SR. NO. CHAPTER’S NAME PAGE NO. 1 2 MARGINAL COSTING 8 …€¦ · Ø Cost accounting helps in...

ACCOUNTINGACADEMY PROF.ABHIJITSENGUPTA

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SR.NO. CHAPTER’SNAME PAGENO.1 COSTINTRO 2-72 MARGINALCOSTING 8-93 BUDGET 10-124 STANDARDCOSTING 13-155 ANALYSISANDINTERPRETATIONOF

FINANCIALSTATEMENTS16-21

6 ACTIVITYBASEDCOSTING 227 METHODSOFCOSTING 23-268 COSTACCOUNTINGRECORDS 279 COSTAUDIT 28-29


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COSTINTRO

Ø Costistheamountofresourcegivenupinexchangeforsomegoodsorservices.Ø TheCharteredInstituteofManagementAccountants,Londondefinescostas“theamountof

expenditure(actualornotional)incurredon,orattributabletoaspecifiedthingoractivity”.Ø thecostperunitisarrivedatbydividingthetotalexpenditureincurredbythetotalunitsproduced

orthequantumofservicerendered.Ø Theprocessofascertainingthecostisknownascosting.Ø Work-in-progressisvaluedatfactorycost.Ø stockoffinishedgoodsmaybevaluedatcostofproduction.Ø Thecostperunitofaproductwillvarywithanincreaseinthevolumeofoutputsincetheamountof

fixedexpensestobebornebyeachunitofoutputdecreases.Ø Itisimportanttonoteherethatthereisnosuchthingasanexactcostortruecostbecausenofigure

ofcostistrueinallcircumstancesandforallpurposes.Ø Themainobjectofcostingistheanalysisoffinancialrecords,soastosubdivideexpenditureandto

allocateitcarefullytoselectedcostcenters,andhencetobuildupatotalcostforthedepartments,processesorjobsorcontractsoftheundertaking.

Ø Costaccountingmayberegardedas``aspecialisedbranchofaccountingwhichinvolvesclassification,accumulation,assignmentandcontrolofcosts.

Ø TheCostingterminologyofC.I.M.A.Londondefinescostaccountingas``Theestablishmentofbudgets,standardcostsandactualcostsofoperations,processes,activitiesorproducts,andtheanalysisofvariances,profitabilityorthesocialuseoffunds”.

Ø `Wheldondefinescostaccountingas“classifying,recordingandappropriateallocationofexpenditurefordeterminationofcostsofproductsorservicesandforthepresentationofsuitablyarrangeddataforpurposesofcontrolandguidanceofmanagement”.

Ø CostAccountancyhasbeendefinedas“theapplicationofcostingandcostaccountingprinciples,methodsandtechniquestothescience,artandpracticeofcostcontrolandtheascertainmentofprofitability.Itincludesthepresentationofinformationderivedtherefromforthepurposeofmanagerialdecisionmaking”.

Ø Costaccountingaimsatsystematicrecordingofexpensesandanalysisofthesamesoastoascertainthecostofeachproductmanufacturedorservicerenderedbyanorganisation.

Ø Costaccountingincreasestheoverallproductivityofanorganisationandservesasanimportanttool,inbringingprosperitytothenation.

Ø Costaccountingprovidesdetailedcostinginformationtothemanagementtoenablethemtomaintaineffectivecontroloverstoresandinventory,toincreaseefficiencyoftheorganisationandtocheckwastageandlosses.

Ø CostaccountinghelpsinperiodsoftradedepressionandtradecompetitionØ CostaccountingaidspricefixationØ Costaccountinghelpsinmakingestimates.Ø CostaccountinghelpsinchannelisingproductiononrightlinesØ CostaccountingeliminateswastagesØ CostaccountingmakescomparisonspossibleØ CostaccountingprovidesdataforperiodicalprofitandlossaccountØ CostaccountinghelpsindeterminingandenhancingefficiencyØ CostaccountinghelpsininventorycontrolØ Investors,banksandothermoneylendinginstitutionsbasetheirjudgmentabouttheprofitability

andfutureprospectsoftheenterpriseonthecostingrecords.Ø Themainfunctionofcostaccountingistheascertainmentofcostofproductorservicesrendered.Ø PostCostingmeanstheascertainmentofcostisdonebasedonactualinformationasrecordedin

financialbooks.


