Cost Accounting Manual (1)
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ACCOUNTINGACCOUNTINGACCOUNTINGACCOUNTING
BYBYBYBY
ATAUSH SHAFIATAUSH SHAFIATAUSH SHAFIATAUSH SHAFI
$ast U%dated on: Tuesda, '
nual 2013
hafi@gai!"co#
OSTOSTOSTOST
nuar 1, )1*
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Table of ContentsCIMACIMACIMACIMA OFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGY .................................................................................... 3
COST OFCOST OFCOST OFCOST OF GOODS SOLD FORMULEGOODS SOLD FORMULEGOODS SOLD FORMULEGOODS SOLD FORMULE ................................................................................ 13
COST CLASSIFICATIONCOST CLASSIFICATIONCOST CLASSIFICATIONCOST CLASSIFICATION .................................................................................................. 17
PROCESS COSTINGPROCESS COSTINGPROCESS COSTINGPROCESS COSTING ..................................................................................................... ...... 18
BYBYBYBY----PRODUCTPRODUCTPRODUCTPRODUCT ...................................................................................................................... 30
DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING ..................................................................................................... ...... 35
BUDGETINGBUDGETINGBUDGETINGBUDGETING ........................................................................................................................ 66
STANDARD COSTINGSTANDARD COSTINGSTANDARD COSTINGSTANDARD COSTING ...................................................................................................... 76
MATERIAL COSTINGMATERIAL COSTINGMATERIAL COSTINGMATERIAL COSTING .................................................. ................................................... . 100
FACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEAD ................................................................................................... 112
BREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSIS .................................................. ............................................ 117
ABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTING ........................................................................ 128
LABORLABORLABORLABOR ................................................................................................................................. 134
COST CYCLECOST CYCLECOST CYCLECOST CYCLE ...................................................................................................................... 139
JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING .................................................................................................... 148
PAST PAPERSPAST PAPERSPAST PAPERSPAST PAPERS ................................................................................................................... 150
IMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERS ...................................................... 169
EXAM RUBRICEXAM RUBRICEXAM RUBRICEXAM RUBRIC .................................................................................................................. 173
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CIMACIMACIMACIMA OFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGY
Ters +efinitions
ost accounting Gathering of cost information and its attachment to cost
objects, the establishment of bdgets, standard costs and
actal costs of o!erations, !rocesses, acti"ities or !rodcts#
and the anal$sis of "ariances, !rofitabilit$ or the social se
of fnds.
ost ob-ect % !rodct, ser"ice, centre, acti"it$, cstomer or distribtion
channel in relation to &hich costs are ascertained.
ost unit 'nit of !rodct or ser"ice in relation to &hich costs are
ascertained.• %s a non, cost is ()he amont of cash or cash
e*i"alent !aid +.
• %s a "erb, cost is ()o ascertain the cost of a s!ecified
thing or acti"it$.
• )he &ord cost can rarel$ stand alone and shold be
*alified as to its natre and limitations.
Industry sector Cost unit
ric-ma-ing 1,000 bric-s
/lectricit$ ilo&atthor &
rofessional ser"ices hargeable hor/dcation /nrolled stdent
Activity Cost unit
redit control %ccont maintained
elling stomer call
ðrodct costing ö cost nit ost enter ن cost nit ر !
Type of cost centre Examples
er"ice location tores, canteen
nction ales re!resentati"e%cti"it$ alit$ control
tem of e*i!ment ac-ing machine
ost c!assification %rrangement of elements of cost into logical gro!s &ith
res!ect to their natre fi:ed, "ariable, "ale adding,
fnction !rodction, selling or se in the bsiness of the
entit$.
+irect cost /:!enditre that can be attribted to a s!ecific cost nit, for
e:am!le material that forms !art of a !rodct.
.rie cost )otal of direct material, direct labor and direct e:!enses.
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Indirect cost or o0erhead /:!enditre on labor, materials or ser"ices that cannot be
economicall$ identified &ith a s!ecific saleable cost nit.
.roduct cost ost of a finished !rodct bilt ! from its cost elements..eriod cost ost relating to a time !eriod rather than to the ot!t of
!rodcts or ser"ices.
Fied cost ost incrred for an acconting !eriod, that, &ithin certain
ot!t or trno"er limits, tends to be naffected b$
flctations in the le"els of acti"it$ ot!t or trno"er
i:ed costs are the same, no matter ho& man$ nits are
!rodced. ;ote, ho&e"er, that as the nmber of nits
increases, the fi:ed cost %er unit actall$ decreases.
)his conce!t ma$ seem confsing at first and it<s best to
thin- in terms of nmbers.
20X1 20X2
i:ed cost =s 50,000 50,000
;o of nits !rodced 500 1,000 'nits ha"e increased
i:ed cost !er nit
=s> 50,000?no. of nits 100 50 ost !er nit has decreased
/"en thogh the costs are fi:ed, &e still sometimes loo- at
the cost !er nit. @on<t let this confse $o A total fi:ed
costs are fi:ed and do not "ar$ &ith acti"it$ le"els.
2ariab!e cost ost that "aries &ith a measre of acti"it$.
Sei30ariab!e cost ost containing both fi:ed and "ariable com!onents and
ths !artl$ affected b$ a change in the le"el of acti"it$.
4e!e0ant cost of an asset =e!resents the amont of mone$ that a com!an$ &old
ha"e to recei"e if it &ere de!ri"ed of an asset in order to be
no &orse off than it alread$ is. Be can call this the de%ri0a!
0a!ue.
/:am!le> @e!ri"al "ale of an asset
% machine cost =s> 14,000 ten $ears ago. t is e:!ected that
the machine &ill generate ftre re"enes of =s> 10,000.
%lternati"el$, the machine cold be scra!!ed for =s> 8,000.
%n e*i"alent machine in the same condition &old cost =s>9,000 to b$ no&. Bhat is the de!ri"al "ale of the
machineC
oltion
irstl$, let s thin- abot the rele"ance of the costs gi"en to
s in the *estion.
ost of machine D =s> 14,000 D !ast?sn- cost
tre re"enes D =s> 10,000 D re"ene e:!ected to be
generated
;et realiEable "ale D =s> 8,000 D scra! !roceeds
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=e!lacement cost D =s> 9,000
Bhen calclating the de%ri0a! 0a!ue of an asset, se the
follo&ing diagram.$6784 6F
=/F%//;) G/= H
H) =s> 10,000
=s> 9,000
;=I /J/)/@ =/I/;'/
=s> 8,000 =s> 10,000
)herefore, the de!ri"al "ale of the machine is the lo&er of
the re!lacement cost and =s> 10,000. )he de!ri"al "ale is
therefore =s> 9,000.
4e!e0ant range %cti"it$ le"els &ithin &hich assm!tions abot cost
beha"ior in brea-e"en anal$sis remain "alid
)he rele"ant range also broadl$ re!resents the acti0it
!e0e!s at 9hich an organiation has had e%erience of
o%erating at in the %ast and for &hich cost inforation is
a0ai!ab!e. t can therefore be dangeros to attem!t to
!redict costs at acti"it$ le"els &hich are otside the rele"ant
range.
A%%ortion )o s!read indirect re"enes or costs o"er t&o or more cost
nits, centers, acconts or time !eriods.
4e3a%%ortion )he res!read of costs a!!ortioned to ser"ice de!artments
to !rodction de!artments.
60erhead absor%tion
rate
% means of attribting o"erhead to a !rodct or ser"ice,
based for e:am!le on direct labor hors, direct labor cost
or machine hors. )here are a nmber of different bases of
absor%tion or <o"erhead reco0er rates< &hich can be
sed. /:am!les are as follo&s.
1 % !ercentage of direct materials cost
2 % rate !er machine hor
3 % !ercentage of direct labor cost
4
% rate !er direct labor hor5 % !ercentage of !rime cost
6 % rate !er nit
;argina! cost art of the cost of one nit of !rodct or ser"ice that &old
be a"oided if the nit &as not !rodced, or that &old
increase if one e:tra nit &ere !rodced.
ontribution ales "ale A "ariable cost of sales
;argina! (or 0ariab!e#
costing
%ssigns onl$ "ariable costs to cost nits &hile fi:ed costs are
&ritten off as !eriod costs.
FIF6 (first in, first out# 'sed to !rice isses of goods or materials based on the cost
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of the oldest nits held, irres!ecti"e of the se*ence in
&hich the actal isse of nits held ta-es !lace. losing
stoc- is, therefore, "aled at the cost of the oldest!rchases.
$IF6 (!ast in, first out# 'sed to !rice isses of goods or materials based on the cost
of the most recentl$ recei"ed nits. ost of sales in the
income statement is, therefore, "aled at the cost of the
most recent !rchases.
A0erage cost 'sed to !rice isses of goods or materials at the &eighted
a"erage cost of all nits held.
ost30o!ue3%rofit
ana!sis (2.
td$ of the effects on ftre !rofit of changes in fi:ed cost,
"ariable cost, sales !rice, *antit$ and mi:.
=reake0en %oint Fe"el of acti"it$ at &hich there is neither !rofit nor loss.>S ratio (.>2 ratio# % measre of ho& mch contribtion is earned from each
=s> 1 of sales.
;argin of safet ndicates the !ercentage b$ &hich forecast re"ene e:ceeds
or falls short of that re*ired to brea- e"en.
%s &ell as being interested in the brea-e"en !oint,
management ma$ also be interested in the amont b$
&hich actal sales can fall belo& antici!ated sales &ithot a
loss being incrred. )his is the argin of safet"
$iiting factor or ke
factor
%n$thing &hich limits the acti"it$ of an entit$. %n entit$
see-s to o!timiEe the benefit it obtains from the limitingfactor. /:am!les are a shortage of s!!l$ of a resorce or a
restriction on sales demand at a !articlar !rice.
t is assmed in limiting factor anal$sis that management
&ishes to ma:imiEe !rofit and that %rofit 9i!! be aiied
9hen contribution is aiied gi"en no change in fi:ed
cost e:!enditre incrred. n other &ords, argina! costing
ideas are a%%!ied.
Standard cost lanned nit cost of a !rodct, com!onent or ser"ice.
Standard costing ontrol techni*e that re!orts "ariances b$ com!aring
actal costs to !reset standards so facilitating action
throgh management b$ e:ce!tion.
;anageent b
ece%tion
ractice of concentrating on acti"ities that re*ire attention
and ignoring those &hich a!!ear to be conforming to
e:!ectations. )$!icall$ standard cost "ariances or "ariances
from bdget are sed to identif$ those acti"ities that re*ire
attention
.erforance standard Idea! standards are based on the most fa"orable o!erating
conditions, &ith no &astage, no inefficiencies, no idle time
and no brea-do&ns. )hese standards are li-el$ to ha"e an
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nfa"orable moti"ational im!act, becase em!lo$ees &ill
often feel that the goals are nattainable and not &or- so
hard.Attainab!e standards are based on efficient bt not
!erfect o!erating conditions. ome allo&ance is made for
&astage, inefficiencies, machine brea-do&ns and fatige. f
&ellset the$ !ro"ide a sefl !s$chological incenti"e, and
for this reason the$ shold be introdced &hene"er
!ossible. )he consent and coo!eration of em!lo$ees
in"ol"ed in im!ro"ing the standard are re*ired.
urrent standards are standards based on crrent &or-ing
conditions crrent &astage, crrent inefficiencies. )he
disad"antage of crrent standards is that the$ do notattem!t to im!ro"e on crrent le"els of efficienc$, &hich
ma$ be !oor and ca!able of significant im!ro"ement.
=asic standards are standards &hich are -e!t naltered
o"er a long !eriod of time, and ma$ be otofdate. )he$ are
sed to sho& changes in efficienc$ or !erformance o"er an
e:tended time !eriod. asic standards are !erha!s the least
sefl and least common t$!e of standard in se.
2ariance )he difference bet&een a !lanned, bdgeted, or standard
cost and the actal cost incrred. )he same com!arisons
ma$ be made for re"enes.
+irect ateria! tota!
0ariance
easrement of the difference bet&een the standard
material cost of the ot!t !rodced and the actal
material cost incrred.
+irect ateria! %rice
0ariance
@ifference bet&een the actal !rices !aid for the !rchased
materials and their standard cost.
+irect ateria! usage
0ariance
easres efficienc$ in the se of material, b$ com!aring
standard material sage for actal !rodction &ith actal
material sed, the difference is "aled at standard cost.
+irect !abor tota!
0ariance
ndicates the difference bet&een the standard direct labor
cost of the ot!t &hich has been !rodced and the actal
direct labor cost incrred.+irect !abor rate
0ariance
ndicates the actal cost of an$ change from the standard
labor rate of remneration.
+irect !abor efficienc
0ariance
tandard labor cost of an$ change from the standard le"el of
labor efficienc$.
+irect !abour id!e tie
0ariance
Hccrs &hen the hors !aid e:ceed the hors &or-ed and
there is an e:tra cost cased b$ this idle time. ts
com!tation increases the accrac$ of the labor efficienc$
"ariance.
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2ariab!e %roduction
o0erhead tota! 0ariance
easres the difference bet&een "ariable o"erhead that
shold be sed for actal ot!t and "ariable !rodction
o"erhead actall$ sed.2ariab!e %roduction o0erhead
e%enditure 0ariance ndicates the actal cost of an$ change from the standard
rate !er hor.
2ariab!e %roduction 62H
efficienc 0ariance
tandard "ariable o"erhead cost of an$ change from the
standard le"el of efficienc$.
Sa!es %rice 0ariance hange in re"ene cased b$ the actal selling !rice
differing from that bdgeted.
Sa!es 0o!ue
contribution 0ariance
)he sales "olme "ariance in nits is the difference bet&een
the actal nits sold and the bdgeted *antit$. )his
"ariance in nits can be "aled in one of three &a$s>
• n terms of standard re"ene,• tandard gross margin or
• tandard contribtion margin.
a %t the standard gross %rofit argin %er unit. )his is the
sa!es 0o!ue %rofit 0ariance and it measres the change in
!rofit in an absor!tion costing s$stem cased b$ the sales
"olme differing from bdget.
b %t the standard contribution %er unit. )his is the sa!es
0o!ue contribution 0ariance and it measres the change
in !rofit in a marginal costing s$stem cased b$ the sales
"olme differing from bdget.c %t the standard re0enue %er unit. )his is the sales
0o!ue re0enue 0ariance and it measres the change in
sales re"ene cased b$ sales "olme differing from that
bdgeted.
!!ose that a com!an$ bdgets to sell 8,000 nits of
!rodct K for =s> 12 !er nit. )he standard "ariable cost !er
nit is =s> 4 and the standard fll cost is =s> 7 !er nit.
%ctal sales &ere 7,700 nits, at =s> 12.50 !er nit.
)he sales "olme "ariance in nits is 300 nits ad"erse8,000 nits bdgeted A 7,700 nits sold. )he "ariance is
ad"erse becase actal sales "olme &as less than
bdgeted. )he sales "olme "ariance in nits can be
e"alated in the three &a$s described abo"e.
a ales "olme !rofit "ariance D 300 nits L standard gross
!rofit margin !er nit
D 300 nits L =s> 12 A 7 D 4s: 1,5 (A#
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b ales "olme contribtion "ariance D 300 nits L
standard contribtion !er nit
D 300 nits L =s> 12 A 4 D 4s: ),/ (A#
c ales "olme re"ene "ariance D 300 nits L standard
re"ene !er nit
D 300 nits L =s> 12 D 4s: *,< (A#
;ote that the sales "olme !rofit "ariance in an absor!tion
costing s$stem and the sales "olme contribtion "ariance
in a marginal costing s$stem can be deri"ed from the sales
"olme re"ene "ariance, if the !rofit mar-! !ercentage
and the contribtion to sales ? ratio res!ecti"el$ are-no&n.
n or e:am!le the !rofit mar-! !ercentage is 41.67M =s>
5?=s> 12 and the ? ratio is 66.67M =s> 8?=s> 12.
)herefore the sales "olme !rofit "ariance and the sales
"olme contribtion "ariance, deri"ed from the sales
"olme re"ene "ariance, are as follo&s.
ales "olme !rofit "ariance D =s> 3,600 % L 41.67M D =s>
1,500 %, as abo"e
ales "olme contribtion "ariance D =s> 3,600 % L 66.67M
D =s> 2,400 %, as abo"e
K has the follo&ing bdget and actal figres for $ear 4.
Budget Actual
ales nits 600 620
elling !rice !er nit =s> 30 29
tandard fll cost of !rodction D =s> 28 !er nit.
tandard "ariable cost of !rodction D =s> 19 !er nit
alclate the follo&ing sales "ariances
a elling !rice "ariance c ales "olme contribtion
"ariance
b ales "olme !rofit "ariance d ales "olme re"ene
"ariance
%ns&er
a ales re"ene for 620 nits shold ha"e been L =s> 30
18,600 bt &as L =s> 29 17,980. elling !rice "ariance 620 %
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b dgeted sales "olme 600 nits
%ctal sales "olme 620 nits
ales "olme "ariance in nits 20 nits ales "olme !rofit "ariance D 20 nits L =s> 30 A 28 D =s>
40
c ales "olme contribtion "ariance D 20 nits L =s> 30 A
19 D =s> 220
d ales "olme re"ene "ariance D 20 nits L =s> 30 D =s>
600
n this *estion $o &ere as-ed to calclate both the sales
"olme !rofit "ariance and the sales "olme contribtion"ariance to gi"e $o some !ractice. o&e"er, the t&o
"ariances &old ne"er be fond together in the same
s$stem in a real sitation. /ither a marginal costing s$stem is
sed, in &hich case the sale "olme contribtion "ariance is
calclated, or an absor!tion costing s$stem is sed, in &hich
case a sales "olme !rofit "ariance is calclated.
=udget %ur%oses dgets ma$ hel! in athoriEing e:!enditre,
commnicating objecti"es and !lans, controlling o!erations,
coordinating acti"ities, e"alating !erformance, !lanning
and re&arding !erformance. Hften, re&ard s$stems in"ol"e
com!arison of actal &ith bdgeted !erformance.
=udget antitati"e e:!ression of a !lan for a defined !eriod of
time. t ma$ inclde !lanned sales "olmes and re"enes#
resorce *antities, costs and e:!enses# assets, liabilities
and cash flo&s.
=udget %eriod eriod for &hich a bdget is !re!ared, and sed, &hich ma$
then be sbdi"ided into control !eriods.
=udget anua! @etailed set of gidelines and information abot the bdget
!rocess t$!icall$ inclding a calendar of bdgetar$ e"ents,
s!ecimen bdget forms, a statement of bdgetar$
objecti"es and desired reslts, listing of bdgetar$ acti"itiesand bdget assm!tions, regarding, for e:am!le, inflation
and interest rates.
.rinci%a! budget factor Fimits the acti"ities of an nderta-ing. dentification of the
!rinci!al bdget factor is often the starting !oint in the
bdget setting !rocess. Hften the !rinci!al bdget factor
&ill be sales demand bt it cold be !rodction ca!acit$ or
material s!!l$.
=udget f!eing le:ing "ariable costs from original bdgeted le"els to the
allo&ances !ermitted for actal "olme achie"ed &hile
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for estiated gro9th or inf!ation net ear. )his a!!roach
is -no&n as increenta! budgeting since it is concerned
mainl$ &ith the increments in costs and re"enes &hich &illoccr in the coming !eriod.
) 3 Eero3based budgeting
Eero3based budgeting in"ol"es !re!aring a bdget for each
cost centre from a Eero base. /"er$ item of e:!enditre has
then to be jstified in its entiret$ in order to be inclded in
the ne:t $ear<s bdget.
O rejects the assm!tion inherent in incremental
bdgeting that ne:t $ear<s bdget can be based on this
$ear<s costs.
* 3 4o!!ing budgets%s an organiEation and the en"ironment it o!erates in are
d$namic al&a$s changing management ma$ decide to
introdce a s$stem of ro!!ing budgets also called
continuous budgets.
% ro!!ing budget is a bdget &hich is continosl$ !dated
b$ adding a frther acconting !eriod a month or *arter
&hen the earlier acconting !eriod has e:!ired.
/ 3 .artici%ati0e budgeting
.artici%ati0e budgeting is <% bdgeting s$stem in &hich all
bdget holders are gi"en the o!!ortnit$ to !artici!ate in
setting their o&n bdgets<.
ash budget @etailed bdget of estimated cash inflo&s and otflo&s
incor!orating both re"ene and ca!ital items.
Fied budget dget set !rior to the control !eriod and not sbse*entl$
changed in res!onse to changes in acti"it$, costs or re"ene.
t ma$ ser"e as a benchmar- in !erformance e"alation.
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Format of cost of goods sold statement
H!ening =a& aterial JJJ
rchases JJJ
%dd@irect /:!enses JJJ
Fess A losing =a& aterial JJJ
+irect ;ateria! Used
@irect Fabor JJJ
@irect /:!enses JJJ
actor$ H"er ead? !!lementar$ ost A B> 2 JJJ
Tota! .roduction ost (Bora!# 7: 1
H!ening Bor-nrocess JJJ ost of Goods to be ade JJJ
losing Bor-nrocess JJJ
ost of oods ;anufactured (Bora!#
H!ening inished Goods JJJ
ost of Goods to be old JJJ
losing inished Goods JJJ
ost of oods So!d (Bora!#
%ddR'nder a!!lied JJJ
FessRH"er a!!lied JJJ
ost of oods So!d (Actua!#
731 D %lso called )otal anfactring ost 64 )otal ost
73) D actor$ H"erhead D ndirect aterial P ndirect Fabor P ndirect /:!enses
73* D %ctal H JJJ
%!!lied H JJJ
Under>60er A%%!ied
ormla to decide Under>60er A%%!ied is>
;H' ;egati"e> H"er a!!lied N ositi"e> 'nder a!!lied
ross .rofit D ales A ost of Goods old %ctal
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Problems in preparation of cogs statement
Assume : Gross Profit = 290,000
Sales = 00,000
C!GS = 310,000
ross .rofit ;argin
4ate
ross .rofit argin rate J ross .rofit> Sa!es 1
)his ratio identifies the ratio of gross !rofit o"er sales. n this ratio
sale is held e*al to 100M. )he Mage of cost of goods sold is 100 A
the Mage margin. t means that if margin is 25M, then Mage cost of
goods sold &ill be 75M. /.g.> 290,000?600,000 : 100 D 48.33M.
ross .rofit
;arku% 4ate
ross .rofit arku% rate J ross .rofit>ost of goods so!d 1
)his ratio identifies the ratio of gross !rofit o"er cost of goods sold.
n this ratio cost of goods sold is held e*al to 100M. )he Mage ofsales is 100 P the Mage of mar-!. t means that if mar-! is 25M
then Mage of sales &ill be 125M. /.g.> 290,000?310,000 : 100 D
93.5M. )hese ratios are also -no&n as cost strctre ratios.
In case of In case of
;argin ;arku%
ales 100M 125M
ost of goods sold 75M 100M
Gross !rofit 25M 25M
%s sho&n abo"e in both of the cases gross !rofit is 25M bt the base
is different. Bhere the sale is 100M the cost of goods sold is 75M,&here the cost of goods sold is 100M the sales is 125M.
%t this stage sometimes sales figre is missing and it is re*ired to
calclate gross !rofit sing the margin rate based on sales. )he
gi"en information in this case is cost of goods sold. ost of the
stdents ma-e a common error, the$ straight a&a$ calclate gross
!rofit Mage on the figre of cost of goods sold, this is &rong in this
sitation as the base is the figre of sales &hich is not gi"en. ere
the follo&ing formla &ill be sed to calclate gross !rofit>
4eCuired inforation J
gi0en inforation Gage of reCuired inforation
Gage of gi0en inforation
n the abo"e sitation &here cost of goods sold is gi"en and gross
!rofit is to be calclated sing the margin rate based on sales,
follo&ing calclations &ill be follo&ed>
Gross !rofit D ost of goods sold absolte amont : 25M?75M
ame conce!t is follo&ed &here cost of goods sold figre is missing
and it is re*ired to calclate gross !rofit sing the mar-! rate
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based on cost of goods sold. )he gi"en information in this case is
that of sales. ost of the stdents ma-e a common error, the$
straight a&a$ calclate gross !rofit Mage on sales, this is &rong, asthe base shold be cost of goods sold &here mar-! rate is to be
sed. ere again the abo"e formla &ill be sed to calclate gross
!rofit>
4eCuired inforation J
gi0en inforation Gage of reCuired inforation
Gage of gi0en inforation
n the abo"e sitation &here sales is gi"en and gross !rofit is to be
calclated sing the mar-! rate based on cost of goods sold,
follo&ing calclations &ill be follo&ed>
Gross !rofit D ales absolte amont : 25M?125M
Bet .rofit 4atio ;et rofit ratio D ;et rofit?ales : 100
In0entor Turno0er
4atio
n"entor$ trno"er ratio D ost of goods sold
%"erage in"entor$
%"erage in"entor$ D H!ening n"entor$ P losing n"entor$
2
In0entor Ho!ding
.eriod
n"entor$ holding !eriod in da$s D ;mber of da$s in a $ear
n"entor$ trno"er ratio
%lternati"el$ D %"erage in"entor$ : 365
ost of goods sold
Cost behavior - per unit of production
.er Unit Tota!
Fied ost ncrease onstant
2ariab!e ost onstant @ecrease
Tota! ost ncrease @ecrease
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CLASSIFICATICLASSIFICATICLASSIFICATICLASSIFICATI
nual 2013
hafi@gai!"co#
NNNN
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PROCESS COSTINGPROCESS COSTINGPROCESS COSTINGPROCESS COSTING
.6IBTS T48AT;8BTS
ood units Foru!a D )ransfer P still P com!lete bt still
• )here &ill be no loss adjstment in 1st
de!artment as the
good nits &ill absorb the bad ? loss nits.
• f losses are in accordance &ith normal !ractice i.e.
standard le"els, the$ are termed as normal loss. f the$
are abo"e e:!ectation, the$ are -no&n as abnormal
losses.
Ad-ustent of !oss
units ()ndde%artent#
'nit loss Q nit cost of last de!tt
Good nits64
'nit cost after adjstment )otal cost ? good nits D JJJ
'nit cost before adjstment D JJJ
Bora! !oss at the
end
• ;o adjstment of loss nits
• Foss nits are inclded in /=
• ost transfer to ne:t de!tt )ransfer P Foss
• er 'nit ost > ost )ransfer
'nit )ransfer
Increase in units %djstment of er 'nit cost> ost recei"e b$ last de!ttGood 'nits
• ;ormal s!oilage in increase nits needs no adjstment.
• @oble line nder nit cost of last de!tt in increase nits
case onl$.
%djsted cost of last de!tt>
'nit still Q nit cost of last de!tt P adjstment of loss nit
n case of increase nits> 'nit still Q adjsted !er nit cost
In%ut ateria! &
ateria! introduced
aterial introdced is e:tra material needed in the !rocess N
shold al&a$s be sho&n se!aratel$ from in!t material.
Bhene"er there are !artl$ com!leted nits at the end of the
!eriod, the$ ma$ contain t&o classification of material i.e.
n!t aterial i.e. !re"ios !rocess costs D %l&a$s 100M
com!lete.
aterial ntrodced D &hich ma$ or ma$ not be
com!lete.
n!t material ma$ also be described as>
• 'nits )ransferred.
• ost of goods or nits transferred.
• re"ios rocess osts.
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WORK IN PROGR!! "GINNING IN#N$OR% &'#CO(
• Fife is "er$ sim!le N eas$ in a"erage costing. )here is no need of
$frcating of finished goods N no remaining !ercentages are to be considered
for o!ening nits.
• lease add o!en B cost in !er nit cost calclation.
• )here is no need to add o!ening B cost to finished goods at the end.
FI4ST +8.A4T;8BT:
• ;o change in 8*i"alent .rodction 4e!ort 8.4.
• ost of Bor-nrocess beginning in"entor$ inclded in Sost harged to
de!artmentT. gnore nit cost.
• Unit ost ca!cu!ation:
B beginning in"entor$ cost Q cost charged b$ de!artment
/= nits
S86B+ & FU4TH84 +8.A4T;8BT:
• ;o change in 8*i"alent .rodction 4e!ort 8.4.
• ost of B beginning in"entor$ inclded in Sost harged to de!artmentT.
gnore nit cost.• Unit ost ca!cu!ation:
B beginning in"entor$ cost Q cost charged b$ de!artment
/= nits
• ost of %receding de%artent:
T"" U".
ost of last de!artment JJJ JJJ
ost of B o!ening in"entor$ JJJ JJJ
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WORK IN PROGR!! "GINNING IN#N$OR% &FIFO(
• %l&a$s ta-e remaining M 100M M gi"en for o!ening in"entor$ in statement of
e*i"alent nit calclation.
• @o not add o!ening B cost in !er nit cost calclation.
• lease remember to add o!ening B cost to finished gods at the end.
• )otal of cost of o!ening B in"entor$ is to be &ritten in Sost harged to
de!artmentT.
• ;o nit cost &ritten on o!ening B in"entor$.
T4ABSF84 T6 B8T +8.A4T;8BT:
F46; U448BT .46+UTI6B nit transfer Q nit cost
F46; 6.8BIB 7I. IB28BT64K
n"entor$ ost %s gi"en in the *estion
@irect aterial B nit Q stage com!letion M Q nit cost
@irect labor B nit Q stage com!letion M Q nit cost
actor$ H"erhead B nit Q stage com!letion M Q nit cost
F46; $6SIB 7I. IB28BT64K
@irect aterial B nit Q stage com!letion M Q nit cost
@irect labor B nit Q stage com!letion M Q nit cost
actor$ H"erhead B nit Q stage com!letion M Q nit cost
A=B64;A$ $6SS
• %bnormal losses cannot be foreseen. t shold be e:clded from rotine
re!orting N onl$ normal costs charged to !rodction. %bnormal losses are
costed on the same basis as good !rodction.
• actors of %bnormal Foss>
lant brea- do&n.
ndstrial accidents.
nefficient &or-ing.
'ne:!ected defects.
'ne:!ected fa"orable conditions.
• Foru!a: %bnormal loss gain D %ctal loss A ;ormal loss.
• ;o adjstment of loss nits
• Foss nits are inclded in /=
• ost of abnora! !oss:
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Fast de!tt JJJ nit loss Q nit cost
aterial JJJ nit loss Q nit cost
Fabor JJJ nit loss Q nit costH JJJ nit loss Q nit cost
)*I#'+N$ PRO,*C$ION RPOR$
F64 FIF6
.re0ious
+e%tt
+irect
;ateria!
+irect
$abor
F6H
Transfer JJJ JJJ JJJ JJJ
6%ening 7I. ( i0en# JJJ JJJ JJJ JJJ
Abnora! $oss JJJ JJJ JJJ JJJ
Abnora! ain JJJ JJJ JJJ JJJ
urrent .roduction
6%ening 7I. (1 G L 1# JJJ JJJ JJJ JJJ
!osing 7I. ( i0en# JJJ JJJ JJJ JJJ
T6TA$ UBITS
F64 6TH84S
.re0ious +e%tt +irect;ateria!
