C9: Accounting and Finance Course

Module 1

Introduction
This module introduces the purpose of management accounting, the goals
of the organisation and the role of management accounting in good
corporate governance. In addition the module identifies cost behaviour
and how this is applied to absorption and variable costing and finally
there is an introduction to the principles of activity-based costing (ABC).

Upon completion of this module students will be able to:

 Understand the role of management accounting and how this fits

with the goals of the organisation.
 Explain how management accounting can add to corporate
Outcomes governance.
 Identify how costs behave.
 Explain the difference between absorption and variable costing.
 Discuss the principles of activity-based costing.
 Explain the difference between activity-based costing and
absorption and variable costing.

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Unit 1 Managing the organisation

Unit 1

Managing the organisation

Learning outcomes
Upon completion of this unit students will be able to:

 Explain the difference between management accounting and

financial accounting.
 Describe the purpose of management accounting.
Outcomes
 Identify the different functions of management.
 Explain the role of corporate governance in managing an
organisation.
 Identify the different parties involved in the governance of an
organisation.
 Describe and explain corporate governance principles.
 Explain the role of ethics in business.

Activity 1.1
For the organisation that you are currently involved with:
1. List all of the areas where accounting information is used to help
with decision-making.
Activity 2. Describe how the organisation is governed.
3. Does your organisation have a code of ethics? If so, how does the
organisation ensure compliance with the code?
4. Are there any operational areas that may lead to an ethical
dilemma? If so, how does the organisation deal with this type of
situation?

Activity 1.1 Feedback

Answers will depend on the organisation the student chooses.

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 C9: Accounting and Finance Course

Unit 2

Costing systems
Learning outcomes
Upon completion of this unit students will be able to:

 Explain the different classifications of cost.

 Describe how costs behave.
 Explain the principles of absorption costing.
Outcomes
 Explain the principles of variable costing.
 Identify the differences between absorption and variable costing.

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Unit 2 Costing systems

Activity 1.2
1. Hawkins Electronics Limited manufactures a portable radio designed
for mounting on the wall of the bathroom. The following list
represents some of the different types of costs incurred in the
manufacture of these radios. Classify each of the items as product
Activity (inventoriable) cost or period (non-inventoriable) costs for the
purpose of preparing external financial statements.
a. The plant manager’s salary.
b. The cost of heating the plant.
c. The cost of heating executive offices.
d. The cost of printed circuit boards used in the radios.
e. Salaries and commissions of company salespersons.
f. Depreciation on office equipment used in the executive
offices.
g. Depreciation on production equipment used in the plant.
h. Wages of janitorial personnel who clean the plant.
i. The cost of insurance on the plant building.
j. The cost of electricity to light the plant.
k. The cost of electricity to power plant equipment.
l. The cost of maintaining and repairing equipment in the plant.
m. The cost of printing promotional materials for trade shows.
n. The cost of solder used in assembling the radios.
o. The cost of telephone service for the executive offices.

2. Lee Company, which has only one product, has provided the
following data concerning its most recent month of operations.
 Selling price: $95
 Units in beginning inventory 100
 Units produced 6,200
 Units sold 5,900
 Units in ending inventory 400

Variable costs per unit:

 Direct materials $42
 Direct labour $28
 Variable manufacturing overhead $1
 Variable selling and administrative $5

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 C9: Accounting and Finance Course

Fixed costs:
 Fixed manufacturing overhead $62,000
 Fixed selling and administrative $35,400
The company produces the same number of units every month,
although the sales in units vary from month to month. The company’s
variable costs per unit and total fixed costs have been constant from
month to month.
Required:
a. What is the unit product cost for the month under variable
costing?
b. What is the unit product cost for the month under absorption
costing?
c. Prepare an income statement for the month using the
contribution format and the variable costing method.
d. Prepare an income statement for the month using the
absorption costing method.
e. Reconcile the variable costing and absorption costing net
incomes for the month.

