Systematic Risk vs Unsystematic Risk

Below is a video regarding the above topic. Hope it benefits you guys for those taking finance paper.

Multi-product Cost Volume Profit Analysis

Here is a good video taken from CIMA P1. Take a look at it as it benefits you. You may find it quite boring but if you like the topic I'll bet you won't miss it.

MFRS 102 Inventories

MFRS 102 Inventories

Firstly, this MFRS applies to companies holding inventories in their course of business. These inventories came from transactions which involving the business and the supplier. It can be transacted either by cash, cheque or on credit. Of course, the objective of the business is to generate profit by selling their inventories or services. But, why we need this MFRS 102?

My explanation regarding this is simple. MONEY!!!. We buy them, we sell them, customers happy and we are happier as well. If we buy something and straight away sell them, there will be no inventories as we don't hold anything in our possession. Our warehouse will be empty and we don't even bother to check or calculate how much inventories left in it. When we mentioned about how much and the word calculate, then the inventories can be measured because they can be turned into money. Get that?

So in summary, I took this from the net... which I found relevant and might help you to understand the objective of providing the information regarding inventories.

The existing and potential customers are interested to know whether the inventories are managed efficiently and cost-effectively.

Example:

An entity purchases inventories from suppliers for resale in the future. Some of the inventories are kept for minimum stock level requirement to prevent stock-outs.

Solution:

The existing and potential customers may like to see if there is no excess inventories and a well-managed inventory turnover. A proper management of inventories indicates that the entity has reasonable cash flows from selling and purchasing of inventories. 

Definition

Inventories are assets

(a) held for sale in the ordinary course of business

(b) in the process of production

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Treatment

Inventories are classified as  current assets in the financial statements when:

(a) It expects to realize the asset, or intends to sell or consume it in its normal operating cycle.

(b) It holds the asset primarily for the purpose of trading.

(c) It expects to realize it within twelve months after the reporting period.

Example:

An entity purchases flour for its biscuit factory.

Solution:

The flour is raw material purchased by the entity and used in the production of biscuit in the factory. The raw material is an inventory classified at current assets in the financial statements because it expects to sell the biscuits in its normal operating cycle within twelve months after the reporting period.

Recognition and Measurement

Inventories shall be recognized and measured at the lower of cost and net realizable value.

Cost of the inventory includes all costs incurred to bring the inventory to its present location and condition. It will include all costs of purchase, conversion costs and all other costs. 

Example:

An entity purchases 500 units of finished goods from supplier costing of RM5,000 for resale to its customers. The net realizable value of the inventories is RM5,200.

Solution:

The finished goods are inventories because they are purchased for the purpose of trading and the inventory, RM5,000 is measured at cost.

The cost of inventories would be recorded as below:

Debit  Inventories/purchase a/c    5,000

      Credit  Bank a/c                             5,000

but it is not as simple as that....

The following costs should be excluded as inventories costs:

•Abnormal amount of wastage including material, labour and overhead

•Storage cost

•Administrative cost

•Selling cost

•SST

Net Realisable Value

MFRS 102 defines net realisable value as ‘the estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale’.

Inventory valuation

•Specific Identification Method

•First In First Out (FIFO) and

•Weighted Average Methods

•Other Methods

–Techniques such as standard cost and retail price may be used for convenience if the results approximate cost

Last In First Out (LIFO) is prohibited

Writing Down to Net Realizable Value

Generally, inventories are written down to net realisable value item by item. Other basis is to group similar or related items.

Raw materials and supplies held in the manufacture or production of finished goods are not generally written down below costs if the finished goods in which they are incorporated are expected to be sold above costs. 

Presentation

Inventories are presented as an item of current assets in the statement of financial position.

Need one?

Annual Report 2017 - Axiata Group

Conceptual Framework for Financial Reporting

Let's look into the annual report and operate them....

Annual Report 2017 - Axiata Group

I try to get 1MDB but where to find? And Tabung Haji, FELDA, MARA....so many. You may find those interesting!!!

Activity Based Costing - Exercise 2.0

JrCheffeya lagi is in the business of producing cakes for various events. Currently she is making 2 kinds of custom made cakes to her client, birthday cake and wedding cake.

