Professional Documents
Culture Documents
CHAPTER-I
1.1 PRINCIPLES
1.2 OBJECTIVE
1.3 METHODS
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1.3.1 JOB COSTING for jobbing industries engaged in production on specific order
of customer and
2. COSTING TECHNIQUES
Besides such methods of assessment of cost of a job or a process, certain costing
techniques followed for the purpose of cost control and management decision.
2.1. a) Standard Costing: This is a technique to assess standard cost of the product,
recording the actual, comparing the actual with that of the standard, finding out the
variation with reasons for ultimate control or revision of standard, if necessary. This
technique can be well use of in cases standard and repetitive nature of work having
all kinds of standard facilities.
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2.2. b) Marginal Costing: This is a technique to assess marginal cost (Prime Cost
and variable overhead) of products and contribution there-of by deducting marginal
cost from sales. Fixed cost is kept away from cost structure. Profitability of each
product is assessed through a ratio of contribution to sale (P/V ratio). The main idea
behind this technique is assessment of true profitability of each product. Arbitrary
distribution of fixed overheads, in absence of suitable bases makes it difficult to
calculate correct profitability of the various products. Cost Accountants can assist
management in various decision making areas like ‘Optimum product mix, pricing,
make or buy and a host of other decisions in day to day business in a competitive
world.
2.4. d) Differential Cost Analysis: This is a technique applied to find out optimum
capacity utilization by comparing incremental revenue with that of differential cost at
different level of capacity. This is a contribution of Cost Accountant in managerial
decision- making where there is a limitation of Marginal Costing.
3. COST ACCOUNTING
As defined, Cost Accounting is a process of accounting for the cost from the
point at which it is incurred or committed to the establishment. Cost accounting
necessarily starts from the same original sources like vouchers and primary
document. Cost accounts relates to the operational side of the business. It classifies
accounting information and records, arranges and interprets such expenses by the cost
elements like materials, labour and expenses.
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This is, specifically, a process of distribution of indirect cost amongst the various
products and services more accurately and scientifically.
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5. COST STRUCTUR
Direct Material+ Direct Labour+ Direct Prime Cost +
Expenses=
Indirect Production Expenses
6. COST SHEET
This is a statement setting out the cost of a product giving details of all the elements
of cost.
There should be clear indication of Prime Cost, Works Cost, Cost of Production, Cost
of Sales and Profit unless information is lacking.
Cost sheet should have the columns like: a) Total Expenditure, b) Percentage of each
element to the total cost of production, e.g., % of Material to the total cost, c)
Element-wise cost per unit, d) Provision for comparison with the previous year. In
case, the organization has applied Standard Costing technique, the standard cost with
necessary element-wise break up can be incorporated in the Cost sheet. In case
organization is following Marginal Costing technique in their product costing, cost of
the product will reflect the marginal cost only. Fixed cost will be shown separately.
There may not be uniformity or universality of format of Cost sheet. It depends on
type of the products/ services, process of manufacture & volume of the organization.
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6.2
A typical example of Job cost sheet is given below:
Bishwajit, Tapan and Sharbani carry on a partnership business sharing
profits & loss equally. Bishwajit devotes to the business only according
to his time permits. Tapan acts as Works Manager and Sharbani as office
manager. Details of business during September2005 were as follows:
Amou Amo
Transactions Transactions
nt unt
Purchase of Stores
49500
Works wages ----Direct Advertising 3000
32000
Indirect Power 1050
4000
Office salaries Income Tax 9500
9390
Carriage In Agent’s Commission 4500
300
Carriage out Maintenance of plant 3660
2800
Sales Rates, light, Insurance (9/10 for Works)
16000
Stock as on 1st Sept. Bad debts 1000
Stores Sundry Expenses---Works 500
17500
Finished goods (600 units) ----Office 1400
4500
Work-in-progress Building Repair 2600
6500
Traveling expenses Partners’ salaries—Tapan 100
1200
Interest on capital: ---Sharbani 1200
Biswjit Depreciation------Plsnt 1000
1500
Tapan ------Building 1900
800
Sharbani Sale of Scrap 100
700
400
On 30th Sept. Stores on hand total Rs.19000 and WIP on that day
was Rs.7700. Finished stock outstanding was 700 units out of
15000 units produced. The building was owned by the firm and
assessed by the Municipality was Rs.14400 per year.
