02 Cost Theory v. Good

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.
CMA SIRAJ MAWANI. PH. 9096299640
COSTING- THEORY
CHAPTER-1 Basic Concepts & Product Cost sheet Q1. Define Cost Accounting, its advantages and li itation! Cost Accounting" Cost accounting is accounting for cost, aimed at providing cost data, statements and reports for the purpose of managerial decision making. Cost Accounting is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. !he term "costing# and "cost accounting$ are many times used interchangeably. %o&ever, the scope of cost accounting is broader than that of costing &hich merely focuses on cost ascertainment. 'ollo&ing functional activities are included in the scope of cost accounting( 1. *. ,. .. /. Cost )ook keeping ( It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services. Cost +ystem ( +ystems and procedures are devised for proper accounting for costs. Cost Analysis ( It involves an investigation into the causes of actual costs varying from the planned costs and fi-ation of responsibility for cost increases. Cost Comparisons ( Cost accounting also includes comparisons bet&een cost from alternative technologies, cost of different products and activities, and cost of same product or service over a period of time. Cost Control ( An important function of cost accounting is utili0ation of cost information for e-ercising control. !his involves an e-amination of each cost in the light of benefit derived from incurrence of the cost.
# portance and Advantages of Cost Accounting !he primary advantages of Cost Accounting +ystem are as under( 1a2 Profit $easure ent and Anal%sis( Costs should be accurately ascertained and matched &ith revenues to measure profits of a firm. 'urther, Cost Accounting is useful for identifying the e-act causes for decrease or increase in the profit 3 loss of the business. Cost Reduction( !he application of cost reduction techniques, operations research techniques and value analysis techniques , helps in achieving the ob4ective of economy in concern#s operations. Continuous efforts are being made by the business organi0ation for finding ne& and improved methods for reducing costs Cost Co parison and Cost Control( Cost comparison helps in cost control. +uch a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter firm comparison methods. #dentification of losses and inefficiencies( A good Cost Accounting +ystem helps in identifying unprofitable activities, losses or inefficiencies in any form, so that appropriate actions are taken. !he use of +tandard Costing and 5ariance Analysis techniques points out the deviations from pre determined level and thus demands suitable action to eliminate its recurrence. !he cost of idle capacity can be easily &orked out, &hen a concern is not &orking to full capacity,
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&inancial Decision $a'ing( 6anagers can obtain relevant information from the Cost Accounting +ystem, to serve as guides in making decisions involving financial considerations. 7uidance may also be given by the Cost Accountant on various decision making issues vi0. &hether to purchase or manufacture a given component, &hether to accept orders belo& cost, &hich machine to purchase &hen a number of choices are available. !he use of 6arginal Costing techniques helps managers in taking short term decisions. Price Deter ination( Cost Accounting is quite useful for price fi-ation. It serves as guide to test the adequacy of selling prices. !he price determined may be useful for preparing estimates or filing tenders. Dispute and #ssue-solving( A good cost accounting system provides cost figures for the use of 7overnment, 8age !ribunals and other bodies for dealing and solving issues like price ta-ation, price control tariff protection, &age level fi-ation. Cost accounting prepares cost records and reports in different depths, detail and form. 9ven assumptions made regarding lacks uniformity. :ifferent organi0ations various costs differ. !here is arbitrariness in apportionment of overheads, allocation controllable and non determination of 4oint costs, division of costs bet&een of overhead absorption rates. controllable,
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(i itation of Cost Accounting 112 1*2 1,2
Cost accounts are prepared in addition to financial accounts. !here are. number of costs, e.g. notional costs and decision making costs &hich do not appear in financial accounts. !his necessitates reconciliation of financial profits and cost profit. Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation. It does not by itself achieve these ob4ectives. Cost accounting has only a limited use in pro4ecting future costs. It needs to be supplemented by various statistical tools. ar's2
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)*+ (ist the o,-ectives of Cost Accounting+ ./ov *00*, 1
!he primary ob4ective of study of cost is to contribute to profitability through Cost ;eduction and Cost Control. !he follo&ing ob4ectives of Cost Accounting can be identified( 112 1*2 Ascertain ent of cost( !his involves collection of cost information, by recording them under suitable heads of account and reporting such information on a periodical basis. Deter ination of selling price( +elling <rices are influenced by a no of factors. %o&ever, prices cannot be fi-ed belo& cost, save in e-ceptional circumstances. %ence cost accounting is required for determination of proper selling price. Cost Control and Cost Reduction( In the long run, higher profits can be achieved only through Cost ;eduction and cost Control. !hese terms are discussed in detail ion a separate Chapter. Ascertaining the profit of each activit% ( <rofit of each department3 activity 3 product can be determined by comparing its revenue on an ob4ective basis. Assisting anage ent in decision- a'ing" )usiness decisions are taken after conducting Cost )enefit Analysis. %ence cost and benefits of each option are analy0ed and the 6anager chooses the least cost option. !hus Cost Accounting and reporting system assists managers in their decision making process.
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)1+ 3hat are the essential features of a good cost Accounting s%ste ! . C+A PE 11 $a% *004, /ov *005, C+A+ #nter /ov 16612 !o be successful, a good Cost Accounting +ystem should possess the follo&ing essential features. 1a2 7i ple and eas% to operate" !he system should be tailor made, practical, simple and capable of meeting the requirement of a business concern. 2
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Accurac% of data( !he data to be used by Cost Accounting +ystem should be accurate. =ther&ise it may distort the output of the system Relevance of data" !he system should handle and report relevant data for use of managers for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary, details $anage ent8s Role" !he top 6anagement should have a faith in the costing system and should also provide a helping hand for its development and success. Participative Role of e9ecutives( >ecessary cooperation and participation of e-ecutives from various departments of the concern is essential for developing a good system of cost Accounting. Cost-effective( !he cost of installing and operating the system should 4ustify the results. !he benefits from the system should e-ceed the amount to be spent on it. 7 ooth i ple entation( !he system should be effectively implemented. A carefully phased programme should be prepared by using net&ork analysts for the Introduction of the system.
)+4+ (ist do:n an% eight factors that %ou :ill consider ,efore installing a costing s%ste + Ans:er. !he eight factors &hich must be considered before installing a Costing +ystem are listed belo&( 112 1*2 1,2 /ature of ,usiness( !he system of costing to be introduced should suit the general nature of business. (a%out aspects( !he si0e and layout of the organi0ation should be studied by the system designers. $ethods and procedures in vogue( !he system designers should also study various methods and procedures for the purchase, receipts, storage and issue of material. !hey should also study the methods of &age payment. $anage ent8s e9pectations and policies" !he system of costing should be designed after a careful analysis of the organi0ational operations, management#s e-pectation and the policies of the concern. Technical aspects" !he technical aspects of the business should be studied thoroughly by the designers. !hey should also make an attempt to seek the assistance and support of the supervisory staff and &orkers of the concern for the system. 7i plicit% of the s%ste " !he system of costing to be installed should be easy to understand and simple to operate. !he procedures laid do&n for operating the system should be easily understood by operating system. &or s standardi;ation" 5arious forms to be used by the costing system for various data3 information collection and dissemination should be standardi0ed as far as possible. Accurac% of data" !he degree of accuracy of data to be supplied by the system should be determined. <utline the steps involved in installing a costing s%ste essentials of an effective costing s%ste ! in a anufacturing unit+ 3hat are the
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!he main steps involved in installing a costing system in a manufacturing unit may be outlined as belo&( 112 !he ob4ectives of installing a costing system in a manufacturing concern and the e-pectation of the management from such a system should be identified first. !he system &ill be a simple one in the case of a single ob4ective but &ill be an elaborate one in the case of multiple ob4ectives.
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1*2
It is important to ascertain the significant variables of the manufacturing unit &hich are amenable to control and affect the concern. 'or e-ample, quite often the production C,sts control may be more important than control of its marketing cost.. Bnder such a situation, the costing system should devote greater attention to control production costs.
)+=+ 3hat are the Pre- re>uisites for installation of Cost Accounting 7%ste + #nstallation of a Costing 7%ste A cost accounting system is a set of plans, programmes, procedures and documentation designed to accumulate costs, assign them to products, processes and 4obs, and report cost information to management at all levels. It assists management in planning, control, performance appraisal, analysis of product profitability and optimum utili0ation of physical and financial resources for achieving organi0ational ob4ectives. !he follo&ing considerations should be specifically taken into account( 1+ *+ Design in suit specific needs !he system should be designed as to serve the specific needs of the organi0ation. #n depth e9a ination of production details" )efore installing the system, management should make an, in depth study of nature of products and processes, technologies, plant layout, nature of material used, so that cost accounting system is tuned to the requirements of the business, Cost Benefit anal%sis( !he benefit from the proposed cost accounting system should far e-ceed the cost involved. !he best system, if cost benefit, becomes useless. (ocation of cost office( Costing department obtains basic data mainly from accounts department. 6ost of this data is related to production activity. Codification( All costs relating to all products of all departments should preferably be coded. !his &ill increase speed in handling and processing of costs. Codification also facilitates computeri0ation of costing system. Continuous $onitoring( =peration of cost accounting system should be continuously monitored so that deficiencies do not creep in, methodical &ork is not replaced by short cuts, and the system is al&ays kept up to date.
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Difficulties in #nstalling Cost accounting 7%ste 1. *. ,. .. /. ?. @. Cack of enthusiasm and support from top management because they are not fully convinced about the benefits from such system. resistance from production staff and people at different levels in other departments because they fear getting sub4ected to additional controls. ;esistance from accounting staff as they believe that their &ork &ould increase. +hortage of trained and &ell qualified staff. =ver enthusiasm to have an unnecessary detailed costing structure or keeping it too simple due to too much concern for cost. %igh cost of installing the system. 'ailing to keep the system up to date,
)+?+ Ho: are costs classified on the ,asis of Ti e Period! <n the ,asis of Ti e Period" Costs are classified into ( 4
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Historical Costs Costs relating to the past time period( Cost &hich has already been incurred. Current Costs Costs relating to the present period. Pre deter ined Costs Costs relating to the future periodD Cost &hich is computed in advance, on the basis of specification of all factors affecting it.
)@+ Ho: are costs classified on the ,asis of BehaviorA /atureA Baria,ilit%! =n the basis of )ehavior3 >ature3 5ariability( Costs are classified into( 112 Baria,le Costs- !hese are costs &hich tend to vary or change in relation to volume of production. !hey increase in total as production increases and vice versa e.g. cost of ra& materials, direct &ages etc. %o&ever, variable costs per unit are generally constant for unit of the additional output. &i9ed Costs- these are costs &hich remain constant at various levels of production. !hey are not affected by volume of production e.g. factory rent, Insurance etc. 'i-ed Costs per unit decreases and vice versa. +ometimes, these are also kno&n as Capacity Costs or <eriod Costs. 7e i- Baria,le Costs !hese are costs &hich are partly fi-ed and party variable. !hese are fi-ed upto a particular volume of production and become variable therefore for the 1 ne-t level of production. %ence, they are also called +tep Costs. +ome e-amples are ;epairs and 6aintenance, 9lectricity, !elephone etc.
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)+6+ Ho: are costs classified on the ,asis of Ele ents! <n the ,asis of ele ents( Costs are classified into( .12 .*2 .12 $aterials Cost of tangible, physical input used in relation to output3 production( e.g., costs of ra& materials, consumable stores, maintenance items etc. (a,our- Cost incurred in relation to human resources of the enterpriseD e.g, &ages to &orkers, +alary to =ffice +taff, !raining 9-penses etc. E9penses- Cost of operating and running the enterprise, other than materials and labourD this is the residual category of costs, 9.g, 'actory ;ent, =ffice 6aintenance, +alesman +alary etc.
)+10+ Ho: are costs classified on the ,asis of Relationships! =n the basis of ;elationship ( Costs are classified into( 112 Direct costs Costs &hich are directly related to 3 identified &ith 3 attributable to a Cost Center or a Cost unit. 9.g. Cost of basic ra& material used in the finished product, &ages paid to site labour in a construction contract etc #n direct Costs- Costs &hich are not directly identified &ith a cost centre or a cost unit. +uch costs are apportioned over different cost centers using appropriate basis e.g, 'actory ;ent incurred over various departmentsD +alary of supervisors engaged in overseeing various construction contracts etc.
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)11+ Ho: are costs classified on the ,asis of Controlla,ilit%! 3hat are the aspects affecting Control! <n the ,asis of Controlla,ilit%( Costs are classified into( 112 a. b. Controlla,le Costs- Costs &hich can be influenced and controlled by managerial action. %o&ever, Controllability is a relative term and is sub4ect to the follo&ing factors. Ti e Certain costs are controllable in the long run and not in the short run. (ocation certain costs are not influenced and decided at a particular location 3 cost center. If rent agreements of all factory premises are e-ecuted centrally at the head =ffice, factory 6anagers cannot control the incurrence of cost.
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Product <utput- Certain costs are controllable by reference to one product or market segment and not by reference to the other. 'or e-ample, cost of common ra& material input for e-ports is lo&er than that of domestically sold goods since e-cise duty concession 3 duty dra&back is available for e-port sales. /on - Controlla,le Costs E !hese are costs that cannot be influenced and controlled by a specific member of the organi0ation. !he line of difference bet&een controllable and non controllable costs is thin.
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>=!9( >o cost is uncontrollable. Controllability is sub4ect to the factors laid do&n above. )1*+ Ho: are costs classified on the ,asis of /or alit%! <n the ,asis of /or alit%( Costs are classified into( 112 1*2 /or al Cost( Costs &hich can be reasonably e-pected to be incurred under normal, routine and regular operating conditions. A,nor al Cost" Costs over and above normal costD &hich is not incurred under normal operating conditions e.g, fines and penalties.
)11+ Enu erate the t%pes of costs on the ,asis of &unctions+ <n the ,asis of &unctions" Costs are classified as underD 112 Production Cost" !he cost of the set of operations commencing &ith supply of materials, labour and services and ends &ith the primary packing of product. !hus it is equal to the total of :irect 6aterials, :irect labour, :irect 9-penses and <roduction =verheads. Ad inistration Cost( !he cost of formulating the policy, directing the organi0ation and controlling the operations of the undertaking, &hich is not directly related to production, selling, distribution, research or development activity or function. +ome e-amples are =ffice rent, Accounts :epartment 9-penses, Audit and Cegal e-penses, :irectors ;emuneration etc. 7elling CostsD !he cost of seeking to create and stimulate demand and of securing orders. !hese are sometimes called marketing costs. +ome e-amples are Advertisement, +alesmen remuneration, +ho& room 9-penses, Cost of samples etc. Distri,ution Cost( !he cost of the sequence of operations &hich begins &ith making the packed product available for dispatch and ends &ith making the reconditioned returned empty package, if any, available for re use. +ome e-amples are :istribution packing 1secondary packing2, carriage out&ards, maintenance of delivery vans, e-penditure incurred in transporting articles to central or local storage, e-penditure incurred in moving articles to and from prospective customers1as in sale or ;eturn2 etc. Research Cost" !he cost of the process &hich begins &ith the implementation of the decision to produce a he& or improved products, ne& application of materials or improved methods. Develop ent Cost( !he cost of the process &hich begins &ith the implementation of the decision to produce a ne& or improved product, or to employ a ne& or improved method and ends &ith commencement of formal production of that product of by that method. Pre production CostD !he part of development cost incurred in making a trial production run prior to formal production. Conversion Cost" !he sum of direct &ages, direct e-penses and overhead cost of convening ra& materials to the finished stage or converting a material from one stage of production to the other.
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)14+ 3rite short notes on Period Costs and Product Costs+ 3h% should product costs ,e co puted! =n the basis of atributability to the <roduct( Costs are classified into( 112 Period Costs( !hese are costs &hich are not assigned to the products but arc charged as e-penses against the revenue of the period in &hich they are incurred. >on manufacturing costs e.g. +elling and 6
:istribution Costs are generally recogni0ed as e-penses against the revenue of the period in &hich they are incurred. >on manufacturing costs. !hese costs are not included in inventory ( valuation. 1*2 Product Costs" !hese are costs &hich are assigned to the product and are included in inventory valuation. !hese are also called as Inventorable costs. Bnder absorption costing, total manufacturing costs are regarded product costs under marginal costing, total manufacturing costs are regarded product costs &hile under marginal costing, only variable manufacturing costs are considered. !he purposes of computing product costs are as under( Preparation of &inancial 7tate ents- 'ocus on inventory valuation and reporting profits. Product Pricing- 'ocus on costs assigned and incurred on the product till it is made available to the customer3 user. Cost- plus- Contracts &ith 7overnment Agencies 'ocus is on reimbursement of costs specifically assigned to the particular 4ob 3 contract. a'ing+ <r E9plain the
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)15+ (ist out the various ite s of costs on the ,asis of relevance to decision 7ignificance ofC Decision- $a'ing Cost+C <n the ,asis of Relevance to decision .a2 .,2 1A2 112 a'ing( Costs are classified into( Relevant Costs vi0. 6arginal Costs, :ifferential Costs, =pportunity Costs etc. #rrelevant Costs vi0. Absorbed fi-ed Costs, +unk Costs, Committed Costs etc.
Relevant Costs( !hese are costs &hich are relevant and useful for decision making purpose. $arginal Cost 6arginal cost is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly &ith production &hereas fi-ed cost remains fi-ed irrespective of volume of production. 6arginal cost is a relevant cost for decision making as this cost &ill be incurred in future for additional units of production. Differential Cost- It is the change in costs due to change in the level of activity or pattern or method of production. 8here, the change results in increase in cost it is called incremental cost, &hereas if costs are reduced due to decrease of output, the difference is called decremented costs. <pportunit% Cost !his refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action, 'or e-ample, a firm may finance its e-pansion plan by &ithdra&ing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the e-pansion plan. =pportunity cost is a relevant cost &here alternatives are available. %o&ever, opportunity cost does not find any place in formal accounts and is computed only for decision making and analytical purposes, <ut- of- poc'et Costs !hese are costs &hich entail current or near future outlays of cash for the decision at hand as opposed to costs &hich do not require any cash outlay such as depreciation. +uch costs are relevant for decision making, as these &ill occur in near future. It is that portion of total cost &hich involves cash outflo&. !his cost concept is a short run concept and is used in decisions relating to fi-ation of selling price in recession, make or buy, etc. =ut of pocket costs can be avoided or saved if a particular proposal under consideration is not accepted, Replace ent Cost It is the cost at &hich there could be purchase of an asset or material identical to that &hich is being replaced or revalued. It is the cost of replacement at current market price and is relevant for decision making. # puted Costs !hese are notional costs appearing in the cost accounts only e.g, notional rent charges, interest on capital for &hich no interest has been paid. 8here alternative capital investment pro4ects are 7
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being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at, as to &hich is the most profitable pro4ect. 1@2 Discretionar% costs !hese are escapable$ or avoidable$ costs. !hese can be avoided if a particular course of action is not chosen. In other &ords, these are costs, &hich are essential for the accomplishment of a managerial ob4ective. #rrelevant Costs" !hese are costs &hich are not relevant for decision making. 7un' Cost- It is a cost &hich has already been incurred or sunk in the past. It is not relevant for decision making and is caused by complete abandonment as against temporary shut do&n. !hus, if a firm has obsolete stock of materials amounting to ;s. 1F,FFF &hich can be sold as scrap for ;s. *,FFF or can be, utili0ed in a special 4ob, the value of opening stock of ;s. 1F,FFF is a sunk cost and is not relevant for decision making. Co itted Cost- A cost &hich has been already committed by the management is not relevant for decision making. !his should be contrasted &ith discretionary costs, &hich are avoidable costs. A,sor,ed &i9ed Cost- 'i-ed costs &hich do not change due to increase or decrease in activity is irrelevant for decision making. Although such fi-ed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision making. %o&ever if fi-ed costs are specific, they become relevant. E9plicit Costs- !hese are also kno&n as out of pocket costs they refer to costs involving 3 immediate payment of cash. +alaries, &ages, postage and telegram, printing and stationary, interest on loan etc. are some e-amples of e-plicit cost involving immediate cash payment. # plicit Costs- !hese costs do not involve any immediate cash payment. !hey are not recorded in the books of account. !hey are also kno&n as economic costs or imputed costs. Esti ated Cost- Gohler defines estimated cost as$ the e-pected cost of manufacture or acquisition, often in terms of a unit of product computed on the basis on information available in advance of actual production or purchase$. 9stimated costs are prospective costs they refer to prediction of costs. 7hut do:n costs- !hese are costs &hich continue to be incurred even &hen a plant is temporarily shut do&n, e.g. rent, rates, depreciation, etc. !hese costs cannot be eliminated &ith the closure of the plant. In other &ords, all fi-ed costs &hich cannot be avoided during the temporary closure of a plant &ill be kno&n as shut do&n costs. A,solute cost !hese costs refer to the cost of any product, process or unit in its totality. 8hen costs are presented in a statement form, various cost components may be sho&n in absolute amount or as a percentage of total cost or as per unit cost or all together. %ere the costs depicted in absolute in absolute amount may be called absolute costs and are base costs on &hich further analysis and decisions are based. !hese are the 9-penses &hich can be charged directly to Hobs, <roduct, <rocesses, Cost Bnits. !hese are also kno&n as :irect 9-penses. :epending on the +ituation, the same item of e-penses may be treated as a chargeable 9-penses or an indirect Cost. 'or e-ample, the rent charges of a machine specifically hired to complete a particular 4ob &ill be a direct charge on the 4ob. )ut if the same machine is used for various purposes, then the rent charges &ill be treated as indirect cost and are apportioned to concerned cost centers on an equitable basis. /ature of Direct E9penses 8
