MACN 201 Management Acc 201 Own Notes

MACN 101 Management Accounting Notes Page |1
Management Accounting. own notes

Book: Management and cost accounting Collin Drury 6 edition
Timetable :Mon 17h00, fri 13h00 ,sat 10H00 ,Tests sat 08h00
Lecturer:Mr Ngomane office 2020 k block 015-268-3297
CONTENTS
Contents....................................................................................................................................................................1
QUESTIONS:...............................................................................................................................................................6
Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)..................................................................6
LAST QUESTION PLACE...........................................................................................................................................7
To scan in/do still:......................................................................................................................................................9
Rem: Notes special things to remember..................................................................................................................10
2-TERMS:(vig ch 1+2)..............................................................................................................................................11
Intro:....................................................................................................................................................................11
Cost Objects:........................................................................................................................................................11
Direct and Indirect Costs......................................................................................................................................11
the production point of indifference, :...............................................................................................................11
analysis of the companies cost structure: ........................................................................................................11
inventory valuation:(note)................................................................................................................................11
DIRECT COSTS : ...............................................................................................................................................12
INDIRECT COSTS :.............................................................................................................................................12
Categories of manufacturing costs. – with direct/indirect costs........................................................................12
DIRECT MATERIALS :.........................................................................................................................................12
INDIRECT MATERIALS :......................................................................................................................................12
DIRECT LABOUR :..............................................................................................................................................12
INDIRECT LABOUR ..........................................................................................................................................12
DIRECT EXPENSE :............................................................................................................................................12
PRIME COST .....................................................................................................................................................12
MANUFACTURING OVERHEAD :.........................................................................................................................12
COST ALLOCATIONS :........................................................................................................................................12
TOTAL MANUFATURING COST :.........................................................................................................................12
Period and Product Costs..................................................................................................................................13
PRODUCT COSTS :............................................................................................................................................13
PERIOD COSTS :................................................................................................................................................13
Relevant and Irrelevant Costs:.............................................................................................................................13
RELEVANT COSTS AND REVENUES :.................................................................................................................13
IRRELEVANT COSTS AND REVENUES: ..............................................................................................................13
Avoidable or Unavoidable costs:..........................................................................................................................13
AVOIDABLE=....................................................................................................................................................13
UNAVOIDABLE..................................................................................................................................................13
Opportunity Costs:...............................................................................................................................................14
-Incremental /or Differential- and Marginal Costs.................................................................................................14
INCREMENTAL or DIFFERENTIAL COSTS :..........................................................................................................14
MARGINAL COSTS :...........................................................................................................................................14
Job Costing and Process Costing systems:............................................................................................................14
JOB COSTING SYSTEMS:....................................................................................................................................14
PROCESS COSTING SYSTEMS:...........................................................................................................................14
ABSORPTION COSTING AND VARIABLE COSTING:and STANDARD COSTING.........................................................14
inventory valuation:(note)................................................................................................................................14
IAS 2 on INVENTORIES States the Following.:...................................................................................................14
Absorbtion costing :..........................................................................................................................................15
Cost Absorbtion Rate :......................................................................................................................................15
Fully Integrated Absorbtion costing System ( or “full” absorb. costing system)................................................15
Variable Costing (or Marginal or Direct Costing)...............................................................................................16
Direct Costing...................................................................................................................................................16
Marginal Costing...............................................................................................................................................16
Standard Costing:.............................................................................................................................................16
Sunk Costs:..........................................................................................................................................................16
SUNK COSTS : ..................................................................................................................................................16
Responsibility Accounting :..................................................................................................................................16
RESPONSIBILITY ACCOUNTING :........................................................................................................................16
PROFIT CENTRE :..............................................................................................................................................16
COST CENTRE:..................................................................................................................................................17
INVESTMENT CENTRE:......................................................................................................................................17
Maintaining a cost database:................................................................................................................................17
Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................17
VARIABLE COSTS :............................................................................................................................................17
FIXED PRODUCTION COSTS :............................................................................................................................18
SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................19
SEMI-VARIABLE (or MIXED COSTS) :..................................................................................................................19
Relevant Range....................................................................................................................................................19
Relevant Range: ..............................................................................................................................................19
Selling Costs.........................................................................................................................................................19
Selling Costs :...................................................................................................................................................19
Conversion Costs:.................................................................................................................................................20
Conversion Costs :............................................................................................................................................20
HIGH-LOW COST ANALYSIS:..............................................................................................................................20
contribution:.....................................................................................................................................................20
budget:.............................................................................................................................................................20
“Standard Hours Produced”:.............................................................................................................................20
“Standard PROFIT STATEMENT”: ......................................................................................................................20
STATIC BUDGET ...............................................................................................................................................20
FLEXED BUDGET ..............................................................................................................................................21
BILL OF MATERIALS ..........................................................................................................................................21
STANDARD COST CARD ...................................................................................................................................21
3-Own notes reconcilliations : any and all types possible........................................................................................22
1-Chapter 1 :INTRODUCTION(drury ch1)..................................................................................................................23
Definition of Accounting ( USA acc. Association)..................................................................................................23
Users of Acc info:..................................................................................................................................................23
Difference between Mngmt and Fin Acc.:.............................................................................................................23
The Decision Making Process:..............................................................................................................................23
Influence of Changing Competitive environment on Mngmnt Acc. Practice..........................................................24
Impact of I.T./Computers Mngmt Acc...................................................................................................................25
International Convergance of Mngmnt Acc...........................................................................................................25
FUNCTIONS OF MANAGEMENT ACCOUNTING:......................................................................................................25
HISTORY OF MANAGEMENT ACCOUNTING............................................................................................................25
Ch6-CHAPTER : COST CLASSIFICATION AND ESTIMATION :ch6 viggario book
................................................................................................................................................................................26
rem/ Note for exams : cost classification chapter.................................................................................................26
1)COST CLASSIFICATION .........................................................................................................................................26
Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................26
VARIABLE COSTS :............................................................................................................................................26

FIXED PRODUCTION COSTS :( or ‘long term variable costs’).............................................................................27
SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................27
mixed costs (ofted referred to as semi-variable costs ,but we call it mixed)....................................................27
SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA VERSA TRUE)..................................28
how to separate the fixed and variable part of mixed costs : normal method......................................................28
HIGH-low analysis -method :identification of fixed & variable components......................................................29
THE learning curve:..............................................................................................................................................30
1-CUMULATIVE AVERAGE TIME-LEARNING MODEL............................................................................................30
B-INCREMENTAL UNIT-TIME LEARNING MODEL:................................................................................................32
c-use of models................................................................................................................................................32
4 Chapter :COST –VOLUME PROFIT ANALYSIS ch. 7 in vigario book........................................................................33
1.ECONOMIST VS ACCOUNTANTS VIEW...................................................................................................................33
Economists VS Accountants COST-VOLUME-PROFIT graph. :................................................................................33
ECONOMISTS GRAPH:.......................................................................................................................................33
Accountants graph............................................................................................................................................33
C.v.p. analysis. (cost-volume-profit.).......................................................................................................................34
assumptions of cvp analysis:................................................................................................................................34
Break-even analysis:............................................................................................................................................34
target profit:.........................................................................................................................................................34
Contribution : ......................................................................................................................................................34
margin of safety:..................................................................................................................................................34
key ratios for cvp.................................................................................................................................................35
(PV ratio) Profit Volume ratio: ( or also called ‘contribution margin %’ )...........................................................35
profit ratio.........................................................................................................................................................35
(B/E sales) break-even sales revenue:( not a ratio)..........................................................................................35
break-even sales volume:( not a ratio).............................................................................................................35
margin of safety ratio ......................................................................................................................................35
OTHER TYPES:...................................................................................................................................................35
abbreviations for ratio’s etc: ...............................................................................................................................35
analysis of cost structure USING CVP PRINCIPLES : (of a company).....................................................................35
METHOD: fORMAT OF SPREADSHEET FOR: full year FINAL ANALYSIS viggario page 247...............................36
Income statement (or budget) showing contribution separately.........................................................................37
cost –volume –profit chart/diagram.....................................................................................................................37
LABELS:...........................................................................................................................................................38
Income statement showing manufacturing costs separately (or also called income &expenditure statement
showing...)............................................................................................................................................................38
1+2 CHAPTER :ABSORBTION COSTING : sYSTEMS FOR RECORDING AND CONTROLLING COSTS :vigario ch-1+2. . .40
To remember for exam/ tricky stuff......................................................................................................................40
from ch1 vigario:the meaning of management accounting.....................................................................................40
Financial accounting.............................................................................................................................................40
Objective of Financial Accounting:....................................................................................................................40
Management accounting......................................................................................................................................41
Variable Costing (or Marginal or Direct Costing)...............................................................................................42
1.from ch 2 vig. systems for recording and controlling product costs. : ..................................................................42
Rem: use 4 decimal places for hourly labour/machine rates for products.........................................................42
DEFINITION: Absorbtion costing :......................................................................................................................42
DEFINITION :Cost Absorbtion Rate :..................................................................................................................43
DEFINITION :Fully Integrated Absorbtion costing System .................................................................................43
IAS 2 on INVENTORIES States the Following.:...................................................................................................43
METHOD TO DO ABSORBTION COSTING...............................................................................................................44
INtRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS:........................................................................44

Cost allocation procedure.................................................................................................................................44
OVERHEAD and MANUFACTURING ACCOUNTS IN LEDGER:...............................................................................46
overhead recovery rates:.....................................................................................................................................46
Purposes of allocating mnftring Overhead to a product...................................................................................46
pre-determined overhead rates........................................................................................................................46
job costing accounting treatment........................................................................................................................49
REM: notes to remember .....................................................................................................................................51
cost CLASSIFICATION FOR SHORT TERM /LONG TERM DECISIONS........................................................................51
5 Chapter abc (activity based costing) vig ch 5....................................................................................................52
Special Notes to watch out for:............................................................................................................................52
ACTIVITY BASED COSTING: GENERAL...................................................................................................................52
abc: Methodogy ...................................................................................................................................................53
ACTIVITIES – COST DRIVERS. : Examples of.....................................................................................................53
VALUATION OF CLOSING STOCK:......................................................................................................................54
ABRIDGED(shortened) INCOME STATEMENTS FOR ABC COSTING:...................................................................54
The Logical error of ABC costing.......................................................................................................................54
How relevant is abc costing?............................................................................................................................54
ch 4 vig VARIABLE AND ABSORBTION COSTING.......................................................................................................57
Special Notes to watch out for:............................................................................................................................57
ARGUMENTS FOR VARIABLE VS ABSORBTION COSTING.......................................................................................57
aRGUMENTS IN FAVOUR OF VARIABLE COSTING:.............................................................................................57
Arguments in favour of absorbtion costing:......................................................................................................57
viewpoint: any system which reports inconsistent profits if sales remain same should be discarded...............58
Accounting Statement on inventories:-ias 2.....................................................................................................58
effect on profit (Income) of variable .vs. absorbtion costing...............................................................................58
EXACT only difference between 2 Types of variable costing and 3 types of absorbtion costing...........................59
What is variable costing.(or marginal or direct costing).......................................................................................60
METHOD : VARIABLE COSTING (CALCULATING VARIABLE PROFIT )..................................................................61
What is absorbtion costing:..................................................................................................................................62
Calculating Absorbtion Profit : 3 METHODS.......................................................................................................62
reconcilliation : standard absorbtion costing : budget profit to actual. ............................................................66
Reconcilliation of Absorbtion profit to variable profit(pg 141 viggio)....................................................................71
Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)................................................................71
income statements formats:................................................................................................................................73
............................................................................................................................................................................74
RECONCILLIATIONS:.................................................................................................................................................75
For over/under recovery in fully integrated absorbtion costing( just copied , must still sort it all out).................75
ch 9 standard costing (Pg 325 vig)..........................................................................................................................76
purpose of standard costing:................................................................................................................................76
Method of Standard costing:................................................................................................................................76
raw MATERIAL variance....................................................................................................................................77
reconcilliation budget profit to actual profit. ......................................................................................................77
1-Chapter 8 :BUDGETS(ch8Viggio book)..................................................................................................................82
Principles of Budgeting:........................................................................................................................................82
Define Budgeting:.............................................................................................................................................82
3 categories of budgets:...................................................................................................................................82
Reasons for budgeting:.....................................................................................................................................82
financial & management budgeting:.................................................................................................................82
Long term planning:.........................................................................................................................................82
Positive factors of budgeting............................................................................................................................83

Budgeting & the human factor.........................................................................................................................83
Method for Budgets:.............................................................................................................................................84
Master Budget:.................................................................................................................................................84
Financial budget...............................................................................................................................................85
Operating budget.............................................................................................................................................85
Cash Budget: (or cash flow statement).............................................................................................................85
sales Budget:....................................................................................................................................................87
Purchases Budget : for raw materials / or retail stock /or any..........................................................................89
opening stock (finished goods or raw materials etc) Budget:...........................................................................90
Production Budget:...........................................................................................................................................90
Opening stock -Raw / direct materials- Budget:................................................................................................91
Labour Budget:.................................................................................................................................................92
Budget income Statement/ statement of inc&expenditure:..............................................................................92
chapter 11 relevant costs (vig ch11)......................................................................................................................96
Context of relevant costs:....................................................................................................................................96
terms: Definitions ................................................................................................................................................96
adding a new product...........................................................................................................................................97
Dropping a product or division.............................................................................................................................97
Make or buy decision............................................................................................................................................97
special orders.......................................................................................................................................................98
IMPortant : use the relevant costing decision model as an aid in choosing among competing alternatives.........99
QUESTIONS:
(1) See page 19 vigario – no ii roman figures at bottom –is there a printing error 'budget' should read 'actual"
(i) Same place no -4- last sentence – how is no fixed cost carried to balance sheet, or where are fixed
costs ever carried to balance sheet??? By not going and subtracting over/under recovery or how?
(2) Semi-variable NOT the same as mixed costs – vigio and drury books different.
(3) Google search for different learning curves for different industries/ mnftr. Types e.g. electr.etc.
(4) See page 224 viggio- how does example work- not include fixed costs? Why? Also is answer 268 or -268?
(5) Pg 246-example1- what means 'Other Costs are 20% VAR WITH PRODUCTION UNITS."?
(6) Differential cost driver ???? what's this mean?
(7) Absorption costing :
(i) The IAS statement on inventories states that ALL overheads,eg management salaries and
depreciation and administration MUST BE INCLUDED IN COST OF INVENTORIES on page 1 ch 1.But PAGE
27 CH2 it says any costs that come after PRESENT CONDITION should not be included eg: selling costs.
BUT WE learn to do a COST OF SALES analysis in the INCOME statement where SALARIES ARE NOT
INCLUED nor admin nor depreciation, but opening and closing inventory is included in the
calculation.SO how do you use the figure above to do this calc. which needs opening - closing
inventories + purchases ? where does one get these figures then, or where do you use the IAS
inventory rate then? ( the rest of income statement has salaries, depreciation etc- you cannot charge it
twice/double!! In income statement.!!) I MEAN : DOES ONE SUBTTRACT/ADJUST THE COSTS CHARGED
TO CLOSING STOCK --OUT OF THE NORMAL SALARIES & OVERHEADS IN THE INCOME STATEMENT SO IT
DOSNT GET SUBTRACTED TWICE?
(ii) WHO MAY USE LIFO method of stock valuation??
(iii) STEP COST ALLOCATION METHOD
This tequnique does account for inter-service dept. cost allocation.
The method used here is to allocate the cost for the service dept. which services the greatest no. of other
service depts. first. Or if you get a situation where some service depts. service each other,as in example
here, then first to be allocated is the one with highest cost. SO WHICH GOES FIRST IF ONE GETS BOTH
TYPES AT SAME TIME?
(8) METHOD OF DOING OVERHEAD ACCOUNT AND OVER/UNDER RECOVERY INCOME STATEMENT.
(i) Overhead account CONTRA WIP account. : All estimated/charged overheads to CR , Actual
overheads to DR , Balancing amount as Over/Under recovery to Income Statement.
(ii) REM: ???????just remember the over/under recover amount that goes to income statement or
comes from this account , WILL NOT INCLUDE ANY OVER/UNDER RECOVERY FOR CLOSING
STOCK?????????
SO FOR (8) WHAT IS THE ANSWER TO BETWEEN ????? QUEST. MARKS. YES/NO ? HOW
7) RECONCILLIATION of BUDGET to ACTUAL PROFIT.
a) When a STANDARD COSTING SYSTEM is used, the under/over recovery is shown as :
i) Volume Variance (difference between budget –actual)
ii) AND Expenditure Variance. (difference between budget –actual)
EXAMPLE: Example 1 on left and 2 on right are completely different exercises, both are Reconcilliations.The one
on the right seems the more correct one.-includes units- but not sure if both are equally correct- ASK.
8) Is marketing costs part of mnftring overheads for absorbtion costing? Delivery costs, packaging, etc?
9) On page 52 viggio, why does it say contribution instead of gross profit,3rd row from bottom far left, because
fixed manufacturing costs do and must get included in the the box above- to calc gross profit!
10) Next Qusetion – read the yellow carefully –there are 2 questions here!
RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT(PG 142

VIGGIO)
1) METHOD :Whether it is a year to year or month to month recon . for the 1 company or whatever :
a) No units on left needed.
b) Start with 1st profit AFTER over/under adjustment, end with last profit after over/under adjustment.
c) Add any Variable Non-mnftr costs (eg:selling costs) subtracted before for net profit.(yes or no or what –
not shown in exercise)
d) Any non-mnftr fixed costs : Add them back in.{or maybe ; not sure but do other one rather- it seems you want to see
the gross profit somewhere)) if different you must do a separate item line to recon it : just subtract one from the other then put
difference in recon ( highly unlikely to happen anyway!) what do you do? And dothey want to see the gross profit for both somewhere
or not?
e) 1st :Do opposite to over/under to bring to first period gross profit( if added in income stat, -then subtract
it and visa-versa)
f) Now you have next periods Gross Profit.
g) Now add/minus previous months over/under- same as you would in income stat,(not add if
subtracted etc but add again – you are going toward getting NEXT PERIODS NET PROFIT now as if
it is a normal income stat.)
h) Now add next periods Variable and Fixed non-mnftr overheads in.
Next question:
Part (a)
For a Variable Standard Costing recon, in the” Volume Variance Part” at top top,,(ask : 1-but what do
you do with closing stock – or 2- opening stock with different fixed cost to this year?) you will also leave out fixed-
mnftring costs here, because you don’t do a special “Overheads Volume –variance subtraction” in the expenditure
section below, because you don’t have any fixed costs in the closing stock to wheedle out (if the numbers are
right it could cause a error, If You don’t do all this I think)
Part (b)
And for same issue as above : what do you do wuth the variable and fixed manufacturing costs whem yopu get a
closing stock for this year, or also Opening stock for this year from last year with different fixed costs to this
year.?????
11) For high –low costing, book vig and drury say you use activities as the one to choose for the HIGH-LOW
method- not price, but in test for last question in the 2nd CVP test, the memorandum uses the price to choose
the high + low one?? Which do we use?
12) What do you do with a closing stock in the budget – if you are doing a recon for budget to actual profit in
absorption or variable or standard costing?????? How do you handle this closing stock in the recon itself.
13) What does ‘full costing mean?test 3
14) What does constant price level terms mean? In test 3
15) In job costing for manufacturing accounts : where do you get wages from? (ALL WRITTEN OUT?)
a) You must pay taxes on all all wages in WIP, as asset or asset increase, esp. in closing stock- how does that
work?ie add the wages then subtract them again fior profit, but for plain retail they only use wages as tax
deductable( msut a stremans wages go to closing inventory?) but for mnftring it is not tax deductable.
16) For overhead account; for 1st month could you CR transfer wages to WIP before any DR it all- so you have a CR
but not a DR in WIP?
17) For fixed costs in variable costing, must fixed go to cost of sales before gross profit or NOT?????/VERY
IMPORTANT: ie in vigg textbook it does both! See drury exercise 7.16: here it is NOT included –fixed costs in
cost of sales- also this was a test question and we got marked wrong for having fixed costs in cost of sales-
BUT in Viggio pg 137 he DOES put fixed costs in Cost of Sales! So what do we do????
18) Do you get a fully integrated STANDARD absorbtion costing system?
19) What for mat does one do the profit statements and income statements for variable costing, and also
absorbtion – drury and viggario each have 2 or 3 methods each , so 6 or more methods. I mean with cost of
sales , or using ccontribution as a heading or putting some stuff at the top first then others below- general mix-
up each has his own method – spo what is a standard accepted format one should use consistently???BIG
MESS!!!!!!!also with including fixed mnftring costs in variable cost of sales figure - or not - etc etc.
20) INDIFFERENCE POINT
21) -Don’t know –try find out
22) INCREMENTAL ANALYSIS
23) Don’t know –try find out
LAST QUESTION PLACE
|
9) For reciprocal allocation (algebra method) of allocating costs to production depts., what happens if you get a
fraction at the end – like R0.345543 - how do you allocate these last fractions between depts.? On page 35
viggio at bottom of page.35 viggio
10) RECON OF PROFITS or also overheads : start at Budget and end at Actual.( or maybe any way you want?)
11) For a JOB COSTING system , part of fully integrated absorbtion costing ,on page 49 viggio , what is contra for
"JOB 1-5" accounts, ie:where does "Job completed" on cr side get posted to? Do these acc's go to trial balance
and Fin Stats? Where in fin stats do they go?
12) Fully integrated absorbtion : do you use budget or actual overheads for closing stock ?- if budget , then if
over/under –recovery is for all of production (incl closing stock) then why is it only added to sold production –
this will give a wrong value for 1-closing stock and 2-profit.OR is the overheads charged to incomplete jobs
already "actual' and not "budget"?
a) TRY PUT sales as only 1 for example pg 130 vig ? then this all becomes clear! (see pg 129 2nd paragraph
from bottom for rule to use budget.. in closing stock only!Also?? before it was said one could use actual or
budget)
b) Fully integrated absorbtion :On page 130 vig highlighted : if over –recovery is for all of production (incl
closing stock) then why is it only added to sold production – this will give a wrong value for 1-closing stock
and 2-profit.OR is the overheads charged to incomplete jobs already "actual' and not "budget"?
c) Over/Under recovery is only applied to sales,not closing stock, but at the full total for closing stock +sales ,
so there is a mistake where sales takes ov/und recovery away from closing stock and visa versa, and
Opening stock dilutes it all a bit too wrongly.(say sales was only 1, then apply this to any example)
d) Pg 150 viggio blu highlight,: for variable costing , if asked for the GROSS PFOFIT, or COST OF SALES
BREAKDOWN, do you include fixed mnft costs or EXCLUDE them then?????
Chapter 9 standard costing :
a) Pg 345 vig – bottom o page, how do they get Standard = R165 000, shouldn’t it be 1.875X 110000?
b) If you have closing stock in a budget ,how do you do the recon for : sales variance: is it
mnftr profit less ‘sales variable costs” or [contribution less closing stock less fixed mnftr-
costs] .-before you div by units and X by difference in sales volume.?
c) From variable &
TO SCAN IN/DO STILL:

(1) Pg 53/54 example 1 of absorbtion costing.
(2) Go through all the 'accountant will recomend ' stuff and summarise well : pg 199 vig top,175/176
vig,180 vig bottom,
(3) Scan pg 177 for abc costing + opdrag page before
(4) Scan Pg 181 for format of a "costing statement "
(5) Limiting factors calculations for abc costing : pg 186 + 187 vig scan + re-study
(6) See page 194 vig and put it all together with the rest of the verbal abc vs absorbtion costing notes
in abc costing chapeter in notes.(get 1 good answer to learn – not 100's)
(7) CHAPTER 4 variable costing: pg 144 to end of book- do the last 2 headings didn’t finish.
(8) Learning curves: scan in some good examples and the text out of textbook to explain better- your
explain is not very clear esp. example 1 page 218 viggio
(9) Fully integ absorb- get examples & exaplain rught pg 35 vig
(10) In RECONCILLIATIONS: do a over/under recovery of fixed overheads for Fully Integrated
Absorbtion Costing
M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 10
REM: NOTES SPECIAL THINGS TO

REMEMBER
I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers.