Prepare a COST SHEET and Statement of Profit.
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6.3
Statement of Profit & Loss
Unit Value
160000
Sales (a)
Less Cost of Sales (b): 14900
4500
Opening Finished Goods
108000
Add Cost of Production 600
112500
15000
5040
Less Closing F.G 15600
107460
700
Selling & Distribution Expenses: 14900
Carriage outward
Traveling Expense 2800
Advertising 1200
Agent’s commission 3000
12000
Bad debt 4500
119460
500
40540
Profit (a)-(b)
Income tax and interest on capital not included as the same are not chargeable to the
production.
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This is done on receipt of the list of completed warrants in the Costing section and the
following actions are being taken:
9.1. Obtaining completed shop copies of warrants duly paired with Accounts
copies of ‘Manufacturing’ and ‘Material’ from ‘Labour’ and ‘Material’ sections
respectively.
9.2. In cases of running warrants from previous year, inclusion of opening balance
is to be ensured. Further, Replacement warrants and warrants for tools/ gauges,
manufactured on parent work orders, are annexed to the main cost cards.
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9.3 Posting to the Cost Cards are to be reconciled with all documents and records
as stated above in order to ensure correctness.
More detail scrutiny with reference to the original documents, viz., PW/DW cards,
Demand & Return notes, NRRs/ NRMs, Replacement warrants etc. may sometimes
be essential for tracing the reasons for variation.
Such monthly statements are prepared in process factories like CF, Aruvankadu, HEF
Kirkee, & OF Bhandara where Process Costing Method is applied
The following statements are prepared monthly to arrive at the cost of production and
issue rates:
Statement-I:
Statement of Raw Material Cost Showing the value of exact cost of material
consumed.
Statement-II:
Statement of allocated overhead, i.e., the Sectional Variable Charges.
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Statement-III
Statement of Cost of Production, this includes-
i) Material Cost as per Statement I,
ii) VOH as allocated through Statement II,
iii) Common VOH distributed based man-hour utilization and
iv) FOH based on a pre-fixed % on the quantity of production.
• Evaluation of production per unit is done based on Weighted Average
Method.
• Pricing of issues from the process are done based on production cost of
the previous quarter.
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CHAPTER-II
15.2. Piece Worker: Workers on Piece rate of wages. After correlation of Piece work
rate with Vth CPC scale of pay the definition has changed to “Workers paid on Piece
rate of hours evaluated on the minimum of the scale of pay of the individual worker.
They are further subdivided into Individual and Gang Piece Worker.
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19.1Tools of Control:
• Passed Wage Roll
• Passed Supplementary Roll
• Punching Medium
• PW Cards
• Manufacturing Warrant
• Govt. Orders
• AFL
• DC
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Cost Accou
Time Wage HP
On Min.on Pay IP
OT Wage on
Min. of Pay
DA Cost Accoun
Time Wage HP Tim
OnHRA
Min.on Pay IP
RTC KOLKATA
OT Wage on
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23.00 15
Min. of Pay
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Cost Acc
Time Wage HP
On Min.on Pay IP
OT Wage on
Min. of Pay
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RTC KOLKATA
DA 23.00 16
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Cost Acco
Time Wage HP
On Min.on Pay IP
OT Wage on
Min. of Pay
Cost Acco
DA Wage
Time HP
On Min.on Pay IP
HRA
OT Wage on
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Min. of Pay
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CHAPTER-III
Pricing documents/information for Receipts and Issue of Store including Prod Store
Receipt Method
Receipt Method
• LP • S.O rate including ST/ED
• CP excluding Railway Freight
• Coal Coke /transport.
• ODD including transfer from Deposit • Paid bills/AT order.
Stock. • Prov. Priced w.r.t SO & Labour,
• Prod of own Fy. department Central cess & S.T.
