CIMA C1Fundamentals Of Management Accounting

Cost Bookkeeping

CIMA C1Fundamentals Of Management Accounting

Class Slides – Ian Wilson

Your syllabus included the following: Explain the principles of Manufacturing

Accounts & the integration of the Cost Accounts with the Financial Accounting System.

Prepare a set of ‘Integrated Accounts’, showing Standard Cost Variances.

Learning Aims (CIMA)

There is NO statutory requirement to keep detailed ‘costing’ records.

Many smaller companies will not bother, instead relying on ‘Financial’ records.

In a larger, more complex business however, cost accounting records are vital to monitor and control what is taking place.

Introduction

What are they?. Defined by CIMA as: ‘a set of accounting records that integrate

both financial and cost accounts, using common input data for all accounting purposes’.

Integrated Accounting Systems

Principal accounts in an integrated system: 4 areas to deal with:1. Resources Accounts – Materials/Wages etc2. Cost of Production Accounts – costs from

start to end of manufacture, Stock, Labour, WIP/Finished Goods/Cost of Sales

3. Sales Accounts – for invoicing customers4. Income Statement – summary of

Profit/Loss

Integrated Accounting Systems

Simple Rules: A Flow into the Account is shown on the

DEBIT side: A Flow out of the Account is shown on the

CREDIT side: Both are Held in a ‘T’ Account: Obviously at the end of a period the

account needs to be ‘balanced off’.

Cost Accounts

Debit Entries: Materials ‘flowing’ into the Company, ie

Direct & Indirect Materials purchased by the Company

Opening Inventory is a DEBIT Entry: Credit Entries: As materials are used in production, they

are shown as a CREDIT. Direct Materials are allocated to the W.I.P. Account

Inventory Control Accounts

Credit Entries: Indirect Materials are allocated to the

Production Overhead Account Closing Inventory values are the balancing

figure on the Credit side of the ‘T’ account.

Inventory Control Accounts

No Opening or Closing Stock here! Debit Entries: Reflect wages paid out to staff/operatives

Credit Entries: Wages split into Direct & Indirect Labour

costs

Labour Control Account

Debit Entries: Costs associated with producing Units of

output are built up on the debit side, likely to be Materials, Labour & Production Overheads

Credit Entries: This is the cost build up on the Debit side,

shown on the Credit side as an output to Finished Goods

Work-in-Progress Account

Used to build up the ‘Indirect Costs’ incurred by each production cost centre.

Debit Entries: Overheads built up on the Debit side as

they are incurred in the period Credit Entries: Overheads ‘Absorbed’ from the Prod O/H

A/C will be charged to the W.I.P. A/C based on the ‘OAR’ (BOAR)

Production Overhead Control

As we saw earlier, we may OVER or UNDER ‘Absorb’ Overheads.

UNDER ABSORPTION – shown on CREDIT side of Production Overhead A/C – balancing figure

OVER ABSORPTION – shown on DEBIT side of Production Overhead A/C – balancing figure

The ‘other’ side of the Under/Over Absorption entry is in the P/L A/C

Over/Under Absorption

Write up the relevant ‘T’ entries: You will need:1. Calculate OAR per unit2. Stock/Inventory Control3. Labour Control4. WIP5. Production Overhead Control6. Income Statement

Exercise 1

Write up the relevant ‘T’ entries: You will need:1. Calculate OAR per unit2. Stock/Inventory Control3. Labour Control4. WIP5. Production Overhead Control6. Income Statement

Exercise 2

In the last session we covered Standard Costing, remember:

What is a Variance?. ‘Difference between a planned, budgeted or

standard cost and the actual cost incurred. The same comparison can be made for revenues’.

The analysis of these ‘differences’ is called VARIANCE ANALYSIS.

Standard Costing Entries

Types of Variances: FAVOURABLE VARIANCES: when actual

results are better than expected, producing higher profits.

ADVERSE VARIANCES: when actual results are worse than expected, producing lower than planned profits

Standard Costing Entries

If a company uses ‘Standard Costing’ systems, account has to be taken of the VARIANCES that occur:

Variances should be recorded in the account in which they first appear:

Standard Costing Entries

Variance: Account recorded in:

Material Price Variance Stores/Materials Control

Labour Rate Variance Wages Control

Materials Usage Variance Work in Progress

Labour Efficiency variance Work in Progress

Idle Time Variance Work in Progress

Total Overhead Variance Overhead Control

Variance Control Account (VCA): The other side of the entry will appear in

the ‘Variance Control Account’ An ADVERSE variance is a DEBIT in the VCA A FAVOURABLE variance is a CREDIT in the

VCA

Standard Costing Entries

Lets try this example: Materials & Overhead costs are given: You have specific details for the Labour

costs including rate & efficiency variances

Exercise 3 Labour Variances

This will test you relating to Materials with some Labour Variances thrown in.

Exercise 4 Material Variances

Advantages of integration:1. No duplication of effort2. No need to reconcile financial & cost

accounts3. Simplicity

Exam: you will be presented with T accounts on screen with ‘missing’ entries.You will have to complete the accounts.

Integrated Accounting Systems