02 COST THEORY V. GOOD.doc

7/27/2019 02 COST THEORY V. GOOD.doc

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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 liitation!

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 manageriadecisionmaking.

!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 functiona

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 totheir 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 costsand fi-ation of responsibility for cost increases.

. Cost Comparisons ( Cost accounting also includes comparisons bet&een cost from alternative technologiescost 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(

a2 Profit $easureent 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 decreaseor increase in the profit 3 loss of the business.

b2 Cost Reduction(!he application of cost reduction techniques, operations research techniques and valueanalysis 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

c2 Cost Coparison 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 byemploying uniform costing and inter firm comparison methods.

d2 #dentification of losses and inefficiencies( A good Cost Accounting +ystem helps in identifyingunprofitable 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 leveand 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,

1


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e2 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 shortterm decisions.

f2 Price Deterination( 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.

g2 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.

(iitation of Cost Accounting

12 Cost accounting prepares cost records and reports in different depths, detail and form. 9ven assumptionsmade regarding lacks uniformity. :ifferent organi0ations various costs differ.

*2 !here is arbitrariness in apportionment of overheads, allocation controllable and non controllabledetermination of 4oint costs, division of costs bet&een of overhead absorption rates.

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.

2 Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation

It does not by itself achieve these ob4ectives.

/2 Cost accounting has only a limited use in pro4ecting future costs. It needs to be supplemented by various

statistical tools.

)*+ (ist the oectives of Cost Accounting+ ./ov *00*, ar's2

!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(

12 Ascertainent of cost(!his involves collection of cost information, by recording them under suitableheads of account and reporting such information on a periodical basis.

*2 Deterination of selling price(+elling


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b2 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

c2 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

d2 $anageent8s Role" !he top 6anagement should have a faith in the costing system and should also

provide a helping hand for its development and success.

e2 Participative Role of e9ecutives( >ecessary cooperation and participation of e-ecutives from variousdepartments of the concern is essential for developing a good system of cost Accounting.

f2 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.

g2 7ooth ipleentation( !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&(

12 /ature of usiness( !he system of costing to be introduced should suit the general nature of business.

*2 (a%out aspects( !he si0e and layout of the organi0ation should be studied by the system designers.

2 $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 methodsof &age payment.

2 $anageent8s e9pectations and policies"!he system of costing should be designed after a carefu

analysis of the organi0ational operations, management#s e-pectation and the policies of the concern.

/2 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.

?2 7iplicit% 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 byoperating system.

@2 ors 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.

2 Accurac% of data"!he degree of accuracy of data to be supplied by the system should be determined.

)+5+


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*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 Csts 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 toaccumulate costs, assign them to products, processes and 4obs, and report cost information to managementat all levels. It assists management in planning, control, performance appraisal, analysis of product

profitability and optimum utili0ation of physical and financial resources for achieving organi0ationaob4ectives.

!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 e9aination of production details")efore installing the system, management should make an

indepth 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.

4+ (ocation of cost office( Costing department obtains basic data mainly from accounts department. 6ostof this data is related to production activity.

5+ Codification( All costs relating to all products of all departments should preferably be coded. !his &illincrease 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 keptuptodate.

Difficulties in #nstalling Cost accounting 7%ste

1. ack 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 theyfear 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 toomuch concern for cost.

?. %igh cost of installing the system.

@. 'ailing to keep the system uptodate,

)+?+ Ho: are costs classified on the asis of Tie Period!


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.12 Historical Costs Costs relating to the past time period( Cost &hich has already been incurred.

.*2 Current Costs Costs relating to the present period.

.2 Pre deterined 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 Behavior /ature ariailit%!

=n the basis of )ehavior3 >ature3 5ariability( Costs are classified into(12 ariale Costs-!hese are costs &hich tend to vary or change in relation to volume of production. !hey

increase in total as production increases and viceversa e.g. cost of ra& materials, direct &ages etc

%o&ever, variable costs per unit are generally constant for unit of the additional output.

*2 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


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c. Product


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: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.

*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 costsare 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(

a. Preparation of inancial 7tateents-'ocus on inventory valuation and reporting profits.

b. Product Pricing-'ocus on costs assigned and incurred on the product till it is made available to the

customer3 user.

c. Cost- plus-Contracts &ith 7overnment Agencies 'ocus is on reimbursement of costs specifically

assigned to the particular 4ob 3 contract.

