ACC 403
Cost Accounting
Tutorials with solutions
Prof. Dr. Jannis Bischof
University of Mannheim
FSS 2023
The tutorial questions are partly based on:
- Bhimani, A., C.T. Horngren, S.M. Datar and M.V. Rajan (2018): Management and Cost Accounting,
7th edition, Harlow / UK: Pearson Education.
- Datar, S. M., Rajan, M. (2021): Horngren’s Cost Accounting: A Managerial Emphasis. 17th edition
(global edition), Harlow / UK: Pearson Education.
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 1
Session 2
Question 1
Inventory flows for RLE during December are as follows:
Number of units Cost per unit (€/unit)
Opening balance 1 December 40 6.00
Purchase 10 December 100 6.60
Sale 12 December 120
Purchase 20 December 80 7.00
Sale 31 December 40
Please calculate the closing inventory value at the end of December and Cost of Goods Sold (COGS) for
the month using
(1) FIFO,
(2) Permanent LIFO,
(3) Periodic LIFO,
(4) Permanent Weighted Average, and
(5) Periodic Weighted Average.
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 2
Solution:
(1) FIFO
# of units Unit costs (€/unit) Total costs (€)
01 Dec Opening balance 40 6.00 240
10 Dec Purchase 100 6.60 660
12 Dec Sale 40 6.00 -240
80 6.60 -528
20 Dec Purchase 80 7.00 560
31 Dec Sale 20 6.60 -132
20 7.00 -140
31 Dec Closing balance 60 7.00 420
COGS = 40 x 6.00 € + 80 x 6.60 € + 20 x 6.60 € + 20 x 7.00 € = 1,040 €
(2) Permanent LIFO
# of units Unit costs (€/unit) Total costs (€)
01 Dec Opening balance 40 6.00 240
10 Dec Purchase 100 6.60 660
12 Dec Sale 100 6.60 -660
20 6.00 -120
20 Dec Purchase 80 7.00 560
31 Dec Sale 40 7.00 -280
31 Dec Closing balance 40 7.00 280
20 6.00 120
400
COGS = 100 x 6.60 € + 20 x 6.00 € + 40 x 7.00 € = 1,060 €
(3) Periodic LIFO
Number of units Cost per unit (€/unit) Total (€)
Opening balance 40 6.00 240
Purchases of the period 100 6.60 660
80 7.00 560
220 1,460
Sales of the period 120
40
160 of which 80 x 7.00 € = 560
80 x 6.60 € = 528
1,088
Closing balance 60 372
COGS = 1,088 €
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 3
(4) Permanent Weighted Average
Number of units Cost per unit (€/unit) Total (€)
Opening balance 40 6.00 240
Purchase 10 Dec 100 6.60 660
Sale 12 Dec 120
Purchase 20 Dec 80 7.00 560
Sale 31 Dec 40
Closing balance 60
Weighted-average cost for Sale 12 Dec = (240 € + 660 €) / (40 + 100) = 45/7 or 6.43 €/unit (rounded)
Cost of the Sale 12 Dec = 45/7 x 120 = 771.43 € (rounded)
Value of remaining units = (140 – 120) x 45/7 = 128.57 € (rounded)
Weighted-average cost for Sale 31 Dec = (128.57 € + 560 €) / (20 + 80) = 6.89 €/unit (rounded)
Cost of the Sale 31 Dec = 6.89 x 40 = 275.60 €
Closing balance value = 60 x 6.89 = 413 € (rounded)
COGS = 771.43 € + 275.60 € = 1,047.03 €
(5) Periodic Weighted Average
Number of units Cost per unit (€/unit) Total (€)
Opening balance 40 6.00 240
Purchases of the period 100 6.60 660
80 7.00 560
220 1,460
Sales of the period 120
40
160
Closing balance 60
Weighted-average cost = 1,460 € / 220 = 73/11 or 6.63 €/unit
Closing balance value = 73/11 €/unit x 60 = 398.18 € (rounded)
COGS = 1,460 € - 398.18 € or 73/11 x 160 = 1,061.82 €
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 4
Question 2
Liquid Company uses LIFO to manage its inventory. In each of the last four years, Liquid purchased
1,000,000 units of a product. In each of the first three years, it sold 750,000 units of the product. The
details on inventory flows are given below:
Year Units Cost per unit (€/unit) Total cost (€)
1 1,000,000 1 1,000,000
2 1,000,000 2 2,000,000
3 1,000,000 4 4,000,000
4 1,000,000 5 5,000,000
In year 4, Liquid experienced unexpected high sales of 1,500,000 units resulting in revenues of
15,000,000 € for that year.
