeted hours, and measures
the extent to which planned utilisation has been achieved
...

Efficiency ratio = Standard hours of actual production × 100% ÷ Actual hours worked
Capacity utilisation ratio = Actual hours worked × 100% ÷ Budgeted hours

Production volume ratio = Standard hours of actual production × 100% ÷ Budgeted hours
- The capacity utilisation ratio multiplied by the efficiency ratio gives us the activity or production volume
ratio: 109
...
8% = 102
...
3% above budget
with higher than budget hours more than offsetting the below budget efficiency
...

- The net profit margin (net profit to sales ratio) is calculated as (profit ÷ sales) × 100%
...

- The net profit margin provides a simple measure of performance for profit centres
...

- Profit margin may be calculated using either net profit or operating profit
...

- The operating profit is the difference between the value of sales (excluding sales tax) and the costs
incurred during operations (total operating expenses)
...


Performance measures for investment centres
- Return on capital employed (ROCE) or return on investment (ROI)) shows how much profit has been
made in relation to the amount of resources invested
...

- Residual income (RI) is an alternative way of measuring the performance of an investment centre
...

- Residual income (RI) is profit before interest and tax less a notional interest charge for invested capital
...
It is
calculated as (sales ÷ capital employed)
...
Is this true or
false?

4 Place the correct letters in the boxes
...

2 B Note that the question said 'the main aim'
...

3 True This is how quantitative and qualitative performance measures differ
...
Net profit margin = net profit ÷ sales revenue

MANAGEMENT INFORMATION Page 22

C
Sunday, October 18, 2020

12:21 AM

SOURCE DOCUMENTS AND
CODING

MANAGEMENT INFORMATION Page 23

SOURCE DOCUMENTS AND CODING
Sunday, October 18, 2020

12:22 AM

Coding
- A code is a system of words, letters, figures or symbols used to represent others
...

- Most organisations use computers to record their accounting transactions because they have the
following advantages
...

• They are automatically accurate and have built in checking facilities
...

• They are capable of sorting information in many different ways
...
For example:
000042 4 cm nails
000043 Office stapler
000044 Hand wrench

(b) Block (or group classification) codes
- These are an improvement on simple sequences codes, in that a digit (often the first one)
indicates the classification of an item
...
'N' stands for another digit; 'NNNNN' indicates there are five further digits in the code
...
For example:
(i) The first digit: 1 Nails
2 Screws
3 Bolts etc…
(ii) The second digit: 1 Steel
2 Brass
3 Copper etc…
(iii) The third digit: 1 50mm
2 60mm
3 75mm etc…
A 60mm steel screw would have a code of 212
...
Under this type of coding the
code means something, it may be an abbreviation of the object being coded
...
For example:
LAX Los Angeles
SIN Singapore
MANAGEMENT INFORMATION Page 24

LAX Los Angeles
CAI Cairo

SIN Singapore
LHR London Heathrow

(e) Hierarchical codes
- This is a type of faceted code where each digit represents a classification, and each digit further
to the right represents a smaller subset than those to the left
...

- A purchase requisition is prepared by the person who identifies a need for the goods to be bought, such
as the storekeeper, and then it must be countersigned (authorised) by the supervisor or departmental
head who is responsible for the department's budget
...

- The supplier may then provide a quotation or an estimate which may include either trade or cash
discounts
...
If discounts are
offered they may be of two types
...

(b) A cash discount is usually given for prompt payment within a stated period (for example,
payment within 7 days gives a 3% discount)
...

- If sales tax is payable, discounts are deducted from the cost of the goods before the sales tax is
calculated and added to the invoice
...

- Once a supplier has been selected, the buyer will prepare a purchase order to ask for the goods to be
supplied
...

• The supplier – to ask for the goods
...

• The stores section – for updating the inventory records
...

- The goods will be sent, normally accompanied by a delivery note, and when received by the business a
goods received note will be completed
...

- If the supplier does not use its own transport, a consignment note will provide the
same evidence as the advice note
...

- If a customer has been overcharged, a credit note may be issued to reduce the original sales invoice to
its correct value
...

- The stores ledger accounts are very similar to bin cards
...
But there are two important
MANAGEMENT INFORMATION Page 25

does, and they are updated from the same sources: GRNs, MRs and MRNs
...

1
...
The balance of inventory after each inventory movement is also
valued
...

