CMA115D: Cost and Management Accounting I Notes (TUT / UNISA / CUT Exam Study Guide)

These notes provide an intensive, exam‑oriented summary of Cost and Management Accounting I for students in South Africa, especially those registered for CMA115D at Tshwane University of Technology (TUT), DSC1630 / DSC1520 at UNISA, and ACC15CO / CACC15A at Central University of Technology (CUT). The focus is on concepts, formats and calculation steps commonly examined in TUT: National Diploma in Internal Auditing and related diplomas. Worked examples and exam tips are integrated to support preparation for semester tests, coursework and final exams.

1. Introduction to Cost and Management Accounting (CMA115D / DSC1630 / ACC15CO)

1.1 Nature and Purpose of Cost and Management Accounting

Cost accounting and management accounting are core subjects in first‑year accounting for the National Diploma: Internal Auditing at TUT, as well as for UNISA modules such as DSC1630 – Introductory Financial Accounting and Costing, and CUT modules such as ACC15CO – Cost Accounting I. Although these terms are related, they are not identical.

Cost Accounting
Cost accounting focuses on:

Recording, classifying and summarising costs of products, services, processes and departments.
Determining unit costs for inventory valuation and cost control.
Providing detailed cost information to both financial and management accounting.

Main objectives:

Ascertainment of cost
- What is the cost per unit of a product (e.g. a chair) or service (e.g. a repair job)?
- Used for stock valuation in financial accounting and for pricing decisions.
Cost control
- Comparing actual costs to standards or budgets.
- Identifying variances and investigating causes.
Cost reduction and efficiency improvement
- Analysing processes to eliminate waste and improve productivity.
Assisting in decision‑making
- Providing relevant cost data for short‑term and long‑term decisions.

Management Accounting
Management accounting has a broader focus:

Provides financial and non‑financial information to internal management.
Helps managers in planning, controlling, decision‑making and performance evaluation.
Includes topics such as budgets, variance analysis, CVP analysis and capital budgeting.

Key features:

Future‑oriented: Focus on planning and forecasting.
Internal focus: Information mainly for internal users (managers, supervisors).
Flexible format: Reports are prepared as needed, not according to IFRS or Companies Act.

Comparison with Financial Accounting

Aspect	Financial Accounting	Cost & Management Accounting
Main users	External (shareholders, creditors, SARS)	Internal (management at all levels)
Main focus	Whole business performance	Products, departments, processes, decisions
Time orientation	Historical (“what happened”)	Mostly future‑oriented, some historical
Rules	IFRS, Companies Act, GAAP	No strict external rules; internal policies
Frequency of reports	Annual, interim	As needed (daily, weekly, monthly, etc.)
Level of detail	Aggregated	Very detailed, unit and departmental level

For exam purposes (especially at TUT and UNISA), you are often asked to:

Define cost accounting and management accounting.
Differentiate between financial and management accounting in a table format.
Explain the role of cost and management accounting in organisations.

1.2 Role in Internal Auditing and Business Decision‑Making

In the National Diploma: Internal Auditing at TUT, CMA115D links directly to modules like IAD115D – Internal Audit I and AFA115D – Accounting for Financial Analysis I. Internal auditors must:

Understand how costs are captured and allocated.
Assess the reliability of the cost information system.
Evaluate internal controls over purchasing, inventory, labour and overhead.
Check whether management decisions (e.g. pricing, product discontinuation) are based on reliable cost data.

Examples of how cost and management accounting supports decision‑making:

Pricing and tender decisions
A factory in Pretoria manufactures 10,000 units of a product. A municipal tender requires a quote for 3,000 units. Management must know:
- Full cost per unit (for break‑even).
- Variable cost per unit (for special‑order pricing).
- Relevant fixed costs.
Make‑or‑buy decisions
A company must decide whether to produce a component in‑house or buy from a supplier in Johannesburg. Decision requires:
- Comparison of relevant costs (materials, labour, variable overhead).
- Consideration of opportunity costs of using internal capacity.
Shut‑down or continuation of a department
Retail chain considers closing a loss‑making department. Cost analysis should:
- Separate avoidable from unavoidable fixed costs.
- Quantify contribution margin lost vs. savings in fixed costs.
Budgeting and performance evaluation
Management uses budgets to set performance targets. Actual performance is compared to budget using variance analysis.

