Journal Entries for the Cost Accounting Cycle

Journal Entries for the Cost Accounting Cycle.

On October 1, the trial balance of the Durable Company showed
Accounts                                              Dr.              Cr.
Cash on Hand and in Bank            $ 25,800
Accounts Receivable                       47,740
Materials                                        44,880
Work in Process                             85,400
Finished Goods                               78,700
Plant and Machinery                     237,240
Accounts Payable                                              $ 54,270
Accrued Payroll                                                    6,600
Accumulated Depreciation — Plant & Machinery 11 5,210
Allowance for Doubtful Accounts                          2,825
Capital Stock                                                     80,000
Retained Earnings                                              260,855
                                                 $519,760       $519,760
During October these transactions took place

(a) Materials purchased (on account) $ 40,000
(b) Materials issued (direct) 65,000 « " (indirect) 3,500
(c) Materials returned to supplier 900
(d) Total payroll for month (direct) 80,000 « « « « (indirect) 9,500
(Assume there are no payroll deductions.)
(e) Wages paid during October 75,000
(f) Sundry manufacturing expenses incurred during October 12,000
(g) Marketing and administrative expenses incurred during October 8,500
(h) Accounts receivable collected 300,000
(i) Accounts payable paid 135,000
(j) Depreciation to be provided for October on plant and machinery at the rate of 10% per annum ?
(k) Factory overhead applied to production 14,200
(1) Work in process, October 31 75,000
(m) Cost of finished goods sold during October 205,000
(n) Sales made on account 285,000

Required: Journal entries for the above transactions
and seventy dollars of the taxes apply to salesman's salaries and $180 to office salaries.
(f) Sundry manufacturing expenses requiring an outlay of $10,000 were paid.
(g) Factory overhead of 90% of the direct labor cost is charged to production,
(h) Cost of production completed for the month totaled $75,000, and finished goods in the shipping room at the end of October totaled $10,000.
(i) Customers were billed for $122,000 for shipments made during October.
(j) Customers paid $68,000 on account.
Required: (1) Record in T accounts the transactions for October using one work in process account.
(2) Close the income statement accounts to Income Summary. Close underapplied factory overhead to Cost of Goods Sold.

Inventory Valuation and Cost of Goods Sold for Samsung Electronics Ltd

Inventory Valuation; Cost of Goods Sold. The cost department of the Samsung Electronics Ltd made the following data and costs available for the year 20XX
:
Inventories:                                                  Jan. 1 Dec.               31 Dec. 31
Raw materials                                               S34,200                  $49,300
Work in process....                                         81,500                     42,350
Finished goods                                               48,600                        ?

Depreciation ON FACTORY Equipment  —                                 21,350
Interest earned                                                                                6,300
Freight-in                                                                                        8,600
Indirect labor                                                                                83,400
Raw materials purchased                                                          $364,000
 Direct labor                                                                               162,500
Miscellaneous factory overhead .                                                  47,900
 Purchases discounts                                                                       5,200

Finished goods inventory: January 1: 300 units; December 31: 420 units, all from current year's production.
Sold during 20xx— : 3,880 units at $220 per unit.

Required: (1) The unit cost of the finished goods inventory, December 31.
(2) The total value of the finished goods inventory, December 31.
(3) The cost of goods sold.
(4) The gross profit total and the gross profit per unit.

Analysis of Cost and Profit Ratios Sumsung Refrigerator Company

Cost and Profit Ratios. The records of the Sumsung Refrigerator Company show the following information for the three months ended March 31, 20xx

Materials purchased $1,946,700
Inventories, January 1, 20xx
:
Materials 268,000
Finished goods (100 refrigerators) 43,000
Direct labor 2,125,800
Factory overhead (40% variable) 764,000
Marketing expenses (all fixed) 516,000
General and administrative expenses (all fixed) 461,000
Sales (12,400 refrigerators) 6,634,000


Inventories, March 31, 20xx
:
Materials 167,000
Finished goods (200 refrigerators), costed at $395 each. No unfinished work on hand.