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)1= 3rite short notes on E9plicit and # plicit Costs+. C+A+ P+E+ 11 $a% *005, $a% *00= 1a2
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)1@+ 3rite 7hort notes on Direct E9penses or Chargea,le E9penses! Ans+
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 112 1*2 1,2 E9a ples 112 1*2 1,2 1.2 1/2 1?2 %ire charges in respect of special machinery or plant. Cost of special 6oulds, design and <atterns, <ayment of royalties Architects, +urveyors and other consultant#s fees. !raveling e-penses to site. 'reight in&ard on special material.
!hese are e-penses other than :irect materials and :irect Cabour !hese are either allocated or charged completely to cost centers or cost units. !hese are included in the prime Cost of a <roduct.
:irect Costs are sub classified on the basis of elements into 6aterials, Cabour and 9-penses. Indirect Costs 1=verheads2 are sub classified on the basis of functions. eant ,% Cost Period! !he period to &hich the Cost relates is called Cost <eriod. It is also called the control period since cost ascertainment is for the purpose of control. 7enerally, the cost period is shorter than the financial period used for reporting purposes. 'or e-ample, if the production process for converting ra& material into finished product requires 1/ days, it may be considered as a Cost <eriod.
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)+*0+ Define a Cost Dnit+ Eive suita,le illustrations+ Cost Dnit" It is a unit of production, service or time or combination of these, in relation to &hich costs may be ascertained or e-pressed. It should be one &ith &hich e-penditure can be most readily associated. An appropriate cost unit should ,e selected 'eeping in vie: the follo:ing" 1. *. ,. .. Cost units should suit the business. It should be most natural to the business. Cost unit should be readily understood and accepted by all concerned. Cost unit should be uniformly maintained over a period of time and should be same or similar products. Cost Bnits differ from one business to the other. !hey are usually units of physical measurement like number, &eight, area, volume, time, length and value. +ome illustrations of cost units are as under( 9-amples of cost Bnits and 6ethods of Costing in 5arious industries #ndustr% )ricks Cement ;oad construction Advertising Interior decoration 6ade to order ;eadymade Cost Dnit <er 1,FFF bricks <er ton <er k.m or per mile 9ach 4ob 9ach 4ob >umber >umber 9 $ethods of costing Bnit costing <rocess costing Hob costing Hob Hob Hob costing )atch costing
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. !yres and tubes batch !oy <harmaceuticals 8ater supply )us service 9ducation 9lectricity %otel )ridge construction +hip building 6ining <etrochemicals +teel !e-tiles +ugar <aper Chemical 'ertili0er =il refinery Automobile Colliery )icycle manufacturing $eaning" 9ach 9ach batch 1FFF >os., tablets, strips, capsules <er 1FFF litre <assenger kilometer <er student hour <er kilo&att hour <er guest per day or per guest per meal etc. 9ach contract 9ach ship <er ton !ons, gallons litres <er ton <er meter <er tonne <er kg3tonne <er kg3litre3tonne <er tonne <er gallon >umber <er tonne >umber
CMA SIRAJ MAWANI. PH. 9096299640 )atch costing )atch costing )atch costing =perating costing =perating costing =perating costing =perating costing =perating costing Contract costing Contract costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing <rocess costing =utput 6ultiple costing
)+*1+ 3hat is a Responsi,ilit% Centre! 3hat are its t%pes! It is an activity centre of a business organi0ation entrusted &ith a special task. It is a unit of function of a business organi0ation headed by an e-ecutive responsible for its performance( Particulars 6eaning Cost Centres A centre for &hich a standard amount of cost is pre determined and used for control. Revenue Centres A centre devoted to raising revenue 1no responsibility for production2 Profit Centres A centre &hose performance is measured in terms of income earned and cost incurred 10 #nvest ent Centres A centre responsible for earning profits and also for asset utili0ation.
T%pes of Responsi,ilities Centres
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1profit earning2 <rofit earning )udgeted profits less actual profits It may mean that one division sells its output to another division &ithin the organi0ation I i.e.inter divisional transfer pricing.
<rimary responsibility <erformance evaluation
Cost reduction and cost control +tandard cost less actual cost Control of cost is sub4ect to 1, !ime *. Cocation ,. <roduct
=ther points
7eneration of sale revenue )udgeted revenue less actual revenue Also responsible for some e-penses related &ith mark eting of products.
9arning return of Investments. )udgeted ;=I less actual ;=I
)+**+ 3rite short note on Cost Centre! Discuss the various t%pes of Cost Centres+ Cost Centre" A cost centre refers to a section, segment or subdivision of an organi0ation of &hich costs are charged. A cost centre is "location, person or its of equipment 1or group of these2 for &hich costs may be ascertained and used for the purpose of control. 'or e-ample a cost centre may be 1i2 1ii2 1iii2 Allocation e.g., departments sales territories etc. A person e.g., engineers salesmen, machine operators, etc. An item of equipment, e.g., machines delivery vans, etc. Classification( Cost Centres can be classified as under( # personal cost Centre it consists of a location or an item of equipment 1or group of these2
.a2 Based on T%pe" Personal Cost Centre It consists of a person or group of persons. .,2 Based on Role" Personal Cost Centre It is a cost centre &here ra& material is processed and converted into finished product %ere both direct and indirect costs are incurred 6achine shops, assembly shops &elding shops and are e-amples of 7ervice cost Centre It is a cost centre &hich serves as an ancillary unit and renders services to a production cost centre. %ere only indirect costs are incurred. !here are no direct costs as there is no measurable and saleable output. <o&er house, gas material service 11 production centres, shop, plant
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. production Cost Centres, .c2 Based on Activit%" <perational Cost Centre It consists of machines and 3 or persons, carrying our similar operations. All machines3operators performing the same operation are brought together under a Cost Centre, the purpose being ascertainment of cost of each operation irrespective of its location inside the factory. Process cost Centre
maintenance centres are e-amples of since cost centres.
It consists of machines and 3 or persons, engaged on a specific process or a continuous sequence of operation. Cost is analysed and related to. a series of operations in sequence. 7enerally, these constitute a single location, as in oil refineries and other process industries
)+*1+ 3rite short notes on the various ethods of costing+ <r Discuss the different $ethods of costing along :ith their applica,ilit% to concerned #ndustr%!. 1666 /ov2 )usiness vary in their nature and in the type of products or services they produce. %ence different methods of cost ascertainment are used in different business. !he output has to be costed, so that costing methods to be employed are also determined &ith due regard to the method of production and the unit of cost used. !he various methods of costing can be summari0ed as under(
COS1S
M)%#"!)-(
L)*+,"
E&'#n(#(
D!"#$%
In !"#$%
D!"#$%
In !"#$%
D!"#$%
In !"#$%
O.#"/#) (
P"!0# C+(%
Fo, Costing( Bnder this method, the cost of each 4ob is ascertained separately. It implies that the direct cost of each 4ob is traceable and identifiable. It is suitable in all cases &here &ork is undertaken on receiving a 12
customer#s order 3 assignment, +ome e-amples areD printing press, motor &orkshop etc. Batch Costing( It is an e-tension of 4ob costing. It is used &here the output under a particular &ork order consists of similar units. . It may not be economically feasible to ascertain cost per unit. %ence a collection or lot of units called a batch is taken for cost ascertainment purposes. 9ach batch is treated as a unit of cost, and thus separately costed. %ere cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch. 9-amples( <harmaceuticals, <roduction of component parts like cycle rims, !5 monitor screens etc. in bulk for subsequent assembly. Contract Costing A larger 4ob is called a contract. 7enerally, e-ecution of &ork is distributed over t&o or more financial years. %ence2 the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads, buildings etc. 7ingle or <utput Costing coals, etc. Cost is ascertained for a product, the product being the only one produced like bricks,
Process Costing and <peration Costing !he cost of completing each stage of &ork is ascertained, like cost of making pulp and cost of making paper from pulp. In mechanical operations, the cost of each operation may be ascertained separatelyD the name given is operation costing. <perating or 7ervice Costing( Ascertainment of cost of rendering or operating a service is called +ervice Costing or =perating Costing. It is used in the case of concerns rendering services like transport, cinema, hotels, etc., &here there is no identifiable tangible cost unit $ultiple Costing It represents a combination of t&o or more methods of costing outlined above. 'or e-ample, if a firm manufactures bicycles including its componentsD the parts &ill be costed by batch costing system but the cost of assembling the bicycle &ill be computed by the +ingle or output costing method. !his &hole system of costing is kno&n as multiple costing. The follo:ing ta,le su >ature of =utput Customer +pecifications( +ingle Bnit >umber of similar units 9-ecution of &ork arises the various ethods of costing applied in different industries 6ethod Cost Ascertainment 9-amples of Industries Hob Costing 'or each order3 Automobile &orkshop3 assignment3 4ob Interior :ecoration )atch Costing 'or each batch3 lot of units produced 'or each contract <rinting <ress for Cards, invitations etc3 <harmaceuticals, Civil Construction3 +hip building Quarries, )rick&orks, Colliery, <aints etc,
Contract Costing
+imilar units of a single product produced by( +ingle process A +eries of processes
Bnit or =utput or single costing
Consisting of multiple varieties of activities and process
<rocess Costing or =peration Costing 6ultiple costing
'or the entire activity, but averaged for the output 'or each process or operation
=il ;efining, )re&eries, Chemicals etc. )icycle Assembly
Combination of any of the methods listed above. 13
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. ;endering of +ervices =perating Costing 'or every type of +ervice
CMA SIRAJ MAWANI. PH. 9096299640 !ransport, %otels, Cinema
)+*4+ 3hat do %ou
ean ,% GTechni>ues of CostingC+
In addition to the above methods of costing there are certain techniques of costing &hich are used along &ith any of the above method. !hese techniques serve the special purpose of managerial control and policy. +ome of the important techniques are as follo&s( 1. *. ,. +tandard Costing )udgetary Control 6arginal Costing It is a valuable technique of cost control It is also a technique that is used to control costs. It is a special technique to help the management in decision making and profit planning. In this technique, only variable costs are charged to products and fi-ed costs are treated as period costs and transferred to < J C A3c. .. /. Absorption Costing Bniform costing As against marginal costing in this technique total cost, i.e. fi-ed and variable is charged to products. It is a system &hereby several undertaking uses the same costing principles and practices so as to make cost data comparable. )+*5+ 3hat are the t%pes of cost ascertain ent! 'or ascertaining cost, follo&ing types of costing are usually used( 112 Dnifor Costing( 8hen a number of firms in an industry agree among themselves to follo& the same system of costing, by adopting common technology for various items and processes they are said to follo& a system of uniform costing. +uch a system of cost ascertainment facilitate s inter firm comparison, determination of true costs of the industry. $arginal Costing( It is defined as the ascertainment of marginal cost by differentiating bet&een fi-ed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of decision making on various management issues, Bnder this method, stocks are valued at variable cost. 'i-ed Costs are treated as <eriod Costs and are not included in +tock 5aluation. A,sorption Costing( It is the practice of charging all costs, both variable and fi-ed to operations, processes or products. +tocks are valued at total cost, inclusive of proportionate amount of fi-ed cost. !his differs from marginal costing &here fi-ed costs are e-cluded. Direct Costing( It is the practice of charging all direct costs to operations, processes or products leaving alK indirect costs to be &ritten off against profits in &hich they arise. It may be distinguished from 6arginal Costing, &here only variable costs are identified &ith products. 7tandard Costing( It is the name given to the technique &hereby actual costs are compared &ith already set standards. It is thus a technique of both cost ascertainment and cost control. !his technique may be used along &ith any method of costing. It is especially suitable &here the manufacturing method involves production of standardi0ed goods of repetitive nature, Historical Costing( It is the ascertainment of costs after they have been incurred. !his type of costing has limited utility. Cost esti ation( Cost estimation is the process of predetermining the cost of the certain product or Hob. 14
1*2
1,2
1.2
1/2
1?2
)+*=+ 3hat is difference ,et:een Cost esti ation and Cost ascertain ent .
!his predetermination of cost is based upon budgetary control, standard costing and variance analysis. Cost estimation is made to take the decision regarding buy3make or to fi- the sale price of the product etc. Cost ascertain ent( Cost ascertainment is the process of determining the cost on the basis of actual data. %ence, computation of historical cost is called Cost ascertainment. Cost estimation and ascertainment are interrelated and very important to the management to have a sound costing system, !he ascertainment of cost greatly helps in cost estimation of future period. !he term cost centre is defined as a location, person.or an item of equipment or a group of these for &hich costs may be ascertained and used for the purposes of cost control. Cost centres can be personal cost centres, operation cost centres and process cost centres. )+*? Distinguish ,et:een 112 1*2 1,2 Ans:er+ .12 Distinction ,et:een Cost Dnit and Cost Centre !he term Cost Bnit is defined as a unit of quality of product, service or time 1or a combination of these2 in relation to &hich costs may be ascertained or e-pressed, It can be for a 4ob, batch, or product group. Cost Dnit !he term cost unit is defined as a unit of product, service or time 1or a combination of these2 in relation to &hich costs may be ascertained or e-pressed. It can be for a 4ob, batch, or product group. Industry 112 >ursing %ome 1*2 ;oad transport 1,2 +teel 1.2 Coal+ingle 1/2 )icycles 1?2 )ridge 1@2 Interior :ecoration 1A2 Advertising 1L2 'urniture 11F2 +ugar company 6ethod of costing =perating =perating <rocess <er Bnit 6ultiple Construction Contract Hob Hob 6ultiple <rocess 9ach Bnit 9ach contract 9ach Hob 9ach Hob 9ach unit <er Quintal 3 !on Bnit of cost <er )ed per &eek or per day <er !onne Gilometer or per mile <er !onne Cost Bnit and Cost Centre Cost Centre and <rofit Centre )ill of material from a material requisition note
having its o&n sugar cane fields !he term Cost Centre is defined as a location, person or an item of equipment or a group of these for &hich costs may be ascertained and used for thF purposes of Cost Control. Cost Centers can be personal Cost Centers, impersonal Cost Centers, operation cost and process Cost Centers. !hus each sub unit of an organi0ation is Gno&n as a Cost Centre, if cost can be ascertained for it. In order to recover the cost incurred by a Cost Centre, it is necessary to e-press it as the cost of output. !he unit 15
of output in relation to &hich cost incurred by a Cost Centre is e-pressed is called a Cost Bnit. .*2 Cost Centre and Profit Centre A Cost Centre is the smallest segment of activity or the area of responsibility for &hich costs are accumulated. A <rofit Centre is that segment of activity of a business &hich is responsible for both revenue and e-penses and discloses the profit of a particular segment of activity. Important points of distinction bet&een Cost Centre and <rofit Centre are as belo&( 1a2 1b2 Cost Centers are created for accounting convenience of costs and their control &here a profit centre is created because of decentrali0ation of operations. A Cost Centre does not have target costs but efforts are made to minimi0e costs, but eD profit centre has a profit target and en4oys authority to adopt such policies as necessary to achieve its targets. )ill of 6aterial( It is a comprehensive list of materials &ith e-act description M specifications, required for a 4ob or other production units. !his also provides information at required quantities so that if there is any deviation from the standards, it can easily detected. It is prepared by the 9ngineering or <lanning :epartment in a standard form. 6aterial requisition >ote( It is a formal# &ritten demand or request, usually from the production department to store for the supply of specified materials, stores etc. It authori0es the storekeeper to issue the requisitioned materials and record the same on bin card. !he purpose of bill of material is to act as a single authori0ation for the issue of all materials and stores items mentioned in it. It provides an advance intimation to store department about the requirements of materials. It reduces paper &ork. It serves as a &ork order to t production department and a document for computing the cost of material for a particular 4ob &ork order to the cost department. !he purpose of material requisition note is to dra& material from the store by concerned departments. )+*@+ .a2 $atch the follo:ing" 1a2 !otal fi-ed cost 1b2 !otal variable cost 1c2 Bnit variable cost 1d2 Bnit fi-ed cost 1e2 +tandard cost 1f2. <eriod cost 1g2#Actual cost 1h2 Cabour and overhead 1i2 Incremental cost 142 )udgeted cost 1. 8hat cost should beN *. Incurred cost ,. Increase in proportion to output .. Cost of conversion /. 8hat costs are e-pected to be ?. :ecrease &ith rise in output @. ;emains constant in total A. ;emains constant per unit L. Cost not assigned to products, 1F. Added value of a ne& product.
.12 Bill of $aterial and $aterial Re>uisition /ote
.,2 #ndicate :hether the follo:ing state ents are true or false"
16
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 112 1*2 1,2 1.2 1/2 1?2 All costs are controllable. Conversion cost is equal to direct &ages plus factory overhead.
5ariable cost per unit varies &ith the increase or decrease in the volume of output. :epreciation is an out of pocket cost. An item of cost that is direct for one business may be indirect for another 'i-ed cost per unit remains fi-ed. atching are indicated as ,elo:"
Ans:er .a2 Correct 1a2 1b2 1c2 1d2 1e2 1f2 1g2 1h2 1i2 142
... ............ ,.,1@2 !otal fi-ed cost, remains constant in total. ...................1,2 !otal variable cost, remains constant in total. ...................1A2 Bnit variable cost, increases in proportion to output. ,,. ............... 1?2 Bnit fi-ed cost, decreases &ith rise in output. ...................112 +tandard cost, &hat cost should be. ...................1L2 <eriod cost, cost not assigned to products, ...... ...... .,,....1*2 Actual cost, incurred cost. ...................1.2 Cabour and overhead, cost of conversion, ...................11F2 Incremental cost, added value of a ne& product. ,......,,..,.., ...... .1/2 )udgeted cost, &hat costs are e-pected to be
.,2 112 1*2 1,2 1.2 1/2 'alse !rue 'alse 'alse !rue 17
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1?2 'alse
18
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. CHAPTER-* C<7T 7HEET )+1 3hat is a Cost 7heet! 3hat are its uses!
$eaning" A Cost +heet is a statement &hich sho&s the break up and build up of costs. It is a document &hich provides for the assembly of the detailed cost of a cost center or a cost unit. Dses" !he follo&ing are the uses of the Cost +heet. 1a2 1b2 1c2 1d2 1e2 1f2 1g2 1h2 <resentation of Cost information. :etermination of +elling <rice. Ascertainment of profitability. <roduct &ise and Cocation &ise cost Analysis. Inter firm and Intra firm Cost Comparison. <reparation of Cost 9stimates for submitting tenders3 quotations. <reparation of )udgets. :isclosure of operational efficiency for Cost Control.
)+*+ 3hat is the Profor a of the Cost 7heet! The profor a of the 7i ple Cost sheet i+e+ :ithout stoc's, is as under" Direct $aterials :irect Cabour :irect 9-penses <rime Cost Add( 'actory =verheads 1 8orks =% 3 6anufacturing =% 3 <roduction =G2 &actor% Cost A 3or's Cost Add( Administration =verheads Cost of Production Add( +elling and :istribution =verheads Cost of 7ales Add( <rofit 3 Coss 1 )alancing 'igure2 7ales The profor a of the Co prehensive Cost 7heet, i+e, :ith stoc's, is as underH <pening 7toc' of Ra: $aterials Add( <urchases 1including Carriage In&ards, !ransit Insurance etc.2 Cess( Closing +tock of ;a& 6aterials :irect 6aterials Consumed :irect Cabour :irect 9-penses 19
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. Pri e Cost Add( 'actory overheads 1 8orks =% 3 6anufacturing =% 3 <roduction =% 2 Add( =pening +tock of 8ork in progress CessD Closing +tock of 8ork in <rogress &actor% Costs A 3or's Cost AddD Administration =verheads Cost of Production Add( =pening +tock of 'inished 7oods Cess( Closing +tock of 'inished 7oods Cost of Eoods 7old Add( +elling and :istribution =verheads Cost of 7ales Add( <rofit 3 Coss 1)alancing 'igure2 7ales )+1+ Co ponents of Total Cost+ :irect material O :irect labour O :irect e-penses <rime cost O 'actory =verhead 8ords Cost O Administration =verhead Cost of <roduction O +elling and distribution overhead )+4 Periodicit% of cost sheet P <rime cost
P 'actory cost or &orks cost P Cost of production P Cost of sales or total cost
Cost +heet may be prepared &eekly, fortnightly, monthly, quarterly, half yearly or yearly. )+5+ Distinguish ,et:een ProductionA $anufacturing Account and a Cost 7heet, or, Ho: does a Production Account differ fro a Cost 7heet+ .C+A #nter /ov+ 166@, $a% *0002 Cost 7heet It is only a statement and hence double entry system is not applicable. !he primary ob4ective is decision making. It is a step by step presentation of total and sho&s <rime Cost. 8orks Cost. Cost of <roduction. Cost of 7oods. +old, Cost of +ales and >et <rofit. !otal Cost is sho&n in aggregate. <roduct Cost +heet sho&s costs in a detailed and &ise or location &ise analysis is not given. analytical manner, &hich facilitates cost Comparison !his is not useful for preparing tenders 9stimated Cost +heets can be prepared based on past e-perience, and useful for submitting 20
Production A $anufacturing Account It is prepared on the basis of double entry system of book keening. !he primary ob4ective of preparation is ;eporting. It has t&o part one sho&ing the cost of6anufacture and the other part sho&ing +ales and 7ross <rofit.
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. quotations. E9a ples" 1a2 1b2
8here only one electric meter is installed in a factory, the common electricity charges should be apportioned to all the departments on the basis of no. of light points or floor area. 'actory ;ent is incurred for the factory a &hole and benefits all the departments in the factory. %ence, it should be apportioned to all the departments on the basis of floor area occupied Absorption of cost is charging cost from cost centre to products or services by means of absorption rate &hich is calculated as follo&s(
$eaning of Cost A,sorption
Cost Absorption Rate =