2
...

- Stores ledger accounts are very often computerised, and this would enable the amount of free inventory
to be monitored
...

Free inventory is inventory on hand + inventory on order – inventory that has been scheduled for use
...

The hours worked are often recorded on clock cards, job cards or timesheets
...
Labour costs include wages (usually weekly) and
salaries (usually monthly) paid to employees, and other payments such as agency workers or contractors
who supply labour
...


QUESTIONS
1 When materials are received by a business what is the internal document completed by the receiving
department?
A Purchase requisition
B Goods received note
C Invoice
D Despatch note
2 Statement 1
...

Statement 2
...
It cannot be
shown as a deduction until payment has been made
...
Is
this true or false?
4 Which type of coding system uses an aid to memory in its code?
5 Which document is filled in by a company when goods have been delivered to them?

ANSWERS
1 B Goods received note
...
This is prepared when the goods arrive and it is sent to other departments
so that they know that the goods have arrived
...

Statement 2 describes a cash discount, not a trade discount
...

4 Mnemonic
5 A goods received note is filled in by a company when goods have been received into inventory
...


MANAGEMENT INFORMATION Page 27

D
Sunday, October 18, 2020

12:50 AM

COST ACCOUNTING

MANAGEMENT INFORMATION Page 28

ACCOUNTING FOR MATERIAL AND LABOUR COSTS
Sunday, October 18, 2020

12:51 AM

Types of materials
- Materials can be classified according to the substances that make them up, how they are measured, or
their physical properties
...

- Work in progress is a term used to represent an intermediate stage between the manufacturer
purchasing the materials that go to make up the finished product and the finished product
...


Ordering inventory
- When the store keeper places an order for materials the amount that will be ordered will be dependent
upon the sales and/or manufacturing plans for the immediate future
...

- Materials issued to production must be classified as either direct or indirect materials
...
Indirect
materials are credited to the materials control account and debited to the production overhead account
...
The remaining inventory will thus be valued at the price of the most recent
purchases
...
Issues will be valued at the prices of the most recent
purchases; hence inventory remaining will be valued at the cost of the oldest items
...

(i) Cumulative weighted average pricing
- With this method we calculate an average cost of all the units in inventory whenever a
new delivery is received
...
The periodic weighted average
pricing method is easier to calculate than the cumulative weighted average method, and
therefore requires less effort, but it must be applied retrospectively since the costs of
materials used cannot be calculated until the end of the period
...

(b) Closing inventory values will be higher using FIFO rather than LIFO
...

In a period of falling raw material prices, the opposite will occur
...
These extra payments are known as shift allowances
...
This
MANAGEMENT INFORMATION Page 29

- Sometimes, employees may receive wages that are directly related to the output that they produce
...


Unit labour costs
- The labour cost can often be a significant element of unit cost and it can change if different
remuneration methods are introduced or if there is a change in productivity
...

- The total labour cost for an employer is the gross pay plus the employer's benefit contributions
...

- Indirect labour costs normally include the overtime premium for direct workers and any idle time hours
for direct workers as well as the indirect workers employment costs
...

- The overtime premium is generally treated as an indirect cost rather than a direct cost of production
...
However, there is an exception to this: if a customer requests
that overtime is worked in order to complete a job earlier, then the entire overtime payment will
normally be treated as a direct cost of that job
...


QUESTIONS
1 What is the name of the amount paid in excess of the normal hourly rate for overtime hours?
A Overtime payments
B Overtime premium
C Overtime excess
D Overtime special payment
2 If overtime is worked at the request of the customer how is the overtime premium normally treated?
A As a direct labour cost
B As an indirect labour cost
3 How is the cost of idle time hours usually treated?
A As a direct labour cost
B As a indirect labour cost
C Neither of the above
4 What is the double entry for direct labour costs?
A Dr Wages control
Cr WIP
B Dr Wages control
Cr Payables
C Dr WIP
Cr Wages control
D Dr Payables
Cr WIP
5 A system where the amount paid per unit increases as the individual's production increases is known as:
A Shiftwork
B Idle time work
C Bonus scheme
D Differential piecework
6 What is the double entry for issues of materials to production?
A Dr Materials control account
Cr WIP account
B Dr Materials control account
Cr Payables
MANAGEMENT INFORMATION Page 30

B Dr Materials control account
C Dr WIP account
D Dr Payables

Cr Payables
Cr Materials control account
Cr Materials control account

7 In a period of rising prices, which one of the following will be true with a FIFO system of costing
inventory when compared to LIFO?
A Product costs are overstated and profits understated
B Product costs are overstated and profits overstated
C Product costs are understated and profits understated
D Product costs are understated and profits overstated

ANSWERS
1 B Overtime premium
...

