CSS Accounting and Auditing Cost and Management Accounting Syllabus

State the formula for prime cost.

$$\text{Prime Cost} = \text{Direct Materials} + \text{Direct Labour} + \text{Direct Expenses}$$

State the formula for works (factory) cost.

$$\text{Works Cost} = \text{Prime Cost} + \text{Factory (Works) Overheads}$$ (adjusted for opening and closing work-in-progress).

State the formula for cost of production.

$$\text{Cost of Production} = \text{Works Cost} + \text{Administration Overheads}$$

State the formula for cost of sales (total cost).

$$\text{Cost of Sales} = \text{Cost of Production} + \text{Selling and Distribution Overheads}$$ (after adjusting for opening and closing finished goods stock).

How is profit derived from cost of sales in a cost sheet?

$$\text{Sales} = \text{Cost of Sales} + \text{Profit}, \quad \text{so} \quad \text{Profit} = \text{Sales} - \text{Cost of Sales}$$

What are the main objectives of material (purchase and storage) control?

To ensure continuous availability of materials for production, avoid both overstocking and stockouts, minimise investment in inventory, prevent wastage/pilferage/deterioration, and obtain materials of the right quality at the right price and time.

Outline the main steps in the material purchasing procedure.

Purchase requisition is raised, suppliers are selected (often via inquiries/tenders), a purchase order is placed, goods are received and inspected (goods received note), invoice is verified against order and GRN, and payment is made. Materials are then stored and issued against material requisitions.

What is the role of the bin card and the stores ledger in material control?

The bin card is a quantitative record of receipts, issues, and balance of each material kept by the storekeeper at the bin/rack. The stores ledger is maintained by the costing department and records both quantity and value of materials. Both should reconcile.

What is the perpetual inventory system?

A perpetual inventory system continuously records stock receipts and issues so that the balance of each item is known at all times, supported by continuous (rolling) physical stock-taking to verify book balances against actual stock.

Why is the method of inventory (stock) valuation important?

Because it determines the value of closing inventory and the cost of materials issued/sold, which directly affects cost of production, reported profit, and the balance-sheet value of inventory.

Name the three main methods of pricing material issues.

First-In-First-Out (FIFO), Last-In-First-Out (LIFO), and Weighted Average Cost. (Others include simple average, specific identification, and standard price.)

Explain the FIFO method of inventory valuation.

Under First-In-First-Out, materials are issued in the order in which they were received, so the earliest purchases are charged out first. Consequently, closing inventory is valued at the cost of the most recent purchases.

In times of rising prices, what is the effect of FIFO on issue cost, closing stock, and profit?

FIFO charges issues at older (lower) prices, so cost of issues/COGS is lower, closing stock is valued at recent (higher) prices, and reported profit is higher.

Explain the LIFO method of inventory valuation.

Under Last-In-First-Out, the most recently received materials are issued first, so issues are charged at the latest prices. Closing inventory is therefore valued at the cost of the oldest purchases.

In times of rising prices, what is the effect of LIFO on issue cost, closing stock, and profit?

LIFO charges issues at recent (higher) prices, so cost of issues/COGS is higher, closing stock is valued at older (lower) prices, and reported profit is lower. (LIFO is not permitted under IAS 2.)

Explain the weighted average method of inventory valuation and its formula.

Issues are priced at the weighted average cost of materials in stock, recalculated after each receipt: $$\text{Weighted Average Cost per Unit} = \frac{\text{Total cost of stock in hand}}{\text{Total quantity in hand}}$$

Which inventory method is disallowed under IAS 2, and which are permitted?

LIFO is not permitted under IAS 2 (Inventories). FIFO and weighted average cost are the acceptable methods.

What is Economic Order Quantity (EOQ)?

EOQ is the order quantity that minimises the total annual inventory cost by balancing ordering (set-up) costs against carrying (holding) costs. At EOQ, total ordering cost equals total carrying cost.

State the EOQ formula and define its variables.

$$\text{EOQ} = \sqrt{\frac{2 D O}{C}}$$ where $D$ = annual demand/usage, $O$ = ordering cost per order, and $C$ = carrying (holding) cost per unit per annum.

At the Economic Order Quantity, what is the relationship between ordering cost and carrying cost?

At EOQ the total annual ordering cost equals the total annual carrying cost; this equality is the point of minimum total inventory cost.

How is the re-order level calculated?

$$\text{Re-order Level} = \text{Maximum usage} \times \text{Maximum lead time}$$ It is the stock level at which a fresh purchase order is initiated.

How is the minimum stock level calculated?

$$\text{Minimum Level} = \text{Re-order Level} - (\text{Average usage} \times \text{Average lead time})$$ It acts as a buffer (safety) stock below which stock should not normally fall.

How is the maximum stock level calculated?

$$\text{Maximum Level} = \text{Re-order Level} + \text{Re-order Quantity} - (\text{Minimum usage} \times \text{Minimum lead time})$$

How is the average stock level calculated?

$$\text{Average Level} = \frac{\text{Maximum Level} + \text{Minimum Level}}{2} \quad \text{or} \quad \text{Minimum Level} + \frac{1}{2}\text{Re-order Quantity}$$

Distinguish between direct labour and indirect labour.