+irect$abor
F6H
Transfer JJJ JJJ JJJ JJJ
!osing 7I. JJJ JJJ JJJ JJJ
Abnora! $oss JJJ JJJ JJJ JJJ
Abnora! ain JJJ JJJ JJJ JJJ
Bora! $oss ()nd +e%tt# JJJ JJJ JJJ JJJ
Bora! $oss at end JJJ JJJ JJJ JJJ
T6TA$ UBITS
6ST .84 UBIT D )otal costs>)otal e*i"alent !rodction nits
T6TA$ 6ST F64 .84I6+ D Iale of com!leted nits P Iale of B
• %n e*i"alent nit means (eCua! to one finished unit of out%utU.
• Hne fll$finished nit of !rodction D 1 e*i"alent nit
• Hne nit 50M com!lete D 0.50 e*i"alent nits. 400 nits 50M com!lete D 200
e*i"alent nits.
• Hne nit 20M com!lete D 0.20 e*i"alent nits. 400 nits 20M com!lete D 80
e*i"alent nits.
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• osts are shared bet&een finished nits and in"entor$ b$ calclating a cost !er
e*i"alent nit>
• ost !er e*i"alent nit D osts of the !rocess?;mber of e*i"alent nits!rodced
8Cui0a!ent units of
c!osing in0entor
t is normall$ assmed that direct materials are added to the
!rodction !rocess at the beginning of the !rocess and that
direct labor o!erations are carried ot throghot the !rocess.
Bhen this assm!tion is sed, nits of closing in"entor$ are>
• 100M com!lete for direct material costs added at the
beginning of the !rocess,
• Hnl$ !artl$com!lete for direct labor and !rodctiono"erhead costs,
• Hnl$ !artl$ com!lete for additional materials that are
added throghot the !rocess.
)he nmber of e*i"alent nits of direct materials cost in a
!eriod &ill therefore differ from the nmber of e*i"alent nits
of con"ersion costs direct labor and !rodction o"erhead.
8Cui0a!ent units:
9eighted a0erage
cost ethod
)he assm!tion is that all nits !rodced dring the !eriod and
all nits of closing in"entor$ shold be "aled at the same cost
!er e*i"alent nit for materials and the same cost !ere*i"alent nit for con"ersion costs.
%n a"erage cost !er e*i"alent nit is therefore calclated for
all nits of ot!t and closing in"entor$. )his incldes the nits
that &ere !artl$com!leted at the beginning of the !eriod and
&hich &ere therefore "aled as closing B at the end of the
!re"ios !eriod.
8Cui0a!ent units: fifo
ethod
t is assmed that all nits of ot!t in a !eriod ha"e the same
cost !er nit.
Bith the firstin, firstot H method of !rocess costing, it is
assmed that the o!ening nits of &or-in!rocess at the
beginning of the month &ill be the first nits com!leted. )he
cost of these nits is their "ale at the beginning of the !eriod
!ls the cost to com!lete them in the crrent !eriod.
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PROC!! 'CCO*N$ - #'RI'$ION!
S"Bo Aerican A%%roach =ritish A%%roach
1 = rocess %?
) @e!artments rocesses
* Bor- in !rocess Bor- in !rogress
/ ;o abnormal gain conce!t abnormal gain conce!t
5 cra! "ale of ;ormal Foss is
ignored
cra! "ale of ;ormal Foss is considered
< ;ormal Foss is calclated at the end
of !rocess
;ormal Foss is considered from
beginning N considered s!ecific "ale
&hile com!ting cost of finished goods
? M of ;ormal Foss is a!!lied on in!t
?ot!t
M of ;ormal Foss is al&a$s a!!lied on
in!t
PROC!! 'CCO*N$ "RI$I!. 'PPRO'C.
.articu!ars Mt Aount .articu!ars Mt Aount
4s" 4s"
H!ening alance JJJ JJJ )ransfer to ne:t de!tt JJJ JJJ @irect aterial JJJ ;ormal Foss JJJ JJJ
@irect Fabor JJJ %bnormal Foss JJJ JJJ
actor$ H"erhead JJJ
%dditional H"erhead JJJ
@irect /:!enses JJJ
H %llocated JJJ
%bnormal Gain JJJ JJJ
T6TA$ T6TA$
Botes:
1" )he ot!t of one !rocess becomes the in!t to the ne:t ntil the finished
!rodct is made in the final !rocess.
)" rocess accont is no more than a ledger &ith debit N credit entries.
*" antit$ colmn is jst a memorandm colmn &hich means that &e jst ha"e
to balance it.
/" @irect labor N factor$ o"erhead ma$ be treated together as con"ersion cost.
5" Ialation of abnormal loss D )otal ost A cra!?;ormal !rodction
<" Ialation of abnormal gain D )otal ost A cra!?;ormal !rodction
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)ransfer P %bnormal Foss A %bnormal Gain
11" om!letion tages for /= as !er =4ITISH A..46AH>
Bora! $oss at the end 100M com!leted nits
Abnora! $oss 100M com!leted nits
Abnora! ain 100M com!leted nits
1)" Accounting for Scra% 2a!ues:
Bora! $oss redited to !rocess accont
Abnora! $oss redited to abnormal loss accont. rocess accont is
credited &ith !er nit cost onl$.Abnora! ain @ebited to abnormal loss accont. rocess accont is
debited &ith !er nit cost onl$.
1*" Foru!a to deterine Abnora! $oss> ain:
ST8. O 1
)otal n!t JJJ
/:!ected Ht!t JJJ
Bora! $oss
ST8. O )
%ctal Foss JJJ
;ormal Foss JJJ
Abnora! $oss
+8ISI6B 4U$8
.ositi0e Abnora! $oss
Begati0e Abnora! ain
1/" Abnora! $oss Account
• %bnormal loss is not e:!ected and shold not ha!!en. t therefore ma-es
sense to gi"e it a cost.
• )otal loss D ;ormal loss P %bnormal loss.
• 'nits of abnormal loss are gi"en a cost. f it is assmed that all losses in
!rocess occr at the end of the !rocess, nits of abnormal loss are costed in
e:actl$ the same &a$ in the as nits of finished ot!t.
• )he cost of nits of abnormal loss is treated as an e:!ense for the !eriod,
and charged as an e:!ense in the income statement for the !eriod.
• ;ormal loss has no "ale?cost, abnormal loss has a cost.
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• cra! "ale treatment of abnormal loss.
)he cost of e:!ected nits of ot!t is calclated in the sal &a$. n the B accontthe cost of abnormal loss D nits of abnormal loss L cost !er e:!ected nit of ot!t.
)he scra! "ale of abnormal loss is set off against the cost of abnormal loss in the
abnormal loss accont, not the !rocess accont B.
@ebit> ash D scra! "ale> mone$ from sale of the scra!!ed nits
redit> %bnormal loss accont abnormal loss nits L scra! "ale !er nit
)he net cost of abnormal loss D cost of abnormal loss mins its scra! "ale is then
transferred as a cost to the cost acconting income statement at the end of the
acconting !eriod.
.articu!ars Mt Aount .articu!ars Mt Aount
4s" 4s"rocess %ccont JJJ JJJ cra! %ccont nits Q
scra! "ale
JJJ JJJ
rofit N Foss %ccont JJJ JJJ
T6TA$ T6TA$
15" Abnora! ain Account
• %ctal loss D ;ormal loss A %bnormal gain
• )he differences bet&een costing for abnormal loss and costing for abnormal gain
are that> %bnormal gain is a benefit rather than a cost> &hereas abnormal loss is
&ritten off as a cost at the end of the financial !eriod, abnormal gain is an
adjstment that increases the !rofit for the !eriod.
%bnormal gain is recorded as a debit entr$ in the !rocess accont, becase it
is a benefit.
)he other half of the doble entr$ is recorded in an abnormal gain accont.
%t the end of the !eriod, the balance on the abnormal gain accont is then
transferred to the income statement as a benefit for the !eriod, adding to
!rofit.
• Bhen loss has a scra! "ale, the "ale of abnormal gain is actall$ less than the
amont sho&n in the B accont. )his is becase actal re"ene from scra!
&ill be less than the e:!ected re"ene, de to the fact that actal loss is less
than the e:!ected loss.
• %cconting for the scra! "ale of abnormal gain is similar to acconting for the
scra! "ale of abnormal loss.
n the !rocess accont B, abnormal gain is "aled at the cost !er
e:!ected nit of ot!t.
)he scra! "ale of normal loss is normal loss nits L scra! "ale !er nit.
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)he scra! "ale of abnormal gain is the scra! re"ene that has been (lostU
becase actal loss is less than e:!ected loss. )his is abnormal gain nits L
scra! "ale !er nit. )he scra! "ale of abnormal gain is recorded as a debit entr$ in the abnormal
gain accont in a similar &a$ to recoding the scra! "ale of abnormal loss as
a credit entr$ in the abnormal loss accont.
)he scra! "ale of the abnormal gain is set off against the "ale of the
abnormal gain in the abnormal gain accont, not the !rocess accont.
)he balance on the abnormal gain accont is the net "ale of abnormal gain
D "ale of abnormal gain mins the scra! "ale not earned. )his balance is
transferred as a net benefit to the cost acconting income statement at the
end of the acconting !eriod.
.articu!ars Mt Aount .articu!ars Mt Aount
4s" 4s"
cra! %ccont nits Q
scra! "ale
JJJ JJJ rocess %ccont JJJ JJJ
rofit N Foss %ccont JJJ JJJ
T6TA$ T6TA$
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CO!$ OF PRO,*C$ION RPOR$ '/RIC'N 'PPRO'C.
MUABTITK SH8+U$8:
'nits tarted?!t into !rocess JJJ
'nits added JJJ
'nits recei"ed from last de!tt JJJ
'nits transferred to ne:t de!tt JJJ
'nits om!leted in de!tt JJJ
%bnormal Foss JJJ
;ormal loss at the end JJJ
6ST HA48+ =K TH8 +8.TT:
ost of %receding de%tt: Tota! ost Unit ost
ost of B H!ening in"entor$ H!en B 'nits > JJJ
ost of !re"ios de!tt Fast de!tt 'nits > JJJ
)otal 'nits > JJJ JJJ B1
ost added b the de%tt:
ost added dring month>
@irect aterial JJJ JJJ
@irect Fabor JJJ JJJ
actor$ H"erhead JJJ JJJ
ost of H!ening B>
@irect aterial JJJ JJJ
@irect Fabor JJJ JJJ
actor$ H"erhead JJJ JJJ
)otal ost %dded b$ the de!tt JJJ JJJ
%djstment of normal loss nits JJJ JJJ
Tota! ost To =e Accounted For
T6TA$ 6ST A6UBT8+ F64 AS F6$$67S:ost of goods transferred JJJ
ost of !receding de!tt?%djsted ost of last de!tt JJJ
losing B>
@irect aterial JJJ
@irect Fabor JJJ
actor$ H"erhead JJJ JJJ
Tota! ost Accounted For
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Botes:
1" @irect labor N factor$ o"erhead ma$ be treated together as con"ersion cost.)" Bora! !oss t%es:
Start +uring 8nd
;ot inclded in /= ;ot inclded in /= nclded in /=
*" )here is no conce!t of %bnormal Foss in %merican s$stem.
/" )here is no conce!t of %bnormal Gain in %merican s$stem.
5" %djstment of normal loss nits 2nd @e!tt N %bo"e
'nit loss Q nit cost of last de!tt
Good 'nits<" ost er 'nit>
)otal cost A ;ormal Foss scra! "ale
/= nits
?" om!letion tages for /= as !er A;84IAB A..46AH>
Bora! $oss at the end ns!ection M
Abnora! $oss ns!ection M
Abnora! ain ns!ection M
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BYBYBYBY----PRODUCTPRODUCTPRODUCTPRODUCT
/ain 0 1oin$ product2
Bhen t&o or more !rodcts arise simltaneosl$ in the corse of !rocessing, each of
&hich has a significant sale "ale in relation to each other.
Koint !rodct is a reslt of tiliEation of the same ra& material and same !rocessing
o!erations. )he !rocessing of a !articlar ra& material ma$ reslt into the ot!t of
t&o or more !rodcts.
• %ll the !rodcts emerging from the manfactring !rocess are of the sameeconomic im!ortance. n other &ords, the sales "ale of those !rodcts ma$ be
more or less same and none of them can be termed as the major !rodct.
• )he !rodcts are !rodced intentionall$ &hich im!lies that the management of
the concerned organiEation has intention to !rodce all the !rodcts.
• ome of joint !rodcts ma$ re*ire frther !rocessing or ma$ be sold directl$
after the s!lit off !oint.
• )he manfactring !rocess and ra& material re*irement is common ! to a
certain stage of manfactring. %fter the stage is crossed, frther !rocessing
becomes different for each !rodct. )his stage is -no&n as (s!lit offU !oint. )he
e:!enditre incrred ! to the s!lit off !oint is called as joint cost and thea!!ortionment of the same to different !rodcts is the main objecti"e of the
joint !rodct acconting.
• )he management has little or no control o"er the relati"e *antities of the
"arios !rodcts that &ill reslt.
• Koint !rodcts are commonl$ !rodced in indstries li-e, chemicals, oil refining,
mining, meat!ac-ing, atomobile etc. n oil refining, fel, oil, !etrol, diesel,
-erosene, lbricating oil are fe& e:am!les of the joint !rodcts.
"3 Product2
% !rodct &hich arises incidentall$ in the !rodction of the main !rodct N &hich has a
relati"el$ small sale "ale com!ared &ith the main !rodct. Bhate"er re"ene entit$
earns is the bons for them.
• )his term (b$!rodctsU is sometimes sed s$non$mosl$ &ith the term (minor
!rodctsU.
• )he b$!rodct is a secondar$ !rodct, &hich incidentall$ reslts from the
manfactre of a main !rodct.
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• $A!rodcts are also !rodced from the same ra& material and same !rocess
o!erations bt the$ are secondar$ reslts of o!eration. )he main difference
bet&een the joint !rodct and b$!rodct is that there is no intention to!rodce the b$!rodct &hile the joint !rodcts are !rodced intentionall$. )he
relationshi! bet&een the b$!rodct and the main !rodct changes &ith
changes in economic or indstrial conditions or &ith ad"ancement of science.
• Bhat &as once a b$!rodct of an indstr$ ma$ become a main !rodct and one
time main !rodct ma$ become a b$!rodct sbse*entl$. or e:am!le, dring
the econd Borld Bar, gl$cerin, a b$!rodct in soa! ma-ing &as in sch a
demand that it became "irtall$ the main !rodct &hile the soa! &as redced to
the b$!rodct.
• Bhat is b$!rodct of one indstr$ ma$ be a main !rodct of another indstr$.
• ;ormall$ in continos !rocess indstr$, the b$A!rodcts emerge. ome of thee:am!les of b$!rodcts are gi"en belo&>
n sgar manfactring, bagasse Vresidal of sgarcane after the
jice is e:tractedW, molasses Vresidal of sgarcane jice after the
im!rities are ta-en otW and !ress md are the three b$
!rodcts, &hich emerge at different stages of manfactring.
n cotton te:tile, the cottonseed, &hich is ta-en ot before the
manfactring !rocess, is a b$!rodct.
S%!it off %oint: !lit off !oint also called se!aration !oint consists of all the costs
incrred !rior to se!aration !oint.
)his is a !oint ! to &hich, in!t factors are commonl$ sed for !rodction of mlti!le
!rodcts, &hich can be either joint !rodcts or b$!rodcts. %fter this !oint, the joint
!rodcts or b$!rodcts gain indi"idal identit$. n other &ords, ! to a certain stage,
the manfactring !rocess is the same for all the !rodcts and a stage comes after
&hich, the indi"idal !rocessing becomes different and distinct. or e:am!le, in a dair$,
se"eral !rodcts li-e, mil-, ghee, btter, mil- !o&der, icecream etc. ma$ be !rodced.
)he common material is mil-. )he !asteriEation of mil- is a common !rocess for all the
!rodcts and after this !rocess# each !rodct has to be !rocessed se!aratel$. %ll costs
before s!lit off !oint? se!aration !oint is common cost or joint cost that is irrele"ant for
decision ma-ing !r!oses.
'oint osts: Koint cost is the !rese!aration cost of commonl$ sed in!t factors for
the !rodction of mlti!le !rodcts. n other &ords, all costs incrred before or ! to
the s!lit off !oint are termed as joint costs or !re se!aration costs and the
a!!ortionment of these costs is the main objecti"e of joint !rodct acconting. osts
incrred after the s!lit off !oint are !ost se!aration costs and can be easil$ identified
&ith the !rodcts.
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"% PRO,*C$ C.
'CCO*N$ING FO
1. ncome from b$!
2. $rodct incom
3. ales income of th
!eriod
4. ;=I of the b$!ro
B42 ;8TH6+:
=e"ene b$ sale of b$ !ro
Fess ost of frth
ost of dis!o
Bet 4ea!iab!e 0a!ue
;=I of the b$!rodct is
&or-ing, to be dedcted
material of !re"ios cost.
;=I has same treatment
assign cost to b$!rodct
not sold is to be ta-en t
Cost Accounting Ma
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'R$2
"% PRO,*C$ R#N*
odct added to sales of the main !rodct
treated as a se!arate sorce of income
e b$!rodct dedcted from the cost of !ro
ct dedcted from the cost of !rodction i
dct
r !rocessing JJJ
al JJJ
o be dedcted from cost of !rodction. n c
rom cost of material N more s!ecificall$ fro
as &e did &ith normal loss in !rocess costin
as &e not assign to normal loss. ;=I of b$!
"ale the b$!rodct in !rocess costing.
nual 2013
hafi@gai!"co#
ction in the
the !eriod.
JJJ
JJJ
se of details
the cost of
. Be &ill not
rodct !rodced
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Bora! $oss =3.roduct
cra! "ale ;=I
;ot assign cost ;ot assign cost
.84 UBIT 6ST F64;U$A:
)otal cost A scra! "ale of normal loss A ;=I of b$!rodct !rodced
/*i"alent nits A $!rodct
'++OC'$ION OF 1OIN$ CO!$!
;A4P8T 2A$U8> SA$8 2A$U8 ;8TH6+
)otal joint !rodct cost Q 100
)otal mar-et cost
D %ns&er Q each mar-et "ale D a!!ortionment of joint cost
)he assu%tion behind this method is that the !rice obtained for an item is directl$
related to its cost.
A284A8 UBIT 6ST ;8TH6+
)otal joint !rodct cost Q 100
)otal nmber of nit !rodced
D %ns&er Q *antit$ !rodce D a!!ortionment of joint cost
78IHT8+ A284A8 ;8TH6+
)otal joint !rodct cost Q 100
)otal nmber of nit &eight
D %ns&er Q indi"idal &eight D a!!ortionment of joint cost
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B42 ;8TH6+
inal sale "ale JJJ
Fess bse*ent !rocessing costs JJJ
'oint cost
B6T8:
• t mst be em!hasiEed that &hate"er method is sed for a!!ortioning joint
costs, it is a con"ention onl$ N its accrac$ cannot be tested. t is totall$
nsitable for an$ form of decision ma-ing.
• )he amont of joint cost N the method b$ &hich joint costs are a!!ortioned are
irrele"ant.
1OIN$ #! "% PRO,*C$2
+IFF848B8 '6IBT .46+UT =K .46+UT
SA$8 2A$U8 igh Fo&
FU4TH84 .468SS %fter s!it off !oint ;ot economical
A6UBTIB %llocate on "arios bases an$ ethods
IBT8BTI6B T6 .46+U8 ntentionall$ ;o intention
,ecision /a4ing Point2
1" Koint cost is irrele"ant for decision ma-ing.
)" Foss on indi"idal joint !rodct is irrele"ant. )he -e$ to decision is that
!rocess as a &hole is !rofitable.
*" ethod>
ncremental =e"ene D JJJ
ncremental osts D JJJ
Increenta! .rofit D
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DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING
.OW $O '$$/P$ ,CI!ION /'KING )*!$ION
FOR $WO PRO,*C$!
,$R/INING +I/I$ING F'C$OR 0 R!O*RC2
@emand Q er 'nit scarce or JJJ
Fess %"ailable hor JJJ
Shortfa!! (if %ositi0e#
N*/RIC'+ POR$ION2
ale er 'nit JJJ
Fess Iariable /:!enses er 'nit JJJ
ontribtion argin er 'nit JJJ
X X
er 'nit carce or JJJ
ontribution ;argin (.er Scarce Hour#
R'NKING F64;U$A D igh to lo& de!ending on ontribtion argin er carce
or
,/'N, D demand Q scarce hor
A!!ocate deand as %er ranking obtained"
Optimum Plan2
@emand Q ontribtion argin !er 'nit JJJ
@emand Q ontribtion argin !er 'nit JJJ@emand Q ontribtion argin !er 'nit JJJ
T6TA$ 6BT4I=UTI6B
Note2 'nit contribtion is not the correct &a$ to decide !riorities.
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/OR $.'N $WO PRO,*C$!
,$R/INING +I/I$ING F'C$OR 0 R!O*RC2
@emand Q er 'nit scarce or JJJ
Fess %"ailable hor JJJ
Shortfa!! (if %ositi0e#
N*/RIC'+ POR$ION2
ale er 'nit JJJ
Fess Iariable /:!enses er 'nit JJJ
ontribtion argin er 'nit JJJ
X X
er 'nit carce or JJJ
ontribution ;argin (.er Scarce Hour#
R'NKING F64;U$A D igh to lo& de!ending on ontribtion argin er carce
or
,/'N, D demand Q scarce hor
A!!ocate deand as %er ranking obtained"
'ppropriate /i52
@emand Q carce or JJJ
@emand Q carce or JJJ
@emand Q carce or JJJ
T6TA$ 6BT4I=UTI6B
/INI/*/ ,/'N, GI#N
,$R/INING +I/I$ING F'C$OR 0 R!O*RC2
@emand Q er 'nit scarce or JJJ
Fess %"ailable hor JJJ
Shortfa!! (if %ositi0e#
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N*/RIC'+ POR$ION2
ale er 'nit JJJFess Iariable /:!enses er 'nit JJJ
ontribtion argin er 'nit JJJ
X X
er 'nit carce or JJJ
ontribution ;argin (.er Scarce Hour#
R'NKING F64;U$A D igh to lo& de!ending on ontribtion argin er carce
or
,/'N, D demand Q scarce hor
A!!ocate deand as %er ranking obtained"
'ppropriate /i52
@emand Q carce or JJJ
@emand Q carce or JJJ
@emand Q carce or JJJ
T6TA$ 6BT4I=UTI6B
)otal @emand inimm @emand Q carce or JJJ
)otal @emand inimm @emand Q carce or JJJ
)otal @emand inimm @emand Q carce or JJJ
T6TA$ 6BT4I=UTI6B
.OW /*C. $O "*% -- FOR/'$
Available Mix XXX
A – (Demand * Limiting factor) JJJ
JJJ
B – (Demand * Limiting factor) JJJ
JJJ
C – (Demand * Limiting factor) JJJ
"alance
If Demand of C is (Balance of B / Limiting factor of C) !# Demand is in less of !at e need"
t!en #nit bo#g!t ill be calc#lates as follos$
%otal Demand of C JJJ
Demand of C JJJ
$nits "oug%t
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5" @e!reciation on ne& e*i!ment that is to be !rchased.
<" tre ost that differ bet&een alternati"es.
?" Iariable H"erhead." %dditional ost.
" %ctal H"erhead.
1" ncremental cost that cold be a"oided if contract not nderta-en. ro"ided that
this additional cost is a cash flo&.
11" @ifferential cost !ro"ided that this additional cost is a cash flo&.
1)" =ele"ant cost N re"ene are those that are affected b$ change in le"el of acti"it$.
1*" @irectl$ attribtable fi:ed cost that althogh fi:ed are rele"ant to decision>
1/" ncrease if certain e:tra acti"ities are nderta-en.
15" @ecrease or eliminated entirel$ if a decision &ere ta-en either to redce the
scale of o!eration or sht do&n entirel$.
IRR+#'N$ CO!$IRR+#'N$ CO!$IRR+#'N$ CO!$IRR+#'N$ CO!$
1" oo- "ale as it is !ast ? historical cost. oo- Iale is irrele"ant e"en if income
ta:es are considered. oo- Iale is essential information for !redicting the
amont N timing of ftre ta: cash flo&s, bt, b$ itself, the boo- "ale is
irrele"ant.
)" @e!reciation on old e*i!ment as it is !ast cost. istorical cost de!reciation that
has been calclated in the con"entional manner. ch de!reciation calclations
do not reslt in an$ ftre cash flo&s. )he$ are merel$ the boo- entries that are
designed to s!read the original cost of an asset o"er its sefl life.
*" i:ed cost is irrele"ant. i:ed o"erheads that &ill not increase or decrease as a
reslt of the decision being ta-en. f the actal amont of o"erhead incrred b$
the com!an$ &ill not alter, then the o"erhead is not a rele"ant cost. )his is tre
e"en if the amont of o"erhead to be absorbed b$ a !articlar cost nit alters as
a reslt of the com!an$Us cost acconting !rocedres for o"erheads.
/" 'nitiEed fi:ed cost.
5" @iscretionar$ cost is fi:ed cost.
<" %llocated?%bsorbed?General o"erhead.
?" 'na"oidable ost becase the decision &ill not affect the cost in an$ &a$.
" n- ? ast ost. Bater nder the bridgesRdo not affect the ftre." Hriginal cost is irrele"ant.
1" /stimation cost is !ast cost.
11" %dministration o"erhead, estimating N design de!artment cost is sn- cost.
1)" tre ost that donUt differ bet&een alternati"es. /"en among ftre costs,
those "ariable costs &hich &ill not differ nder "arios alternati"es are
irrele"ant. or e:am!le, a com!an$ !ro!oses to rearrange !lant facilities and
estimates its ftre cost nder t&o alternati"e choices, as nder>
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.articu!ars +o not re3arrange 4e3arrange
4s" 4s"@irect materials cost?nit 10.00 10.00
@irect labor cost?nit 5.00 4.00
n the abo"e e:am!le, the direct material cost remains constant nder both the
alternati"es, hence it is irrele"ant to the decision Sas to &hether !lant facilities are to be
rearranged or notT. Hnl$ direct labor cost &hich differs nder the t&o alternati"es is
rele"ant. ince there is a sa"ing of =e. 1 !er nit in the second alternati"e, the com!an$
is ad"ised to go in for rearrangement of !lant facilities.
1*" ost of material in stoc- ? com!onent no longer sed in !rodction !rocess.1/" =eallocation of e:isting o"erhead is irrele"ant for decision ma-ing !r!oses.
15" ommitted cost. /:!enditre that &ill be incrred in the ftre, bt as a reslt of
decisions ta-en in the !ast that cannot no& be changed. )hese are -no&n as
committed costs. )he$ can sometimes case confsion becase the$ are ftre
costs. o&e"er, a committed cost &ill be incrred regardless of the decision
being ta-en and therefore it is not rele"ant. %n e:am!le of this t$!e of cost cold
be e:!enditre on s!ecial !ac-aging for a ne& !rodct, &here the !ac-aging has
been ordered and deli"ered bt not $et !aid for. )he com!an$ is obliged to !a$
for the !ac-aging e"en if the$ decide not to !roceed &ith the !rodct# thereforeit is not a rele"ant cost.
8ercise)est $or nderstanding of rele"ant and nonrele"ant costs b$ seeing if $o can identif$
&hich of the follo&ing costs are rele"ant>
a )he salar$ to be !aid to a mar-et researcher &ho &ill o"ersee the de"elo!ment of a
ne& !rodct. )his is a ne& !ost to be created s!eciall$ for the ne& !rodct bt the =s>
12,000 salaries &ill be a fi:ed cost. s this cost rele"ant to the decision to !roceed &ith
the de"elo!ment of the !rodctC
b )he =s> 2,500 additional monthl$ rnning costs of a ne& machine to be !rchased tomanfactre an established !rodct. ince the ne& machine &ill sa"e on labor time,
the fi:ed o"erhead to be absorbed b$ the !rodct &ill redce b$ =s> 100 !er month. %re
these costs rele"ant to the decision to !rchase the ne& machineC
c Hffice cleaning e:!enses of =s> 125 for ne:t month. )he offi ce is cleaned b$
contractors and the contract can be cancelled b$ gi"ing one monthUs notice. s this cost
rele"ant to a decision to close the officeC
d /:!enses of =s> 75 !aid to the mar-eting manager. )his &as to reimbrse the
manager for the cost of tra"elling to meet a client &ith &hom the com!an$ is crrentl$
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negotiating a major contract. s this cost rele"ant to the decision to contine
negotiationsC
So!utiona )he salar$ is a rele"ant cost of =s> 12,000. @o not be fooled b$ the mention of the
fact that it is a fi:ed cost, it is a cost that is rele"ant to the decision to !roceed &ith the
ftre de"elo!ment of the ne& !rodct. )his is an e:am!le of a directl$ attribtable
fi:ed cost. % directl$ attribtable fi:ed cost ma$ also be called a !rodcts!ecific fi:ed
cost.
b )he =s> 2,500 additional rnning costs are rele"ant to the decision to !rchase the
ne& machine. )he sa"ing in o"erhead absor!tion is not rele"ant since &e are not told
that the total o"erhead e:!enditre &ill be altered. )he sa"ing in labor cost &old be
rele"ant bt &e shall assme that this has been acconted for in determining theadditional monthl$ rnning costs.
c )his is not a rele"ant cost for ne:t month since it &ill be incrred e"en if the contract
is cancelled toda$. f a decision is being made to close the office, this cost cannot be
inclded as a sa"ing to be made ne:t month. o&e"er, it &ill be sa"ed in the months
after that so it &ill become a rele"ant cost sa"ing from month 2 on&ards.
d )his is not a rele"ant cost of the decision to contine &ith the contract. )he =s> 75 is
sn- and cannot be reco"ered e"en if the com!an$ does not !roceed &ith the
negotiations.
NO$ION'+ CO!$NO$ION'+ CO!$NO$ION'+ CO!$NO$ION'+ CO!$)he "ale of benefit &here no actal cost is incrred. )here is no actal otflo& of cash.
;otional costs sch as notional rent and notional interest. )hese are onl$ rele"ant if
the$ re!resent an identified lost o!!ortnit$ to se the !remises or the finance for
some alternati"e !r!ose. n these circmstances, the notional costs &old be
o!!ortnit$ costs.
PPPPOIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!
1. @ifficlt to reca!tre mar-et de to hea"$ ad"ertising e:!enses.
2. ear of retrenchment of &or-er.
3. Foss to re!tation of bsiness.
4. )em!orar$ close do&n is not good if relationshi! &ith s!!lier ad"ersel$
affected in an$ &a$.
5. ear of noncollection of des.
6. lant become obsolete N hea"$ ca!ital e:!enditre needed to restart the
bsiness.
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CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$
1. ntrodcing ne& !rodct.2. /:!loring foreign mar-et.
3. rchase of large *antit$ of material.
4. /liminate com!etitor.
5. erishable natre of goods.
6. /m!lo$ee cannot be retrenched.
7. ale of one !rodct at belo& marginal cost !shes ! sale of other !rodct.
