KENYATTA UNIVERSITY

DIGITAL SCHOOL OF VIRTUAL AND OPEN LEARNING

IN COLLABORATION WITH
SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE

BAC 814: MANAGEMENT ACCOUNTING

DEVELOPED BY: DR. FREDRICK W.S. NDEDE

VETTED BY: DR. MOSES ODHIAMBO ALUOCH

1
INTRODUCTION TO THE COURSE MODULE
You are welcome to course on Management Accounting. This module provides an opportunity to
develop a deep understanding of the role of Management Accounting in business success. You
will learn from both internal and external sources. In addition, there will be at least two online
discussions, two online chats and quizzes. The module encourages discussions, critique and
interaction with other students, publications and lectures.

BAC 814: MANAGEMENT ACCOUNTING FLOW CHART

WEEK TOPIC

WEEK 1: INTRODUCTION TO MANAGEMENT ACCOUNTING

WEEK 2: COST CONCEPTS AND COST CLASSIFICATIONS

WEEK 3: ABSORPTION COSTING

WEEK 4: VARIABLE COSTING

WEEK 5: BREAK EVEN ANALYSIS

WEEK 6: PROCESS COSTING

WEEK 7: JOB COSTING

WEEK 8: BATCH COSTING

WEEK 9: BUDGETING AND BUDGETARY CONTROLS

WEEK 10: TYPES OF BUDGETS -CASH BUDGET, PRODUCTION AND MASTER

BUDGET

WEEK 11&12 EXAMINATION

2
OVERVIEW OF THE COURSE
Week 0: Introduction to Management Accounting

This week is intended to help you acclimatize to blended learning and to create a community of
learners who will motivate each other during the course. You will be required to actively
participate in all the activities in module.
Week 1: Introduction to Management Accounting

In week we introduce you to management accounting and to help you understand the nature and
concepts including areas in business and organizations’ where the unit is applied.
Week 2: Cost Concepts and Cost Classifications
This week will be very interesting as you will be introduced to the elements and various concepts
of cost. You will be required to define the term cost as well as discuss the differences between
cost and price, value and even expense.
Week 3: Absorption Costing

In this week you will be required to start applying the already learnt concepts and classes of costs

in the process of assemble and ascertainment of costs. Managers are largely concerned with
where

costs are incurred for control reasons.

Week 4: Variable Costing

. Week four is largely based on classification of costs as management get concern with costs in
terms of relevance to decision making. The drivers of costs are activities some of which change
in level while others remain the same particularly within the same budget period. You will be
required arrange costs in different ways.
Week 5: Break Even Analysis

In this week we become very business-oriented ant introduce you to profit planning. And we
start with the point when the business earns no profit while at the same time does not suffer any
loss. The lesson 5 explains why a business can be at a point where profit and loss are equal and
what happens to planning at this point.

3
Week 6: Process Costing

In week 6 you are introduced to method of determining product costs. Products are different in
their nature and therefore costing of products must be based on them.

Week 7: Job Costing

By the nature of the lesson, it is an extension of the lesson 6. In the week you will be expected to
master the differences in products and the costing methods.

Week 8: Batch Costing

In week you will be introduced to production costing whereby goods are generated in groups or
categories in large quantities. These can be by certain specifications. But the products are
similar. The categories constitute the batches.

Week 9: Introduction to Budgeting and Budgetary Controls

Lesson 9 introduces you to the overall business planning. Manages need to see their businesses
in the future rather than the present. Through the budget prepation you will be required express
the future intentions of a business and how to control the planned activities.

Week 10: Types of Budgets -Cash Budget, Production and Master Budget

For every business activity there must be a budget. These budgets are based on a number of
factors including behaviour and function. In this course you will be required to acquaint yourself
with the various categories of budgets.
Week 11&12: Examination

These two weeks bring together the work you have been doing to an end. This course unit will
be examined and will partially contribute to the award of the degree in the programme that you
are undertaking. We acknowledge that different universities across East Africa may have
different Semester dates. It is however anticipated that most Universities will have a minimum of
13 weeks’ semester. We have therefore placed examinations in the last two weeks but
Universities are allowed to go with their schedules. Your university examinations regulations
will apply.

Troubleshooting

o If you have problems accessing or logging into the system (LMS):

1. Go to the Student Help Desk -https://support.ku.ac.ke/

2. Chat with us at http://chat.ku.ac.ke/

4
3. Call the Digital school offices at (See our Contacts here) -
http://www.ku.ac.ke/dsvol/contact-us

4. Guides about how to use moodle are available athttp://www.ku.ac.ke/dsvol/students-

resources

5. Also use our social media huddles:

Twitter: @KUDigitalSchool

Facebook: @KUDSVOL

MODULE LEARNING OUTCOMES

At the end of this lesson, you will be able to:

1. Explain management accounting process
2 Apply management accounting techniques to analyze and communicate financial
information for decision making

COURSE CONTENT
Nature and Role of Management Accounting, Cost Concepts, Classification and allocation;
Product Costing, Marginal and Absorption Costing Techniques, Cost Volume and Profit
Analysis; Relevant Costs and Special Decisions and Budgeting and Budgetary controls.

COURSE REQUIREMENTS
This is a blended learning course that will utilize the flex model. This means that learning
materials and instructions will be given online and the lessons will be self-guided with the
lecturer being available briefly for face to face sessions and support and also on-site (online)
most of the time. Your lecturer will be meeting you face to face to introduce a lesson and put it
into perspective and you will actively participate in your search for knowledge by undertaking
several online activities.

5
COURSE ASSESSMENT
It is important to note that the module has embedded certain learner formative assessment
feedback tools that will enable you to gauge your own learning progress. The tools include
online collaborative discussions forums that focus on team learning and personal mastery and
will therefore provide you with peer feedback, lecturer assessment and self- reflection.
You will also be required to do one major assignment/project that is meant to assess the
application of the skills and knowledge gained during the course.
1 Final examination score will be 60%
2 Any other graded assignment will be 40%
3 Overall 100%

6
TABLE OF CONTENTS

TABLE OF CONTENTS 7
LESSON 1: INTRODUCTION TO MANAGEMENT ACCOUNTING 9
1.1 Introduction 9
1.2 Lesson Learning Outcomes 9
1.3 Assessment Questions and Answers 13
1.4 References 14
LESSON 2: COST CONCEPTS AND COST CLASSIFICATIONS 15
2.1 Introduction 15
2.2 Lesson Learning Outcomes 15
2.3 Assessment Questions and Aswers 17
2.4 References 18
LESSON 3: ABSORPTION COSTING 19

