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DEPARTMENT OF ACCOUNTING

B.Sc Business Administration Part time Degree

COURSE: ACC 203 (Cost Accounting)

CLASS: B. Sc. Business Administration 200 Level
SEMESTER /SESSION: 1st Semester, 2021/2022 Session
LECTURER: Dr. Iliyasu Garba
CONSULTATION: Whenever I am available in the office
OFFICE: Room 31, Department of Accounting, Gombe State University

B. COURSE OUTLINE
Course Outline

 Understanding the organisations of cost accounting department

 Definition and purpose of cost and management accounting
 Meaning of cost and cost classifications
 Cost units; cost centers; cost allocation and cost apportionment
 Cost behaviour
 Cost separation techniques
 Inventory pricing methods (FIFO, LIFO weighted average etc)
 Labour costing
 Inventory control, EOQ
 Interlocking and integrating accounting

Concept of cost: Cost is the amount of resources given up in exchange for goods or services.
The resources given up are money or money equivalent expressed in monetary units.

(CIMA) Define Cost as “the amount of expenditure (actual or notional) incurred on or

attributable to a specified things or activity”. The activity of a firm may be the manufacturer of
product or the rendering of service which involve expenditure over various heads, e.g material,
labour, other expenses etc. A manufacturing organisation are interested in ascertaining the cost
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per unit of the product manufactured while an organisation rendering services e.g transport
undertaken canteen, electricity company, municipality etc. is interested in ascertaining the costs
of the service it renders. For customer cost means “price” for management cost means
“expenditure incurred” for producing a particular product or rendering a particular service.

A cost most always may be studied in relation to its purpose and conditions. Different cost may
be ascertained by different purposes and under different conditions. It is also important to note
here that there is no such thing as an exact cost or true cost because no figure of cost is true in all
circumstances and for all purposes. Most of the costing information is based on estimates; for
example, the amount of overheads is generally estimated in advance; it is distributed over cost
units, again on an estimated basis using different methods. Many items of cost of production are
handled in an optional manner which may give different costs for the same product without
going against the accepted principles in any way. Depreciation is one such item, the amount of
which will vary in accordance with the method of depreciation being used. Thus, to arrive at an
absolutely correct cost may be quite difficult unless one waits for a long time by which time the
costing information may lose all its value
Costing: is the techniques and process of ascertaining costs. These techniques consist of
principles and rules which govern the procedure of ascertaining cost of product or services. The
techniques to be followed for the analysis of expenses and the process for different products or
service differ from industry to industry.

Cost Accounting: Is “classifying, recording, and appropriate allocation, of expenditure, for

determination of costs or products or services, and for the presentation of suitably arranged data
for purpose of control and guidance of management”.

Importance of cost accounting: The limitations of financial accounting have made the
management to realize the important of cost accounting. Whatever may be the type of business,
it involves expenditure on labour, materials and other items required for manufacturing and
disposing of the product. The management has to avoid the possibilities of waste at each stage. It
has to ensure that no machine remains idle, efficient labour get due incentives, by product are
properly utilised and costs are properly ascertained. Besides the management, the creditors and
employees are also benefited in numerous ways by installation of good costing system. Cost
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accounting increases the overall productivity of an organisation and service as an important tool,
in bringing prosperity to the nation.

Cost as an aid to Management: Cost accounting provides invaluable aids to the management, it
provides detailed costs information to the management to enable maintains effective cost control
over store and inventory. To increases efficiency of the organisation and to check waste and
losses.

Cost Terminologies

Cost Units: a cost unit may be defined as a quantitative unit of product or services in relation to
which costs are ascertained or expressed. It’s a unit of output or services to which cost can be
related. Therefore, the nature of cost will depend on type of business concerned: example of cost
units are (i). Units of product: Contracts; tons of cement; gallons of liquid; books; pair of shoes;
caps. Table etc

(ii). Units of service: Kilowatt-hours; Cinema seats; Passengers miles; hospital operations;
consulting hours etc.

Cost center: this is any location, person or items or equipment for which cost may be
ascertained and used for purpose of cost control. A cost centre is every commonly location in
the service of department or section of business engaged in particular set of activities.

A location may mean a department, store yard, sales area, or a factory

A person may be sales manager, production manager, personal manager, finance manager, or
work engineer.

An item of equipment may be Machine, delivery vehicles, car truck, etc.

For example, in an academic department of a university, all the cost incurred by that department
must be charged to it as a cost centre. Such as repairs and maintenance of vehicles; stationeries;
entertainment; telephone; postages etc. A car as a cost centre must be charged with deprecation,
petrol, tires, maintenance, licenses, insurances etc.
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In relation to each of the cost centres mentioned above allocation of the cost may be made at the
beginning of an accounting period for cost to be incurred and report is to be submitted at end of
accounting period as to how the money is spent. Comparing is to be made between amount
allocated and the amount spent.

