Year 12 Accounting Tutorial

1. Year 12 Accounting Tutorial • Gavin Crosthwaite • Mindarie Senior College

2. Topics Covered • Companies • Cost Volume Processing - CVP • Cost Accounting • Theory

3. Exam Details • The exam will be 3 hours • Will be broken up into practical (65%) and theory (35%) • Make sure you show ALL workings. You will get follow on marks.

4. Companies - What to study • Theory (and lots of it) • Retained Earnings • Calculating Dividends • Balance Sheet (including notes to the balance sheet) • Statement of Changes in Equity • Bonus Shares • General Journal entries

5. Cost Accounting • Classification of Costs • Job Order Costing ( manufacturing and service) • Standard Order Costing • Variances • Direct Material (Price and Usage) • Direct Labour (Rate and Efficiency) • Fixed Overheads (Spending and Capacity) • Variable Overheads (Spending and Efficiency)

6. Cost Volume Profit (CVP) • Contribution Margin and Contribution Margin Ratio • Profit Target • Calculating Profit • Break Even including Multiple products • Margin of Safety • Limitations • Capacity constraints • Special Orders • Make or Buy • Open or Close Down

7. Types of Costs

8. Contribution Margin Sales - Variable Expenses or Selling price per unit - Variable Expense per unit What does it mean? This is the amount left over to cover the cost of the fixed expenses.

9. Contribution Margin Example • Selling price per bed = $300 • Variable expenses per bed = $100 • Fixed expenses per bed = $120 • Number of beds sold per month = 500 How much is the contribution margin?

10. Contribution Margin Ratio Contribution Margin Revenue What does it mean? If the ratio is 54% then this means for every $1 worth of sales we make we have 54c to cover fixed expenses.

11. Break Even Point (in units) Total Fixed Costs Contribution Margin What does it mean? It means we have to sell this many units in order for us to break even for the given period of time.

12. Break Even Point (in units) A business sells pots for a living. The business sells pots for $10 each and has variable costs of $5 per pot. The business has fixed costs of $3,000. What is the Break Even point in Units?

13. Break Even Point (in sales ) Total Fixed Costs Contribution Margin Ratio A business sells pots for a living. The business sells pots for $10 each and has variable costs of $5 per pot. The business has fixed costs of $3,000.

14. Break Even Point (in multi-product firm ) Total Fixed Costs Weighted Contribution Margin per unit What does it mean? It means we have to sell this amount of each product in order for us to break even for the given period of time.

15. Forecast Revenue ( in dollars) • Variable Expenses + Fixed Expenses + Target Profit

16. Forecast Target Revenue ( in units) Total Fixed Costs + Target Net Profit Contribution Margin per unit What does it mean? It means we have to sell this total in units in order for us to make our desired profit for the given period of time.

17. Forecast Target Revenue ( in units) Total Fixed Costs + Target Net Profit Contribution Margin per unit A business sells pots for a living. The business sells pots for $10 each and has variable costs of $5 per pot. The business has fixed costs of $3,000. It would like to make a profit of $4,000 per month.

18. JOB ORDER COSTING • Job Order Costing is used when a business makes a small number of identical products or when each product made is unique. • It is used by the following types of businesses: • printers • motor vehicle repairers • house painters

19. Sunk vs Relevant Costs • Sunk Costs are past costs that cannot be changed in the future. • Relevant Costs are future costs linked to a particular investment proposal. • Sunk costs are not relevant when making an investment decision.

20. JOB ORDER COSTING • There are 3 types of costs that need to be calculated: • Direct Materials • Direct Labour • Factory Overheads - These can be be classified as either fixed or variable

21. JOB ORDER COSTING • Classify the following expenses as either fixed or variable: • Wages of a Factory Supervisor • Electricity • Rent • Insurance • Materials to make the products • Depreciation of machinery

22. JOB ORDER COSTING • Classify the following expenses as either fixed or variable: • Wages of a Factory Supervisor - Fixed • Electricity - Variable • Rent - Fixed • Insurance - Fixed • Materials to make the products - Variable • Depreciation of machinery - Fixed

23. JOB ORDER COSTING • There are 3 types of costs that need to be calculated: • Direct Materials • Direct Labour • Factory Overheads - These can be be classified as either fixed or variable In order to complete the task, we also need the estimated direct labour hours for the given time period.

24. JOB ORDER EXAMPLE • We are going to calculate the job order cost for a cabinet maker. • The direct material for the cabinets are $300. • The direct labour costs are $120. The budgeted direct number of labour hours are $3,500 and will take 4 hours • The business has the following overhead costs for the next 12 months:

25. DEPARTMENTAL APPLICATION OVERHEADS • A business may have more than one department to allocate costs against so that it can make a more accurate costing of a job.

26. Mindarie Skate Designs creates skateboards with custom images and has two factory departments: Art and Design and Manufacturing To complete a skateboard it needs the following: Overhead Art & Design = Labour Hours Manufacturing = Machine Hours

27. JOB COSTING - SERVICE • Some of these types of businesses will have direct material costs such as painters while other types such as lawyers or accountants will not have any material costs.