You are required to prepare : (1) An income statement for the period.
(2) The number of units manufactured.
(3) The unit cost of refrigerators manufactured.
(4) The gross profit per unit sold.
(5) The net income per unit sold.
(6) The ratio of gross profit to sales.
(7) The net income to sales percentage.
(8) The break-even point in sales dollars.

Cost of Goods Sold Statement of Assurance Manufacturing Company

Statement of Cost of Goods Sold. The following data relate to the Assurance Manufacturing Company:
                                                                                                       Inventories
                                                                                  Ending                     Beginning
Finished goods                                                           $95,000                  $1 10,000
Work in process                                                           80,000                      70,000
Direct materials                                                            95,000                      90,000
Costs incurred during the period:
Costs of goods available for sale                                                         $684,000
Total manufacturing costs                                                                      584,000
Factory overhead                                                                                1 67,000
Direct materials used                                                                             193,000
Required: Statement of cost of goods sold of Assurance Manufacturing Company, including all beginning and ending inventories. (AICPA adapted)


Cost of Goods Sold Statement; Unit Cost. The records of Assurance Manufacturing Company show the following information as of March 31, 19B:
Raw materials used                                 $440,000
Direct factory labor                                   290,000
Indirect factory labor                                   46,000
Light and power                                            4,260
Depreciation                                                 4,700
Repairs to machinery                                     5,800
Miscellaneous factory overhead                   29,000
Work in process inventory, April 1, 19A      41,200
Finished goods inventory, April 1, 19A        34,300
Work in process inventory, March 31, 19B  42,500
Finished goods inventory, March 31, 19B    31,500
During the year 18,000 units were completed.

Required: (1) A cost of goods sold statement for the year ended March 31, 19B.
(2) The unit cost of goods manufactured.
(3) The company applies factory overhead on the basis of 30% of direct factory labor cost. Determine the amount of over- or under applied factory overhead.

What are the Objectives of the auditor as per ISA 200?

ISA 200: Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing, the objectives of the auditor, per ISA 200 are: 

 

•  to obtain reasonable assurance about whether the financial statements as awhole are free from material misstatement, whether due to fraud or error. Thisallows the auditor to give an opinion on whether the financial statements have

• been prepared in accordance with the applicable financial reporting framework. to report on the financial statements, and communicate as required by the ISAs,in accordance with the auditor’s findings.

Where the auditor is unable to obtain reasonable assurance and a qualified opinion is insufficient, the auditor must disclaim an opinion or resign. The different types of opinions are covered in a later chapter. ISA 200 requires the auditor to:

1.  comply with all ISAs relevant to the audit
2.  comply with relevant ethical requirements
3.  plan and perform an audit with professional skepticism
4.  exercise professional judgement in planning and performing an audit
5.  obtain sufficient and appropriate audit evidence to allow him to obtain reasonable assurance

What an ISA generally contains?

The IAASB’s pronouncements do not override local laws or regulations. If local laws or regulations differ from, or conflict with, the IAASB’s standards then a professional accountant should not state that he has complied with the IAASB’s standards unless he has fully complied with all of those relevant to the engagement.
 

International Standards on Auditing (ISAs) are written in the context of an audit of financial statements by an independent auditor. They are to be adapted as necessary when applied to audits of other historical financial statements.

Each ISA generally contains:

• an introduction

• objectives

• definitions (if necessary)

• requirements which are shown by the word “shall” and are to be applied as relevant to the audit

• application and other explanatory material which is for guidance only.

ISQCs apply to all services carried out under the IAASB’s engagement standards (ISAs, ISREs, ISAEs and ISRSs).

The other international standards (ISREs, ISAEs and ISRSs) contain:

• basic principles and essential procedures (identified in bold type and by the word “should”), and

• related guidance in the form of explanatory and other material, including appendices.

The basic principles and procedures must be followed. In exceptional circumstances, a professional accountant may judge it necessary not to follow a relevant essential procedure in order to achieve their objectives. In these circumstances, the auditor must be prepared to justify the departure from the requirements of the standard.