,CI!ION /'KING $IP!,CI!ION /'KING $IP!,CI!ION /'KING $IP!,CI!ION /'KING $IP!
1. n hea"$ demand Q igh ? ratio &ill earn high !rofit de to high contribtion.2. n Fo& demand Q Fo& rea- /"en oint means high !rofit as it starts earning
!rofit at lo& le"el of sales.
3. @onUt eliminate the !rodct if the contribtion is !ositi"e.
4. @onUt acce!t order from local mar-et if !rice is belo& sale !rice as it &ill affect
the relationshi!.
5. )o foreigner, it shold be acce!ted if !rice is belo& sale !rice.
6. ost that is rele"ant in one sitation might be irrele"ant in other sitation.
/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING
t is the !rocess of obtaining good?ser"ice b$ otside s!!lier.
=e"ene JJJ
Fess ost JJJ
a"ings JJJ
%"oidable cost JJJ JJJ
*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%
%cce!t orders if these *estions are re!lied in SKesT>
1. !are ca!acit$ a"ailable.
2. ontribtion is !ositi"e.
ncremental =e"ene JJJ
ncremental ost JJJ
Increenta! ontribution
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!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR
%n$thing that limits the acti"it$ of an entit$ is called limiting factor. /.g>
1. @emand
2. aterial
3. Fabor hor
4. achine hor
Bo $iiting Factor igh ratio is good.
$iiting Factor igh contribtion !er scarce resorce is
good.
INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!
ncremental anal$sis considers onl$ that item of re"ene, cost N "olme that &ill change
if ne& !rogram is im!lemented.
/:!ected ? /:!ected sale Q ? ratio JJJ
re"ios ? Hld sale Q ? ratio JJJ
ncreased ? JJJ
Fess %dditional ales JJJ
Increased Bet 6%erating Incoe
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,CI!ION /'KING /O,+,CI!ION /'KING /O,+,CI!ION /'KING /O,+,CI!ION /'KING /O,+
!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR
SA$8S A = er limiting
factor
48 40 40
4anking 1 ) )
1. Bhen there is same contribtion margin !er limiting factor, firm is indifferent in
that case.
2. rodct mi: is irrele"ant here.
3. Bhate"er !rodct entit$ made, it ne"er matters.
Identif&
6b-ecti0es
Search for
.ossib!e
,ourses ofActions
Identif& Statesof Bature
$ist .ossib!e
6utcoes
;easure
.a&offs
Se!ect ,ourse
of Action
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W.NW.NW.NW.N $O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO
1. antit$ is different N cost is different, total cost &ill be distribted b$ &eighted
a"erage cost.
2. )otal cost N brea- ! not gi"en, calclated &eighted a"erage ratio.
3. ore than one ratio gi"en for calclating cost, se &eighted a"erage ratio.
Illustration to above concept 6 782
)otal Iariable ost 836000
I =atio 1 1.5 1.75
'nits 15000 10000 10000
!olution to above illustration 6 782
t$ =atio 1.5 1 1
I =atio 1 1.5 1.75
Beighted %"erage 1.5 1.5 1.75
2 %er unit: )</>15 J
1?"<
)</>1J)<"/ *>1J*"
Illustration to above concept 6 792
irm con"ert into com!an$ on 010509. inancial $ear ends on 31st
dec, 2011
re incor!orate sale D =s> 300000
ost incor!orate sale D =s> 900000
HG D =s> 800000
;o change in sales bt HG redces b$ 10M in !ost incor!oration !eriod.
4eCuired: re N ost incor!oration !eriod.
!olution to above illustration 6 792
.re .ost Tota!
ales 300000 900000 1200000
HG 216216 583783 800000
Gross rofit *?/ *1<)1? /
Gross rofit M 27.93M 35.13M
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Bor-ing> Beighted a"erage is calclated as follo&s
t$ 3 9
I 1 0.9 110M
* "1
IG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KING
1" /INI/*/ PROFI$ J t is to be ignored as it is irrele"ant cost.
)" CO!$ OF $N,R : F'!I"I+I$% !$*,%
rrele"ant for decision ma-ing as it is common cost &hich is to be !aid
regardless of acce!tance or rejection.
*" FO.
FI8+ 6STS:
1. hange as a decision D ncrease in fi:ed costs is incremental cost N
is rele"ant for decision.2. ;ot change as a decision D rrele"ant for decision. i:ed costs are
ignored as there is no incremental fi:e costs e:!enditre.
2ariab!e F6H J %l&a$s rele"ant Fied>Absorbed> A!!ocated>
A%%ortioned F6H J %l&a$s
irrele"ant
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I
;o
Fabor 2
!
Cost Accounting Ma
s & Feedbacks, contact: ATAUSH SHAFI (ataush
/" +'"OR - 8
+'"OR - 9
Fabor
riable ost
of hr Q !er hrrate
ommitted ost
1 rrele"ant !tocommitted le"el
2 =ele"ant o"er Nabo"e that le"el
hift in
1 Iaria
2 H!!ort;o of hr
contrib
ll a!acit$%dditional &or-cannot be done?
nderta-en
ire
;ot i
re a!acit$%dditional &or- can
be done? nderta-en;F =ele
nual 2013
hafi@gai!"co#
Fabor
le ost
nit$ ost !er hr
tion
taff rrent a$
re taff
1 Iariable /:!ense
P
2 Fost ontribtion
ant ost
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@e!reciation is not rele"ant for decision ma-ing bt sing machiner$ &ill in"ol"e some
incremental costs. )hese costs ma$ be referred to as ser costs N the$ inclde re!air
costs arising from se, hire charges Nan$ fall in resale "ale of o&ned assets &hich
reslt from their se.
" R)*IR,0'#'I+'"+
C'! 6 78
C'! 6 79
C'! 6 7;
4IT84IA:
1 A =e*ired is more.
2 A %"ailable is less.
3 A =eglar ses
=e*ired 'nit D JJJ
%"ailable 'nit D JJJ Q crrent
re!lacement !rice
alance D Q crrent
re!lacement !rice
4IT84IA:
1 A =e*ired is more.
2 A %"ailable is less.
3 A ;on =eglar ses
=e*ired 'nit D JJJ
%"ailable 'nit D JJJ Q dis!osal cost
alance D Q crrent
re!lacement !rice
4IT84IA:
1 A =e*ired is less.
2 A %"ailable is igh.
3 A =eglar ses
4eCuired Unit L current re%!aceent
%rice
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C'! 6 7<
C'! 6 7=
AS8 O <
C'! 6 7>
C'! 6 7?
Fu!! cost is re!e0ant
4IT84IA:
1 A =e*ired is more.
2 A %"ailable is none.
3 A Bill ha"e to b$
4IT84IA:
1 A =e*ired is less.
2 A %"ailable is high.
3 A ;on =eglar ses
4eCuired Unit J L dis%osa! cost
4IT84IA:
=e*ired D %"ailable.
4eCuired Unit J
64
A0ai!ab!e Unit J L dis%osa! cost
4IT84IA:
1 A dle hor
2 A =ate as !er agreement
E846 re!e0ant cost
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• bstitte indicates that o!!ortnit$ cost e:ists.
• f t&o o!!ortnit$ costs are gi"en, then select the one &ith higher "ale.
• carce =esorce R %lternati"e se R H!!ortnit$ ost
• 6%%ortunit ost foru!a J
Fo&er of =e!lacement cost 64 igher of ;=I?@is!osal Iale H= Iale in
'se? /conomic 'se
TI.S
• gnore o!ening stoc- as &e assme constant stoc- !er le"el.
• /:istence of s!are ca!acit$ means O/=H =/F/I%;) H).
• ll &age cost is irrele"ant in short s!!l$.
,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING
+ifferentia! osting Increenta! osting
+efinition %lternati"e corse of action hange in de to increase or
decrease in ot!t
A%%roach %bsor!tion ? arginal costing ontribtion
Kard Stick ncrease or @ecrease in re"ene ontribtion arginHe!% anagerial N non acconting
decisions
%ll decisions. oth acconting N non
acconting
Fied ost is not added is added
)*!$ION! FO)*!$ION! FO)*!$ION! FO)*!$ION! FORRRR PR'C$I!PR'C$I!PR'C$I!PR'C$I!
Muestion O 1
G has been as-ed to !re!are a tender for a contract to !rodce a s!ecial batch of 200 !aints to be
com!leted b$ @ecember 31st
. \o ha"e obtained the follo&ing information>
1. /ach !aint re*ired>
aterial 4 -g of %
5-g of
Fabor 2 hrs for s-illed
3 hrs for semi s-illed
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2. 1000 -g of material % is in stoc- for &hich the com!an$ has !aid =s> 3 !er -g. )he !rice of this
material has recentl$ risen to =s> 5 !er -g N is e:!ected to sta$ at that le"el for some time. )he
com!an$ ses the material reglarl$ for its normal !rodction.3. Iariable o"erhead are incrred at the rate of =s> 4 !er direct labor hor.
4. i:ed o"erhead are reco"ered at the rate of =s> 6 !er direct labor hor.
5. )he cost of !re!aring the tender is =s> 300.
6. -illed &or-ers are !aid =s> 7 !er hor &ith a garanteed &ee-l$ minimm of =s> 245 !er &ee-.
)he &or- forces of 85 are onl$ tiliEed for 30 hors !er &ee-.
7. emi s-illed &or-ers are !aid =s> 5 !er hor &ith time N a third for o"ertime. )he &or-forces of
100 are crrentl$ fll$ tiliEed.
8. % s!ecial machine &ill ha"e to be boght at a cost of =s> 3000 &hich cold sbse*entl$ be sold
for =s> 2500. %lternati"el$, the machine con"erted at a cost of =s> 1000 N retained for se
else&here in the bsiness# the com!an$ has intended to b$ an additional machine for this
!r!ose to&ards the end of 20JJ at a cost of =s> 3700.9. )he com!an$ has 600 -g of material in stoc-. t boght this sometime ago at a cost of =s> 4000
bt it crrentl$ is not in reglar se b$ G. )he crrent cost is =s> 9 !er -g. aterial cold be
sed to ma-e a different !rodct in !lace of a material that has a crrent !rchase !rice of =s> 5
!er -g sbstittion on a 1>1 basis. )here is none of this other material in stoc-.
So!ution O 1
;ateria! J
1000 Q 5 5000
% > 600 Q 5 3000
> 400 Q 9 3600$abor J
-illed 85 Q 5 425
emi -illed 100 Q 6.67 667
Bor-ing A 5 P5 Q1?3 D 1.67 [5 P1.67 D 6.67Y
2ariab!e 60erhead :
-illed 85Q4 340
emi -illed 100Q4 400
;achine J
Htflo& 3000
nflo& 2500 500
Htflo& 4000 3000P1000nflo& 3700 300
T6TA$ 1/)*)
Bote:
1. i:ed o"erhead are reco"ered at the rate of =s> 6 !er direct labor hor is ==/F/I%;) for decision
ma-ing.
2. )he cost of !re!aring the tender is =s> 300 are ==/F/I%;) for decision ma-ing.
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Muestion O )
r. ill Gates has been as-ed to *ote a !rice for a s!ecial contract. e ahs recentl$ !re!ared his tenderbt has as-ed $o to re"ie& it for him.
e has !ointed ot to $o that he &ants to *ote the minimm !rice as he belie"es this &ill lead to more
lcrati"e &or- in the ftre. r. ill Gates tender>
;ateria!:
% > 2000 -g ] =s> 10 !er -g 20000
> 1000 -g ] =s> 15 !er -g 15000
> 500 -g ] =s> 40 !er -g 20000
@ > 50 liter ] =s> 12 !er liter 600
$abor:
-illed > 1000 hrs ] =s> 25 !er hr 25000
emi -illed > 2000 hrs ] =s> 15 !er hr 30000
'n -illed > 500 hrs ] =s> 10 !er hr 5000
Fied o0erhead : 3500 hrs ] =s> 12 !er hr 42000
osts of %re%aring the tender :
r. ill Gates time 1000
Hther e:!enses 500
inimm !rofit 5M of total costs 7725
;iniu tender %rice 1<<)5
6ther inforation:
;ateria! A: 1000 -gs of this material is in stoc- of =s> 5 !er -g. r. ill Gates has no alternati"e se for
his material N intends selling it for =s> 2 !er -g. o&e"er, if he sold an$ he &old ha"e to !a$ a fi:ed sm
of =s> 300 to co"er deli"er$ costs. )he crrent !rchase !rice is =s> 10 !er -g.
;ateria! =: there is !lent$ of this material in stoc- at a cost of =s> 18 !er -g. . )he crrent !rchase !rice
ahs fallen to =s> 15 !er -g. )his material is constantl$ sed b$ r. ill Gates in his bsiness.
;ateria! : the total amont in stoc- of =s> 500 -gs &as boght for =s> 10000 some time ago for
another one off contract &hich ne"er ha!!ened. r. ill Gates is considering selling it for =s> 6000 in
total or sing it as a sbstitte for another material constantl$ sed in normal !rodction. f sed in this
latter manner, it &old sa"e =s> 8000 of the other material. rrent !rchase !rice is =s> 40 !er -g.
;ateria! +: there are 100 liters of this material in stoc-. t is dangeros N is not sed in this contract,
&ill ha"e to be dis!osed of at a cost to r. ill Gates of =s> 50 !er liter. )he crrent !rchase !rice is =s>
12 !er liter.
Ski!!ed $abor: r. ill Gates onl$ hires s-illed labor &hen he needs it. =s> 25 !er hor is the crrent horl$
rate.
Sei Ski!!ed !abor: r. ill Gates has &or-force of 50 semi s-illed laborers &ho are not crrentl$ fll$
em!lo$ed. )he$ are on normal contracts N the nmber of s!are hors crrentl$ a"ailable for this !roject
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is =s> 1500. %n$ hors in e:cess of this &ill ha"e to be !aid for at time N a half. )he normal horl$ rate is
=s> 15 !er hor.
Un3ski!!ed !abor: these are crrentl$ fll$ em!lo$ed b$ r. ill Gates on jobs &here the$ !rodce a
contribtion of =s> 2 !er ns-illed labor hor. )heir crrent rate is =s> 10 !er hor, althogh e:tra cold
be hired at =s> 20 an hor if necessar$.
Fied 60erhead: this is considered b$ r. ill Gates to be an accrate estimate of the horl$ rate based
on e:isting !rodction.
osts of %re%aring the tender: r. ill Gates has s!ent 10 hors &or-ing on this !roject at =s> 10 !er
hor, &hich he belie"es is his chargeot rate. Hther e:!enses inclde the cost of tra"el N research s!ent
b$ r. ill Gates on the !roject.
.rofit: this is r. ill Gates minimm !rofit margin &hich he belie"es is necessar$ to co"er Sgeneral da$ toda$ e:!enses of rnning a bsinessT
So!ution O )
;ateria!:
% > 1000 -g ] =s> 10 !er -g 10000
1000Q2 D 2000 A 300 D 1700 [Bor-ing A =s> 300 are o!!ortnit$ sa"ingsY 1700
> 1000 -g ] =s> 15 !er -g 15000
> igher of =s> 6000? H= =s> 8000? 8000
@ > 50 Q 50 [ o!!ortnit$ sa"ingsY 2500
$abor:
-illed > 1000 hrs ] =s> 25 !er hr 25000emi -illed > =e*ired D 2000
%"ailable D 1500
hortfall D 500 500 Q 22.50
Bor-ing A o"ertime of =s> 22.50 15P50M &ill al&a$s be !aid at !remim.
11250
'n -illed > 500 Q 2 D 1000 N 10 Q 500 D 5000 D 1000P5000 D 6000 6000
;iniu Tender .rice ?//5
Botes:
1. i:ed H"erhead > O/=H. ==/F/I%;) for decision ma-ing.
2. osts of !re!aring the tender > O/=H. ==/F/I%;) for decision ma-ing.
3. rofit > O/=H. ==/F/I%;) for decision ma-ing.
Muestion O *
r. Binston hrchill rns a bsiness of manfactring air!lanes. e has recentl$ com!leted a s!ecial
cstom bilt aero!lane for a cstomer &ho ahs become insol"ent N is nable to ta-e deli"er$.
ortnatel$, the cstomer has !aid a nonretrnable de!osit of =s> 5000 on ordering the aero!lane N this
mone$ together &ith the cash !roceed of =s> 4000 no& a"ailable for scra!!ing the aircraft &ill co"er r.
Binston hrchill costs.
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r. Binston hrchill has sddenl$ met a ne& cstomer, H, &ho is interested in b$ing the aircraft bt
onl$ after certain information. ob &ants to -no& ho& mch the aero!lane &ill cost N has as-ed r.
Binston hrchill to !re!are a tender for them.
r. Binston hrchill has in"estigated the modifications re*ired N !re!ared a costing statement>
;ateria!:
% > 5 -g ] =s> 100 !er -g 500
> 10 -g ] =s> 150 !er -g 1500
> 10 -g ] =s> 75 !er -g 750
@ > 7 -g ] =s> 10 !er -g 700
$abor:
-illed > 100 hrs ] =s> 10 !er hr 1000
emi -illed > 75 hrs ] =s> 7 !er hr 525
'n -illed > 80 hrs ] =s> 5 !er hr 400Iariable o"erhead > 255 hrs ] =s> 3 !er hr 765
i:ed o"erhead > 255 hrs ] =s> 2 !er hr 510
osts of !re!aring the statement 100
;iniu tender %rice <?5
e is ncertain abot the !rice at &hich to tender and has as-ed $o to re"ie& his figres for a fee of =s>
150. \o establish the follo&ings>
aterial A %> there are 12 -g in stoc- originall$ !rchased for =s> 100 !er -g. )he !rice has recentl$ risen
to =s> 130 !er -g. r. Binston hrchill normall$ sells material for =s> 120 !er -g. r. Binston hrchill
-ee!s stoc- of aterial A % as it is essential com!onent for all of his aero!lanes.
aterial A > the !rice of =s> 150 !er -g for material also re!resent the historical cost of !rchase of the
10 -g &hich are in stoc-. r. Binston hrchill normall$ sells material to his cstomers as se!arate
accessor$. e has recentl$ b$ing stoc-s at =s> 160 !er -g N selling them on for =s> 20 !er -g.
aterial A > this is no se else&here in the bsiness althogh r. Binston hrchill has 4 -g in stoc- N
cold sell these for a total of =s> 100. )he !rice on the costing statement &as the historical cost of
!rchase, &hich has not changed for some time.
aterial A @> there are 20 -g of this in stoc- N these are of no se else&here in the bsiness. t &ill be
necessar$ to dis!ose of an$ remaining aterial A @ at a lm! sm cost of =s> 200.
Fabor> s-illed labor is !aid on horl$ basis at a rate sho&n in the statement abo"e &ith a garanteedminimm &age rate of =s> 300 !er &ee-. r. Binston hrchill has 15 s-illed &or-ers, all of &hom are
&or-ing onl$ 25 hors !er &ee- at !resent. emi s-illed labor is crrentl$ fll$ em!lo$ed bt cold be
di"erted from a !rodct &hich earns a contribtion after semi s-illed labor of =s> 6 !er semi s-illed labor
hor. %lternati"el$ semi s-illed labor cold be hired at a cost of =s> 20 !er hor. 'ns-illed labor is hired on
a casal basis. )he contract &ill need to be com!leted in one &ee-.
H"erhead> the "ariable o"erhead reco"er$ rate of =s> 3 !er labor hor &or-ed &ere established b$ a
detailed in"estigation of the bsiness costs. )he fi:ed o"erhead absor!tion rate of =s> 2 !er hor is
designed to co"er general o"erhead of the &hole bsiness of =s> 210, the rent of &or-sho! to carr$ ot
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the modification &or- of =s> 100 N the hire of a s!ecial machine costing =s> 200 needed to sha!e the
com!onents. =e*ired D determine the minimm !rice to be tendered. ho& all &or-ings.
So!ution O *
;ateria!:
% > higher of =s> 120? H= =s> 130? D 130Q5 650
> higher of =s> 200? H= =s> 160? D 200Q10 2000
> 4Q100 D 400 N 6 Q 75 D 450 > [400P450D950Y 950
@ 0
$abor:
-illed > 25Q10 250
emi -illed > 75Q6 D 400 N 75Q7D525
Bor-ing A lo&er of =s> 1500 75Q20D1500 H= =s> 975
975
'n -illed > 80Q5 400Iariable o"erhead 225Q3 765
=ent of &or-sho! for modification &or- 100
ash !roceeds 4000
ire of s!ecial machine 200
;iniu Tender .rice 1)
Muestion O /
% Ftd is deciding &hether or not to !roceed &ith a s!ecial order. 'se the details belo& to
determine the rele"ant cost of the order.
a aterials and &ill be sed for the contract. 100 tonnes of material &ill be needed andsfficient material is in stoc- becase the material is in common se in the com!an$. )he
original cost of the material in stoc- is =s> 1 !er tonne bt it &old cost =s> 1.20 !er tonne to
re!lace if it is sed for this contract. )he material re*ired is in stoc- as a reslt of !re"ios
o"er !rchasing. )his material originall$ cost =s> 500 bt it has no other se. )he material is
to:ic and if it is not sed on this contract, then % mst !a$ =s> 280 to ha"e it dis!osed.
b )he contract re*ires 200 hors of labor at =s> 5 !er hor. /m!lo$ees !ossessing the
necessar$ s-ills are crrentl$ em!lo$ed b$ the com!an$ bt the$ are idle at !resent de to a lll
in the com!an$Us normal bsiness.
c H"erhead &ill be absorbed b$ the contract at a rate of =s> 10 !er labor hor, &hich consists
of =s> 7 for fi:ed o"erhead and =s> 3 for "ariable.
d )he contract &ill re*ire the se of a storage nit for three months. % is committed torent the nit for one $ear at a rental of =s> 50 !er month. )he nit is not in se at !resent. %
neighboring bsiness has recentl$ a!!roached % offering to rent the nit from them for =s>
70 !er month.
e )otal fi:ed o"erheads are not e:!ected to increase as a reslt of the contract.
So!ution O /
a )he rele"ant cost of a material that is sed reglarl$ is its re!lacement cost. %dditional stoc-s
of the material &ill need to be !rchased for se in this contract. )he rele"ant cost of material
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is therefore =s> 1.20 !er tonne. aterial has a (negati"eU cost if sed for the contract. )hat is,
there is a rele"ant sa"ing made from not ha"ing to !a$ the dis!osal cost of =s> 280.
b )he rele"ant cost of labor is Eero. )he labor cost is being !aid an$&a$ and no e:tra cost&ill be incrred as a reslt of this contract.
c )he fi:ed o"erhead is not rele"ant becase &e are told that fi:ed o"erheads are not e:!ected
to increase. )he rele"ant "ariable o"erhead cost is> =s> 3 !er hor Q 200 hors D =s> 600. /"en if
$o are not s!ecificall$ told that fi:ed o"erheads &ill remain naltered, it is sal to assme that
the$ &ill not increase, stating the assm!tion clearl$.
d )he rental cost of =s> 50 !er month is not rele"ant becase it &ill not be affected b$ the
contract. )he rele"ant cost of sing the storage nit is the forgone rental income of =s> 70 !er
month.
Suar of re!e0ant costs
aterial A 120
aterial 280
Fabor 0
Iariable o"erhead 600
=ent forgone 210
Tota! re!e0ant cost <5
8ercise: ake or bu>outsourcing decision and acce%t>re-ect an order
% com!an$ manfactres t&o models of a !oc-et calclator. )he basic model sells for =s> 5, has
a direct material cost of =s> 1.25 and re*ires 0.25 hors of labor time to !rodce. )he othermodel, the cientist, sells for =s> 7.50, has a direct material cost of =s> 1.63 and ta-es 0.375
hors to !rodce. Fabor, &hich is !aid at the rate of =s> 6 !er hor, is crrentl$ "er$ scarce,
&hile demand for the com!an$Us calclators is hea"$. )he com!an$ is crrentl$ !rodcing 8,000
of the basic model and 4,000 of the cientist model !er month, &hile fi:ed costs are =s> 24,000
!er month.
%n o"erseas cstomer has offered the com!an$ a contract, &orth =s> 35,000, for a nmber of
calclators made to its re*irements. )he estimating de!artment has ascertained the follo&ing
facts in res!ect of the &or->
• )he labor time for the contract &old be 1,200 hors.
• )he material cost &old be =s> 9,000 !ls the cost of a !articlar com!onent not
normall$ sed in the com!an$Us models.
• )hese com!onents cold be !rchased from a s!!lier for =s> 2,500 or alternati"el$,
the$ cold be made internall$ for a material cost of =s> 1,000 and an additional labor
time of 150 hors.
4eCuireent
%d"ise the management as to the action the$ shold ta-e.
So!ution
n "ie& of its scarcit$, labor is ta-en as the limiting factor. )he decision on &hether to ma-e or
b$ the com!onent has to be made before it can be decided &hether or not to acce!t the
contract. n order to do this the contribtion !er labor hor for normal !rodction mst first
be calclated, as the contract &ill re!lace some normal !rodction.
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Normal products Basic Scientist
;ode! 3 1 ;ode! )4s: 4s:
elling !rice 5.00 7.50
aterials 1.25 1.63
Fabor 1.50 2.25 2.75 3.88
ontribution 2.25 3.62
X X
Fimiting actor 0.25 0.375
ontribution %er direct !abour hour " "<5
)herefore, if the com!an$ is to ma-e the com!onent it &old be better to redce !rodction of
the basic model, in order to accommodate the s!ecial order. )he com!an$ shold no& com!arethe costs of ma-ing or b$ing the com!onent. %n o!!ortnit$ cost arises de to the lost
contribtion on the basic model.
Special contract anufacture of component
=s>
aterials 1,000
Fabor =s> 6 Q150 hors 900
H!!ortnit$ cost 150 hors Q =s> 9.00 1,350
*,)5
ince this is higher than the boghtin !rice of =s> 2,500 the com!an$ &old be ad"ised to b$
the com!onent from the s!!lier if the$ acce!t the contract. )he contract can no& be
e"alated>
Contract contri!ution
4s:
ales re"ene 35,000
aterials 9,000
om!onent 2,500
Fabor =s> 6 Q 1,200 7,200 18,700
ontribution 16,300
ontribution %er direct !abour hour 1*"5
ince the contribtion is higher than either of the e:isting !rodcts, the com!an$ shold acce!t
the contract assming this &old not !rejdice the mar-et for e:isting !rodcts. %s the
cstomer is o"erseas this seems a reasonable assm!tion.
ecase the contribtion is higher for the cientist model it &old be &ise to redce !rodction
of the basic model. o&e"er, the hors s!ent on !rodcing the basic model !er month are
8,000 nits Q 0.25 hors D 2,000, and so the contract &old dis!lace more than a fortnightUs
!rodction of the basic model. )he recommendation assmes that this can be done &ithot
harming longterm sales of the basic model.
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8ercise: discontinuing a %roduct
B$e !lc ma-es and sells for !rodcts. )he !rofit and loss statement for %!ril is as follo&s>
"roduct # X $ % Total
4s: 4s: 4s: 4s: 4s:
ales 30,000 20,000 35,000 15,000 100,000
ost of sales 16,000 8,000 22,000 10,000 56,000
Gross !rofit 14,000 12,000 13,000 5,000 44,000
H"erhead cost>
elling 8,000 7,000 8,500 6,500 30,000
%dministration 2,000 2,000 2,000 2,000 8,000
Bet %rofit /, *, ),5 (*,5# <,
)he management team is concerned abot the reslts, !articlarl$ those of !rodct O, and it has
been sggested that B$e !lc &old be better off if it ceased !rodction of !rodct O. )he
!rodction manager has said that if !rodct O &as discontined the resorces &hich &old
become a"ailable cold be sed to increase !rodction of !rodct \ b$ 40 !er cent. \o ha"e
anal$Eed the cost strctres of each of the !rodcts and disco"ered the follo&ing>
"roduct # X $ % Total
4s: 4s: 4s: 4s: 4s:
Iariable costs 4,800 1,600 13,200 5,000 24,600
i:ed costs 11,200 6,400 8,800 5,000 31,400
)otal 1<, , )), 1, 5<,
)he total fi:ed costs figre incldes =s> 20,000 &hich is not s!ecific to an$ one !rodct, and
&hich has been a!!ortioned to each !rodct on the basis of sales "ales. f the *antit$ of an$
!rodct increases b$ more than 25 !er cent, then the s!ecific fi:ed !rodction costs of the
!rodct &ill increase b$ 30 !er cent.
)he selling o"erhead com!rises a fi:ed cost of =s> 5,000 !er !rodct !ls a "ariable cost
&hich "aries in !ro!ortion to sales "ale. )he fi:ed cost is not s!ecific to an$ !rodct bt the
sales director belie"es that it shold be shared e*all$ b$ the for !rodcts.
)he administration cost is a central o"erhead cost# it is not affected b$ the !rodcts made.
4eCuireents
a re!are a statement &hich sho&s clearl$ the reslts of contining to !rodce !rodcts B, J,
\ and O at the same "olmes as &ere achie"ed in %!ril. resent $or statement in a format
sitable for management decisionma-ing
b i re!are a statement sho&ing clearl$ the reslts if !rodct O is discontined, and
the nmber of nits of \ is increased in accordance &ith the !rodction managerUs statement.
%ssme that no change in selling !rice !er nit is necessar$ to sell the additional nits.
ii =econcile the !rofit calclated in a and b i abo"e# ad"ice the management team as to
&hether !rodct O shold be discontined.
c /:!lain briefl$ an$ nonfinancial factors &hich shold be considered before discontining a
!rodct.
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So!ution
a )he !rofit statement needs to be restated in a marginal costing format if it is to be sefl fordecisionma-ing.
"roduct # X $ % Total
4s: 4s: 4s: 4s: 4s:
ales 30,000 20,000 35,000 15,000 100,000
Iariable ost of sales 4,800 1,600 13,200 5,000
Iariable selling o"erheadQ 3,000 2,000 3,500 1,500
ontribtion 22,200 16,400 18,300 8,500
!ecific fi:ed costs B1 5,200 2,400 1,800 2,000
;et benefit 17,000 14,000 16,500 6,500 54,000
;ons!ecific fi:ed cost of sales 20,000
i:ed selling o"erhead B2 20,000%dministration costs 8,000
Bet %rofit <,
L)otal o"erhead less =s> 5,000 fi:ed cost
7orkings
1"
"roduct # X $ % Total
4s: 4s: 4s: 4s: 4s:
i:ed costs 11,200 6,400 8,800 5,000 31,400;ons!ecific fi:ed costQ 6,000 4,000 7,000 3,000 20,000
!ecific fi:ed costs 5,200 2,400 1,800 2,000 11,400
QGi"en as =s> 20,000 a!!ortioned on the basis of sales "ales 3>2>3.5>1.5
)" =s> 5,000 !er !rodct Q4 D =s> 20,000
b i O discontined
=s>
ontribtion from 40M additional sales of \ =s> 18,300 Q 0.4 7,320
%dditional s!ecific fi:ed costs =s> 1,800 Q 0.3 540
Foss of net benefit from O 6,500
Bet gain )
ii rofit reconciliation
=s>
/:isting !rofit 6,000
@iscontination of O 6,500
%dditional contribtion from \ 7,320
%dditional s!ecific fi:ed costs 540
rofit if O is discontined and sales of \ sbstitted <,)
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)he com!an$ shold therefore discontine !rodct O and sbstitte !rodction and sales of
!rodct \ in the !ro!ortions gi"en. t shold be noted, ho&e"er, that the incremental gain is not
significant and an$ errors in the estimates sed cold mean the &rong decision is ta-en.
c ;onfinancial factors to consider inclde>
• ossible redndancies among the &or-force#
• ignals &hich it ma$ gi"e to com!etitors, &ho ma$ !ercei"e the com!an$ as being
n&illing to s!!ort its !rodcts#
• )he reaction of cstomers, !articlarl$ those &ho ma$ recentl$ ha"e !rchased the
!rodct.
ometimes, e"en &hen management has made the decision to discontine a !rodct or
acti"it$, there is still a frther decision to be made> &hen to discontine it. )he follo&inge:ercise sho&s ho& sch a decision cold be made.
