MAKERERE UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT SCIENCE

(CoBAMS)

COST & MANAGEMENT ACCOUNTING

(COA 2104)
SEMESTER TWO 2024/2025.

FACILITATORS:
D. Namanya/G.Nuwagaba /S. Nabatanzi /T. Masimengo
 Assessments

The unit assessment will be comprised of:

1. Internal coursework assessment 30%

Assignment 1 15%

Assignment 2 15%

2. Final exam 70%

3. The pass mark is 50%

 TOPIC 1

ABSORPTION & MARGINAL COSTING

(PRODUCT COSTING)
 ABSORPTION COSTING

Absorption costing
– This is a method of accumulating a product’s cost, or
costs associated with production and apportioning them
to an individual product.
– Permissible by GAAP, IAS and IFRS for valuation of
inventory (Statement of financial position).
– Products absorbe a broad range of fixed and variable
costs.
– These costs may not be recognised as expenses in the
month when they are incurred.
– Instead, they remain in inventory until inventory is sold;
at that point, they are charged to the cost of goods sold
 ABSORPTION COSTING COMPONENTS
The key cost components under absorption costing
system include:
– Direct materials.
– Direct labour.
– Variable manufacturing overhead
– Fixed manufacturing overhead
– It is possible to use activity-based costing (ABC) to
allocate overhead costs and for inventory valuation
purposes
– However, ABC is a time-consuming and expensive
system to implement and maintain
– Moreover, absorption costing is acceptable by GAAP
or IFRS.
 CALCULATING THE PRODUCT UNIT COST USING
ABSORPTION COSTING
For the month of June 202X, KK incurred the following costs to
manufacture 50,000 product
– Total Direct labour cost 150,000,000/=
– Total Direct material cost 437, 800,000/=
– Total Variable overhead 389, 100,000/=.
– Total fixed costs of 89,100,000/ incurred on 30/06/202X.
Required to Calculate KKs product cost per unit using absorption
costing method.
Solution cost per unit
– Direct labour W1 3,000/=
– Direct materials W2 8,756/=
– Variable overhead W3 7,782/=
– Fixed overhead/number of units) (89.1m/50k) 1,782/=
The cost per unit 21,320/=
 CALCULATING THE VALUE OF ENDING INVENTORY USING
ABSORPTION COSTING
Value of the units of ending inventory
= Units beginning inventory + Units produced – Units sold
Example:The following data relates to KK ltd for the month of May 202X.
Opening inventory Units 2 000
Units produced 10,000
Units sold (300/= per unit) 8,000
Variable costs per unit (in Ugx):
Direct materials 50
Direct labour 100
Variable overhead 50
Fixed overhead per unit produced 25
Using absorption costing, Calculate (a) units in ending inventory
(b) the per-unit product cost and
(c) the value of ending inventory
 Solution

a) Units ending inventory = Units beginning inventory +

Units produced – Units sold
= (2 000 + 10,000) – 8,000 = 4000 units
b). Per unit cost:
Direct materials 50
Direct labour 100
Variable overhead 50
Fixed overhead 25
Unit product cost 225
c). Value of ending inventory = Units ending inventory x
Absorbed unit product cost
= 4000 units x 225 = Ugx 900,000
 STATEMENT OF PROFIT OR LOSS USING ABSORPTION

The following data relates to KK ltd for the month of May 202X.
Opening stock of inventory Units 0.000
Units produced 10,000
Units sold (UGX 300 per unit) 8,000
Variable costs per unit (in Ugx):
Direct materials 50
Direct labour 100
Variable overhead 50
Fixed costs:
Fixed overhead per unit produced 25
Total Fixed selling and administrative 100,000
(a). Calculate the cost of goods sold under absorption costing.
(b). Prepare statement of profit or loss using absorption costing.
 STATEMENT OF PROFIT OR LOSS USING
ABSORPTION
Solution
a) Cost of goods sold under Absorption
(50 + 100 + 50 +25 = 225) x Units sold
= 225 x 8000 = 1,800,000
b) KK Ltd- Absorption-costing statement of profit or loss
Amount (Ugx)
– Sales (8000 x 300) 2,400,000
– Less: Cost of goods sold (1,800,000)
– Gross margin 600,000
– Less: Selling and Admin. (100,000)
Operating income 500,000
 TOTAL COSTS USING PREDETERMINED OVERHEAD
RATE
– Predetermined overhead rate is used to apply manufacturing
overhead to products or job orders
– Usually computed at the beginning of each period by dividing the
estimated manufacturing overhead cost by an allocation base
– Commonly used allocation bases are direct labour hours,
machine hours, and direct materials.
– The formula of predetermined overhead rate is as follows:
 TOTAL COSTS USING PREDETERMINED OVERHEAD
RATE
Example: For the FY 202X, GX ltd budgeted for total
manufacturing overhead cost of 80,000,000/= The company
uses direct labour hours to assign manufacturing overhead
cost to her products. It is estimated that 10,000 direct
labours hours will be used in 202X.
Required: Using the above information, compute the
predetermined overhead rate
Predetermined overhead rate is calculated as

