A TEXTBOOK OF

FINANCIAL COST
AND
MANAGEMENT
ACCOUNTING
Dr. P. PERIASAMY,
M.B.A., Ph.D.,
Reader,
Department of Business Management, '
Erode Arts College,
Erode - 638 009.
Kat
GJIimalaya CJlublishingGJIouse
MUMBAI DELHI NAGPUR BANGALORE HYDERABAD
AUTHOR
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CONTENTS I
(1) ACCOUNTING PRINCIPLES AND CONCEPTS 1 - 6
Meaning and Scope of Accounting - Definition of Accounting - Steps of Accounting - Functions of
Accounting - Objectives of Accounting - Book keeping - Limitations of Accounting; Branches of
Accounting; Accounting Principles - Accounting Concepts - Entity Concept - Dual Aspect Concept
- Accounting Period Concept - Going Concern Concept - Cost Concept - Money Measurement
Concept - Matching Concept - Realization Concept - Accrual Concept - Rupee Value Concept;
Accounting Conventions - Conventions of Disclosure - Convention of Conservatism - Convention
of Consistency - Convention of Materiality - Questions.
(2) DOUBLE ENTRY SYSTEM OF ACCOUNTING 7 - 12
Meaning - System of Accounting - Cash System - Mercantile System - Mixed System - Single
Entry System - Double Entry System - Advantages - Factors Common to Every Business; Types of
Accounts - Personal Accounts - Real Accounts - Nominal Accounts; Accounting Rules - Debit
Aspect - Credit Aspect - Problems and Solutions and Exercises - Questions.
(3) ACCOUNTING BOOKS AND RECORDS 13 - 89
Introduction - Meaning of Books and Records - Journal - Meaning - Specimen ruling of Journal -
Preparation of Journal - Types of Journal - General Journal - Special Journals - Sales Book -
Purchase Book - Sales Returns Book - Purchase Returns Book - Preparation Subsidiary Journals -
Bills Receivable Book - Bills Payable Book - Cash Book - Types of Cash Book - Preparation of
Cash Book - Petty Cash Book - Preparation of Petty Cash Book - Purpose of Subsidiary Books -
Illustrations - Solutions - Questions and Practical Problems; Ledger - Meaning - Specimen Ruling
of Ledger - Posting of Journal to Ledger - Balancing of Ledger - Difference between Journal and
Ledger - Preparation of Ledger - Illustrations - Solutions - Questions and Exercises; Trial Balance
- Meaning - Objectives - Errors not disclosed by Trial Balance - Classification of Errors - Errors of
Omission - Errors of Commission - Errors of Principles Compensating Errors - Errors Disclosed by
Trial Balance - Locating Errors - Suspense Account - Method of Preparation of Trial Balance -
Specimen - Problems - Solutions - Questions and Exercises.
(4) FINAL ACCOUNTS 90 - 121
Meaning - Manufacturing Account - Components of Manufacturing Account - Illustration and
Solution; Trading, Profit and Loss Account - Meaning - Purpose - Specimen Format - Elements of
Trading Account - Equations of Trading Account - Profit and Loss Account - Specimen Format -
Preparation of Final Accounts - Operating Expensel'- - Non-operating Expenses - Operating Incomes .
- Non-operating Incomes; Balance Sheet - t .>urpose - Specimen form of Balance Sheet -
Assets 'and Liabilities - Classification of hl'i :Uabilities - Adjustment Entries - Difference
between Profit and Loss Account and Balance S};et:t - Preparation of Profit & Loss and Balance
Sheet - Illustrations - Solutions - Questions - Exf:ldses.
(5) DEPRECIATION 122 - 148
Introduction - Meaning and Definition of Depreciation, Depletion and Amortization - Purpose -
Factors affecting Depreciation - Methods of charging Depreciation - Straight Line Method - Written
Down Value Method - Annuity Method - Sinking Fund Method - Revaluation Method. Insurance
Policy Method - Depletion Method - Sum of Digits Method - Machine Hour Rate Method -
Calculation of Machine Hour Rate - Illustrations - Solutions - Questions - Exercises.
(6) FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION 149 - 172
Introduction - Meaning of Income Statements, Balance Sheet and Statement of Retained Earnings-
Nature of Financial Statements - Objectives of Financial Statements - Limitations of Financial
Statements; Analysis and Interpretation - Meaning - Types of Analysis and Interpretations - Internal
Analysis - External Analysis - Horizontal Analysis - Vertical Analysis - Rearrangement of Income
Statements - Income Statement Equations - Rearrangement of Balance Sheet - Balance Sheet
Equations - Methods of Analysis and Interpretations - Comparative Financial Statements - Common
Size Statements - Trend Analysis - Ratio Analysis - Fund Flow Analysis - Cash Flow Analysis -
Illustrations - Solutions - Questions - Exercises.