Activity 1.2 Feedback

1. Hawkins Electronic. Classify each item as product (inventoriable)
cost or period (non-inventoriable) costs for the purpose of preparing
external financial statements.
a. Product
b. Prodct
c. Period
d. Product
e. Period
f. Period
g. Product
h. Product
i. Product
j. Product
k. Product
l. Product
m. Period
n. Product
o. Period

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Unit 2 Costing systems

2. Lee Company
Answers for (a.) and (b.), unit product costs:
Variable costing:
 Direct materials $42
 Direct labour $28
 Variable manufacturing overhead $1
 Unit product cost $71
Absorption costing:
 Direct materials $42
 Direct labour $28
 Variable manufacturing overhead $1
 Fixed manufacturing overhead $10
 Unit product cost $81
Answers for (c.) & and (d.), income statements:
Variable costing income statement:
Sales $560,500
Less variable expenses
Variable cost of goods sold:
Beginning inventory $7,100
Add variable manufacturing costs $440,200
Goods available for sale $447,300
Less ending inventory $28,400
Variable cost of goods sold $418,900
Variable selling and administrative $29,500
$448,400
Contribution margin $112,100
Less fixed expenses:
Fixed manufacturing overhead $62,000
Fixed selling and administrative $35,400
$97,400
Net income $14,700

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 C9: Accounting and Finance Course

Absorption costing income statement:

Sales $560,500
Cost of goods sold:
Beginning inventory $8,100
Add cost of goods manufactured $502,200
Goods available for sale $510,300
Less ending inventory $32,400
$477,900
Gross margin $82,600
Less selling and administrative expenses:
Variable selling and administrative $29,500
Fixed selling and administrative $35,400
$64,900
Net income $17,700
Answer for (e.), reconciliation:
Variable costing net income $14,700
Add fixed manufacturing overhead costs
deferred in inventory under absorption costing $3,000
Deduct fixed manufacturing overhead costs
released from inventory under absorption costing $0
Absorption costing net income $17,700

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Unit 3 Activity-based costing

Unit 3

Activity-based costing
Learning outcomes
Upon completion of this unit students will be able to:

 Describe a typical ABC system.

 Explain the components of an ABC system.
 Identify activities and cost drivers.
Outcomes
 Explain the advantages and disadvantages of ABC.
 Explain the difference between traditional costing systems and
ABC.

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 C9: Accounting and Finance Course

Activity 1.3
1. Explain how ABC differs from traditional costing methods.
2. DEM manufactures and sells medical equipment. DEM uses an
activity-based costing system. Direct materials and direct labour costs
are accumulated separately along with information concerning four
Activity
manufacturing overhead cost drivers (activities). Assume that the
direct labour rate is $20 an hour and that there were no beginning
inventories. The following information was available for 2010, based
on an expected production level of 400,000 units for the year:

Activity (cost driver) Budgeted Cost for Cost driver used as Cost allocation rate
2010 allocation base
$ $
Materials handling 3,600,000 Number of parts used $1.50 per part
Milling and grinding 8,800,000 Number of machine $11.00 per machine
hours hour
Assembly and 6,000,000 Direct labour hours $5.00 per labour hour
inspection worked
Testing 1,200,000 Number of units $3.00 per unit
tested

The following production, costs and activities occurred during the

month of September:

Units Direct materials Number of Machine hours Direct labour

produced/tested costs parts used hours
50,000 $3,500,000 275,000 95,000 160,000

Required:
a. Calculate the total manufacturing costs and the cost per unit
produced and tested during September using the ABC approach.
b. Explain the advantages of the ABC approach relative to using a
single predetermined overhead application rate based on direct
labour hours.
3. Williams Industries manufactures and sells tables. The company uses
an activity-based costing system. Direct materials and direct labour
costs are accumulated separately along with information concerning
three manufacturing overhead cost drivers (activities). Assume that
the direct labour rate is $15 an hour and that there were no beginning
inventories. The following information was available for 2010, based
on an expected production level of 50,000 units for the year:

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Unit 3 Activity-based costing

Activity (cost driver) Budgeted Cost for Cost driver used as Cost allocation rate
2010 allocation base
$ $
Materials handling 250,000 Number of parts used $0.20 per part
Cutting and lathe 1,750,000 Number of parts used $1.40 per part
work
Assembly and 4,000,000 Direct labour hours $20.00 per labour
inspection hour

The following production, costs and activities occurred during the

month of July:
Units Direct materials Number of Direct labour
produced/tested costs parts used hours
3,200 $107,200 70,400 13,120

Required:
a. Calculate the total manufacturing costs and the cost per unit
produced and tested during July using the activity-based costing
approach.
b. Assume, instead, that Williams Industries applies manufacturing
overhead on a direct labour hours basis (rather than using the
activity-based costing system described above). Calculate the
total manufacturing cost and the cost per unit of the tables
produced during July (hint – you will need to calculate the
predetermined overhead application rate using the total budgeted
overhead cost for 2010).
c. Compare the per-unit cost figures calculated in a) and b). Which
approach do you think provides better information for
manufacturing managers? Explain your answer.