• -do- Timber/Leather • Stock book rate/priced
• Other Factory. vocabularies
• Other than Defence. • COP
• Return of surplus Material/scrap. • Standard Prod. Rate (Diff with
• Surplus in stock taking. actual shown as P/L in AA)
• Transfer from stock Pile/Capital. • .Priced Copy of Consignor or
• Miscellaneous Receipt. latest receipt rate/estimate.
• To shop on DN. • .Priced copy of Voucher receipt.
• To other Fys on I.Vr or stock • .Ledger rate.
Transfer note of factories located in • .Ledger rate.
same area. • .Value taken from ledger of
• To AF, Navy & R&D on payment. SP/Cap Block Register.
• MES • .Rate given by Factory Mgt.
• To capital • ALR
• Losses-DD Voucher • ALR
• To other cases on payment • ALR (No. department. Ch.)
• ALR+DC5%
• ALR
• ALR
• ALR + DC5% + Additional Ch
5%.
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a) Standard estimates.
b) SWOD
c) Replacement Warrant.
d) Non-recurring Revisions to Material.
e) Semi Statement
f) Receipt from ODD (When PVOS rates are not available)
“Receipts” and “Expenditure” under proper head of Account but also ensures trend of
expenditure against various nature of transaction including store etc. as designed by
different unit control codes on several types of transaction. This also helps budgetary
control under different categories of expenditure, recoveries and issues from Ord.
Factory. Care must be taken for proper identification of stores while incorporating
classification code during placement of order (i.e. cost debitable) to avoid mismatch
and misclassification.
i) Provision of The required quantity of the right material and at right place
ii) Minimum amount of Capital should be booked in Working Stock
iii) Comparing Actual Utilisation of Materials with Estimates for ensuring
corrective actions.
iv) Purchase of Materials of right quality and right quantity at favourable
Prices
v) Prompt action for utilisation / disposal of Scrap & other Stores which are
considered as surplus
Provisioning policy
Period of
Lead Time Utilization Total
Indire
Indirect Direct Indirect
ct Direct
Direct Material Materia Materia Materia
Materi Material
Source l l l
al
Importe
d 12 6 12 12 24 18
Indigeno
us 6 6 12 12 18 18
BACK
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One Ordnance Factory forwarded a proposal for procurement of 4mm steel rod used
for manufacturing pin firing of INSAS rifle. SHIS was vetted for 2000 kg. Tenders
were issued to 6 reputed firms. Value of case being Rs.26.67 Lakhs (@ Rs.475 basic
+ 8 % ED +4 % ST) on resultant single tender, it exceeded powers of GM. The firm
offered for min order quantity 5000 Kg. Earlier the same firm supplied less than 2000
kg on two occasions because SO qty were 2000 & 1500 kg. Factory TPC
recommended purchasing 5000 kg in spite of the facts that Finance member advised
to put up to higher level of TPC which was not done. Factory placed LOI / SO. Fin
div was requested to vet the sanction which was refused.-IFD for 2000 Kg was placed
on MSF @ Rs.2074.41 Kg. Member/ Fin sent a note to the DGOF highlighting (a)
availability of alternate material (b) other factory had 6 sources whereas RFI had one
(c) Min order qty not justified since supplies were less than 2000 KG (d) Supplier
was not asked to supply against previous orders. (e) No SHIS existed. Factory
prepared a covering SHIS for 5000 Kg. A BoE was constituted by the DGOF in Sep
05. Report was awaited as on 3/6/06
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“It has been observed that a Board of Enquiry” is under progress for a deficit quantity
of 600 MT which is not available in stock”. At the stage of forwarding the proposal to
OFB, no mention was made of the outcome of the BoE. Fy GM stated that the
missing acid was successfully located. The report of the BoE was not forwarded as
the enquiry did not take place. It was contended by Fy that demand notes were not
forwarded to LAO.
“Procedure has been followed. Commercial terms & conditions have been vetted by
me. Regarding rate, Member (user) / Fy to certify reasonability by verifying estimates
etc as the value addition and cost involved are beyond my comprehension.”