(7) FUND FLOW STATEMENT 173 - 209
Introduction - Meaning of Fund, Flow of Fund and No Flow of Fund - Statement of changes in
Financial Position - Flow of Funds chart - No Flow of Funds Chart - Examples of Flow of Fund -
Components of Flow of Funds - Current Assets - Current Liabilities - Non-current Assets -
Non-current Liabilities - Fund Flow Statement - Meaning - Difference between Fund Flow Statement
and Income Statement - Fund Flow Statement Vs Balance Sheet - Preparation of Fund Flow
Statement; Fund From Operations - Statement of Changes in Working Capital - Fund Flow Statement
- Meaning - Specimen Format - Purposes - Calculation of Fund From Operations - Illustrations -
Solutions - Rules for Preparation of Working Capital Statement - Specimen Form - Illustrations -
Sources of Fund and Applications of Fund - Components of Sources of Fund and Applications of Fund
- Calculation of Sources and Application of Fund - Illustrations - Solutions - Exercises.
(8) CASH FLOW STATEMENT 210 - 232
Meaning - Purpose of Cash Flow Statement - Difference between Cash Flow Statement and Fund
Flow Statement - Limitations - Preparation of Cash Flow Statement - Flow of Cash Under
Non-Current Items - Flow of Cash due to Operations - Non-cash Items - Specimen Format -
Calculation of Cash Received from Operations - Illustrations - Solutions - Questions - Exercises.
(9) RATIO ANALYSIS 233 - 297
Meaning and Definition of Analysis and Interpretations of Ratios; Principles of Ratio Selection -
Advantages - Limitations of Ratio Analysis; Classification of Ratios - Liquidity Ratio; Current Ratio
- Quick Ratio - Absolute Liquid Ratio; Profitability Ratio; Gross Profit Ratio - Operating Ratio -
Operating Profit Ratio - Net Profit Ratio - Return on Investment Ratio - Return on Capital
Employed Ratio - Earning per Share Ratio - Dividend Yield Ratio - Price Earning Ratio - Net Profit
to Net Worth Ratio; Turnover Ratio; Stock Turnover Ratio - Debtors Turnover Ratio - Debt
Collection Period Ratio - Creditor's Turnover Ratio - Average Payment Period - Working Capital
Turnover Ratio - Fixed Assets Turnover Ratio - Capital Turnover Ratio; Solvency Ratios; Debt
Equity Ratio - Proprietary Ratio - Capital Gearing Ratio - Debt Service Ratio; Overall Profitability
Ratio; Illustrations - Solutions - Questions - Practical Problems.
(10) COST ACCOUNTING 298 - 304
Introduction - Definitions of Important Concepts - Cost - Cost Accounting - Cost Control - Cost
Reduction - Cost Allocation - Cost Absorption - Cost Audit - Cost Unit - Cost Centre -
Objectives of Cost Accounting - Difference between Financial Account and Cost Accounting -
Management Accounting - Meaning - Cost Accounting Vs Management Accounting - Advantages
of Cost Accounting - Limitations of Cost Accounting - Installation of Cost Accounting System -
Practical Difficulties in Installation of Costing System - Steps to Overcome - Questions.
(11) COST METHODS, TECHNIQUES OF COST ACCOUNTING
AND CLASSIFICATION OF COST
305 - 309
Introduction - Methods of Cost':" Job Costing - Contract Costing - Cost Plus Contract - Batch
Costing - Process Costing: Operation Costing - Output Costing - Multiple Costing - Technique of
Costing - Uniform Costing - Marginal Costing - Standard Costing - Historical Costing - Absorption
Costing; Classification of Cost; On the basis of Nature - Functions - Variability - Normality -
Controllability - Material- - Labour - Expenses - Production Cost - Administrative Cost - Selling
Cost - Distribution Cost - Normal Cost - Abnormal Cost - Fixed Cost - Variable Cost -
Controllable Cost - Uncontrollable Cost - Sunk Cost - Opportunity Cost - Replacement Cost -
Conversion Cost - Questions.
(12) COST SHEET ANALYSIS (OR) STATEMENT OF COST 310 - 325
Introduction - Meaning - Elements of Cost - Direct Cost - Indirect Cost - Overheads - Prime Cost
- Works Cost - Cost of Production - Cost of Sales - Importance of Cost Sheet - Specimen Format
of Cost Sheet - Preparation of Cost Sheet - Illustrations - Solutions - Questions - Practical Problems.