The process of issuing auditing standards

Both national and international bodies produce or promulgate auditing standards. The examination requires knowledge of International Standards on Auditing (ISAs). ISAs are designed to be implemented internationally but there may be situations where a conflict may arise between an ISA and local audit requirements. National standard-setters are expected to aim for compatibility with ISAs as far as possible.

ISAs are produced the International Audit and Assurance Standards Board (IAASB), a committee of the International Federation of Accountants (IFAC). IFAC is an international organisation of professional accountancy bodies, including the ACCA.

Producing a new ISA
The process of producing an ISA is as follows:

•  A subject matter is chosen for detail analysis, study, with a view to eventually issuing an ISA.

• After a period of study and research, if there is agreement to proceed, anexposure draft is produced. The exposure draft is approved by the IAASB and then distributed widely amongst the profession and others for comment.

• Comments and proposed amendments are considered by the IAASB. The draft standard is then modified and approved by the IAASB.

• The new ISA is then published.

Are Auditor’s Associated with Financial Information?

In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipients of the report must form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.

Auditor’s Association with Financial Information

An auditor is associated with financial information when the auditor attaches a report to that information or consents to the use of the auditor’s name in a professional connection. If the auditor is not associated in this manner, third parties can assume no responsibility of the auditor. If the auditor learns that an entity is inappropriately using the auditor’s name in association with financial information, the auditor would require management to cease doing so and consider what further steps, if any, need to be taken, such as informing any regulatory authority and/or known third party users of the information of the inappropriate use of the auditor’s name in connection with the information. The auditor may, if necessary, take other action, for example, seeking legal advice.

A major development in the field of auditing has been the issuance of revised and /or redrafted International Standards on Auditing pursuant to the Clarity Project of IAASB. The  objective  of this project is to improve the clarity of International Standards on Auditing (ISAs).  The  IAASB  aims  to  set  high  quality  international  auditing  and  assurance  standards  that are understandable, clear and capable of consistent application, thereby serving  to  enhance  the  quality  and  uniformity  of  practice  worldwide.  The  Auditing  and  Assurance Standards Board has also laid out a strategy to match step with the IAASB  Clarity  Project.  In  the  year  2007,  the  Board  issued  several  revised/new  Standards pursuant to the IAASB Clarity Project.

What are the qualities an Auditor should have?

Auditors work as catalyst between shareholders and the company in regard to the true and fair view of financial statements. What qualifications make him perfect to become a good auditor. It is not enough to realise what an auditor should be. He is concerned with the reporting on financial matters of business and other institutions. Financial matters, inherently are to be set with the problems of human fallibility; errors and frauds are frequent. 

The qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. In short, all those personal qualities that go to make a good businessman contribute to the making of a good auditor. In addition, he must have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by adequate independence. 

In fact, Standards on Auditing mentions integrity, objectivity and independence as one of the basic principles. He must have a thorough knowledge of the general principles of law which govern matters with which he is likely to be in intimate contact. The Companies Act, 1956 and the Partnership Act, 1932 need special mention but mercantile law, specially the law relating to contracts, is no less important. Needless to say, where undertakings are governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is unavoidable.

He must pursue an intensive programme of theoretical education in subjects like financial and management accounting, general management, business and corporate laws, computers and information systems, taxation, economics, etc. Both practical training and theoretical education are equally necessary for the development of professional competence of an auditor for undertaking any kind of audit assignment. 

The auditor should be equipped not only with a sufficient knowledge of the way in which business generally is conducted but also with an understanding of the special features peculiar to a particular business whose accounts are under audit. SA-300 on ‘Audit Planning’ emphasises that an auditor should have adequate knowledge of the client’s business. The auditor, who holds a position of trust, must have the basic human qualities apart from the technical requirement of professional training and education. 

