Level: Intermediate
Intermediate Worked Examples: Cost Accounting
Six graded examples for Chapter 7 Cost Accounting: computing the components of cost of production and Work-in-Progress, preparing the Manufacturing Account in 'T' and statement format, and Break-Even Point Analysis using the Contribution Margin and Graph methods.
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Example 1: Computing the Components of Cost of Production
Question
Solution plan
Direct Material Cost = Opening inventory + Purchases - Closing inventory. Prime Cost = Direct Material + Direct Labour + Direct Expenses. Overhead Cost is the total of all indirect factory costs (supervisor salary, depreciation, rates). Cost of Production = Prime Cost + Overhead Cost.
| Particulars | RM |
|---|---|
| Direct Material Cost | |
| Opening raw material inventory | 12,000 |
| Add: Purchase of raw materials | 48,000 |
| Materials available for use | 60,000 |
| Less: Closing raw material inventory | 9,000 |
| Direct Material Cost | 51,000 |
| Direct Labour Cost | 26,000 |
| Direct Expenses | 4,000 |
| Prime Cost | 81,000 |
| Overhead Cost | |
| Factory supervisor salary | 8,000 |
| Depreciation of factory machinery | 3,000 |
| Factory rates | 2,500 |
| Overhead Cost | 13,500 |
| Cost of Production | 94,500 |
Answer
Direct Material Cost = RM51,000; Direct Labour Cost = RM26,000; Direct Expenses = RM4,000; Prime Cost = RM81,000; Overhead Cost = RM13,500; Cost of Production = RM94,500.
Where marks are usually lost
Example 2: Cost of Production with Work-in-Progress
Question
Solution plan
Compute Prime Cost first (direct material + direct labour + direct expenses), add Overhead Cost to get Total Manufacturing Cost. Then ADD opening Work-in-Progress and DEDUCT closing Work-in-Progress to arrive at the Cost of Production.
| Particulars | RM |
|---|---|
| Direct Material Cost | |
| Opening raw material inventory | 8,000 |
| Add: Purchase of raw materials | 58,000 |
| Materials available for use | 66,000 |
| Less: Closing raw material inventory | 6,000 |
| Direct Material Cost | 60,000 |
| Direct Labour Cost | 32,000 |
| Direct Expenses | 5,000 |
| Prime Cost | 97,000 |
| Overhead Cost | |
| Depreciation of plant | 7,000 |
| Factory insurance | 4,000 |
| Factory electricity | 7,000 |
| Overhead Cost | 18,000 |
| Total Manufacturing Cost | 115,000 |
| Add: Opening Work-in-Progress | 11,000 |
| 126,000 | |
| Less: Closing Work-in-Progress | 9,000 |
| Cost of Production | 117,000 |
Answer
Prime Cost = RM97,000; Overhead Cost = RM18,000; Total Manufacturing Cost = RM115,000; after adding opening WIP RM11,000 and deducting closing WIP RM9,000, Cost of Production = RM117,000.
Where marks are usually lost
Example 3: Manufacturing Account in 'T' Form (no WIP)
Question
Solution plan
All manufacturing costs (direct material, direct labour, direct expenses and overheads) are debited to the Manufacturing Account. The debit total is the Cost of Production, which is credited (transferred) to the Trading Account so both sides balance.
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Direct material used | 40,000 | Trading Account (Cost of Production) | 79,000 |
| Direct labour | 22,000 | ||
| Direct expenses | 3,000 | ||
| Factory rent | 6,000 | ||
| Depreciation of machinery | 2,500 | ||
| Factory supervisor salary | 5,500 | ||
| 79,000 | 79,000 |
Answer
Prime Cost = RM65,000 (40,000 + 22,000 + 3,000); Overhead Cost = RM14,000 (6,000 + 2,500 + 5,500); Cost of Production = RM79,000, transferred to the Trading Account. Both sides of the Manufacturing Account balance at RM79,000.