2 A At the request of a customer, overtime premium is usually treated as a direct cost
...

3 B Idle time hours are usually treated as an indirect labour cost
...

6 C Dr WIP account

Cr Materials control account
...


7 D FIFO uses the price of the oldest items in inventory for inventory issues
...
Consequently costs are lower and profits are higher

MANAGEMENT INFORMATION Page 31

OVERHEAD COSTS
Sunday, October 18, 2020

1:18 AM

Absorption costing
- Overheads are made up of indirect materials, indirect labour and indirect expenses
...

- Absorption costing is a costing method where direct costs are assigned to cost units along with
production overheads using an overhead absorption rate
...
For inventory valuation requirements only production overheads are included
in the valuation of the product
...

- In overview, the process is to share out all of the production overheads amongst the cost centres that
incur them and then to share their overheads amongst the products made in the cost centre
...
Some of the cost centres which incur overheads are service cost centres
...


Allocation and apportionment of overheads
- The first stage of the process is the allocation of specific overheads to specific cost centres – then joint
overheads are apportioned to each cost centre on an appropriate basis
...
These will often be items such as indirect materials and indirect labour
...

- However there will be many expenses of the business such as rent and rates which are shared by a
number of different cost centres
...
For example, rent and rates are often apportioned or shared out between cost
centres on the basis of the amount of floor area that each cost centre occupies
...


Absorption of overheads
- Once all of the production overheads have been apportioned to the production cost centres an overhead
absorption rate is determined normally based upon direct labour hours or machine hours
...

- The final stage of the process now that all of the production overheads have been allocated and
apportioned to the production cost centres is to find an absorption rate with which to absorb or include
the overhead into the cost of each unit of production
...

- The overhead absorption rate is then used to cost each product depending upon how many relevant
hours each product takes in each production cost centre
...

- In order for overheads to be initially allocated and apportioned to the correct cost centres all overhead
invoices must be carefully coded
...
It is therefore important that each
individual expense is correctly coded to the correct cost centre
...
These
amounts will tend to be indirect materials which will be coded on the materials requisition and indirect
labour which will be coded from the payroll
...

- For expenses which have to be apportioned between cost centres then the cost accountant will carry out
MANAGEMENT INFORMATION Page 32

- For expenses which have to be apportioned between cost centres then the cost accountant will carry out
the apportionment on the approved basis of apportionment and the amounts for each cost centre will be
coded to that cost centre
...
The predetermined rate is set annually, in the budget
...

(a) Goods are produced and sold throughout the year, but many actual overheads are not known
until the end of the year
...

(b) An attempt to calculate overhead costs more regularly (such as each month) is possible, although
estimated costs must be added for occasional expenditures such as rent and rates (incurred once
or twice a year)
...
A unit made in one week might be charged
with $4 of overhead, in a subsequent week with $5, and in a third week with $4
...
Only units
made in winter would be charged with the heating overhead
...

(c) Similarly, production output might vary each month
...
The unit rate for overhead would be $20 and $1 per unit respectively, which would again
lead to administration and control problems
...

- For production overheads the level of activity is often budgeted direct labour hours or budgeted machine
hours
...

(a) The overhead likely to be incurred during the coming period is estimated
...

(c) The estimated overhead is divided by the budgeted activity level to arrive at an absorption rate for
the forthcoming period
...

- There are a number of different bases of absorption (or 'overhead recovery rates') which can be used
...

• A rate per machine hour
• A rate per direct labour hour
• A rate per unit
• A percentage of direct materials cost
• A percentage of direct labour cost
• A percentage of prime cost
- Many factories use a direct labour hour rate or machine hour rate in preference to a rate based on a
percentage of direct materials cost, wages or prime cost
...

(b) A machine hour rate would be used in departments where production is controlled or dictated by
machines
...

- A rate per unit would be effective only if all units were identical

Over and under absorption of overheads
- The rate of overhead absorption is based on estimates (of both numerator and denominator) and it is
quite likely that either one or both of the estimates will not agree with what actually occurs
...

