Edexcel A-Level Accounting: Introduction to costing (YAC11) – Revision Notes

These notes condense topic 1.4, Introduction to costing, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018. They cover outcomes 1.4.1 to 1.4.13, all Unit 1 (The Accounting System and Costing) content, so this is International AS material that also counts towards the full International A Level. For full explanations and longer worked examples, use the Introduction to costing study guide. All money amounts are in dollars.

Course hub: Edexcel A-Level Accounting. Checklist: YAC11 topic checklist. Practice: costing practice questions. Free 10-minute diagnostics.

1. Inventory valuation (1.4.1 to 1.4.3)

Method	Assumption	Closing inventory valued at	Rising prices: profit
FIFO	Oldest units issued first	Latest prices	Higher
LIFO	Newest units issued first	Oldest prices	Lower
NRV	Not a flow method: a test	Lower of cost and NRV	Lower if written down

• NRV = estimated selling price - costs to complete - costs to sell.
• Valuing at the lower of cost and NRV applies prudence.
• LIFO is not permitted under IAS 2, the international standard on inventories.
• Perpetual: update after every receipt and issue. Periodic: one calculation at the period end.
• FIFO perpetual = FIFO periodic. LIFO perpetual and LIFO periodic usually differ.

Method in steps: LIFO perpetual

1. Keep a running list of layers (quantity at price), oldest at the top.
2. For each issue, take from the newest layer on hand on that date.
3. Add each receipt as a new layer.
4. Closing inventory = the layers left.

Method in steps: LIFO periodic

1. Add up all issues for the period.
2. Take them from the latest purchase of the period backwards, ignoring dates.
3. What is left (usually the oldest units) is closing inventory.

Worked reminder. Opening 20 units at 30; buy 30 at 32; issue 35; buy 25 at 35; issue 20. Units left: 20.

FIFO:            20 at 35                     = 700
LIFO perpetual:  issue 35 = 30 at 32 + 5 at 30   left 15 at 30
                 issue 20 = 20 at 35             left 15 at 30 + 5 at 35 = 625
LIFO periodic:   issues 55 = 25 at 35 + 30 at 32 left 20 at 30 = 600

Effect (1.4.3). Cost of sales = opening inventory + purchases - closing inventory. A higher closing inventory means a lower cost of sales, so a higher gross profit and a higher current asset in the statement of financial position. This year’s closing inventory is next year’s opening inventory, so the effect reverses.

2. Labour costs (1.4.4 to 1.4.6)

Item	Formula
Labour productivity	output / labour hours
Day work (time rate)	hours worked x rate per hour
Piecework	units produced x rate per unit
Time allowed	units x standard time per unit
Time saved	time allowed - time taken
Halsey bonus	50% x time saved x rate per hour
Rowan bonus	(time taken / time allowed) x time saved x rate per hour
Group bonus share	pool x (worker’s hours or pay / team total)
Employer cost	gross pay + employer’s contributions (e.g. social security, pension)

Method	Advantage	Disadvantage
Day work	Simple, steady pay, quality not rushed	No incentive to raise output
Piecework	Rewards effort, cost per unit fixed	Quality risk; pay hit by breakdowns
Individual bonus	Rewards time saved, guaranteed base pay	Setting fair time allowances is hard
Group bonus	Teamwork; suits team-based tasks	Faster workers subsidise slower ones

Must-know distinction. Employee gross earnings are what the worker is paid before deductions. Employer cost adds the employer’s own contributions on top. The employee’s tax and own contributions come out of gross pay; they are never added to employer cost.

3. Overheads (1.4.7 to 1.4.11)

Cost behaviour (1.4.7)

Type	Total cost as output rises	Example
Fixed	Unchanged	Rent, insurance
Variable	Rises in proportion	Power for machines
Semi-variable	Fixed part + variable part	Phone line rental + call charges
Semi-fixed (stepped)	Flat, then jumps at set levels	Extra supervisor per shift

Allocation, apportionment, absorption (1.4.8)

Term	Meaning	Typical basis
Allocation	Whole cost charged to one cost centre	Department’s own indirect wages
Apportionment	Shared cost split fairly	Floor area, employees, carrying amount, kWh
Absorption	Overhead charged to units or jobs	OAR x hours used

Method in steps: overhead analysis

1. Allocate costs that belong to one cost centre.
2. Apportion shared costs: share = (centre’s basis / total basis) x cost.
3. Re-apportion service departments to production departments.
4. OAR = budgeted overhead / budgeted hours for each production department.
5. Charge jobs: OAR x hours the job uses.