)+=
Total cos t of the cos t centre Totalquantum of the base
Classification of cost ,% ele ent
COS1S
M)%#"!)-(
L)*+,"
E&'#n(#(
D!"#$%
In !"#$%
D!"#$%
In !"#$%
D!"#$%
In !"#$%
O.#"/#) (
P"!0# C+(%
$aterial !he term "materials# refer to all commodities supplied to an undertaking. 'or costing purposes, materials may be classified into t&o broad categories 1a2 :irect 6aterials 1b2 Indirect 6aterials. .a2 Direct $aterials 1+ $eaning :irect materials are those materials &hich can be conveniently iden tified &ith and can be directly allocated to a particular productD 4ob or process. 21
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. *+ &eatures
!he main features of direct materials areD 1a2 It can be easily identified &ith a specific 4ob, contract or &ork order. 1b2 It varies directly &ith the volume of output. +ome e-amples of direct materials are as follo&sD Basic Ra:- $aterials $aterials 1a2 !imber in furniture 1b2 Cloth in 7arments &hisky 1c2 6ilk J cream in ice cream oil 1d2 <aper in )ooks 1e2 7old3 +ilver in He&ellery 1f2 )ricks or Cement in )uilding Construction Pri ar% Pac'ing 1a2 Can for tinned food and drink 1b2 )ottles for &ater, &ine J 1c2 <lastic packing for 6ilk, 7hee J 1d2 !in packing for 7hee J =il 1e2 Card board bo- for drinks like fruity, ;eal 4uice 1f2 )ag for Cement
1+ E9a ples
4+Treat ent .,2 #ndirect 1+ $eaning
:irect 6aterial Cost forms part of pri e cost+ aterials Indirect materials are those materials &hich can not be conveniently identified &ith and cannot directly allocated to a particular product, 4ob or process. !he main features of direct 6aterials are( . .a2 It can be easily identified &ith a specific 4ob, contract or &ork order, .,2 It may or may not vary directly &ith the volume of output.
*+ &eatures
1+ E9a ples
+ome e-amples of indirect materials are as follo&s( .a2 +tores used for maintaining machines such as lubricant oil J grease, cotton &aste, consumable stores etc. .,2 +tores used by service departments like po&er house, boiler house, .c2 6aterials of small value &hich can not be conveniently identified &ith particular product, 4ob or process. 'or e-ample, nails used in furniture, thread used in stitching garments.
4+ Treat ent *+ (a,our
Indirect 6aterial Cost is treated as part of overheads.
Cabour is an essential factor of production. It is a human resource and participates in the process of production. Cabour cost is a significant element of cost of a product or service. 'or costing purposes, labour may be classified into t&o broad categories( 1a2 :irect Cabour and, 1b2 Indirect Cabour. 22
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. .a2 Direct (a,our 1+ $eaning
:irect labour is that labour &hich can be readily identified &ith a specific 4ob, contract or &ork order. It includes 1a2 all labour directly engaged in converting ra& materials into finished goods or in altering the construction, composition or condition of the product, 1b2 any other form of labour &hich is incurred &holly or specifically for any particular 4ob, contract or &ork order
*+ &eatures
!he main features of direct labour are( 1a2 It can be easily identified &ith a specific 4ob, contract or &ork order. 1b2 It varies directly &ith the volume of output.
1+ E9a ples
+ome e-amples of direct labour are( 1a2 8eaver in &eaving unit 1b2 Carpenter in furniture unit 1c2 !ailor in readymade &ears unit 1d2 )aker in )aking unit 1e2 %al&ai in confectionery unit 1f2 8asher in :ry cleaning unit 1g2 Cabour employed on construction contract
4+ Treat ent
8ages paid to direct labour are termed as "direct labour cost# and form part of pri e cost+
.,2 #ndirect la,our 1+ $eaning Indirect labour is that labour &hich cannot be readily identified &ith a specific 4ob, contract or &ork order. It includes all labour not directly engaged in converting ra& materials into finished goods or in altering the construction, composition or condition of the product. !he main features of indirect labour are( 1a2 It can not be easily identified &ith a specific 4ob, contract or &ork order 1b2 It may or may not vary directly &ith the volume of output. 1+ E9a ples 7o e e9a ples of indirect la,our areH 1a2 Cabour employed in <ersonnel :epartment employed in 9ngineering J 8ork +tudy 1b2 Cabour :epartment 1c2
*+ &eatures
Cabour employed in !ime keeping :epartment 23
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1d2 1e2 1f2 1g2 1h2 1i2 Cabour employed in <ay roll :epartment
Cabour employed in Cost Accounting :epartment Cabour employed In ;epairs J 6aintenance :epartment Cabour employed in +tores :epartment Cabour employed in <o&er %ouse :epartment Cabour employed in +ecurity :epartment
142 Cabour employed in 6achine +hop such as tools setters, cleaners 4+ Treat ent 8ages paid to indirect labour are termed as indirect labour cost and are treated as part of overheads.
1+ E9penses All costs other than material costs and labour costs are termed as e-penses. 'or costing purposes, e-penses may be classified into t&o broad categories( 1a2 :irect 9-penses, and 1b2 Indirect 9-penses. .a2 Direct E9penses 1+ $eaning All direct costs other than direct material costs and direct labour costs are termed as direct e-penses. !hese can be readily identified &ith and thus, can be directly allocated to a particular product, 4ob or process. !hus, :irect e-pensesP :irect Costs :irect 6aterial Cost :irect Cabour Cost !he 6ain features of direct e-penses are( 1a2 It can easily be identified &ith a specific 4ob , contract or &orG order, 1b2 it varies directly &ith the volume of output. 1+ E9a ples 9-cise :uty based on output produced ;oyalty based on output produced. Hob <rocessing Charges Cost of special 6oulds, designs and pattered %iring Charges for machines, tools and equipments :irect e-penses from part of pri e cost+
*+ &eatures
4+ Treat ent .,2 #ndirect E9penses 1+ $eaning
All indirect costs other than indirect material costs and indirect labour costs are termed as Indirect e-penses. !hese can not be readily identified &ith and thus, can not be directly allocated to a particular product, 4ob or process. !hus, Indirect 9-pensesP Indirect Costs Indirect 6aterial Cost Indirect Cabour Cost 24
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. *+ &eatures !he main features of Indirect e-penses areD
1a2 It can not be easily identified &ith a specific 4ob, contract or &ork order, 1b2 It may or may not vary directly &ith the volume of output. 1+ E9a ples ;ent, ;ates and ta-es of )uilding ;epairs, Insurance and :epreciation of )uilding, <lant and 6achinery, 'urniture !elephone 9-penses Cighting , heating and Cleaning 9-penses overheads Indirect e-penses are treated as part of
4+ Treat ent
<verheads or I<n Cost8 or I#ndirect Cost8 All material, labour and e-penses &hich cannot be readily identified &ith a particular product, 4ob or process are termed as "Indirect costs#. !he three elements of indirect cost, vi0, indirect materials, indirect labour and indirect e-penses are collectively kno&n as "=verheads or =n costs or )urden. !hus, =verheads P Indirect 6aterials Cost O Indirect Cabour Cost O Indirect 9-penses =verheads are grouped into follo&ing three broad categories(
<verheads .or #ndirect Costs2
Production <verheads
Ad inistration <verheads
7elling & Distri,ution <verheads
#ndirect $aterial
#ndirect E9penses
#ndirect $aterial
#ndirect E9penses
#ndirect $aterial
Indirec t
Expens es
#ndirect (a,our
#ndirect (a,our
#ndirect (a,our
Production A $anufacturing A &actor% <verheads $eaning" <roduction overheads represents all the indirect costs incurred in connection &ith the production of products or services. !hese represents the aggregate of indirect material cost, indirect labour cost and indirect e-penses incurred by production department. E9a ples" 25
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. .a2 #ndirect $aterials Cost 1a2 1b2 .,2 #ndirect la,our cost 1a2 1b2 .c2 #ndirect E9penses 1a2 1b2
Cost of consumable stores and supplies like cotton &aste, lubricating oil etc. Cost of printing, <ostage J +tationary used in <roduction :eptt. +alary of supervisor, &orks manager and departmental superintendents. Contribution to 9+I, <.<., leave pay, maternity pay ;ent, ratesJ ta-es of factory building ;epairs, insurance J depreciation of factory building, plant J machines and furniture 'actory telephone e-penses Cighting, heating J cleaning of factory
1c2 1d2
.*2 Ad inistration <verheads $eaning" Administration overheads represents the cost of formulating the policy, directing the organi0ation and controlling the operations of an undertaking &hich is not related directly to production, selling, distribution, research, or development activity or function. !hese represents the aggregate of material cost, labour cost and e-penses incurred by Administration :epartment for the general management of an organi0ation. E9a ples .a2 $aterials Cost
1a2 Cost of printing, postage J stationery used in Administration department
1b2 Cost of dusters, brusher etc, for cleaning
.,2 (a,our Cost
1a2
+alary of managing director, &hole time director, general manager, finance manager, accounts manager, secretary, legal manager and other staff &orking in Administration department. ;emuneration of internal J statuory cost J financial auditors, Cegal Advisors. ;ent, rates J ta-es of office building ;epair, insurance J depreciation of office building, equipment and furniture 26
1b2
.c2 E9penses
1a2 1b2
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1c2 1d2 .12 7elling <verheads Administration e-penses
CMA SIRAJ MAWANI. PH. 9096299640 office telephone of
Cighting, heating J cleaning Administration office.
$eaning( +elling overheads represents the cost of seeking to create and stimulate demand and of securing order. !hus, this is the cost of promoting sales and retaining customers. !hese represent the aggregate of materials cost, labour cost and e-penses incurred by sales department for the sales management of an organi0ation. E9a ples" .a2 $aterials Cost 1a2 Cost of printing, postage J stationary used insales department. 1b2 Cost of catelogues, list prices etc. +alary of sales director, sales manager, sales officers, salesmen and other staff &orking in sales department. Commission to agents ;ent, rates J ta-es of sales office3 sho&room ;epairs, insurance J depreciation of sales office building, equipment and furniture +ales office telephone e-penses Cighting, heating J cleaning of sales office Advertising )ad :ebts :ebt Collection charges +alesmen#s traveling e-penses 9ntertainment e-penses on customer
.,2 (a,our Cost
1a2
1c2 .c2 E9penses 1a2 1b2
1c2 1d2 1e2 1f2 1g2 1h2 1i2 .42 Distri,ution <verheads
$eaningH :istribution overheads, represent the cost of the "sequence# of operations &hich begins &ith making the packed product available for dispatch and ends &ith making the reconditioned returned empty package, if any, available for re use. !here also include e-penditure incurred in moving in moving articles to central or local storage, or in moving articles to and from prospective "Q#.customers as in the case of goods on sale or return basis. In the gas, electricity and &ater industries ":istribution# means pipes, mains and service &hich may be regarded as equivalent to packing and transportation. !hese represent the aggregate of materials cost, labour cost and e-penses incurred by distribution department for the distribution management of the organi0ation. 27
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. E9a ples" .a2 $aterials
1a2 1b2 1c2
Cost of printing, postage J stationary used in distribution office Cost of secondary packaging Cost of materials used in reconditioning of the empty containers returned by customers for re use.
.,2 (a,our
1a2
1b2 .c2 E9penses