Internal auditors at TUT’s partner organisations frequently evaluate:

Whether there is segregation of duties in cost processes.
Accuracy of standard costing and variance reports.
Appropriateness of overhead allocation bases.
Completeness and accuracy of inventory records.

1.3 Basic Cost Concepts and Cost Objects

A cost is the monetary value of resources sacrificed or forgone to achieve a specific objective. A cost object is any item for which cost is measured. Cost objects can be:

A specific product (e.g. a TUT‑branded hoodie).
A job (e.g. Job 215 for a custom furniture order).
A department (e.g. Maintenance Department).
A service (e.g. an internal audit assignment).

Key cost terms tested in CMA115D / DSC1630 / ACC15CO:

Cost unit – a unit of product or service for which cost is ascertained (e.g. per litre, per kilometre, per guest night).
Cost centre – a location, function or item of equipment for which costs are accumulated (e.g. Assembly Department, Canteen).
Profit centre – a segment for which both costs and revenues are measured (e.g. a retail branch).
Investment centre – a division responsible for profits and capital employed.

Example
A manufacturing company in Pretoria has:

Production departments: Machining, Assembly.
Service departments: Maintenance, Canteen.

Here:

Machining and Assembly are production cost centres.
Maintenance and Canteen are service cost centres, whose costs must be re‑apportioned to production departments.
Each completed product is a cost unit.

Exam questions frequently ask candidates to:

Identify cost objects from a scenario.
Classify departments as cost centres, profit centres or investment centres.
Explain why defining cost objects is essential for accurate costing.

2. Classification of Costs (TUT CMA115D / UNISA DSC1630 / CUT ACC15CO)

Exam success in Cost and Management Accounting I heavily depends on the ability to classify costs correctly. Many MCQs, short questions and calculation questions in CMA115D, DSC1520, and ACC15CO are built around cost classification.

2.1 Direct and Indirect Costs

Direct costs are costs that can be directly and conveniently traced to a cost object.
Indirect costs cannot be traced easily and are allocated using some basis.

Direct Material (DM)

Raw materials that become a physical part of the finished product and whose cost can be traced directly to the product.
Examples:
- Wood used to manufacture tables.
- Fabric used in clothing manufacture.
- Bricks in building construction.

Direct Labour (DL)

Wages paid to employees who physically convert materials into finished products.
Examples:
- Machine operators.
- Assembly workers.
- Carpenters in a furniture factory.

Direct Expenses

Any other direct costs (excluding materials and labour) that can be directly identified with a cost object.
Examples:
- Royalties paid per unit of production.
- Hire of special equipment for a specific contract.

Prime Cost = Direct Material + Direct Labour + Direct Expenses.

Indirect Costs (Overheads)

Cannot be directly attributed to a specific cost unit; incurred for the benefit of multiple cost units.
Examples:
- Factory supervisor’s salary.
- Factory rent and rates.
- Depreciation of factory machinery.
- Factory electricity and water.

Indirect costs for production are known as manufacturing overheads or factory overheads (FOH).

Example Question (Classification)
Classify each of the following as direct material, direct labour, production overhead, administrative overhead, or selling & distribution overhead:

Wages of assembly line workers – Direct labour.
Depreciation on factory equipment – Production overhead.
Marketing manager’s salary – Selling & distribution overhead.
Screws and nails used in furniture – usually Indirect material (production overhead) if not economically traceable per unit.
Legal fees for drafting a contract for a specific once‑off project – Direct expense for that project.

2.2 Cost Behaviour: Fixed, Variable, Semi‑Variable, Step Costs

Understanding cost behaviour is crucial for cost‑volume‑profit (CVP) analysis, budgeting, and break‑even calculations – standard exam content in CMA115D and UNISA DSC1630.

Variable Costs

Total variable cost changes in direct proportion with changes in the level of activity.
Variable cost per unit remains constant within the relevant range.

Example:

Direct material cost is R20 per unit.
If production increases from 1,000 to 2,000 units:
- Total DM cost rises from R20,000 to R40,000.
- DM cost per unit stays at R20.

Fixed Costs

Total fixed cost remains constant regardless of activity level (within the relevant range).
Fixed cost per unit varies inversely with the level of activity.