Value in SEK
Sl
no Item Value in Rs
1095000 6818018
1 Torque wrench for fuse
2 Torque wrench for Heat shell 1095000 6818018
3 Torque wrench for Warhead 1095000 6818018
4 Torque wrench for Ballistic Cap 1095000 6818018
5 Following
Test importation
equipment proposals were
elect equipment received for deliberation
1375000 8561437 in
OFB
6 Gauge 795000 4950067
7 Grease gun 228000 1419642
8 Truing gauge 575000 3580237
9 Calibration tool for torque wrench 90000 560385
10 Truing tool 139000 865483
11 Torque wrench for Piezo 45000 280192
47489515
TOTAL 7627000
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The firm wanted advance payment of 20 %.Total value of 11 proposals - Rs.4, 74,
89,515.00 on PAC
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CHAPTER-IV
a) In-direct material,
b) Indirect wages, and
c) Indirect expenses.
Overhead cost can otherwise be termed as Indirect cost also. Indirect cost is,
therefore by its term, not directly chargeable to a unit of products or a
process.
This is a matter of in depth analysis, why and under what circumstances an
item of expenditure is declared as overhead.
Further, such categorization also caused due to management policy and
accounting convenience.
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First Stage:
Collection, Classification and Codification
Second stage:
Allocation, Apportionment & Re-apportionment
Third and final stage:
Absorption/ Levy/ Recovery/ Charging
Element-wise classification: Cost of Power, Water, Rent, Rates, Taxes etc. for
convenience of Budget and Budgetary control.
Nature-wise classifications: a) Indirect Material, b) Indirect labour, c) Indirect
Expenses for the purpose of Accounting & Control.
Function-wise classification: a) Production, b) Administration, and c) Sales/
Issue for the purpose of management functional control of Overhead cost.
Behaviour-wise classification: (a) Fixed Overhead (FOH) and (b) Variable
Overhead (VOH). Such classification is very much for the purpose of
management decision-making and there-by control.
This is distribution of overhead cost of Production Cost Centres to the products pass
through the production processes. DIRECT WAGE method is followed for product
costing in Ordnance Factories.
Total: 15400
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Total: 22800
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B asis Z Y X A B C
C leric al S tore TO O L
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Point to consider…….
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CHAPTER-V
Priced Store A/c (Showing category / PSA code-wise Issues and Receipts of
Stores)
Cash Compilation (Showing Summary of Financial Code-wise Receipts and
Expenditure for the month)
Cost tabulations (viz. Labour Abstract, Material Abstract, T.V. Abstract etc)
Manufacturing A/c – Statement A&B.
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Principal Ledger is required to be closed annually. For which balances of each head
of account (other than Balance A/c) are struck at the year end and transferred directly
or finally through Subsidiary account(s) to the Balance A/c.
Debit balances of Balance A/c represent Assets while Credit balances exhibit liabilities of the
Factory as on the closing day of the year and sum of all such debit entries should tally
with sum of all the credit entries of Balance account.
Such agreement of totals of Dr. and Cr. side of Balance A/c proves the arithmetical
accuracy of posting made into various heads of accounts of Principal Ledger.
Following heads of Accounts (Total 29) are at present maintained in the Principal
Ledger: -
1. Custom Duty A/c
2. Stores Cash Purchase A/c
3. Stores Supplied by other Factories Act.
4. Transportation charges A/c
5. Stores A/c
6. Sale of Stores (Surplus & Waste) A/c
7. Issue of Stores on Payment A/c
8. Wages A/c
9. Supervision Charges A/c
10.Misc. Charges A/c
11.Overhead Exp. A/c
12.Misc. Credit A/c
13.Work-in-Progress A/c
14.Rent, Rates, Water and Electricity charges Recoverable A/c
15.Payment Services A/c ( Other than Defence Services)
16.Manufacture of own Fys. Stock A/c.