II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for
this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price.
III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED
COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio.
IE:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT
COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN
THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE
COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS
RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless
told otherwise.
2) REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to
single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to
:per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will
give you wrong ANSWERS.(becuase you cannot get all the recurring parts in)
3) If asked to redraft a budget for a learning curve question, do a full total profit/ costs/fixed/var/ budget and also
a per unit one next to it ,just to show, not just a per unit one even if the first budget was not even shown on
paper.
a) Also , if they say fixed costs of R50 each for 300 units, thyen for an extra 100 units the fixed costs will not
apply, it has already been paid.- so leave fixed out in any calc. for the last 100 units.
2-TERMS:(VIG CH 1+2)
The Correct Method To Adopt When Looking At Product Decision-Making
Is As Follows:
1.1. Identify the main or flag-ship product that the company manufactures.
1.2. Maximise the profit on the main product by maximising production ,sales and contribution.
1.3. Sell other products manufactured by the company only if there is spare capacity.
1.4. Sell other products at a price higher than variable cost.
1.5. One can only Max contribution( using Variable costing) per limiting factor, not max profitability by using
ABC or Absorption costing unless you work it out from the start {incl. total activities/total cost drivers=to
get cost driver rate} for each price & production level.)
1) COST RECOVERY RATE.: the rate or basis eg machine hours. at which costs are recovered to a specific eg
production dept.
2) BASIS : the rate/basis is the measurement used to allocate costs eg: labour hours or machine hours.
3) COST PLUS BASIS :means you work out the final figure by starting with the cost price and then adding a certain
amount or % to it.
4) LIMITING FACTORS OF PRODUCTION: like a bottleneck at the machine dept – because machines only produce a
maximum amount each , or one cannot get more than a certain amount of some raw input product per month
etc
INTRO:
1) Management accounting is primarily concerned with producing budgets, setting performance standards, and
evaluating performance
2) Acc sys used for measure costs for profit measurement,inventory valuation ,decision making,performance
measurement, control.
COST OBJECTS:
1. COST OBJECT :Definition: ANY ACTIVITY for which a SEPARATE MEASUREMENT of COSTS is desired.
a) Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territory or
dept.
The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg
labour,materials ,overheads.( or by fixed & variable).THEN assigns these costs to cost objects.
DIRECT AND INDIRECT COSTS

THE PRODUCTION POINT OF INDIFFERENCE, :
Where the total cost of a capital-intensive company = the total cost of a labour-intensive company.
ANALYSIS OF THE COMPANIES COST STRUCTURE:
Its fixed costs and contribution per unit.
INVENTORY VALUATION:(NOTE)
IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work
completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower
of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state
– ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs
directly related to the units of production,such as direct labour.They also include a systematic allocation
of fixed & variable overheads that are incurred in converting material into finished goods.Fixed
production overheads are those indirect costs of production that remain relatively constant regardless
of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and
the cost of factory management and administration.
However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of
seasons or periods under normal circumstances,taking into account the loss of activity relating to
planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod.
Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated
to each product unit is decreased so inventories are not valued at below cost.
As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted
average basis.LIFO is strictly prohibited.
DIRECT COSTS :
Costs that can be specifically and exclusively identified with a particular cost object. . .. Eg:wood
in a desk, maintenance labour in -(cost object maintenance dept)-but NOT Maint.Labour in a –(cost
object desk produced).The more direct cost and less indirect costs =the more accurate the estimate.
INDIRECT COSTS :
Costs that cannot be identified specifically and exclusively with a particular cost object, but can only be identified
with a a number of depts.. /cost objects.
CATEGORIES OF MANUFACTURING COSTS. – WITH DIRECT/INDIRECT
COSTS.
Direct Materials Xx
Direct Labour Xx
Prime Cost Xx
Manufacturing Overhead Xx
Total Manufacturing Cost Xx
i) In manufacturing organisations traditional product costs accumulated as follows – ( developed esp.

from/for ext. accounting requirements.
DIRECT MATERIALS :
Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenance
materials on machine to produce with is not,that is an indirect materials cost.
INDIRECT MATERIALS :
cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.
DIRECT LABOUR :
can be specifically traced to or identified with product eg:labour assemble product
INDIRECT LABOUR
can not be specifically traced to or identified with product eg:labour maintenance of many different
product lines machines.
DIRECT EXPENSE :
NOT labour/materials/overheads/ can be specifically traced to or identified with product eg hiring of
machine to produce a specific quantity of a product is a direct expense. (other than /not
labour/materials-in this context) anything else in this category would be classed as 'OVERHEADS' –see
below.
PRIME COST
= Direct materials+Direct Labour +Direct Expenses.
MANUFACTURING OVERHEAD :
All manufacturing costs exept : Direct materials+Direct Labour +Direct Expenses eg:rent of factory.
COST ALLOCATIONS :
process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSO –
the assigning of eg: rent between mnftring and / non-mnftring depts.
TOTAL MANUFATURING COST :
Direct materials+Direct Labour +Direct Expenses+Mnfctring overheads
PERIOD AND PRODUCT COSTS.

1) Because of external fin acc rules in most countries that require that for inventory evaluation ONLY
MANUFACTURING COSTS /or RETAILER = PURCHASE COSTS + FREIGHT IN -should be included in the
calculation of product costs AS WELL AS ONLY costs related directly to the units of production- accountants
therefore classify costs as product costs and period costs.
a) BECAUSE OF THIS ONLY the FIFO or weidghted average methods may be used to calc. inventory- NOT
L.I.F.O.-ie. Costs must relate directly to units of production.
REASONS CITED FOR THIS:
b) Inventories represent a future probable inflow of revenue , period costs(overheads) do not
c) Many non-manufacturing costs are NOT incurred when the product is being stored-thus inappropriate to
include them in inventory valuation.
INTERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringing
to current state – ????ONLY manufacturing direct and indirect costs- ie:COSTS OF CONVERSION ???????YES OR NO.
Includes systematic allocation of fixed & variable overheads.
However FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low production
inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production,
the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below
cost.
PRODUCT COSTS :
costs identified with goods purchased or produced for resale.-in mnftring is costs attached to product for inventory
valuation of finished goods ,work in progress, matched against sales for recording profits. ONLY MANUFACTURING
OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing
would treat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold
,then as an expense.(when you 'write out' last inventory count and write in new inventory in the profit & loss
statement at year end I THINK? ) ! Product costs= TOTAL MANUFACTURING COSTS =direct
labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg: distribution+telephone for
telesales .as per book exactly: Admin Overheads or selling overheads may never be assosiated with production.
PERIOD COSTS :
costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of
inventory valuation.(or /sales/work in progress.)recorded as an expense ONLY,never as an asset! Period costs=
eg: sales expenses+ admin +distribution expenses.
RELEVANT AND IRRELEVANT COSTS:

RELEVANT COSTS AND REVENUES :
Those Future costs and Revenues that will be changed by any specific decision relating to production volume
or selling volume.eg: material costs change if choose to produce more
IRRELEVANT COSTS AND REVENUES:
Those Future costs and Revenues that will NOT be changed by any specific decision relating to production
volume or selling volume.. Eg: rent for factory will not change if higher production or selling volume.
AVOIDABLE OR UNAVOIDABLE COSTS:

AVOIDABLE=
relevant costs (sometimes used in place of other name)
UNAVOIDABLE
irrelevant costs (sometimes used in place of other name)
INDIFFERENCE POINT
-Don’t know –try find out
INCREMENTAL ANALYSIS
Don’t know –try find out
OPPORTUNITY COSTS:
1) OPPORTUNITY COST =The cost of a foregone opportunity in favour of having chosen another one :eg . if the
cost of selling a new product is to stop selling another one , the opportunity cost is the rvenue one used to
receive from the old one.
-INCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS

INCREMENTAL OR DIFFERENTIAL COSTS :
Accountants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the
PRODUCTION HAS BEEN INCREASED.
MARGINAL COSTS :
Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new product
whereby production has been increased.
JOB COSTING AND PROCESS COSTING SYSTEMS:

JOB COSTING SYSTEMS:
Relates to a costing system where all the costs associated with each job could be different for each job
completed and , so direct materials and labour are allocated at actual cost and fixed overheads are allocated
on a pre-determined cost rate for each separate job.This is also known as a fully integrated absorption costing
system. eg. In constructiion industry –where each house could be unique and have a completely different set
of costs to other houses.
PROCESS COSTING SYSTEMS:
The method used to value stock in mnftring where at end of period some of the closing stock is partially
manufactured-not all finished yet.
ABSORPTION COSTING AND VARIABLE COSTING:AND STANDARD

COSTING.
INVENTORY VALUATION:(NOTE)
IAS 2 ON INVENTORIES STATES THE FOLLOWING.:
IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work
completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower
of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state
– ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs
directly related to the units of production,such as direct labour.They also include a systematic allocation
of fixed & variable overheads that are incurred in converting material into finished goods.Fixed
production overheads are those indirect costs of production that remain relatively constant regardless
of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and
the cost of factory management and administration.
However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of
seasons or periods under normal circumstances,taking into account the loss of activity relating to
planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod.
Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated
to each product unit is decreased so inventories are not valued at below cost.
Variable Production overheads are those indirect costs of production that vary directly,or nearly
directly,with the volume of production,such as indirect materials and indirect labour.
As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted
average basis.LIFO is strictly prohibited.
Cost accounting grew out of the need that financial accountants have for financial information ,and
gathers and analyses costs for the purposes of :product costing,job costing,stock valuation.
ABSORBTION COSTING :
IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED
USING ABSORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE
COSTING – OR YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to
fixed costs being in there- always take them out and convert to CONTRIBUTION ..
Method used to VALUE CLOSING STOCK that includes ALL MANUFACTURING COSTS-VARIABLE AND FIXED-NOT
any NON-MNFTRING COSTS AT ALL!!!!!! ((WHICH DOES/can INCL. RENT AND MAINTENANCE per book)–
The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring
costs(eg direct material) to get the total per unit product cost for inventory valuation per the IAS definition
( which says ALL MNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg:
Maintenance etc.) .ONLY Financial Accounting uses it. NOTE: every time production volume changes ,the
cost per unit will change because fixed costs get divided by a larger /or smaller number now.So it is an
inconvenient method requiring constant raising of under/over recovery charges to balance the figures.The 2
reasons for this is:
1-Actual volume is different to budget volume.
2-Actual manufacturing overhead being different to budget overhead.
That is why Management Accounting uses a different method –: called "Variable Costing".
FOR ABSORBTION COSTING THRE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2-

ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing ther are also these
2 ways , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed and variable in the
stock valuation(per book vigario pg14-concl.
ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE
INFORMATION IN THE FINANCIAL STATEMENTS.
1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST)
2-NON-INTEGRATED ABSORBTION COSTING (BUDGET COST)
3-ACTUAL COST ABSORBTION COSTING. (all exactly per vig. Pg 14 book!)
IS ABSORBTION COSTING ACCEPTABLE:?
NO, because it will distort true company profits due to showing fixed costs as closing inventory
costs –you cannot compare 2 periods properly,or budget properly if you use include rent at a
pre-determined rate eh R300 per product it will not be accurate if production rises or falls.- it
will eg show excessive profits when stock holding is rising ? per book vig pg14.
HOW DO YOU MAKE IT ACCEPTABLE:
You explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT
included in the costing eg R500 –at any level above or below the no. of units that the budget was
calculated at.
However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote on
future jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixed
costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some
allocate all overheads, some only admin + management , some only maintenance and depreciation etc.
COST ABSORBTION RATE :

the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg:
machine hours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing
system.
FULLY INTEGRATED ABSORBTION COSTING SYSTEM ( OR “FULL” ABSORB.
COSTING SYSTEM)
If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in
the previous years as a per unit cost, from per average normal production levels,so eg R1000 rent /
500products made per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg
direct material, to get a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be
allocated as such ONLY mnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other
fixed costs eg admin and computer,marketing costs(more 'sales costs' types get left out)can be left out and
the system would still be called Fully Integrated absorbtion Costing) ONLY where the fixed cost element is pre-
determined though and not based on actual fixed costs ,which is another type of absorbtion costing.The actual
amount will differ from the allocated amount though and OVER or UNDER recovery of fixed overhead will
occour, which must be balanced by a BALANCING AMOUNT known as the over/under –recovered fixed
overhead.This amount is included by 'raising a charge' (possibly it's very own ledger account-CRJ/CPjournal)
and including it in the Cost of sales breakdown in Income statement for Gross Profit calc.
Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the cost
of a product.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to
allocate to FUTURE production.Very few companies will allocate costs to production and service depts. ,
followed by re-allocation from service depts. to production depts. However , when using absorbtion costing,
one must remember that one comapny allocates fixed costs differently to another one,and there is no right or
wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management ,
some only maintenance and depreciation etc.
VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING)
USING ABSORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE
COSTING – OR YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINGS OUT! Due to
The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as
period costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the
period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed
costs.The System is representative of managerial accounting for decision making.
Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)
FOR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK – 1-BUDGET OR 2-ACTUAL.
DIRECT COSTING.
MARGINAL COSTING.
STANDARD COSTING:
Another method of VALUEING CLOSING STOCK – but at a pre-determined rate for BOTH VARIABLE AND FIXED
COSTS.
(1) STANDARD VARIABLE COSTING:
(a) when only pre-determined variable costs are used.
(2) STANDARD FIXED COSTING:
(b) when only pre-determined fixed costs are used.
SUNK COSTS:
SUNK COSTS :
These are COSTS created by a decision in the PAST that cannot be changed by any future decision – or which has
a zero value when making future decision: eg:depreciation,or money spent on material that is no longer required/
or sellable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selling price depends on what
the buyer will pay –it can be above or below 10000 .
RESPONSIBILITY ACCOUNTING :
RESPONSIBILITY ACCOUNTING :
accounting for a RESPONSIBILITY UNIT -an organisation unit or part of a business for which a manager is
reponsible.Revenues & Costs so deviations from performance budget can be attributed to resposible
individual.
PROFIT CENTRE :
same as above :Accountability for profitability of assets placed under a managers control.
COST CENTRE:
SAME AS above but AREA or DEPT. for which a manager is responsible.
INVESTMENT CENTRE:
term defines accountability for profit generation AS WELL AS choices in what will or will not be purchased by
way of capital expenditure in running a business.
MAINTAINING A COST DATABASE:

1) Database to be maintained so relevant cost info can be extracted easily.
2) Need eg: By products, responsibility centres,depts.,distribution channels, + categ. of expense eg direct labour
+ categ. of cost behaviour eg fixed and variable.
3) For cost control and performance measurement:
a) Reports by resposibility centre per week/ etc
b) Future reports for eg: possible price changes.
c) Standards costs stored & used to evaluate
FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR

OF
a) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ?
reduce price to sell more?,or units produced ,guests booked etc)
VARIABLE COSTS :
vary directly or very nearly directly according to incr./decr. in volume(eg:of production).See chart below : total
variable costs are linear/direct and Unit var. cost is constant.
UNITS vs VARIABLE COSTS GRAPH
VARIABLECOSTS: (a)TOTAL Variable Costs:(b)Per Unit (cost =R10 per

unit)
TOTAL Variable
UNIT Variable
5000 5000
4000 4000 40
Cost
3000 3000 30
Cost
2000 2000 20
1000 1000 10 10 10 10 10 10 10
0 0 0
0 100 200 300 400 500 0 100 200 300 400 500
ActivityLevel ActivityLevel (unitsofoutput)
PROFIT vs VARIABLE COSTS GRAPH.

FIXED PRODUCTION COSTS :

basicaly stay constant regardless of volume of production –OVER a specific period of time- (before inflation pushes
up input prices etc),but also called ‘long term variable costs’ because over the long term ALL costs are seen a
variable-due to inflation etc. eg:rent, municipal rates
UNITS vs FIXED COSTS GRAPH
FIXEDCOSTS:(a) Total
FIXED COSTS:(b) unit (supposed hyperbolic!)
Total Fixed Costs
50
Unit Fixed Cost
1000
500
0 0
0 100 200 300 400 500 0 2 4 6
ActivityLevel (no.ofunits) ActivityLevel : Output -no ofunitsproduced
PROFIT vs FIXED COSTS GRAPH

SEMI-FIXED (OR STEP-FIXED COSTS) :

They are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time
period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the next level
etc.– usually in steps-
STEPFIXEDCOSTS
Total Fixed Costs
300
250
200
150
100
50
0
0 100 200 300 400 500
ActivityLevel
SEMI-VARIABLE (OR MIXED COSTS) :

These include both a FIXED and a VARIABLE component eg:maintenance = fixed cost + a variable cost according
to amount of activity ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross
revenue
RELEVANT RANGE
RELEVANT RANGE:
A limited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000
units, over that another costing structure is used,or another range.
SELLING COSTS
SELLING COSTS :
relate to sales, written off in period incurred. Eg :commission costs,etc.
CONVERSION COSTS:
CONVERSION COSTS :
All costs other than Direct Material costs that are incurred in manufacturing a product.The word conversion is
normally associated with process costing and refers to all costs exept direct material directly related to the
manufacturing process.
ADMINISTRATION Costs:
Administration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring
process – but in most instances they are written off as a period cost- not mnftr. Cost. Eg: cost of accountant=
period cost , cost of person who records all manufacturing processes number produced, materials used etc only in
mnftring = manftring admin cost .
HIGH-LOW COST ANALYSIS:
REFERS TO ANALYSIS OF SEMI-VARIABLE COSTS where the var. & fixed. Elements are calc. by analysing incr. in
cost in comparison to incr. in prod. Volume.
CONTRIBUTION:
CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management
accountants to describe the incremental profit that a company will make as the company sells one more unit of
production.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE – VARIABLE COSTS = contribution, then after
that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Variable costs would include
selling,marketing,distribution costs etc,so ALLl variable costs,none are left out. Mngmn acc only concerned with
contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit
contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but
production volume does, so once all fixed costs have been paid by current production volume, any increase in
production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed
profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF
THE CONTRIBUTION goes toward profit.
SALES
- Variable Costs
(incl.marketing,selling,distrib
ution ie: ALL.
= CONTRIBUTION
- Fixed Costs
= PROFIT
BUDGET:
A budget is a quantitative analysis of a plan or corporate action.It is intended that production/sales etc be co-
ordinated by various depts. to achieve expectations about future income/cash flows/fin pos , fin perf and
supportin plans.
“STANDARD HOURS PRODUCED”:
-“– is the time it takes to produce one product ,used as a common denominator to divide up costs into different
products.
“STANDARD PROFIT STATEMENT”:

This is an income statement , using pre-determined standard cost rates , showing what profit we can expect from
a given sales volume.The volume is usually estimated from known sales and production capacity, but could also
just mean the volume for the flexed budget, when using standard costing.
STATIC BUDGET
The plain original realistic budget for the year drawn up at beginning of year.
FLEXED BUDGET
Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but with the original costs
from the Original Budget, not the Actual Costs. This can then be compared to the actual Income statement to
see what the difference in each cost was once converted to the actual sales level.
BILL OF MATERIALS
A list of all the actual materials needed to manufacture a specific product. Does not include labour/overheads
etc. like the ‘Standard Cost Card.’
STANDARD COST CARD
Card with the costs of all the Inputs used to make 1 output product.(That should (actual) be used to produce a
product.)1 card is kept for each different product made. (-historical cost -not a goal type cost).Nowdays on
computer.
3-OWN NOTES RECONCILLIATIONS : ANY

AND ALL TYPES POSSIBLE.
1. Pages with recons:
a. Bottom pg 46 viggio
b.
2. Remember you one can be a few rands out with a Recon. Of Explanation of Over/Under Recovered
overhead due to different(wrong) (amount/hours=rate ) for one or other cost driver in BUDGET as opposed
to ACTUAL.One calls it "Rounding Off"- just write in the list of the calculation in order to balance the
reconcilliation properly – at approximate place where it is relevant : Rounding Off -R20 on page 55 in
viggio
3. RECON OF OVERHEADS: you start at allocated (namely Actual Amount. ), not budget ,so if you sold more
you start there Pg 54 bottom viggio.
4. EXAMPLE OF A RECON: ??? yet to be classified ….
5.
1-CHAPTER 1 :INTRODUCTION(drury ch1)

The Correct Method To Adopt When Looking At Product Decision-Making
Is As Follows:
DEFINITION OF ACCOUNTING ( USA ACC. ASSOCIATION)

a) Process of identifying ,measuring and communicating economic info to permit informed judgements +
decisions by users of
b) Objective of Fin Acc :generate info ext. users use to make decisions about investment in company +
analyse how company is performing.
USERS OF ACC INFO:

Fin Acc :External reporting /Ext users
Mngmt Acc: Internal reporting /Int Users
USERS:= MNGMT , SHAREHOLDERS , EMPLOYEES , CREDITORS + LOAN PROVIDERS , INVESTORS
ALSO: Private Individuals ,Non-profits eg church , Companies
DIFFERENCE BETWEEN MNGMT AND FIN ACC.:

a) Legal Requirements : Fin Acc ( ie:fin stats) are legally required ;
: Mngmt Acc IS NOT legally req.
b) Focus on Individual Parts :Fin Acc : reports generated on WHOLE ;
: Mngmt acc : reports generated on SEGMENTS
c) GAAP :Fin Acc: Uniformity must according IFRS/usa-fasb/uk asb ;
:Mngmt acc NOT REQUIRED
d) Time Dimension :Fin Acc: PAST ONLY
:Mngmt Acc: FUTURE & PAST
e) Report Frequency :Fin: Annual & less detail Semi-annual
:Mngmt: Daily/Weekly/mnthly etc
f) Users :Fin: Ext (+ int you say)
:Mngmt: Int.
THE DECISION MAKING PROCESS:

1) Identify Objectives :
i) Maximise Pres.Value. of future net cash flows.
ii) Social Goals
iii) Security.
2) Search for Alternative Courses of action
i) SWOT /opportunities+threats eg:new products to a New Market or products to an Old market
3) Gather Data about Alternatives
i) States Of nature for each eg boom or recession /inflation
ii) Used for
(1) Short term Decision ::Price / Media to use in advert etc.
(2) Long term decision : Product to sell /machinery to use
4) Select Appropriate Course of action
i) Eg: based on difference in cash flows ( profitability)
5) Implement Decisions
i) In the form of a budget mostly
6) Compare actual and planned outcomes ( Master budget)
i) Performance reports /from feedback
ii) To facilitate management by exeption.
INFLUENCE OF CHANGING COMPETITIVE ENVIRONMENT ON MNGMNT

ACC. PRACTICE
1) Pre- 80's No Incentive for Efficiency/costs/ Mngmt practice
2) Post 80's Globalisation competition caused
a) Innovative products
b) Changing Product Life Cycles – (needs flexibility)
i) From initial expense on research /develop to time customer support is withdrawn
ii) Increasing: sophistication+discriminating customer demands ;tech innovation ;global compete
iii) Many costs are locked in by decisions at design stage –THUS mngmt Acc is used to cost optimise
at the design stage
iv) Reduce time to market of new + modified products,adapt to changing customer requirements
c) High Quality
d) At low Cost
e) First Class Customer Servicec
i) How a value chain works to explain below diagram
(1)Research and development -2 Design-3- Production 4- marketing 5-
Distribution 6- Customer Service
ii)
KEY SUCCESS FACTORS:
KEY SUCCESS FACTORS:
1-Cost Efficiency:Costing accurate ,no under or over costing loose customers+profits,
1-Cost Efficiency:Costing accurate ,no under or over costing loose customers+profits,
2-Quality:eg:tQM=customer orientate process-continuous improve,stats+all processes
2-Quality:eg:tQM=customer orientate process-continuous improve,stats+all processes
3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from
3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from
start to finish of product= process time +move time+wait time+inspect time –where eg:non-value
start to finish of product= process time +move time+wait time+inspect time –where eg:non-value
add activities be eiminated to decrease .(all exept process time)
add activities be eiminated to decrease .(all exept process time)
4-Innovation:ability to adapt to changing customer requirements –flexibility
4-Innovation:ability to adapt to changing customer requirements –flexibility
5-Reliability
5-Reliability
CONTINUOUS
CONTINUOUS EMPLOYEE
IMPROVEMENT: EMPLOYEE
IMPROVEMENT:
1-Mngmt acc supports this
1-Mngmt acc supports this
CUSTOMER
CUSTOMER EMPOWERMENT
EMPOWERMENT
1-Empowering is giving
by identify ways to SATISFACTION
SATISFACTION 1-Empowering is giving
employees closest to the
by identify ways to employees closest to the
improve and then report
improve and then report
as
asTOP
TOP action /customer authority
action /customer authority
to improve processes/
on progress PRIORITY
PRIORITY
to improve processes/
approaches.
on progress approaches.
TOTAL VALUE-CHAIN ANALYSIS

TOTAL VALUE-CHAIN ANALYSIS
1-Co-ordinating all parts of chain to work as a team to improve cost
1-Co-ordinating all parts of chain to work as a team to improve cost
efficiency , reliability and delivery
efficiency , reliability and delivery
iii) Social Responsibility and Corporate ethics also form part of customer satisfaction
f) Greater Product variety

New replaced old BY:
a) Just in Time Production Systems

b) AMT : Advanced Manufacturing Systems
3) Service Industries :( esp large eg financial or airlines)
a) Pre-80's : Monopolies with barriers /or Govt.
b) Post 80's : Deregulation + Privatisation caused :
i) Before NOT costing of individual services , now COSTING PRESSURE causes costing of individ.
Services TO REDUCE COSTS (before easy to pass on cost , now not)
IMPACT OF I.T./COMPUTERS MNGMT ACC.