Below are the cost related to the production of both cakes;

	Birthday cake	Wedding cake
DM – Flour	RM6	RM10
DM - Sugar	RM3	RM5
DM - Fruits	RM8	RM12
DL	RM30	RM50
Units produced/mth	450	350
Machine OH cost/mth	RM50,000
Quality control OH cost/mth	RM12,000
Production machine hours	300	400
No of inspection	300	800

Note that the selling price for birthday cake is RM180 and Wedding cake is RM300.

Required:

Calculate cost of production using traditional costing and Activity Based Costing.

Comment whether the pricing decision for the above cakes are appropriate.

This is your exercise 1 and need to be submitted. Make sure you make a copy before hand it in.

Activity Based Costing - Exercise 1.0

JrCheffeya is in the business of producing cakes for various events.  Currently she is making 2 kinds of custom made cakes to her client, birthday cake and wedding cake.

Below are the cost related to the production of both cakes;

	Birthday cake	Wedding cake
Units produced/mth	350	150
Machine OH cost/mth	RM40,000
Quality control OH cost/mth	RM11,000
Production machine hours	200	300
No of inspection	350	450

Required:

Calculate cost of production using traditional coating and Activity Based Costing.

Activity Based Costing - Introduction

Introduction to Activity Based Costing

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

Simple right?

The method is the same like absorption costing but the costs are absorb logically into relevant activities. Like what the video says, it is not logical to absorb and allocate cost of overheads to all activity at the same rate. Then the unit cost of the product will be different and maybe end up a bit higher. Therefore, it will somehow influence the decision to set the selling price.

Marginal Costing vs Absorption Costing : Exercise

During 2018, Fadhil Works Inc had RM10,000 sales commission, RM2,000 in administrative costs of which RM800 is fixed. They sold 8,500 units and produced 10,000 units. Their selling price per unit was RM45, direct materials was RM10, direct labour RM7 and variable overhead was M3.50. fixed overhead amounted to RM7,500.

Prepare an income statement under Variable costing and Absorption costing.
Show the difference in net profit between the two methods.

Marginal Costing

Marginal Costing

Marginal cost is the variable cost of one unit of product or service. 

Marginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated (sales revenue minus variable cost of sales). Closing inventories of work in progress or finished goods are valued at marginal (variable) production cost. Fixed costs are treated as a period cost, and are charged in full to the profit and loss account of the accounting period in which they are incurred.

The marginal production cost per unit of an item usually consists of the following. 

•Direct materials 

•Direct labour 

•Variable production overheads 

Direct labour costs might be excluded from marginal costs when the work force is a given number of employees on a fixed wage or salary. Even so, it is not uncommon for direct labour to be treated as a variable cost, even when employees are paid a basic wage for a fixed working week. If in doubt, you should treat direct labour as a variable cost unless given clear indications to the contrary. Direct labour is often a step cost, with sufficiently short steps to make labour costs act in a variable fashion. 

The marginal cost of sales usually consists of the marginal cost of production adjusted for inventory movements plus the variable selling costs, which would include items such as sales commission, and possibly some variable distribution costs.

Contribution is an important measure in marginal costing,and it is calculated as the difference between sales value and marginal or variable cost of sales.

Contribution is of fundamental importance in marginal costing, and the term 'contribution' is really short for 'contribution towards covering fixed overheads and making a profit'.

The principles of marginal costing

The principles of marginal costing are as follows. 

a)  Period fixed costs are the same, for any volume of sales and production (provided that the level of activity is within the 'relevant range'). Therefore, by selling an extra item of product or service the following will happen. 

    • Revenue will increase by the sales value of the item sold. 

    • Costs will increase by the variable cost per unit. 

  • Profit will increase by the amount of contribution earned from the extra item. 

b)  Similarly, if the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item. 

c)  Profit measurement should therefore be based on an analysis of total contribution. Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs. Absorption costing is therefore misleading, and it is more appropriate to deduct fixed costs from total contribution for the period to derive a profit figure. 

d)  When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased. It is therefore argued that the valuation of closing inventories should be at variable production cost (direct materials, direct labour, direct expenses (if any) and variable production overhead) because these are the only costs properly attributable to the product.