MAC2601 EXAM PACK.

MAC2601 EXAM PACK. Principles Of Management Accounting. NATURE AND BEHAVIOUR OF COSTS (1) Manufacturing cost/ Production cost Manufacturing costs - costs incurred in the manufacturing process of a product. x Direct + Indirect cost = Manufacturing cost x Direct cost = Direct Material + Direct Labour x Total Direct cost = Prime cost x Conversion cost = Direct Labour + Manufacturing overheads x Indirect cost = Indirect material + Indirect Labour x Total Indirect cost = Overheads Direct cost – costs directly linked to the product. Indirect cost – costs indirectly linked to the product Manufacturing Total cost = variable cost + fixed cost x Variable cost – costs that vary with production e.g. material costs x Fixed cost – costs that are constant throughout the manufacturing period e.g. Rent. x Semi variable cost – cost that have both elements variable element and fixed element e.g. Telephone bill Non Manufacturing cost / Period costs Non Manufacturing cost – costs incurred after the manufacturing process a. Marketing cost – costs related to the sale and distribution of the final product. b. Administrative costs – costs incurred in directing and controlling the organization. Splitting – fixed from variable cost Methods used ƒ High low method ƒ Linear equation ƒ Scatter diagram ƒ Simple regression analysis / least squares methods We will concentrate on the high low method e.g. Observations No. of Units Total overhead cost GR TUTORIALS 2 1 step - identify the two points highest level and the lowest level and calculated the differences. High Low 2. Calculate the variable rate = ௖௛௔௡௚௘ ௜௡ ோ ௖௛௔௡௚௘ ௜௡ ௎௡௜௧௦ ଶହ ଴଴଴ ଶହ଴ = R100/m Variable cost after producing 900 units and 900 x 100 = R90 000 3. Calculating fixed cost Total cost = fixed cost + variable cost. 120 000 = fixed cost + 90 000 (900x100) 120 000 = f x d cost + 90 000 120 000 – 90 000 = f x d COH 30 000 = FX d cost GR TUTORIALS 3 GR TUTORIALS 4 Cost Volume – profit analysis It investigates the change in profit that from changes in activity levels Selling price per unit Variable cost per unit Total fixed costs NB: Assumptions of the cost CVP analysis ƒ Selling price per unit in consultant unless stated. ƒ All cost is linear and can be accurately dividend into variable and fixed elements. ƒ Variable costs are constant per unit, where as fixed cost, we content in total over the relevant range. ƒ Inventory levels do not change – ƒ CVP. Analysis applies to the relevant range only. ƒ Relevant range – activity levels within which the organization normally operates and for which cost and remains behavior are known and can be predicted. Formulas Contribution = sales - total variable costs Contribution ratio = ௖௢௡௧௥௜௕௨௧௜௢௡ ௦௔௟௘௦ x 100 % Breakeven Point ƒ Point where income is equal to expenses i.e. profit is zero ƒ Contribution = total fixed cost Can be expressed in units or value (Rand value) BEP in units = ௧௢௧௔௟ ௙௜௫௘ௗ ௖௢௦௧௦ ௖௢௡௧௥௜௕௨௧௜௢௡ ௣௘௥ ௨௡௜௧ Contribution per units = selling price/unit – variable cost per unit BEP in value = ௧௢௧௔௟ ௙௜௫௘ௗ ௖௢௦௧௦ ௖௢௡௧௥௜௕௨௧௜௢௡ ௥௔௧௜௢ NOTE: BEV = BE units x selling price per unit BE units = ஻ா ௩௔௟௨௘ ௦௘௟௟௜௡௚ ௣௥௜௖௘ ௣௘௥ ௨௡௜௧ Margin of safety (MOS) Amount, or number of units or percentage by which sales revenue may decline before incurring a loss. Margin of safety In value = total sales – breakdown sales In units = total sales (units) – break even sales units Margin of safety Ratio C GR TUTORIALS 5 Mos ratio (units) = ௧௢௧௔௟ ௦௔௟௘௦ ௨௡௜௧௦ି௕௥௘௔௞௘௩௘௡ ௦௔௟௘௦ ௨௡௜௧௦ ௧௢௧௔௟ ௦௔௟௘௦ x 100 % Mos ratio value = ௠௔௥௚௜௡ ௢௙ ௦௔௙௘௧௬ ௜௡ ௩௔௟௨௘ ௧௢௧௔௟ ௦௔௟௘௦ ௩௔௟௨௘ x 100 % Targeted Profit Analysis Used to determine the sales value that will produce a certain net profit. NB. If you understand bep it should be easier to remember the following formulas and also calculating. Target sales In value = ௙௜௫௘ௗ ௖௢௦௧ା௘௫௣௘௖௧௘ௗ ௣௥௢௙௜௧ ௖௢௡௧௥௜௕௨௧௜௢௡ ௥௔௧௜௢ In units = ௙௜௫௘ௗ ௖௢௦௧௦ା௘௫௣௘௖௧௘ௗ ௣௥௢௙௜௧ ௖௢௡௧௥௜௕௨௧௜௢௡ ௣௘௥ ௨௡௜௧ Key important things to note in the effect of price and changes on breakeven point. ƒ When sales increase it would be due to increase in selling price/unit or increase in units sold. ƒ Increase in selling price limit – no effect on production cost. ƒ Increase in sales volume - variable cost are affected , they have to be increased in the same proportion (remember the nature of variable cost and cvp assumption) BEP Graph BEQ Quantity/units produced BEV R VARIABLE COST TOTAL SALES BEP Profit 20x loss GR TUTORIALS 6 Topic 3 Material, Labour, Overhead Material Physical materials converted in products during the manufacturing process (direct material, indirect materials, and other consumables used by the organization). Reasons for holiday inventory Transaction motive – holding inventory for day to day use in production process or for sales, where the supplier might not be able to supply at short notice. Precautionary motive – holding extra inventory when future demand is uncertain. Speculative motive – holding more or less inventory than usual because a change in the supplier’s price is anticipated. Carrying and ordering cost Carrying / holding cost – relevant costs of keeping inventory on the organization’s premises until used and includes handling costs and storage cost.