1) E-business ,e-commerce, internet commerce
2) Derive cost savings from eg; paperless airline tickets,internet banking
3) ERPS: Enterprise resource planning System : eg SAP/Baan/Oracle/J.D.Edwards.= all business function
streamlined in one info system – real time info manager/ one database / single data entry(no duplication)
4) For Mngmt Acc it means no reason to ask mngmnt acc for reports,just push button instead ,but limits ability to
produce locally relevant info.Now to avoid redundancy accoubtants must concentrate more on provide a
supportive/ interpretative/advisers/internal consultants. –THEY SPEND MORE TIME ANALYSING DATA NOW -
INTERNATIONAL CONVERGANCE OF MNGMNT ACC.

1) Generally Mngmnt Acc is standardised throughout industrialised countries-esp. on macro level (overall sys)
FUNCTIONS OF MANAGEMENT ACCOUNTING:

1) A Management and Cost accounting System should generate info. to meet the following requirements:
a) Allocate costs between GOODS SOLD and INVENTORIES for INTERNAL and EXT. PROFIT REPORTING
i) Match costs to revenues per year/mnth etc. /Get inventory value / costs
b) Provide RELEVANT INFO. to HELP MANAGERS mage better decisions.
i) A-routine reports all for Resouce allocation+product mix/discontinuation decision etc.
ii) B-non-routine – strategic decision eg: new machinery investment / negotiate long-term contracts etc
c) Provide info. on PLANNING ,CONTROL ,PERFORMANCE MEASUREMENT ,and CONTINUOUS IMPROVEMENT.
i) In form of BUDGETS.
2) COST ACCOUNTING : definition: concerned with cost accumulation for inventory valuation to meet
requirements of ext. reporting & int. profit measurement.
a) OBJECTIVE OF COST ACC.:cost acc gathers + analyses costs for purpose of :
i) Product costing
ii) Stock valuation /costing
iii) Job costing
3) MANAGEMENT ACCOUNTING : definition: provision of appropriate info. for DECISION MAKING , PLANNING
,CONTROL and EVALUATION. / provision of info. to internal users to help them to make better decisions and
improve the efficiency and effectiveness of operations.
4) NOTE : in many organisations database is originally designed for fin acc, not mngmnt acc, and still in use.!
HISTORY OF MANAGEMENT ACCOUNTING.

1) Most of practices used today from before 1925 -industrial revolution.
2) In 1980s- crisis due mngmnt acc not developed enough to be useful to then.Since 1980 major development to
now.Now it is seen as useful enough.
CH6-CHAPTER : COST CLASSIFICATION

AND ESTIMATION :ch6 viggario book
REM/ NOTE FOR EXAMS : COST CLASSIFICATION CHAPTER
2) Exams ask:
I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers.
II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for
this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price.
III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED
COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio.
IE:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT
COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN
THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE
COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS
RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless
told otherwise.
4) REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to
give you wrong ANSWERS.(becuase you cannot get all the recurring parts in)
1) COST CLASSIFICATION
I) Costs are classified as
(1) FUNCTIONAL COSTS: OR
Used mainly for EXTERNAL REPORTING , costs classified as per function , into eg: departments etc. ,like
‘manufacturing’ or ‘administration’.
(2) BEHAVIOURAL COSTS:
Used for INTERNAl REPORTING/ DECISION MAKING like to evaluate a product division.Behavioural costs refers to
the way costs change in relation to changes in the volume of activity. : Eg fixed or variable costs. So if
mngmnt want to close a division, they will want to know which detailed costs will be eliminated, and which
partially eliminated etc.
FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR

OF
i) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units
sold ?reduce price to sell more?,or units produced ,guests booked etc)
VARIABLE COSTS :
Vary directly or very nearly directly proportionaly to incr./decr. in activity/VOLUME(EG:OF PRODUCTION).See
chart below : total variable costs are linear/direct and Unit var. cost is constant.
VARIABLECOSTS: (a)TOTAL Variable Costs:(b)Per Unit (cost =R10 per

unit)
TOTAL Variable
UNIT Variable
5000 5000
4000 4000 40
Cost
3000 3000 30
Cost
2000 2000 20
1000 1000 10 10 10 10 10 10 10
0 0 0
0 100 200 300 400 500 0 100 200 300 400 500
ActivityLevel ActivityLevel (unitsofoutput)
FIXED PRODUCTION COSTS :( OR ‘LONG TERM VARIABLE COSTS’)

Basicly stay constant regardless of VOLUME OF PRODUCTION –OVER a specific period of time- (before inflation
pushes up input prices etc),therefore also called ‘long term variable costs’ because over the long term ALL costs
are seen a variable-due to inflation etc. eg:rent, municipal rates
REM: watch for over how many units your fixed costs are written off- to be sure any units after that are costed
excluding fixed costs – for quotations etc .Also watch when they are re-activated eg new periods rent etc. for
further costing.
FIXED COSTS:(b) unit (supposed
FIXEDCOSTS:(a) Total hyperbolic!)
Total Fixed Costs
Unit Fixed Cost
50 1000
500
0
0 2 4 6
0 Activity Level : Output -no of units produced
0 100 200 300 400 500
ActivityLevel (no.ofunits)
SEMI-FIXED (OR STEP-FIXED COSTS) :

They are costs that are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a
specific time period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the
next level etc.– usually in steps-
STEP FIXEDCOSTS
Total Fixed Costs
300
250
200
150
100
50
0
0 100 200 300 400 500
ActivityLevel
MIXED COSTS (OFTED REFERRED TO AS SEMI-VARIABLE COSTS ,BUT WE

CALL IT MIXED)
These include both a FIXED and a VARIABLE component eg: maintenance = fixed cost for permanent labour? + a
variable cost according to amount of activity(spares used) ; or sales rep. costs =salary + commission per amount
of sales. Eg rent= rent +10%gross revenue
MOST INDIRECT COSTS (incl labour costs) exhibit mixed costs characteristics.
600
500
400
+ VAR IAB LE
300
FIXED
200
100
0
0 200 400 600
SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA

VERSA TRUE)
COSTS that increase with production,BUT NOT ON A PROPORTIONATE BASIS.
Classified into:
(a) costs that increase at an INCREASING RATE
(b) costs that increase at a DECREASING RATE. (often called LEARNING CURVE COSTS)
Coststhat increase at an Costs that increase at a
INCREASINGRATE DECREASING RATE (also sometimes
just called 'LEARNING CURVE COSTS')
600
500
400
Variable Costs
400
300
VARIABLE VARIABLE
COSTS 200
200 COSTS
100 0
0 0 200 400 600
0 200 400 600
Activity Level. ActivityLevel.
HOW TO SEPARATE THE FIXED AND VARIABLE PART OF MIXED COSTS :

NORMAL METHOD.
1) . WARNING !: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed
cost for any calculations with this method- OR you will definitely get wrong answers!!!!
2) METHOD: You just work out the increase between any 2 levels of production (in a single RELEVANT RANGE)
of by how much the costs increased for each /per single unit per any number of production units increase.This
is the VARIABLE COST COMPONENT – because the fixed costs component does not change at all, so only the
var. costs will have changed for any increase in units produced etc(marginal increase).-! REM: specify 'only per
relevant range' in your answer.
a) After you have the variable component you can now find the fixed component.REMEMBER; fixed costs can
NEVER BE COMPARED ON A PER UNIT BASIS. WARNING !: You ONLY EVER calculate the TOTAL FIXED
COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high low method-
OR you will definitely get wrong answers!!!!
b) Then, to get the fixed costs after this , the fixed cost component is calculated by taking any 1 single level
of production eg : at 60000 units in below example, and subtracting the (no. units X variable cost) from the
total cost for the period for that item eg for direct materials.so you end up subtracting the total variable
cost from the total total cost and get the total fixed cost!
3) Allways do the breakdown of costs to calc. variable costs in the standard format as shown in first table below.
REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to
give you wrong ANSWERS.(because you cannot get all the recurring parts in)
4) Note: below ,remember that the fixed costs REMAIN THE SAME, so they are all there anyway in the figures
below.Only the variable costs can change AT ALL EVER, the fixed costs just stay, no matter what the units
produced is.So any marginal can only be ‘variable costs’.That is the logic.
5) Example: You are given following cost budget at 2 levels of activity:Required: determine fixed & variable levels
of activity.
COST BUDGET
MARGINAL VARIABLE Per Unit Costs
(Differential Units =A-minus-B) (Tot. Price/Tot.Units=
change per unit)

UNITS produced: 60000 80000 80000-60000= 20000 .
R R R R R
Direct Materials 600000 800000 =(800000-600000)=200000 200000/20000=R10 per
unit
Labour 400000 500000 =500000-400000=100000 100000/20000=R5 per unit
Production Overheads 380000 440000 =440000-380000=60000 60000/20000= R3 per unit
Rent 120000 120000 0 0/0=0 per unit
Power 200000 260000 =60000 60000/ 20000=R3 per unit
ANSWER Cont. TO SHOW THE FIXED COSTS AS WELL you basicly now do a Full analysis of costs
worksheet for CVP
Units Unit Total Cost LESS Per Unit Fixed Costs
Variable variable costs at that
Cost(from level(use any level-say
above) 60000)
Remember: FIXED costs
cannot be worked out for a
PER UNIT basis–only as a
“total value” per relevant
range
Direct Materials R10 600000 –(60000*10)= 0
Labour R5 100000
400000 –(60000 * 5)
Production Overheads R3 380000 –(60000 * 3) 200000
Rent R0 120000-(60000 *0) 60000
Power R3 200000-(60000 *3) 20000
HIGH-LOW ANALYSIS -METHOD :IDENTIFICATION OF FIXED & VARIABLE

COMPONENTS.
WARNING !: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed
cost for any calculations with the high low method- OR you will definitely get wrong answers!!!!
1) This is a very simple method, and not very accurate because only 2 values are used, not all the values like
some other mathematical methods.Very commonly well known method.Managers sometimes use very simple
methods to estimate cost functions-
2) The high / low method is used where MULTIPLE cost differences are given for MULTIPLE LEVELS OF
PRODUCTION eg: values at 100,300,500,700 etc etc -not where just 2 levels are given eg:at 30 units and 100
units, as in previous Standard Method & example.
3) – METHOD: Simply Take the HIGHEST and LOWEST values of the COST DRIVER (some books use costs
instead)(eg:a cost driver is = total.units -NOT total.cost- ) and use these as the 2 different values , then carry
on as in Normal Standard method above.–ie subtract low from high and carry on as in Normal Standard
method above.
4) Note ‘units produced’ or any other cost driver could also be used as the COST DRIVER in a high-low method ,
to calculate any similar type of exercise , it does not have to be ‘units produced’.
5) Cost function is y=a+bX ,so differential costs/(diff.cost driver ???? whats this)= slope=b.,any of high or low can
be used to compute constant from here ('because both equations are linear with 2 unknowns-slope+constant-as per book' !). So
fixed is =a ,and X = cost driver eg machine hours or units produced.
6) PROBLEMS WITH HIGH/LOW METHOD.:
a) Highest & Lowest values may not be representative of entire population.
b) The 2 values may be outliers(extremes – not part of average).
c) Ignores all other values (not like regression analysis,which dos'nt)
7) Only works in relevant range(eg: minimum wage for performance based pay for production causes a 'range')
THIS method only works in IN RELEVANT RANGE – not out of rel. range .eg:idle plant. One CANNOT use a value
that came from an idle plant where it is exceptionally low , because this will not be an accurate value to base
a calculation on-_ie there was no real production taking place.So it would be wise in real life to also check the
line on the graph of the plotted values of all values given to choose from, and look for outliers or stepped fixed
costs or relevant ranges before using high-low method NOTE: sometimes another 2 values are chosen which
are more representative if managment suspects outliers/non-representative BUT for exam , unless specifically
mentioned, just use the highest and lowest values.
THE LEARNING CURVE:

1) This is a method to calc. how much faster it gets to produce units as workers get more experienced.It is only
quoted as a percentage % -all else works from or around this %.Time decreases exponentially and learning
continues at same rate till conditions change or a steady state is reached.
1-CUMULATIVE AVERAGE TIME-LEARNING MODEL.
1) The whole formula works in a funny way- the % quoted as the learning curve ONLY applies to the
time it takes to DOUBLE the production from one level to another.(stats type maths funny thing).IF
you multiply this % by a time taken for the first unit ever made – it gives you :NOTE FUNNY THING:
the average of 1st unit +2nd +3rd +4th / 4 =average time per unit.(and that includes the extra in 1st +
little less extra in 2nd ...to end.SO IT DOES NOT GIVE YOU THE EXACT TIME TO PRODUCE THE VERY
LAST UNIT – YOU MUST MULTIPLY THIS ANSWER BY THE nth value of unit-eg: No.16th unit so
multiply answer from (% X learning curve) by 16 and then if you could do the same for unit no
15,which is difficult because it only works in “doubles”, then If you could subtract final figure for 15th
from 16th- you now get the exact time how long unit 16 actually took(true MARGINAL time).The first
figure from the learning curve % is thus just an average of TOTAL TIME TO NOW / final unit you land
on eg :16th etc. ALSO :To get in-between % of say 3 units- between 2 & 4 –you must??? (1) Make
a Graph –read off. (2) try use algebra mathematical model instead
2) BATCHES: because factory production is mostly in batches,if you get ANY QUESTIONS QUOTED IN
BATCHES of eg:100 units –DO NOT CONVERT TO SINGLE UNITS – all answers get done per
batches(as if each batch is a single product) and learn.curve %'s only apply to each full batch.
Example : using 80% learning curve : 40hrs to make first unit

½ way MARGINAL
times
Units Learning Productio Cumulativ Average Total Total Average Note : this
Produce Curve % n :for last e Time (per Time (all Time (last Unit marginal is
d half of Production unit) units) ½ of total Time(pe cockeyed – it
total units . units r each is only for
made made) of last the last ½ of
half of units made ,
total an average
units for them
made) only
1 100% 1 1 40 40 40 40
2 80% 1 2 80%*40=32 32 64-40=24 24
(Or 40*80%) X2=64(note)
3
4 64%(80*80) 2 4 32*80=25.6 25.6*4=102.4 102.4- 19.2 38.4/2=19.2
(Or 40*64%) 64=38.4
5
6
7
8 51.2%(64*8 4 8 25.6*80%=20. 20.48*8=163. 163.84- 15.4 61.44/4=15.
0) 48 84 102.4=61.4 4
(Or 4
40*51.2%)
16 40.96% 8 16 20.48*80%= 262.14 98.3 12.3 98.3/8=12.3
(51.2*80 %)
16.384
(Or40*40.96
%)
Previous AverageTime
Previous Current
Average X .X multiply
column Total Time
80% Cumulative
divided –minus
(Or new Production
by Previous
learning Number KNOWN
curve * hours of units Total Time
for 1st one in this
ever made) last half
of TOTAL
units
made.
3) MATHEMATICAL ALGEBRA FORMULA FOR LEARNING CURVE:(use esp.to work out between
doubles ie: 3,5,6 etc.)
b
I) y=ax
II) y= cumulative average time /unit when x units are produced (ie: it gives you avg. time per unit
as an answer,same as the answer you get when you multiply {learning curve % by hours taken
sort of thing})
III) a=time to produce first unit
IV) x= cumulative number of units produced (eg:d if you want to know avg. time ea. For for 15
units, then x=15)
V) measure or learning (where b = log % / log 2 )rem: on calculator 80% =0.8 NOTE )
a)
VI) NOTE: to get b – you do it on calculator : b= log (learning%as decimal) / div by / log (2)
VII) Use this formula esp. to work out between doubles ie: for number 3,5,6 etc.)
VIII) You can use it to make a % TABLE for units 1-200 etc where each no.of units has a simple %
next to it to use.
B-INCREMENTAL UNIT-TIME LEARNING MODEL:

1) THIS method works exactly the same as the other model, incl. the formula exactly ,exept that the
final figure one gets for the answer eg: 30,5 hours for 4 units , IS NOT THE AVERAGE TIME per unit ,
but the marginal time for only the last one .If you want to calc. the average time from this, to
compare to other method – you must add all the cumulative values to here- from unit 1 upwards-
then divide by the no. of units of course.
2) TO CHOOSE BETWEEN 2 MODELS : Each industry different – so best to study workflow and make
graphs – then compare answers between 2 models to find the one that fits best to that
industry.This model will only differ in some weird exponential / type way from first.
C-USE OF MODELS.
These models can can also be used to measure quality betterment instead of production increment.Other factors ,
other than time that the workers have been learning the job , also contribute to quality eg:job rotation & divide
workers into teams.
4 CHAPTER :COST –VOLUME PROFIT

ANALYSIS ch. 7 in vigario book
1.ECONOMIST VS ACCOUNTANTS VIEW

1) The economists view is different from the accountants view for following reasons:
a) Economists view whole range of activity 0- end Accountants view only relevant range where costs
behave in a linear relationship.
b) Economists assume info.on price, cost, volume is available all levels activity , Accountants assume limited
availability of this info , and linearity over relevant range.
c) Economists view is EXPOSITIONAL , Accountants view is PRACTICAL.
ECONOMISTS VS ACCOUNTANTS COST-VOLUME-PROFIT GRAPH. :

ECONOMISTS GRAPH:
a) TOTAL REVENUE LINE IS CURVILINEAR : Firm cannot increase sales by holding selling price constant- thus
total revenue will be max where slope is zero(starts to fall as sales volume increase) or marginal revenue
from n'th sale = zero.
b) INCREASING AND DECREASING RETURNS TO SCALE :Costs at start (A-B) increase direct linear (normal
increase) then (B-C) as bulk buy discounts & division of labour kicks in , costs level out (decrease ) then (C-
end) costs increase sharply again due to bottlenecks & production beyond normal capacity.
c) Note : there are 2 break –even points for econ. View. ,profit max where distance between cost/revenue
lines is greatest.
ACCOUNTANTS GRAPH.
i) CONSTANT FIXED COST LINE :Assumption that costs are constant in relevant range only
ii) CONSTANT VARIABLE COST & SELLING PRICE /UNIT: these 2 are also constant in relevant range –
because range is small.(sales increase from promotion etc)\
iii) This is representative of a VARIABLE COSTING SYSTEM method.
C.V.P. ANALYSIS. (COST-VOLUME-PROFIT.)

ASSUMPTIONS OF CVP ANALYSIS:
i) All other variables remain constant (when you calc. change from another variable)
ii) Profits calc. on the variable/direct costing basis.
iii) Assumes a short term (normally 1 year) planning period – ie inflation/ market changes are not worked
in.
iv) A single product or constant sales mix exists.
BREAK-EVEN ANALYSIS:
The number of units that must be sold to break even = Fixed Costs / Contribution.
TARGET PROFIT:
If a company requires a certain profit during a period- we must determine whether it is fixed or varies with each
unit sold.If profit required is fixed we treat it in same way as fixed cost – if variable we treat it in same way as a
variable cost.
CONTRIBUTION :
production.(DOES NOT include FIXED COSTS, ONLY PRICE – VARIABLE COSTS = contribution, then after
that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not
profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total
profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does,
so once all fixed costs have been paid by current production volume, any increase in production volume above
this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART
OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION
goes toward profit.
Change in Variable Costs

Divided by Change in SALES VOLUME
= CONTRIBUTION per unit
OR Total Sales revenue

less Variable Costs
= CONTRIBUTION
- Fixed Costs
= PROFIT
MARGIN OF SAFETY:
a) Difference between :
Budgeted Sales Volume MINUS Break-Even Sales Volume.
b) Sometimes Expressed as % of Budgeteted Volume or Budgeted Revenue.
KEY RATIOS FOR CVP

(PV RATIO) PROFIT VOLUME RATIO: ( OR ALSO CALLED ‘CONTRIBUTION
MARGIN %’ )
= Contribution / Sales. =0.abxy or ( * 100/1= ab.xy %) TO 4 decimal places OR to 2 decimal places for
%
PROFIT RATIO
=Profit / Sales =0.abcd or ( * 100/1= ab.cd %) TO 4 decimal places OR to 2 decimal places for %
(B/E SALES) BREAK-EVEN SALES REVENUE:( NOT A RATIO)

=Fixed Expenses / PV Ratio = Rands ,2 decimal cents.
REM: FIXED expenses is NEVER just the totals that do not change –you must FIRST CHECK
EVERY TOTAL eg: labour-MATERIALS-OVERHEADS ETC FOR THE FIXED PART AND VAR. PART
BEFORE you calc. the total fixed costs.
BREAK-EVEN SALES VOLUME:( NOT A RATIO)

=Fixed Expenses / Contribution per unit. = units (round- off unwards only –ie: per unit)
MARGIN OF SAFETY RATIO

Sales - (B\E Sales revenue) / Sales = =0.abcd or ( * 100/1= ab.cd %) TO 4 decimal places OR to 2
decimal places for % {sales means budget sales revenue. –but could also be actual... depends on needs)
OTHER TYPES:
1.1. contribution ratio = marginal contribution/marginal sales
1.2. variable cost ratio = marginal variable costs / marginal sales
ABBREVIATIONS FOR RATIO’S ETC:

(1) FC -fixed costs
(2) VC -variable costs
(3) SP -selling price
(4) OP - operating profit????
(5) UCM -unit contribution margin IE: contribution per unit
(6) UVC -unit variable costs :the variable costs per unit.
(7) USP -unit selling price : the selling price per unit
ANALYSIS OF COST STRUCTURE USING CVP PRINCIPLES : (OF A COMPANY)
2. If sales ‘NUMBER OF UNITS’ not given –do the same ‘analysis spreadsheet’ but calculate ratios TO FIND
ANSWERS instead of using the per unit cost to calculate them:
2.1. ie: contribution ratio = marginal contribution/marginal sales
2.2. variable cost ratio = marginal variable costs / marginal sales
2.3. Use the var cost ratio to find fixed & var. costs from sales – then you can firn break-even sales volume etc
etc from here.
2.4. Use the contribution & var. cost ratios to also find increase in sales effect on contribution etc etc. IF NO
UNITS OF PRODUCTION ARE GIVEN
ii) REM: if selling price goes up by 10% -you cannot just * profit by 10% to get new answer- because fixed
cost : var. cost ratio will stuff it up.You must first * ‘contribution’ by 10% then subtrACT fixed costs to
get new profit.
METHOD: FORMAT OF SPREADSHEET FOR: FULL YEAR FINAL ANALYSIS