)15+ (ist out the various ites of costs on the asis of relevance to decision a'ing+


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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.

@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 accomplishmentof a managerial ob4ective.

)2 #rrelevant Costs"!hese are costs &hich are not relevant for decisionmaking.

12 7un' Cost-It is a cost &hich has already been incurred or sunk in the past. It is not relevant fordecision making and is caused by complete abandonment as against temporary shut do&n. !hus, if a firmhas 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 fordecision making.

*2 Coitted Cost-A cost &hich has been already committed by the management is not relevant fordecision making. !his should be contrasted &ith discretionary costs, &hich are avoidable costs.

2 Asored i9ed Cost-'i-ed costs &hich do not change due to increase or decrease in activity isirrelevant for decision making. Although such fi-ed costs are absorbed in cost of production at a norma

rate, they are irrelevant for managerial decision making. %o&ever if fi-ed costs are specific, they become

relevant.

)1= 3rite short notes on E9plicit and #plicit Costs+. C+A+ P+E+ 11 $a% *005, $a% *00=

a2 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. aresome e-amples of e-plicit cost involving immediate cash payment.

b2 #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.

)1?+ Define the ters .a2 Estiated Costs, .2 7hut Do:n Costs and .c2 Asolute Costs+

.a2 Estiated 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 actuaproduction or purchase$. 9stimated costs are prospective costs they refer to prediction of costs.

.2 7hut do:n costs-!hese are costs &hich continue to be incurred even &hen a plant is temporarily shutdo&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.

.c2 Asolute cost !hese costs refer to the cost of any product, process or unit in its totality. 8hen costsare 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.

)1@+ 3rite 7hort notes on Direct E9penses or Chargeale E9penses!

Ans+ !hese are the 9-penses &hich can be charged directly to Hobs,


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12 !hese are e-penses other than :irect materials and :irect abour

*2 !hese are either allocated or charged completely to cost centers or cost units.

2 !hese are included in the prime Cost of a


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!yres and tubes batch 9ach )atch costing

!oy 9ach batch )atch costing

os., tablets, strips, capsules )atch costing

8ater supply


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profit

earning2


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production Cost Centres, maintenance centres are e-amples of

since cost centres.

.c2 Based on Activit%"


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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 orderconsists 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 thusseparately 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( umber of similar

units

)atch Costing 'or each batch3 lot

ofunits produced


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;endering of +ervices =perating

Costing

'or every type of

+ervice

!ransport, %otels,

Cinema

)+*4+ 3hat do %ou ean % GTechni>ues of Costing+

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 It is a valuable technique of cost control

*. )udgetary Control It is also a technique that is used to control costs.

. 6arginal Costing It is a special technique to help the

management in decisionmaking 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 A3c.

. Absorption Costing As against marginal costing in this technique total

cost, i.e. fi-ed and variable is charged to products.

/. Bniform costing 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 ascertainent!

'or ascertaining cost, follo&ing types of costing are usually used(

12 nifor Costing( 8hen a number of firms in an industry agree among themselves to follo& the same systemof 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 interfirm comparison, determinationof true costs of the industry.

*2 $arginal Costing( It is defined as the ascertainment of marginal cost by differentiating bet&een fi-ed andvariable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of

decisionmaking on various management issues, Bnder this method, stocks are valued at variable cost. 'i-ed

Costs are treated as


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!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 ascertainent( 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 areinterrelated and very important tothe 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 &hichcosts 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

12 Cost Bnit and Cost Centre

*2 Cost Centre and ursing %ome =perating


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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


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12 All costs are controllable.

*2 Conversion cost is equal to direct &ages plus factory overhead.

2 5ariable cost per unit varies &ith the increase or decrease in the volume of output.

2 :epreciation is an out of pocket cost.

/2 An item of cost that is direct for one business may be indirect for another

?2 'i-ed cost per unit remains fi-ed.

Ans:er

.a2 Correct atching are indicated as elo:"

a2 ... ............ ,.,@2

!otal fi-ed cost, remains constant in total.

b2 ...................2

!otal variable cost, remains constant in total.

c2 ...................2

Bnit variable cost, increases in proportion to output.

d2 ,,. ............... ?2

Bnit fi-ed cost, decreases &ith rise in output.

e2 ...................12

+tandard cost, &hat cost should be.

f2 ...................L2


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?2 'alse

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CHAPTER-*

C


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Prie Cost

Add( 'actory overheads 8orks =% 3 6anufacturing =% 3


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quotations.