(a) Over absorption means that the overheads charged to the cost of production are greater than the
overheads actually incurred
...

MANAGEMENT INFORMATION Page 33

(b) Under absorption means that insufficient overheads have been included in the cost of production
...
Under or over recovery of overhead will occur in the following
circumstances
...

• The actual activity level is different from the budgeted activity level
...


Inventory valuation using absorption costing and marginal costing
- Marginal costing is significantly different from absorption costing
...

(a) In marginal costing
(i) Closing inventories are valued at marginal production cost
...

(b) In absorption costing
(i) Closing inventories are valued at full production cost, and include a share of fixed
production costs
...


Profit statements using absorption costing and marginal costing
- The different treatment of overheads in the two methods are reflected in the profit statements produced
...
All fixed costs are then deducted from this figure to give a net profit figure
...
Selling
and distribution and administration overheads are then deducted from this figure to give a net profit
figure
...

A Reapportionment
B Allocation
C Absorption
D Apportionment
4 H Co bases its overhead absorption rate on labour hours
...

Budgeted overheads
$600,000
Actual overheads
$660,000
Budgeted labour hours
120,000
Actual labour hours
110,000
Calculate the over or under absorption of overheads for 20X9
...

A $60,000 over-absorbed
B $60,000 under-absorbed
C $110,000 over-absorbed
D $110,000 under-absorbed
5 Over absorption occurs when absorbed overheads are greater than actual overheads
...
Absorption costing involves allocating specific overheads and
apportioning any joint expenses
...
Remember that overhead absorption rates are
calculated before the actual figures are known so they must use 'budgeted' figures
...
Specific overheads are first allocated to cost centres
...
The overheads of service cost centres
are then reapportioned to production cost centres
...

4D

5 True

MANAGEMENT INFORMATION Page 35

JOB, BATCH AND PROCESS COSTING
Sunday, October 18, 2020

7:53 AM

Job costing
- Job costing is a form of specific order costing in which costs are attributed to individual jobs
...


Aim of job costing
- The aim of job costing is simply to collect the cost information shown below
...

- A job is a cost unit which consists of a single order or contract
...
It is therefore usual for each job to differ in one or more respects from every
other job, which means that a separate record must be maintained to show the details of a particular job
...


Procedure for the performance of jobs
- The normal procedure in jobbing concerns involves the following
...

(b) A responsible official sees the prospective customer and agrees the precise details of the items to
be supplied, for example, the quantity, quality and colour of the goods, the date of delivery and
any special requirements
...
The total of
these items will represent the quoted selling price
...
This means that as soon
as all materials, labour and equipment are available and subject to the scheduling of other
orders, the job will be started
...
A separate record must be maintained to show the details
of individual jobs
...

(a) Materials requisitions are sent to stores
...

(c) The job ticket is passed to the worker who is to perform the first operation
...

(d) When the job is completed by the worker who performs the final operation, the job ticket is sent
to the cost office, where the time spent will be costed and recorded on the job cost sheet
...

(f) The job account is debited with the job's share of the factory overhead, based on the absorption
rate(s) in operation
...

(h) The difference between the agreed selling price and the total actual cost will be the supplier's
profit (or loss)
...
When delivery is made to the customer, the costs become a cost of sale
...

- Job costing systems may also be used to control the costs of internal service departments, eg the
maintenance department
...

- Batch costing is similar to job costing in that each batch of similar articles is separately identifiable
...

- Batch costing is used where common equipment is used to produce batches of different products
...
(If a batch of items is made to order then the costing method is classified as job
costing
...

- A batch is a cost unit which consists of a separate, readily identifiable group of product units which
maintains its separate identity throughout the production process
...

The batch is treated as a separate cost unit during production and the costs are
collected as described earlier in this chapter
...


- Note that whilst direct labour costs, direct expenses and administration expenses increase in proportion
to the total labour hours required to complete the little units and the all-purpose units, there will be no
further material costs to complete the batches
...
Process costs are
attributed to the units produced in a period
...
It is common to identify process costing with continuous production such as the following
...

(a) There is often a loss in process due to spoilage, wastage, evaporation and so on
...

(c) Output from production may be a single product, but there may also be one or more by-products
and/or joint products

Basics of process costing
•
•
•
•

Step 1 Determine output and losses
...