8ercise: deciding 9hen to c!ose a de%artent or factor
t is !ossible that some costs are a"oidable in the longer term bt not in the short term.
or instance, it ma$ be necessar$ to gi"e notice to cease renting a s!ace occ!ied b$ a
de!artment. f the notice re*ired is, sa$, three months then the rental is an na"oidable cost
ntil the three months U notice has e:!ired. %fter that time it becomes an a"oidable cost, as long
as notice is gi"en no&.
)he idea of costs being na"oidable in the short term adds a ne& dimension to or decision
ma-ing. ;ot onl$ is it necessar$ to decide &hether costs are inherentl$ a"oidable, bt &e ma$also need to determine &hen the$ &ill become a"oidable.
n the "er$ short term almost all costs are na"oidable. n the long term almost all costs are
a"oidable becase the &hole organiEation cold be sht do&n com!letel$. ere &e are tal-ing
abot time horiEons in bet&een these t&o e:tremes.
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BUDGETINGBUDGETINGBUDGETINGBUDGETING
=udgetar contro! 'se of bdget to control organiEation acti"ities.
Beed for budgeting • )o set standards.
• )o moti"ate managers.
• erformance e"alation
• )o coordinate bet&een different managers.
• )o coordinate bet&een different de!artments.
;aster budget mmar$ of com!an$ !lan that sets s!ecific target for sale,
!rodction, distribtion N financing acti"ities.
4es%onsibi!it accounting anager shold be held res!onsible for those items that manager
sall$ control to significant e"ent or for an$ de"iation.
4o!!ing>continua!>%er%etu
a! budgeting
)&el"e months bdget that rolls for&ard one month as crrent
month is com!leted. t sho&s crrent !rices.
Huan factor in
=udgeting
dget !rogram &ill be scceeded if bdget ha"e com!lete
acce!tance N s!!ort of !erson &ho occ!$ -e$ management
!ositions. )o! management shold not se bdget to
blame?!ressriEe em!lo$ees. 'se of bdget in sch a negati"e &a$
&ill breed hostilit$, tension, mistrst rather than coo!eration N
!rodcti"it$.
Increenta! a%%roach
budgeting
n this a!!roach, !re"ios $ear bdget is a baseline. ast data is
sed to forecast ftre. ts biggest disad"antage is that anomalies
ha"e been transferred to ftre.
Eero base budgeting Kstif$ all bdgeted e:!enditres before its inclsion in the bdget.
ts baseline is Eero rather than last $ear bdget. t re*ires
considerable docmentation. % more detailed a!!roach N !ast
mista-es can not be carried for&ard.
8stiate redetermination of ftre e"ent either on sim!le gess or
scientific !rinci!les.
Forecast %ssessment of !robable ftre e"ent.
=udget .adding 'nderestimating re"ene N o"er estimating cost.
=udget m!lication of a forecast N related to !lanned e"ent.
=udgetar S!ack )he difference bet&een the re"ene or cost !rojection that a
!erson !ro"ides N a realistic estimate of the re"ene or cost.
"*,G$ #! FORC'!$"*,G$ #! FORC'!$"*,G$ #! FORC'!$"*,G$ #! FORC'!$
=U+8T F648AST
4e!ate to %!anned e0ent" oncern 9ith %robab!e e0ent"
o%rise 9ho!e business unit" o0er !iited function"
.!anned se%arate! for each account %eriod" o0er !ong %eriod"
Too! of contro!" Bot a too! for contro!"
=udget starts 9hen forecast ends & con0ert it into
budget"
Forecast end 9ith forecast of !ike! e0ent"
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$%P! OF "*,G$$%P! OF "*,G$$%P! OF "*,G$$%P! OF "*,G$
FI@,2
t is da&n for one le"el of acti"it$ N one set of condition. t is rigid N is based on
assm!tion that there &ill be no change in bdgeted le"el of acti"it$.
F!eib!e dget designed to change in accordance &ith le"el of acti"it$
attained.
=asic t is !re!ared for se for a long !eriod of time.
urrent =elate to crrent condition N is sed o"er short time !eriod.
$ong ter t is !re!ared for more than one $ear e.g.
• a!ital /:!enditre dget.
• =esearch N @e"elo!ment dget.
!.OR$ $R/2
.eriod t is !re!ared for less than 12 months.
Usefu! For • Fo&er management le"el.
• ontrol !r!oses. e.g.
$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION
%ssming that the !rinci!al bdget factor has been identified as being sales, the stages
in"ol"ed in the !re!aration of a bdget can be smmariEed as follo&s.
a )he sa!es budget is !re!ared in nits of !rodct and sales "ale. )he finished goods
in0entor budget can be !re!ared at the same time. )his bdget decides the !lanned
increase or decrease in finished goods in"entor$ le"els.
b Bith the information from the sales and in"entor$ bdgets, the %roduction budget
can be !re!ared. )his is, in effect, the sales bdget in nits !ls or mins the increase
or decrease in finished goods in"entor$. )he !rodction bdget &ill be stated in terms
of nits.
c )his leads on logicall$ to bdgeting the resources for %roduction. )his in"ol"es
!re!aring a ateria!s usage budget, achine usage budget and a !abor budget.
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d n addition to the materials sage bdget, a ateria!s in0entor budget &ill be
!re!ared, to decide the !lanned increase or decrease in the le"el of in"entor$ held.
Hnce the ra& materials sage re*irements and the ra& materials in"entor$ bdget are-no&n, the !rchasing de!artment can !re!are a ra9 ateria!s %urchases budget in
*antities and "ale for each t$!e of material !rchased.
e @ring the !re!aration of the sales and !rodction bdgets, the managers of the
cost centers of the organiEation &ill !re!are their draft bdgets for the de!artment
o0erhead costs. ch o"erheads &ill inclde maintenance, stores, administration, selling
and research and de"elo!ment.
f rom the abo"e information a budgeted incoe stateent can be !rodced.
g n addition se"eral other bdgets mst be !re!ared in order to arri"e at thebudgeted stateent of financia! %osition. )hese are the ca%ita! e%enditure budget
for noncrrent assets, the 9orking ca%ita! budget for bdgeted increases or
decreases in the le"el of recei"ables and acconts !a$able as &ell as in"entories, and a
cash budget.
P*RC.'! "*,G$P*RC.'! "*,G$P*RC.'! "*,G$P*RC.'! "*,G$
dgeted 'nit old JJJ
%dd /nding n"entor$ of inished Goods JJJ
)otal needs JJJFess eginning n"entor$ of inished Goods JJJ
4eCuired %roduction>Units to be %roduced
,IRC$ /'$RI'+,IRC$ /'$RI'+,IRC$ /'$RI'+,IRC$ /'$RI'+ P*RC.'!P*RC.'!P*RC.'!P*RC.'!0*!'G 0*!'G 0*!'G 0*!'G "*,G$"*,G$"*,G$"*,G$
)he materials !rchases bdget is the bdget for the !rchase cost of materials that &ill
be !rchased in the bdget !eriod. )he materials !rchases bdget might be !re!ared
for all materials, direct and indirect, or for direct materials onl$.
)he !rchases bdget differs from the materials sage bdget b$ the amont of the!lanned increase or decrease in in"entor$ le"els of materials in the bdget !eriod.
=a& aterial needed to meet the !rodction schedle JJJ
%dd /nding n"entor$ of ra& material JJJ
)otal =a& aterial needs JJJ
Fess eginning n"entor$ of ra& material JJJ
4a9 ;ateria! to be %roduction
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!'+! "*,G$!'+! "*,G$!'+! "*,G$!'+! "*,G$
ale in nits JJJ
ale !rice !er nit JJJ
Tota! .rice
a-ing a sales forecast is li-e shooting an arro&. ajor factors to consider &hile
forecasting sales incldes>
1. ast sales le"el N trends.
2. General economic trends.
3. olitical N legal e"ents.
4. lanned ad"ertising N !rodct
!romotion.
5. ntended !ricing !olic$.
6. /:!ected action of com!etitors.
7. /conomic trends in com!an$
indstr$.
8. ar-et research stdies.
,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$
t is a statement of the *antities of direct labor re*ired for !rodction, and its cost.
)he bdget is !re!ared for different grades of labor se!aratel$, bt the total labor
cost shold also be sho&n.
or each grade of labor, the e:!ected hors of &or- shold be calclated, for ma-ing
the bdgeted !rodction *antities of !rodct indi"idall$ and then for all the !rodctsin total. )he total bdget in hors for each grade of labor is con"erted into a cost at the
standard?bdgeted rate !er hor for the grade of labor.
=e*ired rodction from !rodction bdget JJJ
@irect labor hor JJJ
)otal direct labor hor needs JJJ
@irect labor cost !er hor JJJ
Tota! direct !abor cost
O#R.',! "*,G$!O#R.',! "*,G$!O#R.',! "*,G$!O#R.',! "*,G$!
H"erheads bdgets are !re!ared for each de!artment or cost centre, in !rodction,
administration and sales and distribtion.
1. )o !re!are e:!enditre bdgets for each o"erhead cost centre, o"erhead
e:!enditre is allocated and a!!ortioned sing a"ailable methods.
2. n an absor!tion costing s$stem, an o"erhead absor!tion rate shold then be
calclated from the total bdgeted e:!enditre and the bdgeted "olme of
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Fle5ed budgets
1" % fle:ed bdget is a bdget !re!ared to sho& the re"ene, costs and !rofits thatshold ha"e been e:!ected from the actal "olmes of !rodction and sale.
)" % fle:ed bdget is !re!ared for the actal "olme of sales and ot!t, and it
allo&s for the fact that sales re"enes and "ariable costs shold be e:!ected to
increase or fall &ith increases or falls in sales and ot!t.
*" % fle:ed bdget is !re!ared at the end of the bdget !eriod &hen the actal
reslts are -no&n. t is sed to com!are>
1. the actal reslts &ith the fle:ed bdget
2. the fi:ed bdget &ith the fle:ed bdget.
/" f a fle:ed bdget is com!ared &ith the actal reslts for a !eriod, the
differences bet&een the t&o "ariances are mch more meaningfl than if thefi:ed bdget and actal reslts are com!ared.
Fle5ible budgets
le:ible bdgets are not the same as fle:ed bdgets, althogh the$ are similar.
F!eed budgets are !re!ared at the end of a bdget !eriod and loo- bac- at &hat costs,
re"enes and !rofits shold ha"e been in a !eriod based on actal acti"it$ le"els. )he$
are sed to calclate "ariances for the !r!ose of management control and control
re!orting budgetar contro!.
F!eib!e budgets are for&ardloo-ing and are !re!ared at the beginning of a bdget
!eriod &hen the fi:ed original bdget is !re!ared. le:ible bdgets are !re!ared to
sho& the reslts that &old be e:!ected at different le"els of acti"it$, for e:am!le, at
75M, 80M and 85M of the fll ca!acit$. )he$ might be !re!ared &hen there is
ncertaint$ abot &hat the actal "olmes of sales and !rodction &ill be, and se"eral
bdgets are therefore !re!ared for a nmber of different !ossible otcomes.
C'!. "*,G$C'!. "*,G$C'!. "*,G$C'!. "*,G$
6%ening ash ba!ance KKK EEE
%dd =ecei!ts from debtors JJJ \\\ OOO
%dd ales of a!ital items JJJ \\\ OOO
%dd %n$ loan recei"ed JJJ \\\ OOO
%dd roceed for share isses JJJ \\\ OOO
%dd %n$ other cash recei!ts JJJ \\\ OOO
J Tota! ash A0ai!ab!e KKK EEE
Fess a$ments to creditors JJJ \\\ OOO
Fess ash !rchases JJJ \\\ OOO
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"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!
Fied
=udget
F!eib!e
=udget
Actua!
budget
=udget
2ariances
rodction N ales 'nits JJJ JJJ JJJ JJJ
ales JJJ JJJ JJJ JJJ
Iariable osts JJJ JJJ JJJ JJJ
@ JJJ JJJ JJJ JJJ
@F JJJ JJJ JJJ JJJ
I?H JJJ JJJ JJJ JJJ
emi A Iariable osts JJJ JJJ JJJ JJJ
i:ed osts JJJ JJJ JJJ JJJ )otal costs JJJ JJJ JJJ JJJ
.rofit
B6T8:
1. Iariances are calclated b$ com!aring actal reslts N the fle:ible bdgets, not
actal bdgets N the original bdgets.
2. )he correct a!!roach is as follo&s>
• dentif$ fi:ed N "ariable costs
• rodce a fle:ible bdget sing marginal costing techni*es.
Fle5ible "udgeting2 m!ortant !oints inclde>
1" ;o concern &ith actal reslts.
)" lassification of cost b$ beha"iors is the most im!ortant element in
fle:ible bdgeting.
*" f cost is "ariable, identif$ that it is "ariable &ith reference to> no of nits?
no of hors.
/" f cost is semi "ariable, then normall$ high N lo& method is sed to
a!!ortion fi:ed N "ariable !ortion.
5" lease remember that +6 B6T fle: fi:ed cost.
!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R"*,G$!"*,G$!"*,G$!"*,G$!
Ste% 3 1> %n accountant or budget officer shou!d be res%onsib!e for the
ca!ital e:!enditre bdget. )heir tas-s shold inclde commnicating bet&een
interested !arties, !ro"iding necessar$ data to assist in bdget !re!aration, dra&ing !
a timetable to ensre that !ro!er consltation ta-es !lace and so on.
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Ste% 3 )> ales, !rodction and related bdgets co"er, in general, a 12
month !eriod. % detailed ca%ita! e%enditure budget shou!d be %re%ared for the
budget %eriod but additiona! budgets shou!d be dra9n u% for both the ediu and!ong ter" )his re*ires an inde!th consideration of the organisation<s re*irements
for land, bildings, !lant, machiner$, "ehicles, fi:tres and fittings and so on for the
short, medim and long term.
Ste% 3 *: )he budget co0ering the 1) onth %eriod shold be broken do9n into
onth! or Cuarter! s%ending, and details incor!orated into the cash
bdget.
Ste% 3 / itable financing mst be arranged as necessar$.
Ste% 3 5 )he ca!ital e:!enditre bdget shold take account of the %rinci%a!
budget factor. f a"ailable fnds are limiting the organisation<s acti"ities
then the$ &ill more than li-el$ limit ca!ital e:!enditre.
Ste% 3 < %s !art of the o"erall bdget coordination !rocess, the ca!ital
e:!enditre bdget mst be re0ie9ed in re!ation to the other budgets. ro!osed
e:!ansion of !rodction ma$ &ell re*ire significant noncrrent asset e:!enditre
&hich shold be reflected in the bdget.
Ste% 3 ? )he ca!ital e:!enditre bdget shold be u%dated on a regu!ar basis
since both the timing and amont of e:!enditre can change at shortnotice.
PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+ "*,G$!"*,G$!"*,G$!"*,G$!
Ste% 3 1 )he first ste! in the !re!aration of a fle:ible bdget is the deterination
of cost beha0iour %atterns, &hich means deciding 9hether costs are
fied, 0ariab!e or sei30ariab!e.
^ i:ed costs are eas$ to s!ot. )he$ remain constant as acti"it$ le"els change.
^ or nonfi:ed costs, di"ide each cost figre b$ the related acti"it$ le"el. f the
cost is a "ariable cost, the cost !er nit &ill remain constant. f the cost is a semi"ariable cost, the nit rate &ill redce as acti"it$ le"els increase.
Ste% 3 ) )he second ste! in the !re!aration of a fle:ible bdget is to calclate the
budget cost a!!o9ance for each cost item.
=udget cost a!!o9ance J budgeted fied costL (nuber of units L
0ariab!e cost %er unit# LL
Q ;il for "ariable cost
QQ ;il for fi:ed cost
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emi"ariable costs therefore need s!litting into their fi:ed and "ariable com!onents so
that the bdget cost allo&ance can be calclated.
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$%P!
=asic • Use for co%arison"
• Unchanged o0er !ong %eriod"
Idea! • =e!resent !erfect !erformance.
• inimm cost !ossible nder !erfect information.
• ;ot sed in real &orld de to ad"erse im!act on
em!lo$ee moti"ation.
urrent! attainab!e • 'se for !lan N control.
• hold be incrred nder efficient o!erating condition.
• @ifficlt not im!ossible to achie"e.
"RI$I!. ,CI!ION R*+
%ctal is G Ad0erse
%ctal is FHB Fa0orab!e
B6T8: The abo0e ru!e 9i!! not a%%! to Sa!es & 2o!ue 2ariances"
'/RIC'N ,CI!ION R*+
ositi"e Fa0orab!e
;egati"e Ad0erse
'/RIC'N 'PPRO'C. $O #'RI'NC 'N'+%!I!
$WO #'RI'NC
CON$RO++'"+ #'RI'NC2
%ctal H JJJ
dgeted H for a!acit$ %ttained JJJ
Q dgeted H for a!acit$ %ttained D i:ed ost P tandard or Q
tandard Iariable =ate
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!PN,ING 0 @PN,I$*R #'RI'NC2
dgeted H for a!acit$ %ttained JJJ
%ctal H JJJ
Qdgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard Iariable =ate
+8ISI6B 4U$8
%ctal igh Ad0erse
%ctal Fo& Fa0orab!e
FFICINC% #'RI'NC2
%ctal or Bor-ed Q tandard =ate JJJ
tandard or %llo&ed Q tandard =ate JJJ
+8ISI6B 4U$8
%ctal igh Ad0erse %ctal Fo& Fa0orab!e
FO*R #'RI'NC
C'P'CI$% #'RI'NC2
%!!lied H JJJ
dgeted H for a!acit$ %ttained JJJ
Q %!!lied H D tandard or Q )otal tandard =ate
Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard Iariable
=ate
+8ISI6B 4U$8
dgeted igh Ad0erse
dgeted Fo& Fa0orab!e
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!PN,ING 0 @PN,I$*R #'RI'NC2
dgeted H for a!acit$ %ttained JJJ
%ctal H JJJ
Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard
Iariable =ate
+8ISI6B 4U$8
%ctal igh Ad0erse
%ctal Fo& Fa0orab!e
FI@, FFICINC% #'RI'NC2
%ctal or Bor-ed Q tandard i:ed =ate JJJ
tandard or %llo&ed Q tandard i:ed =ate JJJ
+8ISI6B 4U$8
%ctal igh Ad0erse
%ctal Fo& Fa0orab!e
#'RI'"+ FFICINC% #'RI'NC2
dgeted H for a!acit$ %ttained JJJ
dgeted H for tandard or Bor-ed JJJ
Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard
Iariable =ate
Q dgeted H for tandard or Bor-ed D i:ed ost P tandard or Q
tandard Iariable =ate
+8ISI6B 4U$8
dgeted igh Ad0erse
dgeted Fo& Fa0orab!e
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/'$RI'+ #'RI'NC!
=4ITISH A;84IAB
%ctal ost A tandard ost tandard cost of material A %ctal cost of
aterial
64
tandard base on actal ot!t Q standard
rate A %ctal sage Q %ctal rate
Bhere,
tandard base on actal ot!t D nit
made Q !er -g ? hr
%ctal =ate D ost ? hrs
aterial Iariances are di"ided into t9o "ariances>
1" aterial rice Iariance.
)" aterial antit$?'sage Iariance.
=4ITISH %ctal t$ %= A =
64
%ctal ost A %ctal t$
Q =
64
% Q %= A % Q =
A;84IAB %ctal t$ = A %=
=4ITISH = %ctal t$ A %
[ tandard t$ %llo&ed Y
A;84IAB tandard rate tandard
based on actal ot!t A
%ctal sage
Bhere,
1. tandard base on
actal ot!t D
nit made Q !er -g
? hr
2. %ctal =ate D ost
? hrs
Tota! ;ateria! 2ariance: aterial rice Iariance P aterial 'sage Iariance
Tota! +irect ;ateria! 2ariance
+irect ;ateria! .rice 2ariance +irect ;ateria! Usage 2ariance
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PRIC #'RI'NC #'RI'$ION!
1 3 P*RC.'! )*'N$I$%
4a9 ;ateria!
rchase % Q %= rice Iariance % %==
t$ Iariance = % %
B % Q =
losing toc- %ctal t$ A t$ onsmed Q =
B6T8: !osing stock is recorded at S4"
=4ITISH
%ctal ost A tandard ost
D % Q =
% D onsme cost not !rchase cost
H?%F P '= A ?%F
=4ITISH = %ctal t$ A %
[ tandard t$ %llo&ed Y
=4ITISH %ctal t$ %= A =
H=
%ctal ost A %ctal t$
Q =
Tota! +irect ;ateria! 2ariance
+irect ;ateria! .rice 2ariance +irect ;ateria! Usage 2ariance
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) 3 CON!*/ )*'N$I$%
4a9 ;ateria!
rchase % Q %= rice Iariance %==
t$ Iariance = % %
B % Q =
losing toc- %ctal t$ A t$ onsmed Q %=
B6T8: !osing stock is recorded at A4"
=4ITISH
%ctal ost A tandard ost
D % Q =
% D onsme cost not !rchase cost
H?%F P '= A ?%F
=4ITISH = %ctal t$ A %
[ tandard t$ %llo&ed Y
2A$U8 6F $6SIB ST6P 6F 4A7
;AT84IA$
A$U$ATI6B 6F .4I8 2A4IAB8
tandard ost aterial rchased
%ctal ost aterial 'sed
,IFFRNC "$WN $WO /$.O,!
.U4HAS8 MTK 6BSU;8 MTK
eriod ost rodct ost
;ot considered for stoc- "alation onsidered for stoc- "alation
ost charge in !eriod in &hich it is incrred ost charge in !eriod in &hich it is sold
=4ITISH onsmed t$ %= A =
Tota! +irect ;ateria! 2ariance
+irect ;ateria! .rice 2ariance +irect ;ateria! Usage 2ariance
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W.IC. /$.O, $O *!
.U4HAS8 MTK 6BSU;8 MTK
losing stoc- is "aled at = losing stoc- is "aled at %=
Iariance is considered as !eriod cost Iariance is considered as !rodct cost
Iariance is recorded at earliest stage
IB+IATI6B: ;o indication is gi"en R se !rchase *t$ method.
+'"OR #'RI'NC!
=4ITISH %ctal ost A tandard ost
A;84IAB tandard cost of Fabor A %ctal cost of Fabor
H=
tandard base on actal hor Q standard rate A
%ctal hor Q %ctal rate
Bhere,
1. tandard base on actal hor D nit hor Q
!er -g ? hr
2. %ctal =ate D ost ? hrs
=4ITISH %ctal r %= A =
64
%ctal ost A %ctal r Q =
A;84IAB Actua! Hr ( S4 A4#
%ctal hor N !rodcti"e
hor is same thing.rodcti"e hor D %ctal
hor A dle hor
=4ITISH S4 (Actua! Hr SHA#
[ tandard r %llo&ed Y
%ctal \ield Q tandard time
!er nitA;84IAB Standard rate (Standard
based on actua! hr Actua!
hr#
Bhere,
tandard base on actal hr D
nit hr Q !er -g ? hr
%ctal =ate D ost ? hrs
Tota! +irect $abor 2ariance
+irect $abor 4ate 2ariance +irect $abor 8fficienc 2ariance
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GRO!! PROFI$ 'N'+%!I!
dgeted %ctal
ales 'nits 10000 9800
ales er 'nit 10 10.8
ost er 'nit 9 8.6
ales 100000 105840
ost of ales 80000 84280
ross .rofit ) )15<
B6T8: last $ear actal figres are assmed to be bdgeted if t&o $ears are
in"ol"ed. )his $ear &ill be actal $ear.
*! OF !)' : ")
tandard antit$ %llo&ed =a& aterial
dgeted antit$ inished Goods
,CI!ION R*+ FOR GP 'N'+%!I!
. > Sa!es is .ositi0e %IH'=%F/
. > Sa!es is Begati0e %@I/=/
S is .ositi0e %@I/=/
S is Begati0e %IH'=%F/
Tota! ross .rofit +ifference
%ctal G A d eted G
Sa!es 2ariance
%ctal ales A dgeted ales
S 2ariance
%ctal G A dgeted G
.rice 2ariance
% %==
Mt 2ariance
= %
.rice 2ariance
% %==
Mt 2ariance
= %
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C'+C*+'$ION! OF GP 'N'+%!I!
ross .rofit +ifference 21560 A 20000 D 1560 %
Sa!es 105840 A 100000 D 5840
S 84280 A 80000 D 4280 %
Sa!e .rice 980010.810 D 7840
Sa!e Muantit 10980010000 D 2000 %
S .rice 98008.68 D 5880 %
S Muantit 8980010000 D 1600
$WO OR /OR /I@ C'!!
ost 2o!ue Sa!es 2o!ue J Bet 2o!ue > Sa!es ;argin
= of Gross rofit % 2980010000 D 4000 %
S4 of ross .rofit (AM at Actua! ;i 3 =M#
ollo&ing three "ariance are sed in Gross rofit anal$sis>
1" ale !rice
)" ost !rice
*" ;et "olme
!$'N,'R, CO!$ R'$IO!
.roduction 2o!ue 4atio =% Z %? Q 100
.roduction a%acit 4atio =% Q %? Q 100.roducti0it>8fficienc 4atio =%% Q % ?% Q 100
+8ISI6B 4U$8
8fficient Greater than 100M
In3efficient Fess than 100M
C'+N,'R #'RI'NC
= of i:ed ost !er da$ dgeted @a$s A %ctal @a$s
SA$8S ;I 2A4IAB8
= of Gross rofit % at %ctal
i: A % at tandard i:
SA$8S 26$U;8 2A4IAB8
= of Gross rofit % at tandard
i:
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/I@ #'RI'NC!
• )his in"ol"es t&o or more ra& material.
• )his incldes mi: N $ield "ariances.
'PPRO'C. 6 78 &$.I! ON I! RCO//N,,(
+; Tota! ost 2ariance
%ctal ost A tandard ost
.4I8 2A4IAB8 USA8 2A4IAB8% %= A= = % at %ctal i: A %
% A % Q = %Q= A %Q=
%Q%= A %Q=
Usage 2ariance is di0ided into ;i & Kie!d 2ariance
;I 2A4IAB8 KI8$+ 2A4IAB8= % at %ctal i: A % at tandard i: = % at tandard i: A %
%Q= )otal %QBeighted er 'nit ost
././././0000 = = = = antit$ > > > >tandard i: ? @ ? @ ? @ ? @Beighted %"erage
cost !er nit 3 A B , C 4 D($3B 3 A B , C 4 D($3B 3 A B , C 4 D($3B 3 A B , C 4 D($3B <
4a9 ;ateria! Pg 4ate .er Pg ost
% 12 5 60
8 12.5 100
20 (1<>)# 160
• 8 is the &eighted a"erage cost !er nit
• )he &eighted a"erage cost !er nit is sed &here *antities are gi"en in theratio of 60>40 of standard.
'PPRO'C. 6 79
;ateria! .rice 2ariance %Q%Q%= A %Q%Q=
;ateria! ;i 2ariance %Q%Q= A %QQ=
;ateria! Kie!d 2ariance %QQ= A QQ=
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!)A!/ is calculated as folloBs2
S"Bo ases Foru!ae
1 'nit rodce is gi"en 'nit !rodce Q )otal %ctal t$ ? )otal %ctal t$ A Foss
) 'nit rodce is not
gi"en
)otal %ctal t$? )otal tandard t$ Q )otal tandard A
Foss
/aterial %ield #ariance can also be calculated asfolloBs2
%ctal \ield A tandard \ield on %ctal n!t Q =
• %ctal \ield D )otal 'nits A Foss 'nits
• = D )otal ost A ;ormal Foss scra! "ale
)otal 'nits A ;ormal Foss nits
O0! P*RC.'!! C0! I! GI#N
;ateria! .rice 2ariance rchases &ill be actal *antit$
;ateria! ;i 2ariance %ctal onsm!tion &ill be actal *antit$
;ateria! Kie!d 2ariance %ctal onsm!tion ? )otal tandard t$ Q )otal tandard
A Foss
%ctal onsm!tion D H!ening alance P rchases A losing alance
PR ',1*!$/N$
/= balance &ill be sed for tandard antit$ %llo&ed N tandard or %llo&ed in
aterial 'sage Iariance N Fabor /fficienc$ Iariance.
!tandard )uantit3 'lloBed &"ased on FIFO( D
%ctal 'nit Q tandard consm!tion !er nit
!tandard .our 'lloBed &"ased on FIFO( D
%ctal 'nit Q tandard time !er nit
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W'!$'G!
1" ;ormal Foss is not inefficienc$.
)" Iariance is de to %bnormal Foss.
*" % D 8100 N % D 9000 N % of @ D 9070. o, 90708000 D 970 ;ormal Foss>
900 N %bnormal Foss> 70
/" Foss to be adjsted in % as follo&s> %ctal t$ Q 100M ? 100M ;ormal Foss M
+$ Tota! ost 2ariance
%ctal ost A tandard ost
4AT8 2A4IAB8 8FFII8BK 2A4IAB8% %= A= = % at %ctal i: A %
% A % Q = %Q= A %Q=
%Q%= A %Q=
8fficienc 2ariance is di0ided into ;i & Kie!d 2ariance
;I 2A4IAB8 KI8$+ 2A4IAB8= % at %ctal i: A % at tandard i: = % at tandard i: A %
1" Fabor i: Iariance is also called Gang Iariance H= )eam om!osition Iariance.
)"
Fabor \ield Iariance is also called Gang rodcti"it$ Iariance H= )eamrodcti"it$ Iariance.