Direct labour is the work directly engaged in converting raw materials into finished products and is identifiable with specific units/jobs (e.g., machine operators). Indirect labour cannot be traced to specific output and is treated as overhead (e.g., supervisors, store-keepers, cleaners).

Describe the time-rate (time-wage) method of labour remuneration.

Under the time-rate system, a worker is paid according to time spent at work, regardless of output: $$\text{Wages} = \text{Hours worked} \times \text{Rate per hour}$$ It is simple and ensures quality but provides no direct incentive to increase output.

Describe the piece-rate method of labour remuneration and its formula.

Under the piece-rate system, a worker is paid per unit produced regardless of time taken: $$\text{Wages} = \text{Units produced} \times \text{Rate per unit}$$ It rewards efficiency but may compromise quality and offers no guaranteed minimum wage.

Explain the Halsey premium plan of wage payment.

Under the Halsey plan the worker gets the guaranteed time wage plus a bonus of (usually) 50% of the value of time saved: $$\text{Earnings} = (T \times R) + \tfrac{1}{2}(S - T) \times R$$ where $T$ = time taken, $S$ = standard (allowed) time, $R$ = rate per hour.

Explain the Rowan premium plan of wage payment.

Under the Rowan plan the bonus is the proportion of time saved to standard time, applied to time wages: $$\text{Earnings} = (T \times R) + \frac{S - T}{S} \times (T \times R)$$ where $T$ = time taken, $S$ = standard time, $R$ = rate per hour.

What is labour turnover?

Labour turnover is the rate of change in the workforce — the number of employees leaving and being replaced over a period relative to the average number employed. High turnover increases recruitment, training, and disruption costs.

State a formula for the labour turnover rate (separation method).

$$\text{Labour Turnover (Separation Method)} = \frac{\text{Number of separations during the period}}{\text{Average number of workers}} \times 100$$

What is idle time, and how is it classified?

Idle time is the period for which workers are paid but no productive work is done. It is classified as normal idle time (unavoidable, e.g., tea breaks, machine set-up — treated as overhead) and abnormal idle time (avoidable, e.g., strikes, power failure, machine breakdown — charged to the costing profit and loss account).

How are the costs of normal versus abnormal idle time treated in cost accounting?

Normal idle time cost is unavoidable and is absorbed into the cost of production (as overhead/inflated labour rate), whereas abnormal idle time cost is treated as a loss and charged directly to the costing profit and loss account, not to product cost.

Distinguish between allocation and apportionment of overheads.

Allocation is the charging of whole items of overhead that are wholly identifiable with a single cost centre (e.g., a department's own supervisor salary). Apportionment is the proportionate distribution of common overheads that relate to several cost centres over those centres on a suitable basis (e.g., rent split by floor area).

Give examples of suitable bases for apportioning common overheads.

Rent and rates — floor area; lighting/heating — floor area or number of light points; depreciation and insurance of plant — value of plant; supervision — number of employees; canteen/welfare costs — number of employees; power — machine horsepower or machine hours.

What is the difference between primary distribution and secondary distribution of overheads?

Primary distribution allocates and apportions all overheads among all cost centres (both production and service departments). Secondary distribution re-apportions the totals of service (support) departments over the production departments that use them, so that all overhead ends up in production cost centres.

What is absorption of overheads?

Absorption (recovery) of overheads is the process of charging the overheads of a production cost centre to the individual units, jobs, or products passing through it, using a predetermined overhead absorption rate.

State the general formula for an overhead absorption rate.

$$\text{Overhead Absorption Rate} = \frac{\text{Total overheads of the cost centre}}{\text{Total units of the absorption base}}$$ where the base may be units, labour hours, machine hours, wages, or prime cost.

Name the common methods (bases) of absorbing overheads.

Percentage of direct material cost, percentage of direct wages, percentage of prime cost, rate per unit of output, direct labour-hour rate, and machine-hour rate.

What is over-absorption (over-recovery) of overheads and what causes it?

Over-absorption occurs when the overhead absorbed (using the predetermined rate) exceeds the actual overhead incurred. It is caused by actual overheads being lower than estimated, or actual activity being higher than the budgeted level used to set the rate.

What is under-absorption (under-recovery) of overheads and what causes it?

Under-absorption occurs when the overhead absorbed is less than the actual overhead incurred. It is caused by actual overheads exceeding the estimate, or actual activity being lower than the budgeted level used to set the rate.

How are over- and under-absorbed overheads treated in cost accounts?

They may be (a) transferred to the costing profit and loss account (especially if due to abnormal causes or small amounts), (b) carried forward to the next period via an overhead suspense/reserve account, or (c) adjusted by a supplementary rate to cost of sales, WIP, and finished goods if the amount is significant and due to normal causes.