Cost Analysis: this is the process of classifying and estimating the total amount of expenditure
to be incurred in the course of manufacturing a product or rendering a service. Cost analysis
therefore, represents cost classification and estimation.

Cost Control: this refers to ability of management to make sure that expenditure (recurrent and
capita) are well monitored and supervised to ensure that the things are going according to the
plan and that actual results (cost incurred) are obtained for comparism against plant result (cost
to be incurred) so that the appropriate corrective action can be taken on the variance that is
bound to arise before it is too late.

Cost Accounting Sense: This is a new term referring to the need for organizations to be taking
the pain of critically and objectively tracing all the cost element of their products or service
before arriving at the selling price. It is the scientific method of pricing products or service based
on accurate identification, apportionment, and computation of actual total cost of product or
service that would help management in accessing the performance of an organization,
probability- wise, liquidity- wise, and productivity- wise.

Qualities of Good Cost Accounting Information

The cost of accounting information should possess certain qualities for it to be seen as capable of
assisting management toward bringing about positive changes in the affair of the organizations.
The following are the required qualities cost accounting information.

1. Relevance: the information should be relevant to the users and the purpose for which it is
needed.

2. Timeliness: the information should be made available within the time its required. The cost
accountant should know when management need cost accounting information and make it
readily available.
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3. Reliability / Accuracy: the information should be provided in compliance with statutory

regulations, professional requirement or management guidelines.

4. Understandable: the information should not be too complex or ambiguous or too difficult to
understand it should not too simple or bulky.

5. Completeness: the information should show full disclosure of what is required

6. Objectivity: the information is not to be subjectivity or personal to the provider

7. Comparable: the information should give room for comparative analysis with information
provided in the previous periods.

Cost Behavior

This is the study of the way in which cost react or do not react to the change in the level of
activity of organization. Level of activity is the amount of work done or number of event that has
occurred, it’s also refers to the volume of production in a period, number of items sold , number
of inventory issued and receipts.

Types of cost behaviour

I. Fixed cost II. Step cost III. Variable cost IV. Mixed cost

i. Fixed cost: are those cost that do not vary with output or production level, they change with
the passage of time hence they are time or period cost e.g rent, director salaries, Light bill etc

II. Step cost: this is a variant fixed cost. Many cost are fixed in nature but with certain level of
activity (a) a rent , where accommodation requirement increases (b) Basic salaries; where more
employees are employed on account on demand on increase in output.

III. Variable cost: these are cost which tend to vary directly with volume of output. It is a direct
cost; include indirect materials, direct labour and direct expenses etc.

IV. Mixed cost: also refers to as semi variable or semi fixed cost. They are cost items with are
partly fixed and partly variable i.e cost which certain a standing basis charges plus a variable
charge per unit of consumption e.g telephone bills , electricity bills.
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Cost Segregation/ Estimation

This is the process of separating fixed and variable cost element. The following method are used
in cost segregation

a. High low method / Range method

2. Statistical method or Lease square method

3. Scatter graph method

High low method: this method of separating cost into fixed and variable element, is simple
because it relies on two stream point (Highest and lowest level of activity).

Procedure:

i. TC of high output = FC + VC (Highest level of activity )

ii. Less TC of low output = FC + VC (of lowest level of activity)
iii. The variable cost per unit = Different in VC/Different in output
Question one: The operating cost ABC for six (6) months is as follows

Month Cost N Volume of production

1 250,000.00 15,000.00
2 260,000.00 18,500.00
3 220,000.00 14,500.00
4 255,000.00 15,100.00
5 258,000.00 15,300.00
6 230,000.00 14,800.00
Required:
a. Using the high low method to determine the total fixed cost, variable cost per unit and
cost function.
b. What will be the cost in month 7 when output to be 13,000.00 unit?

Question two: The cost of operating the maintenance department. A manufacturing company
for the last four months has been as follows:
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Months Total Costs Production volume (Standard hours)

1 111,000 7000
2 115,000 8000
3 113,000 7700
4 97,000 6000
You are required to compute the total cost for the fifth month when output expected to be
7,500 standard hours using high low method

Cost classification by element or nature

The elements of a cost are essentially part of the cost. There are broadly three element of cost;
thus are: a. Material b. Labour c. overhead

a. Material: The substance from which product is made is called materials. It can be direct as
well as indirect

i. Direct material: it refers to those materials which become integral part of the finished product
and can easily be traceable to specific physical unit.

Direct material includes:

1. All material specifically purchase for particular job or process

2. Component purchase or produced

3. Material passing from one process to another.

2. Indirect materials: all materials used for ancillary to the business and which cannot
conveniently assign to specific physical units are known as “indirect materials” e.g oil, grease,
consumed store and stationary etc.

