Good luck for your exam...

It has been a semester since day one you are in my class. Now it is the time to put your knowledge into test. I believe you are already prepared to answer questions in the final exam. The questions are not really hard but they test your understanding to understand the questions and able to translate them into answers. Don't worry as long as you study, you won't be having any problems answering them. Below I give you a video just to make you relax.....enjoy...

FaCT Edutourism Program - Penang

Still can't move on.....hahaha

Attributable Profit

The concept of attributable profit relates to accounting for long-term contracts. Long-term contracts being ones which have not yet been completed, as at the accounting date.

The idea is to spread the total profit for the contract appropriately across the different accounting periods, for example a company's accounting years. This is achieved by booking an appropriate proportion of the total profit for the contract, in each year.

This appropriate proportion of the total profit is based on the attributable profit.

Attributable profit is defined as that part of the total profit currently estimated to arise over the duration of the contract, that fairly reflects the profit attributable to the work completed to date, as at the accounting date.

In calculating the total profit, allowance is also made for estimated remedial and maintenance costs and increases in costs, so far as they are not recoverable under the terms of the contract.

Relevant accounting standards include Section 13 and Section 23 of FRS 102.

taken form: https://wiki.treasurers.org/wiki/Attributable_profit

Contract Costing Exercise

The estimated price of the contract is RM5,500,000.

Work on the complex started on 1 October 2017. The accounting year ends on 30 June every year.

The following information is related to the contract for the year ended 30 June 2018:

                                                                      RM

Materials issued to site                                     550,000

Materials received from supplier                        485,000

Materials returned to store                                  77,000

Plant bought at cost (1 October 2017)                450,000

Wages – paid                                                   255,000

Subcontractor charges – paid                            108,000

Shares of head office expenses                           95,000

Additional information:

1.     It is the company’s policy to depreciate the non-current assets at 20% per annum.

2.     As at 30 June 2018:

            i.        Unused materials                       -        RM96,000

           ii.        Accrued wages                          -        RM55,000

          iii.        Prepaid subcontractor charges    -        RM49,000

3.     Value of work certified is RM2,500,000 and subjected to 10% retention money.

4.     Estimated future cost to complete the contract is RM3,471,500.

The company recognized its profit based on the value of work certified.

Contract Costing

Definition of Contract Costing:

Contract costing is a specialized system of Job costing applies to long-term contracts as distinct from short-term jobs. Contract costing is mainly applied in civil construction and engineering projects, ship building, road and railway line contracts, construction of bridges etc.

Contract costing is a form of Specific order costing. It is applied to contracts where substantial time is taken to complete the contract and it falls into different accounting periods. However, a duration of exceeding one year is not an essential feature of a long-term contract. Some contracts with a shorter duration than one year should be accounted for as long-term contracts if they are sufficiently material to the activity of the period.

CIMA defines Contract cost and Contract costing as follows:

“Contract cost is the aggregated costs relative to a single contract designated a cost unit”.

“Contract costing is that form of specific order costing which applies where work is undertaken to customers’ special requirements and each order is of long-term duration”.

Features of Contract Costing:

The contracts for which Contract Costing is applied will have the following features:

(a) Contracts are undertaken to special requirements of the customers.

(b) Duration of contracts are relatively for a long period.

(c) Contract work is done on the sites unlike manufacturing under a roof.

(d) Contract work mainly consists of construction activities.

Accounting Procedure for Contract Costing:

If the numbers of contracts are more, a distinguishing number or name is given to each contract for accounting and administration convenience. A separate Contract Account is maintained for each contract.

All costs relating to contracts are charged to the respective Contract Accounts. In the contract cost structure, majority of the expenditure is of direct nature in the form of materials, wages, use of plant and stores, direct expenses etc., and only a small portion will be charged as apportioned overheads.

Accounting Treatment of Costs:

Accounting of each item of cost in contract accounts is discussed below:

1. Materials:

(a) All the materials purchased for the contract or any material sent to site is charged to contract.

(b) If any material is returned to stores or lying at site unused or materials transfers to another contract site is credited to the Contract Account.

(c) If materials are not required immediately, the materials may be stored and its cost is debited to Stock Account.

2. Labour:

All the labour employed or worked at site is treated as direct labour and all costs relating to them is charged to the Contract Account. The salaries and incentives of the administrative and supervisory staff of a specific contract is also charged to that specific contract.