Example:

Factory rent is R50,000 per month.
At 10,000 units: fixed cost per unit = R50,000 ÷ 10,000 = R5.
At 5,000 units: fixed cost per unit = R50,000 ÷ 5,000 = R10.

Common fixed costs:

Factory building depreciation.
Salaries of production managers.
Factory insurance.

Semi‑Variable (Mixed) Costs

Semi‑variable costs contain both a fixed and a variable element.

Examples:

Electricity (fixed minimum charge plus variable usage).
Telephone costs (subscription plus per‑minute charge).
Maintenance costs (fixed contracts plus variable parts).

Formula:

Total semi‑variable cost = Fixed portion + (Variable rate × Units of activity)

In exams, the high‑low method is often used to split semi‑variable costs into fixed and variable components.

Step (Semi‑Fixed) Costs

Remain fixed over certain ranges of activity but jump to a higher level when capacity is exceeded.
Example:
- One supervisor can supervise up to 10 workers at R15,000 per month.
- If an 11th worker is hired, a second supervisor is required, and cost jumps to R30,000.

2.3 Functional Classification: Production, Administration, Selling & Distribution, Finance

Costs can also be classified by function within the organisation.

Production (Manufacturing) Costs
- Costs incurred in converting raw materials into finished goods.
- Include:
  - Direct material.
  - Direct labour.
  - Production overheads (factory rent, factory supervisor salaries, factory lighting, machinery depreciation).
- These costs are inventoriable – they become part of the cost of stock until goods are sold.
Administration Costs
- Costs relating to general management, accounting, HR, and office functions.
- Examples:
  - Salaries of office staff.
  - Office rent and rates.
  - Audit and legal fees (general, not specifically for a project).
- Treated as period costs – expensed in the period incurred.
Selling and Distribution Costs
- Costs incurred in marketing, selling and delivering products to customers.
- Examples:
  - Sales representatives’ salaries and commissions.
  - Advertising and promotion.
  - Delivery vehicle expenses.
  - Warehousing and packing.
Finance (Interest) Costs
- Interest on borrowings, bank charges.
- Often treated separately for decision‑making, as they are usually not part of product cost in management accounting (though IFRS treatment can differ for financial reporting).

Example Table of Functional Classification

Cost Item	Functional Classification
Factory foreman’s salary	Production overhead
Accountant’s salary	Administration cost
Fuel for delivery vehicles	Selling & distribution cost
Interest on bank overdraft	Finance cost
Advertising in a national newspaper	Selling & distribution cost
Office building rent	Administration cost

2.4 Other Important Classifications

Product vs. Period Costs

Product costs: All costs of manufacturing a product (DM, DL, FOH). Included in inventory until the product is sold.
Period costs: Non‑manufacturing costs (administration, selling, finance). Expensed in the period incurred.

Relevant vs. Irrelevant Costs

Used in decision‑making (usually a later module like CMA215D / UNISA DSC2602, but basics often appear in CMA115D tests):

Relevant costs: Future costs that differ between alternatives.
Irrelevant costs: Sunk costs, past expenses, or future costs that do not differ between options.

Controllable vs. Uncontrollable Costs

Controllable: Costs that a manager can significantly influence.
Uncontrollable: Costs that a manager cannot influence within a given time frame.

Opportunity Cost

Value of the benefit sacrificed by choosing one alternative over another.
Important in special order, make‑or‑buy and shutdown decisions.

3. Costing Systems and Methods (Job, Batch, Process & Service Costing)

CMA115D, UNISA DSC1630 and CUT ACC15CO syllabi all require a solid understanding of costing systems used in different industries. Internal auditors must be able to understand and evaluate these systems during audit assignments.

3.1 Overview of Costing Systems

Common costing systems include:

Job Costing
Batch Costing
Process Costing
Contract Costing (often covered briefly)
Service Costing / Operating Costing

A company may use a hybrid of these methods depending on its operations.

3.2 Job Costing (Custom / Specific Orders)

Job costing is used where:

Production is by specific order.
Each job is different and may require separate costing.
Examples:
- Custom furniture (e.g. kitchen cupboards).
- Printing of personalised brochures.
- Internal audit investigations (charged per engagement).

Job Cost Sheet

A typical job cost sheet records:

Job number.
Customer name.
Direct materials used.
Direct labour hours and rate.
Overhead applied (using a predetermined rate).
Total cost and cost per unit.