1a2
+alary of staff attached to distributionoffice like, packers, despatch1staff2 +alary of distribution vehicle driver.
;ent, rates J ta-es of distributing office3 godo&n 3storage 3 &arehouse 1b2 ;epair, insurance J depreciation ofdistribution office )uilding, equipment J furniture, delivery van of distribution office 1c2 :istribution office telephone e-penses 1d2 Cighting, heating J cleaning of distribution office 1e2 :epreciation, repair J running e-penses of delivery vans 1f2 'reight J carriage out&ard 1g2 Insurance of finished stock in godo&n
)+? Classification of costs ,% relation to cost centre Cost $eaning It is the cost &hich can be 1+ Direct Cost
E9a ple
Cost of cloth in a shirt 8ages paid to tailor to shirt a shirt 9-cise duty on production
*+ #ndirect Cost
conveniently identified &ith and directly allocated to a cost ob4ect in an economically feasible &ay. It represents the aggregate of 1a2 :irect 6aterial Cost 1b2 :irect Cabour Cost 1c2 :irect 9-penses It is the cost &hich can not be conveniently identified &ith and directly allocated to a cost centre or cost ob4ect in an economically feasible &ay. It is apportioned to various cost centres on some equitable basis. It is also kno&n as overhead. It represents the aggregate of 1a2 Indirect 6aterial Cost 1b2 Indirect Cabour Cost 1c2 Indirect 9-penses
Cubricating oil for machine +alary of supervisor. ;epairs, Insurance J :epreciation of machines
)+@+ 7pecial Costs Dsed for $anagerial Decision - $a'ing 7pecial Costs $eaning E9a ple 1+ Relevant Costs
!hese are those future costs &hich differ under different alternatives. In case of a decision relating to the replacement of an old
28

!hese can be changed by the decision of the management. !hese are those costs &hich are not relevant, !hese cannot be changed by the decision of the management.
*+ #rrelevant Cost
1+ 7un' Costs
4+
7hutCosts
do:n
5, <ut of Poc'et Cost
!hese are the historical or past costs incurred by a past decision. +ince sunk costs can not be changed by later decision, these are not relevant for decision making. !hese are those fi-ed costs &hich continue to be incurred even &hen a plant is temporarily shut do&n. !hese are those costs &hich involve cash outlay. !hese can be avoided or saved. !hese are used In decisions, relating to fi-ation of selling price during depression, make or buy etc.
machine, dismantle cost of an old machine is a relevant cost. In case of a decision relating to the replacement of an old machine, depreciated book value of old machine is irrelevant cost. In case of decision relating to the replacement of an old machine, depreciated book value of old machine is sunk cost.
;ent, insurance and depreciation of )uilding

8ages of &orkers, purchase of 6aterials, ;ent J Insurance of )uilding,
=+
<pportunit% costs
?+ # puted costs
It is the value of sacrifice made in accepting an alternative course of action. !hese are the notional costs &hich do not involve any cash outlay. !hese costs are similar to opportunity costs.
It is the increase or decrease in total Cost 1 variable J fi-ed 2 due to change in activity level, technology, process or method of production etc. It is termed as incremental cost &hen the cost increases and as decrement cost &hen the cost decreases. It is the amount at any given volume of output by &hich aggregate costs are changed if the volume of output is increased or decreased by one unit. In practice this is measured by the total variable cost attributable to one unit. It is the cost at &hich an asset identical to that &hich is to be replaced, could be currently purchased. In other &ords, it is the current purchase price of an identical asset.
Cikely ;ent of o&ned building proposed to be used for a ne& pro4ect.
1. ;ent of o&ned building. *. Interest of o&ned capital.
@+
Differential costs
!otal cost under alternative 1P ;s 1,FF,FFF, !otal cost under alternative 11P ;s 1,*F,FFF :ifferential costP ;s *F,FFF
6+ $arginal cost
:irect 6aterial Cost ;s .FF, :irect Cabours Cost ;s ,FF, :irect 9-penses ;s *FF, 5ariable =verhead ;s 1FF, 6arginal Cost is ;s 1,FFF An old machine purchased for ;s 1,FF,FFF in the year *,FFF is to be replaced in the year *FF/ by a ne& machinery of the same type &hich could be purchased for ;s *,FF,FFF. %ere replacement cost of old machine is ;s *,FF,FFF.
:irect 6aterial Cost ;s. .FF,
10+
Replace ent cost
11+ Conversion cost
It is the cost of converting a ra&
29

material into a finished product. It is the aggregate of direct labour cost, direct e-penses and production overheads.

