Cost AccountingBY: Sadrani yash

Presentation Answers • What is job costing? What are its main characteristics? Characteristics Features procedure involve in job order costing.

Applicability

• What is BEP? List out the assumption of breakeven analysis

• Assumption of BEP analysis

• What is Profit Volume (P/V) Ratio

• What is CVP analysis? How does it help the management?

• What is process costing? What are its main characteristics? Name the industries where process costing can be applied. Normal Loss Abnormal Loss Abnormal Gain Job Costing & Process Costing

• Accounting for losses in process costing

• What do you mean by operating costing? Draw a specimen cost sheet for transport costing.

• INDUSTRY AND CORRESPONDING COST UNIT

• RECONCILIATION STATEMENT

What is job costing? What are its main characteristics?

• Job costing is a costing method applied to determine the cost of specific jobs or lots of production generally manufactured according to “customer’s specification”

• A job may be product, unit, batch, sales order, project, contract, services etc..

• Job costing is also known as job order costing.

• It is that form of specific order costing which applies where the work is undertaken as per the customer’s specific requirements and each order is of comparatively short duration

Characteristics

• Work is performed in accordance with the customer’s orders and specifications.

• Products are not produced for maintaining stock.

• Every job can be identified clearly.

• Every job is charged with its own cost.

• Costs are collected to each job at the end of its completion.

• Work-in-progress may or may not exit at the end of the accounting period.

• Each job is a separate accounting unit, and separate job or production numbers are allotted to each job.

• The purpose of job order costing is to segregate the cost of each product or lot or job.

• Standardization of controls is comparatively difficult as each job differs and more detailed supervision and control is necessary.

• It is concerned with the cost of an individual job or batch regardless of the time taken to produce it, but normally short duration jobs.

What do you mean by job order costing? Enumerated the objectives and essentials of job costing.• Job order costing used for production of large, unique, high cost

items.

• Built to order rather than mass production.

Features• Work is performed in accordance with the customer’s orders and

specifications.

• Products are not produced for maintaining stock.

• Every job can be identified clearly.

• Every job is charged with its own cost.

• Costs are collected to each job at the end of its completion.

• Work-in-progress may or may not exit at the end of the accounting period.

Features• Each job is a separate accounting unit, and separate job or production

numbers are allotted to each job.

• The purpose of job order costing is to segregate the cost of each product or lot or job.

• Standardization of controls is comparatively difficult as each job differs and more detailed supervision and control is necessary.

• It is concerned with the cost of an individual job or batch regardless of the time taken to produce it, but normally short duration jobs.

Explain procedure involve in job order costing.1. Pre production procedure.

2. Allotment of job number.

3. Issue of production order.

4. Maintenance of separate job cost card.

5. Collection of costs

(i) Accounting for materials.

(ii) Accounting for direct labour.

(iii) Accounting for direct expenses.

(iv) Accounting for overheads.

6. Job cost analysis

• What do you mean by job costing? Under what circumstances, the job costing suitable? Can the caterer use the job costing? If no, which method he should use?

Applicability• Job costing is applicable to concerns engaged in job-order production

or services.

• It is employed by jobbing concerns.

This method of costing is used in organizations, where

• Production is done on the basis of customer’s own specifications,

• Products are manufactured in distinguishable lots,

• Products are not uniform, and

• It is practical to maintain a separate record of each lot from the time the production has begun until it is completed.

What is BEP? List out the assumption of breakeven analysis• Breakeven analysis is also known as cost-volume profit analysis

• Breakeven analysis is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity

Assumption of BEP analysis• Relevant range

The relevant range is the range of an activity over which the fixed cost will remain fixed in total and the variable cost per unit will remain constant

• Fixed cost Total fixed cost are assumed to be constant in total

• Variable cost Total variable cost will increase with increasing number of units produced

• Sales revenue The total revenue will increase with the increasing number of units produced

What is Profit Volume (P/V) Ratio

• This ratio indicates the contribution earned with respect to one rupee of sales.

• It is also known as Contribution Volume or Contribution sales ratio.