E9aples"

a2 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.

b2 '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

$eaning of Cost Asorption

Absorption of cost is charging cost from cost centre to products or services by means of absorption rate&hich is calculated as follo&s(

Total cost of the cost centreCost Absorption Rate

Totalquantum of the base=

)+= Classification of cost % eleent

$aterial!he term "materials# refer to all commodities supplied to an undertaking. 'or costing purposes, materialsmay be classified into t&o broad categories a2 :irect 6aterials b2 Indirect 6aterials.

.a2 Direct $aterials

1+ $eaning :irect materials are those materials &hich can be conveniently identified &ith and can be directly allocated to a particular productD 4ob

or process.

In!"#$%D!"#$%

E&'#n(#(L)*+,"M)%#"!)-(

In!"#$% D!"#$% In!"#$%D!"#$%

O#"/#)(

P"!# C+(%

COSS

21


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*+ eatures !he main features of direct materials areD a2 It can be easily

identified &ith a specific 4ob, contract or &ork order. b2 It varies

directly &ith the volume of output.

+ E9aples +ome e-amples of direct materials are as follo&sD

Basic Ra:- $aterials Priar% Pac'ing

$aterials

a2 !imber in furniture a2 Can for tinned food and drink

b2 Cloth in 7arments b2 )ottles for &ater, &ine J

&hisky

c2 6ilk J cream in ice cream c2


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.a2 Direct (aour

1+ $eaning :irect labour is that labour &hich can be readily identified &ith aspecific 4ob, contract or &ork order. It includes

a2 all labour directly engaged in converting ra& materials intofinished goods or in altering the construction, composition or

condition of the product,

b2 any other form of labour &hich is incurred &holly or specificallyfor any particular 4ob, contract or &ork order

*+ eatures !he main features of direct labour are(

a2 It can be easily identified &ith a specific 4ob, contract or &ork

order.

b2 It varies directly &ith the volume of output.

+ E9aples +ome e-amples of direct labour are(

a2 8eaver in &eaving unit

b2 Carpenter in furniture unitc2 !ailor in readymade &ears unit

d2 )aker in )aking unit

e2 %al&ai in confectionery unit

f2 8asher in :ry cleaning unit

g2 abour employed on construction contract

4+ Treatent 8ages paid to direct labour are termed as "direct labour cost# and

form part of prie cost+

.2 #ndirect laour

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.

*+ eatures !he main features of indirect labour are(

a2 It can not be easily identified &ith a specific 4ob, contract

or &ork order

b2 It may or may not vary directly &ith the volume of output.

+ E9aples 7oe e9aples of indirect laour are

a2 abour employed in


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d2 abour employed in


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*+ eatures !he main features of Indirect e-penses areD

a2 It can not be easily identified &ith a specific 4ob,contract or &ork order,

b2 It may or may not vary directly &ith the volume ofoutput.

+ E9aples ;ent, ;ates and ta-es of )uilding ;epairs, Insurance and:epreciation of )uilding,


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.a2 #ndirect $aterials Cost a2 Cost of consumable stores and supplies

like cotton &aste, lubricating oil etc.

b2 Cost of printing,


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c2 Administration office telephone

e-penses

d2 ighting, heating J cleaning of

Administration office.

.2 7elling


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E9aples"

.a2 $aterials a2 Cost of printing, postage J stationary used in distribution office

b2 Cost of secondary packagingc2 Cost of materials used in reconditioning

of the empty containers returned bycustomers for reuse.

.2 (aour a2 +alary of staff attached todistributionoffice like, packers,

despatchstaff2

b2 +alary of distribution vehicle driver.