;s ,FF, ;s *FF, ;s 1FF, ;s ?FF
:irect Cabour Cost :irect 9-penses <roduction overheads Conversion Cost is
1*+
Co costs
itted
!hese are those costs &hich can not be avoided in the short run once the decision to incur them, has been taken.
!hese are those costs &hich can be avoided by managerial decisions.
:epreciation of plants equipment.
11+Discretionar% costs
Advertising costs, ;esearch :evelopment Costs.
)+6+ #te s e9cluded fro
Cost Accounts
!he follo&ing items of income and e-penditure are normally included in financial accounts and not in cost accounts. !heir inclusion in cost accounts might lead to un&ise managerial decisions. !hese Items are( 1+ #nco es 1a2 <rofit on sale of 'i-ed Assets 1b2 <rofit on sale of investments 1c2 Interest Income 1d2 :ividend Income 1e2 ;ental Income 1f2 !ransfer fees 1a2 Coss on sale of fi-ed assets 1b2 Coss on sale of Investments 1c2 Interest on mortgage and loans 1d2 <reliminary e-penses &ritten off 1e2 7ood&ill &ritten off 1f2 Bnder&riting commission and debenture discount &ritten off 1g2 'ines and penalties 1a2 Income ta1b2 :ividend :istribution ta1c2 !ransfer to 7eneral ;eserves 1d2 !ransfer to +pecial ;eserves like :ividend 9qualisation ;eserve etc.
*+ E9penditures
1+ Appropriations
)+10 Co ponents of total cost !he various components of total cost are as follo&s( Co ponent Ho: to calculate co ponent 1+ Pri e cost P :irect 6aterial CostE :irect Cabour Cost O :irect e-penses >ote( :irect 6aterial Cost P =pening +tock of ra& materials O >et purchases 1e.g., carriage3 freight in&ard2 Closing +tock of ra& materials. *+ 3or's cost or factor% P <rime Cost O &orks3 factory 3 production overloadsE cost opening 8I< closing 8I< >ote( 8ork in progress represents those units on &hich some &ork has been done but &hich are not yet complete. 8hen &ork in 30
1+ Cost of production or cost of goods produced 4+ Cost of goods sold 5+ Cost of sales
progress is valued at factory cost, it is ad4usted as sho&n above, 8orks Cost O Administration =verheads Cost of goods produced O =pening +tock of finished goods Closing stock of finished goods Cost of goods sold O +elling J :istribution =verheads
)+11 &or at of 7tate ent of Profit or (oss !here is no prescribed form of production statement. It may very from industry to industry. A specimen of the general statement of profit or loss is given belo&D 7tate ent of profit or loss Particulars Total .Rs+2 Per unit .Rs+2 A. :irect 6aterial Cost =pening +tock of 6aterials .....D.. Add( <urchases ........ Add( 9-penses on <urchases ....... Cess( <urchase ;eturns ........ Cess( Closing +tock of 6aterials ........ CessD >et value of >ormal +crap of :irect 6aterials . ........ ). :irect Cabour Cost <aid Add( =utstanding at the end .......... Cess( <repaid at the end ....... C. :irect 9-penses 1e.g. ;oyalty on <roduction2 :. <rime Cost RA O ) O COS 9. 8orks =verheads 3 'actory =verheads 3 <roduction =verheads ....... Cess( >et value of >ormal +crap of Indirect 6aterials ....... Ad4ustment on account of +tock of 8I< Add( =pening +tock of 8ork in progress .... Cess( Closing +tock of 8ork in progress TT '. 8orks Cost R : O 9 S ........ 7, Add( =ffice J Administration 9-penses %. Cost of 7oods <roduced R' O 7S I. Ad4ustment on Account of +tock of 'inished 7oods( Add( =pening +tock of 'inished 7oods ...... Cess( Closing +tock of 'inished 7oods P Cost of goods produced H. Cost of 7oods +old R% O lS G. Add( +elling J :istribution 9-penses 31
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. C. Cost of +ales RH O GS 6. Add( <rofit >. +ales RC O 6S 1. *. !utorial >otes( 112 1*2
!hese amounts are ascertained by dividing the respective total by the number of units produced. !hese amounts are ascertained by dividing the respective total by the number of units sold. Bnless other&ise stated, closing stock of finished goods should be valued at current cost of production assuming that the first in first out method of inventory valuation is in use. Items of financial nature like Income !a-, Cash :iscount, Interest on Capital3 )ank =verdraft, :onations, :ividend, <reliminary 9-penses3 7ood&ill &3o, <rovision for :oubtful :ebts, !3f to reserves, etc. are ignored &hile preparing Cost +heet3 <roduction +tatement3Account. EEEEEEEEEEEEEEEEEEEE
Chapter 1 REC</C#(#AT#</ <& C<7T#/E A/D &#/A/CE PR<&#T
)+1 Ans+
GReconciliation of cost and financial accounts in the .166@ J $a%2
odern co puter age is redundantC+ Co
ent
In the modern computer age the use of computer kno&ledge and accounting soft&are has helped the field of 'inancial and cost accounting in a big &ay. In fact, computers &ork at a very high speed and can process voluminous data for generating desired output in on time. =utput produced is precise and accurate. Computers can &ork for hours &ithout any figures. !hey can bring out different financial accounting and cost accounting statement and ;eports accurately in a presentable form. 'inancial accounts and cost accounts sho& their results accurately and precisely, &hen maintained on a computer system, but the profit sho&n by one set of books may not agree &ith that of the other set. !he main reasons for the disagreement of the profit figures sho&n by the t&o set of books is the absence of certain items &hich appear in financial books only and are not recorded in cost accounting books. +imilarly there may be some items &hich appear in cost accounts but do not find a place in the financial books. +ome e-amples &hich affect it are as follo&s ( 1i2 1ii2 1iii2 1iv2 1v2 Coss3profit on sale of fi-ed assets. 9-penses on stamp duty, discount and other e-penses relating to the issue and transfer of shares and debentures. 'ee received on issue and transfer of shares etc. Interest received on bank loan, mortgage etc. Interest received on bank deposits and other investments. 32
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1vi2 1vii2 1viii2 1i-2 1-2 'ines and penalties :ividend received on investments in shares. ;ental income etc. Bnder or recovered e-penses.
:ifference due to varying basis of valuation of stock or in the matter of charging depreciation.
Bnder the situation of different profit figures sho&n by financial and cost accounts, it is necessary to reconcile the results 1profit 3 loss2 sho&n. +uch a reconciliation proves arithmetical accuracy of data, e-plains reasons for the different in the t&o sets of books affords reliability to them. %ence, the reconciliation of cost and financial accounts is essential and not redundant even in the modern age of computer.
)+* Ans+
3hat are the reasons for disagree ent of profits as per financial accounts and cost accounts! Discuss+ .1666 J /ov2 ;easons for disagreement of profit as per 'inancial accounts and cost account are as belo&. !here are certain items &hich are included in 'inancial accounts but not in cost accounts. Cike&ise there are certain items &hich are in cost. 1i2 Accounts but not in financial accounts. 9-amples of financial charges &hich appear only a financial books are ( 1i2 1ii2 1iii2 1iv2 Coss on sale of fi-ed assets and investment. Interest on bank loans, mortgage etc. 9-penses relating to the issue and transfer of share and debentures like stamps duty e-pensesD discount on share and debentures etc. <enalties and fines. 9-amples of incomes &hich are recorded in the financial books only are ( 1i2 1ii2 1iii2 1iv2 1v2 <rofit on sale of investment and fi-ed assets. Interest received on investment and bank deposits. :ividend received on investment in shares. 'ees received on issues and transfer of shares etc. ;ental income
!here are abnormal or special items of e-penditure and income &hich are not included in the cost production. !heir inclusion in cost of production &ould result into correct cost ascertainment. :ifferent bases of charging depreciation also accounts for the disagreement of profits as per financial and cost accounts. :ifferent methods of valuation of closing stock adopted in cost and financial accounts &ill also account for the difference in profit under financial and cost accounts. )+1 3hat the reasons for disagree ent of profits as per cost accounts and financial accounts! Discuss+ .*000 J $a%2 33
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. <r
3h% is it necessar% to reconcile the profits as sho:n ,% the Cost and &inancial Accounts! E9plain the reason for the difference in profit also+ Ans+ .B+ co + J 166?2
;easons for disagreement of profit as per cost and financial accounts. !he various reasons for disagreement of profit sho&n by the t&o sets of books vi0., cost and financial may be listed be belo&( 1+ #te s approaching onl% in financial accounts+ !he follo&ing items of income and e-penditure are normally included in financial accounts and not in cost accounts. !heir inclusion in cost accounts might lead to un&ise managerial decisions. !hese items are (
.i2
#nco e "1a2 1b2 1c2 1d2 1e2 <rofit on sale of assets Interest received :ividend received ;ent receivable +hare !ransfer fees
.ii2
E9penditure 1a2 1b2 1c2 1d2 1e2 1f2 1g2 1h2 Coss on sale of assets Bninsured destruction of assets Coss due to scrapping of plant and machinery <reliminary e-penses &ritten off 7ood&ill &ritten off Bnder&riting commission and debenture discount &ritten off Interest on mortgage and loans 'ines and penalties
.iii2
Appropriation 1a2 1b2 1c2 *+ :ividends ;eserves :ividend 9quali0ation fund, +inking fund etc. #te s appearing onl% in cost accounts !here are some items &hich are included in cost accounts but not in financial accountants. !hese 34
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. are ( 1a2 1b2 1+ >otional interest on CapitalD >otional rent on premises o&ned
Dnder or over J a,sorption of overhead In cost accounts overheads are charged to production at pre I determined rates &hereas in financial accounts actual amount of overhead is charged, the different gives rise to under I or over I absorptionD causing a difference in profits.
4+
Different ,ases of stoc' valuation In financial books, stocks are valued at cost or market price, &hichever is lo&er. In cost books, ho&ever, stock of material may be valued on 'I'= or CI'= basis and &ork in progress may be valued at prime cost or &orks cost. :ifferences in stock valuation may thus cause a difference bet&een the t&o profits.
5+
Depreciation !he amount of depreciation charge may be different in the t&o sets of books either because of the different methods of calculating depreciation or the rates adopted. In cost accounts, for instance, the straight line method may be adopted &hereas in financial accounts it may be the diminishing balance method.
)+4 Ans+
3h% is it necessar% to reconcile the profits ,et:een cost accounts and financial accounts! .*00* J /ov2 1a2 >eed for reconciliation( &hen cost and financial accounts are maintained separately, the profit sho&n by one set of books may not agree &ith that of the other set. In such a situation, it becomes necessary toe reconcile the results 1profit 3 loss2 sho&n by t&o sets of books. Cause for difference bet&een profit sho&n by cost and financial accounts 112 !here are certain items &hich appear in financial books only and are not recorded in cost accounting books e.g. loss on sale of fi-ed assetsD e-penses on stamp dutyD interest on bank loan etc. +imilarly, there may be some items &hich appear in cost accounts only and do not find a place in the financial books e.g., notional interest etc.2 In cost accounts, overheads are generally absorbed on the basis of predetermined overhead rate, &hereas in financial accounts actual e-penditure on overheads is recorded, this &ill also cause a difference bet&een the figures of profit sho&n under financial and cost accounts. :ifferent methods of valuation of closing adopted in cost and financial accounts &ill also cause a difference in the results sho&n by the t&o sets of books. In financial accounts the method generally follo&ed is cost or market price, &hichever is less &hereas in cost accounts different methods of pricing of material issues such as CI'=, 'I'= average etc are used. Bse of different methods of depreciation is also responsible for the variation of profit sho&n by t&o sets of books. In financial accounts, depreciation may be charged according to &ritten do&n value method &hereas in cost accounts it may be charged on the basis of the life of the machine. Abnormal items not included in cost accounts also cause a difference in profit. If such items of e-penses are included, cost ascertained &ill not be correct. 35
1*2
1,2
1.2
1/2
Bnder non integrated system of accounting, cost accounts and financial accounts are separately maintained. In such a system, profit and loss sho&n by costing books may not agree &ith that sho&n by financial books. !herefore, it becomes necessary that profit or loss sho&n by the t&o sets of accounts is reconciled. /eed for Reconciliation 1. *. ;econciliation reveals the reasons for difference in profit and loss bet&een cost and financial accounts. It also helps in checking the arithmetical accuracy of the costing data.
Reasons for Difference in Costing and &inancial Profit A (oss 1. Items sho&n only in financial accounts. !here are a number of items &hich appear in financial accounts and not in cost accounts. !hese items are classified into three categories as under ( 1a2 <urely financial charges. !he e-amples are as follo&s ( 1i2 1ii2 1iii2 1iv2 1v2 1vi2 1vii2 1b2 Coss on the sale of capital assets. :iscount on bonds, debentures, etc. Cosses on investments. 9-penses of company#s transfer office. Interest on bank loans and mortgages, etc. 'ines and penalties. :amages payable under la&.
<urely financial incomes. !he e-amples are as follo&s ( 1i2 1ii2 1iii2 1iv2 1v2 <rofit arising from the sale of capital assets. ;ent receivable. :ividend and interest received on investments. Interest received on bank deposits. !ransfer fees received.
1c2
Appropriations of profit. !he e-amples are as follo&s ( 1i2 1ii2 1iii2 1iv2 1v2 :ividends paid. !ransfer to reserves. Charitable donations. Income ta-. Amounts &ritten off good&ill, discount on debentures, preliminary e-penses, etc. 36
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1vi2
Any other items &hich appears in <rofit and Coss Appropriation Account. .Assign ent2
37
D/#T J ##
Chapter J 4
#/TEERATED
THE<RK
7H<RT /<TE7 )+1 3rite short notes .1665, 166=, 166?, 166@, 1666, *001, *00*2 .B+Co Integrated accounting Ans+ Integrated Accounts( It is the name given to a system of accounting &hereby cost and financial accounts are kept in the same set of books. !his system avoids the need for separate sets of books for financial and costing purpose. Integrated accounts provides or meets out fully the information requirement for costing as &ell as financial accounts. !he main advantage of integrated accounts, are as follo&s( 1i2 1ii2 1iii2 1iv2 :ue to the use of one set of books, there is a significance e-tent of saving in efforts made. >o delay is caused in obtaining information as it is provided from books of original entry. !he question of reconciling costing profit and financial profits does not arise, as there is one figure of profit only. !he accounting procedures can be simplified. J 166?, *0002
9ssential pre requisites for integrated accounts are ( 112 1*2 1,2 )+* A suitable coding system must be developed to serve the purpose of both financial and cost accounts. An agreed routine, &ith regard to the treatment of provision for accruals, prepaid e-penses, other ad4ustment necessary for the preparation of interim accounts be lad do&n. <erfect coordination should e-ist bet&een the staff responsible for the financial and cost aspect of the accounts.
3rite short notes on " Cost (edger control accounts .166= J $a% 2
Ans+
Cost ledger control accounts "- this control account is also popularly kno&n as U7eneral ledger ad4ustment statement accounts is opened is cost ledger to complete double I entry. All items of income and e-penditure taken from financial accounts and all transfers from cost accounts to financial books are recorder in this account. +ince the purpose of this account is to complete double entry in the cost ledger, therefore all transactions in the cost ledger must be recorded through the cost ledger control account. 38
!he balance in this account &ill al&ays be equal to the total of all the balance of the impersonal accounts.
)+1
Distinguish ,et:een an% t:o of the follo:ing "#ntegrated and non J integrated s%ste s of accounting . .B+ Co J *0012
Ans+
/on J integral s%ste of accounting "- Bnder this system, cost and financial accounts are kept separately under t&o sets of accounts books. In other &ords, cost accounts are kept independent of financial accounts. At the end of the year cost accounting profit is reconciled &ith the profit as per financial accounts. #ntegral s%ste of accounting " Bnder this accounting system. )oth the cost accounts as &ell as financial accounts are maintained in one and the same set of books. It means Uthe merger or integration of both financial and cost accounts thus maintaining only one integrated ledger containing both financial as &ell as costing records.U =ther &ise, in non integrated accounting system, cost accounts and financial accounts are kept separately. Bnder this system, ho&ever, certain inter I locking accounts may be maintained so as to ensure integration. !his is kno&n as inter I locking of the t&o accounts. Bnder integrated accounting method, there is no need to reconcile the results of cost accounts &ith those of the financial accounts. It is so because in case of integrated accounting system both accounts are preferred as part of a single comprehensive accounting method.
)+4
3hat are the essential pre-re>uisites of integrated accounting s%ste ! ./ov+, 166=, *001, 1 ar's2
Ans+
Essential pre-re>uisites of #ntegrated Accounting 7%ste "
!he essential pre requisites of integrated accounting system including the follo&ing ( 1. !he managementUs decision about the e-tent of integration of the t&o sets of books. +ome concerns find it useful to integrate upto the stage of primary cost or factory cost &hile other prefer full integration of the entire accounting records. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts. An agreed routine, &ith regard to the treatment of provision for accruals, prepaid e-penses, other ad4ustment necessary for preparation of interim accounts. <erfect coordination should e-ist bet&een the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured. Bnder this system there is no need for a separate cost ledger. =f course, there &ill be a number of subsidiary ledgersD in addition to the useful Customers Cedger and the )ought Cedger, there &ill be ( 1a2 +tores CedgerD 1b2 +tock Cedger and 1c2 Hob Cedger.
*. ,. ..
)+5
3hat are the advantages of integrated accounting! ./ov+, 166?, $a%, *00*, 4 39
ar's2
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. Ans+ Advantages of #ntegrated Accounting "
Integrated Accounting is the name given to a system of accounting &hereby cost and financial accounts are kept in the same set of books. +uch as system &ill have to afford full information required for Costing as &ell as for 'inancial Accounts. In other &ords, information and date should be recorded in such a &ay so as to enable the firm to ascertain the cost 1together &ith the necessary analysis2 of each product, 4ob, process, operation or any other identifiable activity. 'or instance, purchases are analysed by nature of material and its endues. <urchases account is eliminated and direct postings are made to +tores Control Account, 8ork in <rogress account, or =verhead Account. <ayroll is straight&ay analysed into direct labour and overheads. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact all information that management requires from a system of Costing for doing its &ork properly is made available. !he integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of la& and the management maintains full control over the liabilities and assets of its business. !he main advantages of Integrated Accounting are as follo&s ( 1i2 1ii2 1iii2 1iv2 1v2 +ince there is one set of accounts, thus there is one figure of profit. %ence the question of reconciliation of costing profit and financial profit does not arise. !here is no duplication of recording of entries and efforts to maintain separate set of books. Costing data are available from books of original entry and hence no delay is caused in obtaining information. !he operation of the system is facilitated &ith the use of mechani0ed accounting. Centrali0ation of accounting function results in economy.
)+=
3hat do %ou understand ,% integrated accounting s%ste ! 7tate its advantages and pre-re>uisites+
Ans+ Integrated 1or Integral2 Account is the name given to a system &hereby cost and financial accounts are kept in the same set of books. =bviously, then there &ill be no separate sets of books for Costing and 'inancial purposes. Integrated Accounts &ill have to afford full information required for Costing as &ell as for 'inancial Accounts. In other &ords, information and data should be recorded in such a &ay as to enable the firm to ascertain the Cost 1together &ith the necessary analysis2 of each product, 4ob, process, operation or any other identifiable activity. 'or instance, purchases are analysed by nature of material and its endues. <urchase accounts are eliminated and direct postings are made to +tores Control Account, 8ork in <rogress Account, or =verhead Account. <ayroll is straight&ay analysed into direct labour and overheads. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains I in fact, all information that management requires from a system of Costing for doing its &ork properly. !he integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of la& and the managements maintains full control over the liabilities and asserts of its business. !he main advantages of Integrated Accounts are as follo&s( 112 1*2 1,2 1.2 +ince there is one set of accounts, thus there is one figure of profit. %ence the question of reconciliation of costing profit and financial profit does not arise. !here is no duplication of recording of entries and efforts in the separate set of books. Costing data are available from books of original entry and hence no delay is caused in obtaining information. !he operation of the system is facilitated &ith the use of mechani0ed accounting. 40
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1/2 Centrali0ation of accounting function results in economy.
!he essential pre requisites for integrated accounts include the follo&ing steps. 1. !he managementUs decision about the e-tent of integration of t&o sets of books. +ome concerns find it useful to integrate upto the stage of primary cost or factory cost &hile others prefer full integration of the entire accounting records. A suitable coding system must be made available so as to serve to accounting purposes of financial and cost accounts. An agreed routine, &ith regard to the treatment of provision for accruals, prepaid e-penses, and other ad4ustments necessary for preparation of interim accounts. <erfect co ordination should e-ist bet&een the staff responsible for the financial and cost aspects of the accounts and an efficient processing of the accounting documents should be ensured. LLLLLLLLLL
*. ,. ..
Chapter = $ATER#A( THE<RK 7H<RT )DE7T#</7 )+1 Ans+ 3rite short notes on" ABC anal%sis+ .166=, *000, 1661, *004, *0052 CA-P+E+##
A)C Analysis It is a system of inventory control. It e-ercise discriminating control over different items of stores classified on the basis of the investment involved. Bsually the items are divided into three categories according to their importance, namely, their value and frequency of replacement during a period. 1i2 A# category of items consists of any small percentage i.e. about 1FV of the total items handled by the stores but requires heavy investments about @FV of inventory value, because of their high prices and heavy requirement. ")# category of items are relatively less importantD they may be *FV of the total items of material handled by stores. !he percentage of investment required is about *FV of the total investment in inventories. "C# category of items do not require much investmentD it may be about 1FV of total inventory value but they are nearly @FV of the total items handled by store.
1ii2
1iii2
"A# category of items can be controlled effectively by using a regular system &hich ensures neither overWstocking nor storage of materials for production. +uch a system plans its total materials requirements by making budgets. !he stocks of materials are controlled by fi-ing certain levels like, ma-imum level, minimum level and re W order level. A reduction in inventory management costs is achieved by determining economic order quantities after taking into account ordering cost and carrying cost. to avoid shortage and to minimi0e heavy investment in inventories, the techniques of value, analysis reduction, standardi0ation, may be used. In the case of ")# category of items, as the sum involved is moderate, the same degree of control as applied in "A# category of items is not &arranted. !he orders for the items, belonging to this category may be placed after revie&ing their situation periodically. 41
'or "C# category of items, there is no need of e-ercising constant control. =rders for items in this group may be placed either after si- months or once in a year, after ascertaining consumption requirements. In this case the ob4ective is to economics is to economics on ordering and handling costs. !he advantages of A)C analysis are the follo&ing( 1i2 1ii2 1iii2 1iv2 It ensures that, &ithout there being any danger of interruption of production for &ant of materials or stores, minimum investment &ill be made on inventories of stock of materials or stocks to be carried. !he cost of placing orders, receiving goods and maintaining stocks is minimi0ed specially if the system is coupled &ith the determination of proper economics order quantities. 6anagement time is saved since attention need be paid only to some of the items rather than all the items as &ould be the case if the A)C system &as not in operation. 8ith the introduction of the A)C system, much of the &ork connected &ith purchases can be systemati0ed on a routine basis to be handled by sub W ordinate staff.
)+* Ans+
3rite notes on" Bill of $aterial
16@?, 166@M$a%
In most of the manufacturing units a list of materials required for a particular &ork or 4ob order is prepared. +uch a list is usually prepared either by the engineering or production planning department. !his list is kno&n as a bill of material. )ill of material has codeD description and quantity of material and other stores items required for carrying out a particular &ork or 4ob order. It also acts as an authori0ation for the issue of materials and stores items mentioned in it. Bse of )ill of 6aterials save paper &ork and also ensures requisition of the e-act quantity of material. It also saves the botheration of stores people of preparing and issuing a number of material requisition slips. It also acts as an advance intimation to stores and purchase departments about the requirements of materials.
7enerally four copies of it are prepared, one for each of the follo&ing departments 1a2 1b2 1c2 1d2 +tores departments <roduction departments Cost accounts departments <roduction planning departments
D#7T#/ED#7H BET3EE/ )+1 Distinguish ,et:een " Perpetual #nventor% and continuous 7toc' ta'ing+ 166=-/ov .CA #nter J *001, *00=2 Ans+ <erpetual inventory is a system in &hich a continuous record of receipt and issue of materials is maintained by the stores department. In this system the stock control cards, bin cards and stores ledger sho& the receipts, issue and balance of each item at any point of times after each transaction. !he stocks alas per dual records namely )in card and stores ledger are reconciled on a continuous basis. !he system facilitates planning and control.
Continuous stock taking is a system of physical verification of stocks of each item on continuous vases. !he actual quantity on the bin card is compared &ith bin valances. +uch a verification is conducted round the year such that all items of stocks are verified , to . times in a year. Any discrepancies are investigated and reported for corrective action. It also serves as a moral check on stores staff and acts as deterrent to dishonesty. A perpetual inventory 42
system in usually supported by continuous stock taking. it calls for up to date &riting up of stores ledger and bin cards and stock control cards. !he balances as per bin card and stores ledger are compared &hen every receipts or issue is posted. !he physical balance on continuous stock taking is also compared &ith the bin card or ledger balances. !hus monthly accounts can be prepared &ith confidence. )+4 Distinguish clearl% Bin cards and 7tores (edger+ .*000, *00*, *001, 16662 Ans+ )oth bin cards and stores ledger are perpetual inventory records. >one of them is a substitute for the other.
!hese t&o records may be distinguished from the follo&ing point of vie&( 1a2 1b2 1c2 1d2 1e2 1f2 )in card is maintained by the store keeper, &hile the stores recording document &hereas the stores ledger is an accounting records. )in card is the stores recording documents &hereas the stores ledger is an accounting record. )in card contains information &ith regard to quantities i.e. their receipt, issue and balance &hile the stores ledger contains both quantitative and value information in respect of their receipts, issue and balance. In the bin card centuries are made at the time &hen transactions takes place. )ut in the stores ledger entries are made only after the transactions has taken place. Inter departmental transfers of materials appear only in stores ledger. )in cards records each transactions but stores ledger records the same information in a summari0ed form.
DE7CR#PT#BE )DE7T#</7 )+5 Ans+ 3hat is Econo ics <rder )uantit%! 1664M $a%
Econo ics order >uantit% "- 9conomics order quantity represents the si0e of the order for &hich both order, ordering and carrying costs together are minimum. If purchases are made in large quantities, inventory carrying cost &ill be high. If the order si0e is small, ordering cost &ill be high. %ence, it is necessary to determine the order quantity for &hich ordering and carrying costs are minimum. !he formula used for determining economics order quantity is a s follo&s(
EOQ =
8here,
2AO C
A is the annual consumption of material in units. = is the cost of placing an order 1ordering cost per unit2 C is the cost of interest and storing one unit of material for the one year 1carrying cost per unit per annum2. )+= Ans+ Ho: does a ,ill of aterial differ fro a aterial re>uisition notes! E9plain the purpose of each . 1664 M $a%
Bill of aterial "- It is a list of material required either for a particular 4ob or for a &ork order. It contains the descriptionD code and quantity of materials and other stores items required for a particulars 4ob or &ork order. It serves as an advance intimation to stores department about the requirement of 43
materials. It acts as an authori0ation for the issue of all materials and stores items mentioned in the bill of materials. Its use reduce pupae &ork and assures requisition of the e-act quantity of material to the user departments. $aterial re>uisition note "- It is a formal request, for the supply of specified materials, stores etc. to the production departments for a specific 4ob or &ork order. it authori0es the issuing departments to dra& from stores the requisitioned materials. +uch notes contains information about the description, code and quantity of materials needed. It also has 4ob3&ork order number for &hich the material has been requisitioned. !his note is signed by the foreman of the concerned departments. )+? GTo ,e a,le to calculate a ,asic E<) certain assu ptions are necessar%C+ (ist do:n these assu ptions+ 1665 M /ov
Ans+ !he computation of economics order quantity is sub4ect to the follo&ing assumptions. 1i2 1ii2 1iii2 )+@ Ans+ =rdering cost 1per order2 and carrying cost 1per unitK annum2 are kno&n and constant. Anticipated usage 1in units2 of material for a period is uniform and kno&n. Cost per unit of the material 1to be purchased2 is kno&n and it is constant. 3hat is a purchase re>uisition! .Eive a speci en for 1a2 1i2 1ii2 1iii2 1iv2 of a purchases re>uisition!
A purchase requisition is a form used for making a formal request to the purchasing department to purchase materials. <urchase requisitions are usually initiated by A store department for regular and standard items held in the stock. !he production control department for special material required for specific 4ob#s. !he maintenance department for maintenance equipment and items of capital e-penditure. !he heads of departments for office equipments.
!he aforesaid arrangement is only a matter of convenience. In some concerns distinction is made bet&een regular indents and special indents, depending upon &hether the items are needed for replacing stocks or for special orders. )ut both types of indents are initiated by the stores department. Irrespective of the difference regarding the procedure for initiating purchase requisition, the purchase manager should have &ith him a list of the persons authorised to requisition materials. 9ach purchase requisition should clearly state the quantity, quality and other specifications in the appropriate column of the given specimen form along &ith the purpose for &hich materials are required. It should also indicate the date by &hich such materials are needed. :epending upon the procedure to be follo&ed appropriate number of copies of the purchase requisitions may be prepared and used accordingly. A specimen form of purchase requisition is given belo&(
A 7peci en for :ateXXXXXXXXXXX 'or +tock ;eq. >o.XXXXXXXXX +l.>o. Code >o. :escription
of purchase re>uisition :ate of requirementXXXXXXXXX :ept. or &ork order >o.XXXXXXXX
Quantity
7rade
;emarks
44
;equisitioned by XXXXXXXChecked by XXXXX Approved byXXXXXXXXX 'or <urchase :epartment use <urchase =rder >o.XXXXXXXXXXXXXX :ate of <urchaseXXXXXXXXXXXX >ame of +upplier XXXXXXXXXXXXX 9-pected date of deliveryXXXXXXXXXXX )+6 Ans+ 3hat is -ust in Ti e .F#T2 purchase! 3hat are the advantages of such purchases! 1666M $a% Hust in time 1HI!2 purchases means the purchase f goods or materials such that delivery immediately precedes their use.
Advantages of F#T purchases"