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Ø ContinuousCosting,wheretheprocessofascertainmentisofacontinuousnaturei.e.wherecostinformationisavailableasandwhenaparticularactivityiscompleted,sothattheentirecostofaparticularjobisavailablethemomentitiscompleted.

Ø HistoricalCostsareascertainedaftertheyareincurred.Ø Pre-determinedCostsarecalculatedbeforetheyareincurredonthebasisofaspecificationofall

factorsaffectingcost.Ø Estimatedcostsareestimatedbeforegoodsareproduced;thesearenaturallylessaccuratethan

standards.Ø Thesubstancefromwhichtheproductismadeisknownasmaterial.Itcanbedirectaswellas

indirect.Ø Directmaterialreferstothosematerialswhichbecomeamajorpartofthefinishedproductandcan

beeasilytraceabletotheunits.Ø Allmaterialwhichisusedforpurposesancillarytoproductionandwhichcanbeconveniently

assignedtospecificphysicalunitsistermedasindirectmaterials.Ø Directlabourisdefinedasthewagespaidtoworkerswhoareengagedintheproductionprocess

whosetimecanbeconvenientlyandeconomicallytraceabletounitsofproducts.Ø Labouremployedforthepurposeofcarryingtasksincidentaltogoodsorservicesprovided,is

indirectlabour.Ø Directexpensesareincurredonaspecificcostunitandidentifiablewiththecostunit.Ø Indirectexpensesareexpenseswhichcannotbedirectly,convenientlyandwhollyallocatedtocost

centreorcostunits.Ø Overheadsincludethecostofindirectmaterial,indirectlabourandindirectexpenses.overheads

maybeclassifiedas(a)productionormanufacturingoverheads,(b)administrationoverheads,(c)sellingoverheads,and(d)distributionoverheads.

Ø Thedirectcostsarethosewhichcanbeeasilytraceabletoaproductorcostingunitorcostcenterorsomespecificactivity.

Ø Theindirectcostsaredifficulttotracetoasingleproductoritisuneconomictodoso.Theyarecommontoseveralproducts.

Ø Productcostsarethosewhicharetraceabletotheproductandincludedininventoryvalues.Ø Periodcostsareincurredonthebasisoftimesuchasrent,salaries,etc.,includemanysellingand

administrativecostsessentialtokeepthebusinessrunning.Ø Productcostsareincludedinthecostoftheproductanddonotaffectincometilltheproductissold.Ø Periodcostsarechargedtotheperiodinwhichtheyareincurred.Ø TheCharteredInstituteofManagementAccountants,London,definesfixedcostas“thecostwhich

isincurredforaperiod,andwhich,withincertainoutputandturnoverlimits,tendstobeunaffectedbyfluctuationsinthelevelsofactivity(outputorturnover)”.

Ø CommittedCostsreincurredtomaintaincertainfacilitiesandcannotbequicklyeliminated.Ø Policycostsareincurredforimplementingparticularmanagementpoliciessuchasexecutive

development,housing,etc.Suchcostsareoftendiscretionary.


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Ø Managedcostsareincurredtoensuretheoperatingexistenceofthecompanye.g.,staffservices.Ø DiscretionaryCostsresultfromspecialpolicydecisions,newresearchesetc.,andcanbeeliminated

orreducedtoadesirablelevelatthediscretionofthemanagement.Ø StepCostsareconstantforagivenlevelofoutputandthenincreasebyafixedamountatahigher

levelofoutput.Ø Variablecostsarethosecoststhatvarydirectlyandproportionatelywiththeoutpute.g.direct

materials,directlabour.Ø Theconceptofvariabilityisrelative.Iftheconditionsuponwhichvariabilitywasdetermined

changes,thevariabilitywillhavetobedeterminedagain.Ø Semi-fixed(Semi-Variable)costscontainfixedandvariableelements.Semi-variablecostschangein

thesamedirectionasthatoftheoutputbutnotinthesameproportion.Ø Manufacturing/productionCostsisthecostofoperatingthemanufacturingdivisionofan

undertaking.Itincludesthecostofdirectmaterials,directlabour,directexpenses,packing(primary)costandalloverheadexpensesrelatingtoproduction.