.c2 E9penses a2 ;ent, rates J ta-es of distributing office3godo&n 3storage 3 &arehouse

b2 ;epair, insurance J depreciation

ofdistribution office )uilding,equipment J furniture, delivery van of

distribution officec2 :istribution office telephone e-penses

d2 ighting, heating J cleaning of distribution

officee2 :epreciation, repair J running e-penses of

delivery vansf2 'reight J carriage out&ard

g2 Insurance of finished stock in godo&n

)+? Classification of costs % relation to cost centre

Cost $eaning E9aple

1+ Direct Cost It is the cost &hich can beconveniently identified &ith and

directly allocated to a cost ob4ect in aneconomically feasible &ay. It

represents the aggregate ofa2 :irect 6aterial Cost

b2 :irect abour Costc2 :irect 9-penses

Cost of cloth in a shirt 8agespaid to tailor to shirt a shirt

9-cise duty on production

*+ #ndirect Cost It is the cost &hich can not beconveniently identified &ith and

directly allocated to a cost centre orcost ob4ect in an economically feasible

&ay. It is apportioned to various costcentres on some equitable basis. It is

also kno&n as overhead. It representsthe aggregate of

a2 Indirect 6aterial Costb2 Indirect abour Cost

c2 Indirect 9-penses

ubricating oil for machine+alary of supervisor. ;epairs,

Insurance J :epreciation ofmachines

)+@+ 7pecial Costs sed for $anagerial Decision - $a'ing

7pecial Costs $eaning E9aple

1+ Relevant Costs !hese are those future costs &hichdiffer under different alternatives.

In case of a decision relating

to the replacement of an old

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!hese can be changed by the

decision of the management.

machine, dismantle cost of an

old machine is a relevant cost.

*+ #rrelevant Cost !hese are those costs &hich are notrelevant, !hese cannot be changedby the decision of the management.

In case of a decision relating to

the replacement of an oldmachine, depreciated book

value of old machine isirrelevant cost.

+ 7un' Costs!hese are the historical or past costsincurred by a past decision. +ince

sunk costs can not be changed bylater decision, these are not relevant

for decision making.

In case of decision relating tothe replacement of an old

machine, depreciated bookvalue of old machine is sunk

cost.

4+ 7hut- do:n

Costs

!hese are those fi-ed costs &hich

continue to be incurred even &hen aplant is temporarily shut do&n.

;ent, insurance and

depreciation of )uilding

5,


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material into a finished product. It is

the aggregate of direct labour cost,direct e-penses and production

overheads.

:irect abour Cost ;s FF,

:irect 9-penses ;s *FF,ote( :irect 6aterial Cost P =pening +tock

of ra& materials O >et purchases e.g., carriage3

freight in&ard2 Closing +tock of ra& materials.*+ 3or's cost or factor%

costP


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progress is valued at factory cost, it is ad4usted as

sho&n above,

+ Cost of production or

cost of goods produced

P 8orks Cost O Administration =verheads

4+ Cost of goods sold Cost of goods produced O =pening +tock of finished

goods Closing stock of finished goods

5+ Cost of sales Cost of goods sold O +elling J :istribution =verheads

)+11 orat of 7tateent 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

7tateent of profit or loss

Particulars Total .Rs+2 Per unit .Rs+2

A. :irect 6aterial Cost

=pening +tock of 6aterials .....D..

Add(


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. Cost of +ales RH O GS

6. Add( . +ales R O 6S

1. !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.

!utorial >otes(

12 Bnless other&ise stated, closing stock of finished goods should be valued at current cost of production

assuming that the firstinfirst out method of inventory valuation is in use.

*2 Items of financial nature like Income !a-, Cash :iscount, Interest on Capital3 )ank

=verdraft, :onations, :ividend,


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vi2 'ines and penalties

vii2 :ividend received on investments in shares.

viii2 ;ental income etc.

i-2 Bnder or recovered e-penses.

-2 :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 profit 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, thereconciliation of cost and financial accounts is essential and not redundant even in the modern age of

computer.

)+* 3hat are the reasons for disagreeent of profits as per financial accounts and cost accounts!

Discuss+ .1666 J /ov2

Ans+ ;easons for disagreement of profit as per 'inancial accounts and cost account are as belo&. !here arecertain items &hich are included in 'inancial accounts but not in cost accounts. ike&ise there are certain

items &hich are in cost.

i2 Accounts but not in financial accounts.