Predetermined Overhead Rate (POHR)

Because actual overhead is known only at period end, overhead is often applied using:

POHR = Budgeted manufacturing overhead / Budgeted activity (e.g. labour hours, machine hours)

Example:

Budgeted FOH for the year: R600,000.
Budgeted direct labour hours: 30,000 hours.
POHR = R600,000 ÷ 30,000 = R20 per DLH.

If Job 215 uses 200 direct labour hours, overhead applied = 200 × R20 = R4,000.

Worked Example – Job Costing

A TUT internal audit student is placed at a furniture manufacturer:

Job 101: 50 chairs ordered by a hotel.
Direct materials: R12,000.
Direct labour: 160 hours @ R80/hour = R12,800.
Overhead absorption rate: R25 per direct labour hour.

Calculate:

Overhead = 160 × 25 = R4,000.
Total job cost = 12,000 + 12,800 + 4,000 = R28,800.
Cost per chair = 28,800 ÷ 50 = R576.

If the company applies a markup of 25% on cost:

Selling price per chair = 576 × 1.25 = R720.

Job costing questions are common in CMA115D tests and require:

Preparation of a job cost sheet.
Calculation of overhead applied.
Sometimes, analysis of under‑ or over‑absorption of overhead.

3.3 Batch Costing

Batch costing is appropriate when:

Identical units are produced in batches.
Cost is accumulated for the batch, then divided by the number of units.

Examples:

Bakeries producing batches of loaves.
Pharmaceutical companies producing batches of tablets.
Clothing factories producing a batch of T‑shirts in size M.

Cost per unit = Total batch cost ÷ Number of units in the batch.

Batch costing questions often require:

Calculating optimal batch size (linked to EOQ – often in later modules).
Determining cost per unit for each batch.
Comparing profitability across batches.

3.4 Process Costing (Mass Production)

Process costing is used where:

Production is continuous (e.g. chemical plants, food processing).
Units are homogeneous.
Costs are accumulated per process (or department) over a period.

Examples:

Oil refinery (Process 1: Distillation; Process 2: Cracking).
Soft drink manufacturer (Mixing, Bottling, Packing).
Cement factory.

Key Features:

Costs are collected for each process or department.
Output may be in different stages of completion (work in progress).
Equivalent units concept is used when closing WIP exists.

Basic Process Costing Steps

Calculate units to be accounted for:
- Opening WIP + units started = total units to account for.
Determine units completed and transferred, and closing WIP.
Compute equivalent units for materials and conversion costs.
Calculate cost per equivalent unit:
- Cost per equivalent unit = (Opening WIP cost + current period cost) ÷ equivalent units.
Assign costs to:
- Units completed and transferred.
- Closing WIP.

In CMA115D, early process costing questions may simplify by assuming:

No opening WIP.
All materials added at the start of the process.
One combined conversion cost (labour + overhead).

Example – Simplified Process Costing

Process A, March:

Units introduced: 10,000.
Units completed and transferred: 8,000.
Closing WIP: 2,000 units (100% materials, 50% conversion).
Costs:
- Materials: R40,000.
- Conversion: R30,000.

Equivalent units:

Materials:
- Completed: 8,000 (100%).
- Closing WIP: 2,000 (100%).
- Total equivalent units materials = 10,000.
Conversion:
- Completed: 8,000 (100%).
- Closing WIP: 2,000 × 50% = 1,000.
- Total equivalent units conversion = 9,000.

Cost per equivalent unit:

Materials: 40,000 ÷ 10,000 = R4.00.
Conversion: 30,000 ÷ 9,000 ≈ R3.33.

Cost allocation:

Completed units (8,000):
- Materials: 8,000 × 4.00 = 32,000.
- Conversion: 8,000 × 3.33 ≈ 26,640.
- Total: ≈ R58,640.
Closing WIP (2,000):
- Materials: 2,000 × 4.00 = 8,000.
- Conversion: 1,000 × 3.33 ≈ 3,330.
- Total: ≈ R11,330.

Total cost accounted for: 58,640 + 11,330 ≈ R69,970 (slight rounding difference due to decimals).

Exam questions require showing:

Physical flow of units.
Equivalent units calculation.
Cost per equivalent unit.
Cost of units transferred out and WIP.