Ø AdministrationCostsareindirectandcoversallexpenditureincurredinformulatingthepolicy,directingtheorganisationandcontrollingtheoperationofaconcern,whichisnotrelatedtoresearch,development,production,distributionorsellingfunctions.

Ø Sellingcostisthecostofseekingtocreateandstimulatedemande.g.advertisements,marketresearchetc

Ø Distributioncostistheexpenditureincurredwhichbeginswithmakingthepackageproducedavailablefordispatchandendswithmakingthereconditionedpackagesavailableforre-usee.g.warehousing,cartageetc.

Ø Whenanewfactoryisstartedorwhenanewproductisintroduced,certainexpensesareincurred.Therearetrialruns.Suchcostsaretermedaspre-productioncostsandtreatedasdeferredrevenueexpenditure.

Ø TheCharteredInstituteofManagementAccountantsdefinescontrollablecostas“costwhichcanbeinfluencedbyitsbudgetholder”.

Ø Non-ControllableCostisthecostwhichisnotsubjecttocontrolatanylevelofmanagerialsupervision.

Ø Opportunitycostisthecostofselectingonecourseofactionandthelosingofotheropportunitiestocarryoutthatcourseofaction.

Ø Edwards,HermansonandSalmonsondefineitas“thebenefitslostbyrejectingthebestcompetingalternativetotheonechosen.Thebenefitlostisusuallythenetearningsorprofitthatmighthavebeenearnedfromtherejectedalternative”

Ø TheNationalAssociationofAccountants(USA)definesasunkcostas“anexpenditureforequipmentorproductiveresourceswhichhasnoeconomicrelevancetothepresentdecisionmakingprocess”.

Ø Differentialcosthasbeendefinedas“thedifferenceintotalcostbetweenalternatives,calculatedtoassistdecisionmaking”.

Ø BiermanandDjckmandefineitas:“Jointcostsrelatetoasituationinwhichthefactorsofproductionbytheirbasicnatureresultintwoormoreproducts.Thejointnessresultsfromtherebeingmorethanoneproduct,andthesemulti-productsaretheresultofthemethodsofproductionorthenatureofrawmaterialandnotofadecisionbymanagementtoproduceboth”.

Ø TheNationalAssociationofAccountantsdefinesitasfollows:“Jointcostsrelatetotwoormoreproductsproducedfromacommonproductionprocessorelement-material,labouroroverheadoranycombinationthereoforsolockedtogetherthatonecannotbeproducedwithoutproducingtheother”.

Ø TheNationalAssociationofAccountantsdefinesthetermas“thecostofservicesemployedinthecreationoftwoormoreoutputswhichisnotallocabletothoseoutputsonaclearlyjustifiedbasis”.

Ø Uniformcostingsignifiescommoncostingprinciplesandproceduresadoptedbyanumberoffirms.Ø ReplacementCostsisthecostofreplacinganassetatcurrentmarketvalues.


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Ø Avoidablecostsarethosecostswhichunderthepresentconditionsneednothavebeenincurred.Ø Unavoidablecostsarethosecostswhichunderthepresentconditionsmustbeincurred.Ø AccordingtotheCharteredInstituteofManagementAccountants,London,costcentremeans,“a

productionorservicelocation,function,activityoritemofequipmentwhosecostsmaybeattributedtocostunits”.

Ø Productivecostcentresarethosewhichareactuallyengagedinmakingtheproducts-therawmaterialsarehandledhereandconvertedintosaleableproducts.