VIGGARIO PAGE 247
i. Simply divide costs up into a spreadsheet of 4 columns with totals at bottom(see where
to write names):
a. Names/itemised
b. all Variable costs PER UNIT/ea – Not Totals
c. All Fixed costs PER TOTALS – Not per Unit/ea.
d. Total column Per Item (multiply Variable cost column * Number sold
Then add Fixed Costs)
Name Variable per Variable Fixed Total (R) Initial (TO ILLUSTRATE
Unit Cost Totals figures from ONLY)
budget.
Units 100000 units (TO ILLUSTRATE
ONLY
(Put R here to split Note format!!! Format!R R R Note FORMAT:(TO ILLUSTRATE
lines) ONLY
R
Sales 58(see 5800000 5800000 (to illustrate) (TO ILLUSTRATE
calc.below) ONLY
Mnftr Costs: (to illustrate) (TO ILLUSTRATE
ONLY
Direct (20) 2000000 2000000 2000000 Only var
materials
Labour Costs (8) 800000 200000 1000000 1000000 80% variable
Overhead (2) 200000 300000 500000 500000 40% variable
Costs
Non-Mnft
Costs
Rent 400000 400000 400000 fixed
Accounting 200000 200000 200000 Fixed
Marketing (1.2) 120000 180000 300000 300000 40% var
Salaries 500000 500000 500000 Fixed
Other Costs (0.2) 20000 80000 100000 100000 40% var.with
prod.units.
(to illustrate)
CONTRIBUTIO 26.6(=sales-all 2660000 (to illustrate) (TO ILLUSTRATE
N costs) ONLY
FIXED COSTS NOTE ABOVE 1860000 (to illustrate) (TO ILLUSTRATE
ONLY
PROFIT 800000 (to illustrate) (TO ILLUSTRATE
ONLY
II )METHOD: fORMAT OF SPREADSHEET FOR: Pre-Calculations of Variable & Fixed Costs from multiple years
figures.
Name Variable per Variable Cost Fixed Total (R) Initial (TO ILLUSTRATE
Unit Totals figures from ONLY)
budget.
Units 100000 units (TO ILLUSTRATE
ONLY
Note format!!! Format!R R R Note FORMAT:(TO ILLUSTRATE
R ONLY
Sales 58(see 5800000 5800000 (to illustrate) (TO ILLUSTRATE
calc.below) ONLY
Mnftr Costs: (to illustrate) (TO ILLUSTRATE
ONLY
Direct (20) 2000000 2000000 2000000 Only var
materials
Labour Costs (8) 800000 200000 1000000 1000000 80% variable

Overhead (2) 200000 300000 500000 500000 40% variable
Costs
Non-Mnft
Costs
Rent 400000 400000 400000 fixed
Accounting 200000 200000 200000 Fixed
Marketing (1.2) 120000 180000 300000 300000 40% var
Salaries 500000 500000 500000 Fixed
Other Costs (0.2) 20000 80000 100000 100000 40% var.with
prod.units.
(to illustrate)
CONTRIBUTI 26.6(=sales-all 2660000 (to illustrate) (TO ILLUSTRATE
ON costs) ONLY
FIXED COSTS NOTE ABOVE 1860000 (to illustrate) (TO ILLUSTRATE
ONLY
PROFIT 800000 (to illustrate) (TO ILLUSTRATE
ONLY
INCOME STATEMENT (OR BUDGET) SHOWING CONTRIBUTION

SEPARATELY.
INCOME STATEMENT OF XYZ FOR PERIOD 123 R
Sales(Revenue) 5800000
0
Variable Costs: Total
Var.
Direct materials Xxx
Labour costs Xxx
Overhead costs Xxx
Marketing –variable costs Xxx
Other –variable costs Xxx
Contribution: = (sales – variable 266000
costs) 0
Fixed Costs: Total
Fixed
Marketing- non-variable costs xxx
Other costs – non-variable costs xxx
Rent xxx
Accounting xxx
Etc xxx
Profit/Loss =(contribution – fixed 800000
costs)
COST –VOLUME –PROFIT CHART/DIAGRAM.

1) Simply draw a diagram as shown below detailing all totals shown with arrows/labels /units /zero/x&y axis etc all
marked.The prices/units are a bit difficult to get precise on graph-think carefully.
Cost-Volume Profit diagram
4055 Sales Revenue

Rands
Profit/Contribution
(Fixed +Variable) Costs
Fixed Costs
0
0 69925
Units
|____________|
Margin Of Safety.
LABELS:
i) "Margin of safety" (break-even point to selling price- write below the x-axis)
ii) "Variable costs" : arrow from fixed costs line up to var.costs line –labeled.
iii) "Fixed costs" : arrow from fixed costs line down to x –axis-labelled.
iv) "Revenue/sales"
v) "Total costs( fixed + variable costs)"
vi) "Break-even point"
vii) "Increase in profit /contribution"-arrow showing along Profit&Contribution Line +++ from break-even
point.
viii) "DECREASE in profit /contribution"-arrow showing back Profit&Contribution Line ---- from break-
even point.
INCOME STATEMENT SHOWING MANUFACTURING COSTS SEPARATELY

(OR ALSO CALLED INCOME &EXPENDITURE STATEMENT SHOWING...)
1.1.1. Normal inc.Stat just you can show "Manufacturing Costs" under "Cost of sales" breakdown as a
heading and Manufacturing Profit as Gross profit instead.The rest can go under NON-Manufacturing
costs and Profit/Loss at the bottom.
INCOME STATEMENT OF XYZ FOR R
PERIOD 123
Sales(Revenue) 5800000
0
Cost of Sales Xxx
Manufacturing Costs Blank
Labour costs Xxx
Overhead costs Xxx
Direct Material Xxx
Other –costs Xxx
Less : Closing Inventory Xxx
Manufacturing profit Xxx
Non-Manufacturing Costs blank
Marketing- xxx
Other costs xxx
Rent xxx
Profit/Loss 800000
(3)
1+2 CHAPTER :ABSORBTION COSTING :

SYSTEMS FOR RECORDING AND CONTROLLING COSTS
:vigario ch-1+2
TO REMEMBER FOR EXAM/ TRICKY STUFF
(1) For overhead recovery, remember for apportioning from service depts. to production depts., if you
leave out the service % for some calc. , then it is production / all production%`s, NOT 100%, but like
eg: 90% or 95%.EXEPT FOR reciprocal method, where you don’t do this , after the algebra equation
you use 40/100 or 30 / 100 to apportion to production depts.,do no use product./all product. Depts.
eg 30/90 here- because somehow the other service % has already been used etc.!
FROM CH1 VIGARIO:THE MEANING OF

MANAGEMENT ACCOUNTING.
FINANCIAL ACCOUNTING.
OBJECTIVE OF FINANCIAL ACCOUNTING:
THE OBJECTIVE OF FINANCIAL ACCOUNTING is to provide information that external users can use to make
decisions about their investment and analyse how company is performing.
Financial accountants produce Financial statements useful to Fin Analysts.These are produced in accordance with
a system known as absorbtion costing , which means all production costs incl. value of work in progress,finished
goods,and product and period costs(eg rent) are incorporatred in closing stock valuation.
It is important to note that Absorbtion Costing exists for the sole benefit of the Financial accountant, Management
does NOT concern itself with absorbtion costing.
Using a pre-determined overhead recovery rate will result in either an under-recovery or over-recovery of
overheads.
FINANCIAL ACCOUNTING SYSTEM
ABSORBTION COSTING
PRODUCT COSTING
1-ALLOCATE COSTS TO PRODUCTION AND

SERVICE DEPARTMENTS
PRODUCT COSTING 2-ALLOCATE COSTS FROM SERVICE TO
PRODUCTION DEPARTMENTS
DUCTION AND SERVICE DEPTS.
4-CALCULATE AN OVERHEAD RECOVERY

3-SELECT AN ACTIVITY BASE
RATE
MANAGEMENT ACCOUNTING
Management Accountants require Info. that will assist them in decision making and performance evaluation
activities.The shift in emphasis from cost accumulation for financial accounting needs to 'relevant information" for
better profitability reasons has led to emergance of mngmnt acc. as adiscipline.Cost acc.refers to ext.fin acc.
purposes , while mngmnt acc. refers to internal decision making purposes.
MANAGEMENT Acc. measures profits in terms of Contributions, sets budgets, and analyses performance of a
company by comparing the budgeted to the actual results.
Managerial accounting is a very simple discipline used by companies to maximise profit. It requires the analysis of
costs into two simple categories, namely variable and fixed.
The managerial accountant is predominantly involved with setting budgets and evaluating the
company or product performance once the actual results are available.The performance analysis
requires a reconcilliation of budget profit to actual profit ,using the variable costing system.
MMANAGEMENT ACCOUNTING SYSTEM
VARIABLE COSTING
PERFORMANCE ANALYSIS
1-RELEVANT COSTING
2-CONTRIBUTION
3-CVP COST VOLUME PROFIT
A-LIMITING FACTORS B-PROBABILITY ESTIMATES C-COST ESTIMATES
MANAGEMENT ACCOUNTING IS:
RELEVANT COSTING
Contribution
STANDARD Budgets COST
VARIABLE COSTING Performance VOLUME PROFIT
VARIABLE COSTING
VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING)
USING ABSORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE
The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as
period costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the
period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed
costs.The System is representative of managerial accounting for decision making.
Variable costing enables mngmnt to make decisions based on congruent with company objectives of "profit
maximisation".
Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)
FOR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK – 1-BUDGET OR 2-ACTUAL.
1. FROM CH 2 VIG. SYSTEMS FOR

RECORDING AND CONTROLLING
PRODUCT COSTS. :
• Basic difference between short term & long term decision making.
• The 2 components of the over/under recovery rate.
• Pre-determined overhead rates
NOTE: Absorbtion costing is sometimes called traditional or standard costing.
REM: USE 4 DECIMAL PLACES FOR HOURLY LABOUR/MACHINE RATES FOR

PRODUCTS.
DEFINITION: ABSORBTION COSTING :
USING ABSORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE
Method used to VALUE CLOSING STOCK that includes ALL MANUFACTURING COSTS-VARIABLE AND FIXED-NOT
any NON-MNFTRING COSTS AT ALL!!!!!! ((WHICH DOES/can INCL. RENT AND MAINTENANCE per book)–
The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring
costs(eg direct material) to get the total per unit product cost for inventory valuation per the IAS definition
( which says ALL MNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg:
Maintenance etc.) .ONLY Financial Accounting uses it. NOTE: every time production volume changes ,the
cost per unit will change because fixed costs get divided by a larger /or smaller number now.So it is an
inconvenient method requiring constant raising of under/over recovery charges to balance the figures.The 2
reasons for this is:
1-Actual volume is different to budget volume.
2-Actual manufacturing overhead being different to budget overhead.
That is why Management Accounting uses a different method –: called "Variable Costing".
FOR ABSORBTION COSTING THERE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2-

ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing there is also budget
& actual , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed in the stock
valuation(per book vigario pg14-concl.
ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE
INFORMATION IN THE FINANCIAL STATEMENTS.
1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST)
2- 3-ACTUAL COST ABSORBTION COSTING. (all exactly per vig. Pg 14 book!)
IS ABSORBTION COSTING ACCEPTABLE:?
NO, because it will distort true company profits due to showing fixed costs as closing inventory
costs –you cannot compare 2 periods properly,or budget properly if you use include rent at a
pre-determined rate eg R300 per product it will not be accurate if production rises or falls.- it
will eg show excessive profits when stock holding is rising ? per book vig pg14.
HOW DO YOU MAKE IT ACCEPTABLE:
You explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT
included in the costing eg R500 –at any level above or below the no. of units that the budget was
calculated at.
However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote on
future jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixed
costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some
allocate all overheads, some only admin + management , some only maintenance and depreciation etc.
DEFINITION :COST ABSORBTION RATE :

the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg:
machine hours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing
system.
DEFINITION :FULLY INTEGRATED ABSORBTION COSTING SYSTEM
If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in
the previous years as a per unit cost, from per average normal production levels,so eg R1000 rent /
500products made per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg
direct material, to get a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be
allocated as such ONLY mnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other
fixed costs eg admin and computer,marketing costs(more 'sales costs' types get left out)can be left out and
the system would still be called Fully Integrated absorbtion Costing) ONLY where the fixed cost element is pre-
determined though and not based on actual fixed costs ,which is another type of absorbtion costing.The actual
amount will differ from the allocated amount though and OVER or UNDER recovery of fixed overhead will
occour, which must be balanced by a BALANCING AMOUNT known as the over/under –recovered fixed
overhead.This amount is included by 'raising a charge' (possibly it's very own ledger account-CRJ/CPjournal)
and including it in the Cost of sales breakdown in Income statement for Gross Profit calc.
Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the cost
of a product.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to
allocate to FUTURE production.Very few companies will allocate costs to production and service depts. ,
followed by re-allocation from service depts. to production depts. However , when using absorbtion costing,
one must remember that one comapny allocates fixed costs differently to another one,and there is no right or
wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management ,
some only maintenance and depreciation etc.
IAS 2 ON INVENTORIES STATES THE FOLLOWING.:
IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that :Firstly, closing stock – work completed
but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net
realisable value. AND : Inventories are valued at : all costs incurred in bringing to current state – ONLY
manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the
units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads
that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of
production that remain relatively constant regardless of the volume of production, such as depreciation
,maintenance of factory buildings and equipment,and the cost of factory management and administration.
However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or
periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If
idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in
periods of abnormally high production, the amount of fixed averheads allocated to each product unit
is decreased so inventories are not valued at below cost.
Variable Production overheads are those indirect costs of production that vary directly,or nearly directly,with the
volume of production,such as indirect materials and indirect labour.
As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average
basis.LIFO is strictly prohibited.
Cost accounting grew out of the need that financial accountants have for financial information ,and gathers and
analyses costs for the purposes of :product costing,job costing,stock valuation.
METHOD TO DO ABSORBTION COSTING.

INTRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS:
1.1. Called the TRADITIONAL or STANDARD METHOD OF absorbtion costing.
1.2. Remember full integrated absorbtion costing is mostly used in Job costing environment, not every
company will want to estimate the FIXED COSTS to apportion to each product.
1.3. NOTE :(copied vertabim from book)The allocation of mnftring overheads to products in order to determine
a full product cost for decision making purposes will allways give incorrect product costs , as the
overheads are usually allocated on a labour or machine hour basis.It has been argued that the activity
based costing system (ABC) -which identifies more than one activity base- is amore accurate cost
allocation method.ABC tends to allocate a more proportionate value of overheads to products that are
manufatured in short runs and use up a higher proportion of overhead costs than it allocates to long
production run products.
1.4. Method , for fully integrated absorbtion, to allocate service costs to production depts is to use a basis that
most closely reflects the usage of the service cost by the specific production dept. The most common
activity in the production dept. is used, depending on if it is MORE MACHINE or LABOUR intensive. TYPES
of Basis to allocate by:
1.4.1. Labour hours
1.4.2. Machine hours
1.4.3. Any Other
COST ALLOCATION PROCEDURE

Note clever analysis by Viggio author : there is no such thing as cost per unit or profit per unit for a product.Both
cost and profit change every time production quantities change.
To answer question – is it important for a company o determine cost for each product produced- ONE MUST FIRST
ASK QUESTION: for what purpose do you need to know the cost : if answer is to value closing stock – then answer
to question is yes , and we must use absorbtion costing (fin acc.)
If answer is to determine selling price , then answer to quest. Is NO, not important, because selling price is
determined by demand.
If answer is to determine PROFITABILITY of product – Note- then answer is yes but we must use variable costing to
determine Contribution etc.
STEP 1:
Allocate relevant production overheads to the Production AND Service departments.
Identify all OVERHEADS of company and allocate them to these depts on an appropriate basis as follows:
1.4.4. DEPRECIATION : Asset Values in each Department.

1.4.5. INSURANCE : Asset Values in each Department.
1.4.6. RENT : Area occupied.
1.4.7. WATER & ELECTRICITY : Area occupied.
1.4.8. SALARIES : Staff in each Dept.
1.4.9. EMPLOYEE COSTS :Number of Employees.
STEP 2:
Reallocate Service Depts. costs to the Production depts.
Service depts. such as maintenance ,exist to support the manufacturing departments , therefore we need
to find an appropriate BASIS to allocate the costs according to % of usage by the production departments,
Some appropriate methods are:
1-DIRECT COST ALLOCATION METHOD.

Service dept costs are allocated directly to producing depts. No service dept costs are allocated
to other service depts, even though they may perform work for the other service depts.
2-STEP COST ALLOCATION METHOD

This tequnique does account for inter-service dept. cost allocation.
The method used here is to allocate the cost for the service dept. which services the greatest
no. of other service depts. first. Or if you get a situation where some service depts. service each
other,as in example here, then first to be allocated is the one with highest cost.REMENMBER :
each time you apportion a dept out, you leave out it’s % in the next apportion calc.So after
serice dept 1 – it is xx/95 after service dept 2 it is xx/ 80 after service dept 3 it is xx / 75 etc
etc, always leave out last ones % in the denominator of next one!7
3-RECIPROCAL COST ALLOCATION METHOD.(linear algebra) WE MUST ONLY USE THIS METHOD.
This method takes into account inter-service dept. work.It works by apportioning the costs
backwards and forwards between depts. until all costs have been allocated.
THIS IS THE METHOD LECTURER SAYS WE ARE SUPPOSED TO USE – NOT THE OTHERS.
Remember : for this method, FOR reciprocal method , after the algebra equation/ apportioning
you use 40/100 or 30 / 100 to apportion to production depts.,do no use [product % / all product.
Depts . %] eg 30/90 here , like for a direct method or step allocation method last step.The reason
why we do this is because somehow the other service % has already been used in the algebra
type thing (maths reason).!
STEP 3:
ALLOCATE COSTS TO EACH OF THE VARIOUS PRODUCTS ,using one of the rates types given below,
from the production depts. to the products themselves.
Identify the activity most common to a specific production dept. and use that activity to determine the
cost recovery rate. Ie : based on the pre-dominant activity of the production depts. , allocate costs to
EACH OF THE VARIOUS PRODUCTS.
The 4 common bases for allocating the overhead production are: (it is mostly time related in
practice)
1.4.10. Direct labour hours
1.4.11. Machine hours
1.4.12. Direct labour cost
1.4.13. Material cost.
OVERHEAD AND MANUFACTURING ACCOUNTS IN LEDGER:
i) SEE PAGE 44 VIGGIO
ii) Overheads acc. uses dr actual and cr budget overheads
iii) Mnftring acc uses (dr budget overheads contra overheads acc.) see pg 44 vig
OVERHEAD RECOVERY RATES:

PURPOSES OF ALLOCATING MNFTRING OVERHEAD TO A PRODUCT.
i) To arrive at the value of closing stock, when an absorbtion costing system is used.
PRE-DETERMINED OVERHEAD RATES.
1) Remember when you calculate the 'budget costs' and 'actual costs ' for the income statement, to calc.
budget costs you use the budget rates X actual hours worked (not budget hours worked) to get budget cost.
2) Also rem : if they give you budget and actual :overheads and hours , for some period, then USE THE
BUDGETED FIGURES TO GET RATES, AND THEN MULTIPLY THESE RATES BY THE ACTUAL HOURS WORKED TO
GET THE PRE-DETERMINED OVERHEAD COSTS. Do not mix these two up in wrong manner!
3) To get a pre-determined recovery rate to do Quotes.- Esp. in Job Costing Systems eg Printing/Building etc. to
apportion Fixed costs : eg machine repairs, machine time,rental,machine depreciation,electricity etc.
4) Method :
a) Either we use the Overhead Recovery Rates we calculated in the previous Fin. Years and apply them to
Future Quotes.
b) Normaly do a BUDGET / Estimate of the Next Years overheads and Next years Labour hours/Machine
hours.Then calc. our Pre-determined recovery rate from that.
c) Or mix of the 2 methods.

5) Two reasons we will be WRONG in ESTIMATE:
a) The overhead charged will not equal charged overhead.
b) Machine/Labour hours will be different.
6) METHOD OF DOING OVERHEAD ACCOUNT AND OVER/UNDER RECOVERY INCOME STATEMENT.
a) Overhead account CONTRA WIP account. : All estimated/charged overheads to CR , Actual overheads
to DR , Balancing amount as Over/Under recovery to Income Statement.
i) REM: ???????just remember the over/under recover amount that goes to income statement or comes
from this account , WILL NOT INCLUDE ANY OVER/UNDER RECOVERY FOR CLOSING STOCK?????????
ii) NOTE : The total of all entries : NOT including/ BEFORE any balancing "c/d" figure on the CR –
estimated/charged : side is the figure that goes the income statement as part of Cost of Sales - then
after this the over/under recovery ( balancing or "c/d" amount from Overhead Account) is added or
subtracted from Gross Profit in the INCOME STATEMENT to get the "Actual Gross Profit" in the Inc. Stat
OR alternatively –one can add/ subtract the over/under recovery just below the "Estimated Fixed Cost
from Overhead account " –Before the Gross Profit is calculated- in the Income statement
iii) The OVER/UNDER RECOVERED amount is written off to the Income & Expenditure Account
from the Overhead account.
b) WIP (work in progress) account CONTRA Overhead acc.: All Estimated/charged is DR debited to WIP
account and CR credited to Overhead account.
c) Where thes 2 accounts come from or go to I do not know.
d) WHEN WE CHARGE the variable costs amount at the time of production we know what the actual costs
were, so there is never a under/over recovery for variable costs,only for fixed costs.So we do not send the
quoted/estimated/ charged amount for a particular jobs variable costs to the accounts, we send the actual
material etc. used.That is how the system works.So only the Estimated/Charged/Quoted Fixed costs are
sent to the accounts because we do not know what the actual yearly production or yearly fixed overhead is
going to be yet, and for Variable costs, we send the actual costs. WHY? Do not know yet.
e) ALSO SEE EXAMPLE UNDER JOB COSTING FURTHER A FEW PAGES AHEAD in these very notes.
TO INCOME STATEMENT:
7) CLOSING STOCK VALUATION WHEN USING THE OVER/UNDER RECOVERY SYSTEM.:
a) IAS 2 says that closing stock must be valued at the lower of COST and NET REALISABLE VALUE.One can
still make income statements with a normal calculated amount from Budget or Actual values and it will
comply with a "standard absorbtion costing system", but at the end of the year an adjustment would be
made to reflect the IAS 2 requirement.
b) The value of closing stock must be shown at actual cost for absorbtion costing and at budget cost for
standard absorbtion costing for materials and labour etc.
8) INCOME STATEMENT :
a) Remember when you calculate the 'budget costs' and 'actual costs ' for the income statement, to calc.
budget costs you use the budget rates X actual hours worked (not budget hours worked) to get budget
cost.
b) There are 2 ways to include the over/under recovery and Estimated Fixed Costs in the Income
Statement.
FIRST : calculate the The total of all entries : NOT including/ BEFORE any balancing "c/d" figure on the CR –
estimated/charged : side is the figure that goes to the Income Statement as part of Cost of Sales - then after
this the over/under recovery ( balancing or "c/d" amount from Overhead Account) also goes to Income Statement.
(1) The over/ under recovered amount is added or subtracted. from Gross Profit in next line AFTER you
calculate gross profit in the normal way using ESTIMATED FIXED COSTS –This is NAMED : "Actual
Gross Profit" in the Inc. Stat, then normal from there on(so 2 gross profits.
(2) OR alternatively –one can add/ subtract the over/under recovery just below the "Estimated Fixed
Cost from Overhead account " line. Before the Gross Profit is calculated- in the Income statement,
and from there as normal. (so you only have 1 'gross profit '.)
EXAMPLES : Example 1 on left is a Different exercise from Example 2 on right.

8) RECONCILLIATION of BUDGET to ACTUAL PROFIT.

a) When a STANDARD COSTING SYSTEM is used, the under/over recovery is shown as :
i) Volume Variance (difference between budget –actual)
ii) AND Expenditure Variance. (difference between budget –actual)
9) To CALCULATE A MACHINE HOUR RATE FOR EG: a bandsaw

a) Add YEARLY DEPRECIATION (remember to less scrap value etc) + RENT PER M2 + POWER USED + OTHER
OVERHEADS (excl. rent previously calculated) -- all divided by total hours per year -- = machine hour
rate.
b) DON'T include "Direct Bandsaw Labour" in this calculation.
JOB COSTING ACCOUNTING TREATMENT.