Activity 1.3 Feedback

1. Explain how ABC differs from traditional costing methods.
 Both ABC and traditional costing methods allocate overhead
to cost objects, but the methods of doing this differ.
 ABC allocates overhead to a cost object (product, service,
customer, department and so on) by tracing the cost-causing
activities of an organisation directly to a cost object. This
results in activities (and their associated costs) being
allocated into cost pools and then each cost pool is traced to a
cost object.
 Some complex ABC systems can have several hundred
activities and multiple cost pools. The result is a more
accurate reflection of the cost object’s consumption of cost-
causing activities.
 Traditional overhead allocation models also trace overhead to
a cost object, however they typically use a single overhead
driver (such as direct labour hours, or machine hours). The
result is often a distorted amount of overhead applied to the

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 C9: Accounting and Finance Course

cost object. This can be a significant problem in firms where

competition is high and/or overhead is a significant
proportion of the total cost.
2. DEM
a. Calculate the total manufacturing costs and the cost per unit
produced and tested during September.

Activity Cost driver Cost Allocated cost

used as allocation
allocation rate
base
$
Materials handling Number of 1.50 per part 275 000 parts $412 500
parts used
Milling and grinding Number of 11.00 per hour 95 000 MH $1 045 000
machine hours
Assembly and Direct labour 5.00 per hour 160 000 DLH $800 000
inspection hours worked
Testing Number of 3.00 per unit 50 000 units $150 000
units tested
$2 407 500

Total cost:
Direct material $3,500,000
Direct labour:
160,000 x $20 3,200,000
Manufacturing o/h 2,407,500
Total cost $9,107,500
Units produced 50,000
Cost per unit $182.15
b. Explain the advantages of the ABC approach relative to
using a single predetermined overhead application rate based
on direct labour hours.
Multiple allocation rates, as used in ABC costing, overcome
the problem of unitising fixed costs since in smaller cost
pools an appropriate variable activity can be found. The cost
allocations are closer to economic reality and so are more
accurate. This is likely to result in more competitive
behaviour and better decision-making.
3. Williams Industries
a. Calculate the total manufacturing costs and the cost per unit
produced and tested during July using the activity-based
costing approach.

Activity (cost Cost driver used as Overhead Cost Allocated

driver) allocation base allocation rate cost
$ $
Materials handling Number of parts 0.20 per part 70 400 parts 14 080
used
Cutting and lathe Number of parts 1.40 per part 70 400 parts 98 560
work used
Assembly and Direct labour hours 20.00 per hour 13 120 DLH 262 400
inspection
$375 040

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Unit 3 Activity-based costing

Total cost:
Direct material $107,200
Direct labour (13,120 x $15) $196,800
Manufacturing overhead $375,040
Total cost of 50,000 tables $679,040
Cost per table $13.58
b. Assume instead that Williams Industries applies
manufacturing overhead on a direct labour hours basis (rather
than using the activity-based costing system described
above). Calculate the total manufacturing cost and the cost
per unit of the tables produced during.
Predetermined overhead absorption rate:
Estimated overhead/DLH = $6,000,000/200,000 (hours
calculated from assembly and inspection allocation = $30 per
hour.
Total cost:
Direct material $107,200
Direct labour (13,120 x $15) $196,800
Overhead (13,120 x $30) $393,600
Total cost of 50,000 tables $697,600
Cost per table $13.95
c. Compare the per-unit cost figures calculated in a) and b).
Which approach do you think provides better information for
manufacturing managers? Explain your answer.
In this situation, the result is not that significant (only 2.7 per
cent between the ABC cost per unit of $13.58 and the
absorption costing rate of $13.95) but in many other
instances, this is not the case. A cost benefit analysis is
always conducted before installing a new system. One of the
risks to be assessed is the consequences of making the wrong
decision.

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