6ain advantages of H9! purchases are as follo&s( 1. *. ,. !he suppliers of goods or materials co operates &ith the company and supply requisite quantity of goods or materials for &hich order is placed before the start of production. HI! purchases results in cost savings for e-ample, the costs of stock out, inventory carrying, materials handling and breakage are reduced. :ue to frequent purchases of ra& materials, its issue price is likely to be very close to the replacement price. Consequently the method of pricing to be follo&ed for valuing material issues becomes less important for companies using I!! purchasing. HI! purchasing are no& attempting to e-tend daily deliveries to as many areas as possible so that the goods spend less time in &arehouses or on store shelves before they are e-hausted. 3hat is aterial handling cost! Ho: :ill %ou deal it in cost accounts! 1666M$a% Ans+
.. )+10
$aterial handling over " It refers to the e-penses involved in receiving, storing, issuing and handling materials. !o deal &ith this cost in cost accounts there are t&o prevalent, approaches as under(
'irst approach suggests the inclusion of these costs as part of the cost of materials by establishing a separate material handling rate e.g. at the rate of percentage of the cost of material issued or by using a separate material handling rate &hich may be established on the basis of &eight of materials issued. Bnder another approach these costs may be included along &ith those of manufacturing overhead and be charged over the products on the basis of direct labour or machine hours.
1b2
At the time of physical stock taking, it &as found that actual stock level &as different from the clerical or computer records. 8hat can be possible reasons for such differencesN %o& &ill you deal &ith such differencesN <ossible reasons for differences arising at the time of physical stock taking may be as follo&s &hen it &as found that actual stock level &as different from that of the clerical or computer records( 8rong entry might have been made in stores ledger account or bin card. !he items of materials might have been placed in the &rong physical location in the store.
Ans+ 1i2 1ii2
45
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1iii2 1iv2
Arithmetical errors might have been made &hile calculating the stores balances on the bin cards or store ledger &hen a manual system is operated. !heft of stock.
8hen a discrepancy is found at the time of stock taking, the individual stores ledger account and the bin card must be ad4usted so that they are in agreement &ith the actual stock. 'or e-ample, if the actual stock is less than the clerical or computer record the quantity and value of the appropriate store ledger account and bin card 1quantity only2 must be reduced and the differences in cost be charged to a factory overhead account for stores losses.
)+11 Ans+
Discuss the accounting treat ent of defectives in cost accounts+ *000 M $a% Accounting treat ent of defective sin cost accounts"
:efectives refers to those units or portions of production, &hich do not meet the prescribed specifications. +uch units can be re&orked r re conditioned by the use of additional material, labour and I or processing and brought to the point of either standard or sub standard units.
The possi,le :a%s of treating defectives in cost accounts are as ,elo:"

