costing and budgetary control (tc9)

228 Pages·2017·2.41 MB·English

COSTING AND BUDGETARY CONTROL (TC9)
TECHNICIAN DIPLOMA IN ACCOUNTING
MALAW T TC HH I E A N RINTSETRIETDU TAEC OCOF UNTANTS
COSTING AND BUDGETARY CONTROL (TC9) IN MALAWI
‘January 2014 COSTING & BUDGETARY
CONTROL (TC9)
TECHNICIAN DIPLOMA IN ACCOUNTING
INSTITUTE OF CHARTERED ACCOUNTANTS
INN M11 AALAWI (ICAM)
CCOOSSTTIINNGG AANNDD BBUUDDGGEETTAARRYY CCOONNTTRROOLL ((TTCC99))
Copyright © Th e Institute of Chartered Accountants in Malawi – 2014
Th e Institute of Chartered Accountants in Malawi
P.O. Box 1 Blantyre
E-mail: [email protected]
www.icam.mw

ISBN: 978-99908-0-417-1
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means-
graphic, electronic or mechanical including photocopying, recording, taping or information storage and
retrieval systems-without the written permission of the copyright holder.
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COSTING AND BUDGETARY CONTROL (TC9)
PREFACE
INTRODUCTION
The Institute noted a number of difficulties faced by students when preparing for the Institute’s
examinations. One of the difficulties has been the unavailability of study manuals specifically
written for the Institute’s examinations. In the past students have relied on text books which were
not tailor-made for the Institute’s examinations and the Malawian environment.
AIM OF THE MAN(cid:56)AL
The manual has been developed in order to provide resources that will help the
Institute’s students attain the needed skills. It is therefore recommended that each student
should have their own copy.
HOW TO USE THE MANUAL
Students are being advised to read chapter by chapter since subsequent work often builds on
topics covered earlier.
Students should also attempt questions at the end of the chapter to test their understanding. The
manual will also be supported with a number of resources which students should keep checking
on the ICAM website.
COSTING AND BUDGETARY CONTROL (TC9)
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TC9: COSTING AND BUDGETARY CONTROL
AIM OF THE STUDY
To enable students understand principles of costing, their application in product costing,
management information systems and preparation of budgets and budgetary control.
OBJECTIVES
By the end of the study students should be able to:
i. Ascertain costs for products and services using appropriate costing methods and use
them to establish prices;
ii. Prepare budgets for various activities using appropriate budgeting approaches and
methods:
iii. Analyse standards and budgets of various activities and compare with actual to
explain differences;
iv. Use relevant cost theory to make simple and short term management decisions.
FORMAT AND STANDARD OF THE EXAMINATION PAPER
The paper will consist of 5 questions each carrying 20 marks. Candidates will be required to
answer all questions.
SPECIFICATION GRID
This grid shows the relative weightings of topics within this course and should provide
guidance regarding the time to be spent on each.
Syllabus Area Weightings (%)
Cost Ascertainment 40
Planning, performance measurement and
control
30
Decision 30
Total 100
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COSTING AND BUDGETARY CONTROL (TC9)
Learning Outcomes
1 . Cost ascertainment
Students will be able to ascertain costs for products and services using appropriate
costing methods and use them to establish prices.
Students should be able to:
a) Understand the basic concepts of cost accounting
b) Classify costs into fixed, variable and mixed and able to separate mixed
costs into variable and fixed components.
c) Select the most suitable method of costing for different products and services
d) Understand basic concepts of overhead allocation, apportionment and
absorption
e) Prepare management information using :
(cid:120) Marginal costing
(cid:120) Absorption costing and reconcile the differences in profits reported
f) Use non traditional costing methods in the provision of management
information
2. Planning, performance measurement and control
Students will be able to identify and describe the purpose of standard costing system and
the application in budgetary control. Select appropriate budgeting approaches and methods
and prepare budgets.
Students should be able to:
a) Understand the concepts of standards and standard costing and how they
are set.
b) Explain how budgeting fits into the overall planning and control
framework
c) Identify and describe the various stages in the budgeting process
d) Prepare functional and master budgets using different techniques
e) Apply the principles of flexible budgeting in budgetary control
f) Calculate differences between actual performance and standards or
budgets in terms of cost and volume effects and identify possible
reasons for those differences.
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COSTING AND BUDGETARY CONTROL (TC9)
3. Decision making
Students should be able to apply principles of marginal costing and relevant costs
for use in management decision making.
Students should be able to:
a) Calculate the breakeven point, contribution and margin of safety for a
given product or service.