3. Plant:

(a) When the plant is taken on hire, the hire charges are charged to Contract Account.

(b) If the plant is specifically purchased for the contract or plant was sent to site, the value of the plant is debited to Contract Account. The value of plant returned or remaining at site is credited to Contract Account. The balance between amounts debited and credited to contract represents the value of plant used at site.

(c) Sometimes the value of depreciation provided on the plant is debited to Contract Account instead of showing the value of plant issued to site and remaining at site.

4. Sub-Contract Charges:

Sometimes part of the contract work is given on subcontract basis and payments made on subcontract work is debited to Contract Account.

5. Overheads:

The general overheads and head office expenses are apportioned to different con­tracts on equitable basis, and the portion of overheads are charged to the Contract Account.

6. Difficulties in Cost Control:

Generally, contracts are big in size and the contract work is to be carried out at sites. Due to this some problems will arise concerning usage of material, labour utilization, supervision of labour, damage to plant and work, pilferage of materials and tools etc. This site based work makes it difficult to control the costs of the contract.

7. Surveyor’s Certificate and Retention Money:

In contract works, a surveyor or an architect or civil engineer is appointed to periodically visit the site for inspection of the work completed. He will issue a certificate mentioning the stage of completion of work and the value of the work completed to the date of issue of certificate. The payments will be released to the contractor by the contractee based on the said certificate.

Normally the payments will be released only to the certain percentage, say 80% of the work certified. The balance amount of work certified is retained by the contractee till the completion of the entire contract satisfactorily.

The amount so retained is called ‘retention money’. The contractee so retains to safeguard himself from the risks that may arise from the contractor. Usually the percentage of retention money is up to 20% of the amount of work certified.

8. Work-in-Progress:

The amount of work-in-progress includes the value of work certified and uncertified appearing in the Contract Account.

The work-in-progress is shown as Current Asset in the Balance Sheet as follows:

Materials at site, Plant at site are shown separately in the Assets side of the Balance sheet.

9. Costing of Running Contracts:

The long-term nature of contracts has necessitated to determine profit to be attributed to each accounting period. In the long-term contracts it is considered that their outcome can be assessed with reasonable certainty before their conclusion, the attributable profit should be calculated on a prudent basis and included in the accounts for the period under review.

The profit taken up should be based on Standard Cost Accounting principles. In case of Completed Contracts, all the profit that arise from the contract can be transferred to Profit and Loss Account.

But in case of Incomplete Contracts, only a portion of the profit is taken to the Profit and Loss Account depending on the extent of work completed on the contract because some provision is to be made for meeting contingencies and unforeseen loss. There are no hard and fast rules in calculation of profit to be taken to profit and loss account.

But in general, the following principles are followed:

(1) If loss is arrived on incomplete contracts, the entire loss is debited to Profit and Loss Account.

(2) Profit should be considered only in respect of work certified. The uncertified work should be valued at cost.

(3) Completion of contract is less than 25% of the contract price – No profit should be taken to Profit and Loss Account and the entire amount is kept as reserve for meeting contingencies.

(4) Completion of contract is upto 25% or more, but less than 50% of the contract price – In this case 1/3rd of profit, reduced in the ratio of cash received to work certified should be taken to the Profit and Loss Account. The balance will remain as reserve for meeting contingencies.

The formula is given below:

(5) Completion of contract is upto 50% or more, but less than 90% – In this case 2/3rds of profit ascertained as reduced by proportion of cash received to work certified to be taken to Profit and Loss Account, keeping the remaining amount in Reserve.

The formula is given below:

10. Costing of Contracts Nearing Completion:

Completion of contract is upto 90% or more (nearing completion):

In this case the profit to be taken to Profit and Loss Account is calculated by determining the estimated profit by using any one of the following formulas:

(a) Estimated profit x Work certified/Contract Price

(b) Estimated profit x Work certified/Contract price x Cash received/Work certified

Or

Estimated profit x Cash received/Contract price

(c) Estimated profit x Cost of work to date/Estimated total cost

(d) Estimated profit x Cost of work to date/Estimated total cost x Cash received/Work certified

(e) Notional profit x Work certified/Contract price

(The last formula is generally used when the estimated profit figure is not available.)