3.1 Introduction 19
3.2 Lesson learning outcomes 19
3.3 Assessment Questions and Answers 22
3.4 References 23
LESSON 4: VARIABLE COSTING 24
4.1 Introduction 24
4.2 Learning Outcomes 24
4.3 Assessment Questions and Answers 30
4.4 References 31
LESSON 5: BREAK EVEN ANALYSIS 32
5.1 Introduction 32
5.2 Learning Outcomes 32
5.3 Assessment Questions and Answers 36
5.4 References 36
LESSON 6: PROCESS COSTING 37
6.1 Introduction 37

7
6.2 Learning outcomes 37
6.3 Assessment Questions and Answers 43
6.4 References 43
LESSON 7: JOB COSTING 44
7.1 Introduction 44
7.2 Learning Outcomes 44
7.3 Assessment Questions and Answers 47
7.4 References 48
LESSON 8: BATCH COSTING 49
8.1 Introduction 49
8.2 Lesson Learning Outcomes 49
8.3 Assessment Questions and Answers 52
8.4 References 53
LESSON 9:INTRODUCTION TO BUDGETING AND BUDGETARY CONTROLS 54
9.1 Introduction 54
9.2 Learning Outcomes 54
9.3 Assessment Questions and Answers 59
9.4 References 60
LESSON 10: TYPES OF BUDGETS -CASH BUDGET, PRODUCTION AND MASTER
BUDGET 61
10.1 Introduction 61
10.2 Learning Outcomes 61
10.3 Assessment Questions 68
10.4 References 69

8
LESSON 1

INTRODUCTION TO MANAGEMENT ACCOUNTING

1.1 Introduction
In this lesson introduce you to nature and meaning of management accounting, objectives,
function, role, scope and limitations of management accounting and comparison with
financial accounting.
1.2 Lesson Learning Outcomes
By the end of this lesson you will be able to:
1. Explain the nature and meaning of management accounting
2. Explain the objectives
3. Discuss comparison between management accounting and financial accounting.

1.2.1 Meaning of Management Accounting

Management accounting is a decision-making accounting. It is the branch of accounting
that provides information desired by management to decisions on issues affecting
operations of organizations. Businesses are to a large extent carried out by organisations and to a
small extent by individuals irrespective of the business objective. Organisations have become
part of human life as individuals constantly interact with business receive products, make various
enquiries. Ordinary business activities involve for example; buying and selling, engaging human
capital, supply of financial resources and provision of information both for internal and external
use. Decision making on matters affecting day to day operations is another key component of
organisations. It is this aspect of decision making that key in management accounting as a
provider of managerial information Additional reading materials are provided by the links and
the references.

9
E-tivity 1.2.1: Meaning of Management Accounting

Numbering, 1.2.1
pacing and
sequencing
Title Introduction to Management Accounting

Purpose The purpose of this activity is to enable you explain the meaning of
management accounting.
Brief summary Read the materials on these links
of overall task
1: https://www.myaccountingcourse.com/accounting-dictionary/management-
Accounting
2: https://debitoor.com/dictionary/management-accounting

Spark

individual Task 1. Using bullet points, outline the key terms in the themes in the definitions of
management accounting
2. What are the three common terms used in the two definitions?

Interaction a) Post two terms each that are common in the definitions of business and
begins accounting
b) Provide positive and constructive feedback on the team learners’ views and
ideas.
Do this on the discussion forum 1.2.1
E-moderator
interventions 1 Ensure that learners are focused on the contents and context of discussion.
2 Stimulate further learning and generation of new ideas.
3 Provide feedbacks on the learning progress.
4 Round-up the e-tivity

10
Schedule and These activities should be done within 2 hours.
time

Next 1.2.2 Objectives functions and roles of management accounting

1.2.2 Objectives, functions and role of Management Accounting

Management accounting has various objectives which are achieved through various
functions. On achieving these objectives, the organizational internal informational needs
are also met at the same time. The role of management accounting in an organizational is
to ensure speedy and effective use of resources. Read more in the link provided.

E-tivity 1.2.2: Objectives, functions and role of Management Accounting

Numbering, pacing 1.2.2

and sequencing
Title Objectives of Management Accounting

Purpose The purpose of this activity is to make you explain the objectives of
management accounting.
Brief summary of Read the materials on these links
overall task 1. https://www.accountingnotes.net/management-accounting/objectives/top-
9-objectives-of-management-accounting
2. https://debitoor.com/dictionary/management-accounting
Spark

11
individual Task 1. Outline the holistic measurement of performance as a key objective of management
accounting

2. Describe the overall objective of management accounting?

Interaction begins a) Post two other objectives each other than that of holistic measurement of
performance.
b) Provide positive and constructive feedback on the team learners’ views and
ideas.
Do this on the discussion forum 1.2. 2

E-moderator
interventions 1 Ensure that learners are focused on the contents and context of discussion.

2 Stimulate further learning and generation of new ideas.

3 Provide feedbacks on the learning progress.

4 Round-up the e-tivity

Schedule and time These activities should be done within 2 hours.

Next
1.2.3 Comparison with financial accounting

1.2.3 Comparison with financial accounting

Financial accounting is recognized as the oldest branch of accounting and is largely
concerned with external informational needs. Information needed by stockholders,
government, creditors and several other users of accounting information. Management
accounting on the other hand serves the internal informational needs, that makes them
differ in terms of users but similar because they deal with same resources. But still there
are areas where they are considered to be different. For example, the reporting interval or
the range of information More relevant literature provided by the links.
E-tivity 1.2.3: Comparison with Financial Accounting
Numbering, pacing and 1.2.3
sequencing

12
Title Compare management and financial accounting
Purpose The purpose of this e-tivity is to enable you to understand
the difference between management accounting and
financial accounting.
Brief summary of overall task Watch video and read the materials on these links
1. https://www.youtube.com/watch?v=Ep7DqVxFHa
2. https://www.educba.com/financial-accounting-vs-
management-accounting/

Spark

Individual task (a) Using bullet points, outline the stakeholders in Financial
accounting
(b) Using bullet points, list the components of l financial
accounting which led to the emergence of management
accounting,
Interaction begins a) Post two themes that are common in both financial and
management accounting
b) Provide positive and constructive feedback on the team
learners ‘views and ideas. Do this on the discussion forum
1.2.3
E-moderator interventions 1 Ensure that learners are focused on the contents and
context of discussion.
2 Stimulate further learning and generation of new ideas.
3 Provide feedback on the learning progress.
4 Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Cost concepts and cost classifications.

1.3 Assessment Questions

13
a) Explain the nature of management accounting.

b) Identify and describe the objectives of management accounting

c) What are the distinguishing factors between management accounting and financial
accounting?