b) Understand Cost-Volume-Profit (CVP) analysis, assumptions and
limitations.
c) Distinguish between relevant and irrelevant costs and revenues for
decision making.
d) Describe the key concept that should be applied for presenting
information for product mix decisions when capacity constraints apply.
e) Describe how marginal costing can assist in short-term decision making.
REFERENCES
ICAM Manual Costing and Budgetary Control
Drury, J.C. (2012) Management and Cost Accounting, (8th Edition). Cengage Learning:
London.
Lucey, T. (2009) Costing, (6th Edition???). Continuum: London
Horngren, C.T, et al (2002). Cost Accounting: A Managerial Emphasis, (13th Edition).
Prentice Hall International
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COSTING AND BUDGETARY CONTROL (TC9)
TABLE OF CONTENTS
Chapter 1 Introduction to Cost Accounting 6
Chapter 2 Accounting for and Control of Materials 18
Chapter 3 Accounting for and Control of Labour 37
Chapter 4 Accounting for and Control of Overheads 48
Chapter 5 Marginal Costing 59
Chapter 6 ActivityBased Costing 70
Chapter 7 Costing Methods 80
Chapter 8 Process Costing 89
Chapter 9 Standard Costing 108
Chapter 10 Budgeting 117
Chapter 11 Flexible Budgets and Budgetary Control 143
Chapter 12 Variance Analysis 154
Chapter 13 Cost – Volume – Profit Analysis 169
Chapter 14 Decision Making 189
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COSTING AND BUDGETARY CONTROL (TC9)
CHAPTER 1
INTRODUCTION TO COST ACCOUNTING
Learning objectives
By the end of this chapter students should be able to:
(cid:120) Understand the differences between financial accounting and management accounting
(cid:120) Understand the basic concepts of cost accounting
(cid:120) Classify costs in various categories
(cid:120) Separate mixed costs into fixed and variable components
(cid:120) Apply cost behaviour in cost estimation
Introduction
Cost accounting is a part of accounting. Accounting is defined as:
"the art of recording, classifying, and summarising in a significant manner and in terms
of money, transactions and events which are, in part at least, of financial character, and
interpreting the results thereof.” (American Institute of Certified Public Accountants)(cid:3)
From the earlier studies students are introduced to accounting in general but at this
point it is important to explain the various branches of accounting as follows:
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ACCOUNTING(cid:3)
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
provides the scorecard by provides information to
which a company's overall management for planning,
control and decision making
past performance is judged
by outsiders.
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COSTING AND BUDGETARY CONTROL (TC9)
Financial Accounting:
Financial accounting is concerned with provision of information to external parties outside
the organization
Cost and Management Accounting
Cost Accounting is the establishment of budgets; standard costs (benchmark for
comparison with actual); and actual costs of operations, processes, activities or products;
and the analysis of variances, profitability or the social use of funds.
(CIMA’s official terminology)
Functions of Cost Accounting
(cid:120) Determination and analysis of costs and revenue of a business enterprise. Cost
procedures have been developed to record costs and income by departments, processes,
operations, lines of products, sales territories, etc so that comparisons by division and
periods of time can be made in order to assess the operating efficiency of each business
area.
(cid:120) Cost control. Costs are accumulated and analysed to obtain value for money. The
objective is to maintain costs at the lowest point consistent with the most efficient
operating conditions in the light of the service or benefit obtained.
(cid:120) Determining costs and profit for an accounting period
(cid:120) Creating inventory values for costing and pricing purposes
(cid:120) Providing management with information in connection with the problems that involve
choice from among two or more alternative courses of action
(cid:120) Aiding and participating in the creation and execution of plans and budgets.
The main objective of cost accounting, therefore, is the creation of underlying data for use
in management accounting.
Management Accounting:
(cid:3)
“The(cid:3)process(cid:3)of(cid:3)identification,(cid:3)measurement,(cid:3)accumulation,(cid:3)analysis,(cid:3)preparation,(cid:3)interpretation
and communication of information used by management to plan, evaluate and control
within an entity and to assure appropriate use of and accountability for its resources.
Management accounting also comprises the preparation of financial reports for non-
management groups such as shareholders, creditors, regulatory agencies and tax authorities"
(CIMA Official Terminology).
It is “ a profession that involves partnering in management decision making, devising
planning and performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of an
organization’s strategy." Institute of Management Accountants (IMA)
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COSTING AND BUDGETARY CONTROL (TC9)