17.Services to other Fys. A/c
18.Services for Capital Assets A/c
19.Payment Issues for Defence Services A/c
20.Profit & Loss A/c
21.Capital Assets A/c
22.Capital Assets (Stock Pile) A/c
23.Cash Ledger A/c
24.Preliminary Exp. A/c
25.Deferred Revenue Exp. A/c
26.O/s Assets A/c
27.O/s Liabilities A/c
28.Capital Outlay A/c.
29.Balance A/c
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Capital Assets A/c - Debit side contains opening balance, payments, transfers
in and amounts outstanding. On the credit side depreciation, transfers, issues,
outstanding and closing value are shown.
O/s Assets & O/s Liabilities A/c - Contains details of opening and closing
outstanding Assets/Liabilities.
Capital Outlay A/c - Main Control Account. This account is debited for
expenditures incurred and credited for receipts and recoveries.
Balance A/c - Details the closing value of various assets and liabilities. Balance
should agree with the balance as per "Capital outlay Account".
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Work-in-progress Account
Dr Cr
1. Capital Outlay Account:- 1. By Miscellaneous Charges Account:-
Cost of work-in-progress Departmental material utilized on indirect work
(excluding Capital semi) on 1st orders.
April B/F 2. By payment services Account (Other than
(a) Labour Defence Services):-
(b) Material Cost of manufacture during the year.
(c) variable Overhead 3. By manufacture for factory’s own stock
(d) Fixed overhead. Account:-
2. To Capital Outlay Account:- Cost of manufacture during the year.
Cost of uncompleted Capital 4. By Services to other Factories Account:-
Work-in-progress on 1st April Cost of manufacture during the year.
included in Capital Assets 5. By Services for Capital Assets Account:-
Account. Cost of Services during the year.
(a) Labour 6. By Payment Issues for Defence Services
(b) Material Account:-
(c) Variable Overhead Cost of manufacture during the year for Army,
(d) Fixed overhead Navy, Air Force and other Defence Departments.
7. By Profit and Loss Account:-
3. To Stores Account:- (a) Variable overhead expenses under absorbed.
(a) Direct material issued to Shops (b) Fixed overhead expenses under absorbed.
less return. 8. By Capital Outlay Account:-
(b) Issues to other than Defence Cost of abnormal rejections (not chargeable to
Department private bodies, firms production)
and contractors for manufacture of 9. By Balance Account:-
garments or fabrication of stores. Cost of work-in-progress (excluding Capital semi)
4. To Wages Account: on 31st March.
Direct Labour (a) Labour
5. To Overhead Expenses (b) Material
Account:- (c) Variable Overhead
(a) Variable overhead expenses. (d) Fixed Overhead.
(b) Fixed overhead expenses. 10. By Capital Outlay Account:-
6. To Profit and Loss Account:- Cost of uncompleted Capital Work-in-Progress on
(a) Variable overhead expenses 31st March (included in Capital Assets Account).
over absorbed. (a) Labour
(b) Fixed overhead expenses over (b) Material
absorbed. (c) Variable Overhead
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CHAPTER-VI
• Intensity of competition
• Buying capacity of population
• Market influences through demand-supply relation
• Price agreements
• Alternative/substitutes products
• Governmental interference/ strategy
• Capacity utilisation
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CHAPTER
35.1.2 Definition
Standard costing is a technique or a principle which uses standards for costs and
revenues. The purpose is control of costs through variance accounting. A standard is
a predetermined measurable quantity set in defined conditions. It is a benchmark or
norm. It follows, therefore that standard costs are formal estimates of cost.
Budgets are statements of expected costs, while standard show what costs could be if
desired performance was attained.
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Top management
(delegates)
Authority (assigns)
Responsibility (requires)
Accountability
IX. Principle of exception. The last but not the least advantage of standard cost
system is the adoption of the “principle of exception”. This principle assumes
that only those activities are worthy of executive attention which fail to come
up to standard. Management may establish acceptable tolerances, and then
investigate only the important off standard conditions.
a. Difficult to practice
b. Expensive start-up
c. Revision expensive and troublesome.
d. Dysfunctional consequences.