• Fixed costs remain unchanged in the short run, so if there is any change in profits, that is only due to change in contribution.

P/V Ratio = Contribution x 100Sales

P/V Ratio = Changes in profit x 100 Changes in Sales

What is CVP analysis? How does it help the management?

Cost Volume Profit analysis• CVP analysis studies the relationship between expenses, revenues

and net income.

• The aim is to establish what will happen to financial results if a specified level of activity or volume fluctuates.

What is process costing? What are its main characteristics? Name the industries where process costing can be applied.

Process costing• Process costing is a method of costing used to find out the cost of the

product in each process.

• It is used to calculate cost per unit of product is ascertained at each stage of production.

• It is a form of operations costing.

• Process costing is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol, etc.

meaning

•Process costing is that form of operations costing which is used where standardized goods are produced in large volume with continuous production follow.

•This method is applicable where goods or services result from a sequence of continuous processes.

Applicability• This method of costing is used by those concerns which manufacture articles of uniform standards.

• These firms manufacture articles on a continuous flow basis.

• Under the following conditions, process costing can be followed favourably: Production of a single product. Processing of a single product for a certain period. Production of several products of a standard design in the same plant. Division of a factory into separate operations or processes.

Characteristics• Cost flow from one process to another

• Equivalent production computation

• Average unit cost computation

• Normal and abnormal losses

• Work in progress at year end

• Emergence of more than one product

• Transfer to finished goods

• Homogenous product

• Separate ledger

Normal Loss• It is a part of the process loss which is caused under normal

circumstances, and an inevitable loss.

• It can not be avoided by any steps or measures by the management.

• It is also referred to as a non-controllable loss.

• Normal loss may have a scrap value.

• The cost of normal loss after deducting scrap value, if any, is to be borne by the output of the respective process.

Abnormal Loss

• It is a part of the process loss which is caused due to abnormal circumstances.

• Abnormal loss is avoidable and controllable by the management by establishing proper precautionary measures.

• Abnormal loss occurs in addition to normal loss.

Abnormal Gain

• Abnormal gain arises when the actual wastage (loss) is less than the normal wastage or when the actual output is more than the normal output.

• Abnormal gain arises due to rise in the efficiency of the production department, so the benefit of abnormal gain will not be transferred to customers.

Job Costing & Process Costing

Job Costing Process Costing

Production is against some specific orders

Process is in continuous flow and Homogenous

Each Job is separate and independent of each other

Products lose their individual entity, as they are manufactured on a continuous flow

Costs are calculated when a job is completed

Costs are calculated at the end of a cost period

It involves more paperwork

It involves less paperwork

Accounting for losses in process costing

• In a production process, losses are inherent and unavoidable

•Nature of lossesNormal lossAbnormal loss

What do you mean by operating costing? Draw a specimen cost sheet for transport costing.

• Companies belonging to the service sectors like transport companies, hospitals, electricity and gas companies, hotels and restaurants, water supply and road maintenance companies are some of the enterprises where operating costing is applicable.

Characteristics

• It is a system of costing employed to find the cost of rendering a service.

• Under this system, costs are accumulated under suitable headings and are expressed in terms of the unit of services rendered.

• Unlike in other methods of costing, selection of cost unit is difficult in operating costing.

• Operating costs are mostly period costs.

• This system requires a more detailed but simpler statistical data for proper costing

Features

• Classification of costs into variable and fixed

• ascertainment of costs is done periodically

• Stages & process involved in conversion of basic material

• No difficulty in valuation of work in Progress

• Intangible products

• Cost unit differs

• Accurate estimation of cost is difficult

INDUSTRY AND CORRESPONDING COST UNIT

Types of services

Cost unit

Transport Passenger kms, Tonnes kms

Hospital Patient-bed, patient-day

Canteens Meals served

Hotels Room day

Cinema Man show

Power generation Per kilowatt hour

Boiler houses Kilograms of steam supplied

Define contract costing. What are the special features of contract accounting?

Introduction• Contract costing is a type of job costing in which a contract constitutes a unit of cost.

