Table Of ContentCOSTING
An introduction
Colin Drury
Professor, Department of Accountancy and Finance,
Huddersfield Polytechnic
COSTING
An introduction
TEACHERS' MANUAL
SECOND EDITION
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
First edition 1987
Second edition 1990
© 1990 C. Drury
Originally published by Chapman and Hali in 1990
Typeset in 11/12 Sahon by Witwell Ltd, Southport
ISBN 978-0-412-35800-5
AII rights reserved. No part of this publication may bc rcproduced or
transmitted, in any form or by any means, electronic, mechanical,
photocopying, record ing or otherwise, or stored in any rctrieval system of any
nature, without the written permission of the copyright holder and the
publisher, application for which shall be made ro the publisher.
British Library Cataloguing in Publication Data
Drury, Colin
Costing ; an introduction.
Teachers' manual.
2nd ed.
1. Costing
!. Title
658.1552
ISBN 978-0-412-35800-5 ISBN 978-1-4899-6882-1 (eBook)
DOI 10.1007/978-1-4899-6882-1
Contents
Preface vn
2 Cost and revenue classification 1
3 Accounting for materials and labour 5
4 Accounting for overhead expenditure 15
5 Accounting entries for a job costing system 25
6 Process costing 39
7 Joint product and by-product costing 53
8 Absorption costing and variable costing 62
9 Cost-volume-profit analysis 69
10 Measuring costs and benefits for decision-making 86
11 Capital investment decisions 95
12 The budgeting process 103
13 Control in the organization 113
14 Standard costing and variance analyses 124
15 Planning and control of stock levels 141
Preface
This manual is complementary to the main book Costing: An introduction and
to the corresponding Students' Manual. The aim of the main text is to focus on
an understanding of the principles and practice of cost and management
accounting whereas the aim of the accompanying manuals is to focus on the
application of the principles to a wide range of problems.
It is essential that the student works through such a range of problems to gain
experience in the application of principles but generally there is insufficient
classroom time for tutorial guidance. The Students' Manual provides this
guidance by enabling the student to work independently on problems and
referring to the suggested solutions.
The Teachers' Manual provides solutions which are not generally available to
students. The objective is to provide tutors with feedback information on the
student's ability to solve problems independently. A short description of each
problem is given at the beginning of each chapter to enable tutors to select
problems which are appropriate to specific courses.
Finally I would like to thank, once again, the Institute of Chartered
Accountants in England and Wales, the Chartered Association of Certified
Accountants, the Chartered Institute of Cost and Management Accountants,
the Association of Accounting Technicians, the Joint Matriculation Board and
the Associated Examining Board for permission to reproduce problems which
have appeared in past examinations. The answers to the problems are my own
and are in no way the approved solutions of the above professional bodies.
2 Cost and revenue classification
Problem summary
2.1 to 2.5
Essay problems on cost classification. Note that Problem 2.2 also includes a
discussion of the role of the cost accountant. The answers to some of these
questions are contained within the chapter and therefore the answers consist of a
reference to the appropriate section in Chapter 2.
2.6
A description of various cost terms- discretionary, variable, fixed, notional and
opportunity costs. The question also requires the student to indicate whether a
project should be continued or abandoned based on a comparison of relevant
revenues with relevant costs.
2.7 to 2.9
Short questions which can be used to test your understanding of cost
classification.
2.10
A more demanding and time-consuming Foundation/Stage 1 problem relating
to cost behaviour.
2.11
Calculation of a product cost for cost-plus pricing.
2.12
Computation and discussion of relevant, sunk and opportunity costs for
decision-making.