Ø Serviceorunproductivecostcentresdonotmaketheproductsbutareessentialaidstotheproductivecentres.

Ø Mixedcostcentresarethosewhichareengagedsomeonproductiveandotherlinesonserviceworks.

Ø Apersonalcostcentreconsistsofapersonoragroupofpersons.Ø Animpersonalcostcentreisonewhichconsistsofadepartment,plantoritemofequipment(or

groupofthese).Ø Incaseacostcentreconsistsofthosemachinesand/orpersonswhichcarryoutthesameoperation

istermedasoperationcostcentre.Ø Ifacostcentreconsistsofacontinuoussequenceofoperationsitiscalledprocesscostcentre.Ø TheCharteredInstituteofManagementAccountants,London,definesaunitofcostas“aunitof

productorserviceinrelationtowhichcostsareascertained”.Ø JobCostingreferstoasystemofcostinginwhichcostsareascertainedintermsofspecificjobsor

orderswhicharenotcomparablewitheachother.Industrieswherethismethodofcostingisgenerallyappliedareprintingpress,automobilegarage,repairshop,ship-building,housebuilding,engineandmachineconstruction,etc.

Ø Whereaproductpassesthroughdistinctstagesorprocesses,theoutputofoneprocessbeingtheinputofthesubsequentprocess,itisfrequentlydesiredtoascertainthecostofeachstageorprocessofproduction.Thisisknownasprocesscosting.

Ø Whencostsareascertaineddepartmentbydepartment,themethodiscalled“DepartmentalCosting”.

Ø Historical(orConventional)Costingreferstothedeterminationofcostsaftertheyhavebeenactuallyincurred.

Ø StandardCostingreferstothepreparationofstandardcostsandapplyingthemtomeasurethevariationsfromstandardcostsandanalysingthevariationswithaviewtomaintainmaximumefficiencyinproduction.

Ø MarginalCostingreferstotheascertainmentofmarginalcostsbydifferentiatingbetweenfixedcostsandvariablecostsandtheeffectonprofitofthechangesinvolumeortypeofoutput.

Ø Atechniquewherestandardizedprinciplesandmethodsofcostaccountingareemployedbyanumberofdifferentcompaniesandfirms,istermedasuniformcosting.

Ø Thepracticeofchargingalldirectcoststooperations,processorproductsleavingallindirectcoststobewrittenoffagainstprofitsintheperiodinwhichtheyarise,istermedasdirectcosting.

Ø Thepracticeofchargingallcostsbothvariableandfixedtooperation,processorproductsorprocessistermedasabsorptioncosting.

Ø Activity-BasedCosting(ABC)isdefinedasatechniqueofcostattributiontocostunitsonthebasisofbenefitsreceivedfromindirectactivities,e.g.ordering,settingup,assuringquality.

Ø CostAccountingStandards(CAS)hadbeenissuedbytheInstituteofCostAccountantsofIndia(ICAI)Ø Acostaccountingsystemisasystemthataccumulatescosts,assignsthemtocostobjectivesand

reportscostinformation.Itascertainsproductprofitabilityandhelpsmanagementinplanningandcontrolofbusinessoperations.

Ø Managerialaccountinghasitsrootsintheindustrialrevolutionofthe19thcentury.Ø ThemanagementaccountingteamofAnglo-AmericanCouncilonProductivitydefinedmanagement

accountingas:


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“Thepresentationofaccountinginformationinsuchawayastoassistmanagementinthecreationofpolicyandindaytodayoperationofanunderstanding”.

Ø AmericanAccountingAssociationdefinesmanagementaccountingasunder:“Theapplicationofappropriatetechniquesandconceptsinprocessinghistoricalandprojectedeconomicdataofanentitytoassistmanagementinestablishingplansforreasonableeconomicobjectivesandinthemakingofrationaldecisionswithaviewtowardstheseobjectives”.

Ø JBattydefines:“Managementaccountingisthetermusedtodescribeaccountingmethods,systemsandtechniqueswhichcoupledwithspecialknowledgeandability,assistsmanagementinitstaskofmaximisingprofitsorminimisinglosses.”