1.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

14
LESSON 2
CONCEPTS AND CLASSIFICATION OF COSTS
2.1 Introduction
In this lesson we consider the cost concepts and cost classification. We will consider also
relevant cost and cost classifications.
become expenses. But while still held in the business they form the assets.
2.2 Lesson Learning Outcomes
By the end of this lesson you will be able to:
1. Explain the concepts of cost
2. Discuss classification of costs
2.2.1 The concept of Cost
At the onset managers should know something about cost because it is a factor of planning which
needs to be controlled. In addition, cost constitutes data required for preparation of financial
statements and fixation of selling price i.e. Cost + Price = Sales, Cost is a very significant factor
in business operations. And even, more importantly, cost is a factor in the decision process
The term cost is not probably new to us. It is a term used often and sometimes used
inappropriately. Many a times the term cost is used interchangeably with words like; price.
expense and value.
Managers need to know about costs. First because these are resources held for achieving firm
objectives. In other words, used in order to realize benefits Once benefits are realized costs
E-tivity 2.2.1: Concepts of Cost
Numbering, pacing and 2.2.1
sequencing
Title Concepts of Cost
Purpose The purpose of this e-tivity is to enable you to explain the
concept of cost.
Brief summary of overall task Watch videos and read the materials on these links
1.http://www.businessdictionary.com/definition/cost.html
2.https://www.economicsdiscussion.net/theory-of-
cost/different-cost-concepts-an-overview/7000

15
Spark

Individual task (a) Using bullet points, outline the common term in the various
concepts.
(b) Using bullet points, list the components of accounting costs
Interaction begins a) Post two themes that are common in the concepts
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next cost classifications.

2.2.2 Classification of costs

There are several ways of classifying costs. One way one can classify cost is by considering
whether or not the cost is relevant of irrelevant to the decision under consideration. Otherwise for
commercial transactions classification of costs is by the Behaviour or how a cost react after a
decision is made. Costs may be further classified in terms of relevance, nature, function, control
and even time.

E-tivity 2.2.2: Classification of Costs

Numbering, pacing and 2.2.2
sequencing
Title Classification of Cost
Purpose The purpose of this e-tivity is to enable you to understand
the ways costs are classified.

16
Brief summary of overall task Click to open and read the material.in the links provided
Read: https://www.accountingnotes.net/cost-accounting/cost-
classification/classification-of-costs-5-types-accounting/10178
Spark
Assets = Liabilities + Owners’

Equity
Individual task (a) Using bullet points, outline the common term in the
various concepts.
(b) Using bullet points, list the components of accounting
costs
Interaction begins a) Post two themes that are common in the classification
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Absorption Costing technique

2.3 Assessment Questions

a) What is cost?

b) Explain what is meant by relevant costs.

c) What are the various classifications of cost?

17
2.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

18
LESSON 3
ABSORPTION COSTING

3.1 Introduction

A clear understanding of the techniques used by companies to report their end year results is
vital to learners at all levels. It is vital to take note that costing techniques are used in the
preparation final accounting statements.

3.2 Lesson learning Outcomes

By the end of this lesson you will be able to:

3.2.1 Explain what is meant by absorption costing
3.2.2 Describe the merits of absorption costing
3.2.3 Apply the technique in drawing up income statement
3.2.1 Explain what is meant by absorption costing
One of the techniques which so far is widely used for the drawing up income statement is
absorption costing technique. The technique emphasizes that cost incurred specifically for
products manufactured or services provided are assigned to units fully or in total. In other
words, costs are analyzed on the basis of where the cost has been absorbed. The technique is
applied in both product costing and inventory evaluation. The full cost means that both the fixed
and variable costs are charged to the units. More reading are found in the links.

E-tivity 3.2.1: Absorption Costing

Numbering, pacing and 3.2.1

sequencing
Title Absorption Costing Technique
Purpose The purpose of this e-tivity is to enable you to explain the
concept of Absorption costing.
Brief summary of overall task Read the materials on the link
1. https://www.wallstreetmojo.com/absorption-costing/

19
Spark

Individual task (a) Using note points, outline the key features identified in the
absorption concept.
(b) Using bullet points, list the components of absorption
costing
Interaction begins a) Post two themes that are common in the concept
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Merits of Absorption Costing technique

3.2.2 Describe the merits of absorption costing

The technique has the advantage of being preferred for external users reports. Reports to
stockholders, government and other third parties use this technique. See the discussion in the
link.

E-tivity 3.2.2: Merits of Absorption Costing

Numbering, pacing and 3.2.2

sequencing
Title Merits of Absorption Costing Technique
Purpose The purpose of this e-tivity is to enable you to explain the
concept of Absorption costing.

20
Brief summary of overall task Read the materials on the link
1. https://www.iedunote.com/absorption-costing
Spark

Individual task (a) Using bullet points, outline the common term in the merits.
(b) Using bullet points, list the components of accounting costs

Interaction begins a) Post two themes that are common in the merits
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Application of Absorption Costing technique

3.2.3 Apply the technique in drawing up income statement

This application of this technique has been widely adopted by companies
for taxation as well as reporting for a long time. In preparation of statement of income, the
technique uses the costing equation that;
Sales – Cost of Sales = Gross Income.
• Sales sh. 1,000,000
• Cost of Sales sh. (400,000)
• Gross Profit sh. 600,000
• Operating Expenses sh. (650,000)
• Operating loss sh. (50,0000

21
E-tivity 3.2.3: Application of Absorption Costing
Numbering, pacing and 3.2.3
sequencing
Title Application Absorption Costing Technique
Purpose The purpose of this e-tivity is to enable you to demonstrate
the concept of Absorption costing.
Brief summary of overall task Read the materials on these links
1. https://www.accountingnotes.net/cost-accounting/absorption-
costing/absorption-costing-meaning-advantages

Spark

Individual task (a) Using bullet points, outline the common term in the various
concepts.
(b) Using bullet points, list the components of accounting costs

Interaction begins a) Post two themes that are common in the classification
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Variable Costing technique

3.3 Assessment Questions

a) What is the basis of absorption costing?

22
b) How is absorption costing used in the preparation of income statement?

c) State the key components of absorption costing?

3.4 REFERENCES

1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

23
LESSON 4

VARIABLE COSTING
1.1 Introduction

This is a continuation of the discussion of costing techniques. In this lesson we define

variable costing as well as contribution margin. We discuss also principles and application of
variable costing. The other area considered in this lesson is the distinction between variable
costing and absorption costing.

4.2 Lesson learning Outcomes

By the end of this lesson you will be able to:

4.2.1 Define variable costing technique
4.2.2 Explain contribution
4.2.3 Understand contribution margin
4.2.4 Drawing up variable costing statement
4.2.5 Distinguish between Absorption costing and variable costing.