= 80,000,000 ÷ 10,000 hours = 8,000/= per direct labour

hour
 TOTAL COSTS USING PREDETERMINED OVERHEAD
RATE
For the FY 202X, GX tools budgeted to manufacture 85,000 Spades and 800 Hoes.
The company uses direct-machine-hour cost to assign overhead to its 2 products.
Total estimated manufacturing OH was 40,000,000/= and estimated total machine
hours 8,000,000. The total direct labour cost for spades and hoes were 8,500,000/=
and 160,000/= respectively. Other information include
• Cost per unit Spade Hoes
• Direct Machine hours 108/= 150/=
• Direct Materials 180/= 600/=
a) You are required to calculate the predetermined overhead rate.
ANS = 40,000,000/8,000,000 = 5/= per machine-hour
b) Calculate the cost per unit for producing one Spade and one Hoe
Cost per unit Spade Hoe
• Direct Machine-hours 108 150
• Direct Materials 180 600
• Manufacturing O/Hs (108x5/=) 540 (150x5/=) 750
• Direct labour hours* 100 200
• Total cost 928/= 1700/=
*Direct labor hours Spade 8,500,000/ 85,000= 100 and Hoe 160,000/ 800= 200
 OVERHEAD & UNDER ABSORPTION OF O/H
– Overheads are usually applied based on a predetermined overhead
allocation rate.
– Overhead can be over absorbed when the amount allocated or
budgeted to a cost object is higher than the actual amount
– Under absorbed when amount allocated or budgeted is lower than
the actual overhead.
– For example, for the FY 202X, KK planned to produce 50,000 hoes
per month. In March 202X, KK budgeted manufacturing overhead
cost were 100,000,000, which it plans to apply at the rate of
2000/= per hoe.
– However, in March, KK only produced 45,000 hoes and the actual
cost of manufacturing overhead incurred was 94,500,000.
Required to calculate the over or under absorbed overheads.
– KK allocated (45,000 x 2000) = 90,000,000/=
– But overhead actually incurred = 94,500,000.
– Hence KK under absorbed overhead by (94.5m-90m) = 4,500,000/=
 OVERHEAD & UNDER ABSORPTION OF O/H

Example 2
– For the FY 202X, KK planned to produce 50,000 hoes per month.
In March 202X, KK budgeted manufacturing overhead cost were
100,000,000 and absorption rate of 2000/= per hoe.
– However, in March, KK only produced 60,000 hoes and the
actual amount of overhead incurred were 109,000,000/=
Required: Comment on the company's overheads absorbed
Solution
– Using the overhead absorption rate of 2000/= per unit,
– KK would absorb (2000 x 60,000) = 120,000,000/=
– But overhead actually incurred = 109,000,000/=
– Hence KK Over absorbed overhead (120M-109M) =11,000,000/=
– Because O/H are over absorbed when the amount allocated or
budgeted is higher than the actual amount
 MARGINAL COSTING
Marginal or Variable costing
– Is a costing system which treats only the variable manufacturing
costs as product costs while taking fixed manufacturing
overheads as period cost
– Under marginal costing, variable costs are charged to the cost
object and period fixed cost are charged against the total
contribution to arrive at the final profits.
– Contribution is the sales revenue less prime costs
– Hence, under marginal costing, fixed costs are not apportioned
to a cost object e.g. cost centre or product
Main difference
between the AC
and MC is the
treatment of fixed
factory overhead.
 MARGINAL OR VARIABLE COSTING
– Marginal costing stresses the difference between fixed and
variable manufacturing costs.
– Marginal costing assigns only variable manufacturing costs
to the product; these costs include direct materials, direct
labour & variable overhead.
– Fixed overhead is treated as a period expense and is
excluded from the product cost.
– Under Marginal costing, inventory is valued at prime costs
(DL,DM,VOHs) but under absorption costing, a product
costs includes the prime costs plus fixed overhead.
– This leads to different operating income figures.
– The difference arises because of the amount of fixed
overhead recognized under the absorption methods.
 EXAMPLE MARGINAL COSTING

The following data relates to KK ltd for the month of March 202X.
Opening stock of inventory Units 0.000
Units produced 10,000
Units sold (UGX 300 per unit) 8,000
Variable costs per unit (in Ugx):
Direct materials 150
Direct labour 100
Variable overhead 250
Fixed costs:
Fixed overhead per unit produced 125
Fixed selling and administrative 100,000
Required: Using Marginal costing Calculate (a) the units in ending inventory, (b).,
the per-unit product cost (c), the value of ending inventory
 Solution

a) Units ending inventory = Units beginning inventory +

Units produced – Units sold
= 0 + 10,000 – 8,000 = 2000 units
b). Marginal costing unit cost:
Direct materials Ugx 150
Direct labour 100
Variable overhead 250
Unit product cost 500
c). Value of ending inventory = Units ending inventory x
marginal unit product cost
= 2000 units x 500 = 1,000,000/=
 STATEMENT OF PROFIT OR LOSS USING MAGINAL
COSTING
The following data relates to KK ltd for the month of March 202X.
Opening stock of inventory Units 0.000
Units produced 10,000
Units sold (per unit) 8,000
Selling price (per unit) 300/=
Direct materials 50
Direct labour 100
Variable overhead 50
Fixed overhead per unit produced 25
Fixed selling and administrative 100,000
Required
a) Calculate the cost of goods sold under marginal costing.
b) Prepare statement of profit or loss using Marginal costing
 Statement of profit or loss using marginal-costing