Ø BrownandHowarddefine:“Managementaccountingisthataspectofaccountingwhichisconcernedwiththeefficientmanagementofabusinessthroughthepresentationofmanagementofsuchinformationaswillfacilitateefficientandopportuneplanningandcontrol.”

Ø RobertAnthonyhasdefinedmanagementaccountingthus:“Managementaccountingisconcernedwithaccountinginformationwhichisusefultomanagement”

Ø AccordingtoCIMA,London:“Managementaccountingisanintegralpartofmanagementconcernedwithidentifying,presentingandinterpretinginformationusedfor:(a)formulatingstrategy;(b)planningandcontrollingactivities;(c)decisiontaking;(d)optimisingtheuseofresources;(e)disclosuretoshareholdersandothersexternaltotheentity;(f)disclosuretoemployees;(g)safeguardingassets.Theaboveinvolvesparticipationinmanagementtoensurethatthereiseffective:(i)formulationofplanstomeetobjectives(strategicplanning);(ii)formulationofshort-termoperationplans(budgeting/profit;planning);(iii)acquisitionanduseoffinance(financialmanagement)andrecordingoftransaction(financialaccountingandcostaccounting);(iv)communicationoffinancialandoperatinginformation;(v)correctiveactiontobringplansandresultsintoline(financialcontrol);(vi)reviewingandreportingonsystemsandoperations(internalaudit,managementaudit)."

Ø .Themainobjectiveofthemanagementistomanagethecompanyfollowingamanagingpatterncomprisedofformulationofplan,allocationofresponsibilitiesforimplementingtheplan,organisingprocedurestoassistintheexecutionoftheplan,andcontroloftheperformance.

Ø Ananalysisofthealldefinitionsenablesustodefinemanagementaccountingastheprocessingandpresentingofaccounting,costaccountingandothereconomicdata,bothhistoricalandprojected,insuchawayaswouldassistintheperformanceevaluationofmanagerialfunctions,viz.planning,decision-makingandcontrol.

Ø Planninginvolvesforecastingonthebasisofavailableinformation,settinggoals;framingpolicesdeterminingthealternativecoursesofactionanddecidingontheprogramofactivities.

Ø Managementaccountingisadecisionmakingsystem.Ø Managementaccountingisatechniqueofselectivenature.Ø Managementaccountingdoesnotsetparticularformatsforinformation.Ø Thescopeofmanagementaccountingincludesprovidingmeansofcommunicatingmanagement

planstothevariouslevelsoforganisation.Ø Thescopeofmanagementaccountingincludesprovidingandinstallinganeffectivesystemoffeed-

backreports.Thiswouldenablethemanagementinitscontrollingfunction.Ø ThescopeofmanagementaccountingincludesAnalysingandinterpretingaccountingandotherdata

tomakeitunderstandableandusabletothemanagement.Ø ThescopeofmanagementaccountingincludesProvidingmethodsandtechniquesforevaluatingthe

performanceofthemanagementinthelightoftheobjectivesoftheenterprises,thusassistingintheimplementationoftheprincipleofmanagementbyobjectives.

Ø ThescopeofmanagementaccountingincludesImproving,modifyingandsharpeningtheeffectivenessofco-existingtechniquesofanalysis.


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Ø Financialplanningistheprocessofdecidinginadvanceaboutthefinancialactivitiesnecessaryfortheorganisationtoachievethedesiredobjectives.

Ø Managementaccountinghelpsthemanagementthroughthetechniquesofmarginalcosting,differentialcosting,capitalbudgeting,cashflowanalysis,discountedcashflowetc.toselectthebestalternativewhichwillmaximisetheprofitsofthebusiness.

Ø Managementaccountinghelpsthemanagementthroughthetechniquesofmarginalcosting,differentialcosting,capitalbudgeting,cashflowanalysis,discountedcashflowetc.toselectthebestalternativewhichwillmaximisetheprofitsofthebusiness.

