FOREWORD PROFESSIONAL EXAMINATION INTERMEDIATE PAPER 4 COSTING AND QUANTITATIVE TECHNIQUES i COSTING AND QUANTITATIVE TECHNIQUES National Library Cataloguing-In-Publication Data A catalogue record for this book is available from the national library Published by: VI Publishers Lagos, Nigeria. ISBN 978-35055-9-9 © 2009 VI Publishers Printed and bound in Nigeria ii FOREWORD FOREWORD The remarkable success recorded through publication of the first edition of this study pack coupled with the positive impact the initiative had on the performances of professional examination candidates, and other users of the study pack, encouraged the Institute to produce this second edition. Through the review of the Institute‟s professional examination syllabus, which occurs every five years, several innovations were introduced into the curriculum. The advent of the new 15 - subjects (as against the old 19 - subjects) syllabus provided an auspicious moment for the Institute to review and update the existing study packs in the various subjects while new ones were produced for newly introduced subjects.
In this connection, the Institute has produced study packs for the following subjects: Fundamentals of Financial Accounting Costing and Quantitative Techniques Taxation Audit and Assurance Business Communication and Research Methodology Information Technology Management Accounting Financial Accounting Advanced Audit and Assurance Public Sector Accounting and Finance Financial Reporting and Ethics Strategic Financial Management Advanced Taxation In its effort to produce the study packs, the Council of the Institute approached several publishers to take up the challenge of producing them. While others declined the offer, the VI Publishers took up the challenge and commenced the task in earnest by commissioning some writers and reviewers to prepare study pack for each of the thirteen subjects. The writers and reviewers comprised eminent scholars and practitioners with tremendous experiences in their areas of specialization. They have written books, journals, seminar papers, etc.
on the relevant subjects and distinguished themselves in the accountancy profession. The output of the writers and reviewers were subjected to further comprehensive review by an editorial board. iii COSTING AND QUANTITATIVE TECHNIQUES Though, the study packs have been specially designed to assist candidates preparing for the Institute‟s professional examinations, other professional bodies and tertiary institutions, who may have cause to use the study packs, are advised to use them in conjunction with other materials listed in the bibliography and recommended readings. CHAIRMAN, SYLLABUS IMPLEMENTATION AND STUDY PACK REVIEW COMMITTEE iv PREFACE PREFACE INTRODUCTION The maiden edition of this study pack was produced in 2006 by The Institute of Chartered Accountants of Nigeria (ICAN) to address the dearth of good study materials for students of the Professional examinations.
The need to continue to provide students with up-to-date information and good reading materials prompted the Council of the Institute to carry out a review of the syllabus and consequently, the study pack on this subject. It should be noted that where new subjects have been introduced in the new syllabus as a result of the review, efforts have been made to prepare new study packs for them. The Institute committed enormous resources in support of this project by engaging a team of very experienced and seasoned practitioners and academicians to review existing study packs and where necessary produce new ones. It is envisaged that remarkable improvement will begin to manifest in the performances of the professional examination candidates and other users of the study packs.
READERSHIP These study packs will benefit the following categories of readers: Candidates of the Institute‟s professional examinations; Candidates of other professional institutes offering the same or similar subjects to those of ICAN; Students of tertiary institutions; Lecturers in tertiary institutions and training centres; Professional Accountants; and Practitioners of other fields requiring good working knowledge of these subjects. CONTENTS CHAPTER 1 INTRODUCTION TO COST ACCOUNTING This chapter deals with the meaning of cost accounting. It explains the scientific ways of determining total cost of a cost unit and the qualities expected of good cost accounting information. v COSTING AND QUANTITATIVE TECHNIQUES CHAPTER 2 MATERIAL ACCOUNTING AND CONTROL Chapter 2 relates to the procedures involve in the procurement, storage, usage and accounting for material as a cost element.
It emphasizes on the strategies for materials control and the various methods of valuing closing stock in for reflection in the balance sheet. The concept of Just-In- Time (JIT) as a modern purchasing and production method is also discussed. CHAPTER 3 LABOUR ACCOUNTING AND CONTROL This chapter covers the various methods of remuneration, general features of incentive schemes, determination of labour cost and accounting treatment of wages cost. In addition, it discusses the control of labour cost, labour turnover, causes and suggestions for the removal of labour turnover, job evaluation and merit rating.
CHAPTER 4 OVERHEAD COST ACCOUNTING AND CONTROL Chapter 4 treats the nature of expenses normally regarded as overheads including apportionment of service department costs. It also covers the absorption of overheads into product costs, various overhead recovery rates and choice of appropriate rates, and the effect of activity based costing on overhead allotment. CHAPTER 5 COST ANALYSIS Chapter 5 relates the various ways of classifying costs, the cost behavioural patterns, cost estimation or suggestion processes and the importance of cost analysis in managerial decision making process. CHAPTER 6 COST METHODS This chapter explains the distinction between costing methods and costing techniques, the various branches of specific order costing, the various branches of unit (or average) costing, the various methods of job costing, contract costing and service or operating costing.