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The deviation of the actual from the standard is known as “Variance”. The
variance may be favourable or unfavourable (i.e., adverse) depending upon the
circumstances. For example, in case of cost variances, if the actual cost is more
than the standard cost, it is something unfavourable and, therefore, it will be
said that there is an adverse variance. In a reverse situation, where the standard
cost is more than the actual cost, the variance will be termed as favourable.
However, in case of sales variances, things are different. If the actual sales are
more than the budgeted sales, the variance will be termed as favourable. On the
other hand, if the budgeted sales are more than the actual sales, the variance
will be termed as adverse.
COST VARIANCES
The Cost Variances can be put in the form of the following
chart:
Cost Variances
Direct Overhead
Direct Labour
Material Cost
Cost Variance
Cost Variance Variance
(DLCV)
(DMCV) (OCV)
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Direct Labour
Direct Labour Efficiency
Rate Variance
Variance (DLEV)
(DLRV)
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OVERHEAD VARIANCES
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Fixed Overhead
Fixed Overhead Volume
Expenditure
Variance (FOVV)
Variance (FOEXPV)
Fixed Overhead Expenditure or Budget or
Controllable Variance (FOEXPV). This variance is due to
the difference between Budgeted Fixed Overheads and the
Actual Foxed Overheads incurred.
Fixed Overhead Volume Variance (FOVV). This
variance arises on account of difference between standard
and actual output resulting in under or over-recovery of
fixed overheads.
= Ov.
Std. Fixed
Rate per hour
× ( actual
Std. Hours for
production
– Actual Hours
)
Or = Recovered Fixed Overheads –
Standard Fixed Overheads.
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FOCAP =
Std. Fixed Ov.
Rate per hour
× (Actual Hours
Worked –
Budgeted
Hours )
Or = Standard Overheads – Budgeted Overheads.
Alternatively,
Revised Capacity Standard
– Possible
Variance = Overhead
s Overheads
SALES VARIANCES
The sales are affected by two factors:
(i) the selling price and
(ii) the quantum of sales.
Sales variances can be understood with the help of the following
chart:
Sales Variances
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41.2.3 Volume:
The variance is as a result of difference in budgeted and actual quantities of
goods sold.
When more than one product is manufactured and sold, the budgeted sales of
different products are in a given ratio. If the actual quantities sold are not in he
same proportion as budgeted, it would cause a mix variance.
It is the difference between budgeted sales and the revised standard sales.
Value Variance:
Value Variance = Budgeted Profit – Actual Profit
Price Variance:
Price Variance = Standard Profit – Actual Profit
Volume Variance:
Volume Variance = Budgeted Profit – Standard Profit
Mix Variance:
Mix Variance = Revised Standard Profit – Standard Profit
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Quantity Variance:
Quantity Variance = Budgeted Profit – Revised Standard Profit
In case the revised standard profit is more than the budgeted profit, it shall be a
favourable variance and vice versa.
After the variances have been analyzed, they shall be reported to management as to
the extent of favourable and unfavourable due to various causes. Cost reports
presented to management would clearly indicate where the scope for action lics.
Management would take corrective action so as to control the adverse variances.
Responsibility shall be assigned to persons concerned in case of adverse variances
resulting because of factors which were within the control of business. The factors
like changes in market conditions, demand and supply position, etc., are beyond the
reach of management and hence responsibility cannot be placed for such
uncontrollable factors. The management would try its level best to bring down the
actual costs to the level of standard costs and will apply a system of strict inspection
and supervision for effecting cost control.
CONTROL OF VARIANCES
Materials
Price Purchasing Department
Quantity or Grade Stores Purchase or Process Deptt., as the
case may be
Waste, Scrap or Spoilage Production Department (for lack of
proper supervision)
Wages
Rate – for difference in rates for Personnel Department
work requiring higher rates of pay Production Department
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Overheads
Volume Sales Department
Efficiency Production Department Expenditure:
higher rates of indirect workers Personnel Department
higher prices of indirect materials Purchasing Department
higher consumption of indirect materials Production Department
Excessive expenditure in factory Production Department
Excessive expenditure for selling Selling Department
and distribution
Sales
Price and Volume Selling Department
Mchkm07
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