28. Service Job Costing - Example Bill Smith has a decided to operate a painting business and needs to work out how much he should charge for a particular job. The business will have the following overhead costs for the next 12 months: The number of labour hours = 4900 The direct materials will cost $1000 and the direct labour = $500. The profit margin is 25% and take 15 hours to do the job.

29. CALCULATING THE COST OF A PRODUCT • This can be combined with job costing to make the most efficient cost of calculating the manufacture of a product. These are known as a standard cost. • There are 3 types of costs that need to be calculated: • Direct Materials • Direct Labour • Factory Overheads - These can be be classified as either fixed or variable

30. Example - Direct Material • Funky Designs make shoes for the young and trendy. Funky Designs has the following direct material standards which we can use to calculate the direct material costs:

31. Example - Direct Labour

32. Example - Fixed Factory Overheads • The company has budgeted for a total fixed factory overhead of $120,000. It expects (budgets) for a total of 15,000 direct labour hours. Budgeted Fixed Factory Overheads Budgeted Direct Labour Hours

33. Example - Variable Factory Overheads • The company has budgeted for a total variable factory overhead of $75,000. It expects (budgets) for a total of 15,000 direct labour hours. Budgeted Variable Factory Overheads Budgeted Direct Labour Hours

34. VARIANCE ANALYSIS • The difference between the actual and standard performance is known as a variance and can be either favourable, unfavourable or no change. • The variances we will be looking at will affect Direct Material, Direct Labour, Fixed Overhead and Variable Overheads. • You will be given the formulas in the exam.

35. Variance Example • Mindarie Gardens produces garden pavers. The business has developed the standard cost based on 2,400 direct labour hours per month. Actual results for the month Stones Produced: 13 000 Fixed Factory Overhead: 10 000 Direct Material: 28,000 kilos of stone were bought for a cost of $89,600. A total of 27,300 kilos were used to produce the pavers. Variable Factory Overhead: 7 000 Direct Labour: 2 500 hours * $24.50 per hour

36. Direct Material Variance (Price) (Actual Price of Input - Standard Price of Input) x Actual Quantity of Input Purchased (AP-SP) x AQP What does it mean? It compares the price of what we budgeted for materials to what we actually paid for the materials

37. Direct Material Variance (Price) FAVOURABLE Reasons A cheaper supplier of materials has been found UNFAVOURABLE Reasons An unexpected increase in the cost of materials

38. Direct Material Variance (Usage) (Actual Quantity of Input Issued - Standard Quantity of Input Allowed) x Standard Price of Input (AQI - SQA) X SP What does it mean? It compares the price of what we budgeted for materials to be used in the production of goods to what we actually used in the production

39. Direct Material Variance (Usage) FAVOURABLE Reasons We have may used better grade materials which results in less material being required UNFAVOURABLE Reasons An unexpected increase in the cost of materials

40. Direct Labour Variance (Rate) (Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked (AR - SR) X ADLH What does it mean? It compares the actual cost of labour vs what we planned to pay over the given period.

41. Direct Labour Variance (Rate) (Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked (AR - SR) X ADLH What does it mean? It means that we have spent $1,250 more on labour than we expected to for the given period

42. Direct Labour Variance (Price) FAVOURABLE Reasons More than expected use of cheaper workers UNFAVOURABLE Reasons Using higher paid workers to complete work normally carried out by lower paid workers

43. Direct Labour Variance (Efficiency) (Actual Direct Labour Hours worked – Standard Direct Labour Hour allowed) x Standard Rate per Direct Labour Hour (ADLH - SDLHA) X SRDLH What does it mean? It compares the actual cost of labour vs what we planned to pay over the given period.

44. Direct Labour Variance (Efficiency) FAVOURABLE Reasons Improved productivity and/or better and more efficient machinery UNFAVOURABLE Reasons Poorly trained workers and/or breakdown of plant and machinery.

45. Fixed Factory Overhead Spending Actual Fixed Factory Overhead - Budgeted Fixed Factory Overhead What does it mean? It compares the difference in the budgeted amount of FFO to the actual amount of FFO.

46. Fixed Factory Overhead Variance (Spending) FAVOURABLE Reasons A lower than expected increase in supervisors salaries or for indirect materials UNFAVOURABLE Reasons An unexpected increase in supervisors salaries or unexpected rise in indirect materials

47. Fixed Factory Overhead (Capacity) Budgeted Fixed Overhead x (Standard Fixed Overhead per unit - Standard Activity Allowed) BFO x (SFO - SAA) What does it mean? It compares the difference between the amount of FFO spending that was added to each product to the amount that was budgeted for each product.

48. Variable Overhead (Spending) Actual Variable Overhead Cost - (Actual Hours x Standard Variable Overhead Rate) What does it mean? It compares the difference in the budgeted amount of VFO to the actual amount of VFO.

49. Variable Overhead (Efficiency) (Actual Number of Hours - Standard Number of Hours) x Standard Variable Overhead Rate) What does it mean? It compares the difference in the budgeted amount of hours to the actual amount of hours set to allocate the VFO.

50. COMPANIES