a) Please calculate Liquid’s profit in year 4.
b) Please calculate the profit in year 4 assuming that Liquid Company estimated an increasing demand
for its product and purchased 1,500,000 units in year 4. Compare the profit in a) and b). Why do they
differ?
Solution:
a)
Year Units remaining Cost per unit (€/unit)
1 250,000 1
2 250,000 2
3 250,000 4
Profit = 15,000,000 € - (1,000,000 x 5 € + 250,000 x 4 € + 250,000 x 2 €) = 8,500,000 €
b) Profit = 15,000,000 € - (1,500,000 x 5 €) = 7,500,000 €
In a) Liquid Company sold more than it purchased. A LIFO liquidation occurred because older LIFO in-
ventory had to be liquidated to serve the increased demand for the product. Since the older LIFO inventory
was purchased at a lower cost, the profit in a) is higher than in b).
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 5
Question 3
On 1 January 2015, Merveldt AG purchased an item of plant for 130,000 €. The estimated useful life of
the item was 4 years with an estimated residual value of 30,000 €. The item was expected to produce
40,000 units over its useful life.
The item’s actual units produced were as follows:
Year Usage (units)
2015 15,000
2016 12,500
2017 5,000
2018 7,500
a) For each year, please calculate the yearly depreciation costs for the item of plant using the straight-
line depreciation method.
b) For each year, please calculate the yearly depreciation costs for the item of plant using the usage-
based depreciation method.
c) For each year, please calculate the yearly depreciation costs for the item of plant using the declining-
balance method with the declining rate being 30%.
d) For each year, please calculate the yearly depreciation costs for the item of plant using the sum-of-
the-years’ digits method.
e) Please briefly explain each of the different depreciation methods. How do they differ in terms of the
total amount of depreciation and the timing of depreciation recognition?
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 6
Solution:
a) Straight-line depreciation
Yearly depreciation costs = (130,000 € - 30,000 €) / 4 = 25,000 €
Year Opening balance (€) Depreciation costs (€) Closing balance (€)
2015 130,000 25,000 105,000
2016 105,000 25,000 80,000
2017 80,000 25,000 55,000
2018 55,000 25,000 30,000
Total 100,000 30,000
b) Usage-based depreciation
Depreciation rate = (130,000 € - 30,000 €) / 40,000 = 2.5 € per unit
Year Opening bal- Usage (units) Rate (€/unit) Depreciation Closing bal-
ance (€) costs (€) ance (€)
2015 130,000 15,000 2.5 37,500 92,500
2016 92,500 12,500 2.5 31,250 61,250
2017 61,250 5,000 2.5 12,500 48,750
2018 48,750 7,500 2.5 18,750 30,000
Total 40,000 100,000 30,000
c) Declining-balance depreciation
Year Opening bal- Declining rate Depreciation Closing bal-
ance (€) (%) costs (€) ance (€)
2015 130,000 30 39,000 91,000
2016 91,000 30 27,300 63,700
2017 63,700 30 19,110 44,590
2018 44,590 30 14,590* 30,000
Total 100,000 30,000
*The final year depreciation (2018) is the difference between opening balance and the estimated residual
value in order to ensure that depreciation is charged in full.