(13) MATERIAL COST CONTROL 326 - 331
Meaning of Materials - Direct Materials - Indirect Materials - Material Control - Functions of
Materials Control - Objectives of Stores Control - Essentials - Advantages; Materials Purchase
Control - Organization of Purchasing - Centralized Organization - Advantages - Disadvantages -
Decentralized Purchasing - Purchase Manager - Qualities - Duties of Purchase Manager - Functions
of Purchase Department - Purchase Procedure - Bills of Materials - Purchase Requisition - Selection
of Suppliers - Purchase Orders - Goods Received Note - Inspection of Materials - Questions.
(14) MATERIALS - INVENTORY CONTROL 332 - 351
Introduction - Store and Store keeping - Purpose of Store keeping - Functions of the Store keeper -
Stores Layout - Types of Stores - Centralized Stores - Decentralized Stores - Combination of Both;
Fixation of Stock levels - Minimum Stock Level - Maximum Stock Level - Danger Level - Reorder
Level - Calculations - Economic Order Quantity - Calculation EOQ - Illustrations - Solutions -
ABC Analysis - Alphabetical Method - Numerical Alphabetical Method; Inventory System -
Periodic Inventory System - Perpetual Inventory System - Continuous Stock Taking - Advantages
of Each System - Bin Card - Stores Ledger - Bin Card Vs Stores Ledger - Continuous Stock Taking
Vs Periodic Stock Taking - Material Stores Losses - Normal Loss - Abnormal Loss - Inventory
Turnover Ratios - Illustrations - Solutions - Questions - Exercises.
(15) VALUATION OF MATERIALS ISSUES 352 - 367
Introduction - Valuation of Total Cost of Material Purchased - Trade Discount - Quantity
Discount - Cash Discount - Materials Issue Procedure - Material Requisition - Bill of Materials;
Methods of Materials Pricing Issues - First In First Out (FIFO) - Last In First Out (LIFO) - Specific
Price Method - Base Stock Method - Highest In First Method (HIFO) - Periodic Simple Average
Method - Periodic Weighted Average Method - Standard Price Method - Inflated Price Method -
Market Price or Replacement Price Method - Illustrations - Solutions - Questions - Practical
Problems.
(16) LABOUR COST CONTROL
368 - 381
Meaning - Types of Labour Cost - Direct Labour Cost - Indirect Labour Cost - Control of Labour
Cost - Technique - Organization for Control of Labour Cost - Personnel Department - Engineering
and Works Study Department - Method Study - Motion Study - Time Study - Job Analysis - Job
Evaluation - Merit Rating - Job Evaluation Vs Merit Rating; Time Keeping Department - Time
Keeping - Objectives - Methods of Time Keeping - Manual Method - Disc Method - Mechanical
Method - Time Keeping Clocks - Dial Time Records - Key Record System; Time Booking -
Objectives - Methods of Time Booking - Daily Time Sheet - Weekly Time Sheet - Job Cards -
Combined Time and Job Card; Piece Work Card - Idle Time - Types - Normal Idle Time and
Abnormal Idle Time - Accounting Treatment of Idle Time; Overtime - Meaning - Effect of
Overtime - Accounting Treatment of Over Time - Control of Overtime - Casual Workers - System
of Control - Out Workers; Pay Roll Department - Labour Turnover - Methods of Labour Tum over
- Separation Method - Replacement Method - Flux Method - Illustrations - Solutions - Questions -
Practical Problems.
(17) LABOUR COST ACCOUNTING 382 - 401
Introduction - Meaning - Objectives of an Ideal Wage System - Principles - Methods of
Remuneration - Time Rate System - At Ordinary Levels - At High Wage Levels - Guaranteed Time
Rates - Piece Rate System - Straight Piece Rate - Piece Rate With Guaranteed Time Rate;
Differential Piece Rates - Taylor Differential Piece Rate System - Merrick Differential Piece Rate
System - Gantt Task and Bonus Plan - Bonus System or Incentive System; Individual Bonus Plan -
Halsey Premium Plan - Halsey - Wire Premium Plan - Rowan Plan - Barth Variable Sharing Plan -
Emerson Efficiency Plan - Bedaux Point Premium System - Accelerating Premium Plan; Group
Incentive Plan - Indirect Monetary Incentives - Non-Monetary Incentives - Illustrations - Solutions
- Questions - Practical Problems.