Job costing is essentially a bookkeeping exercise used by printers,panelbeaters ,furniture,auditing etc.
AS PER THIS EXAMPLE ONLY:
REM: NOTES TO REMEMBER

1) Remember to check for CLOSING STOCK if Sales is less than Manufacturing'
COST CLASSIFICATION FOR SHORT TERM /LONG TERM DECISIONS.

1. Done in 'relevant costs' chapter.
5 CHAPTER ABC (ACTIVITY BASED

COSTING) VIG CH 5
SPECIAL NOTES TO WATCH OUT FOR:
1.
ACTIVITY BASED COSTING: GENERAL.

1. ABC is just a more sophisticated type of absorption costing first articles written 1988 by Cooper & Kaplan.
1. ABC is a system of allocating PRODUCTION OVERHEADS to PRODUCTS manufactured in more equitable manner
than the TRADITIONAL METHOD of using a SINGLE ALLOCATION BASE such as labour hours.It is a more
sophisticated tecnique .
2. How does ABC use cost data for decision making purposes: ANSWER : ABC analyses the overhead costs into
cost pools and then allocates the costs to the products using cost drivers.
3. What if there is a production constraint? ANSWER: Because ABC Profit= selling price-variable costs-allocated
'cost driver' overheads. SO ABC would advocate maximisation of profit per limiting factor.
4. What is logical error of ABC :ANSWER ABC can and will give you the incorrect decision when the selling price is
determined by supply and demand,and cannot be derived from cost alone.The only time that ABC may give you
the correct answer for decision making is when a cost plus formula gives a selling price that is less than the
market is prepared to pay for the product.
5. The Correct Method To Adopt When Looking At Product Decision-Making Is
As Follows:
6. Reasons for current shift to ABC from TRADITIONAL
6.1. Abc recognise mnfrtring moved away from labour to capital intensive, thus shift from Direct Variable to
Indirect Fixed Costs.
6.2. Shift from single product to Multi product mnftr.-thus low volume require more set up
costs,inspection,packaging,ordering,selling etc. than high volume.
6.2.1. Cost –Plus basis = Traditional costing ,and here companies smooth over all overhead costs on an
equal basis to all products manufactured ,result under costing low volume &over costing high volume
products- THUS outpricing itself on high-volume & make a loss on low volume products.
7. There is a high similarity between conventional absorbtion costing and ABC, but ABC is superior to
Trad.Absorp.Costing as the cost allocation to underlying products is more relevant.
8. Note :ABC costing suffers from exact same problem causing /per unit profit & costs & 'costing' to be incorrect
when changing fixed costs or No. of units producted changes.
9. ABC takes the view that all costs are variable in the long term, and links the activity that causes the variability
to the cost. ABC recognises that there are many activities or cost-drivers causing costs to be incurred.The system
has a framework that is similar to that of a conventional absorption costing system.
10. ABC focuses attention on the underlying causes of costs, provides a method to manage/control overhead
costs.
11. ABC treats volume related products in same way as Trad.Absorb.Costing but differs in treatment of non-
volume related overheads.
12. ABC is similar to zero-based budgeting.
ABC: METHODOGY .
1. Note :ABC costing suffers from exact same problem causing /per unit profit & costs & 'costing' to be incorrect
when changing fixed costs or No. of units producted changes.
2. ABC involves 2 stages :
2.1. Overhead costs are pooled according to the activities which cause the cost.
2.2. Each cost activity is then linked by a cost driver to the product output.
3. Overheads are allocated to products by dividing the activity cost by the period cost driver volume and then
multiplying the determined rate by the units of activity used by the product.A typical ABC cost system will
involve the following steps:
3.1. Determine the activities that relate to the overheads.
3.2. Quantify the activity cost.
3.3. Determine the cost driver associated with the enquiry.
3.4. Determine the cost driver rates by dividing the activity cost by the cost driver volume.
3.5. Apply the rates estimated in step 4 to a product.
ACTIVITIES – COST DRIVERS. : EXAMPLES OF.

BASICLY: ABC does away with the production depts. and service depts. and allocating overhead to each dept in
absorbtion costing and says rather where do the overheads come from originally –and turns these sources into the
new DEPTS .Then the costs go directly from each dept to the product.(some overheads eg electricity are still
divided into each dept., but this is seen as a separate step –not part of the sequence we say is the method!
Purchase Requests No. of Requests.

Material Procurement 1-No of Supplier Orders
2-No of Items.
Material Handling No of Movements
Set-Up No of Set-ups
Maintenance No. of Maintenance hours.
Machinery No of Machine Hours
Fitting No of Labour Hours
Quality Control No of Inspections
Pricing 1-No of Orders
2-No of Customers
Customer Vetting 1-No of Customers
2-Size of Orders.
Expediting Delivery No of Deliveries
Administration. No of Staff.
4. NOTE ;If there are limiting factors of production, the ABC accountant will recomend that the company
maximise the profit per limiting factor/s and may recomend that 1 of the products be discontinued or that
none of the products be discontinued. ABC costing is only concerned with maximising profit per limiting factor.
4.1. BUT- this logic is incorrect, because if there are limiting factors, using the profit per unit concept in making
decisions will allways lead to incorrect conclusions, because overhead costs are not variable and do not
move with the relevant activity.Consequently , the cost per unit will change as production levels change.if
there are limiting factors of production , the production levels will change and so will the cost per
unit.????????????????
VALUATION OF CLOSING STOCK:
4.2. For absorbtion costing - Closing stock can be valued at either budget or actual –we go for budget more??
But see page 46 viggio for full explanation. (budget is the normal correct way , I think at actual is a bit
wrong.
4.3. Note – if budget cost is used to value closing stock , then it may not comply with IAS2 ,that cost must be at
lower of cost and net realisable value.At year end an adjustment would simply have to be made to reflect
the IAS2 requirement.
4.4. Variable costing and Absorbtion costing values closing stock differently because variable leaves out fixed
costs in the calculation , but absorbtion includes fixed+variable+raw materials :see pg 56 viggio for a
simple example-(question is bottom pg 55)
ABRIDGED(SHORTENED) INCOME STATEMENTS FOR ABC COSTING:
Simple Examples for reference.
THE LOGICAL ERROR OF ABC COSTING

1. ABC is just a more sophisticated type of absorption costing .
2. ABC costing has been sold as a better way to make costings to companies, in same way as zero-based
budgeting has been sold to them.The idea is to re-think the cost structure of a product so that a 'better cost'
for the product is arrived at.
3. The greater the competition in a field , the more the selling price is a given , and costs are a by-product of
sales, and we must just max. contribution and sales , without compromising the quality.
4. How does ABC use cost data for decision making purposes: ANSWER : ABC analyses the overhead costs into
cost pools and then allocates the costs to the products using cost drivers.
5. What if there is a production constraint? ANSWER: Because ABC Profit= selling price-variable costs-allocated
'cost driver' overheads. SO ABC would advocate maximisation of profit per limiting factor.
6. What is logical error of ABC :ANSWER ABC can and will give you the incorrect decision when the selling price is
determined by supply and demand,and cannot be derived from cost alone.The only time that ABC may give
you the correct answer for decision making is when a cost plus formula gives a selling price that is less than
the market is prepared to pay for the product.
7. The Correct Method To Adopt When Looking At Product Decision-Making Is
As Follows:
7.5. One can only Max contribution using variable costing per limiting factor, not ABC or Absorption cost unless
you work it out from the start for each price & production level.
HOW RELEVANT IS ABC COSTING?
Much of the criticism of ABC can be summed up as follows:
1-ABC treats the cost allocation to an activity as absolute, certain and linear.
2-It uses a small sample of historical data and extrapolates the information for long-term costing and decision- .
. . making requirements.
3-ABC is a sophisticated absorption costing system and suffers from the same limitations as the traditional
method:
a)Choice of absorption base.
b)Changing volume of production.
4-ABC ignores opportunity costs and will therefore lead to invalid decisions where other contribution-maximising
options exist.
Contempory problems in accounting:
Inability of accounting systems to control the activities of companies which operate in an advanced manufacturing
environment. The main criticisms of accounting and management accounting
1-Conventional accounting systems do not address the modern competitive business environment.
2-Absorption costing systems provide inaccurate information for decision-making.

3-Management accounting is simply accommodating and becoming the slave of financial accounting.
Benefits of ABC:
1-When a high proportion of overhead costs are non-volume-related, and a company produces a variety of
products, the resultant product cost is more accurate than that obtained using traditional methods.
2-The flexibility of ABC allows the extension of cost analysis to areas such as customer costing and internal
management costs.
3-Product costs reflect the long-run variable(fixed) product cost, which is important for strategic decision- making.
4-ABC improves cost estimation, as cost behaviour understanding is improved.
5-ABC improves strategic decision-making in
a)The pricing of products;
b)Improving the product range by discontinuing old products and promoting new ones, and assists in the costing
of . new products.
Many of the above benefits are questionable in the light of changing production volumes, where the cost per
activity will inevitably change as the overhead cost remains constant. It is future marginal or differential (variable
costing) costs (not historical costs) that are relevant for short- and long-term decisions. ses.
Limitations of ABC
1-There is no real evidence that ABC improves company profits.
2-ABC is based on absorption costing techniques, which are only valid at a single historical level of production.
3-ABC is historic and lacks relevance for future strategic decisions.
4-The selection of cost drivers is difficult and in some instances has little relevance to activity.
5-Costs such as rent, rates, depreciation, power, insurance still have to be apportioned
6-ABC assumes that a single cost driver within a cost pool fully explains the cost behaviour of the pool. It is
doubtful . that detailed segregation of costs achieves perfect cost homogeneity within a cost pool.
7- ABC requires an activity whose cost is measurable and can be related to a product. Some costs such as
general . . . advertising, audit fees, finance costs, and goodwill have no meaningful cost driver and cannot be
linked to a . .. .. specific product.
Operational benefits of ABC
The most favourable benefits of ABC have been in the areas of improvement in the management of business
operations, and the motivation to improve business methods.
By breaking down the production operation into many activities that cause costs to be incurred, ABC forces
management to look at the products being manufactured in the light of the overheads being incurred. It also
makes management look at better methods for improving the manufacturing process and business efficiency. In
addition, it improves cost awareness and in many instances results in cost reduction and improved methods of
buying, setting-up, manufacturing and selling.
The technological advances made in the 1980s have dramatically changed production processes in many
companies. Modern product manufacturing requires the production of innovative products of high quality at a low
cost, coupled with strong customer service. These changes have called for the modernising of the ‘traditional
absorption costing’ system, and a mini-revolution in management accounting. Modern automated manufacturing
techniques require greater emphasis to be placed on quality control, production flow and improvement of set-up
times. The western style of management in the mass-production era has long been one of rigid, hierarchical
organisational structures with the line of responsibility well defined. The adoption of automated manufacturing
technologies requires a change in this style, and a move away from highly-structured management. The
distinction between planning and execution must be eliminated, so that management can respond to changes in
product specifications and customer demand.
Western management styles have traditionally concentrated on the costs of individual responsibility centres,
rather than on the costs of the company’s strategic activities, which requires the co-ordination of the activities of
many departments. These requirements are seldom found in the traditional accounting set-up, which does not
focus on determining the costs of providing product characteristics and, in the end, value to the customer.ABC is
one system that can help focus on prominent issues and developed in this time for this reason.
Strategic decisions and ABC

1-good for Job Costing
2-good to be used for management to concentrate on various cost pools and cost drivers to increase
efficiency and lower costs.
3-Good to give value to customers by proper costing of products and focus attention on improving
each cost pool.
Eastern + Western Business strategy:

Product Strategies :Japanese Businessmen start a costing strategy exercise by determining the selling price that
the market accepts : to ensure a desired size of market share , taking into consideration the changing marketing
environment for that product , according to demand and supply, first.
Future market share is planned for and strong customer service is established.
From the selling price they work backwards , to determine max allowed costs that will determine ...according to a
calculus determined primarily by the potential customers utility for the product, the desired marketing positioning,
and internal resource inputs to manufacture product.
Co-ordinated efforts of accountants , designers,and engineers to achieve the desired cost.
Companies establish a strong cost reduction policy that ensures long term survival.
They then go to their books and determine the costs from that starting point – on the basis of cost reduction.
Any decision made on a cost plus basis will invariably give a wrong signal – ie not to actively keep costs in the
right category but to charge the customer for your first choice in production setup.
CH 4 VIG VARIABLE AND ABSORBTION

COSTING.
SPECIAL NOTES TO WATCH OUT FOR:
a) Note:Rem :For fully integrated absorbtion costing, If the question says the company is unable to distinguish
between variable & fixed overheads but they only give you % of each to divide up the actual overheads,eg
: say 40 % variable and 60% fixed, YOU CANNOT use that same % on the budget overhead to divide that
up- it might have a different % completely so unless they give you a specific % for the budget overheads
,DO NOT separate the two at all.Just do the whole calculation as if there was no dividng up and call it
“Overheads” ,not fixed overheads, in income statement.Then the over/under recovery will only be due to
fixed overheads,but they might as well have not mentioned the % ‘s because everything is done as if it
were not there.(viggio pg 131 middle)
b) Number Sold X Price Difference : Note not price difference X No.Sold Difference,No Sold
Difference is only used in Volume Variances!
i) Expenditure Variance: then 2nd do expenditure variance below
(1) Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be taken out,in 2 special steps)
(a) 1 funny part: Overhead Volume :
must be accounted for: the fixed mnftring costs locked in the cost of
sales part, are taken out of the budget profit by subtracting the
{Volume change X Recovery Rate used to calc budget profit}”Volume
change” is how many more/less sales you had than in budget.The
“recovery rate” is the one that was used originally to get the Fixed
costs in the BUDGET, NOT in the ACTUAL cost of sales.This step is only
done because the absorbtion costing system results in fixed costs
being treated as variable
(b) Overhead Expenditure:
c)
ARGUMENTS FOR VARIABLE VS ABSORBTION COSTING

ARGUMENTS IN FAVOUR OF VARIABLE COSTING:
(1) It is consistent in reporting profits if sales/production changes, absorbtion is inconsistent in this.
(2) Does not incl. fixed costs, which do NOT change with volume, thus more useful to Mngmnt
Decision Making , escp. Decisions made where volume is changing.
(3) Fixed costs should ,as is done in variable costing, be charged to period costs because Related to
Ability to produce for a period of time ,not to Production of Specific Units.If zero is
produced –fixed costs will still be incurred.
ARGUMENTS IN FAVOUR OF ABSORBTION COSTING:
i) Fixed Costs are Product Costs :Fixed costs are a neccessary cost in producing a product and as
such should be charged to production /the product cost.
ii) Required by GAAP and Commissioner of Inland Revenue : Absorbtion costing is
iii) Variable Underestimates True Value :Variable costing underestimates the true value of stock( see 1
above),absorbtion reflects it more accurate
iv) Consistency :internal &externalAlso some say : 1-intercompany comparison easier 2- assurance
that all fin stats prepared in accordance GAAP 3- external reporting must be consistent ,if company
changes its reporting method each year then consistency lost.
v) Matching Concept Argument: some say absorbtion because it matches fixed costs to revenue
received.
(1) NOTE: some advocate Adsorption costing because it allows inter-company comparisons,this is
controversial because of:
(a) One may be labour intensive while the other may be capital intensive.
(b) Rent vs lease assets
(c) Asset age different(depreciation)
(d) Cost structures different from company location.
(e) Have different trading markets.

(f) Capital structure differences
(g) Management is different.
VIEWPOINT: ANY SYSTEM WHICH REPORTS INCONSISTENT PROFITS IF
SALES REMAIN SAME SHOULD BE DISCARDED.
i) Absorbtion costing is inconsistent if production volume changes,but not sales: fixed costs cause
imbalance.
ii) Matching concept argument: some say absorbtion because it matches fixed costs to revenue received.
ACCOUNTING STATEMENT ON INVENTORIES:-IAS 2
i) A Primary issue in inventories is amount of cost to be recognised as asset and carried forward until
related revenues are recognised.
ii) Per IAS2 The cost of inventories should comprise all costs of purchase,costs of conversion,and other
costs incurred in bringing inventories to their present location and condition.
iii) Includes systematic allocation of fixed and variable production(not sales/distribution) overheads
incurred in converting materials into finished goods.- costs of conversion includes direct labour.
iv) The process of recognising as an expense the carrying amount of inventories once Sold results in the
Matching of costs and revenues.
EFFECT ON PROFIT (INCOME) OF VARIABLE .VS. ABSORBTION COSTING.

1) NOTE: rem: the difference between both will ALLWAYS ONLY be the increase or decrease in closing stock
multiplied by the fixed manufacturing cost per unit.(per textbook vertabim)
2) There are 3 Different Possible Situations ,each gives a different result.
a) If Production > Sales : then Absorbtion Profit > Variable Profit : see Year 1 Below.(fixed costs locked in
inventory)
b) If Production < Sales : then Absorbtion profit < Variable Profit : see Year 2 Below.(fixed costs from last year
added)
c) If Production = Sales : then Absorbtion profit = Variable Profit : see Year 3 Below. EXCEPT if company is
holding stock of finished goods at a cost different to the current periods cost per unit.(like stock carried
over from year 1 below )
QUESTION for EXAMPLE:
ABSORBTION COSTING Solution.

VARIABLE COSTING Solution.
EXACT ONLY DIFFERENCE BETWEEN 2 TYPES OF VARIABLE COSTING AND

3 TYPES OF ABSORBTION COSTING.
METHOD 1.CLOSING STOCK 2.Fixed Variable
CALCULATION Mnftring Mnftring
OVERHEA OVERHEADS
DS
VARIABLE COSTING Budget Variable Cost =Budget ACTUAL ACTUAL
Fixed Overheads(Costs) NOT INCLUDED
Standard Variable
Costing
VARIABLE COSTING Actual Variable Costs =Actual ACTUAL ACTUAL
Fixed Overheads(Costs) NOT INCLUDED
Normal Variable
Costing
ABSORBTION COSTING ACTUALVARIABLE COSTS = Actual FIXED MNFTRING ACTUAL
OVERHEADS =
Fully-integrated
BUDGET FIXED MNFTRING OVERHEADS = BUDGET Rate X Actual
Budget Rate X Actual Hours Hours
Must do a Over/under
(some place in book says can use actual fixed, recovery .
but don’t understand yet-I think
misunderstood)
Include Raw materials+ WIP +Finished
goods:ALL STOCK
ABSORBTION COSTING BUDGET VARIABLE COSTS: Use the figures FIXED MNFTRING ACTUAL
given for the Budget or Standard cost, not the OVERHEADS =
Standard Absorbtion
actual cost.If plain figures are not given,and ACTUAL final cost,
you must work out ,use Budget Rates X Actual so NO Under/Over
hours. recovery done
BUDGET FIXED MNFTRING OVERHEADS :

Budget Rates X Actual hours or units etc
Include Raw materials+ WIP +Finished goods

at standard/budget costs.ALL STOCK)
ABSORBTION COSTING ACTUAL VARIABLE COSTS :Actual amounts,if FIXED MNFTRING ACTUAL
given. OVERHEAD = ACTUAL
Actual closing stock
final cost
FIXED OVERHEADS : Use Actual Rate X so NO Under/Over
Actual hours (Note: not budget rate X actual recovery done
hours like the other 2 types) (not done because
actual cost is used ,not
Include Raw materials+ WIP +Finished budget rates.)
goods:ALL STOCK
EXCELLENT EXAMPLE of the difference between Variable and Absorbtion costing where the profit is different in 2
years with same costs&price.:
WHAT IS VARIABLE COSTING.(OR MARGINAL OR DIRECT COSTING)

1) Variable costing is ONLY –it recognises fixed costs (ie : mnftring overheads) as a period cost and values stock
at the variable cost of production.:NOTE: NOT variable marketing costs or variable selling /delivery costs.
2) The only difference between Variable costing and Absorbtion Costing is the Treatment of the Closing
Stock.
3) Fixed Manufacturing Overheads are included as part of ‘Cost of Sales’ calculation, BEFORE Gross Profit , and
NOT just written off as a period cost after gross profit, ie NOT included with marketing fixed costs ,selling fixed
costs and distribution fixed costs etc.Variable costing is NOT the same as ”Contribution”calculation exept
for closing stock on a very basic level.
4) Variable Costing ONLY EXCLUDES FIXED manufacturing costs when valuing closing stock.There are 2
methods
a) Closing stock valued at ACTUAL VARIABLE COSTS incurred in current year.
b) Closing stock valued at BUDGET VARIABLE COSTS (also referred to as a type of ‘STANDARD COSTING’)
5) Variable costing is the ONLY system that accurately reflects the profits of a company as fixed mnftring costs
are written off in year incurred, not carried forward to the balance sheet (vertabim as per book viggio pg136 ).
Meaning presumably the ‘cost of sales’ in ‘income statement’ is where the fixed mnftring overheads are
disappeared/written off as a period cost, and not carried over to next year,by left over inventory in the balance
sheet.It is regrettable that fin acc is obsessed with capitalizing fixed costs as per IAS standards by including
the in closing stock calculations.
6) NOTE: NOT TO BE INCLUDED : variable marketing costs or variable selling /delivery costs.
7) Contribution is NOT to be confused with Variable Costing –it has nothing to do with it.You do not apply
‘contribution’ calculation here except vaguely in Closing Stock calc. where Selling price never comes into it
anyway!(variable costing is a fallacy actually)
8) CONTRIBUTION:
production.(DOES NOT include FIXED COSTS, ONLY PRICE – VARIABLE COSTS = contribution, then after
that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not
profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total
profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does,
so once all fixed costs have been paid by current production volume, any increase in production volume above
this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART
OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION
goes toward profit.
SALES
- Variable Costs
= CONTRIBUTIO
N
- Fixed Costs
= PROFIT
METHOD : VARIABLE COSTING (CALCULATING VARIABLE PROFIT )