I+$8 H6U4 2A4IAB8
= % aid A %
I+$8 TI;8 2A4IAB8 48A$ 8FFII8BK 2A4IAB8= % aid A % &or-ed = % &or-ed A %
+$ 8FFII8BK 2A4IAB8
= % A %48A$ 8FFII8BK 2A4IAB8 KI8$+ 2A4IAB8
= % A% for tandard \ield = % for tandard \ield A % for %ctal \ield
SHA for Standard Kie!d D %ctal \ield Q in!t H= hor re*ired ? ot!t
SHA for Actua! Kie!d D tandard \ield Q in!t H= hor re*ired ? ot!t
Standard Kie!d > %ctal n!t Q Ht!t ? n!t
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RCONCI+I'$ION OF "*,G$ : 'C$*'+ PROFI$ '"!ORP$ION CO!$ING
=udgeted .rofit (budgeted sa!es L standard %rofit# JJJale Iolme Iariance JJJ
Standard %rofit on actua! sa!es ( actua! sa!es L standard %rofit# JJJ
ale !rice "ariance JJJ
.rofit before cost 0ariance JJJ
ost 2ariance:
A+2 FA2
aterials A rice JJJ JJJ
'sage JJJ JJJ
Fabor =ate JJJ JJJ
/fficienc$ JJJ JJJ
Iariable H"erhead A !ending JJJ JJJ
/fficienc$ JJJ JJJ
i:ed H"erhead A /:!enditre JJJ JJJ
Iolme JJJ JJJ
a!acit$ JJJ JJJ
/fficienc$ JJJ JJJ JJJ
Actua! .rofit
Standard %rofit Dsales A direct material A direct labor A "ariable e:!ense A fi:ed H"erhead
RCONCI+I'$ION OF "*,G$ : 'C$*'+ PROFI$ /'RGIN'+ CO!$ING
dgeted rofit bdgeted sales Q standard contribtion JJJ
Fess dgeted fi:ed o"erhead cost JJJ
=udgeted ontribution JJJ
ale Iolme Iariance JJJ
Standard ontribution on actua! sa!es ( actua! sa!es L standard contribution# JJJ
ale !rice "ariance JJJ
ontribution before cost 0ariance JJJ
2ariab!e ost 2ariance:
A+2 FA2aterials A rice JJJ JJJ
'sage JJJ JJJ
Fabor =ate JJJ JJJ
/fficienc$ JJJ JJJ
Iariable H"erhead A !ending JJJ JJJ
/fficienc$ JJJ JJJ
i:ed H"erhead A dgeted JJJ JJJ
/:!enditre JJJ JJJ JJJ
Actua! .rofit
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Standard contribution Dsales A direct material A direct labor A "ariable e:!ense.
CO!$ RCONCI+I'$ION !$'$/N$
Standard ost
ost Iariance>
Ad0 Fa0
JJJ JJJ
JJJ JJJ
JJJ JJJ
JJJ JJJ JJJ
Actua! ost
1" a"orable A F/
)" %d"erse D %@@
*" t incldes onl$ cost "ariance.
PROFI$ RCONCI+I'$ION !$'$/N$
=udgeted .rofit
ale Iariance>
Ad0 Fa0JJJ JJJ
JJJ JJJ
JJJ JJJ
JJJ JJJ JJJ
ost Iariance>
Ad0 Fa0
JJJ JJJ
JJJ JJJ
JJJ JJJ
JJJ JJJ JJJActua! ost
1" a"orable A %@@
)" %d"erse D F/
*" t incldes cost N sales "ariance.
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PROFI$ RCONCI+I'$ION !$'$/N$ &FOR /'RGIN'+
CO!$ING(=udgeted .rofit
%dd dgeted i:ed ost JJJ
dgeted ontribtion JJJ
ale Iariance>
Ad0 Fa0
JJJ JJJ
JJJ JJJ
JJJ JJJ
JJJ JJJ JJJost Iariance>
Ad0 Fa0
JJJ JJJ
JJJ JJJ
JJJ JJJ
JJJ JJJ JJJ
Actua! ontribution
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tandard i: D 400
Beight = !er -g
% 30 240
, 25 320
%ctal i: D 192
Beight %= !er -g
% 16 230
, 13 308
tandard *antit$ allo&ed &ill be calclated as follo&s>
f tandard i:?rodction D 400 )hen standard *antit$ D 30
f %ctal i:?rodction D 192 )hen standard *antit$ allo&ed D C
the formla &ill be> %ctal i:?rodction Q ndi"idal tandard *antit$
tandard i:?rodction
A 192 Q 30 D 14.4
400
= 192 Q 25 D 12
400
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tandard Gi: D 1000
Beight = !er -g
% 450 20
, 400 40
250 60
1100
Foss 100
1000
%ctal Gi: D 20000
Beight %= !er -g
% 10000 19
, 8500 42
4500 65
tandard *antit$ allo&ed &ill be calclated as follo&s>
f tandard Gi:?rodction D 1000 )hen total standard *antit$ D 1100
f %ctal Gi:?rodction D 20000 )hen standard *antit$ allo&ed D C
the formla &ill be> %ctal Gi:?rodction Q )otal tandard *antit$
tandard Gi:?rodction F/ an$ Foss
20000 Q 1100 D 22000
1000
) abo"e 22000 is total nit &hich &ill be allocated as follo&s>
A 22000 Q 450 ? 1100 D 9000
= 22000 Q 400 ? 1100 D 8000
22000 Q 250 ? 1100 D 5000
))(((
Bote that in !oss
case, 9e 9i!! take
tota! standard
Cuantit&" 7e 9i!! not
take indi0idua!
standrad Ct&
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tandard Gi: D 1000 -g
t$ = !er -g
% 450 20
, 400 40
250 60
1100
tandard Foss 100
tandard Ht!t 1000
%ctal Gi: D 20000 -g
t$ = !er -g
% 10000 19
, 8500 42
4500 65
;ateria! .rice 2ariance J
% 10000
, 17000 %
22500 %
29500 %
;ateria! ;i1 2ariance J
% 11820 %
, 5480 %
43620
26320
% D 9409
, D 8363
D 5227
;AT84IA$ ;I 2A4IAB,8S I$$UST4ATI6B
23000 Q 450 ?1100
23000 Q400 ?1100
23000 Q250 ? 1100
%ctal t$ %= =
= %ctal t$ at %ctal Gi: %ctal t$ at tandard Gi:
%ctal t$ at tandard Gi: is calclated as follo&s>
10000 1920 D
8500 4240 D
4500 6560 D
20 10000 9409 D
40 8500 8363 D
60 4500 5227 D
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;ateria! Kie!d 2ariance J
% 8180 %
, 14520 %
13620 %
36320 %
f tandard Gi:?rodction D 1000 )hen standard *antit$ D 450
f %ctal Gi:?rodction D 20000 )hen standard *antit$ al lo&ed D C
the formla &il l be> %ctal Gi:?rodction Q ndi" idal tandard *anti t$
tandard Gi:?rodction
A 20000 Q 450 D 9000
1000
= 20000 Q 400 D 8000
1000
, 20000 Q 200 D 5000
1000
;ateria! Usage 2ariance J
% 20000 %
, 20000 %
30000
10000 %
64
;ateria! Usage 2ariance J Gaterial Gi: Iariance PGaterial \ield Iariance
26320 P 36320 % D 10000 %
;ateria! ,ost 2ariance J
D 10000 Q 19 . 9000 Q 20
8500 Q 42 . 8000 Q 40
4500 Q 65 . 5000 Q 60
D 190000P357000P292500 . 180000P320000P300000
D 839500 . 800000 D 39500 %
64
;ateria! ,ost 2ariance J Gaterial rice Iariance PGaterial 'sage Iariance
29500 % P 10000 % D 39500 %
%ctal ost . tandard ost
= %ctal t$ at tandard Gi: . tandard t$ %llo&ed
= %ctal t$ at %ctal Gi: . tandard t$ %llo&ed
20 10000 . 9000 D
40 8500 . 8000 D
60 4500 . 5000 D
tandard t$ %llo&ed is calclated as follo&s>
20 9409 . 9000 D
40 8363 . 8000 D
60 5227 . 5000 D
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,dgeted sales is as follo&s>A 800 nits ] 100 !er nit
= 700 nits ] 200 !er nit
%ctal sales is as follo&s>
A 900 nits ] 110 !er nit
= 800 nits ] 180 !er nit
ost !er nit>
A 80
= 170
,a!cu!ate sa!es 0ariances"
Sa!es .rice 2ariance J
% 9000
, 16000 %
7000 %
Sa!es ;i1 2ariance J
% 140 %
, 210
70
% D 907
, D 793
% 100 80 D 20
, 200 170 D 30
Sa!es 2o!ue 2ariance J
% 2140
, 2790
4930
Sa!es Usage 2ariance J
% 2000
, 3000
5000
30 800 700 D
= of Gross roft is calclated as follo&s>
= of Gross rofit %ctal t$ at %ctal i: %ctal t$ at tandard i:
%= of Gross roft is calclated as follo&s>
tandard ales tandrad ost
%ctal ales tandrad ost
20 900 907 D
30 800 793 D
%ctal t$ at tandard i: i s calclated as follo&s>
1700 Q 800?1500
1700 Q700?1500
= of Gross rofit %ctal t$ at tandard i: ,dgeted t$
20 907 800 D
30 793 700 D
= of Gross rofit %ctal t$ at %ctal i: ,dgeted t$
20 900 800 D
%ctal t$ %= =
900 110100 D
800 180200 D
SA$8 ;IH 2A4IAB,8S I$$UST4ATI6B
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MATERIAL COSTING
MATERIAL COSTING
/'$RI'+ CO!$ING /$.O,!
• irst in first ot H
• Fast in last ot FH
• ighest in first ot H
• tandard osting D antit$ issed Q standard cost
• =e!lacement osting = D antit$ issed Q re!lacement cost
• %"erage osting %IH
1. mlati"e %"erage osting % D normal method that &e se.
2. eriodic %"erage osting %
ost of nit recei"ed P cost of o!ening stoc- ? ;o of nit recei"ed P no of o!ening stoc-
D ans&er Q *antit$ issed indi"idal JJJ
Fess ost of nit recei"ed P cost of o!ening stoc- JJJ
Iale of losing stoc-
+IFO #! FIFO CO/P'RI!ON
;ethod .rice Incoe Stateent 8ffect =a!ance Sheet 8ffect
S BI
$IF6 ncrease igh Fo& Fo& /nding n"entor$
FIF6 ncrease Fo& igh igh /nding n"entor$
$IF6 @ecrease igh igh igh /nding n"entor$
FIF6 @ecrease Fo& Fo& Fo& /nding n"entor$
FIF6 $IF6 7A66S consists of irst !rchased Fast !rchased %"erage cost of all
item
8nding In0" consists of ost recent
!rchase
/arliest
!rchase
%"erage cost of all
item
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IN#N$OR% #'+*'$ION /$.O,!
• ost
• ale !rice
• Fo&er of cost or mar-et "ale
• Fo&er of cost or net realiEable "ale
• Fo&er of cost or re!lacement "ale
FOR/*+'
Tota! ;ateria! Turno0er: aterial 'sed?%"erage aterial
Finished oods Turno0er: inished Goods old>%"erage aterial A0erage ;ateria!: H!ening stoc- P losing stoc-?2
+a 4eCuireent in A0erage In0entor: 365 ? )rno"er ratio
+ate before Bet 6rder: • re*enc$
• @a$ !!l$ left D nit in in"entor$ ?
/H Q re*enc$
• ;e:t Hrder > !!l$ Feft A Fead )ime
+OWR OF CO!$ : /'RK$ #'+*
AS8 6ST ;A4P8T $;
4e%!aceent
ost
B42>ei!ing Ad- B42>
F!oor
;arket ($td b
f!oor & cei!ing#
JJ JJ JJ JJ JJ JJ JJ
1 2 3 2nd
nmber is
sho&n here
Fo& of
mar-et or
cost2 1 3
* ) 1
!$OR +,GR C'R,
;>S
Store !edger card > bin card
(;ethod nae#
+AT8 488I28+ ISSU8+ =A$AB8
Unit U"." Aount Unit U"." Aount Unit U"." Aount
JJJJ200J JJ JJ JJ JJ JJ JJ JJ JJ JJ
JJJJ200J
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,FC$I# *NI$!
S.8IFI (7I.# 8BTI48 (F6H# Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
aterial
Fabor
actor$ H"er ead
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
aterial
Fabor
actor$ H"er ead
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
aterial
Fabor
actor$ H"er ead
actor$ H"er ead
aterial
Fabor
actor$ H"er ead
inished Goods
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
inished Goods
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
!POI+'G *NI$!
S.8IFI (7I.# 8BTI48 (F6H# Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
aterial
Fabor
actor$ H"er ead
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
aterial
Fabor
actor$ H"er ead
!oiled Goods
actor$ H"er ead
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
ost of !oilage D @P@FPH A !oilage cra!
!oiled Goods
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
inished Goods
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
inished Goods
Bor- in rocess A aterial
Bor- in rocess A Fabor
Bor- in rocess A H
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!POI+'G C'+C*+'$ION
S.8IFI (7I.# 8BTI48 (F6H# =eco"er$ =eco"er$ P loss
er nit cost change er nit cost do not change
G cost> )otal cost P %dditional cost A !oilage
cost
G cost> )otal cost A !oilage cost
!oilage distribtion> !oilage cost ? total cost
Q 100
!oilage distribtion> articlar cost ? nit
made Q 100
IN#N$OR% CON$RO+!
7ITH6UT SAF8TK ST6P 7ITH SAF8TK ST6P
6rder $e0e! > .oint >
4e36rder $e0e!:
a:imm sage dring lead time
64
a:imm sage Q a: lead time
;ormal ?%"erage sage dring
lead time P afet$ toc-
64
;ormal ?%"erage sage Q
lead time P afet$ toc-
;iniu $e0e! > Sock
> .oint> =uffer $e0e!
Hrder Fe"el ;ormal ?%"erage
sage dring lead time
64
Hrder Fe"el A ;ormal ?%"erage
sage Q lead time
64
a:imm dail$ sage ;ormal
?%"erage dail$ sage Q lead time
;aiu $e0e! >
Stock > .oint
Hrder Fe"el P /H inimm
sage dring lead time
64
Hrder Fe"el P /H A inimm
dail$ sage Q lead time
Hrder Fe"el P /H ;ormal
?%"erage sage dring lead
time
64
/H P afet$ toc-
Safet Stock: a:imm 'sage A %"erage 'sage
Q lead time
A0erage Stock $e0e!: _ inimm Fe"el P a:imm
le"el
64
_ H!ening toc- P losing toc-
/H?2 P afet$ toc-
+anger $e0e! ;ormal ?%"erage sage dring lead
time for rgent s!!l$
64
;ormal ?%"erage dail$ sage Q lead
time for rgent s!!l$
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CONO/IC OR,R )*'N$I$%
86M D ` 2 Q %= Q H
P Q .'.
Buber of 6rders ;H > %= ? /H
Tota! 6rdering ost )H > H; Q )H
A0erage In0entor '% > /H ? 2
Tota! arring ost ) > '% Q )
FreCuenc of 6rders 365 ? ;H
)his formla is based on three assu%tions>
1. rice &ill remain constant throghot the $ear and *antit$ discont is not in"ol"ed.
2. attern of consm!tion, "ariable ordering costs !er order and "ariable in"entor$
carr$ing charge !er nit !er annm &ill remain the same throghot, and
3. /H &ill be deli"ered each time the stoc- balance is jst redced to nil.
CONO/IC "'$C. )*'N$I$%0")0'/N,, CONO/IC OR,R )*'N$I$%
86M D ` 2@
1 A @?=
et! ost.
+ %nnal @emand.
H olding ost.
4 rodction =ate !er time !eriod.
!'#ING! C'+C*+'$ION
8ISTIB B87
6rdering ost %= Q H ? /H %= Q H ? /H arring ost Q Q ' Q /H ? 2 Q Q ' Q /H ? 2
.urchase ost 'nit made Q !er nit cost 'nit made Q !er nit cost
SA2IBS @ifference of /:isting N ;e&
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FOR/'$FOR/'$FOR/'$FOR/'$
1" actor$ cost D JJJontribtion re*ired D P ) ? total limiting factor hrs Q limiting factor hr D JJJ
=/ D )" Fo&est !rice> asic nit P ;et rofit A H!ening rofit ? a!acit$
IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$
%nnal !rchase cost D rrele"ant
%nnal ordering cost D =ele"ant
%nnal carr$ing cost D =ele"ant
CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$
1" n"oice !rice
)" @iscont
*" nsrance in transit
/" ommission or bro-erage
5" rchase related ta:es N dties non refndable N non adjstable
<" )rans!ortation cost if constant !er nit
?" ;on retrnable container N !ac-ing
CO/PONN$ OF OR,RCO/PONN$ OF OR,RCO/PONN$ OF OR,RCO/PONN$ OF OR,RING CO!$ING CO!$ING CO!$ING CO!$
1" lerical cost !er order
)" ns!ection cost !er order
*" )rans!ortation cost if constant !er order
CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(
1" nsrance
)" Bastage
*" aterial handling cost
/" torage charged if constant !er order
5" nterest ? &or-ing ca!ital cost
@ /H D =a& aterial
B / D rodction
G Bor-ing a!ital anagement D tore
@/)H= @ebtor anagement
%
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'"C 'N'+%!I! '"C 'N'+%!I! '"C 'N'+%!I! '"C 'N'+%!I!
1" areto anal$sis
)" 80>20 rle
*" %l&a$s better control
/" %l!habetical a!!roach to in"entor$ management
5" electi"e in"entor$ management
<" ../. i.e. ontrol b$ im!ortance N e:ce!tion
?" I./.@. i.e. Iital, @esirable, /ssential
IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$
• /H
• =eorder
• ;ormal ma:
• %bsolte ma:
• afet$ stoc- ? bffer ? in stoc-
IB28BT64K 4864+IB SKST8;1" eriodic s$stem )" er!etal s$stem
'nder this s$stem, the "ale of in"entor$
is determined at the end of the $ear
throgh a !h$sical cont of in"entor$ in
store?&arehose. t does not maintain a
continos record of mo"ement of each
in"entor$ item.
'nder this s$stem, a com!lete and
continos record of mo"ement of each
in"entor$ item is maintained. er!etal
records are sefl in !re!aring monthl$
*arterl$ or other financial statement.
=ecord sed is normall$ a Sstore ledger
cardT s!ecif$ing *antit$ &ise recei!t,isse and balance together &ith "ales in
chronological se*ence.
T76 =IB SKST8; irst bin D o"er N abo"e reorder le"el econd bin D reorder le"el
4eorder !e0e! sste ) bin under reorder
!e0e! sste
.eriodic re0ie9 sste
'nit of reorder le"el
/:cess nits
• @esired
closing stoc-
• ale nit
• )otal re*ired
• H!ening stoc-
to be boght
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O)O)O)O)
Annua! ordering cost J Annua! carring cost
%@ Q H ? /H J /H Q ? 2 64 /H Q ' Q M?2
/H 2
J 2 Q %@ Q H?' Q M
/H J ` 2 Q %@ Q H?' Q M
A284A8 6BSU;.TI6B B64;A$ 6BSU;.TI6B
H!ening P closing ? 2 1. ighest fre*enc$
2. onsme most of time
1" 'se normal consm!tion. f normal consm!tion not gi"en, then se a"erage
consm!tion.
)" onsm!tion N lead time D base !arameter &ill al&a$s be same
1" @%\ D @%\
)" B// D B//
!$OCK O*$ CO!$!$OCK O*$ CO!$!$OCK O*$ CO!$!$OCK O*$ CO!$
1" =estarting cost)" Foss of good&ill N cstomers
*" Foss of contribtion margin
/" /:tra cost associated &ith emergenc$ !rchase
5" onsm!tion Y ;ormal D toc- ot costs occrs
<" arr$ing cost of safet$ stoc- D safet$ stoc- nit Q !er nit
?" ;ote> &ill not be di"ided b$ 2 as it is not sed on reglar basis.
" toc- ot cost > 1 er time N ) er nit
'NN*'+ ,/'N, 'NN*'+ ,/'N, 'NN*'+ ,/'N, 'NN*'+ ,/'N,ash sales nit JJJ
redit sales nit JJJ
)otal sales nit JJJ
%dd A losing G JJJ
Fess A H!ening G JJJ
4eCuired
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O$.R $%P! OF "PO$.R $%P! OF "PO$.R $%P! OF "PO$.R $%P! OF "P
ash =8. n the ash /, fi:ed cost ta-en at cash cost onl$ ash cost. ;o
non cash item &ill be considered. /.g. @e!reciation, %mortiEation
etc. %lso called SOut of pocket fixed cost T. )his / is sed in slac-
!eriod for short time.
o%osite =8.
(60era!! =8.#
/ in case of t&o or more than t&o !rodcts combined / for
one com!an$.
Muestion:
.articu!ars Unit A Unit =
ales =s. 20 =s. 45
Iariable cost =s. 15 =s. 30ontribtion =s. 05 =s. 15
ales mi: 6000 'nit 4000 'nit
?I =atio 1?4 1?3
rodct % and sales different !rodct at different !rice and
!rodct ha"e different cost and different sales mi:. =e*ired to find
combined / of com!an$ in %mont &hen fi:ed cost D360,000C
Ans9er:
IB UBIT 4ATI6 A A0g" contribution %er unit
5Q6 P 15Q4?10 D =s. 9 !er combo nit360,000?9 D 40,000 nits
%> 40000?10 Q 6 D 24000, > 40000?10 Q 4 D 16000
IB SA$8S 4ATI6 A A0g" .>2 ratio %er unit
5Q6 P 15Q4?20Q6 P 45Q4 D 30M
360,000?30M D 1200,000
=8. in case of
o%ening stock
Muestion: H!ening stoc- 6000 'nit ] =s.10.00 I at 60M D
60,000
rodction 44000 'nit ] fi:ed cost D 187000 D 484,000
elling rice D =s.10.50 in crrent $ear.
Ans9er:
.articu!ars Tota! ost 2ariab!e cost .er U" Fied cost
H!ening stoc- 60,000 36,000 6.00 ;ot tr. n this
$ear
rodce nits 484,000 297,000 6.75 187,000
ontribtion re*ired for absor!tion of fi:ed cost D =s. 187,000
ontribtion earn b$ o!ening nits 6,000 Q10.56 D =s. 27,000
alance contribtion D =s. 160,000
D 160,000?3.75 D 42,667
D )otal sale of nits D 6,000P42,667 D 48,667.
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=8. in case of
change in
0ariab!e cost at0arious !e0e! of
%roduction"
Muestion: irst 5000 'nits ] =s. 3.00 ontribtion 2.00
;e:t 'nits ] =s. 2.80 ontribtion 2.20
ales !rice D =s. 5.00 and fi:ed cost D =s. 27500Ans9er: 5,000 P 12,500 D 17,500
=8. in case of
+ifferentia! fied
cost at
differentia!
%roduction !e0e!s:
Muestion: ales !rice D 20.00 and I D 15.00
i:ed cost, =s. 30,000 ! to 8000 nits and =s. 45000 abo"e 8000
'nit.
Ans9er:
/ ! to 8000 nits> 30,000?5 D 6,000 nits
/ abo"e 8000 nits> 45,000?5 D 9,000 nits.
ost =8. t is sed for !rofit earning ca!acit$ after a s!ecific le"el of
!rodction.Muestion:
.articu!ars .!ant A .!ant =
Iariable cost !er nit 8.00 6.50
i:ed cost 90,000 120,000
Bhich is more !rofitable and state the le"el in nits and com!are
the cost !ar nit &hen !rodction is 15000 nits or 25000 nitsC
Ans9er: 120,00090,000 ? 8.006.50 D 20,000 'nits.
=8. in case of
sei 0ariab!e cost
Muestion:
/ngine fi:ed cost D 32,000, )rain bogie i:ed cost D 12,000
a!acit$ D 60 !ersons !er bogie, )ic-et ontribtion D =s. 300
@etermine the / in ogie nmber and in !ersonsC
Ans9er:
ontribtion !er bogie D 300Q60 A 12000 D 6,000.00
ogie re*ired for / D 32,000 ? 6000 D 5.3333 or 6.00
/ tic-ets D 104,000 ? 300 D 347 tic-ets
.rofit =8. IB A;6UBT: i:ed cost P @esired !rofit ? I ratio
IB UBIT: i:ed cost P @esired !rofit ? ontribtion !er nit
=8. in case of
erger of %!ants
> co%an
Muestion:
.articu!ars .!ant A .!ant =
Bor-ing ca!acit$ 70M 60M
ales 350 240I 280 180
ontribtion 70 60
i:ed cost 50 45
rofit 20 15
1. ind ot the combined / of com!an$C
2. ind ot !rofit?loss at 50M ca!acit$C
Ans9er:
(1# i:ed cost D 50.00 P 45.00 D 95.00
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a%acit at 1G A = Tota!
ales 500 400 900
Fess> I 100M 400 300 700ontribution 1 1 )
ommon ?I ratio D 200?900Q100 D 22.22 M
ales "ale on / D 95?22.22M D =s.427.50
()# At 5 G ca%acit
ales 900 Q 50M D 450
ontribtion 450 Q 22.22M D 100
Fess > i:ed cost D 95
.rofit J 5
/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$
Sa!e JJ
$ess 3 2 JJ
ontribution JJ
$ess S%ecific Fied ost JJ
Tota! JJ
$ess3 enera! Fied ost JJ
.rofit
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FACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEAD
O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.
%ctal H i:ed P Iariable JJJ
%!!lied H %ctal ca!acit$ attained Q H %!!lied =ate JJJ
Under > 60er A%%!ied
F6H A%%!ied 4ate : /stimated H?/stimated a!acit$ le"el
'nder a!!lied? @r? 'nfa"orable & H"er a!!lied? r? a"orable
C'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NC
%!!lied H JJJ
dgeted GH for ca!acit$ attained i:ed H P %ctal ca!acit$
attained Q H "ariable rate
JJJ
F6H 2ariab!e 4ate : /stimated Iariable H?/stimated a!acit$ le"el
!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R
dgeted H for a!acit$ %ttained JJJ
%ctal H JJJ
FOR/*+'FOR/*+'FOR/*+'FOR/*+'
Fied F6H /stimated )otal H A Iariable H
Tota! F6H i:ed H P Iariable H
F6H a%%!ied rate (if 0ariab!e F6H
is gi0en#
i:ed H?/stimated ca!acit$ P Iariable rate
=udgeted 0o!ue> nora!
ca%acit > standard acti0it !e0e!
i:ed H?i:ed H rate )otal rate A Iariable rate
2ariab!e F6H 4ate hange in bdgeted H?hange in acti"it$ le"el
=udgeted Fied F6H )otal bdgeted H Iariable H dgeted "olme Q
"ariable rate
Fied ost Iariable H P dgeted fi:ed H
=udgeted F6H i:ed cost P Iariable cost dgeted "olme Q "ariable
rate
ost of Unused a%acit /stimated fi:ed H A i:ed H %!!lied
Stages of absor%tion costing %llocation P %!!ortionment P %bsor!tion
=!anket > .!ant 9ide> Sing!e 4ate )otal H of the factor$?)otal acti"it$ le"el of the factor$
+e%artenta! 4ate )otal H of de!tt?)otal acti"it$ le"el of the de!tt
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Actua! 4ate )otal %ctal H?)otal actal acti"it$ le"el
=ases of Acti0it $e0e! 1 achine or 2 Aantit$ 3 rime cost
4 @ cost 5 @F cost 6 @F horsActua! osting %ctal @irect aterial ost P %ctal @irect Fabor ost P
%ctal @irect /:!enses ost P %ctal H ost
Bora! osting %ctal @irect aterial ost P %ctal @irect Fabor ost P
%ctal @irect /:!enses ost P %!!lied H ost
Under>60er a%%!ied +ecision 4u!e B6.U
;egati"e D H"er a!!lied N ositi"e D 'nder a!!lied
4eason of Under>60er a%%!ied 1 %ctal H"erhead costs are different from bdgeted
o"erhead
2 %ctal H"erhead acti"it$ le"els are different from
bdgeted o"erhead
3 %ctal H"erhead costs N acti"it$ le"els are differentfrom bdgeted o"erhead
'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$
Absor%tion osting ;argina! osting
.rie ost rodct ost rodct ost
2ariab!e F6H rodct ost rodct ost
Fied F6H rodct ost eriod ost
Adin 2ariab!e eriod ost eriod ost
Adin Fied eriod ost eriod ostSe!!ing 2ariab!e eriod ost eriod ost
Se!!ing Fied eriod ost eriod ost
PRPRPRPR----,$R/IN, FO. R'$,$R/IN, FO. R'$,$R/IN, FO. R'$,$R/IN, FO. R'$
=ased on Actua! a%acit Attained: /stimated H at actal ca!acit$ attained
/stimated a!acit$ le"el at actal ca!acit$
attained
=ased on Bora! a%acit: /stimated H at normal ca!acit$
/stimated a!acit$ le"el at normalca!acit$
8stiated F6H at nora! ca%acit
i:ed /:!ected actal ca!acit$ P normal ca!acit$ hors Q "ariable rate
2ariab!e 4ate: Iariable %ctal a!acit$ %ttained?%ctal a!acit$ %ttained ors
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FO.FO.FO.FO. C'P'CC'P'CC'P'CC'P'CI$I!I$I!I$I!I$I!
&'le(#ate(T%eoreticalCa)acit*
& ' stimated r#nning + !r a da," -. da,s in a ,ear ' stimated mac!ine !o#r +*-.*&0 12.00
Mac!ine 3o#rs
Practical Ca)acit* 1 /stimated rnning D 20 hr a da$, 5 da$s !er &ee-, 50
&ee-s !er $ear
2 /stimated machine hor D 20Q5Q50Q10 D 50000 achine
ors
+ormal("u'gete'
Ca)acit*
1 'sed for long rn !lanning.
2 oresee ca!acit$
3 ased !on !ast e:!erience considering !resent
circmstances.
-)ecte' Actual Ca)acit* 'sed for short rn !lanning. /.g. seasonal.
.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!
Ste% 1 )a-e the acti"it$ le"el and cost for>
• )he highest acti"it$ le"el
• )he lo&est acti"it$ le"el.
Ste% ) )he difference bet&een the total cost of the highest acti"it$ le"el and the total
cost of the lo&est acti"it$ le"el consists entirel$ of "ariable costs. )his is becase
the fi:ed costs are the same at all le"els of acti"it$.
Acti0it !e0e! V
igh % )otal cost of %
Fo& )otal cost of
+ifference: (A =# units T of A T of =
• rom this difference, &e can therefore calclate the "ariable cost !er
nit of acti"it$.
• 2ariab!e cost %er unit D ) of % A ) of ? % A nits
Ste% * a"ing calclated the "ariable cost !er nit, a!!l$ this "ale to the cost of either
the highest or the lo&est acti"it$ le"el. t does not matter &hether $o se the
high le"el or the lo& le"el of acti"it$. \or calclation of fi:ed costs &ill be the
same. alclate the total "ariable costs at this acti"it$ le"el.
Ste% / )he difference bet&een the total cost at this acti"it$ le"el and the total "ariable
cost at this acti"it$ le"el is the fi:ed cost.
Substitute in the W!o9X eCuation ost
V
)otal cost of lo& "olme of acti"it$ ) of
Iariable cost of lo& "olme of acti"it$ I
)herefore fi:ed costs !er !eriod of time T of = 3 2
\o no& ha"e an estimate of the "ariable cost !er nit and the total fi:ed costs.
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de%artent
+e!i0er e%enses Beight, "olme or ton-ilometre
4e%airs of %!ant Iale of !lant.