4.2.1 Define variable costing technique

Variable costing technique is a form of costing based on the behaviour of costs. Costs are
severed into two components of fixed and variable costing. This form of costing is known also as
direct or marginal costing. Variable costs are the portion of total costs which monetary amounts
change in direct proportion to the volume of activities. These are the cost of consumables which
include; direct material, direct labour and variable overheads. For this type of costs, it is total
cost that vary while unit cost remains constant.

Fixed costs are capacity costs. They measure the ability of a business to sustain a level of
operations in production/manufacturing, administration and selling and distribution. How much
of this type of cost held by a business is defined by the amount of long-lived assets?

E-tivity 4.2.1: Definition of Variable Costing

Numbering, pacing and 4.2.1

24
sequencing
Title Meaning of variable Costing Technique
Purpose The purpose of this e-tivity is to enable you to explain the
meaning of variable costing.
Brief summary of overall task Read the materials on these links
1. https://www.wallstreetmojo.com/variable-costing/

Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of variable
costs
Interaction begins a) Post two themes that are common in the explanations of
variable costing
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
3 Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Principles of variable Costing

4.2.2 Contribution

A major Contribution of variable costing in cost accounting is the ability to calculate the
amount of contribution in an activity. Contribution being the amount generated by variable

25
costs i.e., direct labour cost + direct material cost + variable overhead costs towards fixed
costs. The amount is the difference between sales amount and the variable cost amount. The
costing equation used under variable costing technique is; Sales – Variable costs =
Contribution. Find further materials by reading and watching the videos.

E-tivity 4.2.2: Contribution

Numbering, pacing and 4.2.2

sequencing
Title Contribution
Purpose The purpose of this e-tivity is to enable you to explain the
meaning of contribution.
Brief summary of overall task Watch videos and read the materials on these links
1. https://www.accountingcoach.com/blog/what-is-contribution-
margin
2. https://www.youtube.com/watch?v=1TxWhgRPq3s
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of
contribution
Interaction begins a) Post two themes that are common in the explanations of
the contribution
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Contribution Margin

26
4.2.3 Contribution Margin

In addition to the computation of contribution, another important use of variable costing is

determination of contribution margin. This is a ratio indicating the extent that sales revenue
covers variable cost. Contribution margin is calculated as, contribution divided by sales revenue
(Contribution/Sales).

E-tivity 4.2.3: Contribution Margin

Numbering, pacing and 4.2.3

sequencing
Title Contribution Margin
Purpose The purpose of this e-tivity is to enable you to explain the
meaning of contribution.
Brief summary of overall task Watch video on the link
1. https://www.youtube.com/watch?v=1TxWhgRPq3s
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of
contribution margin
Interaction begins a) Post two themes that are common in the explanations of
the calculation of contribution margin
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.

27
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Drawing up Income Statement

4.2.4 Drawing up variable costing statement

There is yet another use of variable costing which is presentation of income statement. This is
largely accounting information for managerial use and for external reporting. Using the example
of Exhibit 3.1 in the previous lesson, we can assume that variable costs were 80% of the cost of
Exhibit 4.1
• Sales sh. 1,000,000
• Variable Cost sh. (400,000)
• Contribution sh. 600,000
• Fixed Expenses sh. (650,000)
• Operating loss sh. (50,0000

It may make no sense to use two different approaches and end up with the same position. But
this is only because in exhibit there were no inventories. Read the materials and watch the video
for more information.

E-tivity 4.2.4 Drawing up variable costing statement

Numbering, pacing and 4.2.4

sequencing
Title Income statement
Purpose The purpose of this e-tivity is to enable you to learn the
preparation of variable cost statement
Brief summary of overall task Read the material on the link
1. https://courses.lumenlearning.com/sac-
managacct/chapter/variable-costing/

28
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing statement.
Interaction begins a) Post two themes that are common in the explanations of
the preparation of the statement
b) Provide positive and constructive feedback on the team
learners ‘views and ideas
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Distinction with Absorption Costing

4.2.5: Distinguish between Absorption costing and variable costing.

Variable costing or marginal costing deals mainly with marginal analysis whereas absorption
costing deals with full costing.

E-tivity 4.2.3: Distinguish between Absorption costing and variable costing.

Numbering, pacing and 4.2.5

sequencing
Title Distinction with Absorption Costing
Purpose The purpose of this e-tivity is to enable you to learn the
preparation of variable cost statement

29
Brief summary of overall task Watch video and read the materials on these links
1 https://keydifferences.com/difference-between-marginal-
costing-and-absorption-costing.html
2 https://www.youtube.com/watch?v=z7oB2F8uVZc
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing statement.
Interaction begins a) Post two themes that are common in the explanations of
the differences
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and context
of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Break- Even Analysis

4.3 Assessment Questions

a) Explain variable Costing

b) What is variable?

c) Describe the nature of variable cost

30
d) Compare variable costing and absorption costing

4.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

31
LESSON 5
BREAK EVEN ANALYSIS

5.1 Introduction
In this lesson we explain break-even analysis and show how the relationship between revenue
and costs can be used to plan for profits. We discuss also the assumptions of B/E analysis and
how B/E point is calculated.
5.2 Lesson Learning Outcome
By the end of this lesson you will be able to:
5.2.1 Explain the Break-Even Analysis
5.2.2 Determination of the Break-even point
5.2.3 Discuss assumptions of B/E analysis
5.2.1 Explain the Break-Even Analysis
Break Even analysis also known as Cost, Volume and Profit analysis is the starting point of
profit planning. It establishes the relationship between expenses, output quantity or sales revenue
and profit. Cost behaviour patterns affect volume and consequently the profit. Firms seek to have
the best combination of the components for a reasonable period of time to permit planning.
E-tivity 5.2.1 Break-Even Analysis

Numbering, pacing and 5.2.1

sequencing
Title Break-Even Analysis
Purpose The purpose of this e-tivity is to enable you to understand the
concept of BEP.
Brief summary of overall task Read materials on the link
1. https://www.tutor2u.net/business/reference/operations-
introduction-to-break-even-analysis

Spark

32
Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing statement.
Interaction begins a) Post two themes that are common in the explanation of
the break-even analysis
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Break- Even point