1) Variable Costing ONLY EXCLUDES FIXED manufacturing costs when valuing closing stock ,other wise
it works exactly the same as NORMAL ABSORBTION COSTING.(see absorbtion costing)
2) In all Variable Costing methods ,Fixed non-mnftring costs are left out of Gross Profit calculation and are
treated as Period Costs only.FIXED manufacturing costs are INCLUDED in GROSS PROFIT calculation –in COST
OF SALES ,but LEFT OUT of CLOSING STOCK calculation.But ONLY VARIABLE MANUFACTURING COSTS are
included when valuing CLOSING STOCK, fixed are left out, so as not to carry them to next year/capitalize
them/send them to balance sheet.
3) The 2 methods of doing variable costing are:
i) Method 1: Closing stock valued at Actual Variable Costs:
(1) Use : Actual Rate X Actual Hours etc. ,or plain quoted Actual amount,whichever is given.
(2) Include Raw materials+ WIP +Finished goods; ie: ALL STOCK)
ii) Method 2 : Closing stock is valued at budget variable cost –Standard costing.
(1) Use : Budget Rate X Actual Hours etc.
(a) Use the Budget Rate or Budget Total Amount if given,and remember to also Include any Raw
materials+ WIP +Finished goods; merchandise for sale all at standard / budget cost.. ie :ALL
STOCK.
(b) The reason why they use the Budget Total Given Amount (eg for materials or variable labour)in
standard costing is that they want the cost carried over to the following Fin Year to be an
average cost, as set by their standard costing rates.This is so small fluctuations in yearly prices
or other factors do not upset the costing on a long term scale- so we know last years stock is
valued at +/- what this years stock will be valued at, so we are not too far out.: ie
“Standardized Costing”.
Examples of both methods for same exercise below.:
WHAT IS ABSORBTION COSTING:

b) Absorbtion costing is a financial accounting system that incorporates both variable &fixed costs in arriving
at BOTH its Gross Profit and Closing Stock valuation.The system matches the costs to revenue received ,so
fixed costs are carried over to following year in any closing stock left over.
c) Note:Rem : If company unable to distinguish between variable & fixed overheads – usually they give you a
ratio to divide it up in, and one MAY ONLY USE FIXED for over/under recovery, not variable for this at all.
d) Note: for all 3 types of absorbtion costing, the closing stock must include all unused raw materials +all
WIP(work in progress) + All Unsold Finished goods +All Merchandise purchased for resale(incl.costs to
bring to that point eg freight) :ie ALL STOCK.
CALCULATING ABSORBTION PROFIT : 3 METHODS
i) THERE are 3 Different Methods to Do Absorbtion Costing.
ii) The ONLY difference between the 3 types is :
(1) Fixed Mnftring Overheads AND
(2) Closing Stock Calculation.
(1) FULLY INTEGRATED ABSORPTION COSTING.
(a) A fully integrated absorbtion costing system is mainly used where a company runs a job
costing accounting system and it wishes to determine the full cost of a particular job once it
has been completed.
(b) A Fully Integrated absorption costing system is very similar to the others 2 types.There are 2
differences :
(i) FIXED OVERHEAD :the Budget Rate X Actual Hours or units, is charged to income
statement.
1. Under/Over recovery :must be done because budget rates are used in cost of sales,so
any difference must be balanced out.(see absorbtion costing chapter before for details)
(ii) CLOSING STOCK :Actual costs ONLY for Variable costs and Budget Rates X Actual
Hours/Units/Parts for Fixed overheads
(c) Full Job Cost will equal:
(i) Direct Materials - Actual Cost
(ii) Direct Labour - Actual Cost
(iii) Other Variable Costs - Actual Cost
(iv) Overhead Costs - Allocated = Budget Rate X Actual Hours etc.
(d) Closing Stock is valued in exactly the same way as “Cost of Sales” above, no difference.
(e) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK
(f) BUDGET Rate : is also called the “PRE-DETERMINED RECOVERY RATE”.It is usually
calculated by preparing a budget at beginning of year, using previous years costs,new price
levels,etc.
(g) Under/Over Recovery :With this one , one uses an over/under recovery – so you first use
budget rate X actual hours to calc. fixed overheads, then show any difference to actual as
over/under recovery at the end of the income statement.Standard Absorbtion does not put an
over/under recovery in, there you only use the actual costs for 'cost of sales', no budget rates
used at all,(but budget variable +budget fixed costs for closing stock).
(h) Note rem:Over/Under recovery is only applied to sales,not closing stock, but at the full total
for closing stock +sales , so there is a mistake where sales takes over/under recovery away
from closing stock and visa versa, and Opening stock dilutes it all a bit too, wrongly.(say sales
was only 1, then apply this to any example to see how it makes a mistake)
(i) Income Statement : you can deduct Over/Under Recovery in the Cost of Sales(just before closing
stock) or just before Net Profit at end- it will make no difference –both are correct.But closing
stock is calculated separately, without applying any over/under recovery to it separately,and
deducted in cost of sales breakdown. Rem :Cost of sales = TOTAL (incl. closing
stock)labour,materials,overheads –minus- SEPARATE closing stock .
(j) Note:Rem :For fully integrated absorbtion costing, If the question says the company is unable
to distinguish between variable & fixed ACTUAL overheads but they only give you % of each to
divide up the actual overheads,eg : say 40 % variable and 60% fixed, YOU CANNOT use that
same % on the budget overhead to divide that up- it might have a different % completely so
unless they give you a specific % for the budget overheads ,DO NOT separate the two at all.Just
do the whole calculation as if there was no dividng up and call it “Overheads” ,not fixed
overheads, in income statement.Then the over/under recovery will only be due to fixed
overheads, not the variable overheads – it just moves through the whole thing as normal
because it should not appear in your calculation because it was not different! So but they might
as well have not mentioned the % ‘s because everything is done as if it were not there.(viggio
pg 131 middle)????????????not sure of this statement – re-check this!
EXAMPLE OF FULLY INTEGRATED METHOD

(2) STANDARD ABSORPTION COSTING.(CLOSING STOCK IS VALUED AT BUDGET

ABSORPTION COST)
(a) The standard absorption costing system is very similar to the fully-integrated absorption
costing system.There are 2 differences :
(i) FIXED OVERHEAD :the ACTUAL final cost ,NOT the budget rate X actual hours like
in Fully integrated , is charged to the income statement.
1. NO Under/Over recovery :not done because actual cost is used ,not budget
rates.
(ii) CLOSING STOCK :Budget cost structure for both Variable costs and Fixed
overheads, not just for fixed.
1. Budget Variable Costs: Use the figures given for the Budget or Standard cost,
not the actual cost.If plain figures are not given,and you must work out ,use
Budget Rates X Actual hours.
2. Budget Fixed Overheads :Use Budget Rates X Actual hours or units etc
(b) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK
1.
(c) EXAMPLE: STANDARD COSTING SYSTEM.
(3) ABSORBTION COSTING (NORMAL) CLOSING STOCK IS VALUED AT ACTUAL

ABSORPTION COST.
(a) Normal absorbtion costing is basicly the same as the other 2 types, exept that Budget
costs are never used anywhere at all, only Actual costs are used.
(b) It would only differ from the other 2 for the following 2 items:
(i) FIXED OVERHEAD :the ACTUAL final cost ,NOT the budget rate X actual hours like
in Fully integrated , is charged to the income statement.
1. NO Under/Over recovery :not done because actual cost is used ,not budget
rates.
(ii) CLOSING STOCK :Only Actual Costs are used.For all Variable Costs :the plain full
actual amounts,if given.For Fixed overheads , which must be apportioned,
between goods sold and closing stock –which is what absorption costing is originally
all about- Fixed Overheads =Actual Rate X Actual hours.(Note: not budget rate X
actual hours like the other 2 types)
(c) Incomplete jobs are valued in exactly the same way as finished products –up to stage
where they are completed now.They are not valued at ZERO!
(d) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK
EXAMPLE: CLOSING STOCK VALUED AT ACTUAL ABSORPTION COST.
RECONCILLIATION : STANDARD ABSORBTION COSTING : BUDGET PROFIT

TO ACTUAL.
1. Note : This is a Reconcillation of difference between budget rates X units budgeted and actual
ratesXunits sold, not between budget cost and actual cost.
2. This example is for standard costing, so no Over/Under recovery takes place in the Income
statement, but there will still be an over/under recovery between budget profit and fixed profit.This
is because FIXED PROFIT IS LOCKED INTO THE BUDGET CALC. AND MUST BE TAKEN OUT
SEPARATELY ALLWAYS:,because it does not change with volume change: needs special
treatment,in same context as for fully Integrated system basicly.It is shown below as an “Overhead
Volume& Overhead Expenditure Difference.”,but all in the Expenditure section of recon.Note!see
method+example.
3. DO NOT go from budget sales to standard sales.It is more meaningful and easier if you allways
recon budget profit to standard profit and then to actual profit.If you want you can first go from
budget sales to budget profit , but from there carry on as above. B-Sales to S-Sales to S-Profit recon
is however possible, but not wanted, rather B-Sales to B-profit to S-profit OR just B-Profit to S-Profit.
-
4. METHOD: (we always first do a volume variance, then an expenditure variance,never anything else)
NOTE rem: For Income ALLWAYS SUBTRACT THE top RECONCILLIATION FIGURE FROM THE
bottom ONE BUT for Costs ALLWAYS SUBTRACT THE bottom RECONCILLIATION FIGURE
FROM THE top ONE in any recon.: so if BudgetProfit is at top its always BudgetProfit – ActualProfit
in ALL the calculations , or visa versa.THERE is only 1 exception to this rule so far: for “fixed
mnftring overhead volume variance”
Note: rem: CLOSING STOCK/OPENING STOCK COST:

(A)- if there is opening stock on your actual income statement , or in your budget income
statement : you just add it to your production as if it was produced in current period, also
uniyts is now also more ,you add it to your budget units produced.
(i)VARIABLE COSTS: you must take out the individual material,labour etc OUT of the
OPENING STOCK
and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used
as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and
budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in
the Opening stock are any different to the Cost Prices in the Budget/Actual – then it
will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is
the same as the current budget costs , it can mostly be ignored –it cancels out with
any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get
the same answer both ways from budget figures- you`ll see.BUT if they are different
to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be

ignored, it will change all the Rates and calculations.)
(ii)FIXED COSTS:Any opening stock in budget : you must take out any mnftr-fixed costs
and add it to
budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100
000 and in opening stock you have 18 000 , then you ONLY work with 118 000
.Remember your total number of units for these cost calculations in the budget will
be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE
BOTH! So number of units will be more than stated!!! by the number in
opening stock.!!! (P.S: if there is opening stock for actual there must also be for
budget )
(B)-Closing stock on Actual : forget it, the calculations and formulas will work around it by
themselves.
(C)-Closing stock on Budget: ??dont know?? Maybe only :(not sure)subtract from contribution,
before subtracting fixedmnft costs,then divide by units no. for recon step (1) thing??
1. First: do the ACTUAL income statement so you have all the figures , then calculate the BUDGET
profit only , you just need this figure to start off with.- all the budget per unit rates etc are also
needed but you do not have to first do a budget income statement , only an actual one,just use all
the given figures for the budget.
a. VOLUME VARIANCE : 1st do volume variance at top
b. Balance no.1 :then show new balance no.1 for volume difference,
c. EXPENDITURE VARIANCE : then 2nd do expenditure variance below
d. Balance no.2 :then show balance no.2 for expenditure + volume difference.
i. VOLUME VARIANCE : 1st do volume variance at top
1. For Standard Absorption Costing:
a. = {( Budget Manufacturing Profit – Variable Non-Mnftr Costs
only )} / budget no. units X [+/-Difference in Sales Volume]
(less= -,more =+) to give a Neg or Pos answer eventually.
b. Note : This would be = {( Budget Total Contribution less closing stock
– Fixed Mnftr Costs) / Budget Units} X [+or -Difference in
Sales Volume ] (less= -,more =+)
c. Note :=this would also be =( “Gross Profit Less Variable Non-
Mnftring cost(leave fixed mnft costs)) / divided by budget
units” X Difference in Sales Volume +/-.”
2. For a Variable Standard Costing recon.:
a. Contribution per unit X [+or -Difference in Sales Volume]
(less= -,more =+)
b. You will also not subtract (fixed)mnftring costs here, nor subtract
closing stock from contribution , it just comes out below in one shot,
because you don’t do a special “Overheads Volume –variance
subtraction” in the expenditure section below, because you don’t have
any fixed costs in the closing stock to wheedle out (if the numbers are
right it could cause a error, If You don’t do all this I think) ,(ask : 1-but
what do you do with closing stock – or 2- opening stock with different
fixed cost to this year?)
3. Note:rem: Why , for absorbtion type costing ,they leave out non-mnfr fixed
costs is ANSWER:because fixed costs do not change if sales volume
changes,only variables costs will make a difference,remember you are working
with profit, not revenue – so you basicly use the “Contribution” to do your
calculations ,exept for ‘absorbtion’ you also subtract the fixed mnfrt costs from
contribution, because Note: the fixed mnftring costs locked in the cost of sales
part, are balanced out by an Overhead Volume+Expenditure variance
calculation in the Expenditure Variance part below.This is the only “volume
variance” that takes place in the “expenditure section of the reconciliation” –to
get rid of the fixed costs locked in the costing - it is an extra volume variance
section forced into the expenditure variance section. This 1 special step: is only
done because the absorbtion costing system results in fixed costs being treated
as variable costs-(last sentence per viggio book vertabim)
Ie :24000-8000=16000/1000= R16/unit
4. This Step just brings the budget volume down to actual volume using the
contribution ,BUT still at budget prices, on its way to showing how the actual
profit came out of the budget profit.
ii. Balance no.1 :then show new balance no.1 for volume difference, also incl. a Units
Sold column on left, To show new no. of units .Note the ‘description’/name used in
example.
iii. EXPENDITURE VARIANCE: then 2nd do expenditure variance below
1. Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be
taken out,in 2 special steps)
a. Mnfctring Fixed Cost Overhead Volume :funny part
i. For Standard Absorbtion Costing :
1. {(+/-) Production Volume changeX Fixed Costs
Recovery Rate used to calc budget profit}” if production
went up(+) add , if down(-) subtract.-
2. Note: the subtract top from bottom and visa versa rule
thing does not work here – this is a special case.
3. Note :You add if production went up(+) or subtract, if
down(-) because you have more profit if there`s more in
stock, or less profit if there`s less in stock at end of day,
from manuftr. more.
4. -Note: USE Production Volume , DO NOT USE Sales
Volume, ie: not like in the Volume Variance in step 1. It
is just a mathematical formula/method to balance out
fixed mnftr.costs stuck in production volume/budget
closing&opening stock/sales volume/ actual
closing&opening stock etc.
5. (ii)FIXED COSTS: Any OPENING STOCK IN BUDGET :
you must take out any mnftr-fixed costs and add it to
budget fixed costs to get a total to use in all calcs.So if
budget fixed-mnftr costs=100 000 and in opening stock
you have 18 000 , then you ONLY work with 118 000
.Remember your total number of units for these cost
calculations in the budget will be : [The No. Produced
+ Number In Opening Stock].:DON’T FORGET! USE
BOTH! (P.S: if there is opening stock for actual there
must also be for budget )
6.
7. -Note: The “recovery rate” is the one that was used
originally to get the Fixed costs in the BUDGET, NOT in
the ACTUAL cost of sales. Volume change” is how many
more/less production,NOT sales , you had than in budget
-Note: The reason for this step is that the fixed mnftring
costs locked in the Opening/CLOSING STOCK of cost of
sales part, are dealt with by a 2 part process to recon
budget to actual profit. 1st in Sales Volume Variance
the fixed-mnft costs and closing stock are subtracted
from contribution , where they would normally stay, then
in this step we basicly restore the balance lost in step 1.
The balance we “lost” is if you multiply a fraction of the
budget sales by the “contribution less fixed-mnftr costs
less closing stock” you are treating fixed costs as a
variable cost .This step just restores the balance –
mathematicly.(must work it out yourself one day!no
time)
8. - This one step is only included if some fixed costs are in
your opening/closing stock, to make sure they are
treated correctly.If no fixed costs are in closing stock it
could theoreticly be left out and only 1- “overhead
expenditure” below and 2-exclusion of mnftring fixed
costs as well as non-mnftr fixed costs for “sales volume
variance”(step 1) be done instead.(you must click the
idea behind or difficult)
ii. For Standard Variable Costing

The difference between variable&absorbtion recon. lies
only in sales volume variance and the fixed mnftr
cost(done below) variance.This step is left out because
there are no fixed costs to wheedle out of
Opening/Closing stock, like in absorbtion costing.
b. Mnfctring Fixed Cost Overhead Expenditure:
=Budget Mnftring Overhead – Actual Mnftring Overhead(even if
result=negative)
(ii)FIXED COSTS:Any OPENING STOCK IN BUDGET :
you must take out any mnftr-fixed costs and add it to budget fixed
costs to get a total to use in all calcs.So if budget fixed-mnftr
costs=100 000 and in opening stock you have 18 000 , then you ONLY
work with 118 000 .Remember your total number of units for these
cost calculations in the budget will be : [The No. Produced +
Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if
there is opening stock for actual there must also be for budget )
2. Sales Price : Number Actually SOLD X Price Difference

: Note not price difference X No.Sold Difference, Number Sold Difference is
only used in Volume Variances!
:Note: for the rule of always minus bottom from top or visas versa – a sale is
trated as an income so it is the subtract top from bottom one to apply here –so
“actual – budget=answer” .If price increased it must be positive(you add), but
if decreased , it must be negative(less).So here you minus visa versa : ie: top
from bottom : this answer is then added to the recon if positive, or minus’ed
if negative.
3. Variable Selling Costs :{ Number Actually SOLD X Budget Per/unit cost}-
Actual Total Cost funny part 3 of 3:
Note: We already did any Volume calculations in step 1, so First we bring the
Budget selling costs up/down to the amount sold volume ,to avoid doing it
twice, Then only can we subtract Actual Selling costs from Budget selling costs.
Note: selling costs come from amount sold, not the amount produced.
4. Variable Manufacturing Costs: :{ Number Actually PRODUCED X Budget
Per/unit cost}-Actual Total Cost
These costs include MATERIAL,VARIABLE LABOUR etc.
Note: First we bring the Budget PRODUCED costs up/down to the amount
PRODUCED volume , Then only can we subtract Actual PRODUCTION costs from
Budget PRODUCTION costs.Because closing stock is already subtracted from
from actual profit /and/or / budget profit shown on recon. , we don’t touch it.All
we are doing is adding/subtracting a bit to the figure in cost of sales before
closing stock was subtracted. Note:manufacturing costs = for amount actually
produced , not just amount sold.
Note: rem: Closing stock/Opening Cost: if there is opening stock on your
actual income statement , or in your budget income statement , you must
take out the individual material,labour etc OUT of the OPENING STOCK and add
it to all the Cost of Sales : Input material and labour and fixed costs etc. used as
the recon. costs for any calculations for the recon.IT IS PART OF THE actual and
budget raw materials etc,in this way, when doing ANY calculations.If the Cost
Prices in the Opening stock are any different to the Cost Prices in the
Budget/Actual – then it will just average out to a new value. (Tip –Do Not
IGNORE it in budget ,because if it is the same as the current budget costs , it
can mostly be ignored –it cancels out with any calc.s one does for [standard
costs X actual volume stuff] for the recon-you`ll get the same answer both ways
from budget figures- you`ll see.BUT if they are different to budget costs
( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will
change all the Rates and calculations.)
5. Fixed Selling/Admin etc. Costs : total Budget – total Actual –finish and klaar
(even if ANSWER is negative, then put it as negative)
These costs would also be for distribution or marketing costs- ie: any FIXED
costs that are NON-MANUFACTURING costs, so not part of cost of sales, get
treated like this.The variable non-manufacturing are shown in no. 4 above.
iv. Balance no.2 :then show balance no.2 for expenditure + volume difference, and
include units on far left.
Example from last example in section above. (viggio pg136)

RECONCILLIATION OF ABSORBTION PROFIT TO VARIABLE PROFIT(PG 141

VIGGIO)
1) The Only difference between the absorption and variable profit is ALWAYS the increase or decrease in
closing stock multiplied by the fixed manufacturing cost per unit.- so either can be higher or lower
depending on circumstances-
a)
2) There are 3 possible methods to do this recon:
a) WHERE OPENING AND CLOSING STOCK HAVE THE SAME FIXED COSTS involved.(cost structures)
(Ignore variable cost changes)
i) You just do 1 item line : [closing stock–opening stock increase/decrease] X [Per Unit fixed cost
incr.or decr]
ii) See which is higher/lower to decide when to minus/add.
b) WHERE OPENING AND CLOSING STOCK HAVE DIFFERENT FIXED COSTS involved.(cost
structures) (Ignore variable cost changes)
i) You do 2 item lines :completely different from the type done above
ii) ADD :Fixed stock in opening stock: Opening stock units X Per Unit fixed costs in opening
stock.
iii) MINUS :Fixed stock in closing stock: Closing stock units X Per Unit fixed costs in closing
stock.(if closing drops then try adding, or a complete visa- versa not sure)
c) IF NO METHODS WANT TO WORK –remember they are all based on the main method below ,then
try that one:
3) General Method:
a) Find Closing stock per unit costs first(rem :leave out fixed costs in the variable but include in
absorb.),but for standard absorbtion it will be at budget costs, so you cannot do this.
b) Use this to find how many units in each closing stock :(they will be the same). but for standard
absorbtion it will be at budget costs, so you cannot do this
c) Find in absorbtion costing, fixed mnfr costs / total production –to get fixed costs per unit.(remember in
standard absorbtion – all done at budget costs, but in other absorbtion all done at Actual costs)
d) Use all the above in the formulas.
4) Allways use ACTUAL opening /closing cost for your calculations, not budget.
5) Allways start at absorbtion and end at variable.Check to see if adding/ or subtracting will cause the recon
to work.I am not sure which way is minus / or which is add? Remember the theorem though:
a) If production higher than sales, absorb. > Var. ,visa versa, and if = then absorb=var.
RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT(PG 142

VIGGIO)
2) METHOD :Whether it is a year to year or month to month recon . for the 1 company or whatever :
a) No units on left needed.
b) Start with 1st profit AFTER over/under adjustment, end with last profit after over/under adjustment.
c) Add any Variable Non-mnftr costs (eg:selling costs) subtracted before for net profit.
d) Any non-mnftr fixed costs : Add them back in.{or maybe ; not sure but do other one rather- it seems you want to see
the gross profit somewhere)) if different you must do a separate item line to recon it : just subtract one from the other then put
difference in recon ( highly unlikely to happen anyway!)
e) 1st :Do opposite to over/under to bring to first period gross profit( if added in income stat, -then subtract
it and visa-versa)
f) Now you have next periods Gross Profit.
g) Now add/minus previous months over/under- same as you would in income stat,(not add if
subtracted etc but add again – you are going toward getting NEXT PERIODS NET PROFIT now as if
it is a normal income stat.)
h) Now add next periods Variable and Fixed non-mnftr overheads in.
Finished –now you
i) have next periods net profit. Recon done!

INCOME STATEMENTS FORMATS:

a) 2 COLUMN FORMAT INCOME STATEMENT
b) 3 COLUMN FORMAT INCOME STATEMENT /PROFIT STATEMENT.
c) 3 X 1COLUMN FORMAT ,3 YEARS All ON 1 PAGE FOR COMPARISON.

RECONCILLIATIONS:
Check page 150 viggio bottom for a new type.-scan in – not yet scanned in or done yet
Make sure you got recon of absorbtion to absorbtion
FOR OVER/UNDER RECOVERY IN FULLY INTEGRATED ABSORBTION

COSTING( JUST COPIED , MUST STILL SORT IT ALL OUT)
(4) THIS IS BOTH FROM FULLY INTEGRATED , ESP. MEANT FOR THE
OVER/UNDER RECOVERY RECON.
iii) ume Variance (difference between budget –actual)
iv) AND Expenditure Variance. (difference between budget –actual)
CH 9 STANDARD COSTING (PG 325 VIG)

PURPOSE OF STANDARD COSTING:
a) Standard costs are pre-determined target costs that should be incurred under efficient operating
conditions.They are not the same as budget costs.Budgets are on a entire activity basis, standard costs are
on a per unit basis.But they are similar to a budget and could even be referred to as a budget at times
eg:in exams)The Budget Cost developed is used to calculate the Standard Unit Costs.
b) Standard costing is a performance system that analyses performance in detail.The purpose is to look at
each category of variance and do an in-depth analysis of what went wrong or right,and establish how,given
this information, we can do better in the next accounting period.
c) Standard costing stands for “standard” : ie: it sets a standard.
d) 3 types of Standard costs can be used:
i) BASIC COST STANDARDS:
Not used much : A value which does not change over long periods of time.-Developed from years of
experience. Used more as a basis to develop current standards from and to compare actual results
with.But not used much for standard costing, as they are too easy to attain, not a very high goal to set,
most efficient way is not necessarily found/studied.
ii) CURRENT ATTAINABLE / STANDARDS:
Most frequently used : based on current operating conditions,they make a study to take account of
machine breakdowns, substitute materials, etc.= a fair base from which to evaluate employee
performance.In the short term.
Basicly- higher than basic but still attainable.
iii) IDEAL STANDARDS:
Seldom used: Reflect the minimum operating costs under ideal conditions.Seldom used as they are
usually seen by workers as being impossible.
c) Methods of Setting the Standards:
i) HISTORICAL: from historical cost – but does not set a very high goal or find most efficient way of
production.
ii) ENGINEERING STUDIES: do studies to find most efficient way of production ,yet still attainable: 1-
Materials: purchasing dept makes a study ;2-Labour :time &motion study incl.machine breakdowns etc
3-Overhead –any method 4-“Standard Hours Produced” – is the time it takes to produce one product
,used as a common denominator to divide up costs into different products.
d) STANDARD PROFIT STATEMENT: This is like an income statement but sometimes for just a single
product, using pre-determined standard cost rates , showing what profit we can expect from a given sales
volume.The volume is estimated from known sales and production capacity.Could also mean the flexed
budget when using standard costing.
e) STATIC BUDGET:The plain original realistic budget for the year drawn up at beginning of year.
f) FLEXED BUDGET:/Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but
with the original costs from the Original Budget, not the Actual Costs. This can then be compared to the
actual Income statement to see what the difference in each cost was once converted to the actual sales
level.
g) STANDARD PROFIT: same as a flexed budget basicly , it is like an income statement using standard costs
at actual sales level, not budget sales level.It does not need to be for the whole company, it could also be
for just 1 product .Formula = [actual units sold X standard sales price] – [actual units sold X standard
costs].
h) BILL OF MATERIALS: A list of all the actual materials needed to manufacture a specific product.Does not
include labour/overheads etc. like the ‘standard cost card.’
e) STANDARD COST CARD: card with the costs of all the Inputs used to make 1 output product.(That
should (actual) be used to produce a product.)1 card is kept for each different product made. (-historical
cost -not a goal type cost).
f) STOCK ACCOUNTS: raw materials, work in progress, finished goods and the like.
g) A “RUN DOWN OF STOCK” : is the transfer of raw materials from inventory to WIP.
METHOD OF STANDARD COSTING:

i) If a company uses standard costing, then all stock accounts must be at a standard value all the
time.Stock accounts include the following:
(1) NOT Raw Materials purchased : this is Dr entered at actual price in books.
(2) BUT ALL “Raw Material” Transferred to “Work in Progress”: at Standard Cost.ther
(3) BUT ALL “Work in Progress” Transferred to “Finished Goods” : at Standard Cost.
ii) A “RUN DOWN OF STOCK” : is the transfer of raw materials from inventory to WIP.
iii) CHANGING /RE-ESTIMATING STANDARD COSTS: As per textbook, from a managerial accounting
perspective it is best to re-estimate/change standard costs at the start of Year. But it is common
practice and accepted accounting&auditing practice to change at End of year, incl. re-valuing all stock
accounts eg WIP, finished goods etc and also all variance accounts by Dr or Cr them with the incr/decr
in stock values.
iv) Rem: when you transfer to WIP and then to FINISHED GOODS and then COST OF SALES you also ONLY
send [Variable costs] for Variable Costing and [Fixed- Mnftr + Variable Costs] for Absorbtion
costing,same as for closing stock.(it seems when it hits the income statement with fixed- mnftr in the
cost of sales, it is only for inventory or tax valuation purposes? Unknown- must check)
RAW MATERIAL VARIANCE.
(1) THE STANDARDS:
1. The Price -Material cost per unit input
2. The Usage -Required per unit of output
3. Finished Product Cost Price(eg:2kg X R10/kg=R20) - Cost per Unit of Output
4. The Mix (eg :2kg sand + 3 kg cement) - Amount of each Type Material required per Unit
output
5. The Yield (eg:5kg = 1 unit) - Amount of finished product you get from 1 Mix
(2) THE VARIANCES:

1. Price Variance: Actual No. used X Budget/Standard Cost
2. Usage Variance: Budget required per unit output Vs Actual usage .
3. Mix Variance: Financial effect of changing budget mix to a new mix.
4. Yield Variance: Budget Vs. Actual total output from materials used.
(3) METHOD:
1. You can only calc. a materials variance price that is based on actual purchases
2. The usage variance is always at standard cost value.
3.
RECONCILLIATION BUDGET PROFIT TO ACTUAL PROFIT.