He is called upon constantly to critically review financial statements and it is obviously useless for him to attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles and techniques. Auditing is a profession calling for wide variety of knowledge to which no one has yet set a limit; the most useful part of the knowledge is probably that which cannot be learnt from books because its acquisition depends on the alertness of the mind in applying to ever varying circumstances, the fruits of his own observation and reflection; only he who is endowed with common sense in adequate measure can achieve it.

How to promulgate Auditing and Assurance Standards?

Procedure for Issuing the Statements on Standard Auditing Practices. Broadly, the following procedure is adopted for the formulation of Auditing and Assurance Standards.

(i) The Auditing and Assurance Standards Board (AASB) determines the broad areas in which the Standard on Auditing (SAs) need to be formulated and the priority in regard to the selection therefor.
(ii) In the preparation of SAs, the AASB is assisted by study groups constituted to consider specific subjects. In the formation of study groups, provision is made for participation of a cross-section of members of the Institute.
(iii) On the basis of the work of the study groups, an exposure draft of the proposed SA is prepared by the Board and issued for comments by members of the Institute.
(iv) After taking into consideration the comments received, the draft of the proposed SA is finalised by the AASB and submitted to the Council of the Institute.
(v) The Council of the Institute will consider the final draft of the proposed SA, and if necessary, modify the same in consultation with the AASB. The SA is issued under the authority of the Council.

Compliance with Documents Issued by the Institute

The Institute has, from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a number of matters. The ‘Statements’ have been issued with a view to securing compliance by members on matters which, in the opinion of the Council, are critical for the proper discharge of their functions. ‘Statements’ therefore are mandatory. Accordingly, while discharging their attest function, it will be the duty of the members of the Institute:
(a) to examine whether ‘Statements’ relating to accounting matters are complied with in the presentation of financial statements covered by their audit. In the event of any deviation from the ‘Statements’, it will be their duty to make adequate disclosures in their audit  reports so that the users of financial statements may be aware of such deviations; and

(b) to ensure that the ‘Statements’ relating to auditing matters are followed in the audit of financial information covered by their audit reports. If, for any reason, a member has not been able to perform an audit in accordance with such ‘Statements’, his report should draw attention to the material departures thereform. ‘

Guidance Notes’ are primarily designed to provide guidance to members on matters which may arise in the course of their professional work and on which they may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in nature. A member should ordinarily follow recommendations in a guidance note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so. Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance note relating to an accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary.

International Auditing and Assurance Standards Board

In  1977,  the International  Federation  of  Accountants  (IFAC)  was  set  up  with  a  view  to bringing harmony in the profession of accountancy on an international scale.   In pursuing

this  mission,  the  IFAC  Board  has  established  the  International  Auditing  and  Assurance

Standards  Board  (IAASB)  to  develop  and  issue,  in  the  public  interest  and  under  its  own

authority,  high  quality  auditing  and  assurance  standards  for  use  around  the  world.    The

IFAC Board has determined that designation of the IAASB as the responsible body, under

its own authority and within its stated terms of reference, best serves the public interest in

achieving this aspect of its mission.

The  IAASB  functions  as  an  independent  standard-setting  body  under  the  auspices  of

IFAC.    The  objective  of  the  IAASB  is  to  serve  the  public  interest  by  setting  high  quality

auditing and assurance standards and by facilitating the convergence of international and

national  standards,  thereby  enhancing  the  quality  and  uniformity  of  practice  throughout

the  world  and  strengthening  public  confidence  in  the  global  auditing  and  assurance

profession.  The IAASB achieves this objective by:

a)  Establishing high quality auditing standards and guidance for financial statement audits that

are  generally accepted  and recognized by investors, auditors, governments, banking

regulators, securities regulators and other key stakeholders across the world;

b) Establishing  high  quality  standards  and  guidance  for  other  types  of  assurance  services  on

both financial and non-financial matters;

c) Establishing high quality standards and guidance for other related services;

d)  Establishing high quality standards for quality control  covering the  scope  of services

addressed by the IAASB; and

e)  Publishing  other  pronouncements  on  auditing  and  assurance  matters,  thereby  advancing

public understanding  of the roles and responsibility of professional auditors and assurance

service providers.