Where marks are usually lost
Example 4: Statement of Cost of Production with WIP
Question
Solution plan
Carriage inwards is added to purchases as it is a cost of acquiring raw materials. Direct Material Cost = opening + purchases + carriage inwards - closing. Prime Cost + Overhead Cost = Total Manufacturing Cost. Add opening WIP, deduct closing WIP to obtain Cost of Production.
| Particulars | RM |
|---|---|
| Direct Material Cost | |
| Opening raw material inventory | 15,000 |
| Add: Purchase of raw materials | 90,000 |
| Add: Carriage inwards | 3,000 |
| Materials available for use | 108,000 |
| Less: Closing raw material inventory | 12,000 |
| Direct Material Cost | 96,000 |
| Direct Labour Cost | 45,000 |
| Direct Expenses | 6,000 |
| Prime Cost | 147,000 |
| Overhead Cost | |
| Supervisor salary | 20,000 |
| Depreciation of plant | 8,000 |
| Factory insurance | 5,000 |
| Factory rates & taxes | 4,000 |
| Overhead Cost | 37,000 |
| Total Manufacturing Cost | 184,000 |
| Add: Opening Work-in-Progress | 14,000 |
| 198,000 | |
| Less: Closing Work-in-Progress | 10,000 |
| Cost of Production | 188,000 |
Answer
Direct Material Cost = RM96,000; Prime Cost = RM147,000; Overhead Cost = RM37,000; Total Manufacturing Cost = RM184,000; Cost of Production (after WIP) = RM188,000, transferred to the Trading Account.
Where marks are usually lost
Example 5: Break-Even Point: Contribution Margin Method
Question
Solution plan
Contribution Margin per unit = Selling price per unit - Variable cost per unit. BEP (units) = Fixed Cost / Contribution Margin per unit. BEP (RM) = BEP units x Selling price. For target profit: Quantity = (Fixed Cost + Target Profit) / Contribution Margin per unit.
| Particulars | Amount |
|---|---|
| Base data | |
| Selling price per unit (RM) | 5 |
| Variable cost per unit (RM) | 3 |
| Fixed cost per month (RM) | 24,000 |
| Computation | |
| Contribution Margin per unit = 5 - 3 (RM) | 2 |
| BEP (units) = 24,000 / 2 | 12,000 |
| BEP (RM) = 12,000 x 5 | 60,000 |
| Target profit RM10,000 | |
| Quantity = (24,000 + 10,000) / 2 (units) | 17,000 |
| Particulars | RM |
|---|---|
| Total Revenue (12,000 x 5) | 60,000 |
| Less: Variable Cost (12,000 x 3) | 36,000 |
| Contribution Margin | 24,000 |
| Less: Fixed Cost | 24,000 |
| Profit / (Loss) | 0 |
Answer
Contribution Margin per unit = RM2. Break-Even Point = 12,000 units or RM60,000. Verification shows profit/loss = RM0 at 12,000 units. To reach a target profit of RM10,000, Encik Zaidi must sell 17,000 units.
Where marks are usually lost
Example 6: BEP Analysis with Cost Change and Target Profit
Question
Solution plan
For each situation, Contribution Margin per unit = Selling price - Variable cost per unit; BEP (units) = Fixed Cost / Contribution Margin. The rise in fixed cost raises the BEP, but the fall in variable cost raises the contribution margin (lowering BEP). For target profit, quantity = (Fixed Cost + Target Profit) / Contribution Margin. Profit at a given quantity = (quantity x Contribution Margin) - Fixed Cost. Graph method: plot Total Revenue and Total Cost lines; their intersection is the BEP.
| Particulars | Before | After |
|---|---|---|
| Selling price per unit (RM) | 20 | 20 |
| Variable cost per unit (RM) | 12 | 10 |
| Contribution Margin per unit (RM) | 8 | 10 |
| Fixed cost per month (RM) | 32,000 | 48,000 |
| BEP (units) = Fixed Cost / CM | 4,000 | 4,800 |
| BEP (RM) = units x 20 | 80,000 | 96,000 |
| Particulars | Amount |
|---|---|
| (b) Target profit RM12,000 | |
| Quantity = (48,000 + 12,000) / 10 (units) | 6,000 |
| (c) Profit if 7,000 units sold | |
| Contribution Margin (7,000 x 10) | 70,000 |
| Less: Fixed Cost | 48,000 |
| Profit | 22,000 |
Answer
(a) Before: Contribution Margin RM8, BEP = 4,000 units (RM80,000). After: Contribution Margin RM10, BEP = 4,800 units (RM96,000). Although BEP rises, the higher contribution margin means profit grows faster once sales pass the BEP. (b) For a target profit of RM12,000, sell 6,000 units. (c) At 7,000 units, profit = RM22,000. Using the graph method, the BEP is the intersection of the Total Revenue and Total Cost lines.
Where marks are usually lost
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