The balance amount of profit not transferred to Profit and Loss Account but kept as reserve for meeting contingencies is shown in the balance sheet assets side by deducting it from the amount of work-in-progress. It is carried down as a credit balance in the Contract Account itself, the work- in-progress being represented by the debit balance in the Contract Account.

taken from: http://www.accountingnotes.net/cost-accounting/contract-costing/contract-costing-definition-and-features-cost-accounting/10453

Variance Analysis Exercises

Hi there,

Using the same old example from the previous posting of Standard Costing, I expanded the exercises and it looks like below

Example:

Setandet Kos Sdn Bhd manufactures mobile phone by the name of oPhone. Below is the budgeted cost information of oPhone for the month of October 2018 based on the budgeted production and sales of 5,000 units.

                            

    RM

Direct material:                                    

                             Plastic casings (10,000 kg)                       600,000

                             Wires (10,000 meters)                             120,000

                             Direct labour (8,000 hours)                      240,000

                             Variable overhead                                    100,000

                             Fixed overhead                                          60,000

The variable overhead cost is absorbed based on direct labour hours while the fixed overhead cost is absorbed based on number of units produced. The standard selling price of oPhone is RM1,200 per unit.

Calculate the standard cost for oPhone.

The actual data for the month is as follows:

Units produced and sold                          6,000

Selling price per unit                               RM1,000

Direct material:

Plastic casings purchased and used   12,500 kg@ RM58 per kg

Wires purchased and used                10,750 meters @ RM10 per meter

Direct labour                                         10,000 hours @ RM22 per hour

Variable overhead cost                           RM120,000

          Fixed overhead cost                               RM60,000

Analyse the following:

i)          Direct material price variance for plastic casings

ii)         Direct material usage variance for wires

iii)        Direct labour rate variance

iv)       Direct labour efficiency variance

v)        Variable overhead expenditure variance

vi)       Variable overhead efficiency variance

vii)      Fixed overhead expenditure variance

viii)     Fixed overhead volume variance

ix)       Sales margin price variance

x)        Sales margin volume variance

        

Variance Analysis

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Definition

Variance Analysis, in managerial accounting, refers to the investigation of deviations in financial performance from the standards defined in organizational budgets.

Explanation

Variance analysis typically involves the isolation of different causes for the variation in income and expenses over a given period from the budgeted standards.

So for example, if direct wages had been budgeted to cost $100,000 actually cost $200,000 during a period, variance analysis shall aim to identify how much of the increase in direct wages is attributable to:

• Increase in the wage rate (adverse labor rate variance);
• Decline in the productivity of workforce (adverse labor efficiency variance);
• Unanticipated idle time (labor idle time variance);
• More wages incurred due to higher production than the budget (favorable sales volume variance).

Types of Variances

Main types of variances are as follows:

• Sales Price Variance
• Sales Volume Variance
• Sales Mix Variance
• Sales Quantity Variance
• Direct Material Price Variance
• Direct Material Usage Variance
• Direct Material Mix Variance
• Direct Material Yield Variance
• Direct Labor Rate Variance
• Direct Labor Efficiency Variance
• Direct Labor Idle Time Variance
• Variable Overhead Spending Variance
• Variable Overhead Efficiency Variance
• Fixed Overhead Total Variance
• Fixed Overhead Spending Variance
• Fixed Overhead Volume Capacity & Efficiency Variance

taken from: https://accounting-simplified.com/management/variance-analysis/index.html

Definition

Sales Price Variance is the measure of change in sales revenue as a result of variance between actual and standard selling price.

Formula

Sales Price Variance:

=	(Actual Price - Standard Price)	x	Actual Unit
=	Actual Price x Actual Units Sold	-	Standard Price x Actual Units Sold
=	Actual Sales Revenue	-	Standard Revenue of Actual Units Sold

Explanation

Sales Price Variance can be calculated in a number of ways as illustrated in the formulas given above. The calculation of the variance is in fact very simple if you just remember the objective of finding the variance, i.e. how much change in sales revenue is attributable to the change in selling price from the standard?

Example

ABC PLC is a fertilizer producer which specializes in the manufacture of NHK-II (a chemical fertilizer) and ORG-I (a types of organic fertilizer).