Step 3 Calculate total cost of completed output and WIP (step not required if no WIP)
...

Cost per unit = Costs incurred ÷ output

Losses
- During a production process, a loss may occur due to wastage, spoilage, evaporation, and so on
...
It is more sensible to accept that the loss will
occur, and spread the costs of production over the actual units of output
...

• Loss is given no share of cost
...

Equivalent units are notional whole units which represent incomplete work, and which are used to
apportion costs between work in progress and completed output
...
In addition, it is anticipated that idle time will
MANAGEMENT INFORMATION Page 38

3 A job cost estimate includes 630 productive labour hours
...
The wage rate is $12 per hour
...
Details of the three jobs worked on during a period are:
Job BA Job DC Job FE
$$$
Opening work-in-progress 22,760 3,190 –
Direct materials in the period 4,620 11,660 14,335
Direct labour in the period 12,125 10,520 7,695
Overheads are absorbed at 40% of prime cost in each period
...

What is the value of the closing work-in-progress?
A $61,894
B $65,084
C $66,360
D $68,952

5 Process costing is centred around four key steps
...

What was the cost per unit for the process?
A $15
...
08
C $16
...
09

ANSWERS
1D
2 Total batch cost ÷ Number of units in the batch

3 D (630 ÷ 0
...

4 B Job BA is completed so can be ignored
MANAGEMENT INFORMATION Page 39

4 B Job BA is completed so can be ignored
Total costs = (11,660 + 10,520 + 14,335 + 7,695) × 1
...
Equivalent units of production are notional whole units which represent incomplete work and
which are used to apportion costs between work in progress and completed output
...
08

MANAGEMENT INFORMATION Page 40

E
Sunday, October 18, 2020

8:28 AM

THE SPREADSHEET
SYSTEM

MANAGEMENT INFORMATION Page 41

THE BASICS OF USING SPREADSHEETS
Sunday, October 18, 2020

8:29 AM

Spreadsheets
- A spreadsheet is basically an electronic piece of paper divided into rows and columns
...

- A spreadsheet is essentially an electronic piece of paper divided into rows (horizontal) and columns
(vertical)
...
etc and the columns lettered A, B C
...
Each
individual area representing the intersection of a row and a column is called a 'cell'
...
For example, in the spreadsheet below the word
Jan is in cell B2
...
This is shown by the box around the
cell
...

- The main examples of spreadsheet packages are Lotus 1 2 3 and Microsoft Excel
...


- Spreadsheets provide a tool for calculating, analysing and manipulating numerical data
...
For example, the spreadsheet above
has been set up to calculate the totals automatically
...


Basic spreadsheet skills
- Essential basic skills include how to move around within a spreadsheet, how to enter and edit data and
formulae, how to select cells, how to fill cells, how to insert and delete columns and rows and how to
improve the basic layout and appearance of a spreadsheet
...

- A single cell can be accessed by clicking on the cell using the mouse or by using the arrow keys on the
keyboard
...


- A worksheet is a single page or sheet in Excel
...


MANAGEMENT INFORMATION Page 42

The contents of any cell can be one of the following
...
A text cell usually contains words
...
To do this, enter an apostrophe before the number eg '451
...

(b) Values
...

Values are right aligned by default, with no overflow feature
...
A formula refers to other cells in the spreadsheet, and performs some sort of
computation with them
...
In Excel, a formula always begins with an equals sign: =
...


Data can be entered into cells in a few different ways
...
Simply type it in
2
...
Use Excel's Fill feature to automatically fill a range from a base cell or cells

Copy, cut and paste
Ctrl + C for Copy
Ctrl + X for Cut
Ctrl + V for Paste

Spreadsheet formulae
- Formulae can be used in spreadsheets to perform a wide range of calculations, all of which are
performed much quicker than manual calculations
...
The bar also shows the cell address of the 'active cell' (C3 in
this example), which is the cell that the cursor is currently in
...


Dates
- Almost all spreadsheets will make use of dates in some way
...

- Dates are entered into Excel as numbers, eg 23 July 2013 would be entered as 23/07/13
...

- Relative cell references (B3) change when you copy formulae to other locations or move data from one
place to another
...


Identifying and correcting errors in formulae
- There are a number of types of error in Excel, which you need to know how to identify and correct
...
1 Removing circular references
- Circular references usually (but not always) represent a mistake in the logic of the spreadsheet, for
example, a formula that includes a reference to its own cell address
...

