Accounting & Costing for Business PDF

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Accounting & Costing for Business

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Table of Contents
Task 1: Enter the transactions in Pat’s journal and ledger accounts and compile a trial
balance as at 31 December 2019 ....................................................................................... 3
1.1 Pat’s journal account as at 31 December 2019 ..................................................................... 3
1.2 Pat’s ledger account as at 31 December 2019 ...................................................................... 4
1.3 Pat’s Trial Balance as at 31 December 2019 ......................................................................... 6
Task 2 ............................................................................................................................... 7
2.1 “Financial statements provide useful information to a wide range of users” Discuss ............ 7
2.2 Shane’s trading and profit and loss account for the year to 31 March 2019 and the balance
sheet as at that date ................................................................................................................ 9
2.2.1 Shane’s trading and profit and loss account for the year to 31 March 2019 .................................... 9
2.2.2 Shane’s balance sheet for the year to 31 March 2019 ..................................................................... 10
Task 3: Identify and classify different types of cost of the new product ............................ 10
Task 4: Calculate the variances in as much detail as possible and identify possible causes
for the variances and recommend corrective actions for them. ........................................ 12
4.1 Variance Calculation of Claudia Limited’s product X .......................................................... 12
4.1.1 Sales Variances .................................................................................................................................. 12
4.1.2 Direct Material Variances.................................................................................................................. 12
4.1.3 Direct Labour Variances .................................................................................................................... 13
4.1.4 Variable Production Overhead Variances ......................................................................................... 14
4.1.5 Fixed Production Overhead Variances.............................................................................................. 14
4.2 Possible Causes for the Variances of Claudia Limited’s Product X and Recommended
Corrective Actions for them. ................................................................................................... 16
5.0 References ................................................................................................................ 18

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Task 1: Enter the transactions in Pat’s journal and ledger accounts and
compile a trial balance as at 31 December 2019
1.1 Pat’s journal account as at 31 December 2019
Pat’s Business
General Ledger Account
As at 31st December 2019
Date Description Relevant Account Debit
(Rs)
Credit (Rs)
01.12.19
Cash invested by Pat for the
business
Cash a/c 10,000
Capital a/c 10,000
02.12.19
Goods bought on credit from
creditors (Grass Rs.6000 and
Seed Rs.7000)
Purchases a/c 13,000
Creditors a/c 13,000
10.12.19
Goods sold on credit to
debtors (Fog Rs.3000 and
Mist Rs.4000)
Debtors a/c 7,000
Sales a/c 7,000
12.12.19
Goods returned to the
suppliers (Grass Rs.1000 and
Seed Rs.2000)
Creditors a/c 3,000
Purchase Return a/c 3,000
15.12.19
Additional goods bought on
credit from creditors (Grass
Rs.3000 and Seed Rs.4000)
Purchases a/c 7,000
Creditors a/c 7,000
20.12.19
Goods sold on credit to
debtors (Fog Rs.2000 and
Mist Rs.3000)
Debtors a/c 5,000
Sales a/c 5,000
24.12.19 Office expenses paid in cash
Office Expense a/c 5,000
Cash a/c 5,000
29.12.19
Cash received from debtors
(Fog Rs.4000 and Mist
Rs.6000)
Cash a/c 10,000
Debtors a/c 10,000
31.12.19
Cash paid to creditors (Grass
Rs.6000 and Seed Rs.8000)
Creditors a/c 14,000
Cash a/c 14,000

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1.2 Pat’s ledger account as at 31 December 2019
Debit Cash Account Credit
01.12.19 Capital 10,000 24.12.19 Office expense 5,000
29.12.19 Debtors 10,000 31.12.19 Creditors 14,000
31.12.19 Balance c/d 1,000
20,000 20,000
01.01.20 Balance b/f 1,000
Debit Capital Account Credit
31.12.19 Balance c/d 10,000 01.12.19 Cash 10,000
10,000 10,000
01.01.20 Balance b/f 10,000
Debit Purchases Account Credit
02.12.19 Creditors 13,000 31.12.19 Balance c/d 20,000
15.12.19 Creditors 7,000
20,000 20,000
01.01.20 Balance b/f 20,000
Debit Grass’s Account (Creditor) Credit
12.12.19 Purchase return 1,000 02.12.19 Purchases 6,000
31.12.19 Cash 6,000 15.12.19 Purchases 3,000
31.12.19 Balance c/d 2,000
9,000 9,000
01.01.20 Balance b/f 2,000