5.2.2 Determination of the Break-even point

A key point in break-even analysis is the determination of break-even point. This is the level of
output or sales revenue at which profit is zero. Either output units or sales revenue can be applied
in determining the break-even point.
Break-even point can be determined by:
1 Applying the formula:
BEP = Fixed Cost/Contribution or
2 Use of graphical presentation.
By plotting the volume figures at a particular level of output against total mixed cost figures we
are able to get the total cost line. We repeat the process by plotting volume figures against total
revenue line. The point of intersection of the total cost line and total revenue line is the BEP as
we shall show.
Based on the formula, break-even point may be determined as shown in Exhibit 5.1
Exhibit 5.1.
Selling price sh. 100
Variable Cost per unit sh. 65
Fixed cost sh. 500,000

33
BEP = sh. 500,000/35x100
BE Sales sh.1, 428,571

E-tivity 5.2.2 Break-Even Point

Numbering, pacing and 5.2.2

sequencing
Title Break-Even Point
Purpose The purpose of this e-tivity is to enable you to understand the
computation of BEP.
Brief summary of overall task Click to open the link to read the material
1. https://cleartax.in/s/break-even-analysis
2. https://corporatefinanceinstitute.com/resources/knowledge/
modeling/break-even-analysis/
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing statement.
Interaction begins a) Post two themes that are common in the explanation of
the break-even analysis
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1) Ensure that learners are focused on the contents and
context of discussion.
2) Stimulate further learning and generation of new ideas.
3) Provide feedback on the learning progress.
4) Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Assumptions of Break Even Analysis

34
5.2.3 Discuss assumptions of B/E analysis
In applying the Break-even analysis certain assumptions are made. These are the allowances or
provisions put to standardize the results. For example it is assumed that costs are severable into
fixed and variable costs and there is only one product mix. There are still many other
assumptions as you will find out.
E-tivity: 5.2.3 Assumptions of Break-Even Analysis

Numbering, pacing and 5.2.3

sequencing
Title Assumptions of Break-Even Analysis
Purpose The purpose of this e-tivity is to enable you to understand the
computation of BEP.
Brief summary of overall task Read materials on the link
1. http://www.assignmentguys.com/assumptions-of-break-
even-analysis/
Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing statement.
Interaction begins a) Post two themes that are common in the explanation of
the break-even analysis
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity

35
Schedule and time This task should take more than two hours
Next Process Costing

1.3 Assessment Questions

a) Discuss Break- eve Analysis

b) What are the assumptions of break- even Analysis?

c) What is the importance of break- even point?

d) Show how break- even point is calculated.

5.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

36
LESSON 6
PROCESS COSTING

6.1 Introduction
This lesson explains the nature and meaning of process costing, preparation of process account,
how to deal losses and process gains. The lesson also introduces concept of equivalent units of
production and valuation of work in process.
6.2 Learning Outcome
By the end of this lesson you will be able to:
6.2.1 Explain the nature of process costing system
6.2.2 Distinguish between normal and abnormal losses
6.2.3 Compute Equivalent units of production
6.2.4 Prepare Process Account.

6.2.2 Understanding Process Costing

Let me begin from the point of view of the products for which we need to determine the cost.
You can then imagine the raw material used in the production and the factory that manufacture
the product. Then you probably realize how products are different. The difference in products
shows how costing for products are also different. Many products cannot be separately identified
till they reach their point of sale. Process costing which is an operating costing system is used in
costing such products.
Production of such products follows a sequence. Think of sugar mill or an oil refinery for
example. There are different stages in production, which form the process. Each process is an
account which is clearly maintained with the cost of inputs. A preceding process feeds the
subsequent process with input material. It is not possible to cost each unit because most probably
they are at different degrees of completion.

37
E-tivity: 6.2.1: Understanding Process Costing

Numbering, pacing and 6.2.1

sequencing
Title Nature and Meaning of Process costing
Purpose The purpose of this e-tivity is to enable you to understand the
nature of process costing
Brief summary of overall task Read materials on the link
1. https://www.accountingcoach.com/blog/what-is-process-
costing

Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing process.
Interaction begins a) Post two themes that are common in the explanation of
the process costing
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Process Losses

38
6.2.2 Process losses
One of the characteristics of process manufacturing is to experience losses in the course of
production. Normal loss occurs due to system activities and are unavoidable. Abnormal loss on
the other hand is avoidable. Such loss may be causes by managerial factors. Somehow, abnormal
loss is an increase in normal loss. Distinction between normal and abnormal loss may be founded
partly on the cause of the and partly on treatment of the loss in process accounts.
Instead of losses, a process may realize gains. Occasionally, a process may realize a gain instead
of loss. The abnormal gain logically is a decrease in normal loss at least from the accounting
point of view, such gains are likely as a result of improvement in managerial factors.
E-tivity: 6.2.2 : Process losses

Numbering, pacing and 6.2.2

sequencing
Title Normal and Abnormal losses distinguished
Purpose The purpose of this e-tivity is to enable you to understand the
distinction between normal and abnormal losses
Brief summary of overall task Watch videos and read the materials on these links
1. https://www.yourarticlelibrary.com/accounting/normal-loss-
abnormal-loss-and-abnormal-gain/76703
2. https://www.youtube.com/watch?v=KmaTkro4hlA

Spark

Individual task (a) Using bullet points, outline the common term in the
explanations.
(b) Using bullet points, list the key components of the
costing process.
Interaction begins a) Post two themes that are common in the explanation of
the process costing
b) Provide positive and constructive feedback on the team

39
learners ‘views and ideas.

E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Calculation of Equivalent Units

6.2.3 Computation of Equivalent units of production

Equivalent units of production are a mixture of fully processed units and partly processed units
in a process manufacturing situation. It is estimate in equal terms of how many units produced at
point reached. The reason behind computation of EUP is to be able to assign cost per unit for
each input of labour, material and overheads. One need to understand the level of completion
reached in terms of cost. Two cost flow assumptions applied for computation of EUP are FIFO
and average methods.
Exhibit 6.1: Under FIFO
Cost Element WIP % units Complete % WIP Closing % Units EUP
Material 300 40 120 2,060 100 500 100 500 2,680

Exhibit 6.2: Under Average Method

Cost Element Complete % + WIP Closing % Units = EUP
Material 2,360 100 500 100 500 2,860

Under average method beginning work in process inventory is accounted together with started
and completed because of the nature of the process.

40
E-tivity: 6.2.3: Computation of Equivalent units of production

Numbering, pacing and 6.2.3

sequencing
Title Computation of Equivalent Units in Production (FIFO)
Purpose The purpose of this e-tivity is to enable you to understand
how equivalent units in production are computed
Brief summary of overall task Read materials on the link
1.https://smallbusiness.chron.com/difference-between-average-
costing-equivalent-units-fifo-costing-equivalent-u
Spark

Individual task (a) Using bullet points, outline the common terms in the
explanations.
(b) Using bullet points, list the key components of the
computation of EUP.
Interaction begins 1. Post two themes that are common in the explanation of
the computation of EUP.
2. Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Preparation of process account.