3.5 Joint and By‑Product Costing (Overview)

In some processes, a single input yields multiple products simultaneously. This gives rise to joint products and by‑products.

Joint products: Two or more products of significant value produced from a common process up to a split‑off point.
- Example: In a petroleum refinery, petrol, diesel and paraffin are joint products.
By‑products: Products of relatively low value compared to main products.
- Example: Sawdust in a sawmill.

Joint cost allocation methods (often studied later but may be introduced):

Physical units method.
Sales value at split‑off.
Net realizable value (NRV) method.

Key exam point: joint costs are sunk with respect to further processing decisions; for decisions about whether to process further, only incremental costs and revenues matter.

3.6 Service / Operating Costing

Service costing (also called operating costing) is used for service organisations such as:

Transport companies (cost per passenger‑km or ton‑km).
Hospitals (cost per patient‑day).
Hotels (cost per room‑night).
Educational institutions (cost per student).

Typical cost unit examples:

Service Industry	Cost Unit Example
Bus company	Passenger‑kilometre
Goods transport	Ton‑kilometre
Hospital	Patient‑day
Hotel	Room‑night
School / university	Student per semester

Example – Bus Company Operating Costing

A bus operates between Pretoria and Johannesburg:

Distance per round trip: 120 km.
Number of round trips per day: 4.
Average number of passengers per trip: 40.
Operating days per month: 25.
Monthly operating costs: R180,000.

Step 1: Calculate total passenger‑kilometres:

Distance per day: 4 trips × 120 km = 480 km.
Passenger‑km per day: 480 km × 40 passengers = 19,200 passenger‑km.
Per month: 19,200 × 25 = 480,000 passenger‑km.

Step 2: Cost per passenger‑km:

Cost per passenger‑km = Total cost ÷ total passenger‑km = 180,000 ÷ 480,000 = R0.375.

To determine a fare with a 20% profit margin:

Required revenue per passenger‑km = 0.375 × 1.20 = R0.45.
Fare for one 120 km trip = 0.45 × 120 = R54.

In exams, you may be asked to:

Prepare a cost statement per cost unit.
Separate fixed and variable costs.
Compute fares or charges with required profit margins.

4. Overheads: Allocation, Apportionment, Absorption and Activity‑Based Costing

Overhead costing is a critical topic in CMA115D at TUT, DSC1630 at UNISA, and ACC15CO at CUT. Many internal audit assignments involve reviewing how overheads are allocated to departments and products.

4.1 Overhead Terminology and Steps

Overheads are indirect costs: they cannot be directly traced to products. Managing overheads involves four main stages:

Collection of overheads by cost centres.
Allocation and apportionment of overheads to production and service departments.
Re‑apportionment (secondary distribution) of service department overheads to production departments.
Absorption of production department overheads into product cost using an appropriate basis.

Allocation

Charging a whole cost to a particular cost centre because it is clearly identifiable with that centre.
Example: Rent of the maintenance workshop allocated entirely to Maintenance Department.

Apportionment

Distributing a cost between several cost centres on a fair and rational basis.
Example: Factory rent apportioned to departments based on floor area.

4.2 Primary Distribution of Overheads

In primary distribution, overheads are allocated/apportioned to all departments (production and service).

Common bases of apportionment:

Overhead Type	Typical Basis
Rent, rates, building insurance	Floor area (square metres)
Factory lighting	Number of light points / floor area
Power for machines	Machine hours / kilowatt rating
Canteen, staff welfare	Number of employees
Depreciation of machinery	Value of machinery / machine hours
Material handling costs	Number of material requisitions / weight of materials
Supervision	Direct labour hours / number of employees

Example – Primary Distribution Table

Assume a factory has three departments:

Production: A, B.
Service: C.

Overheads and apportionment bases:

Factory rent R40,000 – based on floor area.
Power R20,000 – based on machine hours.
Canteen R10,000 – based on number of employees.