9-amples of financial charges &hich appear only a financial books are (

i2 oss on sale of fi-ed assets and investment.

ii2 Interest on bank loans, mortgage etc.

iii2 9-penses relating to the issue and transfer of share and debentures like stamps duty e-penses

discount on share and debentures etc.iv2


34/72



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are (

a2 >otional interest on CapitalD

b2 >otional rent on premises o&ned

+ nder or over J asorption of overhead

In cost accounts overheads are charged to production at pre determined rates &hereas in

financial accounts actual amount of overhead is charged, the different gives rise to under or over

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 I'= basis and &ork in progress may bevalued 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 thedifferent 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 3h% is it necessar% to reconcile the profits et:een cost accounts and financial accounts! .*00* J

/ov2

Ans+ a2 >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 profit 3 loss2 sho&n by t&o sets of books.

Cause for difference bet&een profit sho&n by cost and financial accounts12 !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 financia

books e.g., notional interest etc.2

*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.

2 :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 methodgenerally follo&ed is cost or market price, &hichever is less &hereas in cost accounts different

methods of pricing of material issues such as I'=, 'I'= average etc are used.

2 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&nvalue method &hereas in cost accounts it may be charged on the basis of the life of the machine.

/2 Abnormal items not included in cost accounts also cause a difference in profit. If such items ofe-penses are included, cost ascertained &ill not be correct.

35


36/72


Bnder nonintegrated 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 financia

accounts.

*. It also helps in checking the arithmetical accuracy of the costing data.

Reasons for Difference in Costing and inancial Profit (oss

1. Items sho&n only in financial accounts. !here are a number of items &hich appear in financia

accounts and not in cost accounts. !hese items are classified into three categories as under (

a2


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vi2 Any other items &hich appears in


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/#T J ##

Chapter J 4

#/TERATED

THE


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!he balance in this account &ill al&ays be equal to the total of all the balance of the impersonal accounts.

)+ Distinguish et:een an% t:o of the follo:ing "-

#ntegrated and non J integrated s%stes of accounting. .B+ CoJ *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 offinancial 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 locking accounts may be maintained so as to ensure integration

!his is kno&n as inter 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, ar's2

Ans+ Essential pre-re>uisites of #ntegrated Accounting 7%ste"

!he essential prerequisites 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 ituseful 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.

.


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Ans+ Advantages of #ntegrated Accounting "

Integrated Accounting is the name given to a system of accounting &hereby cost and financial accounts arekept 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 together &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.


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/2 Centrali0ation of accounting function results in economy.

!he essential prerequisites 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 costaccounts.

. An agreed routine, &ith regard to the treatment of provision for accruals, prepaid e-penses, and otherad4ustments necessary for preparation of interim accounts.

.


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'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(

i2 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.

ii2 !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.

iii2 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.

iv2 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.

)+* 3rite notes on" Bill of $aterial 16@?, 166@M$a%

Ans+ 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 forthe 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

a2 +tores departments

b2


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system in usually supported by continuous stock taking. it calls for uptodate &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*, *00, 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&(

a2 )in card is maintained by the store keeper, &hile the stores recording document &hereas the stores ledger

is an accounting records.

b2 )in card is the stores recording documents &hereas the stores ledger is an accounting record.

c2 )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.

d2 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.

e2 Inter departmental transfers of materials appear only in stores ledger.

f2 )in cards records each transactions but stores ledger records the same information in a summari0ed form.

DE7CR#PT#E )E7T#


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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 beenrequisitioned. !his note is signed by the foreman of the concerned departments.

)+? GTo e ale to calculate a asic Euisition! .ive a specien for of a purchases re>uisition!

Ans+ a2 A purchase requisition is a form used for making a formal request to the purchasing department to

purchase materials. uisition

:ateXXXXXXXXXXX 'or +tock :ate of requirementXXXXXXXXX

;eq. >o.XXXXXXXXX :ept. or &ork order >o.XXXXXXXX

+l.>o. Code >o. :escription Quantity 7rade ;emarks

44


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;equisitioned by XXXXXXXChecked by XXXXX Approved byXXXXXXXXX

'or


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iii2 Arithmetical errors might have been made &hile calculating the stores balances on the bin cards or

store ledger &hen a manual system is operated.

iv2 !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 quantity

only2 must be reduced and the differences in cost be charged to a factory overhead account for stores losses.

)+11 Discuss the accounting treatent of defectives in cost accounts+ *000 M $a%

Ans+ Accounting treatent 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 reconditioned by the use of additional material, labour and I or processing and brought tothe point of either standard or substandard units.