41
6.2.4 Prepare Process Account
Process accounts are prepared using the traditional T- Account where input costs are debited
while output values representing revenues are credited.
E-tivity: 6.2.4: Prepare Process Account

Numbering, pacing and 6.2.4

sequencing
Title Preparation of Process Account
Purpose The purpose of this e-tivity is to enable you to understand
how to draw up a process account
Brief summary of overall task Read materials on the link
1. http://www.futureaccountant.com/process-costing/study-
notes/cost-elements-components-recording-accounting-met
Spark

Individual task (a) Using bullet points, outline the common terms in the
preparation of accounts
(b) Using bullet points, list the key components of the
process account
Interaction begins c) Post two themes that are common in the explanation of the
accounts
d) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Job Costing

42
6.3 Assessment Questions
a) What is a process?

b) Define process costing.

c) Explain what is equivalent units of production

d) Discuss the features of process costing.

6.4 REFERENCES

1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

43
LESSON 7
JOB COSTIMG
7.1 Introduction
This lesson introduces you to job costing and the build up to the cost of a job, procedures and the
types of records maintained.
7.2 Learning Outcome
By the end of this lesson you will be able to:
7.2.1 Define job costing
7.2.2 Understand the requirements in job costing
7.2.3 Discuss accounting records in job costing
7.2.1 Job costing defined
Job costing is a form of specific order costing in which costs are attributed to individual jobs.

E-tivity: 7.2.1: Job costing defined.

Numbering, pacing and 7.2.1

sequencing
Title Meaning of job costing
Purpose The purpose of this e-tivity is to enable you to understand
how
To draw up a process account
Brief summary of overall task Read materials of the link
1. https://strategiccfo.com/job-costing/

Spark

44
Individual task (a) Using bullet points, outline the common terms in the
preparation of accounts
(b) Using bullet points, list the key components of the
process account
Interaction begins a) Post two themes that are common in the explanation of
the accounts
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Requirements in job costing

7.2.2 Understand the requirements in job costing

A job is an activity and a profit Centre. In order to realize profit, there are preliminaries that must
be in place. Manufacturers carryout production in terms of orders and costs are assembled and
ascertained per job. Jobs are assigned numbers to identify each profit Centre. Clearly maintained
records for example are a necessity. Costing systems for stock valuation is another.
E-tivity: 7.2.2.: Understand the requirements in job costing

Numbering, pacing and 7,2.2

sequencing
Title Requirements for job costing
Purpose The purpose of this e-tivity is to enable you to understand the
prerequisites of job costing
Brief summary of overall task Read materials of the link
1. https://www.accountingnotes.net/cost-accounting/job-
costing/job-costing-features-objectives-pre-requisites-

45
Spark

Individual task (a) Using bullet points, outline the common terms in job
costing
(b) Using bullet points, list the key components of job
costing
Interaction begins a) Post two themes that are common in the explanation of
the job costing
b) Provide positive and constructive feedback on the team
learners ‘views and ideas
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Accounting records in job costing

7.2.3 Discuss accounting records in job costing

Accounting records for job costing is in the form of traditional T-accounting you experienced in
process accounting.

E-tivity: 7.2.3.: Discuss accounting records in job costing

Numbering, pacing and 7.2.3
sequencing
Title Accounting records
Purpose The purpose of this e-tivity is to enable you to understand
how to draw up accounts in job costing.

46
Brief summary of overall task Read materials on the link
1.https://openstax.org/books/principles-managerial-
accounting/pages/4-7-prepare-journal-entries-for-a-job-order-
cost-system

Spark

Individual task (a) Using bullet points, outline the common terms in the
preparation of accounts
(b) Using bullet points, list the key components of job
costing
Interaction begins a) Post two themes that are common in the explanation of
the accounts
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Batch Costing

7.3 Assessment Questions

a) What is a job?

b) In what kind of production is job costing applied?

47
c) Discuss the two categories of products

d) Show how job costing is carried out.

7.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

48
LESSON 8
BATCH COSTING
8.1 Introduction
This lesson explains the nature and meaning of batch costing, requirements, accounting records
and distinctions with job costing.
8.2 Learning Outcome
By the end of this lesson you will be able
8.2.1 Understand the nature and meaning of batch costing
8.2.2 Show the accounting records
8.2.3 Distinguish batch costing and job costing.
8.2.1 Explain the nature of batch costing
Batch costing is in fact an extension of job costing system. Batch is a group or set of things or
People. So that instead of manufacturing on the basis of job orders production processes is
carried out in batches of individual items with equal value but separately identifiable. The cost
per unit is calculated by averaging unit cost over the batch total cost.

E-tivity 8.2.1: Explaining the nature of batch costing

Numbering, pacing and 8,2.1
sequencing
Title Batch Costing
Purpose The purpose of this e-tivity is to enable you to understand
what batch costing is.

Brief summary of overall task Click to open the link to read the material.
1.https://accountlearning.com/batch-costing-meaning-
economic-batch-quantity-
applicability/#:~:text=Batch%20costing%20is%20another%20f
orm,unit%20or%20artic
-

49
Spark

Individual task (a) Using bullet points, outline the common terms in the
explanation of batch costing.
(b) Using bullet points, list the key components of batch
costing.
Interaction begins a) Post two themes that are common in the explanation of
the batch costing
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Accounting records in batch costing

8.2.2 Show the accounting records

Accounting records for batch costing include journal and ledger entries. These are records for
costs for similar and separately identifiable items. From these records one is able to calculate unit
cost.

E-tivity 8.2.2: Batch Costing Records

Numbering, pacing and 8,2.2
sequencing
Title Batch Costing Records
Purpose The purpose of this e-tivity is to enable you to understand
what which records are maintained in batch costing is.

50
Brief summary of overall task Click to open the link to read the material.
1. https://www.playaccounting.com/exp-ca/ca-exp/batch-
costing/
Spark

Individual task (a) Using bullet points, outline the common terms in the
explanation of batch costing. records
(b) Using bullet points, list the key components of batch
costing.
Interaction begins e) Post two themes that are common in the explanation of the
batch costing
f) Provide positive and constructive feedback on the team
learners ‘views and ideas. Do this on the discussion forum
8.2.2
E-moderator interventions 3 Ensure that learners are focused on the contents and
context of discussion.
4 Stimulate further learning and generation of new ideas.
5 Provide feedback on the learning progress.
6 Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Comparison with Job costing

8.2.3 Comparison with job costing.

These two costing systems are more similar than different as both the systems use ABC system.
The only areas where differences may be cited include:
1. Requirement that manufacturing be as per job orders as opposed to batches
2. Gathering of costs

51
E- tivity 8.2.3: Comparison with job costing.
Numbering, pacing and 8,2.3
sequencing
Title Comparison with Job Costing
Purpose The purpose of this e-tivity is to enable you to understand the
similarities and differences between Batch costing and
Job costing.
Brief summary of overall task Read materials on the link
1. https://www.mbaknol.com/business-finance/similarities-
and-difference-between-job-costing-and-batch-costing/
Spark

Individual task (a) Using bullet points, outline the differences in the
explanation of the two costing. systems
(b) Using bullet points, list the key similarities in the two.