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Debit Seed’s Account (Creditor) Credit
12.12.19 Purchase
return 2,000 02.12.19 Purchases 7,000
31.12.19 Cash 8,000 15.12.19 Purchases 4,000
31.12.19 Balance c/d 1,000
11,000 11,000
01.01.20 Balance b/f 1,000
Debit Fog's Account (Debtors) Credit
10.12.19 Sales 3,000 29.12.19 Cash 4,000
20.12.19 Sales 2,000 31.12.19 Balance c/d 1,000
5,000 5,000
01.01.20 Balance b/f 1,000
Debit Mist's Account (Debtors) Credit
10.12.19 Sales 4,000 29.12.19 Cash 6,000
20.12.19 Sales 3,000 31.12.19 Balance c/d 1,000
7,000 7,000
01.01.20 Balance b/f 1,000
Debit Sales Account Credit
31.12.19 Balance c/d 12,000 10.12.19 Debtors 7,000
20.12.19 Debtors 5,000
12,000 12,000
01.01.20 Balance b/f 12,000

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Debit Purchase Return Account Credit
31.12.19 Balance c/d 3,000 12.12.19 Creditors 3,000
3,000 3,000
01.01.20 Balance b/f 3,000
Debit Office Expense Account Credit
24.12.19 Cash 5,000 31.12.19 Balance c/d 5,000
5,000 5,000
01.01.20 Balance b/f 5,000
1.3 Pat’s Trial Balance as at 31 December 2019
NO Description Debit Credit
1 Cash 1,000
2 Capital 10,000
3 Purchases 20,000
4 Grass (Creditor) 2,000
5 Seed (Creditor) 1,000
6 Fog (Debtor) 1,000
7 Mist (Debtor) 1,000
8 Sales 12,000
9 Purchase Return 3,000
10 Office Expense 5,000
Total 28,000 28,000

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Task 2
2.1 “Financial statements provide useful information to a wide range of users”
Discuss
Financial statements are formal records of an organization’s financial activities and the
financial performance (Murphy, 2020). There are several financial statements such as;
 Statement of profit or loss
 Statement of financial position
 Statement of changes in equity
 Statement of cash flows
The main purpose of financial statements is to provide information about an organisation’s
financial performance, position, cash flows and changes in equity to a wide range of users to
make successful economic decisions. Mostly stakeholders of a company are interest in the
information provided in the financial statements for different purposes such as;
 Managers use financial statements to assess the present and past transactions and to
evaluate the financial performance and position of the company and its rivals, with the
intention of taking efficient future business decisions and to maximise shareholder
wealth and to gain competitive advantage.
 Shareholders assess returns and risks of their investments in a company to make future
investment decisions.
 Suppliers are interested in the financial statements to evaluate the credit worthiness of
a company, to decide whether to supply goods on credit and to set credit terms based
on a company’s financial status.
 Customers refer financial statements to evaluate whether the company has adequate
resources to make sure there is a stable supply of goods in the future. Mostly customers
who are depending on specialized products are keen on a steady supply based on their
demand.

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 Employees evaluates a company’s profitability using financial statements to have
understanding about their future remuneration and job security.
 Competitors use financial statements to compare their performance with rival
companies to gain knowledge and develop strategies with the intention of obtaining a
competitive advantage.
 Governments analyse financial statements to keep records on economic progress of
companies and to determine the accuracy of the taxes.
 Financial institutes such as banks decides on whether to grant loans to a company by
assessing the information on liquidity and the availability of assets presented in a
company’s financial statements.
 General public is interest in how a company’s activities effects the economy,
environment and the local community therefore, to assess it they use the information
provided by financial statements.
In conclusion by considering the information provided above, it is clear that financial
statements provide useful information to a wide range of users. Such information supports them
to take appropriate decisions regarding business matters and become successful.