The possile :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.

a2 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.

b2 Charged to general overheads"If the department responsible for defectives cannot be identified

the re&ork costs are charged to general overheads.

c2 Charged to departental 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


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ii2 'alse, Continuous stock taking is a part of perpetual inventory system.

iii2 'alse, "A# stands for highest value items.

EEEEEEEEEEEEEE

Chapter ?

(AB


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Causes of (aour turnover "- the main causes of labour turnover in an organi0ation3 industry can be broadly

classified under the follo&ing heads(

a2


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c2 )reakage of tools, &astage of material increases.

d2 =verall production decreases due to the time lost bet&een the leaving recruitment of ne& &orkers.

e2 ;eduction in sales accounts for loss of contribution and good&ill consequently.

D#7T#/#7H BET3EE/

)+4 Distinguish Bet:een Fo evaluation

and $erit rating+ .166=, 1666, *001, 16642

Ans+ Fo evaluation and erit rating"-

!he main points of distinction bet&een 4ob evaluation and merit rating are as follo&s (

12 Hob evaluation is the ascertainment of the relative of 4obs &ithin a company and merit rating is theassessment of the relative &orth of the man behind a 4ob. In other &ords, merit rating rates employeeson their 4ob &hile 4ob evaluation rates the 4obs.

*2 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.

2 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 theirperformance.

)+5 Distinguish et:een the follo:ing " .166? J$a%2

Casual :or'er and out:or'er+

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 ofhis home is usually compensated on the basis of his output. %e is supplied &ith ra& materials and tools necessaryfor carrying out the 4ob. An out&orker outside the factory2 is usually on speciali0ed 4obs3contract &ork

)+= E9plain the eaning of and the reasons for Oidle TieO and discuss its treatent in cost accounts

.*0002 1664 J /ov

49


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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 tie"-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 availability of ra& materials, tools or &aiting for 4obsdue 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.

Treatent in cost accounting"- Idle time may be normal or abnormal

/oral idle tie"- 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.

Anoral idle tie "- 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 oectives of tie 'eeping and tie oo'ing!

Ans+


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d2 !o compute and determine overhead rates and absorption of overheads under the labour and

machine hour method.

)+? 3hat is overtie preiu! E9plain the treatent of overtie preiu in cost accounting+ 7uggest

steps for controlling overtie+ 1665 J /ov2

Ans+


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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 aproper consideration of these factors.

Tie and otion stud% is iportant to anageent ecause of the follo:ing features"-

1. Improved methods, layout, and design of &ork ensures effective use of men, materials and resources.

*. Bnnecessary and &asteful methods are pin pointed &ith a vie& to either improving them or criminatingthem 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.

.


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b2 8orkers engaged on highly skilled 4obs or rendering skilled services, e.g. tool making, inspection and

testing.

c2 8here the pace of output is independent of the operator, e.g. automatic chemical plants.

)+11 Ho: are pa%ents to :or'ers in respect of over-tie :or' and set-up tie treated in cost Account!

166?2Ans+


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)+1+ 7tate the purpose served % the Tie eeping and Tie oo'ing records of a factor%+

*000

Ans+ Tie 'eeping and Tie oo'ing records serve the follo&ing purposes(

i2 It completes the attendance records of the company

ii2 It helps in calculating the &age3salaries of &orkers.

iii2 abour cost of each 4ob can be easily calculated.

iv2 It helps in e-ercising control on labour time and productivity.

Ans. /oral #dle Tie+!he >ormal idle time is almost unavoidaleand the employer has to bear its cost. !his

is the time lost in

- 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 teabreaks

+uch normal idle time is calculated by comparing the "time card# &ith the Io card8and 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.

Anoral #dle Tie++uch abnormal idle time arises because of the follo&ing causes (

- +trikes

- ockouts

- 6achinery breakdo&n or po&er failure

- >onavailability 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


55/72


Chapter-@


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11. +upervision >umber of &orkers

1*. Canteen e-penses >umber of &orkers

1. 9mployee &elfare e-penses >umber of &orkers

1. umber of &orkers

1/. Indirect abour :irect abour 38age )ill

1?. 9mployer#s contribution to


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)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.

C2


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b2 Children education allo&ances

c2 %oliday pay

d2 eave pay

e2 eave 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 eachdepartment.