Labour: in order to convert materials into finished products, human effort is required such
human effort can be direct as well as indirect

1. Direct labour: is defined as the wages paid to a worker who are engaged in the production
process and whose time can be conveniently and economically traceable to specific physical unit.
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ii. Indirect labour: labor employ for the purpose of carrying out task incidental goods produce or
service provide is called indirect labour e.g wages of Inspector, supervisor and internal transport
man.

Overhead: the term overhead includes indirect labour, indirect material, and indirect expenses
incurred.

Material pricing: A material pricing or valuation method has to be used for the determination of
the value of closing stock of different firms or materials. There are many method of pricing or
valuing materials of which only FIFO and LIFO will be discuss here.

FIFO Means: First – In – First Out whereas LIFO means: Last – In – Fist – Out

First – In – First Out (FIFO): this is the method of pricing materials issue for production,
using the oldest batch in stock, is issue until all units of that batch have been exhausted, then the
price of the next oldest batch will be used and so on. The method assumes that the materials are
used in the same sequence as they are purchase.

Advantage of FIFO

i. It is easy to operate
ii. The value is based on the cost and so no profits or loss arise
iii. The stock balance will represent a fair common valuation stock
iv. The method ensures that older materials are issued first
v. The method is acceptable for accounting and taxation purpose

Disadvantage of FIFO

i. It is burdensome as times apply

ii. The price of issued materials may not account for present economic value

Last in First Out (LIFO) : This method ensures that the most recently purchase materials will
be the first to be issued and are always issued in actual cost. The method use to relate costs as
closely as possible to current price level.

Advantages of LIFO
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i. It simple to operate
ii. The profit is disclosed and seems to be more stable and make accounting information to
be better guide to the management.
iii. The costs charge to production is closely related to current price level.

Disadvantages of LIFO

i. Its involve considerable clerical work

ii. The valuation of stock may not be accepted
iii. It cannot be fairly used for the purpose of comparing cost

Question Three:

Public Admin Company limited purchase the following articles

January 1st 2019, 2000 units at N100 each

February 4th 2019, 1500 units at N125 each

April 21st 2019, 3000 units at N150 each

Issues were made from the store as follows:

Jan. 10, 800 units

Feb. 15, 1000 units

March. 30, 600 units

April. 30, 2000 units

You are required to prepare the store ledger account of the company using FIFO and LIFO
method of stock valuation to determine the closing stock as at 30th April 2019

Question Four: Tunfure Company limited purchase the following articles:

Nov. 4th Purchas 100 units at N180

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Nov. 8th Issue 50 units

Nov. 10th Purchase 300 units at N190

Nov. 11 issue 200 units

Nov. 12 issue 150 units

Nov. 15 Purchase 150 units at N160

Nov. 21 issue 100 units

Nov. 25 Purchase 100 units at N130

Nov. 30th issue 100 units

You are required to prepare the store ledger account of the company using FIFO and LIFO
method of stock valuation to determine the closing stock as at 30th November, 2019

Labour Costing

Labour refers to the physical (bodily) and mental efforts necessary for the productions of goods,
services, or profits. The physical aspect relates to unskilled labour while the mental aspect relates
to skill labour. The reward for labour is salary or wages so labour cost must be well planned and
controlled and this is done through an adequate and effective system of remuneration

Labour remuneration

The term “remuneration” means total monetary earning of employees who may come inform of
hourly wages, payment by results and other financial incentives.

Incentives are arrangement of financial or non financial nature made to stimulate human efforts
and effectiveness. In introducing any system of remuneration the management of an organisation
should make sure that the individual workers will surely benefits and that will encourage them to
do their best.
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Remuneration method can be categorized into three main heading. There are as follows: 1.
Time Rate 2. Piece Rate 3.Bonus incentives scheme.

1. Time Rate Scheme: this method of remunerating workers can be classified further into (i) Flat
time and (ii) Over time. Under the flat time rate scheme labour is paid for the time worked in
respective of the volume of production during the period. Payment may be best on the hours, the
day, the week, the month or even the year in which the work was performed. Flat time rate
system s simple to operate and easy to understand it encourage professionalism and development
of great skills and care. However, it has a disadvantage of given room to inefficient worker to
earn same amount as the efficient worker and it does not reward special or extra efforts.

Under overtime scheme; labour is paid for time worked at special rate, which is to be negotiated
upon between the management and the workers union.

Question Five: Usman Iliyasu worked for 45 hours in a week his rate of pay was N30 per hour.
What was his gross pay for the week? And for the month

Question Six: The clock card of Usman Iliyasu showed an overtime of 35 hours during the
month of November 2019. What were his total earnings for the month?, if his fixed monthly
salary was N60,000.00 and the overtime rate per pay per hour was agreed at N40

2. Piece rate scheme: this scheme reward worker according to the number of pieces he produces
regardless of the time taken. There are three types of piece rate payment system.

i. Straight (flat) piece rate

ii. Piece rate with guaranteed pay
iii. Differential Piece rates

Under the flat piece rate method an employee is paid a fixed amount per unit of production
regardless of the time taken. The worker is paid at a fixed time rate for the number of standard
hours for work he performs.