Data:

Department	Floor Area (m²)	Machine Hours	Employees
A	2,000	4,000	40
B	1,500	3,000	30
C	500	1,000	10
Total	4,000	8,000	80

Apportionment:

Rent:
- Rate: 40,000 ÷ 4,000 = R10 per m².
- A: 2,000 × 10 = 20,000.
- B: 1,500 × 10 = 15,000.
- C: 500 × 10 = 5,000.
Power:
- Rate: 20,000 ÷ 8,000 = R2.50 per MH.
- A: 4,000 × 2.50 = 10,000.
- B: 3,000 × 2.50 = 7,500.
- C: 1,000 × 2.50 = 2,500.
Canteen:
- Rate: 10,000 ÷ 80 = R125 per employee.
- A: 40 × 125 = 5,000.
- B: 30 × 125 = 3,750.
- C: 10 × 125 = 1,250.

Primary distribution summary:

Department	Rent	Power	Canteen	Total Overhead
A	20,000	10,000	5,000	35,000
B	15,000	7,500	3,750	26,250
C	5,000	2,500	1,250	8,750
Total	40,000	20,000	10,000	70,000

4.3 Secondary Distribution (Re‑apportionment of Service Overheads)

Service department overheads must be re‑distributed to production departments since only production departments directly work on products.

Methods of re‑apportionment:

Direct method
- Ignore services rendered between service departments.
- Allocate service department costs only to production departments.
Step‑down (sequential) method
- Rank service departments (most service provided to others first).
- Apportion first service department’s cost to other departments, then proceed.
Reciprocal method
- Recognises mutual services between service departments.
- Uses algebraic equations or repeated distribution to allocate costs.

In CMA115D and ACC15CO, most exam questions use direct or step‑down methods, sometimes repeated distribution.

Example – Step‑down Method

Continuing the earlier example, suppose Department C’s overhead (R8,750) is apportioned to A and B based on number of employees:

A: 40 employees.
B: 30 employees.
Total: 70 employees (excluding C itself, as we step down).

Rate: 8,750 ÷ 70 ≈ R125 per employee.

A: 40 × 125 = 5,000.
B: 30 × 125 = 3,750.

Final overheads:

Department A: 35,000 + 5,000 = R40,000.
Department B: 26,250 + 3,750 = R30,000.

Total remains R70,000, now fully assigned to production departments.

4.4 Overhead Absorption Rates (OARs)

Once total overheads per production department are known, overheads are absorbed into products using Overhead Absorption Rates (OARs).

Common bases:

Machine hours (MH) – for capital‑intensive departments.
Direct labour hours (DLH) – for labour‑intensive departments.
Direct wages – percentage of direct wages.

OAR Formula

OAR (per MH or DLH) = Budgeted overhead for department / Budgeted activity (MH or DLH)

Example:

Department A has budgeted overhead of R40,000 and budgeted 4,000 machine hours.
OAR = 40,000 ÷ 4,000 = R10 per MH.

If a job uses 120 machine hours in Department A:

Overhead absorbed = 120 × 10 = R1,200.

Under‑ and Over‑Absorption of Overhead

Since OARs are based on budgeted data, actual overhead incurred and actual hours may differ, causing:

Under‑absorption: Actual overhead > absorbed overhead.
Over‑absorption: Actual overhead < absorbed overhead.

Example:

Budgeted overhead: R200,000.
Budgeted machine hours: 10,000.
OAR: R20 per MH.
Actual machine hours: 9,000.
Overhead absorbed: 9,000 × 20 = R180,000.
Actual overhead incurred: R190,000.
Under‑absorption: 190,000 − 180,000 = R10,000.

Treatment in exams:

Under/over absorption is recorded in an overhead adjustment account.
Small differences may be written off to Cost of Sales.
Larger differences may be pro‑rated between cost of sales and inventory.

Internal auditors should assess whether overhead absorption rates are:

Based on recent, realistic budgets.
Reviewed regularly.
Consistently applied across jobs/departments.

4.5 Activity‑Based Costing (ABC) – Introductory Perspective

While classical overhead absorption uses a single basis per department, Activity‑Based Costing (ABC) uses multiple cost drivers to improve accuracy.

In ABC:

Overheads are grouped into cost pools, each related to an activity (e.g. machine setup, inspections, material handling).
A cost driver is identified for each pool (e.g. number of setups, inspection hours, material movements).
Overheads are allocated to products based on their consumption of activities.

Examples of cost drivers:

Number of setups for setup costs.
Number of purchase orders for purchasing department costs.
Number of deliveries for distribution costs.