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2.2 Shane’s trading and profit and loss account for the year to 31 March 2019 and
the balance sheet as at that date
2.2.1 Shane’s trading and profit and loss account for the year to 31 March 2019
Shane’s business
Trading and profit and loss statement
For the year ended 31st March 2019
Notes Description Rs. Rs. Rs.
- Sales 100,000
- Add: opening Stock at 1st April 2018 10,000
- Add: purchases of goods 55,000
- Less: closing stock at 31st March 2019 (15,000)
- Cost of Sales (50,000)
- Gross Profit 50,000
- Less: Administrative expenses
1 Insurance 1,500
- Office expenses 15,000
2 Office furniture depreciation 500
- Bad debts 1,000
3 Provision for doubtful debts 450
- Salaries (25,000 + 1,000) 26,000 (44,450)
- Net Profit 5,550
Notes (Rs.)
1. Insurance expense for the year ended 31/03/2019 = Insurance expense - Prepaid insurance
= 2,000 – 500
= 1,500
2. Office furniture depreciation per annum = Office furniture cost × 10%
= 5,000 × 10%
= 500
3. Provision for doubtful debts = [Outstanding debtors × 5%] – Provision at 1/04/2018
= [(20,000 – 1,000) × 5%] - 500
= 450

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2.2.2 Shane’s balance sheet for the year to 31 March 2019
Shane’s business
Balance sheet
For the year ended 31st March 2019
Description Cost Accumulated depreciation Net value
Non-current assets
Office furniture 5,000 (2,000 + 500) = 2,500 2,500
Current assets
Closing stock 15,000
Bank 1,200
Cash 300
Trade Debtors (20,000 - 1,000 - 950) 18,050
Insurance pre-payments 500 35,050
Total assets 37,550
Equity
Capital 33,000
Net profit 5,550
38,550
Less: drawings (6,000) 32,550
Current liabilities
Trade creditors 4,000
Accrued salary expense 1,000
Total equity and liabilities 37,550
Task 3: Identify and classify different types of cost of the new product
When introducing new products to the market a company should first evaluate the stages of a
product launch and determine the costs associated with it, to successfully plan ahead. Hence
it’s the responsibility of management accountants to identify and classify different types of
costs of new products. As one of the main objectives of this company is to introduce at least
one new product to the market in a year, the company will be incurring a significant amount of
research and development cost. Therefore, the company should evaluate the costs related to the
new product in order to set a product value, with the intention of achieving at least a breakeven
point and to obtain profits from the new products in the future.

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Firstly, a company will incur product development and production cost. Direct labour, direct
material and overheads are some of the costs that the company will incur during production
and development process. When developing a new product, the company will have to purchase
raw materials, necessary equipment and if extra space is needed to conduct production
processes, then they will have to incur fixed costs such as factory rentals. Afterwards when
engaging in the production process, the company will have to recruit employees to manufacture
the products which is also known as direct labour cost. Further variables overhead costs such
as material shipment cost, inventory costs, wages for handling and utilities for equipment, and
fixed overhead costs such as production supervisor salaries, electricity bills, and depreciation
on production equipment will be incurred.
After the product is successfully manufactured the company will have to incur costs to test the
quality and safety of the product before delivering it to the market. If the tests are not
successful, then additional cost must be incurred to rectify the errors of the product. Afterwards
the company will have to incur marketing costs to promote and to make the community aware
of the product. For this purpose, advertisement costs, press releases, social media networking
and sponsors will be some of the costs that the company will come across when engaging in
marketing. Consequently, when making short-term and sales price decisions, the managers
might modify product costs to remove the overhead costs. Also the managers can focus on the
direct material and labour costs of a product and the time it spends on a bottleneck operation.