Question Seven: Abubakar Iliyasu produces 600 units of output in a week. The rate of pay per
unit is N20. What is his total earning per week?
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Question Eight: Victoria John produce 800 pieces of product in a day. The piece time for 80
pieces is 1 hour. The standard rate of pay per our is N45. What is her gross earning per day?

3. Bonus Incentives System: the principle of bonus incentives system definitely combine time
rate and piece rates in such a way that the gain and losses in the labour efficiency are shared
between the employer and the employees. The bonus to be shared is a product of efficiency and
effectiveness and is calculated on the time saved . The different between time allowed and time
taken, the gained realized on the time save is not budgeted for as it is not expected of the worker
and so it is normally seen as windfall.

The best known bonus systems are Halsey, Halsey – weir and Rowan. Under the Halsey bonus
scheme; a standard time is allowed for a job. Time rate is paid for a worker who completes the
job within the standard time , if a worker takes less than the standard time to complete the job
and he take another job to complete the standard time, that is to utilize the time saved , he will be
paid 50% of the time saved value. The remaining 50% represent thee employers share.

Question Nine: Ibrahim Khalil Iliyasu Battery Company limited uses Halsey premium bonus
system. Time allowed for the production of six Battery is 12 hours, Hourly rate is N38. What is
the total earning of Moses who took 9 hours to complete the job and used 3 hours saved further
production?

Material Costing: Material costing refers to the process of attaching monetary value to the
materials issued for production process or disposals of finished goods from store.

Purchasing procedure: The important procedure to be observed by an organization in

connection with the purchases of raw materials is as follows:

i. Initiation of the purchase procedure by means of purchase requisition

ii. Preparation of purchase order and its dispatch to the supplier
iii. Receipt of the materials
iv. Inspection or testing of the materials
v. Debit note to the supplier in respect of defects rejects etc
vi. Passing off the transaction into account department for payment
vii. Entry into the relevant accounting books
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Store keeping Procedures: The important procedures observed in good storekeeping are as
follows:

i. Good arrangement of the store items to ensure the location of items without difficulty
ii. Full identifications of all materials at all time e.g through the use of store card
iii. Efficient procedure for receipt, and storage of materials
iv. Proper document and prompt recording of all movement of store items
v. Ability to give details on request of quality held in store. e,g through the use of
perpetual inventory system
vi. Protections of materials against any deterioration
vii. Periodic comparison of the physical stock with the perpetual inventory record.
viii. Observation of stock level to ensure that the company does not run out of stock
ix. Economic use of storage space

Stock Level: one of the major objectives of stock control system is to ensure that stock out does
not occur and those surplus stocks are not carried. Note that stock out occur when there is
insufficient stock to meet production demand or customer requirement, these can lead to loss of
customers good will, profit reduction etc. Similarly surplus stock result in increase storage cost
which also lead to reduction in profit.

There are three (3) predetermine criteria level for each items material in stock which ensure that
neither stock cuts occur nor surplus stock are carried or held and these are:

1. Maximum Level 2. Minimum Level 3. Reorder Level

1. Maximum Level: This is the level above which stock should not normally be allowed to rise
without specific authority from the management. The level is given by the following formula:
Reorder Level + Reorder quantity – (Minimum usage x Minimum reorder period)

2. Minimum Stock Level: This is a level below which the stock should allow to fall.
Expectedly, there is bound to be stock outs, whenever the stock level allow to fall this minimum
level, and which may eventually lead to stoppages it is given by Re order level – ( Average Re
order period)
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3. Re order Level: This is the point of which is essential to initiate purchase requisition or fresh
supplies of the materials. It is the level to which the material stock level is to be allowed to fall
before an order for further supplies is placed. It is given by maximum usage x maximum reorder
period

i. Re-order period or lead time: This is the time taken between the placing of an order and
the receipt of the materials
ii. Re order quantity: This is economic order quantity (EOQ) or simply normal order it is
the quantity that minimize the total cost of order and holding of stock
iii. Average stock level: Maximum stock level plus Minimum stock level divided by 2

Question Ten: The following data was extracted from the record of Malala Manufacturing LTD
Gombe for the period

Average uses 1000 units per day

Minimum usage 600 units per day

Maximum usage 1300 units per day

Economic order quantity 50,000 units

Re-order period 25 to 30 days

You are required: Determine the following

1. Maximum stock level 2. Minimum stock level 3. Re- order level

Economic Order quantity (EOQ) : Is the quantity of material order when the ordering cost and
holing cost are at minimal. This is the quantity that will minimize the cost of administration of
stock.