Service departments (1.4.9)

Continuous allotment (repeated distribution) is used when service departments serve each other.

1. Share out the first service department’s total by the given percentages, including to the other service department.
2. Share out the second service department’s new total the same way.
3. Repeat until the amount left is very small; split the final amount between production departments only.
4. Check: production departments’ totals = total overhead at the start.

Rates (1.4.10)

• Machine hour rate = budgeted overhead / budgeted machine hours. Use for machine-intensive departments.
• Labour hour rate = budgeted overhead / budgeted direct labour hours. Use for labour-intensive departments.

Over and under absorption (1.4.11)

Absorbed = OAR x ACTUAL hours
Absorbed > actual overhead  ->  over absorbed  ->  add to profit
Absorbed < actual overhead  ->  under absorbed ->  extra expense, reduces profit

Causes: actual hours differ from budget, actual spending differs from budget, or both.

4. Job and batch costing (1.4.12 and 1.4.13)

• Work done to the customer’s specification; each job separately identified.
• Job cost sheet: direct materials + direct labour + direct expenses = prime cost; + absorbed production overhead = production cost; + administration, selling and distribution overhead = total cost; + profit = price.
• Batch: identical items costed as one job; cost per unit = batch cost / units.

Must-know distinction: mark-up vs margin. Mark-up is profit as a percentage of cost. Margin is profit as a percentage of selling price. A 25% mark-up on cost of 80 gives a price of 100, which is a 20% margin.

Quick self-test

1. Classify: (a) factory rent, (b) a line rental plus a charge per call, (c) one extra supervisor for every 2,000 units.
2. A business buys 100 units at 4, then 50 units at 5, then issues 120. Value closing inventory using FIFO and using LIFO.
3. An item cost 52. It can be sold for 64 after completion costs of 9 and selling costs of 6. At what value should it be shown?
4. A worker makes 340 units at a piece rate of 0.95. Calculate gross pay.
5. Time allowed 30 hours, time taken 24 hours, rate 15 an hour. Calculate total earnings under Halsey.
6. Same data as question 5. Calculate total earnings under Rowan.
7. Gross pay is 500 and the employer pays contributions of 11% of gross pay. Calculate employer cost.
8. Budgeted overhead is 72,000 and budgeted machine hours are 9,000. Calculate the machine hour rate.
9. Using the rate in question 8, actual machine hours are 9,400 and actual overhead is 73,100. Calculate the over or under absorption.
10. A batch of 480 units costs 3,360. Calculate the cost per unit.
11. A team produces 1,800 units in 600 labour hours. Calculate labour productivity.
12. A cost is 200 a month plus 0.40 per unit. Calculate the cost for 3,000 units.

Answers

1. (a) Fixed. (b) Semi-variable. (c) Semi-fixed (stepped).
2. 30 units left. FIFO: 30 at 5 = 150. LIFO: 30 at 4 = 120 (perpetual and periodic give the same here because all issues come after both purchases).
3. NRV = 64 - 9 - 6 = 49, below cost of 52, so 49.
4. 340 x 0.95 = 323.00.
5. Time saved 6 hours. Bonus = 0.5 x 6 x 15 = 45. Earnings = 24 x 15 + 45 = 405.
6. Bonus = 24/30 x 6 x 15 = 72. Earnings = 360 + 72 = 432.
7. 500 x 1.11 = 555.
8. 72,000 / 9,000 = 8.00 per machine hour.
9. Absorbed = 9,400 x 8 = 75,200. Actual 73,100. Over absorbed 2,100.
10. 3,360 / 480 = 7.00 per unit.
11. 1,800 / 600 = 3 units per labour hour.
12. 200 + 0.40 x 3,000 = 1,400.

Where marks are usually lost

• Writing “LIFO periodic” but pricing issues in date order, which is LIFO perpetual.
• Showing closing inventory at NRV when NRV is above cost.
• Leaving out the costs to complete or the selling costs from NRV.
• Saying FIFO gives “more profit” without stating that this holds when prices are rising.
• Using time allowed instead of time saved in a bonus, or forgetting to add the bonus to basic pay.
• Including the employee’s income tax in employer cost.
• Apportioning a shared cost on a basis unrelated to it (for example, rent by employees when floor area is given).
• Stopping continuous allotment while a large balance remains in a service department.
• Calculating absorbed overhead with budgeted hours instead of actual hours.
• Confusing mark-up on cost with margin on selling price when pricing a job.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 1: The Accounting System and Costing, topic 1.4 Introduction to costing.