Answer to problem 2.8
(1) (a) (5) (i)
(2) (d) (6) (b)
(3) (e) (7) (h)
(4) (f)
2 Cost and revenue classification
Answer to problem 2.9
(i) Direct materials: 9
(ii) Direct labour: 16
(iii) Direct expenses: 10
(iv) Indirect production overhead: 1, 6, 8, 18, 19
(v) Research and development cost: 20
(vi) Selling and distribution cost: 7, 11, 12, 13, 17
(vii) Administration costs: 2, 3, 4, 14, 15
(viii) Finance costs, 5
Answer to problem 2.10
(a) (i) Schedule of annual mileage costs:
5,000 miles 10,000 miles 15,000 miles 30,000 miles
£ £ £ £
Variable costs:
Spares 100 200 300 600
Petrol 380 760 1,140 2,280
Total variable cost 480 960 1,440 2,880
Variable cost per mile 0.096 0.096 0.096 0.096
Fixed costs:
Depreciation (Note 1) 2,000 2,000 2,000 2,000
Maintenance 120 120 120 120
Vehicle licence 80 80 80 80
Insurance 150 150 150 150
Tyres (Note 2) 75 150
2,350 2,350 2,425 2,500
Fixed cost per mile 0.47 0.235 0.162 0.083
Total cost 2,830 3,310 3,865 5,380
Total cost per mile 0.566 0.331 0.258 0.179
Notes:
(1) £5,500 (cost)-£1,500 (Trade-in price)
Annual depreciation = = £2,000
2 years
(2) At 15,000 miles per annum tyres will be replaced once during the
two-year period at a cost of £150. The average cost per year is £75. At
30,000 miles per annum tyres will be replaced once each year.
Comments:
Tyres are a semi-fixed cost. In the above calculations they have been regarded
as a step fixed cost. An alternative approach would be to regard this semi
fixed cost as a variable cost by dividing £150 tyre replacement by 25,000
miles. This results in a variable cost per mile of £0.006. For a discussion of
Answer to problem 2.11 3
the alternative treatment of semi-fixed costs see Chapter 2.
Depreciation and maintenance cost have been classified as fixed costs.
They are likely to be semi-variable costs but in the absence of any additional
information they have been classified as fixed costs.
(ii) See Fig. 1.1 for the answer to this question. The step increase in fixed cost is
assumed to occur at an annual mileage of 12,500 miles and 25,000 miles
because tyres are assumed to be replaced at this mileage.
(iii) The respective costs can be obtained from the vertical broken lines in the
graph.
ol
~
~ ()
0
Ui ~
00 -o
Cii ~
c:::: l 3
c ro
<{
E?
Annual mileage
Fig. 2.1 Answer to Problem 2.10(a) (ii)
(b) The cost per mile declines as activity increases. This is because the majority of costs
are fixed and do not increase when mileage increases. However, total cost will
increase with increases in mileage.
Answer to problem 2.11
(a) Standard cost sheet
£ £
(per unit)
Direct materials 40m2 at £5.30 per m2 212
Direct wages:
Bonding dept: 48 hours at £2.50 per hour 120
Finishing dept: 30 hours at £1.90 per hour 57 177
4 Cost and revenue classification
(i)Prime cost 389
Variable overhead: (Wl)
Bonding dept: 48 hours at £0.75 per hour 36
Finishing dept: 30 hours at £0.50 per hour 15 51
(ii)Variable production cost 440
Fixed production overhead (W2) 40
(iii)Total production cost 480
Selling and distribution cost (W3) 20
Administration cost (W3) 10 30
(iv)Total cost 510
Workings:
£375,000
Wl Variable overhead rates: Bonding = £0.7 5 per hour
500,000 hours
£150,000
Finishing = £0.50 per hour
300,000 hours
W2 £392,000 = £40
Fixed production overhead rate per unit of output =
9,800 units
The fixed production overhead rate per unit of output has been calculated
because there appears to be only one product produced. Alternatively a fixed
production hourly overhead rate can be calculated and charged to the
product on the basis of the number of hours which the product spends in
each department.
£196,000
W3
Selling and production cost per unit of output = = £20
9,800 units
£98,000
Administration cost per unit of output= = £10
9,800 units
100
(b) Selling price per unit £510 x = £600
85