1. 8hen defectives are normal and it is not beneficial to identity them 4ob &ise, then the follo&ing methods may be used. 1a2 1b2 1c2 *. ,.
Charged to good products" !he cost of rectification of normal defectives is charged to good units. !his method is used &hen defectives rectified are normal. Charged to general overheads" If the department responsible for defectives cannot be identified, the re&ork costs are charged to general overheads. Charged to depart ental overheads" If the department responsible for defectives can be correctly identified, the rectification cost should be charged to that department.
8hen normal defectives are easily identifiable &ith specific 4ob the re&ork costs are debited to the identified 4ob. 8hen defectives are abnormal and are due to causes &ithin the control of the organisation, the re&ork cost should be charged to the Costing <rofit and Coss Account. #+ C+ 3+ A+ A C 7 # B+ - C<$+ .H2
inventory Control.
.B+Co + M .H2 J 16662
1*+ 112 1*2 1,2
#ndicate :hether the follo:ing state ent are True of &alse, giving reason in one in one or t:o lines+ 166? According to CI'= method of pricing, issues are close to current economics values. <erpetual inventory system means continuous stocks taking. Bnder the A)C analysis of material control, "A$ stands for the highest.
Ans+
1i2
!rue, Issue of materials are made from the latest purchases. 46
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1ii2 1iii2
'alse, Continuous stock taking is a part of perpetual inventory system. 'alse, "A# stands for highest value items. EEEEEEEEEEEEEE
Chapter ? (AB<DR THE<RK
7H<RT )DE7T#</7 )+1 3rite short notes on" (a,our Turnover+ .1664,166=, *0012 Ans+ (a,our Turnover" - Ceaving and coming of &orkers in business organi0ation gives rise to the phenomenon of labour turnover. Cabour turnover of an organi0ation is the rate of change in its labour force during a specified period. !his rate of change is compared &ith an inde- &hich acts as there meter to ascertain its reasonableness. !he suitable inde- of labour turnover may be the standard or usual labour turnover in the industry or locality, or the labour turnover rate for a past period. A higher labour turnover reflects that the &orkers in the organi0ation are ne& and ine-perienced, and it is a matter of concern to the organi0ation. Also it accounts for an increase in cost of production end even disturbs the even flo& of production in the market. !o measure labour turnover, the follo&ing three methods, vi0., 1i2 +eparation methodD 1ii2 ;eplacement method and 1iii2 'lu- method are available. 9ach method emphasi0es on different aspects. )ut it is e-pected from business concern that a particulars method may be used consistently to facilitates comparison of data from year to year. Cabour turnover may be calculated by using any one of the follo&ing formulae( >umber of employees replaced Cabour turnover P - 1FF Average number of employees on roll <R >umber of employees left Cabour turnover P - 1FF
Average number of employees on roll <R >umber of Hoining plus number of leaving Cabour turnover P Average number of employees on roll 47 - 1FF
Causes of (a,our turnover "- the main causes of labour turnover in an organi0ation3 industry can be broadly classified under the follo&ing heads( 1a2 1b2 1c2 <ersonal causes Bnavoidable causes Avoidable causes
;emedial steps to minimi0e labour turnover. !he follo&ing remedial steps are useful in minimi0ing labor turnover. 1a2 1b2 1c2 1d2 1e2 9-it Intervie& Hob analysis and evaluation +cientific system of recruitment, selection, placement and promotion. 9nlightened attitude of management Bse of committee.
)+*
Discuss the t:o t%pes of cost associated :ith la,our turnover .*001, 1666 J /ov2
Ans+
T:o t%pes of cost :hich are associated :ith la,our turnover are "112 Preventive costs "- !hese include costs incurred to keep the labour turnover as a lo& level i.e., cost of medical schemes. If a company incurs high preventive cost. !he rate of labour turnover is usually lo&. Replace ent costs "- !hese are the costs &hich arise due to high labour turnover. If men leave soon after they acquire the necessary training and e-perience of &ork, additional costs &ill have to be incurred on ne& &orkers, i.e. cost of advertising, recruitment, selection, training and induction etc. caused due to the inefficiency and ine-perienced ne& &orkers.
1*2
It is obvious that a company &ill incur very high replacement costs if the rate of labour turnover is high. +imilarly, only adequate preventive costs can keep labour turnover at a lo& level. 9ach company must, therefore, &orkout the optimum level of labour turnover keeping in vie& its personnel politics and the behavior of replacement costs and preventive costs at various levels of labour turnover rates.
)+1 Ans+
3hat is i pact of N(a,our TurnoverN on a
anufacturing organi;ationNs :or'ing! 1166@ J /ov2
Cabour turnover refers to the rate of change in the composition of labour force of a concern during a specified period of time. !he impact of labour turnover on a manufacturing organisationUs &orking is manifold. 9ven flo& of production is disturbed. Cost of recruitment and training increases. 48
1a2 1b2
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1c2 1d2 1e2 )reakage of tools, &astage of material increases.
=verall production decreases due to the time lost bet&een the leaving recruitment of ne& &orkers. ;eduction in sales accounts for loss of contribution and good&ill consequently.
D#7T#/ED#7H BET3EE/ )+4 Distinguish Bet:een and $erit rating+ .166=, 1666, *001, 16642 Fo, evaluation
Ans+
Fo, evaluation and
erit rating "-
!he main points of distinction bet&een 4ob evaluation and merit rating are as follo&s ( 112 Hob evaluation is the ascertainment of the relative of 4obs &ithin a company and merit rating is the assessment of the relative &orth of the man behind a 4ob. In other &ords, merit rating rates employees on their 4ob &hile 4ob evaluation rates the 4obs. Hob evaluation and its accomplishments are meant to set up a rational &age and salary structure &hereas merit rating provides a scientific basis for determining fair &ages for each &orker based on his ability and performance. Hob evaluation simplifies &age administration by bringing a uniformity in &age rates. =n the other hand, merit rating is used to determine fare rate of pay for different &orkers on the basis of their performance.
1*2
1,2
)+5
Distinguish ,et:een the follo:ing " Casual :or'er and out:or'er+
.166? J$a%2
Ans+
Casual :or'er and out:or'er "-
A &orker &ho is appointed for a short duration to carry on normal business activities in place of regular but temporarily absent &orker. +uch a &orker is also kno&n as daily &ager or Ubad liesU. A casual &orker do not en4oy the facilities available to a regular &orker. A &orker &ho does not &ork in the factory premises but either he &orks in his home or at a site outside the factory is kno&n as an out&orker. An out&orker &ho &orks in his home is usually compensated on the basis of his home is usually compensated on the basis of his output. %e is supplied &ith ra& materials and tools necessary for carrying out the 4ob. An out&orker 1outside the factory2 is usually on speciali0ed 4obs3contract &ork
)+=
E9plain the
eaning of and the reasons for Oidle Ti eO and discuss its treat ent in cost accounts+ .*0002 1664 J /ov
49
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. Ans+
Idle time refers to the labour time paid for but not utili0ed on production. It, in fact, represents the time for &hich &ages are paid, but during &hich no output is given out by the &orkers. !his is the period during &hich no output is given out by the &orkers. !his is the period during &hich &orkers remain idle. Reasons for idle ti e"- According to reasons, idle time can be classified into normal idle time and abnormal idle time. >ormal idle time is the time &hich cannot be avoided or reduced in the abnormal course of business. !he main reasons for the occurrence of normal idle time are as follo&s ( *. time taken by &orkers to travel the distance bet&een the main gate of factory and the place of their &ork. ,. time lost bet&een the finish of one 4ob and starting of ne-t 4ob. .. time spent to overcome fatigue. /. time spent to meet their personal needs like taking lunch, tea, etc.
!he main reasons for the occurrence of abnormal idle time are ( 1. *. ,. :ue to machine break do&ns, po&er failure, non I availability of ra& materials, tools or &aiting for 4obs due to defective planning. :ue to conscious management policy decision to stop &ork for some time. In the case of seasonal goods producing units, it may not be possible for them to produce evenly throughout the year. +uch a factor too results in the generation of abnormal idle time.
Treat ent in cost accounting "- Idle time may be normal or abnormal /or al idle ti e "- It is inherent in any 4ob situation and thus it cannot be eliminated or reduced. !he cost of normal idle time should be charged to the cost of production. !his may be done by inflating the labour rate. It may be transferred to factory overheads for absorption, by adopting a factory overhead absorption rate. A,nor al idle ti e "- It is defined as the idle time &hich arises on account of abnormal causes e.g. strikes, lockoutsD floodsD etc. such an idle is uncontrollable. !he cost of abnormal idle time due to any reason should be charged to costing profit and account. .,2 Discuss the o,-ectives of ti e 'eeping and ti e ,oo'ing!
Ans+ 1a2 1b2
<,-ectives of ti e 'eeping and ti e ,oo'ing "- !ime keeping has the follo&ing t&o ob4ectives Preparation of Pa%roll"- 8ages bills are prepared by the payroll departments on the basis of information provided by the time keeping departments. Co putation of cost "- Cabour cost of different 4obs, departments or cost centers are computed by costing departments on the basis of information provided by the time keeping department. !he ob4ectives of time booking are as follo&s ( 1a2 1b2 1c2 !o ascertain the labour time spent on the 4ob and the idle labour hours. !o ascertain labour cost of various 4obs and products. !o calculate the amount of &ages and bonus payable under the &age incentive scheme. 50
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1d2
!o compute and determine overhead rates and absorption of overheads under the labour and machine hour method.
)+?
3hat is overti e pre iu ! E9plain the treat ent of overti e pre iu steps for controlling overti e+ 11665 J /ov2
in cost accounting+ 7uggest
Ans+
<verti e pre iu "- =vertime is the amount of &ages paid for &orking beyond normal &orking hours as specified by 'actories Act by a mutual a agreements bet&een the &orkers union and the management. According to 'actories Act of 1L.A, a &orker is entitled for overtime at double the rate of his &ages 1including allo&ances2 if he &orks beyond L hour in a day or .A hours in a &eek. 9ven &here the act is not applicable, the practice is to pay for overtime &ork at higher rates usually in accordance &ith a standing agreement bet&een the employer and the &orkers. %ence, payment of overtime consists of t&o elements, the normal &ages i.e., the usual amount, and the e-tra payments i.e. the premium. !his amount of e-tra payments paid to a &orkers under overtime is kno&n as overtime premium. Treat ent of overti e pre iu 1a2 1b2 1c2 1d2 in cost accounting
If the overtime is restored to at the desire of the customer, then the entire amount of overtime including overtime premium should be charged to the 4ob directly. If it is due to a general pressure of &ork to increase the output, the premium as &ell as overtime &agers may be charged &ages may be charged to general overheads. If it is due to the negligence or delay of &orkers of a particular departments, it may be charged to the concerned department. If it is due to circumstances beyond control, it may be charged to costing profit and loss account.
7teps for controlling overti e"Important steps for controlling overtime &ork are as follo&s( 112 1*2 1,2 1.2 9ntire overtime &ork should be duly authori0ed after investigating the reasons for it. =vertime cost should be sho&n against the concerned departments. +uch a practice should enable proper investigation and planning of production in future. If overtime is a regular features, the necessity for recruiting more men and adding shift should be considered. If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resorts to sub I contracting.
)+@
3hat do %ou
ean ,% ti e and otion stud%! 3h% is to so i portant to 11666 J $a%2
anage ent!
Ans+
Ti e and otion stud% "- it is study of time taken and motions 1movements2 performed by &orkers &hile performing their 4obs at the place of their &ork. !ime and motion study has played a significance role in 51
controlling and reducing labour cost. !ime study is concerned &ith the determination of standard time required by a person of average ability to perform a 4ob. 6otion study on other hand, is concerned &ith determining the proper method of performing a 4ob so that there are no &asteful movements, hiring the &orker unnecessarily. %o&ever, both the studies are conducted simultaneously. +ince materials, tools equipment and general arrangements of &ork, all have vital bearing on the method and time required for its completion. !herefore, their study &ould be uncompleted and &ould not yield its full benefit &ithout a proper consideration of these factors. Ti e and 1. otion stud% is i portant to anage ent ,ecause of the follo:ing features"-
Improved methods, layout, and design of &ork ensures effective use of men, materials and resources.
*. Bnnecessary and &asteful methods are pin I pointed &ith a vie& to either improving them or criminating them altogether. !his leads to reduction in the &ork content of an operation, economy in human efforts and reduction fatigue. ,. %ighest possible level of efficiency is achieved in all respect. .. <rovides information for setting labour standards I a steps to&ards labour costs control and cost reduction. /. Bseful for fi-ing &age rates and introducing effective incentive scheme.
)+6
Discuss the effect of overti e pa% ent on productivit%+
1*001 J /ov+2
Ans+ 1.
=vertime &ork should be restored to only &hen it is e-tremely essential because it involves e-tra cost. !he overtime payments increase the cost of production in the follo&ing &ays. !he overtime premium paid is an e-tra payment in addition to the normal rate.
*. !ime and thus the output during normal output. ,. In order to earn more the &orkers may not concentrate on &ork during normal time and thus the output during normal hours may also fall. .. ;eduction output and increased premium of overtime &ill bring about an increase in costs of production.
)+10
7tate the circu stances in :hich in :hich ti e rate s%ste factor%+ 1*001 J /ov2
of :age pa% ent can ,e preferred in a
Ans+
Circu stances in :hich ti e rate s%ste
of :age pa% ent can ,e preferred"
In the follo&ing circumstances the time rate system of &age payment is preferred in a factory( 1a2 <ersons &hose services cannot be directly or tangibly measured, e.g. general helpers, supervisory and clerical staff etc. 52
1b2 8orkers engaged on highly skilled 4obs or rendering skilled services, e.g. tool making, inspection and testing. 1c2 8here the pace of output is independent of the operator, e.g. automatic chemical plants.
)+11 Ans+
Ho: are pa% ents to :or'ers in respect of over-ti e :or' and set-up ti e treated in cost Account! 1166?2 <verti e 3ages+ +ometimes &orkers &ork for an e-tra time over and above the normal hours of &ork. According to the Indian 'actories Act 1L.A, overtime is the time &orked for more than nine hours per day or .A hours per &eek. Bsually, for overtime has to be paid double the normal rate of payment. !his coupled &ith the fact that overtime comes at the end of the day, &hen fatigue has set in, should make it clear that the 4obs done in overtime are rather costly. !his is because of higher rate of &age payment, lo& productivity and additional e-penses on lighting etc. !he <roduction manager or some higher authority should authori0e the overtime because there is a danger that &orkers may develop that as a habit. !he follo&ing treatment should be given to overtime &ages in the follo&ing cases ( =vertime required because of some abnormal conditions like floods, earthquakes etc. should be charged to Costing <rofit J Coss A3c. =vertime &hen required for seasonal pressure should be taken as an item of factory overheads. 8hen overtime is direct i.e. can be identified &ith individual 4obs, it should be charged entirely to that particular 4ob or &ork3order concerned. 8hen =vertime is required to make &ith any shortfall in production due to some fault of management or some une-pected development, it should be charged to Costing <rofit J Coss A3c.
)+1*
#ndicate :hether the follo:ing state ent are True or &alse, giving reason in one or t:o liens" 166@
1i2 Ans+
8aste can be reali0ed but scrap cannot be reali0ed.
'alse. +crap can be reali0ed but not the &aste.
1=
#ndicate :hether the follo:ing state ents are True or &alse" 1i2 1ii2 1iii2
166@
=vertime premium paid to all factory &orkers is usually considered direct labour. <eriod costs are invariable and re e-penses out as and &hen the inventory is sold. Idle facility and idle time are the same.
Ans+
1i2 1ii2 1iii2
'alse 'alse 'alse 53
)+11+ 7tate the purpose served ,% the Ti e Peeping and Ti e ,oo'ing records of a factor%+ *000 Ans+ Ti e 'eeping and Ti e ,oo'ing records serve the follo&ing purposes( 1i2 1ii2 1iii2 1iv2 It completes the attendance records of the company It helps in calculating the &age3salaries of &orkers. Cabour cost of each 4ob can be easily calculated. It helps in e-ercising control on labour time and productivity.
Ans.
/or al #dle Ti e+ !he >ormal idle time is almost unavoida,le and the employer has to bear its cost. !his is the time lost in I coming from the gate of the factory to the department in &hich the &orker is engagedD or going from one 4ob to anotherD or getting from the department to the factory gate at the closing times or intervalsD or personal needs and tea breaks
+uch normal idle time is calculated by comparing the "time card# &ith the I-o, card8 and it may be treated in any these t&o &ays ( It may be treated as an overhead e-pense because no particular 4ob has benefited out of itD or !he 4obs should be charged at a rate higher than the actual rate paid to the &orker in order to recover the cost of the normal idle time.
=ut of these the second method is better. It is so because under the first method if the &ages paid for idle time are treated as "overheads# then even those 4obs, &hich have not used this class of &orkers, have to bear a part of the overheads. A,nor al #dle Ti e+ +uch abnormal idle time arises because of the follo&ing causes ( +trikes Cock outs 6achinery break do&n or po&er failure >on availability of 4obs or materials
!he abnormal idle time may be treated as a loss rather than a cost. %ence, it may be charged to the "Closing <rofit J Coss Account#.
54
Chapter-@ <BERHEAD7 $eaning of overhead =verhead costs are the operating costs of a business enterprise &hich cannot be traced directly to a particular unit of output. =verhead may be defined as the cost of indirect materials, indirect labour and such other e-penses including services as cannot conveniently be charged direct to specific cost units. C.I.6.A., Condon, !erminology gives a very simple definition of overhead as an aggregate of indirect materials, indirect &ages and indirect e-penses.$
Difference ,et:een allocation and apportion ent of overheads+ .C+A #nter $a% 16642 Allocation of overheads"Allocation is the process of charging the full amount of overhead costs to a particular cost centre. !his is possible &hen the nature of e-penses is such that it can be easily identified &ith a particular cost centre. 'or e-ample, the salary paid to a foreman of a particular production department can be directly identified &ith that department and therefore it &ill be directly charged to that department. Apportion ent of overheads"It is process of splitting up an item of overhead cost and charging it to the cost centers on an equitable basis. !his is done in case of those, overhead items &hich can#t allocated to a particular department. 'or e-ample salary paid to the &orks manager of the factory cannot be charged &holly to a particular production department but &ill have to be charged to all departments of the factory on an equitable basis. Eive so e ,ases of Allocation & Apportion ent of <AH+ 1. *. ,. .. /. ?. @. A. L. 1F. =verhead Costs ;ent ;epair and maintenance of building %eating and lighting Air conditioning Indirect material :epreciation Insurance ;epair and maintenance of plant +upervision )ases of Apportionment 'lora area 'lora area 'lora area 'lora area :irect material Asset 5alue Asset 5alue Asset 5alue >umber of &orkers 55
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 11. 1*. 1,. 1.. 1/. 1?. 1@. 1A. 1L. *F. *1. **. *,. +upervision Canteen e-penses 9mployee &elfare e-penses <ersonnel overheads Indirect Cabour 9mployer#s contribution to <' J 9+I 8orkmen compensation +tores overhead 6isc. e-penses Crane e-penses 7eneral overheads 7eneral machine e-penses <o&er
>umber of &orkers >umber of &orkers >umber of &orkers >umber of &orkers :irect Cabour 38age )ill :irect Cabour 38age )ill :irect Cabour 3 8age )ill >umber of material requisition :irect material or direct labour or prime cost >umber of hours crane &orked in departments labour hours or machine hours 5alue of plant J machinery %orse po&er of machine or %.< - hours &orked
*.. */.
Ceave &ith pay 7ratuities
:irect Cabour 3 8age bill :irect Cabour 38age )ill Bases of Apportion ent >o.of material requisitions >o. of employees 5alue of materials purchased or >o.of purchase orders >o. of employees !on miles, truck miles, no. of package :irect labour hours %ours spent on inspection or value of output
7ervice Depart ent 1. *. ,. .. /. ?. A. +tores :eptt. <ersonal :eptt. <urchase :eptt. 8elfare :eptt. 9-ternal transport !ool room e-penses Inspection e-penses
7H<RT )DE7T#</7 )+1 3rite short notes on " Treat ent of interest on capital in cost accounts+ .166?2 1661 - /ov Ans+ Argu ents for the inclusion of interest on capital in cost accounts+ 1A2 Interest is the cost of capital as &ages are the re&ard for labour. )oth are factors of production and, therefore should not be treated differently in cost accounts. 8hile determining the total cost, interest like &ages should be included in the cost of production. 56
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1)2
!he e-clusion of interest from cost accounts, particularly in businesses &here ra& material is used in different states of readiness &ould distort costs and render their comparison a difficult one. <rofit on different 4obs3operation requiring different periods for completion may not be comparable if interest on capital is not included in their total cost. +ometime e-clusion of interest cost may lead the management to take &rong decisions. !he significance of time value of money is recogni0ed only &hen interest is treated as in element of cost a% ,e included in cost
1C2 1:2 192 )-* Ans+
3hat is notional rent of a factor% ,uilding! Eive one reasons :h% it accounts+ .1665 J /ov2
/otional Rent "- It is a reasonable charges raised in the cost accounts for the use of o&ned premises. =ne reason for the use of such a nominal charge is to enable comparison bet&een the cost of items made in factories &hich are o&ned and in rented factories. %o&ever, it may be noted that the case of o&ned factory cost for the same is accounted for by means of depreciation. Ho: do %ou deal :ith the follo:ing in cost accounts! .i2 .ii2 Research and Develop ent E9penses &ringe Benefits+ .*0002
)+1
Ans.1i2 ;easons and development 9-penses( ;esearch and development e-penses is the e-penses incurred for searching ne& or improved products, production methods3 techniques or plants3equipments. ;esearch e-penses may be incurred for carrying basic or applied research. )oth basic and applied research relates to original investigations to gain from ne& scientific or technical kno&ledge and understanding, &hich is not directed to&ards any specific practical aim 1under basic research2 and is directed to&ards a specific practical aim or ob4ective 1under applied research2. !reatment in cost accounts ( e-penses of basic research 1if it is a continuous activity2 be charged to the revenues of the concern. It may be spread over a number of years if research is not a continuous activity and amount is large. 9-penses of applied research, if relates to all e-isting products and methods of production then it should be treated as a manufacturing overheads of the periods during &hich it has been incurred and absorbed. +uch e-penses are directly charged to the product, if it is solely incurred for it. If applied research is conducted for searching ne& product or methods of production etc., then the research e-pense treatment depends upon the outcome of such research. :evelopment e-penses begins &ith the implementation of the decision to produce a ne& or improved product or improved method. !he treatment of development e-penses is same as that of applied research.
1ii2
'ringe benefits ( In every organi0ation, &orkers are paid some benefits in additional to their normal &age or salary. !hese additional benefits are popularly called benefits. !hey include( 1a2 %ousing 57
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1b2 1c2 1d2 1e2 Children education allo&ances %oliday pay Ceave pay
Ceave travel concession to home to&n or any place in India etc.
9-penses incurred on factory &orkers should be treated as factory overheads and apportioned among the production and services departments on the basis of number of &orkers in each department. 'ringe benefits to office and selling and distribution staff be treated as administration overheads and selling and distribution overheads respectively and recovered accordingly.
)+4 Ans .
3hat is ,lan'et overheads rate! #n :hich situations, ,lan'et rate is to ,e used an% :h%! )lanket overheads rate is one single overheads absorption rate for the &hole factory. It may be computed by using the follo&ing formulae( )lanket overhead rate overhead costs for the &hole factory !otal units of the selected base +ituations for using blanket rate( !he use of blanket rate may be considered appropriate for factories &hich produces only one ma4or product on a continuous basis. It may also be used in those units in &hich all products utili0e same amount of time in each department. If such conditions do not e-ist, the use of blanket rate &ill give misleading results in the determination of the production cost, specially &hen such a cost ascertainment is carried out for giving quotations and tenders. :iscuss in brief three main methods of allocating support departments costs to operating departments. =ut of these three, &hich methods is conceptually preferableN
)+5
Ho: do %ou deal :ith the follo:ing in cost accounts! .12 Bad de,ts+
Ans .
Bad De,ts ( !here is no unanimity among various author about the treatment of bad debts. +ome authors believe that bad debts are financial losses and therefore should not be included in the cost of a particulars product or 4ob. Another vie& is that, bad debts are a part of selling and distribution overheads, especially &here they arise in the normal course of trading. !herefore they should be treated in cost accounts in the same &ay as any other selling and distribution e-penses. E9plain .12 Training costs .
)+=
Ans+
!raining costs( these costs comprises ofW &ages and salaries of the trainees or learners, pay and allo&ances of the training and teaching staff, payments of fees etc. for training or for attending courses of studies sponsored by outside agencies and cost of materials, tools and 58
equipments used for training, costs incurred for running the training department, the losses arising due to the initial lo&er production, e-tra spoilage etc. occurring &hile providing training facilities to the ne& recruits. All these costs are booked under separate standing order numbers for the various functions. Bsually there is a service cost center, kno&n as the training sections, to &hich all the training costs are allocated. !he total cost of training section is thereafter apportioned to production centers.
)+?
E9plain" +ingle and multiple overheads rates.
Ans .
+ingle overhead rate ( it is one single overhead absorption rate for the &hole factory. It may be computed as follo&s( +ingle overhead rate P =verhead costs for the entire factory !otal quantity of the base selected !he base can be total output, total labour hours, total machines hours etc. !he single overhead rate may be applied in factories &hich produces only one ma4or product on a continuous basis. It may also be used in factories &here the &ork perform in each department is fairly uniform and standardi0ed. 6ultiple overheads rates( it involves computations of separates rates for each production department, services departments, cost center and each product for both fi-ed and variable overheads, it may be computed as follo&s( =verhead allocated 3 apportioned to each departments cost center or product
6ultiple overheads rate( Corresponding base Bnder multiple overhead rates, 4obs or products are changed &ith varying amount of factory overheads depending on the type and number of departments through &hich they pass. %o&ever the number of overheads rates &hich a firm may compute &ould depend upon t&o opposing factories vi0., the degree of accuracy desired and the clerical cost involved. )+@ #ndicate :hether the follo:ing state ents are true of false, giving reason in one or t:o lines" 1i2 Ans . 'i-ed cost does not charge in the same proportion in &hich output changes.
!rue. !otal fi-ed cost does not change &hen output changes.
59
CHAPTER-6 F<B A/D BATCH C<7T#/E F<B C<7T#/E D#7T#/ED#7H BET3EE/ )+1 Distinguish ,et:een Fo, costing and process costing+ .166= J /ov2
.166@2.B+co .H2 J *0002 Ans:er" Hob Costing 1. Hob costing. costing is specific order <rocess Costing 1. <rocess costing is a method of costing used to ascertain the cost of a product at each process or stage of manufacture. *. Costs are accumulated for each process separately for a given period of time. ,. 'inished products of one process becomes the ra& materials for the ne-t process. .. !he unit cost here is the average cost of the process for a given period. Its correct computation requires the measurements of production at various stages of manufacture. /. Costs are computed for each process at the end of each period. ?. As the processes operations are standardi0ed, accumulation of costs and supervision and control are comparatively easier.
*. Cost here is determined on 4ob basis. ,. 9ach 4ob needs special treatment and no t&o 4obs are like. .. !he cost of each 4ob is compiled separately by adding materials, labour and overheads costs.
/. Costs are computed &hen 4ob is completed. ?. As each 4ob is distinct or is of different nature, more detailed supervision and control and necessary
DE7CR#PT#BE )DE7T#</7 )+* Descri,e -o, costing and ,atch costing giving e9a ples of industries :here these are used+ .*001-$a%2
Ans+ Fo, costing " It is a method of costing &hich is used &hen the &ork is undertaken as per the customer#s special requirements. 8hen an inquiry is received form the customer#s costs 60
e-pected to be incurred on the 4ob are estimated and on the basis of the estimate, a price is quoted to the customer. Actual cost of materials, labour and overheads are accumulated and on the completion of 4ob, these actual costs are compared &ith the quoted price and thus the profit or loss on it is determined. Hob costing is applicable in printing press, hare &are, ship building, heavy machinery, foundry etc. Batch costing " It is variant of 4ob costing. Bnder batch costing, a lot of similar units &hich comprises the batch may be used as a unit for ascertaining cost. In the case of batch costing separate cost sheets are maintained for each batch of products by assigning a batch number. Cost per unit in a batch is ascertained by dividing the total cost of batch by the number of units produced in that batch. +uch a method of costing is used in the case of pharmaceutical or drug industries, readymade garments industries, industries manufacturing electronics parts of !.5. and radio sets etc. )+1 Descri,e ,riefl% the nature of accounting pro,le s associated :ith -o, costing+ .*00*2
Ans+ Fo, costing " Hob costing is used in that type of production &here &ork is done against orders and instructions from customers. !o ascertain the cost of each 4ob, a separate account is prepared for each 4ob to ascertain its cost and profit. 'or this purpose each 4ob is given one 4ob number. :irect materials and &ages are charged to each 4ob on actual costs basis &hile overheads are charged on a pre determined rate by one of the methods of absorption of overhead. In this &ay total cost of a 4ob is ascertained. !his total cost is compared &ith the sale price of the 4ob to ascertain profit or loss on the 4ob. BATCH C<7T#/E )+4 E9plain in ,rief the follo:ing concepts " Batch costing+ .*0012
Ans+ !his is a variation of 4ob costing. 8hile 4ob costing is concerned &ith costing of 4obs made to a customer#s particular requirements, batch costing is used &hen production involves limited repetition &ork and a definite number of articles are manufactured in each batch to be held in stock for sale to customers generally. !hus a batch is cost unit consisting of a group of identical items. )atch costing is applied in the manufacture of shoes, toys, readymade garments, components parts of, cars, radios, &atches, etc. )+5 Discuss the concept of Econo ics Batch )uantit% .EB)2+
Ans+ Econo ics ,atch )uantit% " production is usually done in batches and each batch can have any number of units of a components in it. !he optimum quantity for a batch is that quantity for &hich the setting up and carrying costs are minimum. +uch an optimum quantity is kno&n as 9conomic batch quantity$. !he formula used to determine the economic batch quantity 19)Q2 is (
Economic Batch Quantity =