5. DO NOT go from budget sales to standard sales.It is more meaningful and easier if you allways
recon budget profit to standard profit and then to actual profit.If you want you can first go from
budget sales to budget profit , but from there carry on as above. B-Sales to S-Sales to S-Profit recon
is however possible, but not wanted, rather B-Sales to B-profit to S-profit OR just B-Profit to S-Profit.
6. Note : This is a Reconcillation of difference between budget ratesXunits budgeted and actual
ratesXunits sold, not between budget cost and actual cost.
7. This example is for standard costing, so no Over/Under recovery takes place in the Income
statement, but there will still be an over/under recovery between budget profit and fixed profit.This
is because FIXED PROFIT IS LOCKED INTO THE BUDGET CALC. AND MUST BE TAKEN OUT
SEPARATELY ALLWAYS:,because it does not change with volume change: needs special
treatment,in same context as for fully Integrated system basicly.It is shown below as an “Overhead
Volume& Overhead Expenditure Difference.”,but all in the Expenditure section of recon.Note!see
method+example.
8. METHOD: (we always first do a volume variance, then an expenditure variance,never anything else)
NOTE rem: For Income ALLWAYS SUBTRACT THE top RECONCILLIATION FIGURE FROM THE
bottom ONE BUT for Costs ALLWAYS SUBTRACT THE bottom RECONCILLIATION FIGURE
FROM THE top ONE in any recon.: so if BudgetProfit is at top its always BudgetProfit – ActualProfit
in ALL the calculations , or visa versa.
Note: rem: CLOSING STOCK/OPENING STOCK COST:

(A)- if there is opening stock on your actual income statement , or in your budget income
statement :
(i)VARIABLE COSTS: you must take out the individual material,labour etc OUT of the
OPENING STOCK
and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used
as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and
budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in
the Opening stock are any different to the Cost Prices in the Budget/Actual – then it
will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is
the same as the current budget costs , it can mostly be ignored –it cancels out with
any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get
the same answer both ways from budget figures- you`ll see.BUT if they are different
to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be
ignored, it will change all the Rates and calculations.)
(ii)FIXED COSTS:Any opening stock in budget : you must take out any mnftr-fixed costs
and add it to
budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100
000 and in opening stock you have 18 000 , then you ONLY work with 118 000
.Remember your total number of units for these cost calculations in the budget will
be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE
BOTH! So number of units will be more than stated!!! by the number in
opening stock.!!! (P.S: if there is opening stock for actual there must also be for
budget )
(B)-Closing stock on Actual : forget it, the calculations and formulas will work around it by
themselves.
(C)-Closing stock on Budget: ??dont know?? Maybe only :(not sure)subtract from contribution,
before subtracting fixedmnft costs,then divide by units no. for recon step (1) thing??
e. VOLUME VARIANCE : 1st do volume variance at top

f. Balance no.1 :then show new balance no.1 for volume difference,
g. EXPENDITURE VARIANCE : then 2nd do expenditure variance below
h. Balance no.2 :then show balance no.2 for expenditure + volume difference.
i. VOLUME VARIANCE : 1st do volume variance at top
1. For Standard Absorption Costing:
a. = {( Budget Manufacturing Profit – Variable Non-Mnftr Costs
only )} / budget no. units X [+/-Difference in Sales Volume]
(less= -,more =+) to give a Neg or Pos answer eventually.
b. Note : This would be = {( Budget Total Contribution less closing stock
– Fixed Mnftr Costs) / Budget Units} X [+or -Difference in
Sales Volume ] (less= -,more =+)
c. Note :=this would also be =( “Gross Profit Less Variable Non-
Mnftring cost(leave fixed mnft costs)) / divided by budget
units” X Difference in Sales Volume +/-.”
2. For a Variable Standard Costing recon.:
a. Contribution per unit X [+or -Difference in Sales Volume]
(less= -,more =+)
b. You will also not subtract mnftring costs here, nor subtract closing
stock from contribution , it just comes out below in one shot, because
you don’t do a special “Overheads Volume –variance subtraction” in
the expenditure section below, because you don’t have any fixed costs
in the closing stock to wheedle out (if the numbers are right it could
cause a error, If You don’t do all this I think) ,(ask : 1-but what do you
do with closing stock – or 2- opening stock with different fixed cost to
this year?)
3. Note:rem: Why they leave out non-mnfr fixed costs is ANSWER:because fixed
costs do not change if sales volume changes,only variables costs will make a
difference,remember you are working with profit, not revenue – so you basicly
use the “Contribution” to do your calculations ,exept for ‘absorbtion’ you also
subtract the fixed mnfrt costs from contribution, because Note: the fixed
mnftring costs locked in the cost of sales part, are balanced out by an
Overhead Volume+Expenditure variance calculation in the Expenditure
Variance part below.This is the only “volume variance” that takes place in the
“expenditure section of the reconciliation” –to get rid of the fixed costs locked
in the costing - it is an extra volume variance section forced into the
expenditure variance section. This 1 special step: is only done because the
absorbtion costing system results in fixed costs being treated as variable costs-
(last sentence per viggio book vertabim)
Ie :24000-8000=16000/1000= R16/unit
4. This just brings the budget volume down to actual volume, BUT still at budget
prices, on its way to showing how the actual profit came out of the budget
profit.
ii. Balance no.1 :then show new balance no.1 for volume difference, also incl. a Units
Sold column on left, To show new no. of units .
iii. EXPENDITURE VARIANCE: then 2nd do expenditure variance below
1. Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be
taken out,in 2 special steps)
a. Overhead Volume :funny part
i. For Standard Absorbtion Costing :
1. {(+/-) Production Volume changeX Fixed Costs
Recovery Rate used to calc budget profit}” if production
went up(+) add , if down(-) subtract.-
2. Note :You add if production went up(+) or subtract, if
down(-) because you have more profit if there`s more in
stock, or less profit if there`s less in stock at end of day,
from manuftr. more.
3. -Note: USE Production Volume , DO NOT USE Sales
Volume, ie: not like in the Volume Variance in step 1. It
is just a mathematical formula/method to balance out
fixed mnftr.costs stuck in production volume/budget
closing&opening stock/sales volume/ actual
closing&opening stock etc.
4. (ii)FIXED COSTS: Any OPENING STOCK IN BUDGET :
you must take out any mnftr-fixed costs and add it to
budget fixed costs to get a total to use in all calcs.So if
budget fixed-mnftr costs=100 000 and in opening stock
you have 18 000 , then you ONLY work with 118 000
.Remember your total number of units for these cost
calculations in the budget will be : [The No. Produced
+ Number In Opening Stock].:DON’T FORGET! USE
BOTH! (P.S: if there is opening stock for actual there
must also be for budget )
5.
6. -Note: The “recovery rate” is the one that was used
originally to get the Fixed costs in the BUDGET, NOT in
the ACTUAL cost of sales. Volume change” is how many
more/less production,NOT sales , you had than in budget
-Note: The reason for this step is that the fixed mnftring
costs locked in the Opening/CLOSING STOCK of cost of
sales part, are dealt with by a 2 part process to recon
budget to actual profit. 1st in Sales Volume Variance
the fixed-mnft costs and closing stock are subtracted
from contribution , where they would normally stay, then
in this step we basicly restore the balance lost in step 1.
The balance we “lost” is if you multiply a fraction of the
budget sales by the “contribution less fixed-mnftr costs
less closing stock” you are treating fixed costs as a
variable cost .This step just restores the balance –
mathematicly.(must work it out yourself one day!no
time)
7. - This one step is only included if some fixed costs are in
your opening/closing stock, to make sure they are
treated correctly.If no fixed costs are in closing stock it
could theoreticly be left out and only 1- “overhead
expenditure” below and 2-exclusion of mnftring fixed

costs as well as non-mnftr fixed costs for “sales volume
variance”(step 1) be done instead.(you must click the
idea behind or difficult)
ii. For Standard Variable Costing
The difference between variable&absorbtion recon. lies
only in sales volume variance and the fixed mnftr
cost(done below) variance.This step is left out because
there are no fixed costs to wheedle out of
Opening/Closing stock, like in absorbtion costing.
b. Overhead Expenditure:
=Budget Mnftring Overhead – Actual Mnftring Overhead(even if
result=negative)
(ii)FIXED COSTS:Any OPENING STOCK IN BUDGET :
you must take out any mnftr-fixed costs and add it to budget fixed
costs to get a total to use in all calcs.So if budget fixed-mnftr
costs=100 000 and in opening stock you have 18 000 , then you ONLY
work with 118 000 .Remember your total number of units for these
cost calculations in the budget will be : [The No. Produced +
Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if
there is opening stock for actual there must also be for budget )
2. Sales Price : Number Actually Sold X Price Difference

: Note not price difference X No.Sold Difference, Number Sold Difference is
only used in Volume Variances!
:Note: here you must break the rule of always minus bottom from top – here if
price increased it must be positive(you add), but if decreased , it must be
negative(less).So here you minus visa versa : ie: top from botton : ie minus
budget from actual =this answer is then added to the recon if positive, or
minus’ed if negative.
3. Variable Selling Costs :{ Number Actually Sold X Budget Per/unit cost}-
Actual Total Cost funny part 3 of 3:
Note: We already did any Volume calculations in step 1, so First we bring the
Budget selling costs up/down to the amount sold volume ,to avoid doing it
twice, Then only can we subtract Actual Selling costs from Budget selling costs.
Note: selling costs come from amount sold, not the amount produced.
4. Variable Manufacturing Costs: :{ Number Actually PRODUCED X Budget
Per/unit cost}-Actual Total Cost
These costs include MATERIAL,VARIABLE LABOUR etc.
Note: First we bring the Budget PRODUCED costs up/down to the amount
PRODUCED volume , Then only can we subtract Actual PRODUCTION costs from
Budget PRODUCTION costs.Because closing stock is already subtracted from
from actual profit /and/or / budget profit shown on recon. , we don’t touch it.All
we are doing is adding/subtracting a bit to the figure in cost of sales before
closing stock was subtracted. Note:manufacturing costs = for amount actually
produced , not just amount sold.
Note: rem: Closing stock/Opening Cost: if there is opening stock on your
actual income statement , or in your budget income statement , you must
take out the individual material,labour etc OUT of the OPENING STOCK and add
it to all the Cost of Sales : Input material and labour and fixed costs etc. used as
the recon. costs for any calculations for the recon.IT IS PART OF THE actual and
budget raw materials etc,in this way, when doing ANY calculations.If the Cost
Prices in the Opening stock are any different to the Cost Prices in the
Budget/Actual – then it will just average out to a new value. (Tip –Do Not
IGNORE it in budget ,because if it is the same as the current budget costs , it
can mostly be ignored –it cancels out with any calc.s one does for [standard
costs X actual volume stuff] for the recon-you`ll get the same answer both ways
from budget figures- you`ll see.BUT if they are different to budget costs
( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will
change all the Rates and calculations.)
5. Fixed Selling/Admin etc. Costs : total Budget – total Actual –finish and klaar
(even if ANSWER is negative, then put it as negative)
These costs would also be for distribution or marketing costs- ie: any FIXED
costs that are NON-MANUFACTURING costs, so not part of cost of sales, get
treated like this.The variable non-manufacturing are shown in no. 4 above.
iv. Balance no.2 :then show balance no.2 for expenditure + volume difference, and
include units on far left.
Example from last example in section above. (viggio pg136)
9.
1-CHAPTER 8 :BUDGETS(ch8Viggio book)

Still add a raw materials needed per product budget- check all last years budgets for an example of this-magato-
PRINCIPLES OF BUDGETING:
DEFINE BUDGETING:
1) Definition: Budgeting :are accounting plans that normally serve the purpose of quantifying the objectives
of the firm and provide a basis for control and performance evaluation. It is long & short term goals that are
quantified Financially OR Physically. Important is Comparison between goals & results.
3 CATEGORIES OF BUDGETS:
1) Operating Plans:
a) Operating plans are directed at the Production and Investment objectives of the firm.
2) Administrative Plans
a) These form the objectives of the development and maintenance of the Companies
structure.
3) Strategic Plans
a) Long term company objectives in relation to Competitors , Company growth, and
Philosophy.
REASONS FOR BUDGETING:
1) Periodic Planning : budgeting process’ creates a formal planning framework that provides specific
deadlines for each phase of the planning process:
2) Co-ordination of company activities and quantification of objectives. : exchange
ideas between various company segments +quantify costs of available alternatives + compare cost/revenue
of each product&dept.
3) Performance evaluation : compare actual to original or flexed budget.
4) Cost Awareness : promote cost awareness in managers who are normally concerned with other things
eg production or marketing strategy.
5) Goal Orientation. : makes depts. achieve com0pany goals, not their own goal. Often highlighted in the
the transfer and use of products intercompany- looks like nothing but it could be too much.
FINANCIAL & MANAGEMENT BUDGETING:
1) Define the objectives of the budgeting system to prevent: a battle of wills to by dept managers to get the Max.
expenditure and the Min. results.(to just keep fin. Managers happy)
2) Companies must realize there are 2 separate budgetry functions in the corporate objectives
a) Financial control: ie the Master Budget incorporating all the financial budgets.
b) Management Control : Line & production managers : system should allow greater freedom of action by line
managers varying from specific details to more general target specifications thereby improving attitude of
workers etc.
LONG TERM PLANNING:
1) Concerned with defining company objectives eg:
a) Profit maximization
b) Or Increase market share
c) Or Improve company image
d) Or Increase shareholder wealth
e) Or non-financial issues
i) Eg :environmental issues /
ii) Employee job satisfaction
iii) Improve company image ( where do we want to be in 10 years)
iv) Environmental issues.
v) Staff training
2) 5-10 years management to look at where it wants to be : as per asset base + labour force + market share. +
non-financial issue (as mentioned above)
3) Strategic Planning Requires :(it is a whole process to be read up about)

a) SWOT ananlysis : Strengths & Weaknesses + Opportunities & Threats evaluation.
b) Establish Data Banks to provide past & current information for planning.
c) Establish Preliminary Long Term Forecasts.
d) Review Expectations of internal + external company participants.
4)
5) See where resources are to be directed.
6) Most common Problems with Strategic Planning:
i) To make managers do Long term goals because they are vague and do not allways cause short term
profit (no-bonuses) etc.
ii) The assumption that historical data can be extrapolated to the future because unknown economic &
political changes make future strategies void within a short time.
POSITIVE FACTORS OF BUDGETING
BUDGETING & THE HUMAN FACTOR

1) Meeting goals means employees must 1- understand them and 2-act in certain manner to meet them
2) Coersion is often used eg : bonus or take action if budgets not met.
3) Lack of consultation as to employees reaction can lead to industrial disputes.
4) Dangers of Strict Performance Evaluation :Line managers could make sure budget is not bettered as future
budgets will be even more stringent.- ie deviousness. Also manipulate data and dysfunctional behavior to get
around tight budgets.
5) Defined, quantitative targets are more likely to motivate management to perform well, even if they are
difficult, as long as they are accepted by management.
6) Budgets will motivate workers if they represent a set of definite, quantitative goals, together with regular
feedback on the attainment of the standards. It is therefore essential that management is involved in setting
standards and budgets.
7) Companies should strive for a budgetary system that will achieve complete goal-congruence between the
workers and the company.
8) Positive aspects of budgeting
9) If the budgeting system creates a negative reaction in workers, who may see the system as unfair and
inequitable, you will create a subversive spirit leading to dysfunctional behaviour in conflict with corporate
goals.
The budgeting process should, where possible, be structured in such a

• El sets appropriate standards of performance:
• El defines good performance and provides a means of measuring such pertormance, anc
• U stipulates how rewards are to be linked to results.
• El Communication of corporate objectives and budgetary guidelines to all people responsible for budget
preparation.
• El Determination of the success factors of the company.
• El Full participation by all line management, with a commitment to meet corporate goals.
• II Preparation of the sales budget.
• El Preparation of budgets for all major operating activities.
• U Negotiation of budgets and standards.
• Co-ordination and review of budgets.
• El Acceptance and communication of all budgets by managers who will bear responsibility.
• El Frequent feedback of actual performance against budget targets.
• El Flexible budgeting capabilities.
• El Monetary and non-monetary incentives.
METHOD FOR BUDGETS:
MASTER BUDGET:
1) The master budget is the total budget package for a company; It is the end product of the budget preparation
process. The master budget consists of all the individual budgets for each part of the company aggregated into
one overall budget for the entire company. The development of the master budget is a sequential process, in
which information from one budget is carried forward to another budget. Some elements, such as the capital
expenditure budget, are independent.
2) Components of the master budget

• Operating budget
• Sales budget
• Budget of ending inventories
• Production budget:
— Materials budget
— Direct labour budget
— Manufacturing overhead budget.
• Budgeted cost of goods sold
• Administrative expense budget
• Marketing expense budget
• Budgeted net income from operations
• Budgeted non-operating items
• Budgeted net income
FINANCIAL BUDGET
Consists of the following parts:
• Capital expenditure budget
• Budgeted statement of financial position (balance sheet)
• Budgeted statement of changes in financial position
OPERATING BUDGET
• The operating budget is composed of the income statement elements. A manufacturing business budgets
for both manufacturing and non-manufacturing activities. We will discuss the various elements of the
operating budget of a manufacturing firm shortly.
CASH BUDGET: (OR CASH FLOW STATEMENT)

• Cash Budget is one of the most important budgets because it shows how liquid a company is.
• Normally prepared Weekly or Monthly as they are required for management (liquidity) information.
(4) KEY PREPARATION OF CASH BUDGET STEPS

1) First you prepare the Debtors Collection Schedule, then the Creditors Payment Schedule, and then you can go
and prepare the final Cash Budget (or also called the Cash Flow ). Also , it is one of the last budgets one
prepares, because you must do all the sales,production, purchases etc budgets first to get all the figures you
need.
2) The cash budget is one of the most important budgets as it shows how liquid the company is at any point in
time. Cash budgets are normally prepared weekly or monthly, as they are required for management
information.
3) Key factors in preparing a cash budget are
i) Establish opening cash balance
ii) Estimate cash from operations, ie net income after adjusting for non-cash items such as depreciation
iii) Estimate timing of debtor cash receipts taking into account customer payment behaviour
iv) Include all non-operating cash items such as capital purchases, repayment or advances on loans, etc
v) Estimate the amount and timing of credit payments, salaries and wages
4) The difference between the net income figure and net cash flow is explained to a large extent by the
changes in working capital.
Note: The cash budget is normally the more complex budget to complete, because non-cash items appearing in
different budgets must be adjusted for (removed). Receipts &payments also usually lag behind periods incurred in
Note: Esp. in exam, it is recommended to first draw up a diagram to determine where cash flows take place.
STEP 1 DEBTORS
COLLECTION
SCHEDULE:
MONTH TOTAL JAN FEB MAR
December - 10000 (if 8000
credit(cash in from it
previous credit sales) is
calculabl
e)
January-Cash 20000 20000
January-Credit 80000 16000 40000 20000
Feb-Cash 24000 24000
Feb-Credit 96000 19200 48000
Mar-Cash 32000 32000
Mar-Credit 128000 25500
Capital expenditure 1000 500 500
Loan repayments 5000 1000 2000 2000
Etc. 10000 5000 5000 0
TOTALS This total will 52500 98250 127500
include
april,may,etc
,so leave out.
January-Cash 100% AS
PER
exercise
January-Credit(cash in 20% 50% 25%
from previous credit
sales)
Feb-Cash 100%
Feb-Credit 20 50%
Mar-Cash 100%
Mar-Credit 20%
Workings for Debtors Schedule: (rather write jan/feb with/ instead of %) : see all the calculations on
the left of this debtors schedule for how to do the calculations.
STEP 2: CREDITORS PAYMENTS SCHEDULE

• You can do the same type of creditors payment schedule as above or.
MONTH TOTAL JAN FEB MAR
January-Cash 20000 20000
January-Credit(cash 80000 16000 40000
in from previous credit
sales)
Feb-Cash 24000 24000
Feb-Credit 96000 19200 xxxxxx
iTOTALS xxxx xxxx xxxx xxxxx
• Another type of payments/purchases budget.
Creditors’ payments schedule/Purchases

March April May
Sales 100 000 105 000 117 000
Cost of sales 66 667* 70 000* 78 000*
Opening Stock (15 625)* (60 000) (60 000)
Closing Stock (90 000 x 100
/150) 60 000* 60 000* 60 000*
Increase Stock 44 375* - _ - _
Purchases 111 042 70 000 78 000
Discount @ 4% (4 442)* (2 800)* (3 120)*
106 600 67 200 74 880
Solution: CASH BUDGET or CASH FLOW

STATEMENT
Jan Feb Mar Apr Total
Open Bank (10000)(eg: from (142000) (from
Balance material being paid 1 below left)
Qtr in advance)
Sales 0(there were sales 60000(cash
but no receipts of received for previous
cash yet) sales etc.)
Total (10000) Etc Etc Etc Etc
Less:materials (80000) Etc Etc Etc Etc
Less:labour (10000) Etc etc Etc Etc
Less:other (20000) Etc Etc Etc Etc
Less:etc (22000) Etc Etc etc Etc
Closing Bank (142000) Etc Etc etc Etc
Balance
SALES BUDGET:
1) The sales budget is the first budget to be prepared, and it is usually considered the most important budget
because so many other budgets are directly related to sales and are therefore largely derived from the sales
budget.
2) Factors that are taken into account include