Interaction begins a) Post two themes that are common in the explanation of
the two.
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Introduction to budgets and budgetary controls

8.3 Assessment Questions

a) Discuss the advantages of batch production

52
b) How is unit cost calculated in the case of batch costing?

8.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

53
LESSON 9
INTRODUCTION TO BUDGETING

9.1 Introduction

In this lesson we discuss the meaning of budgeting, the need for budgets, budget setting and the

Zero Based Budget (ZBB)

9.2 Lesson learning Objectives

By the end of this lesson you will be able to:

9.2.1 Define a budget

9.2.2 Explain the need for a budget
9.2.3 Budget setting
9.2.4 Zero Based Budget
9.2.1 Definition of a budget

A budget can be defined in several ways based of the purpose of the budget. But for our
purpose a budget is a statement of expression of future intention. Future is a subsequent
period and intention are the reason for the budget. More materials are provided on the links
and references.
E-tivity 9.2.1: Defining a budget

Numbering, pacing and 9.2.1

sequencing
Title Definition of budget
Purpose The purpose of this e-tivity is to enable you to understand the
meaning of a budget.
Brief summary of overall task Read materials on the link
1. http://www.businessdictionary.com/definition/budget.html

54
Spark

Individual task (a) Using bullet points, outline the key terms in the
explanation of the term “budget”
(b) Using bullet points, list the key issues in a budget.

Interaction begins a) Post two themes that are common in the explanation of
the budget
b) Provide positive and constructive feedback on the team
learners ‘views and ideas
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Need for budgeting

9.2.2 Explaining the need for a budget

Budget is a plan or at best a guide to future business activities. In addition to being a guide there
are several other needs of a budget which can be implied. Budgets are useful in business for
example in;

i. Coordination
ii. Motivation and
iii. Control

Open the link and read the material for more information.

55
E-tivity 9.2.2: Explaining the need for a budget

Numbering, pacing and 9.2.2

sequencing
Title Need for budgets
Purpose The purpose of this e-tivity is to enable you to understand the
uses of a budget.
Brief summary of overall task Click to open the link to read the material.
1. https://hbr.org/2003/02/who-needs-budgets

Spark

Individual task (a) Using bullet points, outline the key terms in the
explanation of the need for budget
(b) Using bullet points, list the key issues in the need for
budgeting.
Interaction begins a) Post two themes that are common in the
explanation of the budget
b) Provide positive and constructive feedback on the
team learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Budget Setting

9.2.3 Budget setting

Could you have ever imagined how budget setting is carried out? You probably may
have participated in a budget setting process. Whichever way, the process includes;

56
(i) Identification of responsibilities
(ii) Communication of guidelines to the budget team
(iii)Identification of limiting factor
(iv) Preparation of budget for the limiting factor and
(v) Setting procedures for monitoring, review and conclusion of the process.

Read more from the link provided.

E-tivity 9.2.3: Budget setting

Numbering, pacing and 9.2.3
sequencing
Title Budget Setting Process
Purpose The purpose of this e-tivity is to enable you to understand the
budget. Setting process
Brief summary of overall task Click to open the link to read the material.
1.https://corporatefinanceinstitute.com/resources/knowledge/fi
nance/budgeting/

Spark

Individual task (a) Using bullet points, outline the key terms in the
explanation of the budget setting process
(b) Using bullet points, list the key terms in the process of
budget setting.
Interaction begins a) Post two themes that are common in the explanation of
the budget setting
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.

57
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Incremental Budget

9.2.4 Zero Based Budget (ZBB)

The justification of ZBB is that funding requirements, production and even sales are based on
annual needs. And so, at the beginning of a budgeting period everything is at zero. Although for
some needs there could be stocks which may lessen the commitment for the period. There is
more reading in the link provided.

E-tivity 9.2.4: Zero Based Budget (ZBB)

Numbering, pacing and 9.2.4

sequencing
Title Zero Based Budget (ZBB)
Purpose The purpose of this e-tivity is to enable you to Zero Based
Budget.
Brief summary of overall task Click to open the link to read the material.
1. https://efinancemanagement.com/budgeting/zero-based

Spark

58
Individual task (a) Using bullet points, outline the key terms in the
explanation of the Zero Based Budget setting process
(b) Using bullet points, list the key terms in the process of
ZBB budget process.
Interaction begins a) Post two themes that are common in the explanation of
the budget setting
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Functional Budgets

9.3 Assessment Questions

a) Define the term budget.

b) Explain the budget setting process

c) Discuss the need for budgets

59
9.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

60
LESSON 1O
FUNCTIONAL OF BUDGETS

10.1 Introduction

This lesson explains to you the functional classification of budgets including; flexible
budgets, cash, sales, production and master budgets.

10.2 Learning outcomes

By the end of this lesson you will be able to:

10.2.1. Explain Flexible Budgets
10.2.2 Draw up a flexible Budget
10.2.3 Prepare a Cash Budget
10..2.4 Production budget
10.2.5 Draw up a Master Budget
10.2.1. Nature and meaning of a Flexible Budget

A flexible budget is a variable budget as it uses the same principle of behaviour of costs. The
budget levels are based of the level of activities. More reading materials are provided in the
links. Click on the link for more reading materials.