(18) OVERHEADS 402 - 424
Meaning and Definitions of Overheads - Importance of Overheads - Classification of Overheads -
Indirect Materials Cost - Indirect Labour Cost - Indirect Expenses - Production Overhead -
Administration Overhead - Selling Overhead - Distribution Overhead - Fixed Overhead - Variable
Overhead - Useful of Overhead Classification; Codification of Overhead - Advantages of Codification
- Procedure or Steps in Overhead - Collection of Overhead - Overhead Expenses - Sources and
Documents Used - Overhead Analysis - Allocation and Absorption - Apportionment of Overhead -
Basis of Apportionment - Illustrations - Solutions - Reapportionment or Redistribution of Overhead
- Method of Re-apportionment - Direct Re-distribution Method - Step Distribution Method -
Reciprocal Service Method - Step Repeated Distribution Method - Simultaneous Equitation Method
- Trial and Error Method - Illustrations of Each Methods - Solutions - Questions - Practical
Problems.
(19) ABSORPTION OF O V E ~ H E D 425 - 446
Meaning - Overhead Rate - Actual Overhead Rate - Pre-Determined Overhead Rate - Blanket
Overhead Rate - MUltjple Overhead Rate - Normal Overhead Rate - Supplementary Overhead Rate;
Methods of Absorption of Overhead - Direct Material Cost Method - Direct Labour Cost Method -
Direct Labour Hours Method - Prime Cost Method - Unit Output Method - Machine Hour Rate;
Calculation of Machine Hour Rate - Fixed or Standing Charges - Variable Machine Expenses -
Basis for Apportionment of Machine Expenses - Advantages - Disadvantages - Illustrations -
Solutions -- Questions - Practical Problems.
(20) JOB, BATCH AND PROCESS COSTING 447 - 470
Introduction - Meaning - Features of Job Order Costing - Objectives of Job Order Costing - Pre-
requisite for Job Order Costing - Advantages and Disadvantages of Job Order Costing -
Procedure for Job Order Cost System; Batch Costing - Meaning - Features - Determeniation -
Diffemece between Job Costing and Batch Costing - Advantages and Disadvantages - Problems and
Solutions; Process Costing - Meaning - Application of Process Costing - Job Costing Vs Process
Costing - Calculation of Normal Process Loss and Abnormal Process Loss - Procedure for
Preparation of Process Costing - Illustrations - Solutions - Questions - Practical Problems.
(21) JOINT PRODUCT AND BY -PRODUCT 471 - 490
Introduction - Joint Products - Me<lning - Features of Joint Products - Objectives of Joint Product
Costing - Methods of Apportionment of Joint Products - Average Unit Cost Method - Physical Unit
Method - Survey Method _. Contribution Margin Method - Standard Cost Method - Market Value
Method - Market Value at Point of Separation - Market Value After Further Processing - Net
Realisable Value or Reverse Cost Method - By-Products - Meaning - Methods of Valuation of By-
Products - Non Cost or Sales Value Method - Other Income Method - Cost Methods - Replacement
Cost Methods - Standard Cost Method - Apportionment on Suitable Basis - Inter Process Profits -
Equivalent Units - Steps Involved for Calculation of Equivalent Units - Illustrations - Solutions -
Questions - Multiple Choice - Questions - Answers - Practical Problems.
(22) CONTRACT COSTING 491 - 508
Meaning - Special Features of Contract Costing -- Costing Procedure - Accounting Treatment of
Materials, Labour, Direct Expenses, Overhead C05t, Plant and Machinery - Sub-Contracts - Work
Certified - Work Uncertified - Work in Progress - Accounting Treatment of Profit or Loss of Contract
- Escalation Clause - Cost-Plus Contract - Profit or Loss on Completed Contract - Cost of Uncertified
Work - Problems and Solutions - Questions - Choose the Correct Answers - Practical Problems.
(23) UNIFORM COSTING 509 - 511
Uniform Costing - Meaning - Objectives - Essential Requisites for Installation of Uniform Costing
- Advantages of Uniform Costing - Limitations - Requisites of Inter - Firm Comparison -
Advantages - Disadvantages - Questions.
(24) ACTIVITY-BASED COSTING 512 - 521
Meaning - Different Stages in Activity Based Costing - ABC and Cost Drivers - Examples of Cost
Drivers - Classification of Activities - Unit Level Activities - Batch Level Activity - Product Level
Activities - Facility - Level Activities - Difference Between Activity - Based Costing and
Conventional Costing - Advantages of Activity - Based Costing - Essential Factors.)f a Good
Activity - Based Costing System - Illustrations - Solutions - Questions.