(a) Decisions taken by competitors
What the competitors are doing is important, as we need to consider whether we are likely to gain or lose
market share. Perhaps we should even consider diversifying.
(b) State of local and world economy
We need to consider our current markets as well as the potential for export. Local and world trends are
important, especially as the two begin to merge as lechnological advances improve. We need to consider
inflation rates, exchange rates and cost of debt.
(c) International markets
These must be considered from both the exporting side and the effect that imported goods will have on our
projected sales.
(d) Effectiveness of advertising and promotion policies
The effect that advertising will have on our product needs to be considered. Where necessary, surveys
should be carried out to ascertain consumer tastes. Demand elasticity should also be ascertained in setting
a pricing strategy.
(e) Effects of seasonal fluctuations
We need to ascertain if there are any seasonal or cyclical trends that should be considered in creating our
objective or subjective forecasts.
(I) Stability of supplies
Consideration of supply lines is important, as disruption will cause production bottlenecks that will affect
sales.
(g) Historical data
In preparing forecasts, it is always important to analyse historical data to ascertain trends and determine
whether future expectations are likely to mirror historical trends.
3) Key General Budgeting Factors
1) The key to budgeting lies in the recognition of the sales market as well as the production limitations.: These
are:
a) Expected Sales levels of products
b) Production capacity dictated by space, machine output, availability of labour and material.
c) Financial Resources, both short and long term
Sales Budget (EXAMPLE per

viggio)
JUNE Total JUL Total AUG Total

Value Value Value
Products Price Unit Total Units Tota Units Total
s Value l Value
Valu
e
June
Mondi 120 100 120,00 Etc etc etc Etc
0 0
Hilton 150 200 300,00 Etc etc etc Etc
0 0
420,00 Etc etc etc Etc
0
OR ALTERNATIVELY YOU CAN USE THIS LAYOUT, IF THERE are workings to be shown in the columns,
and not enough space etc.
Products Price Unit Total Value

s
June
Mondi 120 100 120,000
0
Hilton 150 200 300,000
0
420,000
July
Mondi Etc etc

Hilton etc
etc
July
Mondi …total total …total
Hilton …total Etc …total
total
etc
Another Example Of Sales Budget “Workings”(vigio)

May June July Aug
Sales –Units 800 1000 1000 1200
Sales –Value 96000 120000 120000 144000
More “Sales” workings: (Vig) (for getting the % in weird questions with multiple % discounts etc to work out
first, before you do the answer)
May 45% 30% 15%
Jun 45% 30% 15%
Jul ` 45% 30%
Aug 45%
PURCHASES BUDGET : FOR RAW MATERIALS / OR RETAIL STOCK /OR ANY

1) One can do a purchases budget for Raw materials or Stock for a retail shop or anything else. One can do a
separate purchases budget for each of these things , then combine them in a master purchases budget, or just
add the figures from each to get the total purchases for the Budget Income Statement (SCI) or Cash
Budget(cash flow budget)
2) Before you do the purchases budget you must do the Sales Budget then the Production Budget then the Raw
Materials Opening Stock Budget etc. to get all the figures needed to do this budget. So it is one of the last
budgets you do.
PURCHASES BUDGET for: Raw Materials (MANUFACTURING)

(EXAMPLE per viggio)
1st half 2nd half Total
Material A
Required closing 13500kg Etc Etc
Stock
LESS:Opening 12500kg Etc Etc
stock
1000kg Etc Etc
ADD: materials 1250x20 Etc Etc
needed for ea=25000kg
current
production
Budget 26000 Etc Etc
Purchases
Material B.
Etc Etc Etc Etc
Etc Etc Etc Etc
Etc Etc Etc Etc
Etc Etc Etc
Another type of payments/purchases budget:

PURCHASES BUDGET for RETAIL SHOP STOCK.

March April May
Sales ( cosmetic ie: X 100 000 105 000 117 000
70% = cost)
Cost of sales 70 000 78 000 66 667
* * *
Opening Stock (60 000 (60 000 (15 625
) ) )*
Closing Stock (90 000 60 000 60 000 60 000
x 100/150) * * *
Increase Stock - _ - _ 44 375 OPENING STOCK (finished
*
goods OR raw materials ETC)
Purchases 111 042 70 000 78 000
Discount @ 4% (2 800 (3 120 (4 442 BUDGET:
)* )* )* 1) This is a very specialized budget , actually
106 600 67 200 74 880 just a calculation to work out the opening
stock. The budget of this type which would be more of a ‘budget’ is a ‘Stock’ or “stock-holding” budget –There
can be many different “stock ‘ budgets, eg 1-raw materials 2-finished goods etc.
2) A Raw Materials budget can be done in EXACTLY the same format and way- just different names&numbers.
3) This budget could be prepared in a format where the periods are in columns and materials on the left if it is
more convenient. Ie column 1=Material 2-Cost each 3- July: no.Units & Total Cost 4-Aug no.Units&Total Cost
5-Sept. No.Units & Total Cost etc. etc. etc.
Given a policy to keep sufficient stock on hand to meet 50% of sales in following year:
1-First work out the cost of each finished goods.
Finished Goods Budget (EXAMPLE per viggio)
Products Units Cost Total Value
Opening stock Begin Year
Mondi 50%x1000=50 80 40,000
0
Hilton 50%x2000=10 100 100,000
00
140,000
Stock Begin Second Half
Mondi Etc Etc
Hilton Etc
Year End Stock

Mondi Etc total …total …total
Hilton Etc total …total …total
PRODUCTION BUDGET:
• The production budget is dependent on the expected sales, together with required inventory levels of finished
goods. The production plan must take the opening stock levels into account, and specify the timing of
production.
• Remember: if the question says the policy of company is to keep 50% of the ‘estimated’ sales of finished
goods in stock then even if they DID NOT SAY there is any opening stock in the first year, THERE PROBABLY IS
so you must work it out as the OPENING STOCK for the first year of production ( this is a hidden figure- not
given or logical & plain)
• Production budget works on Units, not normally on Rands Value.
Given a policy to keep sufficient stock on hand to meet 50% of sales in following year:
1-First work out the cost of each finished goods.
Production Budget (EXAMPLE per viggio)
Mondi
Required closing 750 600 600
Stock
LESS:Opening 500 750 500
stock
250 (150) 100
ADD: Sales 1000 1500 2500
Budget 1250 1350 2600
Production:
Hilton
Etc Etc Etc Etc
Etc Etc Etc Etc
Etc Etc Etc Etc
Etc Etc Etc
OPENING STOCK -RAW / DIRECT MATERIALS- BUDGET:

Direct materials budget
• Purchases will be determined by opening stock levels, desired closing stock levels, and production
requirements. We need to consider:
o Quantity discounts
o Storage capacity
o Stock and re-order levels
o Delivery times from suppliers
o Liquidity constraints
• So you first have to do the production budget in order to get the figures to be able to do this raw materials
budget next.
• This budget could be prepared in a format where the periods are in columns and materials on the left if it
is more convenient. Ie column 1=Material 2-Cost each 3- July: no.Units & Total Cost 4-Aug
no.Units&Total Cost 5-Sept. No.Units & Total Cost etc. etc. etc.
Given a policy to keep sufficient stock on hand to meet 50% of PRODUCTION(not sales) in next 6mnth period:
For unit calculation is was here: 50% x 1250(from previous budget) x20kg per unit= total material A needed
Raw Materials Stock Budget (EXAMPLE per viggio)

Materials Units Cost Total Value
Opening stock Begin Year
Material A 50%x1250x20=1 2 25000
2500
Material B 50%x1600x10=8 5 40000
000
65000
Stock Begin Second Half
Material A 50%x1350x20=1 Etc
3500
Material B Etc
Year End Stock

Material A Etc total …total …total
Material B Etc total …total …total
LABOUR BUDGET:
1) The direct labour budget is useful for production planning as well as for personnel management. Consideration
must be given to any changes in the type of labour talent needed as a result of changes in the mix of products
manufactured and sold. Significant swings in production during the year cause much greater problems in
planning for labour than for materials and manufacturing overheads.
2) Factors requiring consideration
(a) Establish general requirements for skilled and unskilled labour
(b) Training needs
(c) Staff turnover
(d) Wage negotiating policies.
3) It is Taken from other budgets prepared for eg :Production Budget etc. above then carried on from there, so:
LABOUR Budget (EXAMPLE per viggio)

Mondi type product.
Budget 1250 Etc Etc
Production
Direct Labour x4 Etc Etc
Hour
Total hours =5000 hrs Etc Etc
Hourly rate x10 Etc Etc
Direct Labour =R50000 Etc Etc
Cost
Hilton type product.
Budget Etc Etc Etc
Production
Direct Labour Etc Etc Etc
Hour
Total hours Etc Etc Etc
Hourly rate Etc Etc Etc
Direct Labour Etc Etc Etc
Cost
Total hours =5000 hrs Etc Etc
Hourly rate x10 Etc Etc
Direct Labour =R50000 Etc Etc
Cost
BUDGET INCOME STATEMENT/ STATEMENT OF INC&EXPENDITURE:

Taken from budgets above then carried on from there, so:
Sales 140000
Opening Stock: Finished product 65000
Opening stock: Materials 138250
Purchases: Materials 130000
LESS :Labour costs: (130 000)
473250
LESS Closing stock: Finished product (120000)
LESS Closing stock: Materials (73000)
COST of SALES: 280000 (280000)

Profit for the Year/half year/etc. 140000
Q1 Q2 Q3 Q4 Total
Sales (15000)(eg: even if (142000)
not paid for yet)
Costs
Less:materials (10000) Etc Etc etc etc
Less:labour (80000) Etc Etc etc etc
Less:other (10000) Etc Etc etc etc
Less:etc (20000) Etc Etc etc etc
Planning etc (22000) Etc Etc etc etc
Total costs ******** Etc Etc etc etc
Profit/loss (51)
NOT FINISHED YET : STILL TO DO: no

time
The following set of scans is what you could not finish due to no time:
still to study very well.as budgets are very common & important.
h
CHAPTER 11 RELEVANT COSTS (VIG CH11)

CONTEXT OF RELEVANT COSTS:
1) This chapter explains the “relevant costing decision model” which one must use to make new product/drop
product/special orders/2 alternative decisions/limiting factors etc. type of decisions.
2) Management accounting is primarily concerned with producing budgets, setting performance standards, and
evaluating performance.
3) Relevant costs Requires an understanding of:
1) Special Orders: A special order is one that will not affect a companies current sales to its regular
customers (often as an export). It is usually sold at below full cost – by using contribution to work out an
extra low price, because overheads are covered by sales to normal customers. { {Note : Be careful : even
doing this for export can cause your own goods to re-appear on the local market at lower price than you
usually even sell at by a re-import.}
a) 2 Alternative Decisions: is about comparing a capital–intensive business to a labour intensive-business
usually.
b) Limiting Factors: always look out for when assessing any exam question: eg: production bottlenecks/raw
material supply problems ie:quotas.
TERMS: DEFINITIONS
1) Relevant Cost:
i) Those Future costs and Revenues that will be changed by any specific decision relating to production
volume or selling volume.eg: material costs change if choose to produce more
a future cash flow arising as a direct consequence of the decision under review.-ONLY RELEVANT COSTS
should be considered in decision making , because it is assumed that in the long run future profits
would be maximized if the ‘cash profits’ of the company, ie: the cash earned from sales minus the cash
expenditures incurred to sell the goods, are also maximized.
ii) COSTS WHICH ARE NOT RELEVANT INCLUDE:
(1) Past sunk costs, or money already spent.
(2) Future spending already committed by separate decisions.
(3) Costs which are not of a cash nature eg: depreciation
(4) Absorbed overheads eg rent (so only cash overheads NEWLY by the decision incurred are relevant
to a decision)
iii) The relevant cost of a unit of production is usually the variable cost of that unit plus (or minus) any
change in the total expenditure of fixed costs.
2) Differential cost
a) A differential cost is the difference in cost of alternative choices. If Option A costs an extra R300 Option B
costs an extra R360, the cost differential is R60, with Option B being more expensive. A differential cost is
the difference between the relevant costs of each option.
3) Incremental cost(marginal)
a) The differential cost of an extra unit of production is the extra cost required to make that unit, ie it is the
difference in cost between making the unit and not making it. This type of cost is also called incremental
cost. Incremental costs are relevant costs.
4) Opportunity cost
a) An opportunity cost is the benefit foregone by selecting one alternative in preference to the most
profitable alternative. If, for example, a company is currently making a cash-flow of R100 000 from the
use of a machine and it now has an opportunity of investing in a new machine, the choices are:
i) Continue with the existing machine
ii) Replace with the new machine
iii) Opportunity cost could be the difference in new machine (buying)– old machine (selling) cost
5) Sunk costs
a) A sunk cost in decision-making terms is a past expenditure incurred as a result of past decisions,which:
i) Has been charged as a cost of sale in a previous accounting period
OR
ii) Will be charged in a future accounting period, although the expenditure has already been incurred (or
the expenditure decision irrevocably taken). An example of this type of cost is depreciation. if the fixed
asset has been purchased, depreciation may be charged for several years but the cost is a sunk cost
about which nothing can now be done.
ADDING A NEW PRODUCT

Following factors are to be considered: 1- working capital :cash to be invested in stock and debtors , as well as 2-
incremental admin.costs, 3-advertising, 4-incremental marketing costs, etc.
DROPPING A PRODUCT OR DIVISION

1) Following factors are to be considered:
i) Production capacity taken up by product :
(1) Under-utilisation condition of capacity : if it at least contributes to fixed costs it should not be
dropped.
(2) Operating At Full Capacity: strong consideration should be given to an alternative product if it has a
higher ‘Contribution’ .
ii) Long term prospects for recovery of demand
iii) Market competition
iv) The cash break-even point /CHART
(1) The cash break-even point is only a short term solution where the long term prospects for recovery
are good.
(2) Where the CVP chart shows the profit break even point below which a company is said to be making
a loss,
(3) the CASH BREAK-EVEN CHART is an analysis based on the receivable cash from sales minus the
outflow of all cash payable.It ignores all NON-CASH OUTLAYS and takes account of time lags in
accounts receivable and payable. Eg depreciation could make a difference between the 2 chart
types. So if cash outflows are low the company could SAFELY continue to operate at a financial
actual loss without big risk of INSOLVENCY.
MAKE OR BUY DECISION

1) Includes outsourcing a service (eg: IT Dept functions. )
2) Qualitative as well as Quantitative aspects must be considered:
a) QUALITATIVE ASPECTS:
i) Consideration of competitiors economies of scale.
ii) Consideration of inhibited future expansion due to the tying up of available capacity.
iii) Reduction in dependence on outside supplier.
iv) Internal quality control, rather than relying on outside companies quality control dept.
v) Risk of destroying long term relationships with suppliers which may prove to be harmful and disruptive.
vi) Technology change often makes internal production more costly than purchasing from outside.
b) QUANTITATIVE ASPECTS :
i) This means the Actual numbers involved : see example below.
3) METHOD:
a) You only use Variable costs to go and calculate the Differential cost between making or buying the product.
So only relevant costs are considered, not sunk costs like overheads eg rent + depreciation.
SPECIAL ORDERS
1) To work this out , do an “incremental analysis” ( income statement – all costs&profit added up one by one sort
of)of new order then minus any loss of sales from production capacity (less commission etc.) to get the final
answer.
2) A special order is one that will not affect a companies current sales to its regular customers (often as an
export). It is usually sold at below full cost – by using contribution to work out an extra low price, because
overheads are covered by sales to normal customers. { {Note : Be careful : even doing this for export can
cause the goods to re-appear on the local market at lower price than you usually even sell at.}
3) The following qualitative aspects must be considered for special orders:
a) The effect of selling at lower prices to use excess capacity: the buyer might undersell you to your normal
customers.
b) One might have to use normal customers capacity to fulfill a large order and loose normal sales.
c) The special order may be packaged in a different brand so as not to compete with the normal sales, or sold
on a foreign market.
d) Price must cover variable costs, special shipping& production costs and then still have some
contribution(profit) left to make it viable
e) Opportunity cost of tying up the plant must be considered.
f) Effect on commissions paid to company staff.
g) Accommodation of sales to existing customers
h) Future long term contracts from company requesting a special order price.( now they always want the low
price, not just once,- your normal customers will want it too if they ever find out!)
i) Market factors: how will the special order affect our competitiors attitude to pricing.
4) Example:
IMPORTANT : USE THE RELEVANT COSTING DECISION MODEL AS AN AID

IN CHOOSING AMONG COMPETING ALTERNATIVES.
1) LABOUR VS CAPITAL INTENSIVE EVALUATION: To Evaluate by Normal Method:

a) first calc. the fixed costs, then evaluate how long it will take to break even.
b) Next calc. indifference point: fixed+variable x X = fixed + variable x X. (???when on a time-volume line
both are equal- or what???)
c) Draw a graph to see which is more profitable ABOVE the indifference point.
d) To evaluate a decision with limiting factors, choose the one which maximizes profit on the basis of
contribution per limiting factor.
2) LIMITING FACTORS EVALUATION: How To Evaluate Management Accounting Information For All
Questions And In Particular Where There Is A Limiting Factor
a) Step1-5 Simplified: 1-sort variable/fixed costs+ work out totals.2-do contribution VS limiting
factors(bottlenecks).
Step 1
Sort out the information given by evaluating fixed costs and variable costs, both budget and actual. Virtually
all questions require an analysis of the cost structure. Have headings, eg fixed costs, variable costs, high / low,
absorption costing, variable costing. You will invariably be given information on a variable costing or
absorption costing basis that requires you to sift through the information and show the costs as variable costs
or fixed costs.
Step 2
Identify maximum production capacity for machinery or labour and show whether there is a limiting factor.
Headings should read “Potential limiting factor — machine hours”, (or labour hours or material, etc). You must
also conclude whether there is a limiting factor for each cost analysed.
Step 3
When there is a limiting factor, you must determine the contribution per unit, followed by the cost per limiting
factor.
Step 4
Do the budget.
Step 5
Evaluate possible alternative information that may change the contribution per unit determined in Step 3
above.
NOTE :EXAMPLE OF CONTRIBUTION PER LIMITING FACTOR WHERE BUYING IN IS A PROBLEM.

This is often a problem for students . Where there is an option to buy in , the correct method is to calc. the
contribution per limiting factor.Method is shown here:
3) 2 Alternative Decisions: is about comparing a capital–intensive business to a labour intensive-business.

4) When evaluating a business decision or when answering an examination question that requires an opinion on
how a business should be structured you should consider the following:
a) BUSINESS COST STRUCTURE
Business is about maximising contribution and minimising ‘overheads’.The goal should be lower fixed costs to
be able to generate a positive contribution or profit faster.When starting a company it is therefore better to
start small and not ‘too flashy’ in order to minimise the fixed costs. If the business does not work, your losses
will be restricted to the fixed costs. Low fixed costs, however, tend to go hand in hand with high variable
costs. The contribution per unit for new companies will normally tend to be relatively low.
b) FIRST MILESTONE
The first objective of a business should be to break even. If a company cannot break even in the short to
medium-term, it is probably a bad investment. You should therefore always determine the 1-break even
point and the 2-margin of safety. Companies with a low fixed cost structure or low overheads will be less
risky than companies with high fixed costs. In an examination question asking for advice how a company is
performing, focus your answer on an analysis of the companies cost structure, ie its fixed costs and
contribution per unit.
c) MEDIUM /LONG TERM OBJECTIVE:
Once a company has established itself and has passed the break-even point, the company will look to
changing its cost structure so that the contribution per unit increases. Invariably, this means moving from a
‘low fixed cost, high variable cost’ cost structure to a ‘high fixed cost, low variable cost’ cost structure. It
therefore becomes important at this point to determine the Production Point Of Indifference, ie where the
total cost of a capital-intensive company = the total cost of a labour-intensive company
d) LONG-TERM OBJECTIVE
The long-term objective should be to maximise return on investment. Companies should therefore aim at
increasing sales and reducing variable costs. In the long-term, a company will aim at minimising the variable
costs of production, and therefore maximise contribution. Targeting fixed costs is counter-productive. Fixed
costs are the engine-room of the company and represent the manufacturing assets that generate sales profit.
If the overheads are too high, it is because the sales are too low. Target sales, and the costs will look after
themselves. Most companies, when faced with difficult times, tend to target fixed costs such as salaries and
the infrastructure of the company, which often leads to a slow death. It is better to target variable costs which
will increase contribution and sales rather than a cost reduction. Always focus on sales.
d) EXAMPLE:
The example below evaluates two production options, high fixed costs, low variable costs vs. the option of low
fixed costs and high variable costs. In examinations, you must focus on the overall discussion.
1- Effects of different cost structure (VARIABLE – FIXED –CONTRIBUTION)

2 -Break-even point
3 -Point of indifference ; indifference point
4 -Long-term cost structure
Still to do: 1- METHOD EXACTLY OF HOW TO DO THE INDEIFFERECE POINT

2-ALL THE RATIOS TO USE AND WORK OUT IN THE EVALUATION PROCESS
3-EXAMPLES OF LIMITING FACTORS & METHOD IN OWN WORDS.
See all following scans for ‘still to do’ +/-

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MACN 101 Management Accounting Notes Page |1

Management Accounting. own notes

VARIABLE COSTS :............................................................................................................................................26

INtRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS:........................................................................44

Positive factors of budgeting............................................................................................................................83

RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT(PG 142

TO SCAN IN/DO STILL:

REM: NOTES SPECIAL THINGS TO

I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers.

DIRECT AND INDIRECT COSTS

i) In manufacturing organisations traditional product costs accumulated as follows – ( developed esp.

PERIOD AND PRODUCT COSTS.

RELEVANT AND IRRELEVANT COSTS:

AVOIDABLE OR UNAVOIDABLE COSTS:

-INCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS

JOB COSTING AND PROCESS COSTING SYSTEMS:

ABSORPTION COSTING AND VARIABLE COSTING:AND STANDARD

FOR ABSORBTION COSTING THRE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2-

COST ABSORBTION RATE :

VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING)

MAINTAINING A COST DATABASE:

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR

UNITS vs VARIABLE COSTS GRAPH

VARIABLECOSTS: (a)TOTAL Variable Costs:(b)Per Unit (cost =R10 per

PROFIT vs VARIABLE COSTS GRAPH.

FIXED PRODUCTION COSTS :

UNITS vs FIXED COSTS GRAPH

PROFIT vs FIXED COSTS GRAPH

SEMI-FIXED (OR STEP-FIXED COSTS) :

SEMI-VARIABLE (OR MIXED COSTS) :

“STANDARD PROFIT STATEMENT”:

3-OWN NOTES RECONCILLIATIONS : ANY

1-CHAPTER 1 :INTRODUCTION(drury ch1)

DEFINITION OF ACCOUNTING ( USA ACC. ASSOCIATION)

USERS OF ACC INFO:

DIFFERENCE BETWEEN MNGMT AND FIN ACC.:

THE DECISION MAKING PROCESS:

ii) To facilitate management by exeption.

INFLUENCE OF CHANGING COMPETITIVE ENVIRONMENT ON MNGMNT

TOTAL VALUE-CHAIN ANALYSIS

f) Greater Product variety

a) Just in Time Production Systems

IMPACT OF I.T./COMPUTERS MNGMT ACC.

INTERNATIONAL CONVERGANCE OF MNGMNT ACC.

FUNCTIONS OF MANAGEMENT ACCOUNTING:

HISTORY OF MANAGEMENT ACCOUNTING.

CH6-CHAPTER : COST CLASSIFICATION

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR

VARIABLECOSTS: (a)TOTAL Variable Costs:(b)Per Unit (cost =R10 per

FIXED PRODUCTION COSTS :( OR ‘LONG TERM VARIABLE COSTS’)

Unit Fixed Cost

SEMI-FIXED (OR STEP-FIXED COSTS) :

MIXED COSTS (OFTED REFERRED TO AS SEMI-VARIABLE COSTS ,BUT WE

SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA

HOW TO SEPARATE THE FIXED AND VARIABLE PART OF MIXED COSTS :