EOQ =

Where:
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D = Annual demand

Co = Ordering cost

Cc = Carrying cost

Question Eleven: Bello and Aliyu Ltd purchases 30,000 units of materials per annum the
ordering cost per order is N400 and the unit purchase price is N100 is fixed by the company.
The annual stock holding cost per stock is N80

Required:

i. EOQ
ii. Number of order per year
iii. Ordering cost
iv. Total carrying cost of stock

Costing Report

Information is the life blood of business. The efficiency of an organisation is to a certain extent
governed by the relevance and regularity of the information provided to those who perform the
functions of management. The required information is supplied through reports which may be
oral, graphic or written. However, oral reports should not form the basic of important managerial
decisions. It would be advisable to have the reports always in writing. Graphic reports in the
form of charts and diagrams facilitate quick grasp of significant trends by those who go through
such reports. This aspect is considered in greater details in the next chapter.
Meaning of Report
A report is a formal communication which moves upward. It differs from the word
.communication.. The superior communicates orders to the subordinate. The subordinate
communicates results. The word report is generally used for the factual communication by a
lower level to a higher level of authority. Thus orders are .communicated. While results
are .reported The term .reporting to management. Refers to the formal system whereby through
reports relevant information is constantly fed, to the management. It has how become a
specialised function. Large concerns these days have a separate .management information
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division.. The Information Manager should know not only the information each level of
management requires but also the techniques to be employed for collecting, storing, processing
and finally communicating the required information.
Reporting is an important output of accounting function. Accountant is the custodian of factual
data regarding cost, sales and profits and therefore he provides a useful information service.
Depending on the size of the business, the information may be collected and communicated to
the management by the accountant himself or the management/accountant or Information
Manager who may be heading a separate Management Information Division.
Requisites of a Good Report
A report is vehicle carrying information. The fruitfulness of the work done by the
Different executives not only depends on the quality of work itself but also the way in which the
information or results are conveyed to their superiors. Thus, good reporting is necessary for
effective communication. A good report should, therefore, have the following requisites:
1. Following points are important in this respect:
(a) Report should have a suggestive title, heading, sub-headings, and paragraph divisions.
(b) In case statistical figures are to be quoted in the report, only the significant totals should be
given in the body of the report. The other statistical details may be given, in the appendix.
(c) The report should contain facts rather than opinions. In case certain opinions are expressed,
they should be logical sequence of facts presented in the report.
(d) In case report is in response to a request or letter, cross reference of such request or letter
should be given.
(e) The report should bear the date on which it is put up. The names of the person to whom the
report is to be sent should also be mentioned on the top.
(f) The objectives of the report should be perfectly served by the contents of the report.
(g) The contents should follow in a logical sequence:
(i) The summary of present position,
(ii) The course that might be taken and the expected results,
(iii) The recommendations and reasons for their submission.
2. The report should be submitted as soon as possible. Information delayed is
Information denied. Reports are meant for action. The sooner the report is made, the quicker can
the action be taken. In some cases promptness in presentation is more important than any other
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general principles of reporting. Accuracy may have to be sacrificed to achieve the objective of
promptness.
In order to increase the speed of collecting the accounting information, following steps may be
taken:
(a) A proper record-keeping system, tailored according to the requirements of submission of
different reports, should be established in the organisations.
(b) In order to avoid clerical errors and increase productivity, mechanical accounting devices
may be used.
(c) Accounting work should be departmentalized in order to prevent bottlenecks in reporting.
(d ) Employees may be asked to report immediately about any abnormal or extra-ordinary
situation.
3. Reports are also meant for comparison. This is possible only when information contained in
the report is placed in some perspective, e.g., time, norms or standards.
Figures should be given for some previous period such as .last month. or .same month for the last
year. etc. Actual figures may also be placed side by side with corresponding budget, standard or
estimated figures. The objective is to highlight significant deviations from previous periods or
standards or estimates. The principle of .Management by exception. should be applied while
drafting .reports..
Insignificant variations need not be reported
Consistency is closely linked with comparability since comparison is possible
only when the reports are prepared and presented on a consistent basis. This
objective can be achieved if the information embodied in the report
emanates from a common source. Moreover uniform procedure should be
followed over a period of time for collection, classification and presentation
of the accounting information.
5. The report should be in-simple, unambiguous and concise form.
Professional or technical jargon should be avoided since those who receive
the report may be quite unfamiliar with expressions the accountant takes for
granted. It should be also readable. Conciseness and rounding off of figures
to a desirable point both add to readability of the report which is another
dimension to simplicity.
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6. The report should be appropriate for the person for whom it is meant. The
following points are of significance in this context:
(i) Report should be related to the responsibilities of the recipients. For
example, the Production Manager should be supplied with only such reports
which relate to his division or area of control.
(ii) Report should be designed to suit the level of management for whom it is
meant. The general principle is higher the level of management, the more
concise the report should be. The top management gets reports from all
areas but the number of reports and the details of the information have to be
carefully pruned. However, reports to the middle-management have to be
more detailed, covering section-wise performance and deviations. For
example the top management has to be given reports covering profit and
loss statement, the estimated funds flow, the capital expenditure follow up,
the sales, production and other appropriate statistics. A Sales Manager, on
the other hand, may be given reports only regarding such matters which
directly affect him. He may be supplied with reports having detailed
comparison of actual sales with the budgeted sales with reference to
products, customers, territories salesmen etc.
7. In order to have an appropriate response of the report, it is necessary that
every report should be addressed to a responsibility centre and should
contain a message about the variances which are controllable at that point.
There is no objection to the mention of all variances relating the area
covered in order to make the report complete. But variances which are
beyond the control of the executive reserving the report should be
mentioned separately in the report.
8. The report should be reasonably accurate. The degree of accuracy will
depend upon the purpose for which the information is required. Such
inaccuracies which will not affect the significance of the information may be
ignored.
Steps for Effective Reporting
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In order to have effective and efficient reporting, the following steps should
be taken:
(i) .Reporting. should be the logical outcome of accounting routine. This
requires detailed planning of flow of paper work and its analysis.
Types of Cost Reports
Cost reports may broadly be classified into two categories :
(i) Routine reports.
(ii) Special reports.
Routine reports. These reports are submitted to different levels of
management as per a fixed time schedule. The schedule should indicate the
following:
(a) Title of the report.
(b) The recipients of the report and its copies.
(c) The periodicity of reporting.
(d) The respective dates on which the manuscript and the reports are to be
sent.
(e) Sources of data and the date by which the data should be ready at the
respective sources. Routine reports are usually printed or cyclostyled,
leaving blank spaces to be filled in. Following is a list of the important routine
reports which may be prepared in an industrial organisation :
S. No. Name of the Report Period Original addressed to Copy to
1. Material utilisation Weekly Shop Foreman Departmental Manager
Production Controller
2. Labour efficiency Weekly Shop Foreman Departmental Manager
Production Controller
3. Idle time/overtime Weekly Shop Foreman Departmental Manager
Production Controller
4. Idle capacity Monthly Managing Director Production Controller
Production Manager
5. Stock levels Monthly Managing Director Production Controller
Production Manager
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6. Stock turnover Monthly Managing Director Production Controller