Su%er0ision no. of machine?em!lo$ee or @irect &ages
Fire Insurance Iale of %sset or area occ!ied
;achine sho% e% achine hors or Fabors hors.
enera! 8% @irect Bages or ;o. of /m!lo$ees
Audit Fees ales or total cost
;aintenance of bui!ding %rea or labor hors
4e%air and ;aintenance ost Iale of assets or hors &or-ed for each de!artment
Stores +e%artent ;o. of stores re*isitions
anteen 8% ;o. of meal ser"ed or no. of em!lo$ees.
Trans%ort +e%t Beight or "olme or ton-m.
i0i! Ser0ice +e%t %rea.
.urchase +e%artent ;o. of !rchase orders !laced or "ale of materials
!rchased for each de!artment.
rane ser0ice rane hors or &eight of materials handled
Tie3kee%ing ;o. of em!lo$ees
.o9er house eat area of cbic contents or B
Too! 4oo @irect Fabor hors
Ins%ection ;mber of nits
Hos%ita! and +is%ensar ;mber of nits
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BREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSIS
FOR/*+'FOR/*+'FOR/*+'FOR/*+'
=reake0en %oint 4ixed Cost/C/M 5atio (Contrib#tion Margin 5atio)
• C/M 5atio Contrib#tion / 6ales * &00
75
4ixed Cost
& – 8ariable cost / 6ales
75
4ixed Cost
Contrib#tion 9er #nit (6:;: ;er <nit – 8:C: ;er <nit)
I= 8AL<64ixed Cost
C/M 5atio (Contrib#tion Margin 5atio)
• C/M 5atio Contrib#tion / 6ales * &00
• Contrib#tion Margin Contrib#tion 6ale ' ;rofit
8ol#me:
In o%ening stock 'nits from o!ening stoc- P total fi:ed cost A total contribtion
from o!ening stoc-?rrent ontribtion !er nit
ontribution argin ale A Iariable /:!ense
.rofit co%utation ale Q ? =atio A i:ed ost
Be9 fied cost ale ? A argin of safet$ Q ?
6!d fied cost ale A 100 A argin of safet$ Q ? =atio
2ariab!e e%enses 1 ? =atio Q ales
ontribution argin ratio ontribtion Q 100
ales
64
hange in rofit Q 100
hange in ales
64
hange in ontribtion Q 100
hange in ale
64hange in )otal ost Q 100
hange in ale
64
ale A Iariable /:!ense Q 100
ales
+ecision !ue J
igher the ? ratio Z more &ill be the !rofit.
Fo&er the ? ratio Z lo&er &ill be the !rofit.
Sa!e %ro-ection i:ed ost P rofit Foss rojection
? =atio ontribtion argin =atio
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64
i:ed ost P rofit rojection ? 1ta: rate
? =atio ontribtion argin =atio8tra units so!d to aintain
sae %rofit
=e"ised 'nits A /:isting 'nits
Increase in se!!ing %rice Bhen marginal cost is =s> J1J, the selling !rice is =s> J2J
Bhen marginal cost is =s> J3J, the selling !rice is =s> J2J Q
J3J ? J1J.
ncrease in selling !rice D ;e& rice A Hld rice
Bo of unit so!d to get desired
!e0e! of %rofit
IB UBITS:
)otal =e*ired ontribtion i:ed cost P )arget !rofit
ontribtion !er nit ale !er nit A Iariable cost !er
nit
IB 2A$U8S:)otal =e*ired ontribtion i:ed cost P )arget !rofit
? =atio ontribtion argin =atio
• ? =atio D ontribtion ? ales Q 100
Ta i%act hange in "olme in nits Q contribtion margin !er
nit Q 1 A ta: rate
Bet dec!ine in contribution
argin
@ecline in =e"ene nit !rodce Q old sale !rice A ne&
sale !rice JJJ
@ecline in ost rther rocessing ost JJJ
;ote> ;o offer acce!tance if net decline in contribtion
margin N "ice "ersa.;argin Safet 4atio elected sale figre A brea- e"en !oint Q 100
elected sale figre
64
rofit ? ? =atio Q 100
IB UBITS J %ctal?dgeted nit sold A brea- e"en nit
$aan 4u!e )otal ost D )otal =e"ene
Accountant 4u!e ontribtion argin D P rofit
ash =8. ash i:ed ost
ash ? er 'nit
• ash means all e:clding @e!reciationP
%mortiEation P all non cash items.• t determines at !oint &here total cash cost N
total sales line intersect each other.
4e0ised .>2 ratio =e"ised contribtion margin !er nit
=e"ised sale !rice !er nit
Be9 ontribution Gi"en ontribtion A Iariable osts
4u!e ;o "ariable e:!ense, all sale !rice &ill be ?
.rofit margin of safet$ M Q ? M
;argin of safet total sales A brea- e"en sales
;argin of safet G total sales A brea- e"en sales ? total sales
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Tota! sa!es argin of safet$ !rofit
.rofit ales Q margin of safet$ M Q ? M
4eCuired ontribution i:ed ost P )arget rofit A )arget Foss A @onation Aht do&n
;argin of Safet rofit
? M
64
rofit
? er 'nit
Sa!e .rice i:ed ost?'nit P Iariable ost er 'nit
At =reak 80en $e0e! ale A I A D rofit64
ale D I P P rofitTarget .rofit ale D I P P rofit
ost =reak e0en %oint t is the !rodction le"el at &hich !rodction cost is
same irres!ecti"e of the alternati"e ado!ted.
ost ./.. D @ifference in fi:ed costs
@ifference in "ariable costs
Ta I%act efore @i"ide D %fter )a: ncome?1t
%fter lti!l$ D efore )a: Q 1t
ale Q ? ratio D P rofit
rea- e"en sale Q ? ratio D A rea- e"en sales
.rofitabi!it ontribtion ? -e$ factorontribution > ke factor %nnal !rodction ? nstall ca!acit$
rea- e"en sale P ? ratio Q ? ratio D ontribtion
rea- e"en sale P ? ratio Q ? ratio Q ? ratio D P rofit
/ ales M P H ales M D 100 M
ontribtion at / D i:ed cost
ontribtion at H D rofit
ontribtion on / P ontribtion on H D )otal ontribtion
i:ed ost D / ales Q I =atio
rofit D H sales Q I =atio
Iariable cost D !er nit cost is constant bt change in total amont.i:ed cost D hange in !er nit cost bt total cost are constant.
emi "ariable ost D t is ombination of Iariable cost and fi:ed cost.
f sales !rice constant than "ariable cost change in same ratio to sales changes.
f sales !rice is change bt sales t$ is same than Iariable cost also constant bt onl$
change in ?I =atio.
estion sa$ find ot increase in sales !rice to re*. / at +.M )han M increase in ales
!rice D rrent / A =e"ised / ? =e"ised /
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POIN$!POIN$!POIN$!POIN$!
1. t is the le"el of acti"it$ &here total cost e*als sale !rice.2. t is the !oint &here contribtion is e*al to fi:ed cost.
3. t is a !oint of no !rofit N no loss.
4. t is the !oint a"ailable to co"er fi:ed e:!enses N then to !ro"ide !rofits for the
!eriod.
5. t is the logical e:tension of arginal osting.
6. t is a !o&erfl instrment for decision ma-ing.
7. ontribtion means contribtion to&ards fi:ed cost N !rofit.
8. rea- e"en !oint D Oero !rofit !oint
'!!*/P$ION! '!!*/P$ION! '!!*/P$ION! '!!*/P$ION!
1. %ll costs can be se!arated in fi:ed N "ariable costs.
2. ;o change in o!erating efficienc$.
3. ;mber of nits !rodced N sold &ill be the same so that there is no o!ening N
closing stoc-.
4. %ll fi:ed costs &ill flctate N &ill not change &ith change of acti"it$ le"el.
5. Hnl$ !rodct or in case of man$ !rodcts, !rodct mi: &ill remain nchanged.
6. elling !rice &ill remain constant des!ite com!etition or change of "olme.
7. Iariable cost &ill flctate in same !ro!ortion in &hich "olme of ot!t "aries.
C.CKC.CKC.CKC.CK
Sa!e JJJ
$ess 2ariab!e ost JJJ
ontribution JJJ
$ess3 Fied ost JJJ
.rofit
/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO
ale or ot!t behind brea- e"en !oint is called margin of safet$. argin of safet$ is
that sales or ot!t &hich is abo"e brea- e"en !oint. %ll fi:ed costs are reco"ered at
brea- e"en !oint, so fi:ed e:!enses ha"e been e:clded from the formla of margin of
safet$. )he margin of safet$ at brea- e"en !oint is nil as actal nit sold is e*al to brea-
e"en nit sold. t can be increased b$>
1. ncrease in le"el of !rodction.
2. ncrease in sale !rice.
3. =edce fi:ed cost or "ariable cost or both.
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4. bstitte e:isting !rodcts b$ more !rofitable !rodcts.
$arge ;argin of Safet ndicator of strength as sbstantial redce in sales N!rodction, !rofit &ill be made.
Sa!! ;argin of Safet ndicator of &ea-ness as small redce in sales N !rodction,
loss &ill be made.
'NG+ OF INCI,NC 'NG+ OF INCI,NC 'NG+ OF INCI,NC 'NG+ OF INCI,NC
t is an angle at brea- e"en !oint &here sales line cts total cost line. t sho&s the rate at
&hich the !rofit is made.
Farge %ngle of ncidence rofit at high ratemall %ngle of ncidence rofit at lo& rate
R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$
In 4u%ees In G
i:ed cost P target !rofit ? M i:ed cost ? M )arget rofit M
'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION!
In 4u%ees In G
i:ed cost P ;et rofit ? 1t ? M i:ed cost P ? M ;et rofit ? 1t
PRO,*C$ /I@PRO,*C$ /I@PRO,*C$ /I@PRO,*C$ /I@
In G .er Unit
i:ed cost P )arget rofit ? M i:ed cost P )arget !rofit ? !er nit
• ? M D total contribtion ? total sales Q 100
• ? !er nit D total contribtion ? total sales
Bote: n !rodct mi:, there is onl$ one fi:ed cost. )hat is common for all the
!rodcts.
Head Increase to be sho9n in
)otal
I er nit
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R)*IR, !'+!R)*IR, !'+!R)*IR, !'+!R)*IR, !'+!
i:ed ost P )arget rofit JJJ
Fess J N \ ontribtion @emandQontribtion er 'nit JJJ
OUs ontribtion JJJ
@i"ided $
er 'nit contribtion of OUs JJJ
4eCuired sa!es
'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$
A6UBTABT 86B6;IST
Hne / )&o /
)otal ost is straight line )otal ost is not a straight line
first redce N then climb as !er la& of
diminishing retrn
=e"ene Fine is straight line =e"ene Fine is not straight line
less stee! to de!ict the need to gi"e
discont to achie"e higher sale "olme
i:ed ost is straight line
gnore economies ? diseconomies of scale,
elasticit$ of demand# discont to secre
increase in "olme.
=ecogniEe economies ? diseconomies of
scale.
rea- e"en time D sale D P I rea- e"en time D %"erage re"ene D
%"erage cost
'se is limited to area &ithin rele"ant
range.
@ifficlt to ma-e chart &hen ste!
occrs.
3 )o increase sale, !rice redctions ha"e to
be offered N as ot!t increase, marginal
cost of additional !rodction increases.
3 /conomist arges that accontantdistinction bet&een N I is nrealistic.
n realit$, &hether cost is fi:ed or "ariable
de!ends on time frame ta-en.
3 rea- e"en !oint is intersection of line
re!resenting t&o fnctions
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"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!
Step& 1 Select appropriate scales for t'e axes and dra( and la!el t'em) t the
e:tremes of the a:es right at the end of the a"ailable s!ace. )he frthest !oint on the
"ertical a:is &ill be the monthl$ sales re"ene, that is, 1, 700 nits Q =s> 50 D =s> 85,000
)he frthest !oint on the horiEontal a:is &ill be monthl$ sales "olme of 1,700 nits.
a-e sre that $o do not need to read data for "olmes higher than 1,700 nits before
$o set these e:tremes for $or scales.
Step& 2 *ra( t'e fixed cost line and la!el it) )his &ill be a straight line !arallel to
the horiEontal a:is at the =s> 20,000 le"els. )he =s> 20,000 fi:ed costs are incrred in
the short term e"en &ith Eero acti"it$.
Step& + *ra( t'e total cost line and la!el it) )he best &a$ to do this is to
calclate the total costs for the ma:imm sales le"el, &hich is 1,700 nits in ore:am!le. ar- this !oint on the gra!h and join it to the cost incrred at Eero acti"it$,
that is, =s> 20,000
4s:
Iariable costs for 1,700 nits 1,700 Q =s> 30 51,000
i:ed costs 20,000
)otal cost for 1,700 nits ?1,
Step& , *ra( t'e revenue line and la!el it) Hnce again the best &a$ is to !lot the
e:treme !oints. )he re"ene at ma:imm acti"it$ in or e:am!le is 1,700 Q =s> 50 D =s>
85,000. )his !oint can be joined to the origin, since at Eero acti"it$ there &ill be no sales
re"ene.Step& - ar. any re/uired information on t'e c'art and read off solutions as
re/uired)
hec- that $or chart is accrate b$ reading off the measres that &e ha"e alread$
calclated the brea-e"en !oint, the margin of safet$, the !rofit for sales of 1,700 nits.
Step& C'ec. t'e accuracy of your readins usin arit'metic) t is al&a$s good
e:amination !ractice to chec- the accrac$ of $or ans&ers and ma-e adjstments for
an$ errors in $or chart if $o ha"e time
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PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.
)he %rofit>0o!ue .>2# gra%h is a "ariation of the brea-e"en chart and illstrates the
relationshi! of !rofit to sales "olme.
6BST4UTI6B 6F A .46FIT>26$U;8 4A.H
(a# << is on the $ a:is and actall$ com!rises not onl$ <!rofit< bt contribtion to !rofit in
monetar$ "ale, e:tending abo"e and belo& the : a:is &ith a Eero !oint at the
intersection of the t&o a:es, and the negati"e section belo& the : a:is re!resenting
fi:ed costs. )his means that at Eero !rodction, the firm is incrring a loss e*al to the
fi:ed costs.
(b# <I< is on the : a:is and com!rises either "olme of sales or "ale of sales re"ene.
(c# )he !rofit"olme line is a straight line dra&n &ith its starting !oint at Eero !rodction
at the interce!t on the $ a:is re!resenting the le"el of fi:ed costs, and &ith a gradient of
contribtion?nit or the ? ratio if sales "ale is sed rather than nits. )he ?I line
&ill ct the : a:is at the brea-e"en !oint of sales "olme. %n$ !oint on the ?I line
abo"e the : a:is re!resents the !rofit to the firm as measred on the "ertical a:is for
that !articlar le"el of sales.
Fet s dra& a ?I gra!h for or e:am!le. %t sales of 120,000 nits, total contribtion &ill be
120,000 L =s> 1 A 0.5 D =s> 60,000 and total !rofit &ill be =s> 20,000.
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A+2ABTA8S 6F TH8 .>2 4A.H
(a# f the bdgeted selling !rice of the !rodct in or e:am!le is increased to =s> 1.20, &iththe reslt that demand dro!s to 105,000 nits des!ite additional fi:ed costs of =s>
10,000 being s!ent on ad"ertising, &e cold add a line re!resenting this sitation to or
?I chart.
(b# %t sales of 105,000 nits, contribtion &ill be 105,000 L =s> 1.20 A 0.50 D =s> 73,500
and total !rofit &ill be =s> 23,500 fi:ed costs being =s> 50,000.
(c# )he diagram sho&s that if the selling !rice is increased, the brea-e"en !oint occrs at a
lo&er le"el of sales re"ene 71,429 nits instead of 80,000 nits, althogh this is not a
!articlarl$ large decrease &hen "ie&ed in the conte:t of the !rojected sales "olme. t
is also !ossible to see that for sales abo"e 50,000 nits, the !rofit achie"ed &ill be
higher and the loss achie"ed lo&er if the !rice is =s> 1.20. or sales "olmes belo&50,000 nits the first o!tion &ill $ield lo&er losses.
(d# )he ?I gra!h is the clearest &a$ of !resenting sch information# t&o con"entional
brea-e"en charts on one set of a:es &old be "er$ confsing.
(e# hanges in the "ariable cost !er nit or in fi:ed costs at certain acti"it$ le"els can also be
incor!orated easil$ into a ?I gra!h. )he !rofit or loss at each !oint &here the cost
strctre changes shold be calclated and !lotted on the gra!h so that the
!rofit?"olme line becomes a series of straight lines.
(f# or e:am!le, s!!ose that in or e:am!le, at sales le"els in e:cess of 120,000 nits the
"ariable cost !er nit increases to =s> 0.60 !erha!s becase of o"ertime !remims that
are incrred &hen !rodction e:ceeds a certain le"el. %t sales of 130,000 nits,
contribtion &old therefore be 130,000 L =s> 1 0.60 D =s> 52,000 and total !rofit&old be =s> 12,000.
8A;.$8
% com!an$ manfactres a single !rodct &hich incrs fi:ed costs of =s> 30,000 !er annm.
%nnal sales are bdgeted to be 70,000 nits at a sales !rice of =s> 30 !er nit. Iariable costs
are =s> 28.50 !er nit.
(a# @ra& a !rofitA"olme chart, and se it to determine the brea-e"en !oint. )he com!an$
is no& considering im!ro"ing the *alit$ of the !rodct and increasing the selling !rice
to =s> 35 !er nit. ales "olme &ill be naffected, bt fi:ed costs &ill increase to =s>45,000 !er annm and "ariable costs to =s> 33 !er nit.
(b# @ra&, on the same gra!h as for !art a, a second !rofitA"olme chart and comment on
the reslts.
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S6$UTI6B)he t&o lines ha"e been dra&n as follo&s>
Situation (a#" )he !rofit for sales of 70,000 nits is =s> 75,000.
=s> 000
ontribtion 70,000 Q =s> 30 28.50 105
i:ed costs 30
rofit ?5
)his !oint is joined to the loss at Eero acti"it$, =s> 30,000, that is, the fi:ed costs.
Situation (b " )he !rofit for sales of 70,000 nits is =s> 95,000.=s> 000
ontribtion 70,000 Q =s> 35 33 140
i:ed costs 45
rofit 5
)his !oint is joined to the loss at Eero acti"it$, =s> 45,000, that is, the fi:ed costs.
oent on the resu!ts
)he chart de!icts clearl$ the larger !rofits a"ailable from o!tion b. t also sho&s that the
brea-e"en !oint increases from 20,000 nits to 22,500 nits bt that this is not a large increase
&hen "ie&ed in the conte:t of the !rojected sales "olme. t is also !ossible to see that for
sales "olmes abo"e 30,000 nits the !rofit achie"ed &ill be higher &ith o!tion b. or sales
"olmes belo& 30,000 nits o!tion a &ill $ield higher !rofits or lo&er losses.
)he !rofitA"olme chart is the clearest &a$ of !resenting information li-e this. f &e attem!ted
to dra& t&o con"entional brea-e"en charts on one set of a:es the reslt &old be a jmble
that &old be "er$ difficlt to inter!ret.
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ABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTING
;argina! costing @irect aterial P @irect Fabor P Iariable H
Absor%tion costing @irect aterial P @irect Fabor P )otal H
Fied F6H (under absor%tion# i:ed H Q %ctal ca!acit$?rodction
;ormal a!acit$
Bote: f actal ca!acit$ is missing, it is assme that normal
ca!acit$ is actal ca!acit$.
Finished goods in0entor )otal HG Q !rchase nit P H!ening stoc- A sale
nit
%ctal ca!acit$?!rodction
;argina! cost )he marginal cost of an item is its "ariable cost.• arginal !rodction cost D @irect materials P @irect labor P
Iariable !rodction o"erhead.
• arginal cost of sale for a !rodct D @irect materials P @irect
labor P Iariable !rodction o"erhead P Hther "ariable
o"erhead for e:am!le, "ariable selling and distribtion
o"erhead.
• arginal cost of sale for a ser"ice D @irect materials P @irect
labor P Iariable o"erhead.
t is sall$ assmed that direct labor costs are "ariable marginal
costs, bt in some sitations, direct labor costs might be fi:ed costs,
and so &old not be inclded in marginal cost.
'+$RN'$I# CONCP$ '+$RN'$I# CONCP$ '+$RN'$I# CONCP$ '+$RN'$I# CONCP$!!!! OF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$ING
)o econoist, marginal cost is the additional cost incrred b$ the !rodction of one e:tra nit.
)o accountant, marginal cost is a"erage "ariable cost &hich is con"entionall$ !resmed to act
in linear fashion i.e. marginal cost !er nit is assmed to be constant on the short rn.
'!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING
1" /"er$ additional nit of ot!t or sale, or e"er$ additional nit of acti"it$, has the same
"ariable cost as e"er$ other nit. n other &ords, the "ariable cost !er nit is a constant
"ale.
)" i:ed costs are costs that remain the same in total in each !eriod, regardless of ho&
man$ nits are !rodced and sold.
*" osts are either fi:ed or "ariable, or a mi:tre of fi:ed and "ariable costs. i:ed costs
can be se!arated into a "ariable cost !er nit and a fi:ed cost !er !eriod. )echni*es
sch as high?lo& anal$sis or linear regression anal$sis shold be sed to do this.
/" )he marginal cost of an item is therefore the e:tra cost that &old be incrred b$
ma-ing and selling one e:tra nit of the item.
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'b 'b 'b 'b
Cost Accounting
Feedbacks, contact: ATAUSH SHAFI (ataushsha
arginal Costing ,iagram2 arginal Costing ,iagram2 arginal Costing ,iagram2 arginal Costing ,iagram2
sorption Costing ,iagram2sorption Costing ,iagram2sorption Costing ,iagram2sorption Costing ,iagram2
anual 2013
i@gai!"co#
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'"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING
Sa!e JJJ
$ess3 ost of oods So!d:
+irect ;ateria! JJJ
+irect $abor JJJ
Factor 60erhead A%%!ied (Fied 2ariab!e# JJJ
ost of ood ;anufactured JJJ
Add 6%ening Finished oods JJJ
$ess !osing Finished oods JJJ
ost of oods So!d JJJ
Add Under A%%!ied JJJ
$ess 60er A%%!ied JJJ
ost of oods So!d (Ad-usted# JJJ
ross .rofit JJJ
$ess 6%erating 8%enses:
Se!!ing o0erhead (Fied 2ariab!e# JJJ
Adinistration o0erhead (Fied 2ariab!e# JJJ JJJ
6%erating .rofit> Bet .rofit
Botes:
1" )o calclate fi:ed H, see formla abo"e.
)" a!acit$ &ill be of t&o t$!es> 1> dgeted 2> ;ormal. 'se bdgeted ca!acit$. f not
gi"en, then se ;ormal ca!acit$.
*" H!ening inished Goods D ost of Good anfactred?rodction 'nits Q
H!ening toc- 'nits
/" losing inished Goods D ost of Good anfactred?rodction 'nits Q
losing toc- 'nits
5" H!ening toc- 'nits &ill be gi"en in the *estion.
<" losing toc- 'nits &ill be calclated as follo&s> H!ening toc- 'nits P rchases A ales
?" Gross rofit D ales A HG
" 'nder ? H"er a!!lied as calclated as !er H method. oth i:ed N Iariable Iariances&ill be considered here.
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/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING
Sa!e JJJ
$ess3 ost of oods So!d:
+irect ;ateria! JJJ
+irect $abor JJJ
Factor 60erhead A%%!ied (2ariab!e on!# JJJ
2ariab!e ost of ood ;anufactured JJJ
Add 6%ening Finished oods JJJ
$ess !osing Finished oods JJJ
ost of oods So!d JJJ
Add Under A%%!ied JJJ
$ess 60er A%%!ied JJJ
ost of oods So!d (Ad-usted# JJJ
ross ontribution JJJ
$ess 2ariab!e se!!ing & adinistration o0erhead JJJ
Bet ontribution JJJ
$ess 6%erating 8%enses:
Se!!ing o0erhead (Fied# JJJ
Factor o0erhead (Fied# JJJ
Adinistration o0erhead (Fied# JJJ JJJ
6%erating .rofit> Bet .rofit
Botes:
1" H!ening inished Goods D Iariable ost of Good anfactred?rodction
'nits Q H!ening toc- 'nits
)" losing inished Goods D Iariable ost of Good anfactred?rodction
'nits Q losing toc- 'nits
*" H!ening toc- 'nits &ill be gi"en in the *estion.
/" losing toc- 'nits &ill be calclated as follo&s> H!ening toc- 'nits P rchases A ales
5" 'nder ? H"er a!!lied as calclated as !er H method. Hnl$ Iariable Iariances &ill be
considered here.
RCONCI+I'$IONRCONCI+I'$IONRCONCI+I'$IONRCONCI+I'$ION
;et income %bsor!tion costing
Fess @ifference in closing stoc- JJJ
%dd @ifference in o!ening stoc- JJJ
Bet incoe (;argina! costing#
+ifference in %rofit under t9o costing sste is due to different stock 0a!uation ethods use"
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CONCP$!CONCP$!CONCP$!CONCP$!
A J ; ame rofit
A R ; igh rofit
A Y ; Fo& rofit
Tota! ontribution R F rofit
Tota! ontribution J F ;o rofit N no loss
Tota! ontribution R F Foss
.roduction R a%acit H"er a!!lied
.roduction Y a%acit 'nder a!!lied
/'RGIN'+/'RGIN'+/'RGIN'+/'RGIN'+ CO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$ING
A=S64.TI6B 6STIB ;A4IBA$ 6STIB
• arginal cost is the !art of the cost of
one nit of !rodct or ser"ice &hich
&old be a"oided if that nit &as not
!rodced or &hich &old increase if
one e:tra nit &ere !rodced.
• arginal cost is the "ariable cost ofone nit of !rodct or ser"ice.
• f "olme of sales falls b$ one nit,
!rofit &ill fall b$ amont of
contribtion earned from that nit.
i:ed !rodction cost are absorbed into the
cost of nits N carried for&ard.
i:ed !rodction cost are treated as !eriod
cost N &ritten off as incrred.
%bsor!tion costing &ill re!ort high !rofit &hen
stoc- le"el increases as fi:ed o"erhead &ill be
carried for&ard to closing stoc-.
losing stoc-s are "aled at fll !rodctioncost.
losing stoc-s are "aled at marginal?"ariable!rodction cost.
%bsor!tion costing &ill re!ort lo& !rofit &hen
stoc- le"el decreases.
Bhen nit of !rodct is made, the e:tra cost
incrred in its manfactre is "ariable
!rodction costs. i:ed costs are naffected N
no e:tra fi:ed costs are incrred &hen ot!t
is increased.
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,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING
;argina! osting 2>S Absor%tion osting
arginal cost e:cldes fi:ed costs. 'nder absor!tion costing, e"en fi:ed costs
are charged to the !rodct?ser"ice.
arinal Costin 34S *irect Costin 'nder marginal costing onl$ "ariable cost
both direct and indirect is charged to the cost
nit
'nder direct costing, onl$ direct cost both
fi:ed and "ariable is charged to the cost nit.
!sorption Costin 34S *irect Costin 'nder absor!tion costing, all costs both direct
and indirect are assigned to the cost nit.
'nder direct costing onl$ direct cost is
assigned to the cost nit. n both t$!es of
costing, "ariabilit$ of cost is ignored.
*ifferential Costin 34S arinal Costin
*ifferential costin ;argina! osting
Scope
Bider than marginal costing. ;arro&er than differential costing.
2ariabi!it
oth fi:ed and "ariable costs are
considered
Hnl$ "ariable costs are considered.
+efinition
annot be !recisel$ defined e:ce!tin terms of increase or decrease in
total costs.
an be defined as !rime cost !ls"ariable o"erheads.
=asis of +ecision ;aking
om!arison of differential cost
&ith incremental ? decremental
re"ene.
argin of contribtion and !rofit
"olme.
Incor%oration in Accounting Sste
)his t$!e of costing does not find a !lace in
the acconting s$stem as it in"ol"es ftre
corse of action. o&e"er, it ma$ beincor!orated in the bdgets.
arginal costs ma$ be
incor!orated in the acconting
s$stem.
A%%!icabi!it
%!!licable to both, long term as &ell as
short term decision ma-ing.
%!!licable onl$ to short term
decision ma-ing.
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LABORLABORLABORLABOR
$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION
1" Tie 9ork: Bages D ors &or-ed Q rate of !a$ !er hor
H"ertime D aid at a !remim rate.
a. H"ertime !remim is e:tra rate !er hor &hich is !aid. t is not the &hole of the
!a$ment for the o"ertime hors.
b. asic rate is =s# 4!er hor and o"ertime is !aid at time and a *arter. /ight hors
of o"ertime is !aid as follo&s>1. asic a$ 8Q4 D 32
2. H"ertime 8Q1 D 8
c. hift !remim is gi"en &hen em!lo$ees &or- for nsocial hors. t is similar to
o"ertime !remim. t is the e:tra amont !aid !er hor abo"e the basic horl$
rate.
)" .iece 9ork: Bages D 'nits !rodced Q rate of !a$ !er nit
a. Garanteed minimm &age rate is gi"en to !iece &or-ers.
*" =onus>incenti0e sste
i. igh da$ rate s$stem
ii. ndi"idal bons scheme
iii. Gro! bons scheme
i". rofit sharing scheme
". ncenti"e scheme in"ol"ing shares
"i. Iale added incenti"e scheme> Iale added D sales A cost of
boght in material N ser"ices.