a) Cost of goods sold under marginal costing

Each unit Direct materials, + Direct labour + Direct overheads
= 50 + 100 + 50 = 200
Hence, Cost of goods sold = 200 x 8000 = 1,600,000
b) KK Ltd- Marginal-costing statement of profit or loss
Amount (Ugx)
– Sales (8000 x 300) 2,400,000
– Less: Cost of goods sold (1,600,000)
– Gross profit 800,000
– Less: fixed expense (25x10,000) (250 000)
– Selling and Admin. (100,000)
Operating Profit 450,000
 SEGMENTED STATEMENT OF PROFIT OR LOSS
USING MARGINAL COSTING
– Marginal costing is used to prepare segmental statement
of profit or loss to give useful information on variable
and fixed expenses.
– A segment is a sub-unit of a company of sufficient
importance to warrant the production of performance
reports.
– Segments can be divisions, departments, product lines,
etc.
– In a segmented statement of profit or loss, fixed
expenses are broken down into:
– Direct fixed expenses
– Common fixed expenses.
 DIRECT AND COMMON FIXED EXPENSES

– Direct fixed expenses are fixed expenses that are

directly traceable to a segment also known as avoidable
fixed expenses or traceable fixed expenses because they
vanish if the segment is eliminated.
– Eg., if the segments were sales regions, a direct fixed
expense for each region would be the rent for the sales
office.
– Common fixed expenses are jointly caused by two or
more segments.
– These expenses persist even if one of the segments to
which they are common is eliminated
– For example, depreciation on the corporate
headquarters building or the salary of the CEO would be
a common fixed expense for most large companies.
 Example
Audio Ltd produces MP3 and DVD players in a single factory. The
following information relates to the company for the year 202X.
MP3 (Ugx) DVD (Ugx)
Sales 400,000 290,000
Variable cost of goods sold 200,000 150,000
Direct fixed overhead 30,000 20,000
• A 5% sales commission is paid for each of the product lines.
• Estimated direct fixed selling and administrative expense are
10,000/= and 15,000/= for MP3 and DVDs respectively
• Estimated common fixed overhead are 100,000/= and
• The common selling & admin. expense estimated are 20,000/=
Required: Using marginal costing, prepare Audio’s segmented
statement of profit or loss for the FY 202X
 Example
Audio Ltd Segmented statement of profit or loss for the FY 202X
MP3 DVD TOTAL
Sales 400,000 290,000 690,000
V. Cost of goods sold (200,000) (150,000 (350,000)
Variable selling expense* (20,000) (14,500) (34,000)
Contribution margin 180,000 250,500 305,500
Less: Direct fixed expenses:
Direct fixed overhead (30,000) (20,000 (50,000)
Direct selling and admin. (10,000) (15,000) (25,000)
Segment margin 140,000 90,500 230,500
Less: Common fixed expenses:
Common fixed overhead (100,000)
Common selling and administrative (20,000)
Operating income 110,500/=
*Variable selling expense for MP3 players = 5% x Sales = 0.05 x 400,000 = 20,000/=
Variable selling expenses for DVD players = 5% x Sales = 0.05 x 290,000 = 14,500/=
 Advantages of marginal costing
i. MC is preferable for decision-making, as contribution is the most
reliable criteria upon which to base a decision.
ii. It avoids arbitrary apportionment of fixed costs and the under-
or over-absorption of overheads.
iii. Separating fixed and variable costs can help in short-term pricing
decisions. As fixed costs will remain unaffected by fluctuations in
activity within a relevant range, management can focus on
variable costs and contribution.
iv. Fixed costs, by their nature relates to periods of time rather than
volume of production and thus should be treated as such in the
preparation of profit statements.
v. It gives a more accurate picture of how an organisation’s cash
flows and profits are affected by sales and volume.
vi. In manufacturing organisations, it avoids the manipulation of
profits through increased production volumes.
vii. MC provides information for break-even analysis that indicates if
fixed costs can be converted with the change in sales volume
 Disadvantages of marginal costing

1. A MC system identifies the contribution per item earned but

does not establish the fixed cost per item, so there is a danger
that items will be sold on an ongoing basis at a price which fails
to cover fixed costs.
2. MC does not conform to GAAPs requirements by IAS 2 Inventory
valuation – Inventory is valued based on the total cost incurred
in bringing the product to its present condition and location.
3. MC ignores the element of fixed cost is included in the stock
valuation provided by marginal costing. Therefore, year-end
adjustments are necessary before the preparation of the
financial statements for reporting purposes.
4. Ignores the importance of fixed overheads in decision making
 TOPIC 2

THE COST–VOLUME–PROFIT (CVP)

& BREAK-EVEN ANALYSIS