Production Manager
7. Labour cost Monthly Managing Director Production Manager
Production Controller
Costing Reports 431
8. Sales analysis (by products, territories and channels) Fortnightly Sales
Manager Personnel Manager Managing Director
9. Finished stock Fortnightly Sales Manager Managing Director
10. Product cost estimates (for price fixation and Quotations) When required
Sales Manager Managing Director
Production Manager
Production Manager
Production Manager
11. Break-even-analysis Whenever required
Managing Director Production Manager
Sales Manager
12. Material Price variance
Usage variance
Monthly
Monthly
Purchase Officer Shop
Foreman
Production Manager
Production Manager
Production Controller
Chief inspector
13. Labour Rate variance
Efficiency variance
Monthly
Monthly
Personnel Manager
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Shop Foreman
Production Manager
Production Manager
Production Controller
Personnal Manager
Copies of Reports addressed to higher levels are sent to lower levels. Reports
originally addressed to lower levels are summarised and sent to higher
levels.
Some of the reports like Materials Wastage Reports (regarding waste, scrap,
spoilage, defective etc.) have been explained in the chapter on .Materials...
Similarly Idle Time
Reports etc. have been explained in the chapter on .Direct Labour and Direct
Expenses... Students are advised to go through the proformas of these
reports. Variance
Reporting to Management has been explained in the Chapter on Standard
Costing.
Moreover regular reports for derivation of actual and budgeted performances
can also
be submitted. This aspect has been explained in the Chapter on Budgetary
Control.
Special reports.
Special reports are required for special purposes. The purpose of obtaining
such reports, and the time limit within which such reports are to be
submitted, has to be specifically and clearly laid down. Sometimes special
staff may have to be employed for the purpose. Special reports may require
co-ordination of various departments or functions such as industrial
engineering, marketing etc. Examples of some of the specific reports are
given below :
(i) Reports for information about competitive products.
(ii) Report by Purchase Department on problems involved in purchasing of
materials.
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(iii) Report by the cost accountant on the implications of price movements on