(25) RECONCILIATION OF COST AND FINANCIAL ACCOUNTS 522 - 535
Reconciliation of Cost Financial Accounts - Meaning - Reasons for the difference - Items shown
only in Financial Accounts - Income - Expenditure - Items shown only in Cost Accounts -
Absorption of Overheads - Methods of stock valuation - Abnormal losses and gains - Methods of
Reconciliation - Treatment of causes for differences - Types of problems - I\Iustrations - Solutions
- Questions - Practical Problems.
(26) MARGINAL COSTING AND COST VOLUME PROFIT ANALYSIS 536 - 560
Meaning of Marginal Cost and Marginal Costing - Features of Marginal Costing - Absorption
Costing - Absorption Costing Vs Marginal Costing - Differential Costing - Meaning - Marginal
Costing Vs Differential Costing - Advantages of Marginal Costing - Limitations of Marginal
Costing - Cost - Volume Profit Analysis - Meaning - Objectives - Marginal Cost Equations -
Contribution - Break Even Analysis - Profit Volume Ratio (PN Ratio) - Margin of Safety - Break
Even Chart - Cash Break Even Point - Advantages - Limitations - Illustrations - Solutions -
Questions - Practical Problems.
(27) BUDGETING AND BUDGETARY CONTROL 561 - 596
Introduction - Definition of Budget - Essentials of Budget - Difference between Forecast and
Budgets - Budgetary Control- Objectives of Budgetary Control- Scope and Techniques of Standard
Costing and Budgetary Control - Requisites for effective Budgetary Control - Organization for
Budgetary Control - Organization Chart - Budget Centre - Budget Officer - Budget Committee -
Budget Manual - Budget Period - Key Factors - Advantages of Budgetary Control - Limitations of
Budgetary Control; Types of Budgets Control Ratios - Capacity Ratio - Activity Ratio - Efficiency
Ratio - Calendar Ratio; Some Important Budgets - Sales Budgets - Production Budget - Material
Purchase Budget - Cash Budget - Master Budget - Fixed Budget - Flexible Budget - Advantages -
Fixed Budgets Vs Flexible Budgets - Methods of Preparing Flexible Budget - Multi - Activity
Method - Ratio Method - Charting Method - Illustrations - Solutions - Zero Base Budgeting -
Questions - Practical Problems.
(28) STANDARD COSTING AND VARIANCE ANALYSIS 597 - 641
Introduction - Standard Cost and Standard Costing - Meaning - Standard Costing and Budgetary
Control - Preliminaries to the establishment of Standard Costs: Advantages and Disadvantages of
Standard Costing, Analysis of Variances - Material Variances - Calculation of Material Price
Variances, Material Usage Variances, Material Mix Variance; Labour Variance; Overhead Variance -
Overhead Cost Variance - Fixed Overhead Variances - Sales Variances - Illustrations - Solutions -
Questions - Practical Problems.
(29) CAPITAL BUDGETING 642 - 669
Capital Budging - Meaning - Definition - Importance - Objectives - Principles or Factors of Capital
Budgeting Decisions - Capital Budgeting Process - Types of Capital Expenditure - Types of Capital
Budgeting Proposals - Methods of Evaluating Capital Investment Proposals - Traditional Methods -
Pay-back Period Method - Post Pay - Back Period - Discounted Pay-back Period - Reciprocal Pay-
Back Period - Accounting Rate of Return Method - Time Adjusted Method - Net Present Value
Method - Internal Rate of Return Method - Profitability Index Method - JIIustrations - Solutions -
Questions - Multiple Choice Question and Answers - Practical Problems.
(30) COST AUDIT 670 - 674
Cost Audit - Meaning and Definition - Difference between Financial Audit and Cost Audit Purposes
or Objectives of Cost Audit - Protective Purpose - Constructive Purpose - Circumstances Under
Which Cost Audit is Desirable - Types of Cost Audit - Efficiency Audit - Propriety Audit -
Statutory Audit - Advantages or Usefulness of Cost Audit - Usefulness to the Management - To the
Government - To the Shareholders; Cost Audit Programme - Areas of Cost Audit Programme is
carried out - Advantages - Disadvantages - Cost Accounts Records Questions.
(31) REPORTING TO MANAGEMENT 675 - 681
Introduction - Definition of Management Reporting - Objectives of Management Reporting -
Essentials of Good Reporting System - Classification of Management Reporting - According to
Objectives, Period, Functions - Report Meant for the Top Level of Management, Middle Level
Management and Junior Level Management - Questions.
DOD