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 7
d) Sum-of-the-years’ digits depreciation
SYD = 1 + 2 + 3 + 4 = 10 (or n*(n + 1) / 2 where n = estimated useful life)
Year Cost (€) Residual value Depreciation Depreciation Closing bal-
(€) rate costs (€) ance (€)
2015 130,000 30,000 4/10 40,000 90,000
2016 130,000 30,000 3/10 30,000 60,000
2017 130,000 30,000 2/10 20,000 40,600
2018 130,000 30,000 1/10 10,000 30,000
Total 100,000 30,000
e) The total amount of depreciation is identical no matter which depreciation method is used – the choice
of depreciation method only alters the timing of depreciation recognition.
Straight-line method: Cost of an asset is evenly spread over its useful life.
Usage-based method: Depreciation is calculated on actual physical use (e.g., factory machinery).
Declining-balance method: Depreciation costs under declining balance method progressively declines
over an asset’s useful life (e.g., computer equipment).
Sum-of-the-year’s digits method: Most of the depreciation is recognized in the first years of an asset’s
useful life (e.g., automobiles).
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 8
Question 4
John Doe works in the production department of ABC Company as a machine operator. John is paid on
an hourly basis at a rate of 20 € per hour. John works five 8-hour shifts per week Monday–Friday
(40 hours). Any time John works over and above these 40 hours is considered overtime for which he is
paid at a rate of time and a half (30 € per hour). If the overtime falls on weekends, John is paid at a rate
of double time (40 € per hour). John is also paid an additional 20 € per hour for any holidays worked, even
if it is part of his regular 40 hours.
John is paid his regular wages even if the machines are down (not operating) due to regular machine
maintenance, slow order periods, or unexpected mechanical problems. These hours are considered “idle
time”.
During December John worked the following hours:
Hours worked including machine downtime Machine downtime
Week 1 42 3.5
Week 2 45 6.4
Week 3 48 5.0
Week 4 46 2.8
Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during
Week 4. All overtime worked by John was Monday–Friday, except for the hours worked in Week 3. All of
the Week 3 overtime hours were worked on a Saturday.
a) Calculate (1) direct manufacturing labor, (2) idle time, (3) overtime and holiday premium, and (4) total
earnings for John in December.
b) Is idle time and overtime premium a direct or indirect cost of the products that John worked on in
December? Explain.
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 9
Solution:
a) (1) Direct manufacturing labor
Total cost of hours worked at regular rates
42 hours × 20 € per hour 840 €
45 hours × 20 € per hour 900 €
48 hours × 20 € per hour 960 €
46 hours × 20 € per hour 920 €
3,620 €
Minus idle time
(3.5 hours × 20 € per hour) 70 €
(6.4 hours × 20 € per hour) 128 €
(5.0 hours × 20 € per hour) 100 €
(2.8 hours × 20 € per hour) 56 €
Total idle time 354 €
Direct manufacturing labor costs 3,266 €
(2) Idle time = 17.7 hours × 20 € per hour = 354 €
(3) Overtime and holiday premium
Week 1: Overtime (42 – 40) hours × Premium, 10 € per hour 20 €
Week 2: Overtime (45 – 40) hours × Premium, 10 € per hour 50 €
Week 3: Overtime (48 – 40) hours × Premium, 20 € per hour 160 €
Week 4: Overtime (46 – 40) hours × Premium, 10 € per hour 60 €
Week 4: Holiday 8 hours × 2 days × Premium, 20 € per hour 320 €
Total overtime and holiday premium 610 €
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 10
(4) Total earnings in December
Direct manufacturing labor costs 3,266 €
Idle time 354 €
Overtime and holiday premium 610 €
Total earnings 4,230 €
b) Idle time caused by regular machine maintenance, slow order periods, or unexpected mechanical prob-
lems is an indirect cost of the product because it is not related to a specific product.
Overtime premium caused by the heavy overall volume of work is also an indirect cost because it is not
related to a particular job that happened to be worked on during the overtime hours. If, however, the
overtime is the result of a demanding “rush job”, the overtime premium is a direct cost of that job.
Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 11