the cost of the products.
(iv) Report regarding market research about a specific product or products.
(v) Report regarding choice of products or selection of a method of
production when alternative choices are available.
(vi) Report on cost-benefit analysis (including non-cost considerations),
whenever management has to decide among alternative courses of acts.
Review of Reports
Constant review regarding the utility of different reports should be done so
that no executive is starved of information and no executive is fed with
unwanted data. In other words a report should neither be a burden to the
sender nor a nuisance to receiver. It will be appropriate for each executive to
ask himself the following questions regarding each of the reports submitted
to him:
(a) .Do I want it ?.
In, case the answer is .No., he need not ask any further questions.
(b) .Is it relevant to my position ?.
In other words whether such a report helps him in making better decisions.
(c) .Does it come in time .?.
Meaning thereby whether it comes too late or too early than required.
(d) . Is it at the right frequency?.
In other words the report should not be come more or less often than
required.
(e) .Is it accurate enough?.
It implies whether the report is less accurate or more accurate than desired.
(f) .Is its presentation in the best form for me?.
The Presentation of information should be in the most suitable form .
In case correct answer are found to these questions and remedial measures
are taken when necessary , the reports . the carriers of information . will
effectively serve the objectives for which they are
Procurement procedure and Documentation
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Procurement is the purchase of goods and services at the best possible price to meet a
purchaser’s demand in terms of quantity, quality, dimensions and site. It means that the
goods/services are appropriate and that they are procured at the best possible cost in terms of
quality and quantity, time, and location. Every business should define procurement processes
intended to promote fair and open competition while minimizing exposure to fraud and
collusion. Every business/firm has standard procurement procedures for getting goods or
services. These procedures cover all aspects of the procurement cycle, including the selection of
the supplier, contract negotiations, order placement and payment. All firms have procurement
procedures and they are used to control spending activity, ensure appropriate approvals are in
place and reduce the risk of overpayment. An appropriate approval procedure is to limit access to
the purchase order forms and require signed authorization from a competent person. This
separation of the goods recipient and the approval is designed to ensure that a competent person
generally senior person is aware of the order and can confirm that the materials are required for
business purpose. In short we can say procurement procedure includes:
• Planning,
• Standards determination,
• Specifications development,
• Selection of supplier
• Value analysis,
• Funding,
• Price determination,
• Supply contract administration,
• Inventory control and stores, and
• Disposals and other related functions.
PROCUREMENT DOCUMENTATION
Documents which are involved in the procurement are called procurement documents.
Procurement documents serve an important aspect of the organizational element in the project
process. It is a kit which is used in process bidding and submitting project proposals and the
facets of work that make up a project. In a simple way, these are the contractual relationship
between the purchaser and the supplier of goods or services.
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The procurement documents will differ according to type of contract which will be executed.
Basically procurement documents include of all documents that serve as invitations to tender,
solicit tender offers and establish the terms and conditions of a contract. Generally these
documents may be required for procuring any good/services, which as are under:
Request for Proposal (RFP): It is an early stage in a procurement process. Purchaser issues an
invitation to supplier for submitting a proposal on a particular goods or service often through a
bidding process.
Request for Information (RFI): A request for information (RFI) is a standard business process
whose purpose is to collect written information about the capabilities of various suppliers.
Normally it follows a format that can be used for comparative purposes. It is a proposal
requested from a prospective seller or a service provider to determine what products and services
are potentially available in the marketplace to meet a buyer's needs and to know the capability of
a seller in terms of offerings and strengths of the seller.
Request For Quotation (RFQ): A request for quotation (RFQ) is a standard business process
whose purpose is to invite suppliers into a bidding process to bid on specific products or
services. RFQ, generally means the same thing as IFB (Invitation For Bid). An RFQ typically
involves more than the price per item. Information like payment terms, quality level per item or
contract length are possible to be requested during the bidding process. These may serve as a
binding contract.
Offers: This type of procurement documents are bids, proposals, and quotes made by potential
suppliers to prospective clients.
Contracts: Contracts refer to the final signed agreements between clients and suppliers.
Amendments/Modifications: This refers to any changes in solicitations, offers and contracts.
Amendments/
Modifications have to be in the form of a written document.
METHODS OF PURCHASING
Purchasing is an art. Wrong purchases increase the cost of materials, store equipments and the
finished goods. Hence, it is imperative that purchases should be effectively, efficiently and
economically performed.
The methods of purchasing can be broadly classified as centralised and localised purchasing.
Centralized Purchasing
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In a large organisation, manufacturing units are many. In such cases centralized purchasing is
beneficial. Centralised purchasing means that all purchases are made by a single purchase
department. The advantages are:
(i) Specialised and expert knowledge is available.
(ii) Advantages arise due to bulk purchases.
(iii) The cost of purchasing can be reduced and selling price can be lowered.
(iv) As there is good knowledge of market conditions, greater control can be exercised.
(v) When materials have to be imported, it is advantageous to centralise the buying.
(vi) Economy and ease in compilation and consultation of results.
(vii) It can take advantage of market changes.
(viii) Investment in inventories can be reduced.
(ix) Other advantages include undivided responsibility, consistent buying policies.
The factors to be considered when decision regarding centralisation has to be taken are
geographical
separation of plants, homogeneity of products, type of material bought, location of supplies etc.
64 EP-CMA
Decentralisation of Purchases
In decentralised purchasing, each department or branch makes its own purchases. The
advantages of localised purchasing are:
(i) Each plant may have its own particular need. This can be given special attention.
(ii) Direct contact can be established with suppliers.
(iii) The time lag between indenting and receiving materials can be reduced.
(iv) Technical requirements of each plant can be ascertained.
PURCHASE PROCEDURE
Though different concerns adopt different practices regarding details recorded, forms and records
used. The routine followed for the purchase of materials is usually the same. The steps may be
enumerated as follows:
(i) Indenting for materials
(ii) Issuing of tenders and receiving quotations
(iii) Placing of order
(iv) Inspecting stores received
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(v) Receiving the stores accepted in inspection