- If a spreadsheet column is not wide enough to display its contents, the cell displays a series of hashes
...


QUESTIONS
1 Which one of the following statements about spreadsheets is incorrect?
A Spreadsheets make calculations easier and quicker
B Data can be manipulated more easily
C 'Totals' figures can be calculated automatically
D The information will always be accurate
2 Cell C4 contains a sales price net of sales tax of 17
...
Which one of the following formulae would
NOT give the gross sales price?
A C4* 117
...
175
C C4* (1 + 0
...
5%
3 In order to move quickly from one place to another in a large spreadsheet, which one of the following
key controls would be unhelpful?
A F2
B Page up
C F5
D Ctrl and an arrow key
4 If a spreadsheet column is not wide enough to display its contents, which of the following would
appear?
A #REF!
B #NUM!
C #####
D #DIV/O!

5 Which of the following options would perform the 'paste' function?
A Ctrl + P
B Ctrl + R
C Ctrl + T
D Ctrl + V
6 When a cell displays the error #REF!, what has caused this?

ANSWERS
MANAGEMENT INFORMATION Page 44

ANSWERS
1 D The spreadsheet itself won't make errors but it is still subject to human error
...

2 D Try this using a figure of 100 in cell C4
...
50
...
175
because Excel has added 0
...

3 A F2 will not be helpful as this is an edit key
...


5 D Ctrl + V will paste
...


MANAGEMENT INFORMATION Page 45

USING SPREADSHEETS TO PRESENT INFORMATION
Sunday, October 18, 2020

11:51 AM

Charts, graphs and tables
- Charts and graphs and tables are often excellent ways of communicating information
...
It is
a chart in which data is shown in the form of a bar (two dimensional, or three dimensional for extra
impact), and is used to demonstrate and compare amounts or numbers of things
...
A horizontal presentation is also possible
...
For example, company revenue may be shown for a
number of years split by geographical region
...


MANAGEMENT INFORMATION Page 46

Line graphs
- Line graphs are often used in commercial contexts, to display a wide variety of information
...


Area charts
Area charts are much like line graphs, but they display shading in the areas below the lines
...

Area charts emphasise the magnitude of change over time and can be used to draw attention to the total
value across a trend
...

- It is called a pie chart because it is circular, and so has the shape of a pie in a round pie dish
...

- Pie charts have sectors of varying sizes, and you need to be able to draw sectors fairly accurately
...
Working out sector sizes involves converting parts of the total into
equivalent degrees of a circle
...
An element which is 50% of your total will therefore occupy a segment of
180degrees, and so on

• Shading distinguishes the segments from each other
• Colour can also be used to distinguish segments

Scatter diagram
- Scatter diagrams are graphs which are used to exhibit data, (rather than equations) in order to compare
the way in which two variables vary with each other
...

- To construct a scatter diagram or scatter graph, we must have several pairs of data, with each pair
showing the value of one variable and the corresponding value of the other variable
...
The resulting graph will show a number of pairs, scattered over the graph
...


The trend line
- For the most part, scatter diagrams are used to try to identify trend lines
...


MANAGEMENT INFORMATION Page 48

Tables
- Tables are a simple way of presenting numerical information
...

- A table is two-dimensional (rows and columns): so it can only show two variables: a sales chart for a
year, for example, might have rows for products, and columns for each month of the year
...

• The table should be given a clear title
...

• Where appropriate, there should be clear sub-totals and a right-hand total column for
comparison
...

• Tables should not be packed with too much data so that the information presented is difficult to
read
...

- Even after your chart is 'finished', you can change it
...

(b) You can change each element by double clicking on it then selecting from the options available
...


Spreadsheet format and appearance
- A spreadsheet should be given a title which clearly defines its purpose
...
Formatting should be used to make the data held in the
spreadsheet easy to read and interpret
...
This can make the spreadsheet difficult to read, especially when
MANAGEMENT INFORMATION Page 49

scrolling down and/or to the right
...
Titles of rows and columns can be 'frozen' so that they will always be
visible to the user
...
To freeze column headings select the row below the headings and select
Window then Freeze Panes
...


Formatting
- Numbers can be formatted in several ways, for instance with commas, as percentages, as currency or
with a certain number of decimal places
...
Some of these functions may also be accessed through toolbar buttons
...