'ringe benefits to office and selling and distribution staff be treated as administrationoverheads and selling and distribution overheads respectively and recovered accordingly.

)+4 3hat is lan'et overheads rate! #n :hich situations, lan'et rate is to e used an% :h%!

Ans. )lanket overheads rate is one single overheads absorption rate for the &hole factory. It may becomputed 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 productsutili0e 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 dets+

Ans. Bad Dets( !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. !hereforethey should be treated in cost accounts in the same &ay as any other selling and distributione-penses.

)+= E9plain

.12 Training costs.

Ans+ !raining costs( these costs comprises ofW &ages and salaries of the trainees or learners, payand 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


59/72


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. Itmay 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 productiondepartment, 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 stateents are true of false, giving reason in one or t:o

lines"

i2 'i-ed cost does not charge in the same proportion in &hich output changes.

Ans. !rue. !otal fi-ed cost does not change &hen output changes.

59


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CHAPTER-6

F


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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, shipbuilding, 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 costingseparate 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.

)+ Descrie riefl% the nature of accounting proles associated :ith o costing+

.*00*2

Ans + Fo costi ng " 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 isprepared 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 overheadsare charged on a predetermined 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


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P :emand of the components in a year

7 P +etting up cost per batch

CP Carrying cost p.u. per annum.

LLLLLLLLL

62


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CHAPTER-10

C


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Basis of Distinction Fo Costing Contract costing

1.Cost unit Each o is treated as

a cost unit.

Each contract is

treated as a cost unit.

*. E9ecution of :or' Hob &ork is e-ecuted

in factor%preises+

Contract &ork is

e-ecuted at the site

of contract+

. #ndirect costs Indirect costs are

higher that those

under contractcosting.

Indirect costs are

lo:erthan those under

4ob costing.

. Pricing


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)+* 3rite notes on "-

.12 Cost J Plus J Contracts .166=,*000 - /ov2

Ans+ $ain features of cost - plus - contracts"

!he main features of cost plus contracts are as follo&s(1 . !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 mater ia l and labour i s not

steady and the contract completion may take number of years.

. !he different costs to be i nc luded 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 a lso 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.

)+ Discuss rief the principles to e fol lo:ed :hile ta'ing credit for profit on

incoplete contracts+ .*00,1666 J $a%2

Ans+ Principal to e follo:ed :hile ta'ing credit for profit on incoplete 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 contractshould 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, al l the

incomplete contracts should be classified into the follo&ing four categories.

12 Contract less than */V categor ies.

*2 Contract bet&een */V and /FV complete.

2 Contracts bet&een /FV and LFV complete

2 Contracts nearing completion, any bet&een LFV and 1FFV complete.

a 2 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.

b 2 Contract et:een *5Q and 50Q coplete " In this case one third of the

national profit reduced in the ratio of cash received to &ork certified, may be65


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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"=

c 2 Contracts et:een 50Q and 60Q coplete " In this case, t&o third of thenotion 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"=

d 2 Contracts nearing copletion, an% et:een6Q and 100Q cop lete " 8hen a

contact is nearing completion or LFV or more &ork has been done on a

contract. !he amount of profit to be certified to profit and loss account maybe determined by using any one of the follo&ing formula(

%or& certifie"Estimate" 'rofit

Contract price

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CHAPTER-1*

PR


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Basis of Distinction Fo Costing Process Costing

1. +pecific orders Hob is performed against

specific orders

ature 9ach 4ob may be different


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Constructive purpose ( It provides management &ith information useful in regulating production, choosing

economical methods of operation, reducing operations costs and reformulating plants etc.

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CHAPTER-1

F


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proportions &hich can not be

changed by the management

natural proportion.


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Tutorial /otes "

i2 !he management may decide to treat all products produced as 4oint products or one product as main

product and other products as )y


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.?2 /et Reali;ale 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

) ess ( 'urther processing costs

C >et reali0able value A)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

) ess 9stimated profit

C !otal cost of sales A)2

: ess ( +elling and distribution e-penses

9 !otal cost of goods sold C:2 ' ess ( 'urther et 5alue 9'2

)+1 .a2 Ho: :ould %ou deal :ith %-products in costing"

i2 8here they are of small total valueN

ii2 8here they are considerable total valueN

iii2 8here they require further processingN

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02 COST THEORY V. GOOD.doc

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