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Task 4: Calculate the variances in as much detail as possible and identify
possible causes for the variances and recommend corrective actions for
them.
4.1 Variance Calculation of Claudia Limited’s product X
4.1.1 Sales Variances
4.1.1.1 Sales Price Variance
Actual Revenue (1,000 units × Rs.975) = 975,000
Standard revenue from actual quantity sold (1,000 units × Rs.900) = 900,000
Sales price variance (Rs.) = 75,000 (F)
4.1.1.2 Sales Volume Variance
Actual sales volume = 1,000 units
Budgeted sales volume = 1,020 units
Sales volume variance in units = 20 units (A)
× standard contribution margin (Rs.900 – Rs.600) × Rs.300
Sales volume contribution variance in Rs. = 6,000 (A)
4.1.2 Direct Material Variances
4.1.2.1 Direct Material Price Variance
Actual material cost for 90,000 kg = 720,000
Standard material cost for 90,000 kg = 450,000
Direct material price variance in Rs. = 270,000 (A)

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4.1.2.2 Direct Material Usage Variance
Actual amount of material used to produce 1,000 units = 90,000 kg
Standard material usage to produce 1,000 units (100 kg × 1,000) = 100,000 kg
Direct material usage variance in kg = 10,000 kg (F)
× standard cost per kg × Rs.5
Direct material usage variance in Rs. = 50,000 (F)
Material price Rs. 270,000 (A)
Material usage Rs. 50,000 (F)
Total Rs. 220,000 (A)
Table 1: Summary of Direct Material Variances
4.1.3 Direct Labour Variances
4.1.3.1 Direct Labour Rate Variance
Actual labour cost = 63,000
Standard labour cost for 8,200 hours (8,200 × Rs.8) = 65,600
Direct labour rate variance in Rs. = 2,600 (F)
4.1.3.2 Direct Labour Efficiency Variance
Actual hours taken to produce 1,000 units = 8,200
Standard hours taken to produce 1,000 units (1,000 × 10 hrs) = 10,000
Direct labour efficiency variance in hrs = 1,800 (F)
× standard rate per hour × Rs.8
Direct labour efficiency variance in Rs. = 14,400 (F)
Labour rate Rs. 2,600 (F)
Labour efficiency Rs. 14,400 (F)
Total Rs. 17,000 (F)
Table 2: Summary of Direct Labour Variances

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4.1.4 Variable Production Overhead Variances
4.1.4.1 Variable Production Overhead Expenditure Variance
Actual variable production overhead cost for 8,200 hrs = 25,000
Standard variable production overhead cost for 8,200 hrs (8,200 × Rs.2) = 16,400
Variable production overhead expenditure variance in Rs. = 8,600 (A)
4.1.4.2 Variable Production Overhead Efficiency Variance
Direct labour efficiency variance in hrs (calculated in 4.1.3.2) = 1,800 (F)
× standard variable production overhead rate per hour × Rs.2
Variable production overhead efficiency variance in Rs. = 3,600 (F)
Variable production overhead expenditure Rs. 8,600 (A)
Variable production overhead efficiency Rs. 3,600 (F)
Total Rs. 5,000 (A)
Table 3: Summary of Variable Production Overhead Variances
4.1.5 Fixed Production Overhead Variances
4.1.5.1 Fixed Production Overhead Expenditure Variance
Actual fixed production overhead incurred = 9,800
Standard fixed production overhead = 10,200
Fixed production overhead expenditure variance in Rs. = 400 (F)

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4.1.5.2 Fixed Production Overhead Volume Variance
Actual production hours = 8,200
Budgeted production in units = 10,200
Fixed production overhead capacity variance in hours = 2,000 hrs (A)
× standard fixed production overhead rate per hour × Rs.1
Fixed production overhead capacity variance in Rs. = 2,000 (A)
Actual production hours = 8,200
Standard production in units = 10,000
Fixed production overhead efficiency variance in hours = 1,800 hrs (F)
× standard fixed production overhead rate per hour × Rs.1
Fixed production overhead efficiency variance in Rs. = 1,800 (F)
Fixed production overhead expenditure Rs. 400 (F)
Fixed production overhead capacity Rs. 2,000 (A)
Fixed production overhead efficiency Rs. 1,800 (F)
Total Rs. 600(A)
Table 4: Summary of Fixed Production Overhead Variances
* Special note: A refers to adverse variances while F denotes favourable variances.