"ii. asle$ constant !artial sharing scheme
"iii. )a$lor differential !iece rate !lan
i:. G%;)) tas- N bons !lan
:. /merson efficienc$ bons !lan
:i. =o&an "ariable sharing !lan
:ii. eda: !oint !lan
:iii. erth "ariable sharing !lan
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FOR/*+'FOR/*+'FOR/*+'FOR/*+'
Has!e constant %artia! sharing schee Bage rate Q 50M Q time sa"e
Ta!or differentia! %iece rate %!an Bage rat e Q time sa"e ? time allo&ed Q time ta-en
Unit rodction
Tie or
Unit $abor ost Fabor ? 'nits
Unit 60erhead ost H ? 'nits
on0ersion ost .er Unit @F P H ? 'nits
.46+UTI2ITK
1 3 6ut%ut an %er hour )otal Ht!t ? )otal an hors
) 3 $abor Hour %er unit of %roduction )otal Fabor or? )otal Ht!t
* 3 8tent of ineffecti0e>$ost tie an hors Fost ? ossible an ors Q 100
/ 3 Actua! Tie co%ared 9ith
standard tie
%ctal )ime tandard )ime
5 3 6ther ;ethods
ale Iale ? ;o of &or-ers
@irect Bages ? ;o of nits
%dded "ale of the !rodct ? )otal &ages cost
.reiu osting ;ethods
@irectl$ charged to !rodction
)reated as o"erhead element
harged to income statement as !eriod costs
8ffecti0e .er hour )otal Bee-l$ /arnings ? )otal ors
$abor Turno0er ;ethods
;mber of em!lo$ees lea"ing
%"g nmber on !a$roll
64
;mber of em!lo$ees lea"ing P joining
%"g nmber on !a$roll
64
;mber of em!lo$ees re!laced
%"g nmber on !a$roll
Id!e tie foru!a dle hors ? total hors Q 100
Ha!se37eir %!an /arnings D ors &or-edQrate !er hor P 30M of
time sa"edQrate !er hor
antt Task and bonus sste a Ht!t belo& standard D ;et !a$ment is of
garanteed time rate
b Ht!t at standard D ;et !a$ment is 120Mof time
rate
c Ht!t abo"e standard D ;et !a$ment is 120M of
!iece rate
8erson 8fficienc .!an a /fficienc$ belo& 662?3MD ;o bons, onl$
garanteed time rate
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b rom662?3M to 100M D t changes at "arios
le"els, at 100M bons rate is 20M of the )ime &ages
c %bo"e 100M D 120M of time &agesP 1M increasefor e"er$1M increase in efficienc$ be$ond 100M
=edau .ont Sste /arningsD hors &or-edQ rate !er hor P 75Mof
hors sa"edQrate !er hor
Ta!orXs Sste a /fficienc$ Fess than 100M D a$ment is 80M of
!iece rate
b /fficienc$ of 100M or more D a$ment is 120M of
!iece rate
;errick differentia! %iece rate Sste a or efficienc$ ! to 83M D !a$ment is ordinar$
!iece rate
b or efficienc$ from 83M to 100M D !a$ment is110M of ordinar$ !iece rate
c or efficienc$ more than 100M D a$ment is 120M
of ordinar$ !iece rate
=arth Sste /arnings D rate !er hor Q `standard hor Q hors
&or-ed
RoBan variable sharing planRoBan variable sharing planRoBan variable sharing planRoBan variable sharing plan
1. ase &age are generall$ garanteed ! to tas-. %bo"e sch tas-, bonses are !aid
according to a "ariable share of the time sa"ed.2. )ime sa"ed is the fnction of standard time allo&ed &hereas in other bons !lan, it is
the fnction of actal time &or-ed.
7orker 1 7orker )
Standard tie a!!o9ed in
hours
8 8
Actua! tie taken in hours 4 6
G bonus (Standard tie
a!!o9ed in hours 3 Actua!
tie taken in hours# >
Standard tie a!!o9ed in
hours
84?8Q100 D 50M 86?8Q100 D 25M
merson efficienc3 bonus planmerson efficienc3 bonus planmerson efficienc3 bonus planmerson efficienc3 bonus plan
1. /m!irical scale of bons ratios
2. 66M efficienc$ D O/=H bons
3. 87.5M efficienc$ D agreed M bons
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Assue nora! 9age rate 7.50<<G efficienc O/=H
?"5G efficienc 7.50P10M D 8.25
1G efficienc 7.50P20M D 9
11G efficienc 7.50P21M D 9.075
G'N$$ tas4 : bonus planG'N$$ tas4 : bonus planG'N$$ tas4 : bonus planG'N$$ tas4 : bonus plan
Standard .roduction =e!o9 .roduction Abo0e .roduction
iece rodced 300 291 345
rodction M to standard 100M 97M 115M
Bages alclation
;ormal Bage ;ormal Bage ;ormal Bage
ons ons
%dditional ons
&age P bons Q M
"edau5 point plan"edau5 point plan"edau5 point plan"edau5 point plan
1. )ime sa"ed D 75M
2. =emaining time of 25M to foreman, ser"iceman, other indirect !ersonnel
3. ;ormal !erformance inde: D 60M not 100M on assm!tion that 60 nits of standard
time can be !rodced &ith normal effort in 60 mintes of actal time. )echnicall$, one
!oint D one minte.
4. or first 60 !oints, &or-er &ill get normal &ages. or additional !oints, sa$ 75 A 60 D 15
!oints &ill be distribted in 75>25 ratio.
PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%
.roduction .roducti0it
antit$ or "olme of ot!t !rodced. easre of efficienc$ &ith &hich ot!t has
been !rodced.
=elati"e measre of hors actall$ ta-en N the
hors that shold ha"e been ta-en to ma-e
the ot!t.
m!ro"ed !rodcti"it$ is the mean of redcing
total nit costs.
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+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R
1" a$ment in !iece&or- basis D "ariable cost)" Fabor cost is often mi:ed costs de to bons, o"ertime !remim, and commission.
*" a$ment in da$ rate &age D !a$ !er &ee- is fi:ed regardless of "olme.
,IFFRNC "$WN,IFFRNC "$WN,IFFRNC "$WN,IFFRNC "$WN ,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR
=asic %a of direct 9orker Direct cost
=asic %a of indirect 9orker ndirect cost nless cstomer as-s for order &hich
in"ol"e dedicated se of indirect &or-er time
=onus ndirect cost
7age of su%%ort staff ndirect costsId!e tie ndirect costs
ost of 9ork on ca%ita! eCui%ent %dded to cost of e*i!ment
8%!oers Bationa! insurance contribution ndirect labor costs
60ertie %reiu to direct or indirect
9orkers
ndirect costs. /:ce!tions are>
• H"ertime &or-ed at s!ecific re*est of
cstomer to get his order com!leted,
direct costs
• H"ertime is &or-ed reglarl$ b$
!rodction de!tt in normal corse of
o!eration, o"ertime !remim !aid to
direct &or-ers &ill be direct costs.
'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$
I+$8 TI;8
Bora! Id!e tie Should be charged to the cost of production
Abnora! Id!e tie Should be charged to Costing Profit and Loss account.
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COST CYCLECOST CYCLECOST CYCLECOST CYCLE8B84A$ H8A+ 6FFI8 FAT64K
.urchase of ;ateria!: aterial ontrol
Iocher?%ccont a$able
.urchase of ;ateria!:actor$ Fedger
Iocher?%ccont a$able
.urchase of ;ateria!: aterial ontrol
General Fedger
4eturn of ;ateria!: Iocher?%ccont a$able
aterial ontrol
4eturn of ;ateria!:Iocher?%ccont a$able
actor$ Fedger
4eturn of ;ateria!: General Fedger
aterial ontrol
;ateria! Issued: Bor-inrocess
actor$ H"erhead
aterial ontrol
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;ateria! Issued: Bor-inrocess
actor$ H"erhead
aterial ontrol
;ateria! 4eturned: aterial ontrol
Bor-inrocess
actor$ H"erhead
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;ateria! 4eturned: aterial ontrol
Bor-inrocess
actor$ H"erhead
Factor 60erhead: actor$ H"erhead
re!aid /:!enses
%llo&ance for @e!
Iarios redits
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
F6H .aent: Iarios redits
Iocher a$able
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
F6H +is%osa!: Iocher a$able
ash
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
F6H A%%!ied: Bor-inrocess
H %!!lied
F6H A%%!ied:actor$ Fedger
H %!!lied
F6H A%%!ied: Bor-inrocess
General Fedger
+is%osa! F6H A%%!ied: H %!!lied
H ontrol
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
.aro!!: a$roll
ncome ta: &ith held
ro"ident fnd
%ccred a$roll
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
.aro!! .aent: %ccred a$roll
Iocher a$able
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
.aro!! +is%osa!: Iocher a$able
ash
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
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.aro!! +istribution: Bor-inrocess
actor$ H"erheadelling H"erhead
@istribtion H"erhead
a$roll
.aro!! +istribution:actor$ Fedger
elling H"erhead@istribtion H"erhead
a$roll
actor$ ledger &ill be sed
for B N H
.aro!! +istribution: Bor-inrocess
actor$ H"erheadGeneral Fedger
General ledger &ill be sed for H
N @H
.aro!! ontribution: Bor-inrocess
actor$ H"erhead
elling H"erhead
@istribtion H"erhead
ncome ta: &ith held
ro"ident fndocial ecrit$ nd
.aro!! ontribution:actor$ Fedger
elling H"erhead
@istribtion H"erhead
ncome ta: &ith held
ro"ident fnd
ocial ecrit$ nd
.aro!! ontribution: Bor-inrocess
actor$ H"erhead
General Fedger
Finished oods: inished Goods
Bor-inrocess
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
Finished oods: inished Goods
Bor-inrocess
ost 6f oods So!d: ost Hf Goods old
inished Goods
ost 6f oods So!d:ost Hf Goods old
actor$ Fedger
ost 6f oods So!d: General Fedger
inished Goods
redit Sa!e: )rade @ebtor
ale
;H /;)=\ BFF / =/H=@/@
%) /%@ H/.
;H /;)=\ BFF / =/H=@/@ %)
%)H=\ H/.
Bote: Be &ill al&a$s se General Fedger for ead Hffice N actor$ Fedger for actor$ &hile
recording jornal entries.
IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/
n the integrated acconting s$stem, se!arate set of acconts nder cost acconting and
financial acconting s$stems are not maintained. )he acconts are integrated and onl$ a single
set of acconts are maintained. )his enables a firm to eliminate se!arate rofit and Foss
%cconts nder financial acconting and cost acconting s$stems and onl$ one rofit and Foss%ccont is !re!ared. )hs there is no *estion of t&o se!arate amonts of !rofits being
disclosed from the t&o different set of boo-s. )he need for reconciliation of !rofits sho&n b$
cost acconts and financial acconts is therefore is eliminated.
NONNONNONNON ---- IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/
'nder the nonintegrated s$stem, se!arate ledgers are maintained for financial transactions
&hile the cost acconts de!artment is res!onsible for maintaining cost acconts.
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• )he cost of sa!es account records the total cost of sales, &hich consists of !rodction
costs, administration costs and sales and distribtion costs.
osts incurred are recorded as debit entries in these acconts.
6STS 6F .46+UTI6B AB+ TH8 7I. A6UBT
Bature: )he B accont is sed to record the costs of !rodction A
direct materials, direct labor and !rodction o"erheads
absorbed.
+ebit redit
1 @irect materials issed
from stores to !rodction
B accont =a& materials accont
stores accont
2 @irect labor costs in
!rodction
B accont Bages and salaries
accont3 rodction o"erheads
absorbed into !rodction
costs
B accont rodction o"erheads
%ccont
F46; 4A7 ;AT84IA$S T6 6ST 6F SA$8S
Bature: aterials !rogress throgh the !rodction s$stem, from ra&
materials to &or- in !rogress, from &or- in !rogress to
finished goods, and from finished goods to cost of sales.
+ebit redit
1 @irect materials issed
from stores to !rodction&or- in !rogress
B accont =a& materials accont
stores accont
2 om!leted !rodction
transferred from B to
finished goods at !rodction
cost
inished goods
accont
B accont
3 inished goods sold to
cstomers
ost of sales
%ccont
inished goods accont
!rodction cost of sales
B6B3.46+UTI6B 6284H8A+S
Bature: ;on!rodction o"erheads are recorded initiall$ in an
administration o"erheads accont and a sales and distribtiono"erheads accont. )he$ are transferred from these acconts
to the cost of sales accont. )he cost of sales accont
therefore records the !rodction cost of finished goods sold,
administration o"erheads costs and sales and distribtion
o"erheads costs.
+ebit redit
1 %dministration o"erheads ost of sales
accont
%dministration
o"erheads accont
administration
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o"erheads for the !eriod
2 ales and distribtion
o"erheads
ost of sales
accont
ales and distribtion
o"erheads accont salesand distribtion
o"erheads for the !eriod
6.8BIB AB+ $6SIB IB28BT64K
1" )he ra& materials accont, &or-in!rogress accont incom!lete !rodction and
finished goods accont !ro"ide a record of the cost of o!ening and closing in"entor$ at
the beginning and end of each acconting !eriod.
)" )he "ale of the in"entor$ is the crrent balance on the in"entor$ accont. )his is
al&a$s either 0 or a debit balance.
*" o&e"er, at the end of an acconting !eriod, an accont is (closed offU for the !eriod,
and the balance on the accont is>1 carried for&ard as a closing balance for the !eriod that has jst ended, and
2 an o!ening balance at the beginning of the ne& !eriod.
/" )he closing in"entor$ at the end of a !eriod is entered on the credit side (abo"e the lineU
and the corres!onding doble entr$ is a debit entr$ (belo& the lineU as o!ening
in"entor$ at the beginning of the ne:t !eriod.
5" (b?fU means (broght for&ardU. \o might also see the letters (b?f&dU or (b?dU meaning
(broght do&nU. imilarl$, (c?fU means carried for&ard. \o might also see the letters
(c?f&dU or c?d for (carried do&nU. )he o!ening in"entor$ broght for&ard is called the
(balanceU on the accont at the beginning of the !eriod.
TH8 6STIB SKST8; IB6;8 STAT8;8BTBature: )here is an income statement in the cost ledger, for recording
the !rofit or loss in each acconting !eriod. )his is a !art of the
doble entr$ cost acconting s$stem. )he credit side of the
income statement records sales. )he debit side of the income
statement records the cost of sales. )here might also be other
items in this accont, sch as nder or o"erabsorbed
o"erheads in an absor!tion costing s$stem or "ariances in a
standard costing s$stem or abnormal loss or abnormal gain in
a !rocess costing s$stem.
)he balance on this income statement accont is>
1 % credit balance &hen sales are higher than the cost of
sales, and there is a !rofit.
2 % debit balance &hen sales are less than the cost of
sales, and there is a loss.
)he !rofit or loss for the !eriod is then transferred to a
retained !rofits accont, so that the balance on the income
statement becomes 0.
+ebit redit
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ales ales accont ncome statement accont
ost of sales ncome statement accont ost of sales accont
TH8 FIBABIA$ $8+84 6BT46$ A6UBT
Bature: )he cost ledger incldes acconts relating to costs. )here are
man$ other acconts that are not s!ecificall$ related to costs,
sch as the ban- accont, the accont for trade recei"ables,
the accont for trade !a$ables, an accont for accmlated
!rofits, and so on. n the cost ledger, a s!ecial accont called
the financial ledger control accont or the cost ledger control
accont ma$ be sed to record one of the doble entr$
transactions re*ired &hen the a!!ro!riate accont does not
e:ist in the cost ledger.
A6UBTIB F64 +I48T AB+ IB+I48T ;AT84IA$S AB+ $A=6U4 6STSBature: @irect materials costs and direct labor costs are direct costs
of !rodction and are charged to the &or-in!rogress
accont. ndirect materials costs and indirect labor costs are
o"erhead costs of !rodction and are charged to the
!rodction o"erhead accont, administration o"erhead
accont or selling and distribtion o"erheads accont, as
a!!ro!riate.
+ebit redit
@irect materials issed
from stores to !rodction
B accont =a& materials accont
in"entor$ accont@irect labor costs in
!rodction
B accont Bages and salaries
accont
Indirect ateria!s
ndirect materials issed
from stores to !rodction
cost centres
rodction o"erheads
accont
=a& materials accont
in"entor$ accont
ndirect materials issed
from stores to
administration cost centres
%dministration
o"erheads accont
=a& materials accont
in"entor$ accont
ndirect materials issedfrom stores to sales and
distribtion cost centres
ales and distribtiono"erheads accont
=a& materials accontin"entor$ accont
Indirect !abour
ndirect labor !rodction
ost
rodction o"erheads
accont
Bages and salaries
accont
%dministration costs of
Fabor
%dministration
o"erheads accont
Bages and salaries
accont
ales and distribtion
labor costs
ales and distribtion
o"erheads accont
Bages and salaries
%ccont
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A=S64=8+ .46+UTI6B 6284H8A+S
Bature: rodction o"erheads are absorbed into the cost of
!rodction. )he balance on the !rodction o"erhead accont
is the nderabsorbed o"erhead or o"erabsorbed o"erhead.
%t the end of each acconting !eriod, this balance is
transferred to an nder or o"erabsorbed o"erhead accont.
rodction o"erheads
%bsorbed
B accont
%bsorbed o"erheads
are added to the cost
of !rodction
rodction o"erheads
accont
6;.$8TIB TH8 6ST A6UBTIB IB6;8 STAT8;8BT
Bature: )he cost ledger incldes an income statement &here sales are
matched &ith the cost of sales. Hther adjstments, sch as an
adjstment for nder or o"erabsorbed o"erheads, are also
recorded in the income statement, and the balance on the
accont is the !rofit or loss for the !eriod.
TH8 FIBISH8+ 66+S A6UBT
Bature: )he finished goods accont records the !rodction cost of
finished goods com!leted in the !eriod, and the !rodction
cost of goods sold in the !eriod.
TH8 6ST 6F SA$8S A6UBT AB+ TH8 SA$8S A6UBT
Bature:)he cost of sales accont records the total cost of sales in the
!eriod A the !rodction cost of sales and administration and
sales and distribtion o"erheads.
TH8 6ST A6UBTIB IB6;8 STAT8;8BT
Bature: )he !rofit or loss is recorded in a cost acconting income
statement. )he income statement also incldes an$ other
adjstments to !rofit, sch as nder or o"er absorbed
o"erhead, abnormal loss or gain, or standard cost "ariances.
)he balance on the income statement is the !rofit or loss for
the !eriod. )he matching doble entr$ is in the financial ledger
control accont accmlated !rofits.
RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!
4easons for +ifference in .rofit
)he !rofit sho&n b$ financial acconts and cost acconts differ on accont of the follo&ing
reasons.
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W Items of 5inancial Nature not recorded in Cost Accounts& )he follo&ing items are not
recorded in cost acconts as the$ are of !rel$ financial natre and conse*entl$ the !rofits
differ as these items are recorded in the financial acconts.• nterest recei"ed on ban- de!osits.
• @i"idend, interest recei"ed on in"estments.
• =ent recei"ed
• Fosses on sale of assets
• ad debts &ritten off, reco"ered
• )ransfer fees recei"ed
• nterest on !ro!rietorUs ca!ital
• ines and !enalties !a$able
• om!ensation !a$able.
W Items C'ared to "rofit and 6oss Account !ut not 7ecorded in Cost Accounts& )he follo&ing
items are fond in the cost acconts bt not recorded in the financial acconts.
• or!orate ta:es
• %!!ro!riations ot of !rofits, sch as transfer of !rofits to reser"es
• ertain !a$ments li-e di"idend
• %dditional !ro"isions of de!reciation
• ertain amonts &ritten off sch as good&ill, !atents, !reliminar$
e:!enses, nder&riting commission etc.
W Items "eculiar in Cost Accounts& )he items described belo& are !ecliar in cost acconts&hile their treatment in financial acconts is different. ence there is a difference bet&een the
!rofits sho&n b$ both the s$stems
8ver'eads& n cost acconts, o"erheads are finall$ absorbed in the !rodcts b$ com!ting the
!redetermined rate of absor!tion. n sch cases, there ma$ be nder?o"er absor!tion of
o"erheads.
)his means that the o"erheads actall$ incrred &ill not tall$ &ith the o"erheads charged to the
!rodct. n financial acconts o"erheads are al&a$s ta-en at actal basis irres!ecti"e of
nder?o"er absor!tion of the same. n sch cases the !rofits sho&n b$ both the s$stems &ill
differ. o&e"er, if the nder?o"er absorbed o"erheads are charged to the costing !rofit and
loss accont, the !rofits sho&n b$ financial acconts and cost acconts &ill not differ.
3aluation of Closin Stoc. and #or.9in9"roress& )he !rinci!le of "alation of closing stoc-
in financial statements is cost !rice or mar-et !rice &hiche"er is less. o&e"er, in cost
acconts, "alation of closing stoc- ma$ be made on the basis of marginal costing &here onl$
the "ariable costs are ta-en into consideration &hile "aling the closing stoc-. )hs the closing
stoc- "alation ma$ differ. Bor-inrogress in cost acconts is often "aled on the basis of
!rime cost and sometimes "ariable manfactring o"erheads are added in the same. Hn the
other hand, in financial acconting, &or-in!rogress ma$ be "aled after ta-ing into
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consideration administrati"e e:!enses also. @e to this difference in "alation, !rofits sho&n
b$ cost acconts and financial acconts differ.
A!normal 6osses and :ains& n cost acconts, abnormal losses and gains are com!ted and
transferred to the osting rofit and Foss %?c. ;o sch com!tation is made in the financial
acconts. )his reslts in difference bet&een the !rofits sho&n b$ cost acconts and financial
acconts.
PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$
.rofit as %er cost accounts
Add:
1. ncome and !rofits ta-en in financial acconts and not in cost acconts. JJ2. ;otional e:!enses ta-en in cost acconts and not in financial acconts. JJ
3. H"erabsor!tion o"erheads in cost acconts. JJ
4. /:cess "alation of o!ening in"entor$ in cost acconts as com!ared to "alation in
inancial acconts.
JJ
5. Fo&er "alation of closing in"entor$ in cost acconts as com!ared to "alation in
financial acconts.
JJ
6. /:cess de!reciation acconted for in cost acconts. JJ
$ess:
1. /:!enses and losses acconted for in financial acconts and not in cost acconts. JJ
2. %!!ro!riations in financial acconts onl$. JJ3. ;otional income ta-en in cost acconts and not in financial acconts. JJ
4. 'nderabsor!tion of o"erheads in cost acconts. JJ
5. Fo&er "alation of o!ening in"entor$ in cost acconts as com!ared to "alation in
financial acconts.
JJ
6. igher "alation of closing in"entor$ in cost acconts as com!ared to "alation in
financial acconts.
JJ
7. Fo&er de!reciation acconted for in cost acconts. JJ
.rofit or !oss as %er Financia! A>c
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JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING
1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$
'6= 64+84 6ST SH88T
Kob
stomer ;ame @ate tarted > JJJ
@escri!tion @ate Hrdered > JJJ
antit$ @ate Banted > JJJ
@ate om!leted > JJJ
+I48T ;AT84IA$
@ate @e!artment @escri!tion 'nit ost )otal
JJ JJ JJ JJ JJ
JJ JJ JJ JJ JJ
)H)%F JJJ
+I48T $A=64
@ate @e!artment @escri!tion or =ate )otal
JJ JJ JJ JJ JJ
JJ JJ JJ JJ JJ
)H)%F JJJ
A..$I8+ FAT64K 6284H8A+@ate @e!artment asis or =ate )otal
JJ JJ JJ JJ JJ
JJ JJ JJ JJ JJ
)H)%F JJJ
'%=\
@=/) %)/=%F > JJJ elling rice > JJJ
@=/) F%H= > JJJ Fess A actor$ ost JJJ
%F/@ %)H=\ HI/=/%@ > JJJ %dmin /:! JJJ > JJJ
)H)%F > JJJ rofit JJJ
+ate Started B
+ate Finished G
+ate So!d HG
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PAST PAPERSPAST PAPERSPAST PAPERSPAST PAPERS
M O 1 Zs%ring )11[
A
ales 180000Q12Q110 273600
Fess aterial A % 2025000Q45 91125
aterial A 675000Q30 20250
Fabor 18000?200 D 90Q180000Q12Q20?60 64800
I?H 180000Q12?80M Q 15 40500
?H 10000
ost of Goods old 226675
ross .rofit /<)5
7orkings:
aterial> 180000Q12?80M D 2700000 aterial A %> 2025000 P aterial A> 675000
=
ales 180000Q12Q110 273600
Fess
aterial A % 1800000Q48 86400
aterial A 600000Q30 18000
Fabor ee Bor-ing 54108
I?H 180000Q12?90M Q 15 A 20M 28800
@e!reciation 7.5 illion?5 1500
?H 10000 15M 8500
ost of Goods old 197308
ross .rofit /))
7orkings:
aterial> 180000Q12?90M D 2400000 aterial A %> 1800000 P aterial A> 600000
Fabor> 18000?200 D 90Q180000Q12Q14?60 D 45360
720000504000 D 216000Q90Q45M D 8748
5/1
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M O 5 Zs%ring )11[
.A4T 3 A
Sa!es Muantit J i:ed ost P )arget rofit D 61000P65660 ?208 D 608.942 nits
? er 'nit
)arget !rofit> rofit of > 1 D 62540
hortfall of > 2 D 3120 6254059420
<5<<
? er 'nit =e"ise ale rice 86015 D 845
I D 637
? D )
Bote J 464400?540000 D 860
F6H Se!!ing
580000 84660 26500
540000 80580 25500
/ / 1
2 ( .er Unit# 1) )5F )55 1)
I er 'nit> aterial 183.6?540 D 340
Fabor 91.8?540 D 170
H D 102
elling D 25
<*?
)otal H D 25500
elling D 12000
%dmin D 23500
<1
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.A4T 3 =
;iniu Sa!es .rice J
)otal Iariable ost 650 Q 637 D 414050
)otal i:ed ost 61000 P 2500 D 63500
)arget rofit D 65600
)otal ale Iale =e*ired D 543210
Sa!e .rice 9i!! be D 543210?650000 D 835.70
M O / Zs%ring )11[;ateria!: 150000 nits re*ire 25000 -g Q 3 of at> D 75000 -g.
ar-et @emand D 75000 -g of at>
a!acit$> 100000 -g.
rchase> 50000 7500025000 from otside.
;ormal Foss> 4M
rodction> 250001000 25000Q4M D 24000 -gom!an$ &ill b$ 51000 -g of at> b$ otside. ;ormal Foss is also
there. o, com!an$ &ill b$ 51000?0.96 D 53125 -g of at> b$ otside.
I 25000Q200 D 5
et ! ost D
rchase cost D 53125 Q 225 D 115*1)5
Tota! J 5115*1)5 J 1?**1)5
2: 250Q230625 D 5?<5<)5
$abor: Fabor rate !er hr D 9000?200 D 45
Fabor re*ired for this job D 150000?100Q150 D 225000 hrs
;ormal Foss is there. o more labor hr &ill be needed.
D : 0.04 D 225000 Z : D 225000?0.04 D 234375
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234375225000 D 9375 is ;ormal loss for total !rodction bt e ins!ect
60M of !rocess, the ;ormal Foss &ill be D 9375 Q 60M D 5625 hr.
)otal hr D 225000 P 5625 D 230625
dle hr D 20000
Fabor hr re*ired D 230625 A 20000 D 210625
t &ill be> 210625 Q 45 D 9478125
20000Q45Q60M D 540000
111)5
FI8+ F6H: Hnl$ incremental H &ill be charged. om!an$ is rnning at 80M
ca!acit$. !ecific order re*ires 30M additional ca!acit$. o 80M P
30M D 110M ca!acit$ is needed.
/nhance ca!acit$ D 110M 100M D 10M
22000000 for 100M
22000000?100M D 220000 for 10M ca!acit$
220000Q10 for 10M ca!acit$ Q 1.5 D **
Tota! cost 9i!! be:
aterial D 17033125
Fabor D 10018125
I?H D 5765625
?H D 3300000
*<11<?5
rofit is 20M of ale !rice
D J A 0.2: D 36116875 Q0.8: D 36116875 QJ D 36116875?0.8 D 45146093.75
Sa!e .rice J 45146093.75 ? 150000 D *"?
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M O ZS%ring )1[
Sa!e: ale 99 D 6500
ale 2000 D 6000 7200?120M
@ecrease in *t$ D 500
=atio of fall in *t$ D 500?6500 D 1?13
;ateria!: @ecrease in *t$ is 1?13th
# I shold decrease to 12?13th
.
ost of 2000 D 3600 3900Q12?13
%ctal ost 2000 D 3400
=edction in D 200
Sa!e .rice: ale 7200?120M D 6000
%ctal ost D 7200
hange D 1200
Sa!e 2o!ue: 2600Q1?13 D 200
Hr
all in sale 6500Q1?3 D 500
all in I 3900Q1?13 D 300
all in D 200
Fied ost: ncrease in D 200
8ffect:
all in D 200
ncrease in D 1200
@ecrease in D 1000
ncrease in D 200
;et rofit D 1)
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I!!ustration of abo0e:
Kear: 1
%ctal t$ D 10000 nit
onsm!tion of @ D 3 -g
@ consme D 30000 -g 10000Q3
%= D 4
% D =s> 120000 10000Q3Q4
Kear: )
%ctal t$ D 10M increase 10000P10M D 11000
onsm!tion of @ !er nit D 5M increase 3P5M D 3.15
%= D 15M increase 4P15M D 4.6
% D =s> 159930 11000Q3.15Q4.6
1)315* J ** (A#
heck:rice > 20790 % 159390 Q 15?115 H= 34650 4.64
IHF > 12000 % 120000 Q 10M
t$ > 6600 % alancing figre H= 4 3465033000 D6600%
rice P Iol P t$ D 20790 % P 12000 % P 6600 % D 39390 %
/fficienc$ Iar > = % A % D 43465033000 D 6600%
././././0000 ase $ear onsm!tion tandard !er -g
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M O < ZAutun )/[
7ithout +iscount 7ith +iscountaterial 42Q37 1554
42Q36.9 1549.8
@irect Fabor 850 850
@irect aterial 300 300
Tota! 2ariab!e ost )?/ )<"
ale rice 2862 2862
>; 15 1<)")
%nnal 6007320 6307320
=8 Unit (F > ; %er unit# *)1 *<
M O < ZS%ring )5[
;ain .oint J Bo 2 is gi0en, then a!! Sa!e .rice 9i!! be assued to be >;"
4eC O 1
4550?4000 4550?5000
=8. 1138 910
4eC O )4e0ise F 3550 3550
>; 3000 3750
=8. 1138 947
4eC O *
Bote: /liminate the difference &ill be indifferent.
Sa0ing in F 1000?1000 4000Q25M 1000?1250 5000Q25M
Bo of Tickets (for indifferent%oint#
1000 800
4eC O /
1. @emand ? good &ill in mar-et
2. %"ailabilit$ of alternati"es
3. ;atre of concert
4. )aste of adience
5. %rea
6. /:!ectation of sale of tic-et
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M O ? ZAutun )5[
ale rice D 1000 !er nit
Hther I D 600 !er nit
ommission N discont D 5M of ales
;ote for stdents>
Hther "ariable cost !er nit &ill remain constant in case for fall in sale !rice. Bhere
commission N discont !er nit &ill also fall if there is fall in sale !rice.
M O ? ZS%ring )<[
om!tation of sale !rice>
@irect aterial D 193600
@irect Fabor D 90000
H"er ead D 80000
%dmin D 30000
)otal ost 82M of sales D 393600
%dd A ommission 8M of sales > 393600Q8M D 38400
;et rofit 10M of sales
M O ) ZBo0 1<[
)here is nothing in the *estion. tdent &ill get confsed de to ar-s> 14 gi"en in the
*estionN &rote lot of irrele"ant material N lost !recios mar-s N time.
M O ZAutun )[
;et !rofit > 412500
D 127500
ontribtion D 540000
? !er nit 156 D 9
ales 540000?9 D 60000
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M O 5 ZS%ring )/[
t is assme that minimm order *t$ is !rchase order. Fimiting factor is a"ailabilit$ of fnds.