• Contract costing, which is otherwise called terminal costing, is adopted by those business undertakings which undertake definite contracts.

• CIMA - Contract cost as ‘the aggregated costs relative to a single contract designated as a cost unit.’

Features of Contract Costing• Each contract is considered as a separate unit of cost.

• A separate ledger account is kept for each contract and is allotted a unique number.

• Usually the contract work is carried out at the customer’s site.

• A contract usually takes more than one accounting year to complete.

• Normally the entire labour cost is directly chargeable to the contract.

• Plant and equipment may be purchased or hired for the contract work.

• Penalties may be incurred by the contractor for failing to complete the work within the specified period.

Accounting Procedure• Materials:

Issue from storeroom Purchases from market Transfer from other contract Material supplied by contractee

• Direct Labour

• Direct Expenses

• Indirect Expenses or Overheads

• Plant and Machinery

• Subcontract cost

• Extra Work Done

• Escalation Clause

Types of contracts

•Fixed –price contract with escalation clause

•Cost-plus contract

Fixed Price contract with escalation clause

• Contracts of some nature extend over a long period, covering more than a few accounting periods.

• During such lengthy period, there may be changes in the prices of materials, labour and so on.

• At the time of acceptance of a contract, such factors have to be foreseen and estimated properly.

• If such factors are not taken into account, then the contractor may not be able to attain the profit targeted.

• In order to safeguard against this, a special clause known as “escalation clause’ is incorporated in fixed price contracts.

Escalation clause

• The clause is provided in the contract to cover up any changes in the price of materials, labour, etc. Since the contracts generally take more than one year to complete, the object of incorporating this clause is to safeguard the interest of both the parties against unfavourable changes in prices.

De-escalation cluase • A de-escalation clause may be inserted in the agreement to take care of the interest of the contractee. It provides for downward revision of the contract price in case the cost goes down beyond a certain agreed level or the quantity of materials and labour-time reduce from an estimated level.

Cost Plus Contract• It is a modified method of contract costing.

• This method of costing is used when it is not possible to determine the cost of the contract in advance with a reasonable degree of accuracy.

• Under this type of contract, the contractee agrees to pay the contractor the contract price plus an agreed percentage above the contract price or a fixed fee. Cost-plus contracts are generally used in Governments only.

• Contract Price It is the value of the contract which is agreed to be paid to the contractor by the contractee when the contract is satisfactory completed.

Cost Plus Contract

• The cost plus contract is useful in the following situations: When it is difficult to estimate the cost of a contract due to the cost fluctuations or the long period of time required to execute the contract, or

When the probable cost of contract cannot be estimated in advance with a reasonable degree of accuracy, or

When the contract is absolutely new to the contractor.

Work-in-progress (WIP)

• Incomplete contracts are referred to as work-in-progress. It includes the cost of certified work, cost of uncertified work, the value of plant at site, and the cost of materials at site.

Work Certified • Both the contractor and the contractee are interested in getting the work certified due to the following: It helps to monitor the progress of work done. It is a basis of payment to be made by the contractee. It facilitates the estimation of profit. It helps to get loans against work certified. 

• Work certified always has a cumulative value. It is a part of the work done, generally in percent. It is always valued at the contract price.

Work Uncertified

•Work uncertified is the value of work done, but not certified by the architect.

 

Retention money

• To put the contractee in a favourable position to take care of any faulty work that may arise or to recover penalty that may recoverable on account of late completion. This also ensures the contractee that the contractor will continue to work and not leave the contract incomplete.

What do you understand by reconciliation of cost and financial accounts? Indicate the possible reasons for difference between them.

DEFINITION

•Cost Accounting A method of accounting, which provides for assembling and recording of all elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job.

•Financial Accounting Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.

RECONCILIATION IS PROCESS•Whereby Profits Revealed by Two Sets of Books-financial Accounts and Cost Accounts are Tallied after Ascertaining the Reasons for Disagreement of Two Profits.

NEED FOR RECONCILIATION• When cost and financial accounts are maintained separately, the profit

shown by one set of books may not agree with that of the other set.