Following information relates to the sale of fertilizers by ABC PLC during the period:

Material	Quantity	Acutal Price	Standard Price
NHK-II	200 tons	$380/ton	$400/ton
ORG-I	300 tons	$660/ton	$600/ton

Sales Price Variance shall be calculated as follows:

	Actual Price (a)	Standard Price (b)	a - b = c	Unit Sold (d) (tons)	c x d
NHK-II	380	400	20	200	4,000 Adverse
ORG-I	660	600	60	300	18,000 Favorable
Total					14,000 Favorable

Analysis

Favorable sales price variance suggests higher selling price realized during the period than anticipated in the standard. Reasons for favorable sales price variance may include:

• Decrease in the number of competitors in the market
• Improved product differentiation and market segmentation
• Better promotion and aggressive sales campaign

Adverse sales price variance indicates that sales were made at a lower average price than the standard. Causes for adverse sales price variance may include:

• Increase in competition in the market
• Decrease in demand for the products
• Reduction in price enforced by regulatory authorities

Sales Volume Variance

Definition

Sales Volume Variance is the measure of change in profit or contribution as a result of the difference between actual and budgeted sales quantity.

Formula

Sales Volume Variance (where absorption costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Profit Per Unit

Sales Volume Variance (where marginal costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Contribution Per Unit

Explanation

Sales Volume Variance quantifies the effect of a change in the level of sales on the profit or contribution over the period.

Sales volume variance differs from other volume based variances such as material usage variance and labor efficiency variance in that it calculates not just the variance in sales revenue as a result of the change in activity but it quantifies the overall change in the profit or contribution.

The nature of the sales volume variance helps in forming a more meaningful analysis of other variances in the preparation of the operating statement. For example, the material usage variance needs to take into account only the difference between the actual consumption of material and the standard consumption of material for the actual number of units sold since the sales volume variance already takes into account the variation in material cost caused by the difference between budgeted and actual sales volume.

Sales volume variance should be calculated using the standard profit per unit in case of absorption costing whereas in case of marginal costing system, standard contribution per unit is to be applied.

Example

Wrangler Plc is a manufacturer of jeans trousers and jackets.

Information relating to Wrangler Plc's sales during the last period is as follows:

	Trousers Units	Jackets Units
Budgeted	12,000	5,000
Actual	10,000	8,000

Standard costs and revenues per unit of trouser and jacket are as follows:

	Trousers $	Jackets $
Revenue	20	50
Direct labor	5	10
Direct Material	6	15
Variable Overheads	4	10
Fixed Overheads	2	5

Wrangler Plc uses marginal costing to prepare its operating statement.

Sales Volume Variance shall be calculated as follows:

Step 1: Calculate the standard contribution per unit

As Wrangler Plc uses marginal costing system, we need to calculate the standard contribution per unit. Allocation of the fixed overheads may therefore be ignored.

	Trousers $	Jackets $
Revenue	20	50
Direct labor	(5)	(10)
Direct Material	(6)	(15)
Variable Overheads	(4)	(10)
Standard contribution per unit	5	15

Step 2: Calculate the difference between actual units sold and budgeted sales

	Trousers Units	Jackets Units
Actual	10,000	8,000
Budgeted	(12,000)	(5,000)
Difference	(2,000)	3,000

Step 3: Calculate the variance for each product

	Trousers	Jackets
Standard contribution per unit (Step 1)	$5	$15
Actual Units Sold - Budgeted Sales (Step 2)	x (2000 units)	x 3000 units
Variance	$10,000 Adverse	$45,000 Favorable

Step 4: Add the individual variances

Sales Volume Variance ($10,000 - $45,000)

=

$35,000 Favorable

Note: If Wrangler Plc used absorption costing, sales volume variance would be calculated based on the standard profit per unit (i.e. fixed costs per unit of output will need to be deducted from the standard contribution calculated in Step 1).

Analysis

Favorable sales volume variance suggests a higher standard profit or contribution than the budgeted profit or contribution.
Reasons for favorable sales volume variance include:

• Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)
• Favorable sales mix variance> (i.e. higher proportion of the more profitable products sold than planned in the budget)

Adverse sales volume variance indicated a lower standard profit or contribution than the budgeted profit or contribution.
Causes for an adverse sales volume variance include:

• Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
• Adverse sales mix variance (i.e. higher proportion of the less profitable products sold than anticipated in the budget)

Favorable sales volume variance can be achieved in case of a favorable sales mix variance even if the total number of units of all products sold during the period are lower than the total budgeted units (and vice versa).


It is therefore important to investigate the sales volume variance by analyzing it further into sales quantity and sales mix variances in case where an organization sells more than one product.