ABC is particularly useful when:

Overheads are a large proportion of total costs.
There is a diverse product range with varying consumption of support activities.
Traditional methods cause product cost distortion (e.g. simple products overcosted, complex products undercosted).

In early‑level modules like CMA115D, ABC may be treated conceptually or with simple numerical examples. Core concepts students must know:

Definition of activity, cost pool and cost driver.
Steps in ABC:
1. Identify activities.
2. Create cost pools.
3. Determine cost drivers.
4. Compute activity rates (cost per driver unit).
5. Charge costs to products based on usage.

5. Cost Accounting Records, Cost Sheets and Basic CVP Analysis

This section brings many earlier concepts together into formats commonly examined in CMA115D (TUT), DSC1630 (UNISA) and ACC15CO (CUT), and highlights their relevance for internal auditing and management decision‑making.

5.1 Cost Sheet / Cost Statement Format

A cost sheet summarises different elements of cost for a period or for a specific job/batch. The standard exam format:

Prime cost
= Direct materials + Direct labour + Direct expenses.
Factory / Works cost
= Prime cost + Factory overhead – net change in WIP.
Cost of production
= Factory cost + Administration overhead – net change in finished goods stock.
Cost of sales
= Cost of production of goods sold + Selling & distribution overheads.
Profit
= Sales – Cost of sales.
Sales
= Cost of sales + Profit (or obtained from data).

Example – Cost Sheet for a Manufacturing Firm

Data for Mpho Manufacturers for the year ended 31 December:

Opening raw materials: R30,000.
Purchases of raw materials: R200,000.
Closing raw materials: R20,000.
Direct labour: R150,000.
Direct expenses: R10,000.
Factory overhead: R120,000.
Opening WIP: R15,000.
Closing WIP: R25,000.
Administration overhead: R60,000.
Opening finished goods: R40,000.
Closing finished goods: R35,000.
Selling and distribution overhead: R50,000.
Sales: R650,000.

Step 1: Direct materials consumed:

DM consumed = Opening RM + Purchases − Closing RM
= 30,000 + 200,000 − 20,000 = R210,000.

Step 2: Prime cost:

Prime cost = DM consumed + DL + Direct expenses
= 210,000 + 150,000 + 10,000
= R370,000.

Step 3: Factory cost:

Factory cost before WIP adjustment:
- = Prime cost + Factory overhead
- = 370,000 + 120,000 = 490,000.
Adjust WIP:
- Factory cost = 490,000 + Opening WIP − Closing WIP
- = 490,000 + 15,000 − 25,000 = R480,000.

Step 4: Cost of production:

Cost of production before finished goods adjustment:
- = Factory cost + Administration overhead
- = 480,000 + 60,000 = 540,000.
Adjust finished goods:
- Cost of goods available for sale = Opening finished goods + Cost of production
- = 40,000 + 540,000 = 580,000.
- Cost of goods sold (before S&D) = 580,000 − Closing finished goods
- = 580,000 − 35,000 = R545,000.

Step 5: Cost of sales:

Cost of sales = Cost of goods sold + S&D overhead
= 545,000 + 50,000 = R595,000.

Step 6: Profit:

Profit = Sales − Cost of sales = 650,000 − 595,000 = R55,000.

Exam Presentation

Prepare a nicely formatted cost statement:

Mpho Manufacturers
Cost Statement for the year ended 31 December

Direct materials consumed … R210,000
Direct labour ………………… R150,000
Direct expenses ……………… R10,000
Prime cost ………………… R370,000
Factory overhead …………… R120,000
Factory cost (before WIP) R490,000
Add: Opening WIP ………… R15,000
Less: Closing WIP ………… (R25,000)
Factory cost ……………… R480,000
Administration overhead … R60,000
Cost of production …… R540,000
Add: Opening finished goods R40,000
Less: Closing finished goods (R35,000)
Cost of goods sold …… R545,000
Selling & distribution OH … R50,000
Cost of sales …………… R595,000
Sales ……………………… R650,000
Profit …………………… R55,000

Internal auditors should check:

Whether classification of costs (production vs period) is consistent with policy.
Accuracy and validity of opening/closing inventory figures.
Reasonableness of overhead allocations.

5.2 Material, Labour and Overhead Control (Introductory)

While detailed material and labour control is often expanded in higher modules, CMA115D and equivalent modules introduce basic controls.

