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Accounting and Control of Material, Labour and Overhead. Accounting and Control of Material Accounting and Control of Labour Accounting and Control of Overhead. Accounting and Control of Material. Materials : supplies purchased from outside sources and used to manufacture products for sale
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Accounting and Control of Material, Labour and Overhead Accounting and Control of Material Accounting and Control of Labour Accounting and Control of Overhead
Accounting and Control of Material • Materials : supplies purchased from outside sources and used to manufacture products for sale • Direct material and Indirect material (part of factory overhead) • Materials must be available and acquired before production can begin ACT3131/First Semester 2008
Accounting and Control of Material • Emphasis on Material control • Purchasing procedure • Documents involve includes: purchase requisition, • Material receipts • Use of bin card to record material received • Use bin card of record movement of material • Use of stores record card ACT3131/First Semester 2008
Sources of demand: storekeeper, department heads Request for material on purchase requisition Selection of supplier by purchasing department & dispatch of purchase order to supplier Receiving of goods and invoice by receiving department Materials checked and inspected and GRN prepared Materials and GRN sent to store. Invoice and, GRN and inspection report sent to purchasing dept. Materials checked against goods received note by storekeeper Invoice checked by purchasing department against purchase order, GRN and inspection report Invoice signed by buyer and sent to accounts department Payment made by accounts department. ACT3131/First Semester 2008
Control of Material • Stores control • Optimum level of inventory should be maintained • Material should be protected against pilferage or deterioration • Materials should be identified and located speedily • Stocktaking • Material issues • Use of material requisition note • Pricing of material • First In First Out • Last In First Out • Weighted Average ACT3131/First Semester 2008
Accounting for Materials • Records are maintained to record • Purchase of materials • Return of materials to suppliers • Materials issued from store to production • Materials returned from production to store • Transfer of materials between jobs ACT3131/First Semester 2008
Accounting and Control of Labour • Amount paid to employees of the firm for their time, skill, experience, effort, output • Include remuneration paid to production workers • Direct Labour • Indirect Labour (part of Overhead) ACT3131/First Semester 2008
Accounting and Control of labour • Recording of labour time • Time sheets (record the time spent on each job completed ) • Job cards (completed by an employee who records the time spend on a particular job) • Job tickets (prepared for each operation within a single job) ACT3131/First Semester 2008
Accounting and Control of Labour • Method of remuneration • Time rate (employee paid on the basis of time worked) • Payment by result or piecework • Piecework with guaranteed day rate (guaranteed a day rate) • Differential piece rate (piece rate vary at different level of efficiency) • Premium scheme ACT3131/First Semester 2008
Accounting for Labour • Wage reports prepared: • Overtime report • Idle time report (shows idle time , production time and analysis of idle time) • Labour turnover report • Wage analysis report • Reconcile the total gross wages with the wages allocated to the jobs or cost centres ACT3131/First Semester 2008
Procedures for recording payroll costs • Records hours worked or quantity of output by employees in total and by job, process or department • Analyzing the hours by employees to determine how time is to be charged • Charging payroll costs to jobs, processes, department and factory overhead accounts • Preparing the payroll which involves computing and recording employees gross earnings, deductions and net earnings ACT3131/First Semester 2008
Accounting for Overhead • Cost Allocation and Cost Apportionment • Blanket overhead rate vs Departmental overhead rate • Actual vs Normal Costing • Overapplied and Underapplied Overhead ACT3131/First Semester 2008
Cost Allocation • Cost Allocation • Indirect material and indirect wages that are specific to a cost centre can be allocated • Overhead costs can be allocated to cost centre if: • Caused solely by a particular cost centre and • The exact amount is known ACT3131/First Semester 2008
Assigning indirect costs using blanket overheadrates • •Some firms use a single overhead rate (i.e.blanket or plant-wide) for the organization as a whole. • Example • Total overheads = RM900 000 • Direct labour (or machine hours) =60 000 • Overhead rate = RM15 per hour ACT3131/First Semester 2008
Assume that the company has 3 separate departments andcosts and hours are analysed as follows: •Product Z requires 20 hours (all in department C) ACT3131/First Semester 2008
•A blanket overhead rate can only be justified if all productsconsume departmental overheads in approximately thesame proportions: Product X spends 1 hour in each department and product Yspends 5 hours in each department (Both blanket anddepartmental rates would allocate £45 to X and £225 to Y). •If a diverse range of products are produced consumingdepartmental resources in different proportions separatedepartmental (or cost centre)rates should be established. ACT3131/First Semester 2008
Cost centre overhead rates •Where a department contains a number of different centres(each with significant overhead costs)and productsconsume overhead costs for each centre in differentproportions,separate overhead rates should also be established for each centre within a department. •The terms cost centres or cost pools are used to describe allocation to which overhead costs are initially assigned. •Frequently cost centres/cost pools will consist ofdepartments but they can also consist of smaller segmentswithin departments. ACT3131/First Semester 2008
The two-stage allocation process •To establish departmental or cost centre overhead rates a two-stage allocation procedure is required: Stage 1 –Assign overheads initially to cost centres. Stage 2 –Allocate cost centre overheads to cost objects (e.g.products)using second stage allocationbases/cost drivers. ACT3131/First Semester 2008
An illustration of the two-stage process for atraditional costing system • •Applying the two-stage allocation process requires the following 4 steps: • Assigning all manufacturing overheads to production and service cost centres. • Reallocating the costs assigned to service cost centres to production cost centres. • Computing separate overhead rates for each production cost centre. • Assigning cost centre overheads to products or other chosen cost objects. ACT3131/First Semester 2008
The annual overhead costs for a company which has three production centres and two service centres (Materials procurement and General factory support) are as follows: ACT3131/First Semester 2008
The following information is also available ACT3131/First Semester 2008
Cost Apportionment • Defined as “the allotment to two or more cost centres of proportions of common items of cost on the estimated basis of benefits received” (CIMA) ACT3131/First Semester 2008
Under-and over recovery of overheads •If actual activity or overhead spending is different fromthat used to compute the estimated overhead rates therewill be an under or over recovery of fixed overheads. Example Estimated fixed overheads =£2 million Estimated activity =1 million directlabour hours Overhead rate =£2 per DLH ACT3131/First Semester 2008
•Assume actual activity is 900 000 DLH ’s and actualoverheads are £2 million: Overhead allocated to products = RM1.8 million (900 000 × £2) Under-recovery = RM200 000 •Assume actual overheads are £1 950 000 and actual activityis 1 million DLH ’s: Overhead allocated to products = RM2 million (1 million ×RM2) Over-recovery = RM200 000 •External financial accounting principles (GAAP) requirethat under/over recoveries are treated as period costs. ACT3131/First Semester 2008
Overhead Absorption • The allotment of overhead to cost units by means of rates separately calculated for each cost center” (CIMA) ACT3131/First Semester 2008
Actual costing • Actual Costing - allocates: • Indirect costs based on the actual indirect-cost rates times the actual activity consumption ACT3131/First Semester 2008
Normal costing • Normal Costing – allocates: • Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption • Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption ACT3131/First Semester 2008
Over or under absorption of Overhead • Difference between actual overhead and applied (absorbed overhead) • Absorbed overhead greater than actual overhead (overhead overabsorbed) • Absorbed overhead less than actual overhead (overhead underabsorbed) ACT3131/First Semester 2008