(vi) Checking and passing bills for payment.
Indenting for Materials
The stores department prepares indents for the purchase of materials and sends it to the purchase
department. The indents may be for replenishment of stocks or for a special job. The former are
called regular indents and the latter special indents.
Regular indents are prepared periodically and placed when the ordering level for different items
of stocks are reached. The quantity indented is equal to the ordering quantity fixed for each item.
The special indents are based on the demands received either from the planning or production
department. They should be certified by the department originating it. They are purchased as and
when required. Every document is usually linked with the previous and succeeding transaction to
facilitate back references.
Issue of Tenders to Suppliers
The purchase department issue tenders to suppliers or publish them in papers. The suppliers
quote their terms of price and delivery/payment. After the last date for receipt of quotations is
over, the tenders are opened and a comparative statement is prepared. Tenders are prepared in
triplicate. Of them, two are sent to the suppliers and one is retained with the purchase
department. The supplier mentions his terms in the original.
While considering the tenders, the reliability of the supplier has to be taken into account. The
quality of goods and time taken to deliver the goods on previous occasions should be checked.
The financial stability and capacity to deliver goods should be ensured.
Sometimes purchases may be made without inviting quotations. The circumstances are when
prices are controlled, or purchases are made under long-term contracts, or catalogue prices are
available or when there is a cost plus contract. If, purchase is made under cost plus profit basis,
the cost composition and reasonableness of price should be checked.
Placing of Purchase Orders
Normally six copies of purchase orders are made. The supplier, stores, inspection department,
store accounting section, purchase department and progress department are sent one copy each.
The purchase order has legal and accounting significance. From legal point of view, it binds both
the parties to the terms of the contract. From accounting point of view, it signifies the amount
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which has to be spent. It signifies the stores department to accept the goods and the
accounts department to accept
Interlocking and Integrated Accounts
As in Financial Accounting, the double entry system of bookkeeping is also used in cost
accounting with every debit entry made in one account having a corresponding credit entry in
another. This may be achieve either thorough interlocking account or integrated accounts.
Interlocking (or non- integrated account) accounting system
Under this arrangement, the financial accounts and the cost accounts are kept separately and
independent of each other but are reconcile on a regular basis.
Integrated Accounting system
Under this arrangement, only one set of accounting records is kept using a common input for
data for both financial and cost accounting transactions. As a result, there is only one profit
figure that can be generated so that there is no need for reconciliation of accounts.
The main futures of interlocking accounting system
Under the interlocking account system, the financial accounts are kept separate from the cost
accounts. The principal account to be found in the cost ledger and their purpose are as follows

a. raw material control account or store control account

b. Work in progress control account
c. Finished goods control account
d. Production overhead control account
e. Production wages control account
f. Cost ledger control account
Among other accounts in the control ledger are :
1. Cost sales
2. Sales account
3. Costing profit and loss account
4. Administration overhead control account
5. Selling and distribution control account
Important of Control Account
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A control accounts represent a total amount of a group items like raw material or work in
progress. The details transactions are recorded in the individual account while only sum of the
various transactions is recorded in the control account. For example, N15 is charged to each of
ten jobs as direct material costs then N150 is debited to work in progress control account as cost
of material.
Question one:
On January 2022 a Manufacturing company inside GSU has the following balance in the cost ledger
Dr. Cr.

N N

Material Control Account 22,000

Work in Progress control account 30,000

Finished Good control account 35,000

Cost ledger control account 87,000

87,000 87,000

The following transaction took place during the year 31st December 2022
Raw Material Produced N

Directly by store keeper 90,000

Directly by production department 8,000

Carriage inward (exclusively by store material) 2,000

Issues of raw materials from store

Direct material to production 87,000

Indirect material to production 4,000

Indirect production to marketing 6,000

Indirect material to administration 1,000

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Labour costs

Direct wages 75,000

Indirect production wages 12,000

Idle time 1,500

Administration salaries 17,000

Marketing salaries 13,000

Indirect expenses

Productions 9,000

Administration 4,000

Marketing 4,500

Material return from store to supplier 1,000

Material damage by flood 2,000

Cost of good produced 195,000

Cost of good sold 215,000

Sales 310,000

Production overhead absorbed 32,000

Administration overhead absorbed 23,000

Marketing overhead absorbed 22,500

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In addition it is the policy of the company to charged N5000 annually as notional rent for the use
of the building as factory.
Required:
i. Prepare the relevant account in the cost ledger and determine the costing profit for
the year 2022
ii. Extract a trial balance in the cost ledger as at 31st December 2022