A0ai!ab!e funds:
Bor-ing a!ital D 800000
=nning inance D 50000
Fess A %dmin D 152700
ar-eting D 72842
inance ost 500000Q24MQ6?12 D 60000
)otal D )55/)
)otal Grand D 1014458
Sa!e 318 421 280
2 248 345 204
>; 70 76 76
>; G ( >; >2L1# 28M 22M 37M
4anking ) * 1
M O ? ZS%ring )?[ +ress Scraf Handbag
60M com!leted 11700 11700 11700
10M dress N scraf 1950 1950
20M dress N handbag 3900 3900
10M dress onl$ 1950
Tota! Units 15000 Q 30M D 19500 15 1*<5 15<
/:isting 'nits 15000
Increenta! Units /5 1*<5 15<
ncremental ales Iale
@ress 4500Q2000 9000000
craf 13650Q400 5460000
andbag 15600Q500 7800000
)otal ales 22260000
ncremental osts
aterial 4500Q3.5Q100 1575000
ost of designer 150000
oo-s 15600Q8 124800
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=edction in =esale "ale>
/:isting 15000Q20 300000
=e"ised 19500Q5 97500 202500tting osts>
@ress 4500Q35 157500
craf 13650Q75 204750
andbag 15600Q20 312000 674250
Hther>
@ress 4500Q2000 Q 40M 3600000
craf 13650Q400Q55M 3003000
andbag 15600Q500Q60M 4680000 11283000
)otal osts 14009550
ncremental rofit 8250450 M O ? ZAutun )*[
4eC O 1
Sei Auto
$ ost 2000 2000
Iariable anfactring ost 1500 1200
a"ings 500 200
5000000 10000000
Muantit to -ustif (F >Sa0ings# 1 1)5
4eC O )
Sei Auto
%nnal =e*irement 15000 15000
a"ings 500 800
)otal a"ings 7500000 12000000
5000000 10000000
Bet Sa0ing )5 )
4eC O *
@ifference in I sa"ings D 300 !er nit
@ifference in D 5000000
antit$ to jstif$ allocation D 16667 5000000?300
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M O * ZAutun )?[
inished Goods D 20000?97M D 20619
=a& aterial D 20619?98M D 21040
@irect aterial D 21040 Q 42.3 D 889992
%ssme D 1 -g e*als 1 nit.
M O * ZS%ring 1[
@t$ dra&bac- is an income in case of e:!ort. t is !aid on im!ort time N &ill be refnded later.
M O ZS%ring )5[
? er nit D 4500000?300000 P 30 D 45
8ffect on %rofit:
a titching elimination
Foss of ? 300000Q10M D 30000Q45 D 1350000
=edction of I 30000010M D 270000Q6 D 162000
;et enefit D )? b 'se of !lastic e$e
ost of glass e$e 30000010M D 270000Q2?95MQ4?100 D 227368
ost of !lastic e$e 30000010M D 270000Q2?90MQ3?100 D 180000
;et enefit D /?*<
c illing material
ost of s$nthetic 30000010M D 270000?2000Q1600 D 216000
;et loss of sing scra! 30000010M D 270000 Q1 D 270000
;et enefit D (5/#
B8T 8FF8T D )<**<
M O / ZAutun )1[
Bote: This Cuestion is a co% of sae Cuestion fro 1 Ms & As b hart Fou!k
$nch
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Unit %roduce:
ale 21000losing toc- 21000Q10M 2100
23100
H!ening toc- 19000Q5M 950
Unit ;ade ))15
Tota! & .er Unit Fied F6H J
%nnal i:ed H on 300611 6000000Q1.08 D 6480
)rain ost D 300
)otal D 6780
er 'nit 2011 D 6780?22150 D 306.09
er 'nit 2010 D 6000?18000 D 333.33
2 %er unit on *3<311 J
aterial 5 -g Q 95M D 4.75Q60Q4M 62.4
aterial ns!ect 4.75Q2 9.50
Fabor 4Q85MD3.4Q75Q1.1 280.50
Fabor ncenti"e 4Q15M D0.6Q82.575P10MQ30M 14.85I?H 15Q1.05Q3 47.25
Iariable elling 10 m Q 30M ?19000 157.89
)otal <"*
2 %er unit on *3<31 for 6%ening Stock J
aterial 5Q60 300
Fabor 4Q75 300
I?H 15Q3 45
)otal </5
.rofit: D 7610865 % D 7284740
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M O / ZS%ring )1)[
(a# Ho9 an units of the sa!! %ack of %roduct3= shou!d be so!d to achie0e break3e0enN4s"
i:ed ost 7600000Q12 91200000
)arget rofit
=e*ired ontribtion 91200000
Fess A % Farge D 250000Q120 [731Y 30000000
mall D 150000Q45 [73)Y 6750000
Farge D 225000Q150 [73*Y 33750000 70500000
20700000
X
mall ? er 'nit [73/Y 90
Buber of Unit So!d (Sa!! .ack: =# )*
731:
A J !arge .ack
? D ale A I
25M D 100M 75M
I D 120?25Q75 D 360
ale D 120?25Q100 D 480
? D 480360D120
73):
A D Sa!! .ack
I D 360Q67.5M D 243
%s the ratio of the selling !rice of both the !ac-s of !rodct% are same as the
ratio of their *antities, ales &ill be as follo&s>ale D 480Q3?5 D 288
? D 288243D45
73*:
= D !arge .ack
? D ale A I
%s the ratio of contribtion margin to "ariable cost for the large !ac- of !rodct
is 2>3, ? &ill be as follo&s>
ere, ? D 2
I D 3
? D ale A I
2 D 5 3ale D 150?2Q5 D 375
I D 150?2Q3 D 225
? D 325 A 225 D 150
73/:
= D Sa!! .ack
ale D 375Q64M D 240
%s the ratio of the I is not gi"en, &e &ill assme that I of both the !ac-s of
!rodct% are same as the ratio of their *antities, I &ill be as follo&s>
I D 225Q2?3 D 150
? D 240150 D 90
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(b# Ho9 an units of the sa!! %ack of %roduct3= shou!d be so!d to earn a net incoe of
4s" 1,5*,N A%%!icab!e ta rate for the co%an is )5G"
4s"
i:ed ost 7600000Q12 91200000
)arget rofit 10530000?1 A 0.25 14040000
=e*ired ontribtion 105240000
Fess A % Farge D 250000Q120 [731Y 30000000
mall D 150000Q45 [73)Y 6750000
Farge D 225000Q150 [73*Y 33750000 70500000
34740000
X
mall ? er 'nit [73/Y 90
Buber of Unit So!d (Sa!! .ack: =# *<
(c# =ased on the resu!ts of (b# abo0e %re%ares a %roduct 9ise and conso!idated incoe
stateent for the %eriod ending *1 +eceber )1)"
.46+UT 7IS8 IB6;8 STAT8;8BT
.roducts Sa!e .er
Unit
2 .er Unit Sa!e 2o!ue Sa!es 2 >;
A $arge .ack 480 360 250000 120000000 90000000 30000000
A Sa!! .ack 288 243 150000 43200000 36450000 6750000
= !arge .ack 375 225 225000 84375000 50625000 33750000= Sa!! .ack 240 150 386000 92640000 57900000 34740000
6BS6$I+AT8+ IB6;8 STAT8;8BT
4s"
ales 340215000
Fess I 234975000
? 105240000
Fess 91200000
dgeted rofit efore )a: 14040000
Fess )a: 3510000
=udgeted .rofit After Ta 15*
M O ZAutun )1)[
1" anager annal salar$ amonting =s> 2500? is irrele"ant as it is !ast cost.
)" i:ed H"erhead ] =s> 25? !er @F is irrele"ant for decision ma-ing.
*" otor adjstment &ill be as follo&s>
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Be -no& that total cost is calclated as follo&s>
@irect aterial P @irect Fabor P @irect /:!enses P actor$ H"erhead
%!!l$ing the abo"e formla on data gi"en in the *estion>
.eta! $eaf
@irect aterial 20000 250Q80 16000 125Q128
@irect Fabor 18000 720Q25 24000 960Q25
actor$ H"erhead 18000 J 24000 J
%dmin H"erhead 20000 \ 16000 \
Tota! ost 5) (a!cu!ated as be!o9# 5< (a!cu!ated as be!o9#
Be -no& the formla of rofit i.e. rofit D ale A ost. %!!l$ this formla on data
gi"en in the *estion>
)5G 6B 6STJ
rofit D ale A ost
25M D 125M 100M
D 65000?125Q100 D 52000.
*G 6B SA$8S .4I8Jrofit D ale A ost
30M D 100M 70M
D 80000?100Q70 D 56000.
38000 P 18000 J P 20000 \ D 52000 /*> 1
40000 P 24000 J P 24000 \ D 56000 /*> 2
lti!l$ e*ation 2 &ith 0.75, &e &ill get>
30000 P 18000 J P 12000 \ D 42000
o, &e get this e*ation>
38000 P 18000 J P 20000 \ D 52000
30000 P 18000 J P 12000 \ D 42000
8000 P 0 J P 8000 \ D 10000
8000 \ D 100008000
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8000 \ D 2000
\ D 2000?8000 D 25M
%!!l$ing \> 25M on e*ation 01, &e &ill get>
38000 P 18000 J P 20000 0.25 D 52000
38000 P 18000 J P 5000 D 52000
43000 P 18000 J D 52000
18000 J D 52000 A 43000
18000 J D 9000
J D 9000?18000 D 50M
heck: f &e a!!l$ J> 50M N \> 25M on the "ariables gi"en in the table, &e &ill
get the same ans&ers.
.eta! $eaf
@irect aterial 20000 250Q80 16000 125Q128
@irect Fabor 18000 720Q25 24000 960Q25
actor$ H"erhead 9000 18000Q50M 12000 24000Q50M
%dmin H"erhead 5000 20000Q50M 4000 16000Q50M
Tota! ost 5) 5<
M O 5 ZAutun )1)[
4eCuired ;ateria! A ;ateria! =
%l!ha 900 P 200 D 1100 2200 1100Q2 2200 1100Q2
eta 3000 P 300 D 3300 0 3300Q0 9900 3300Q3
Gamma 5000 P 400 D 5400 16200 5400Q3 21600 5400Q4
18400 33700
A0ai!ab!e 22000 340008cess (*<# (*#
Fimiting factor &ill either be gi"en in the *estion or calclated as follo&s>
ost ? er or =ate
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A!%ha =eta aa Eeta
ale rice 66 88 106 40
@irect aterial % 8 0 12 @irect aterial 12 18 24 15 2.5Q6
@irect Fabor 25 30 25 10 A 10Q1
@irect aterial 3.1 3.2 2.7 1 A 0.4P0.6
ontribution 1?" *<" /)"* 1"/
X X X X
$iiting Factor ) * / )"5
.SH "5 1)")< 1"5? 5"<
4anking * 1 ) /
Iariable H"erhead for Oeta &ill be calclated as follo&s>
A!%ha =eta aa
;achine Hour ()# 1.6?8 D 0.2 1.4?7 D 0.2 1.2?6 D 0.2
$abor Hour (1# 1.5?2.5 D 0.6 1.8?3 D 0.6 1.5 ?2.5 D 0.6
Tota! .er Unit ost:
;achine Hour 2Q0.2 D0.4 2Q0.2 D0.4 2Q0.2 D0.4
$abor Hour 1Q0.6 D 0.6 1Q0.6 D 0.6 1Q0.6 D 0.6
Tota! 0.10 0.10 0.10
6%tia! ;i:
%"ailable D 34000
Fess A eta 3300Q3 D 9900
24100
Fess A Gamma 5400Q4 D 21600
2500
Fess A %l!ha 1100Q2 D 2200
300
Fess A Oeta 120Q2.5 D 300
BI$
Oeta &ill ha"e to ma-e 120 nits N b$ 480 600120 rest nits from otside.
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M O ? ZAutun )1)[
5 ;onths ? ;onthsa%acit ?5
300000Q5?12Q70M
1<1
300000Q7?12Q92M
ale rice 87500Q34 2975000 N
@irect aterial 87500Q12 N 161000Q12 1050000 1932000
@irect Fabor igher of =s> 8? H= =s> 150000
!er month
750000 1288000
Iariable H"erhead 87500Q6 N 161000Q6 262500 472500
emi Iariable 262500 472500
i:ed H"erhead 750000Q5?12 N
750000Q7?12
312500 437500
.rofit ?5
ost for ? onths 5<
emi"ariable cost &ill be calclated as follo&s>
At 55G a%acit 37500 450000?12
At ?G a%acit 52500 4500000P180000
D 630000?12
)<)5 52500Q5
At )G a%acit 67500 630000P180000
D 810000?12
/?)5 67500Q7
Be -no& that re*ired sale !rice is calclated as> =e*ired contribtion?'nit rodced
)otal !rofit for the $ear D 5 onths rofit P 7 months rofit
936000 D 75000 P 7 months rofit
7 months rofit D 93600075000 D 861000
tting the data in the formla>
4eCuired ontribution J Fied ost Target .rofit
Unit .roduced
D 861000 P 5096000
161000
D =s> 37 er 'nit
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IMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PAST
PAPERSPAPERSPAPERSPAPERS
ATT8;.T J ZAUTU;B )1)[
M O 1(b#:
arginal re"enes and marginal costs can also be calclated in this fashion at different le"els of
demand.
Unit ;argina! 4e0enue ;argina! ost .rofit
1000 260001100 2 5553 1 2928 27500
1) 1 (5*35)# 1 ()3)?# *
1300 3 5249 1 2726 29900
a:imm !rofit &ill be at 1200 nits ] =s> 30000?.
M O ):
Fabor cost !er !iece at 10M inter"als bet&een 60M and 130M efficienc$, assming that at
100M efficienc$ 80 !ieces are !rodced !er da$ is calclated as follo&s>
8fficienc Inter0a!s 6ut%ut .iece 4ate Tota! 7ages $abor ost .er .iece
60M 48 3 168 3.5 168?48
70M 56 3 168 3 168?56
80M 64 3 192 3 192?64
90M 72 3.6 3Q120M 259 3.6 259?72
100M 80 3.6 3Q120M 288 3.6 288?80
110M 88 3.9 3Q130M 343 3.90 343?88
120M 96 3.9 3Q130M 374 3.90 374?96
130M 104 3.9 3Q130M 405 3.90 405?104
Ht!t &ill be calclated as follo&s>
100 80
60 C
60M D 60?100Q80 D 48.
70M D 70?100Q80 D 56.
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80M D 80?100Q80 D 64.
90M D 90?100Q80 D 72.
100M D 100?100Q80 D 80.
110M D 110?100Q80 D 88.
120M D 120?100Q80 D 96.
130M D 130?100Q80 D 104.
M O <:
)ested nitsU means final !rodct read$ for sold. )here shold be de!artment for testingN the cost &old be associated to testing the nits. Be can refer to this as 'nit
)ransferred.
ATT8;.T J ZAUTU;B )11[
M O *:
1. rodction cost bdget D @ P @F PI?H P ?H
2. @irect Fabor &ill be calclated as follo&s>
75000?4 D 18750 P 10M D 20625?0.96 Q 3 D 64453.
M O /:
/= &ill be calclated as follo&s D B M Q om!letion M
50M Q 40M 20M
20M Q 30M 6M
30M Q 24.5M 7.35M
**"*5G
M O <:
1. Bhen "ariable cost &ill not be gi"en, then all "ariable cost is cost of good sold.
2. %"erage stoc- le"el D in P a: ? 2
ATT8;.T J ZAUTU;B )1[
M O 1:
1. @irect labor hr &ill be sed to allocate H.
2. ost !er nit D H cost ? nit !rodced
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M O *: )otal in!t A net in!t A loss Q 1.81.60.09 D 0.11
M O 5:
1. gnore cost of monthl$ !a$roll
2. gnore fi:ed H.
3. @irect labor cost is not !ossible to calclate here.
ATT8;.T J ZS.4IB )1[
M O 1:
losing stoc- D
i.
Beighted a"g A H!ening stoc- P !rchases
ii. H D rchases
ormla D ost of !rchase Q closing stoc-
rchases
M O ): %"erage n"entor$ D /H ?2 P afet$ toc-
6500?2P2000 D 5250
arr$ing ost D %"erage in"entor$ Q 17700 D 92925000 Q 1M D 9292500
Hrdering cost D 4224000Q10M D 422400
M O *:
;ateria! 6 is introduced at the start of the %rocess in de%artent A and subseCuent!
transferred to de%artent =" Bora! !oss in de%artent A is 5G of the units transferred"
)otal )ransfer P B P ;ormal Foss
664500 )ransfer P 24000 P ;ormal Foss
664500 A 24000 )ransfer P ;ormal Foss
640500 )ransfer P ;ormal Foss
105M 100 M P 5M
)ransfer to ne:t de!tt 640500 Q 100?105 D 610000
;ormal Foss of de!tt A % 640500 Q 5?105 D 30500
1G of the units %rocessed are e0a%orated before the ins%ection stage"
)his means this is ;ormal Foss N is calclated as follo&s>
'nit recei"ed b$ last de!tt Q 10M D 610000 Q 10M D 61000
+uring the ear, actua! e0a%oration in de%artent = 9as 1G higher than the estiated
nora! !osses because of high !e0e! of Su!%her contents in natura! gas used for %rocessing"
%ctal Foss D 110
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;ormal Foss D 100
Abnora! $oss D 10
%bnormal Foss %mont D 61000Q10?100 D 6100
M O /:
1. tandard *t$ P losing G A H!ening G D rchases
2. rchases are calclated as follo&s>
tandard t$ nit made Q !er hr JJJ
%dd A %d"erse aterial 'sage Iariance Iariance ?30 JJJ
Fess A a"orable aterial 'sage Iariance Iariance ?30 JJJ
%dd A losing G tandard t$ Q da$s gi"en ?365 JJJ
Fess A H!ening G tandard t$ Q da$s gi"en ?365 JJJ
ATT8;.T J ZAUTU;B )[
M O ):
1. %l&a$s record actal H in H distribtion sheet.
2. %ctal H &ill be fond at H distribtion sheet.
M O *:1. )otal contribtion M D )otal contribtion ? total sales Q 100
2. / D ? )otal contribtion M
M O /:
1. rchase ost D @emand Q nit !rice
2. )rans!ort ost D antit$ ? a!acit$ Q ;o of order D JJJ Q one tri! cost gi"en
3. ired ost D ighest /H Q third !art$ rate add in second nit
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EXAM RUBRICEXAM RUBRICEXAM RUBRICEXAM RUBRIC
DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING
8A; 4U=4I: rchase ne& e*i!ment &hich &old cost =s. 240 million and ha"e a sefl
life of si: $ears &ith no sal"age "ale. )he com!an$ ses straightline method of de!reciation.
A6UBTIB T48AT;8BT: % notion that de!reciation on ne& machine being a fi:ed cost &ill
be ignored is !artiall$ correct. t at the same time it is rele"ant cost as it cold, be a"oided if
the other e*i!ment &ere !rchased from e:ternal s!!lier.
8A; 4U=4I: i:ed o"erhead> 1# @e!reciation D 60 )# General o"erheads D 30
A6UBTIB T48AT;8BT: gnore fi:ed o"erhead of all t$!es nless a direction is gi"en in the
*estion. %nother o!tion &as to inclde these bt in that case one shold gi"e a note
e:!laining their assm!tion.
8A; 4U=4I: -illed labor can &or- on other contracts &hich are !resentl$ o!erated b$
semis-illed labor &ho ha"e been hired on tem!orar$ basis at a cost of =s. 325,000 !er month.
)he com!an$ &ill need to gi"e them a notice of 30 da$s before terminating their ser"ices.
A6UBTIB T48AT;8BT: -illed labor re*ired for this contract cold ha"e been sed to
re!lace the semis-illed &or-ers &ho &ere &or-ing on other contracts and had been hired on
tem!orar$ basis. )he amont !a$able to sch semis-illed &or-ers &as =s. 3.9 million
325,000:12. onse*entl$, man$ stdents too- =s. 3.9 million as the o!!ortnit$ cost. n
doing so, the$ ignored the information that e"en if the semis-illed labor &ere laid off, 30 da$s
salar$ &old ha"e to be !aid to them and conse*entl$ the com!an$ &ill onl$ be sa"ing =s.
3,575,000. Hn the other hand, man$ stdents erroneosl$ too- the o!!ortnit$ cost as =s.
4,225,000 i.e. e*al to 13 months salaries of the ns-illed labor.
8A; 4U=4I:
1. @ rate> 42.3
2. 'nit> 20000
3. =eject rate> 2M
A6UBTIB T48AT;8BT:
1. @ cost &ill be calclated as follo&s D 20000Q42.3Q100?98
2. G rejection rate &ill be calclated as follo&s D ost ?100M Q M
8A; 4U=4I: rchase cost !ls additional charges
A6UBTIB T48AT;8BT: ost Q 100?100PM
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8A; 4U=4I: Bhich com!onent to be !rchased from s!!lier
A6UBTIB T48AT;8BT: Fo&est cost &ill be ran-ed higher than highest cost.
8A; 4U=4I:
SA$8S K E
=efined 6 5.50 7
'nrefined 2.50 2.75 4
A6UBTIB T48AT;8BT: Bhen t&o re"ene figres are gi"en in the *estion, &e &ill
incremental re"ene.
SA$8S K E
=efined 6 5.50 7
'nrefined 2.50 2.75 4Increenta! 4e0enue *"5 )"?5 *
8A; 4U=4I:
.entagon Heagon 6ctagon
ales !rice !er nit =s. 2300 1550 2000
aterial cost !er g. =s. 250 250 250
Fabor time !er nit intes 20 30 45
achine time !er nit ors 4 2.5 3
;et &eight !er nit of finished !rodct g. 6 4 5
\ield M 90 95 92/stimated demand 'nits 10000 20000 9000
/ach &or-er is !aid monthl$ &ages of =s. 15,000 and &or-s a total of 200 hors !er month. FUs total
o"erheads are estimated at 20M of the material cost. i:ed o"erheads are estimated at =s. 5 million !er
month and are allocated to each !rodct on the basis of machine hors. 100,000 machine hors are
estimated to be a"ailable in ebrar$ 2012.
A6UBTIB T48AT;8BT:
aterial P Fabor P Iariable H &ill be calclated as follo&s>
.entagon Heagon 6ctagon
aterial ost aterial cost !er -g Q ;et
Beight ? \ield
250Q6?0.90 D
1666.67
250Q4?0.95 D
1052.63
250Q5?0.92 D
1358.70
Fabor ost 15000?200 D 75
Q 20?60 D 25
15000?200 D 75
Q30?60 D 37.5
15000?200 D
75Q45?60 D
56.25
Iariable H see bo: belo& for calclation 133.33 85.33 121.74
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2ariab!e F6H ca!cu!ation:
)otal H"erhead D i:ed H P Iariable H20M of aterial D i:ed H P Iariable H
H= /;)%GH;> 1666.67Q20M Z 333.33 D333.33 A 200 5000000?100000Q4 D 133.33
H= /J%GH;> 1052.63Q20M Z 210.53 D210.53 A 125 5000000?100000Q2.5 D 85.53
H= H)%GH;> 1666.67Q20M Z 271.74 D271.74 A 150 5000000?100000Q3 D 121.74
BREAK EVEN POINTBREAK EVEN POINTBREAK EVEN POINTBREAK EVEN POINT
B6T8:
1. Bhene"er sales increases. %ll "ariable cost &ill increase nless s!ecified.
2. ;o Iariable cost, all sales !rice &ill be contribtion margin.
8A; 4U=4I: om!te the brea-e"en !oint in nits if the com!an$ offers a discont of 10M
on !rchase of 20 bottles or more, assming that 20M of the sales &ill be to b$ers &ho &ill
a"ail the discont.
A6UBTIB T48AT;8BT: orrect discont calclation &ill be>
10M discont on 20M of =s> 16 Q 16Q20M D 3.2 Q10M D 0.32 !aisa !er bottle.
8A; 4U=4I:
)< )?
.roduction 175000 225000
Tota! osts 11900000 16518600
=ate of inflation in 2007> 15M
=e*ired> Iariable cost N fi:ed costs in real terms.
A6UBTIB T48AT;8BT: =eal =ate for crrent $ear D crrent $ear cost ?1P inflation rate
D 16518600?1.15 D 14364000.
.roduction Tota! osts
)? 225000 14364000)< 175000 11900000
+ifference 5 )/</
Iariable cost !er nit D 2464000?50000 D 49.28
i:ed cost D 14364000 A 225000Q49.28 D 14364000 A 11088000 D 3276000
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8A; 4U=4I: Bhen !er nit cost of sales N "ariable cost is not gi"en in brea-e"en mi: case.
A6UBTIB T48AT;8BT:
/ D J/@ H)
? Q indi"idal ratio
8A; 4U=4I: Bhat !rice !er nit to be *oted for the ne:t $ear if it is desired to earn 10M
!rofit on sales assming that the "ariable cost &ill increase b$ 10M, fi:ed cost b$ 10M N
!rodction b$ 10M.
Iariable cost D 4400 Q 'nit D 1100 Q D 1595000
A6UBTIB T48AT;8BT:
Bhen sales increase, "ariable e:!ense increases b$ same ratio.
ale D "ariable cost P fi:ed cost P !rofit
;o of nit Q sale !rice !er nit D ;o of nit Q "ariable cost !er nit P fi:ed cost P ;o of
nit Q sale !rice !er nit Q 10M
1100Q D 1100Q4400 P 1595000P 1100Q Q 10M
1100 D 4840000 P 1595000 P 110
1100 A 110 D 6435000
D 6435000 ? 990
D 6500 nits
ENTRIESENTRIESENTRIESENTRIES
8A; 4U=4I: )he "alation is carried ot b$ the inance @e!artment sing stores
memorandm record.
A6UBTIB T48AT;8BT: t e:hibits that onl$ *antit$ is recorded in the stores ledger.
LABORLABORLABORLABOR
8A; 4U=4I: bons hors
A6UBTIB T48AT;8BT: bons hors &ill be com!ared &ith direct hors &or-ed.
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8A; 4U=4I:
@irect materials !er nit D 0.8 -g at =s. 60 !er -gFabor !er nit D 27 mintes at =s. 80 !er hor
Iariable !rodction o"erheads D =s. 40 !er labor hor
i:ed !rodction o"erheads, at a normal ot!t le"el of 105,000 nits !er month, are estimated at =s.
2,100,000.
A6UBTIB T48AT;8BT:
aterial P Fabor P Iariable H &ill be calclated as follo&s>
@irect materials !er nit D 120000Q0.8Q60 D 5760000
Fabor !er nit D 120000Q27?60Q80 D 4320000Iariable !rodction o"erheads D 120000Q27?60Q40 D 2160000
i:ed !rodction o"erheads D 2100000Q120000?105000 D 2400000
• Bhere mintes are gi"en, it &ill al&a$s be di"ided b$ 60.
• rodction ost @ P @F P H &ill be mlti!lied b$ !rodction nits N selling cost selling
H b$ sale nits nless stated other&ise N &rites this assm!tion in the !a!er as note.
MATERIAL MATERIAL MATERIAL MATERIAL
8A; 4U=4I: Godo&n rent of =s. 10,000 !er month
A6UBTIB T48AT;8BT: )his &ill not be inclded in carr$ing cost calclation.
8A; 4U=4I: Bhat &old be the safet$ stoc- and reorder !oint if the com!an$ is &illing to
ta-e>
1. a 20M ris- of being ot of stoc-C
2. a 10M ris- of being ot of stoc-C
A6UBTIB T48AT;8BT: f the com!an$ is read$ to ta-e 20M ris- of being ot of stoc-
meant that it needed to -ee! sfficient safet$ stoc- to ensre that it &old onl$ be ot of stoc-
if the lead time reached 13 da$s or in other &ords it &old need to reorder &hen 12 da$s stoc-&as left. i.e. the re order !oint shold be 12 da$s.
)he a"erage sage !er da$ &as 450 nits 162000?360
ince the sal lead time &as 11 da$s, safet$ stoc- shold be e*al to 1211D1 da$Us stoc- i.e.
450 nits N reordering !oint &as 450Q12 D 5400 nits
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8A; 4U=4I:
6rdered Muantit Unit %rice 4s"'!to 999 nits 160.00
1000 to 1999 nits 158.40
2000 or more nits 156.80
A6UBTIB T48AT;8BT:
1. )a-e lo&er class bondaries i.e 999, 1000 N 2000 as annal demand for calclating /H.
2. antit$ discont &ill be calclated as follo&s>
i. rchase ost D nit made Q cost !er nit Q 100M M gi"en
ii. Hrdering ost D %nnal demand Q ordering cost ? /Hiii. arr$ing ost D /H Q arr$ing ost?2 Q 100M M gi"en
8A; 4U=4I: Bhen ne:t order be !lacedC
A6UBTIB T48AT;8BT:
1 re*enc$ D 365? ;o of order
2 A @a$s !!l$ left D 'nit in in"entor$ ?/H Q re*enc$
3 A !!l$ left A lead time
8A; 4U=4I: olding cost !er $ear
A6UBTIB T48AT;8BT: /H ?2 Q safet$ stoc- Q arr$ing cost
8A; 4U=4I: % %=)
;ateria! ode Kear! Usage Unit ost Tota! ost
)J01 10000 0.50 5000
)J02 7100 0.65 4615
)J03 2000 2.50 5000
)J04 5250 2.00 10500)J05 6000 1.75 10500
)J06 2750 0.80 2200
)J07 1500 1.00 1500
)J08 5500 1.85 10175
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Cost Accounting Manual 2013
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A6UBTIB T48AT;8BT:
1. er nit &ill decide &hich nit$ falls in %, N 2. 'nit N total cost &ill be sed for calclating %, N
3. 'nit?sage Q !er nit D total cost
;ateria! ode Kear! Usage Unit ost Tota! ost
)J03 2000 2.50 5000
)J04 5250 2.00 10500
A ?)5 (1"G# 155 (*1"*1G#
)J05 6000 1.75 10500
)J07 1500 1.00 1500
)J08 5500 1.85 10175= ))5 (5"/G# *?<?5 (?<"1)G#
)J06 2750 0.80 2200
)J01 10000 0.50 5000
)J02 7100 0.65 4615
/1 (1G# // (1G#
8A; 4U=4I: =econcile the !h$sical in"entor$ balances &ith the
balances as !er boo-.
A6UBTIB T48AT;8BT:
H!ening balance H!ening alance P =ecei!ts A sse JJJ
Fess A ontamination JJJ
%dd A ;ot inclded in oo-s JJJ
%dd A =etrn b$ !rodction @e!tt JJJ
Fess A Brong =ecording JJJ
%dd A eld on behalf of cstomer JJJ
.hsica! =a!ance
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Cost Accounting Manual 2013
8A; 4U=4I: OF earns a gross !rofit of 25M of sales and niforml$ maintains stoc-s at
80M of the !rojected sale of the follo&ing month.
A6UBTIB T48AT;8BT:
G D ale A G
25M D 100M 75M
G D 55000?100Q25 D 13750
ebrar$ D G D 95000?100 Q75 D 71250
arch D G D 55000?100 Q75 D 41250
%!ril D G D 60000?100 Q75 D 45000
a$ D G D 65000?100 Q75 D 48750
6%ening Stock (G of S# .urchase !osing Stock J S
ebrar$ D 57000 P A 33000 D 71250
arch D 33000 P A 36000 D 41250
%!ril D 36000 P A 39000 D 45000
a$ D 39000 P A 45000 D 48750