Material Control

Objectives:

Ensure enough material is available to meet production needs.
Avoid over‑stocking and under‑stocking.
Minimise ordering, holding and stock‑out costs.

Key documents:

Material requisition note.
Goods received note (GRN).
Bin cards and stores ledger.

Labour Control

Timekeeping systems (clock cards, biometric systems).
Job cards to record labour hours per job.
Overtime control and approval procedures.

Overhead Control

Budgeting of overheads.
Use of standard rates for absorption.
Regular comparison of actual vs budget and investigation of large variances.

Internal auditors evaluate:

Adequacy of documentation and authorisation.
Segregation of duties between ordering, receiving, recording and paying.
Physical security of inventory.

5.3 Cost‑Volume‑Profit (CVP) Analysis and Break‑Even (Intro)

Most South African first‑year cost accounting modules, including CMA115D, UNISA DSC1630 and CUT ACC15CO, include basic CVP analysis.

Core concepts:

Selling price per unit (SP).
Variable cost per unit (VC).
Contribution per unit = SP − VC.
Total contribution = Total sales − total variable costs.
Contribution margin ratio (C/S ratio) = Contribution ÷ Sales.
Fixed costs (FC).
Break‑even point (BEP): level of sales where profit = 0.

Break‑Even Formulas

BEP (units):

BEP units = Fixed costs ÷ Contribution per unit

BEP (sales revenue):

BEP sales = Fixed costs ÷ C/S ratio

Profit at given sales volume:

Profit = (Contribution per unit × units sold) − Fixed costs

Example – Single Product CVP

A company manufactures calculators:

Selling price: R300 per unit.
Variable cost: R180 per unit.
Fixed costs: R240,000 per year.

Calculate:

Contribution per unit:
- = 300 − 180 = R120.
Break‑even units:
- = 240,000 ÷ 120 = 2,000 units.
C/S ratio:
- Contribution per unit ÷ Selling price = 120 ÷ 300 = 0.4 (40%).
Break‑even sales (Rand):
- = 240,000 ÷ 0.4 = R600,000.

If the company sells 3,000 units:

Total contribution = 3,000 × 120 = R360,000.
Profit = 360,000 − 240,000 = R120,000.

Margin of Safety (MOS)

Measures how much sales can drop before reaching break‑even.

MOS (units) = Actual or budgeted sales units − BEP units.
MOS (%) = MOS (units) ÷ Actual or budgeted sales units × 100.

Continuing the example:

If budgeted sales = 3,000 units:
- MOS = 3,000 − 2,000 = 1,000 units.
- MOS % = 1,000 ÷ 3,000 × 100 ≈ 33.33%.

A higher MOS indicates lower risk of making a loss.

Assumptions of CVP Analysis

Selling price per unit is constant.
Variable cost per unit is constant.
Total fixed cost remains constant within relevant range.
All output produced is sold (no change in inventory).
Sales mix is constant (if multiple products).

Exam questions often require:

Calculation of BEP, target profit, MOS.
“What‑if” analysis: effect of changes in selling price, costs or volume on profit.
Basic interpretation of results.

5.4 CVP and Internal Auditing Implications

Internal auditors in training (National Diploma at TUT, BCompt at UNISA, BAcc at CUT) should understand that:

CVP is a planning tool, not a precise predictor.
Real‑world deviations from assumptions must be considered.
Management may take riskier pricing or volume decisions if CVP analysis is misunderstood or misapplied.

Key audit considerations:

Integrity of input data
- Are selling prices, variable costs and fixed costs based on reliable and current information?
- Are overheads correctly separated into fixed and variable portions?
Appropriateness of assumptions
- Are capacity constraints, market factors and product mix considered?
- Are scenario analyses (sensitivity tests) performed?
Use in budgeting and performance measurement
- Are CVP analyses used to set realistic budgets and performance targets?
- Are managers incentivised based solely on volume, risking overproduction?

This study guide offers a structured foundation in Cost and Management Accounting I with direct relevance to CMA115D at TUT, DSC1630 / DSC1520 at UNISA, and ACC15CO / CACC15A at CUT, aligned with the competencies required in the National Diploma: Internal Auditing. Mastery of these principles, formats and calculation methods is essential not only for passing exams but also for effective participation in internal audit and management accounting functions in South African organisations.