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Description Rs. (F) Rs. (A) Rs
Budgeted contribution (1,020 × 300) - - 306,000
Sales volume variance - 6,000 (6,000)
Budgeted contribution from actual sales - - 300,000
Sales price variance - 75,000
375,000
Material price - 270,000 -
Material usage 50,000 - -
Labour rate 2,600 - -
Labour efficiency 14,400 - -
Variable production overhead expenditure - 8,600 -
Variable production overhead efficiency 3,600 - -
Fixed production overhead expenditure 400 - -
Fixed production overhead capacity - 2,000 -
Fixed production overhead efficiency 1,800 - -
72,800 280,600 (207,800)
Actual contribution 167,200
Table 5: Variance reconciliation statement
4.2 Possible Causes for the Variances of Claudia Limited’s Product X and
Recommended Corrective Actions for them.
 Sales Variances
Although the sales volume shows an adverse variance of 6,000, the sales price denotes a
favourable variance of 75,000. This is because Claudia Limited could sell its product X at
higher price than they expected, although the units sold and produced was less than they
expected.
Corrective actions: To achieve a favourable sales volume variance the company can evaluate
the demand for the product X, and then decide an accurate budgeted level of volume to produce
and sell.

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 Direct Material Variances
Based on the expectation of Claudia Limited, the direct material cost for 90,000 kg was
supposed to be Rs. 450,000 but its actual cost was Rs. 720,000. Whereas the direct material
usage denotes a favourable variance of Rs. 50,000. As per the standard measures of the
company the material usage for 1,000 units was supposed to be 100,000 kg while its was
actually 90,000 kg. This favourable result might have been due to the usage of high quality
materials than the standard and effective use made of those materials. Hence due to the usage
of high quality standards the material price must have increased.
Corrective actions: Since the total material variance indicates an adverse variance of 220,000
the company should take stapes to reduce the increase of the material prices. For this purpose,
they can go for a different supplier who produces similar quality products for a lower price. Or
else they can buy materials in a bulk mostly since the demand for this product is high and ask
for discounts from the supplier.
 Direct Labour Variances
Both the labour rate and efficiency indicates a favourable variance which gives a total value of
17,000. The reason for favourable labour rate is mainly because Claudia Limited has
successfully recruited employees at a lower labour cost than they expected. Also those
employees had been able to produce product X more efficiently than expected. This might be
because of the use of quality raw materials, user friendly equipment and work motivation, or
the standard time allocated by the company is not accurate.
Corrective actions: As the direct labour variances obtained are favourable the company
shouldn’t worry much. But in future they should provide more accurate standards and also to
improve the labour efficiency further they should provide better training and motivation for the
employees.

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 Variable and Fixed Production Overhead Variances
The variable production overhead expenditure of Claudia Limited shows an advance variance
of 8,600, while variable production overhead efficiency denotes a favourable variance of 3,600.
The reason for adverse overhead expenditure variance might be due to the utility expenses for
equipment and wages for handling etc. incurred due to the production process of product X.
Whereas the overall fixed production overhead variance is adverse Rs.600.
Corrective actions: Claudia Limited should advice the management accountants to use latest
and up to date values when preparing the standard cost card. Also this variance analysis will
help them to identify the errors of their standards and they can prepare the standards more
accurately. The company can also adopt techniques such as total quality management to
increase the efficiency to the business operations.
5.0 References
Murphy, C. B., 2020. Financial Statements. [Online]
Available at: https://www.investopedia.com/terms/f/financial-statements.asp
[Accessed 27 July 2020].