• In such a situation, it becomes necessary to reconcile the results (profit / loss) shown by two sets of books Cause for difference between profit shown by cost and financial accounts is that there are certain items which appear in financial books only and are not recorded in cost accounting books

• Similarly, there may be some items which appear in cost accounts only and do not find a place in the financial books Need for Reconciliation:

Reasons Of Difference

• Notional Rent of Own Building

• Notional Interest on Capital Employed

• Notional Salaries

• Notional Depreciation

1. Items Shown in

Cost Accounts Only

Reasons Of Difference

• Abnormal Wastage of Materials

• Loss By Fire or theft ( not insured)

• Cost of Abnormal idle time

• Exceptional Bad Debts

1. Items of Expenses

and losses Shown in Cost Accounts Only

Abnormal Losses

Reasons Of Difference

• Interest rec. on Loans, deposits, investments

• Dividend Received

• Dividend Receivable

• Profit on Sale of Assets

• Transfer Fees

• Brokerage, Commission, Discount Received

2. Items(INCOME) Shown

Only in Financial Accounts

Reasons Of Difference

• Interest on Loan and Debentures

• Discount on Issue of Shares & Debentures

• Cash Discount

• Fines & Penalties

• Loss On Sale of Fixed Assets

• Donations, Subscriptions etc

3.Items of Expenses

and losses Shown in Fin. Accounts Only

Financial Expenses

Reasons Of Difference

• Dividend & Bonus to Share holders

• Transfer to Gen. Reserve, Sinking Fund

• Taxes on Income & Profits

• Excess Provision against Depreciation

3.Items of Expenses

and losses Shown in Fin. Accounts Only

Appropriation ofProfits

Reasons Of Difference

4. Under or Over absorption

of Overheads

Reasons Of Difference

5. Valuation of Stocks

Reasons Of Difference

6. Different Methods Of Depreciation

ITEMS INCLUDED IN FINANCIAL ACCOUNTS ONLY

• Appropriation of profits Provision of taxation Goodwill Preliminary expenses written off Dividend & Bonus to Share holders Transfer to Gen. Reserve, Sinking Fund Taxes on Income & Profits Excess Provision against Depreciation

• Purely financial charges Losses on sale of investment Interest on Loan and Debentures Discount on Issue of  Shares & Debentures Cash Discount Fines & Penalties Loss On Sale of Fixed Assets Donations, Subscriptions etc Expenses on transfer of company’s office.

• Purely financial incomes Interest received on bank deposits /loans Profits made on sale of investment/assest Fixed assets transfer fee received. Dividend Received Dividend Receivable Brokerage, Commission, Discount Received

ITEMS INCLUDED IN COST ACCOUNTS ONLY...

• Cost of abnormal idle time

• Under/over absorption of expenses in cost accounts

• Abnormal wastage of materials

• Notional rent

• Depreciation on an asset even when the book value of an asset is reduced to a negligible figure.

Reconciliation procedure

• Ascertainment of profit as per Cost Accounts

• Ascertainment of Profit as per Financial Accounts

• Reconciliation of both the profits

RECONCILIATION STATEMENT

• The preparation of reconciliation statement involves the following steps:

1. Profits as per any set of books(cost or financial) may be taken as a base.

2. The effect of the particular cause of difference should be studied on the profits shown by the other set of books.

3. In case, the cause has resulted in an increase in the profit shown by other set of books, the amount of such increase should be added to the profit as per the former set of books which has been taken as a base. preparation of reconciliation statement

4. In case, the cause has resulted in a decrease in the profit shown by other set of books, the amount of such decrease should be subtracted from the profit as per the former set of books which has been taken as a base .

In the reconciliation it does not matter in which form the stock is kept ,i.e, raw material, work-in-progress or finished stocks. The basic principle is that if the opening stock is higher, profit is lower whereas if the closing stock is higher, profit is higher, and vice versa. for example:

If opening raw material is lower in cost accounts, the costing profit will be higher .

If closing work in progress is higher on cost accounts, costing profits will be higher.