Cost Accounting Concepts for Management Accounting

This article discusses cost accounting concepts such as direct material, direct labour, and manufacturing overhead. It also includes a financial analysis of a new fruit juice counter and optimal mix units. The article emphasizes the importance of considering all costs and revenue items related to a business segment to determine its profitability.

Running Head: Cost Accounting Concepts
MANAGEMENT ACCOUNTING

Cost Accounting Concepts 1
Question 1
Part a
Mixing Bottling Total
Direct Material $ 113,000.00 $ 17,000.00 $ 130,000.00
Direct Labour $ 15,000.00 $ 6,000.00 $ 21,000.00
Manufacturing overhead $ 32,000.00 $ 9,000.00 $ 41,000.00
Total Cost $ 160,000.00 $ 32,000.00 $ 192,000.00
1 litre 1000 ml
4800 litres 4800000
Per bottle capacity 300 ml
Total number of bottles 16000
Cost per bottle= Total Cost
Number of bottles
$ 192,000.00
16000
$ 12.00
Part b
Journal Entries Debit Credit

Cost Accounting Concepts 2
Raw Material Inventory
$
130,000.00
Cash
$
130,000.00
Raw Material Purchased for cash
WIP Inventory
$
130,000.00
Raw Material Inventory
$
130,000.00
Being raw material used.
Factory Payroll
$
21,000.00
Cash
$
21,000.00
Being wages paid in cash.
WIP Inventory
$
21,000.00
Labour
$
21,000.00
Recording of direct labour
Manufacturing Overhead
$
41,000.00
Cash $

Cost Accounting Concepts 3
41,000.00
Being manufacturing overhead paid in cash.
WIP Inventory
$
41,000.00
Factory Overhead
$
41,000.00
Recording of factory overhead
Cost of goods sold
$
192,000.00
WIP Inventory
$
192,000.00
Being WIP transferred to COGS account
Assumed that payment for all the production costs has been
made.
Question 2
Actual Purchases 6000
Actual Rate 7.4
Standard Data
Material
Quantity per unit 2 kg
Price 7.20 per kg

Cost Accounting Concepts 4
Total quantity required to
produce actual units 4000
Labour
Hours per unit 3.5 hours
Rate 18 per hour
Hours required for actual units 7000
Actual Data
Material
Direct Material Consumed 31080
Rate per kg 7.4
Total Kgs consumed for 2000
units 4200
Labour
Hours per unit 6450
Rate 18.3
Part a
Direct Material Price Variance
Actual Quantity * (Standard Price - Actual
Price)
Unfavou
rable
4200*(7.20-7.40)
-$
840.00
Part b
Direct Material Usage Standard Price* (Standard Quantity- Actual Unfavou

Cost Accounting Concepts 5
Variance Quantity) rable
7.20*(4000-4200)
-$
1,440.00
Part c
Direct Labour Rate Variance
Actual Hours* (Standard Labour Rate-Actual
Labour Rate)
Unfavou
rable
6450*(18-18.30)
-$
1,935.00
Part d
Direct Labour Efficiency
Variance
Standard Labour Rate* (Standard Hours- Actual
Hours)
Favoura
ble
18*(7000-6450)
$
9,900.00
Question 3
Part a
In the case of the ice cream shop named as Super Scooper, the financial analysis of the new
fruit juice counter has been carried by the manager of the shop. In order to determine the
profitability of a segment of a business it is necessary to consider all the costs and revenue
items related to such business segment. The income statement that is prepared by the
manager of the company contains all the costs that have been incurred in the given year.

Cost Accounting Concepts 6
However, the income statement contains certain costs that are irrelevant for the determination
of profitability of the new department. These costs would have been incurred even if there
was no juice counter was set at the Super Scooper shop. The inclusion of such costs is not
appropriate for the decision making and is therefore leading to unrealistic results (Horngren,
et. al., 2002). These costs are: utilities expenses, building depreciation, salary of the manager
of the shop. These expenses are the fixed costs which have already been incurred and are
merely allocated to the new juice counter. If these expenses were not included in the income
statement which is prepared to identify the state of profitability of only new juice counter, the
said income statement would have revealed the profitability in place of losses. The cost of
fruits, consumable expenses and counter staff wages are the costs that would not have
incurred if the shop did not have any juice counter. Hence, these costs are necessary to be
considered for the decision making about whether the new juice centre is a profitable segment
or not. An inclusion of any item in the statement of determination of profit or loss of a
specific business unit can lead to absurd results that in turn lead to incorrect decision making
by the managers (Drury, 2013).
To identify the correct profitability of new fruit juice counter all the allocated costs will have
to be eliminated from the income statement. This will result to depiction of the true
profitability state of the juice counter. The depreciation expense on counter equipment and
furnishings is an exclusive expense in respect of counter and hence it must be taken into
account while calculating the profit or loss of the new counter. The revised income statement
suggests that the new fruit juice counter must be continued as it is a profitable segment.
Part b
Income statement
Sales $ 67,500.00

Cost Accounting Concepts 7
Less: Variable Costs
Cost of sales $ 30,000.00
Wages $ 18,000.00
Consumables $ 6,000.00
Total Variable Costs $ 54,000.00
Contribution $ 13,500.00
Less: Fixed Cost
Depreciation of counter
equipment $ 3,750.00
Profit $ 9,750.00
Question 4
Part a
Particulars
Standar
d Deluxe
Selling Price
$
70.00
$
120.00
Direct Material
$
15.00
$
22.00
Direct Labour
$
10.00
$
30.00
Manufacturing Overhead
$
30.00
$
60.00

Cost Accounting Concepts 8
Total Manufacturing Cost
$
55.00
$
112.00
Monthly Demand 40000 24000
Particulars
Standar
d Deluxe
Manufacturing Overhead 30 60
Rate per hour 30 30
Number of hours per unit 1 2
Number of units per month 40000 24000
Total Hours Required 40000 48000 88000
Available hours 60000
Particulars
Standar
d
Delux
e
Selling Price
$
70.00
$
120.00
Direct Material
$
15.00
$
22.00
Direct Labour
$
10.00
$
30.00
Variable Overhead
$
10.00
$
20.00

Cost Accounting Concepts 9
Total Variable Cost
$
35.00
$
72.00
Contribution
$
35.00
$
48.00
Fixed Manufacturing Overhead
$
20.00
$
40.00
Profit
$
15.00
$
8.00
Part b
Particulars
Standar
d
Delux
e
Fixed Manufacturing Overheads per unit
$
20.00
$
40.00
Variable Manufacturing Overheads per
unit
$
10.00
$
20.00
Total Manufacturing Cost per unit
$
30.00
$
60.00
Particulars
Standar
d
Delux
e
Contribution per unit
$
35.00
$
48.00
Number of hours per unit 1 2
Contribution per hour $ $

Cost Accounting Concepts 10
35.00 24.00
Rank I II
Particulars
Standar
d
Delux
e
Hours Allocation 40000 20000
Hours required per unit 1 2
Optimal Mix Units 40000 10000

Cost Accounting Concepts 11
REFERENCES:
Drury, C.M. (2013). Management and cost accounting 3rd ed. Germany: Springer.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T.
(2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.