CHAPTER 7 PROCESS COST AND PRODUCT COSTING This chapter explains the meaning of process costing, the characteristics of process costing and the determination of equivalent units and the meaning of its concept. In addition, it treats the account for spoilages, cost of production report, vi PREFACE joint costs and joint products, various methods of apportioning joint costs to joint products, the accounting treatment of by-products and the determination of total costs of producing joint products. CHAPTER 8 BUDGETING AND BUDGETARY This chapter explains the meaning and significance of budget, budgeting process, the various types of budgets, using activity, time and quantitative perspectives. It deals with budgetary control process, including comparison between budgeted and actual result, the significance of budget committee, budget manual, budget officer, etc.
and the use of budgetary improvement techniques like incremental budgeting, zero base budgeting, planning, programming, budgeting system, rolling budgeting and the preparation of functional and master budgets of a business organisations. CHAPTER 9 STANDARD COSTING Chapter 9 treats the objectives of standard costing, types of standards, applications of standard costing, setting of standards, variance analysis, advantages of standard costing and control ratios. CHAPTER 10 COST DATA FOR SHORT-RUN TACTICAL DECISION MAKING This chapter deals with the fundamental differences between absorption and marginal costing techniques, nature of management decision making with emphasis on marginal costing. In addition, the chapter discusses the concept of CVP analysis and necessity of cost accounting data in short-term tactical decision making.
CHAPTER 11 COST CONTROL This chapter explains the difference between cost control and cost reduction, the mechanisms for controlling costs, the various mechanisms for reducing costs and the recent development in cost accounting. CHAPTER 12 COST LEDGER ACCOUNTS This chapter provides understanding of the interlocking system of accounts, integral or integrated system of account, reconciliation or cost and financial accounting profits, recreation of the cost records and the treatment of notional charges. vii COSTING AND QUANTITATIVE TECHNIQUES CHAPTER 13 THEORY OF INDEX NUMBERS This chapter treats the theory of index numbers with emphasis on simple relative index and aggregate index numbers. CHAPTER 14 BASIC PROBABILITY CONCEPTS This chapter contains elementary treatment of probability including the addition and multiplication laws of probability.
The treatment is extended to conditional probability and independence, the concept of random variables and their distributions, and some commonly used distributions including Binominal, Poisson and Normal. CHAPTER 15 SET THEORY This chapter explains the application of set theory in business set, types and their presentation using the Venn Diagram approach. CHAPTER 16 INTRODUCTION TO MATRICES This chapter discusses the term “functions” and their use in solving real life problems. The functions include: linear functions, quadratic functions, exponential function, as well as polynomials and logarithm functions.
CHAPTER 17 BASIC CONCEPTS OF DIFFERENTIATION The chapter explains the concept of derivates, function differentiation, application of the principle to economic and business problems and the concept of simple partial differentiation of first order. CHAPTER 18 BASIC LINEAR PROGRAMMING This chapter explains the concept of linear programming, “its basic assumptions, problem formulation, methods of solving LP problems, interpretation of results and the concept of duality and shadow cost. CHAPTER 19 NETWORK ANALYSIS Chapter 19 discusses the concept and meaning of network analysis, types, terms and methods especially Critical Path Method (CPM) and Programme Evaluation Review Technique (PERT). viii PREFACE CHAPTER 20 REPLACEMENT ANALYSIS The chapter explains the meaning and purpose of replacement theory, concept and technique, gradual and sudden failure replacement policies and difference between individual and group replacement policies.
CHAPTER 21 TRANSPORTATION MODEL The transportation problem is introduced as a special class of linear programming problem in which the objective is to transport or distribute a single commodity from various sources to different destinations at a minimum cost. Some basic methods of solving transportation problems are outlined with examples. CHAPTER 22 COMPUTER ASSISTED COSTING TECHNIQUES This chapter discusses the application of IT tools for cost accounting activities with emphasis on web conferencing and e-mail. VI Publishers May 2009 ix COSTING AND QUANTITATIVE TECHNIQUES x SYLLABUS AND EXAMINATION QUESTIONS FORMAT ACKNOWLEDGEMENT A number of individuals and Institutions who are very vital in the production of this pack are hereby acknowledged.
We are especially grateful to the Syllabus Implementation/Study Pack Committee made up of: 1. Odejayi, Muyiwa - Deputy Chairman 3. Popoola, Toyin - Member We also appreciate the following copyright holders for permission to use their intellectual properties: The Institute of Chartered Accountants of Nigeria (ICAN) for the use of the Institute‟s examination materials; International Federation of Accountants (IFAC) for the use of her various publications; International Accounting Standards Board (IASB) for the use of International Accounting Standards: Nigerian Accounting Standards Board (NASB) for the use of Statements of Accounting Standards (SAS‟s); and Owners of Trademarks and Trade names referred to or mentioned in this study packs. The publisher has made every effort to obtain permission for use of intellectual materials in this study pack from the appropriate sources.
If there are any errors or omissions, please contact the publisher who will make suitable acknowledgement in the reprint. We acknowledge, with thanks, the immense contributions of the writers and reviewers of this study pack, namely: Mrs. Nkanbia – Davies, Prof. xi COSTING AND QUANTITATIVE TECHNIQUES Awosope, Messrs, M.
Adelanwa, Doyin Talabi, M. Obisesan and Toyin Popoola, as well as the Institute‟s secretarial staff under the leadership of O. Oyewo and other support staff. This acknowledgement will not be complete if the typesetters, Olufunke Oyeniyi and Ogunbiyi Babatunde Julius are not mentioned.
Our sincere appreciation goes to the members of the following committees of the Institute of Chartered Accountants of Nigeria who contributed their resources to make this project a reality: Students Affairs‟ Committee Examinations‟ Committee Technical Committee on Syllabus Review Syllabus Implementation/Study Packs Committee. Finally, we are indebted to the President, Chief (Dr. Uche, the Council of The Institute of Chartered Accountants of Nigeria for the financial and moral support which gave impetus to the production of this study pack.