&here, EB) P 9conomics batch quantity 61
2.U.S. C
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. D P :emand of the components in a year 7 P +etting up cost per batch C P Carrying cost p.u. per annum. LLLLLLLLL
62
CHAPTER-10 C</TRACT C<7T#/E THE<RK 3hat is contract costing! $eaning of Contract Costing Contract costing is that form of specific order costing under &hich each contract is treated as cost unit and costs are accumulated and ascertained separately for each contract. Basic &eatures of Contract Costing 1a2 1b2 1c2 1d2 1e2 1f2 1g2 9ach contract is treated as cost unit. All costs are accumulated and ascertained for each contract. A separate Contract Account is prepared for each contract and is assigned a certain number by &hich the contract is identified. 8ork on contracts is usually e-ecuted at the site of the contract. :irect costs usually constitute a ma4or portion of the total cost of the contract. Indirect costs usually constitute a small portion of the total cost of the contract. !he numbers of contracts undertaken by a contractor at a time is not usually very large.
#n :hich industries contract costing is applied Contract costing is applied in "1a2 1b2 Industries engaged in the construction of building, roads, bridges or other construction &ork Industries undertaking engineering pro4ects.
/u ,er of parties involved in a contract !here are t&o parties involved in a contract vi0. 1a2 1b2 !he contractor I the person &ho undertakes the contract and !he contractee I the person &ho assigns the contract.
Distinction ,et:een -o, costing and contract costing! .$a% *0052 Hob costing differs from contract costing in the follo&ing respects(
63
Basis of Distinction 1. Cost unit *. E9ecution of :or'
Fo, Costing Each -o, is treated as a cost unit. Hob &ork is e-ecuted in factor% pre ises+
Contract costing Each contract is treated as a cost unit. Contract &ork is e-ecuted at the site of contract+
,. #ndirect costs
Indirect costs are Indirect costs are higher that those lo:er than those under under contract 4ob costing. costing. <ricing is influenced by individual condition and general policy of the organi0ation. +i0e of a 4ob is s aller than that of a contract. !he numbers of 4obs are usually large+ <ricing is influenced by the specific clauses of the contract+ +i0e of a contract is larger than that of a 4ob. !he number of contracts undertaken are usually s all+
.. Pricing
/. 7i;e
?. /u ,er
$eaning of :or' certified 8ork certified is that portion of the &ork completed &hich has been certified 3 approved by the contractee#s architect or surveyor. It is valued in in terms of contract price. $eaning of :or' uncertified 8ork uncertified is that portion of the &ork completed &hich has not been certified 3 approved by the contractee#s architect or surveyor. It is valued at cost.
)+1
3rite short notes on "Escalation clauses .*000,*00*,1665-$a%2
Ans+ !his clause is al&ays provided in a contract to safeguard the interest of the contractor against any rise in price of materials and rates of labour and their increased utili0ation. If the prices of materials and rates of labour increase during the period of the contract beyond a certain defined level, the contractor &ill be compensated to the e-tent of a portion thereof. !he contractor has to satisfy the contractee about his claim for compensation in respect of prices and utili0ation of material and labour.
64
)+*
3rite notes on ".12 Cost J Plus J Contracts .166=,*000 - /ov2
Ans+ $ain features of cost - plus - contracts" !he main features of cost 1. *. ,. plus contracts are as follo&s(
!his method is adopted in the case of those contacts &here the probable cost of the contracts can not be ascertained in advance &ith a reasonable accuracy. !hese contracts are preferred &hen the cost of material and labour is not steady and the contract completion may take number of years. !he different costs to be included in the e-ecution of the contract are mutually agreed, so that no dispute may rise in future in this respect. Bnder such type of contracts contractee is allo&ed to check or scrutini0e the concerned books, documents and accounts. +uch a contract offers a fair to the contractee and also a seasonal profit to the contractor. !he contactor price here is ascertained by adding a fi-ed and mutually pre decided component of profit to the total cost of the &ork.
.. /.
)+1 Discuss ,rief the principles to ,e follo:ed :hile ta'ing credit for profit on inco plete contracts+ .*001,1666 J $a%2 Ans+ Principal to ,e follo:ed :hile ta'ing credit for profit on inco plete contacts"!he portion of profit, to be credited to, profit and loss account should depend on the stage of completion of the contact. !his stage of completion of the contract should refer to the credited &ork only. 'or this purpose, uncertified &ork should not be considered as far as possible. 'or determining the credit for profit, all the incomplete contracts should be classified into the follo&ing four categories. 112 1*2 1,2 1.2 Contract less than */V categories. Contract bet&een */V and /FV complete. Contracts bet&een /FV and LFV complete Contracts nearing completion, any bet&een LFV and 1FFV complete.
1a2 1b2
Contract less than *5Q categories " If the contract has 4ust started or it is less than */V complete, no profit should be taken into account. Contract ,et:een *5Q and 50Q co plete " In this case one third of the national profit reduced in the ratio of cash received to &ork certified, may be
65
transferred to the profit and loss account. !he amount of profit to be transferred to the profit and loss account may be determined by using the follo&ing formula(
Cash recei!e" Or alternati!e = #ational profit $ %or& certifie"

1c2 Contracts ,et:een 50Q and 60Q co plete " In this case, t&o third of the notion profit, reduced by the portion of cash received to &ork certified may be transferred to the profit and loss account. In this case the formula to be used is as under (
2 Cash recei!e" Or alternati!e = #ational profit $ %or& certifie"

1d2 Contracts nearing co pletion, contact is nearing completion contract. !he amount of profit be determined by using any one an% ,et:een6Q and 100Q co plete " 8hen a or LFV or more &ork has been done on a to be certified to profit and loss account may of the follo&ing formula(
Estimate" 'r ofit
%or& certifie" Contract price
66
CHAPTER-1* PR<CE77 C<7T#/E
3hat is Process Costing! $eaning of Process Costing <rocess Costing is a method of costing under &hich the all costs are accumulated for each stage of production 1also called process of production2 and the cost per unit of product is ascertained at each stage of production by dividing the total cost of each process by the normal output of that process. CI6A, Condon, defines process costing as that form of operation costing &hich applies &here standardi0ed goods are produced.$ Basic &eatures of Process Costing
1a2 1b2 1c2 1d2 1e2 1f2 1g2
!he production is continuous !he product is homogenous !he processes are standardi0ed !he output of one process becomes the input of another process !he output of the last process is transferred to 'inished +tock Account Costs are collected process &ise Cost per unit is calculated at the end of period by dividing the total process cost by the normal output produced #n :hich #ndustries Process Costing is applied <rocess Costing is applied in those industries &here manufacturing activity is carried on continued by means of t&o or more processes and the output of one process becomes the input of the follo&ing process till completion. It is generally applied in (
1a2 1b2 1c2 1d2 1e2
<aper Industries Chemicals Industries !e-tiles Industries +ugar Industries Crude oil ;efineries Distinction ,et:een -o, costing and process costing
Fo, Costing differs fro
Process Costing in the follo:ing respects" 67
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. Basis of Distinction 1. +pecific orders *. >ature ,. Cost centre .. Cost Ascertainment Fo, Costing Hob is performed against specific orders 9ach 4ob may be different !he cost centre is a 4ob. Costs are ascertained separately collected and for each 4ob
Process Costing <roduction is continuous <roduct is homogenous and standardi0ed !he cost centre is a process Cost are collected and ascertained for each process separately. <rocess costs are calculated at the end of each period. !here is al&ays some &ork in process because of continuous production. Co&er degree of control is required because of homogenous products and standardi0ed process. !he output of one process is transferred to another process as input.
/. 8hen cost are calculatedN ?. 8I<
Hob costs are calculated only &hen a 4ob is completed. !here may or may not be &ork in process %igher degree of control is required because of heterogeneous 4obs. !here are usually no transfers from one 4ob to another unless there is some surplus &ork.
@. :egree of control
A. !ransfer
!he percentage of &astage in each case is computed on the basis of >umber of units entering the process concerned. !he &astage of each process has a scrap value. !he &astage of process A and ) is sold at ;s. 1 per unit and that of process C at ;s.. per unit. )+1 Ans+ 1i2 1ii2 E9plain ,riefl% the procedure for valuation of :or'-in-process+ :efinition of Cot Adult ( It is defined as the verification of cost accounts and a check on the adherence of Cost Accounting plan. It in fact comprises of ( !he verification of cost accounting records such as accuracy of the cost accounts, cost reports, cost statements, cost data, costing techniques. 9-amining cost accounting records to ensure that they adhere to the cost accounting principles, plans, procedures and ob4ectives. In other &ords, the Cost Auditor ensures that the cost accounting plan is in accordance &ith the ob4ectives established by the management and in conformity &ith the appropriate system of cost accounting. )roadly, the purpose of cost audit can be classified as 1i2 <rotective and 1ii2 Constructive. <rotective purpose ( It e-amines that there is no undue &astage or losses and the costing system brings out the correct and realistic cost of production or processing.
68
Constructive purpose ( It provides management &ith information useful in regulating production, choosing economical methods of operation, reducing operations costs and reformulating plants etc. EEEEEEEEEEEEEEEE
CHAPTER-11 F<#/T PR<DDCT A BK PR<DDCT $EA/#/E <& F<#/T PR<DDCT $eaning of Foint Products Hoint <roducts represent t&o or more products of almost equal importance &hich are produced in natural proportions simultaneously from the same material in the same process. !hese products may be saleable &ithout further processing or after further processing. &eatures of Foint Products 1a2 1b2 1c2 1d2 Hoint products are of al ost e>ual i portance+ In other &ords, no single one of them can be regarded as the main product. !hese are produced in natural proportions+ In other &ords, proportion of such products can not be changed at the &ill of the management. !hese are produced simultaneously fro the sa e aterial+
!hese are produced simultaneously in the sa e process+
E9a ples of Foint Products #ndustr% 1a2 <il refining 1b2 &lour ill Fo, Product 7asoline, petrol, diesel, paraffin &a-, coal tar, kerosene etc. 8hite flour, bro&n flour, animal feeding stuff
$eaning of co-products Co products represent t&o or more products &hich are contemporary but are not necessarily produced in natural proportions from the same material in the same process. 'or e-ample, &heat and grain produced in t&o separate farms &ith separate processing of cultivation. +imilarly, timber boards made from different trees are co products. Distinction ,et:een -oint products and co-products Hoint products can be distinguished from co products in the follo&ing respects(
Basis of distinction .a2 Proportion
Foint products !hese are produced in natural
Co-products !hese are not produced in 69
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. proportions &hich can not be changed by the management
natural proportion. <roportion of such products can be changed by the management.
.,2 $aterial
!hese are produced from the same material.
!hese need not necessarily be produced from the same material.
.c2 Process
!hese are produced simultaneously in the same process.
!hese need not necessarily be produced in the same process.
.d2 # portance
!hese are of almost equal Importance
!hese need not necessarily be of equal importance.
B%-Products $eaning of B%-Products )y <roducts are products of relatively small value &hich emerges incidentally in the course of manufacturing the main product. &eatures of B%-Products 1a2 1b2 )y products are of relatively small value. !hese emerge incidentally in the course of manufacturing the main product.
E9a ples of B%-Products #ndustr% 1. +ugar *. Cotton ,. ;ice 6ill $ain Product +ugar Cotton ;ice B%-Products 6alasses, )agasse Cotton +eed %usk
Distinction ,et:een Foint Products and B%-Products Foint products differ fro Basis of Distinction 1. Balue B%-Products in the follo:ing respects" B%-Products !hese are of relativel% s all value !hese emerge incidentall% in the course of manufacturing the main product
Foint Products !hese are of al ost e>ual Balue
*. Production
!hese are produced si ultaneousl%
70
Tutorial /otes " 1i2 1ii2 !he management may decide to treat all products produced as 4oint products or one product as main product and other products as )y <roducts !he same product may be a 4oint product in one industry and a )y <roducts in another industry. $ETH<D7 <& APP<RT#</#/E F<#/T C<7T7 <BER F<#/T PR<DDCT7 !he various methods of apportioning 4oint costs over 4oint products are as follo&s( 112 1*2 1,2 1.2 1/2 1?2 1@2 1A2 .12 .*2 <hysical Bnit 6ethod Average unit cost method +urvey method 3 point values method Contribution margin method 6arket value at separation point method 6arket value after further processing method >et relisable value method ;everse cost method Ph%sical unit ethod " Hoint costs are apportioned on the basis of physical volume of the 4oint products at the split off point. Any processing loss is also apportioned over the products on the same basis. Average unit cost ethod " Hoint costs are apportioned on the basis of average cost per unit &hich is obtained by dividing the total 4oint costs by total number of units of 4oint products produced.
Average cost per unit .12
Total (oint Costs Total #o. of Units of (oint 'r o"ucts
7urve% A ethod A point values ethod " Hoint costs are apportioned on the basis of point values3 percentages assigned to the products according to their relative importance. !he point values 3 percentage are based on the technical survey of all the factors affecting the production and distribution of 4oint products. Contri,ution argin ethod "
.42
112 !he variable portion of total 4oint cost is apportioned on the basis of physical volume of products produced ratio. 1*2 !he fi-ed portion of total 4oint cost is apportioned on the basis of contribution margin ratio. Contribution margin is the difference bet&een the total sales value and total variable cost. .52 .=2 $ar'et value at separating point ethod " Hoint costs are apportioned in the ratio of market value of 4oint products at the separation point. $ar'et value after further processing ethod " Hoint costs are apportioned in the ratio of market value of the 4oint products after further processing.
71
MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. .?2
/et Reali;a,le value ethod " Hoint costs are apportioned in the ratio of net reali0able values of the 4oint products at the separation point. >et reali0able value is computed as follo&s(
A +ales value after further processing ) Cess ( 'urther processing costs C >et reali0able value 1A )2
.@2
Reverse cost ethod " Hoint costs are apportioned in the ratio of net values of the 4oint products at the separation point. >et value is computed as follo&s(
A +ales value after further processing ) Cess 9stimated profit C !otal cost of sales 1A )2 : Cess ( +elling and distribution e-penses 9 !otal cost of goods sold 1C :2 ' Cess ( 'urther <rocessing Costs 7 >et 5alue 19 '2
)+1
.a2 Ho: :ould %ou deal :ith ,%-products in costing" 1i2 8here they are of small total valueN 1ii2 8here they are considerable total valueN 1iii2 8here they require further processingN EEEEEEEEEEEEEE
72

02 Cost Theory v. Good

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MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1e2

CMA SIRAJ MAWANI. PH. 9096299640

(i itation of Cost Accounting 112 1*2 1,2

)*+ (ist the o,-ectives of Cost Accounting+ ./ov *00*, 1

1,2 1.2 1/2

CMA SIRAJ MAWANI. PH. 9096299640

1@2 1A2 )+5+ Ans:er

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1*2

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. .12 .*2 .12

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. c.

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

)1@+ 3rite 7hort notes on Direct E9penses or Chargea,le E9penses! Ans+

CMA SIRAJ MAWANI. PH. 9096299640

T%pes of Responsi,ilities Centres

CMA SIRAJ MAWANI. PH. 9096299640

<rimary responsibility <erformance evaluation

9arning return of Investments. )udgeted ;=I less actual ;=I

CMA SIRAJ MAWANI. PH. 9096299640

maintenance centres are e-amples of since cost centres.

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

Bnit or =utput or single costing

Consisting of multiple varieties of activities and process

<rocess Costing or =peration Costing 6ultiple costing

=il ;efining, )re&eries, Chemicals etc. )icycle Assembly

Combination of any of the methods listed above. 13

CMA SIRAJ MAWANI. PH. 9096299640 !ransport, %otels, Cinema

)+*4+ 3hat do %ou

ean ,% GTechni>ues of CostingC+

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY.

CMA SIRAJ MAWANI. PH. 9096299640

.12 Bill of $aterial and $aterial Re>uisition /ote

CMA SIRAJ MAWANI. PH. 9096299640

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. 1?2 'alse

CMA SIRAJ MAWANI. PH. 9096299640

CMA SIRAJ MAWANI. PH. 9096299640

CMA SIRAJ MAWANI. PH. 9096299640

CMA SIRAJ MAWANI. PH. 9096299640

$eaning of Cost A,sorption

Cost Absorption Rate =

Total cos t of the cos t centre Totalquantum of the base

Classification of cost ,% ele ent

MAWANI AND SUPREME PROFESSIONAL COMMERCE ACADEMY. *+ &eatures

CMA SIRAJ MAWANI. PH. 9096299640

4+Treat ent .,2 #ndirect 1+ $eaning

4+ Treat ent *+ (a,our

Indirect 6aterial Cost is treated as part of overheads.

CMA SIRAJ MAWANI. PH. 9096299640

Cabour employed in !ime keeping :epartment 23

CMA SIRAJ MAWANI. PH. 9096299640

4+ Treat ent .,2 #ndirect E9penses 1+ $eaning

CMA SIRAJ MAWANI. PH. 9096299640

<verheads .or #ndirect Costs2

)+ (ist the o,-ectives of Cost Accounting+ ./ov 00*, 1

1+ 112 12 1,2