• Alignment of text or values within cells
...
With a column of values, however, the numbers
are often easier to compare if they are aligned to the right hand side of the cells
...
Where the text entered in a cell is bigger than the
cell, this option increases the height of the row containing that cell so that the whole of the text is
visible
...

• Add colour, shading or borders to cells
...
Borders can be used to create tables or add total or sub total lines
around a cell as shown below
...

• Lock or hide specific cells in a worksheet
...
In Excel you
simply select Format and then Cells … to reach these options
...
Negative numbers can be shown in red if desired
...
23
...

(c) General format is the format assumed unless another format is specified
...

(d) Percent format multiplies the number in the display by 100 and follows it with a percentage
sign
...
548 in a cell would be displayed as 54
...

(e) Accounting format is similar to the currency format, but the decimal points will be aligned, the
currency symbol and any minus sign are always displayed on the far left of the cell
...

(f) Hidden format is a facility by which values can be entered into cells and used in calculations but
are not actually displayed on the spreadsheet
...

This can be achieved by selecting custom and entering three semi-colons in the type box
...
This option is often used before copying the spreadsheet into a word
processing or presentation package (eg Word or PowerPoint)
...

- Filtering data allows you to select and display just some of it in the table
...


Linking spreadsheets
- Spreadsheets can be linked to and exchange data with word processing documents – and vice versa
...
There are a number of options available to achieve this
...

(b) A neater option if you are just including a small table is to select and copy the relevant cells from
the spreadsheet to the computer's clipboard by selecting the cells and pressing Ctrl+C
...

(c) Office packages, such as Microsoft Office, allow you to link spreadsheets and word processing
files
...


Uses for multi-sheet spreadsheets
- There are a wide range of situations suited to the multi-sheet approach
...

(a) A model could use one sheet for variables, a second for calculations, and a third for outputs
...

(c) To provide different views of the same data
...
For instance, you could have one sheet of data
sorted in product code order and another sorted in product name order
...

Some common applications of spreadsheets are:
Preparation of management accounts
Cash flow analysis, budgeting and forecasting
Account reconciliation
Revenue and cost analysis
Comparison and variance analysis
Sorting, filtering and categorising large volumes of data
Management accountants will use spreadsheet software in activities such as budgeting, forecasting,
reporting performance and variance analysis
...
Spreadsheets can contain formulae that will quickly and easily
calculate and re-calculate outputs when data is inputted
...

- These advantages of spreadsheets make them ideal for taking over the manipulation of numbers,
leaving staff to get involved in the real planning process
...

b
...

d
...

f
...

h
...


There are a number of printing options that can be used to make a spreadsheet more visually
Appealing such as;
Use print preview
Print margins
Paper orientation and size
Fit output on one page
Create or amend page breaks
Print gridlines
Print part of a worksheet
Print row and/or column headings on every page
Add headers and/or footers

Advantages and disadvantages of spreadsheets
Advantages of spreadsheets
•
•
•
•

Excel is easy to learn and to use
...

They enable the analysis, reporting and sharing of financial information
...


• Disadvantages of spreadsheets
MANAGEMENT INFORMATION Page 52

• Disadvantages of spreadsheets
•
•
•
•
•
•

A spreadsheet is only as good as its original design, garbage in = garbage out!
Formulae are hidden from sight so the underlying logic of a set of calculations may not be obvious
...

Research shows that a high proportion of large models contain critical errors
...

Spreadsheets can easily be corrupted and it is difficult to find errors in large models
...

2 List five activities for which a management accountant could use spreadsheets
...

5 Which of the following is a disadvantage of a spreadsheet?
A They cannot answer 'what if' questions
B They cannot check for incorrect entries
C They are difficult to learn to use
D They make calculations more difficult
6 List three possible uses for a multi-sheet (3D) spreadsheet
...

2 Answers include budgeting, forecasting, reporting performance, variance analysis, revenue and cost
analysis and reconciliations
...
Line graphs are particularly useful for demonstrating trends
...

5 B Spreadsheets accept the data that is entered into them and cannot identify incorrect entries
...
They can
help consolidate data from different sources
...

MANAGEMENT INFORMATION Page 53

help consolidate data from different sources
...

7 B Organising data for analysis is not an issue of formatting

---