E-tivity 10.2.1: Nature and meaning of a Flexible Budget

Numbering, pacing and 10. 2.1

sequencing
Title Flexible Budget
Purpose The purpose of this e-tivity is to enable you to explain
flexible budget.
Brief summary of overall task Watch videos and read the materials on these links
1.https://www.myaccountingcourse.com/accounting-
dictionary/flexible-budget
2.https://www.youtube.com/watch?v=JHVaey2WdPE

61
Spark

Individual task (a) Using bullet points, outline the key terms in the
explanation of flexible budget
(b) Using bullet points, list the key terms in the process of
Flexible budgeting.
Interaction begins a) Post two themes that are common in the explanation of
the budgeting
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Drawing up flexible Budget

10.2.2 Draw up a flexible Budget

Earlier in the Module you learned that costs are either fixed or variable. But a business cannot
operate with either fixed costs or variable costs only. An expense like depreciation or rent may
remain the same. You also learnt that some costs are irrelevant. It means therefore that in
preparing a flexible budget, it important to identify the costs which are fixed and which are
variable. Another important step is fixing the level of operation

E-tivity 10.2.2: 2 Drawing up a flexible Budget

Numbering, pacing and 10. 2.2

sequencing
Title Preparation of Flexible Budget

62
Purpose The purpose of this e-tivity is to enable you to understand
how flexible budget is prepared.
Brief summary of overall task Watch video and read the material on these links
1.https://www.myaccountingcourse.com/accounting-
dictionary/flexible-budget
2.https://www.youtube.com/watch?v=JHVaey2WdPE
Spark

Individual task (a) Using bullet points, outline the key terms in the
preparation of flexible budget
(b) Using bullet points, list the key terms in the process of
Flexible budget.
Interaction begins a) Post two themes that are common in the
preparation of the budget.
b) Provide positive and constructive feedback on the
team learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents
and context of discussion.
2. Stimulate further learning and generation of new
ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Drawing up Cash Budget

10.2.3 Drawing up Cash Budget

Cash is one of the factors that are limiting which might require budgeting first. Cash budgeting
follows the equation; However, this can be difficult since cash budget include all other budgets.

63
Cash balance b/d + Cash receipts – Cash payments = Cash balance c/d. This general equation
simply shows the movement of cash within a specified period.

The uniqueness in cash activities is that there is usually a balance which can be debit or credit.

E-tivity 10.2.3: Drawing up a Cash Budget

Numbering, pacing and

sequencing 10.2.3
Title Preparation of Cash Budget
Purpose The purpose of this e-tivity is to enable you to understand
how to prepare a cash budget.
Brief summary of overall task Click to open the links to read and watch the materials .
1 https://edwardlowe.org/how-to-prepare-a-cash-budget-2/
2 https://www.youtube.com/watch?v=5zyJQFY30Q8

Spark

Individual task (a) Using bullet points, outline the key terms in the
preparation of Cash budget
(b) Using bullet points, list the key terms in the process of
cash budgeting
Interaction begins a) Post two themes that are common in the preparation of
the budget.
b) Provide positive and constructive feedback on the team
learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.

64
3. Provide feedback on the learning progress.
4. Round-up the e-tivity

Schedule and time This task should take more than two hours
Next Drawing up Production Budget

10.2.4 Drawing up Production Budget

Key to production budget is the volume of sales and related inventories. Second key component
of production budget is the cost of production including material, labour and overheads. Like
every other operating budget production budget is easily prepared on a monthly basis.

E-tivity 10.2.4: Drawing up Production Budget

Numbering, pacing and

sequencing 10.2.4
Title Preparation of production Budget
Purpose The purpose of this e-tivity is to enable you to understand
how to prepare a production budget.
Brief summary of overall task Watch videos and read the materials on these links
1 https://www.playaccounting.com/explanation/budgeting-
process/production-budget/.
2.https://www.youtube.com/watch?v=w4whF4Qh96g

Spark

Individual task (a) Using bullet points, outline the key terms in the
preparation of production budget
(b) Using bullet points, list the key terms in the process of
production budgeting

65
Interaction begins a) Post two themes that are common in the
preparation of the budget.
b) Provide positive and constructive feedback on the
team learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Drawing up of sales Budget

10.2.5 Sales Budget

For most businesses Sales is the limiting fact because of market which could be scarce far
product or as a result of competition. Budgeted sales is often the first line of budgets to be
carried out allowing the rest of the budgets to revolve around sales budget. Other key issues in
sales budgeting include the nature of the product. Sale of some products are dictated by weather
like soft drinks. The budget period is thus critical. Another is the sales volume and also the data
for previous year to guide direction

E-tivity 10.2.5: Drawing up a Sales Budget

Numbering, pacing and

sequencing 10.2.5
Title Preparation of sales Budget
Purpose The purpose of this e-tivity is to enable you to be able to
prepare a sales budget
Brief summary of overall task Watch videos and read the materials on these links
1.https://theinvestorsbook.com/sales-budget.html
2. https://www.youtube.com/watch?v=frCX_bsFsao

66
Spark

Individual task (a) Using bullet points, outline the key terms in the
preparation of sales budget
(b) Using bullet points, list the key terms in the process of
Preparation of sales budget
Interaction begins a) Post two themes that are common in the
preparation of the sales budget.
b) Provide positive and constructive feedback on the
team learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next Preparation of master budget

10.2.6 Drawing up of Master Budget

Master budget is the overall budget for a business or organization taking into consideration the
costs as well as revenue for the forthcoming period.

E-tivity 10.2.6: Drawing up of Master Budget

Numbering, pacing and

sequencing 10.2.6
Title Preparation of master Budget
Purpose The purpose of this e-tivity is to enable you to understand the
preparation of master.

67
Brief summary of overall task Read materials on the link.
1.https://www.myaccountingcourse.com/accounting-
dictionary/master-budget
2. https://www.youtube.com/watch?v=p7h4HClNYDI

Spark

Individual task (a) Using bullet points, outline the key terms in the
preparation master budget
(b) Using bullet points, list the key terms in the process of
Preparation of master budget
Interaction begins a) Post two themes that are common in the
preparation of the master budget.
b) Provide positive and constructive feedback on the
team learners ‘views and ideas.
E-moderator interventions 1. Ensure that learners are focused on the contents and
context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on the learning progress.
4. Round-up the e-tivity
Schedule and time This task should take more than two hours
Next END

10.3 Assessment Questions

a) Explain the classification of costs by function

b) Distinguish between flexible and a fixed budget

68
c) What is cash budget?

d) Discuss the preparation of a master budget.

10.4 REFERENCES
1. Drury, J. C. Management and Cost Accounting 11th Edition. Chapman and Hall 2017
Retrieve from: http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/bcom-
2/COST%20AND%20MANAGEMENT.pdf
2. Management Accounting by T. Lucy 7th Ed. 2009: Retrieve from:
https://www.academia.edu/31079125/MANAGEMENT_ACCOUNTING_STUDY_T
EXT
3. I.M. Pandey, Financial Management, Vikas Publishing House PVT Ltd. 11th Edition,
2015 Retrieve from: https://sites.google.com/site/67456rty4/1188-1
4. Arnold J. and Turley S. Accounting for Management Decision 3rd Edition, Prentice
https://tacorivey.firebaseapp.com/aa182/accounting-for-management-decisions-by-
john-arnold-stuart-turley-tony-hope-0133088189.pdf

69