Ø DataprovidedbyCostandFinancialAccountingisfurtherusedforthemanagementofallprocessesassociatedwiththeefficientacquisitionanddeploymentofshort,mediumandlongtermfinancialresources.SuchaprocessofmanagementisknownasFinancialManagement.

Ø TheobjectiveofFinancialManagementistomaximizethewealthofshareholdersbytakingeffectiveInvestment,FinancingandDividenddecisions.

Ø 'Dividenddecision'relatestothedeterminationoftheamountandfrequencyofcashwhichcanbepaidoutofprofitstoshareholders.

Ø ,ManagementAccountingreferstomanagerialprocessesandtechnologiesthatarefocusedonaddingvaluetoorganizationsbyattainingtheeffectiveuseofresources,indynamicandcompetitivecontexts.

Ø Costaccountingontheotherhand,rendersinformationfortheguidanceofthemanagementforproperplanning,operation,controlanddecisionmaking.

Ø FinancialaccountsarekeptinsuchawayastomeettherequirementsoftheCompaniesAct,Income-taxActandotherstatues.

Ø Financialaccountingemphasizesthemeasurementofprofitability.Ø Costaccountingaimsatascertainmentofcostsandaccumulatesdataforthisverypurpose.Ø Managementaccountingdatacannotbecompletelyaccurateinallrespects


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MARGINALCOSTING

Ø Marginal costing is defined as “the ascertainmentofmarginal costs andof the effect onprofit ofchangesinvolumeortypeofoutputbydifferentiatingbetweenfixedcostsandvariablecosts”.

Ø Marginal costing is also known as “Variable Costing”, “Differential Costing” or “Out-of-pocket”costing.

Ø Marginalcostisthecostofoneunitofproductorservicewhichwouldbeavoidedifthatunitwerenotproducedorprovided.

Ø AccordingtoCIMATerminologyMarginalCostingistheascertainmentofmarginalcostsandoftheeffectonprofitof changes involumeor typeofoutputbydifferentiatingbetween fixedcostsandvariablecostsinthistechniqueofcostingonlyvariablecostsarechargedtooperations,processesorproductsleavingallindirectcoststobewrittenoffagainstprofitsintheperiodinwhichtheyarise.

Ø Onlythevariablecostsaretakenintoaccountforcomputingthevalueofstocksofwork-in-progressandfinishedproducts.

Ø Fixedcostsarechargedofftorevenuewhollyduringtheperiodinwhichtheyareincurredandarenottakenintoaccountforvaluingproductcost/inventories.

Ø Costscanbeclassifiedaseitherafixedcostoravariablecost.Ø A fixedcost isone that is independentof the levelofsales; rather, it is related to thepassageof

time.Examplesoffixedcostsincluderent,salariesandinsurance.Ø Avariable cost isone that isdirectly related to the levelof sales, suchas costof goods soldand

commissions.Ø BreakevenanalysisisalsoknownasCost–volume–profit(CVP)analysis.Ø Cost–volume–profit(CVP)analysisisdefinedinCIMA’sOfficialTerminologyas

‘Thestudyoftheeffectsonfutureprofitofchangesinfixedcost,variablecost,salesprice,quantityandmix’.

Ø InbreakevenanalysisorCVPanalysisanactivity level isdeterminedatwhichall relevantcostarerecoveredandthereisasituationofnoprofitornoloss.Thisactivityleveliscalledbreakevenpoint.

Ø In anotherwords breakevenpoint is the level of sales or production atwhich the total costs andtotalrevenueofabusinessareequal.

Ø ContributionisthedifferencebetweensellingpriceandvariablecostofsalesØ Theexcessofcontributionoverfixedcostsistheprofit.Ø Sellingpricecontainingprofit:

Contribution=Fixedcost+ProfitØ Sellingpriceatcost:

Contribution=FixedcostØ Sellingpriceatloss:

Contribution=Fixedcost–LossØ Marginalcostequation:

Sales-Cost=ProfitorSales-(Fixedcost+Variablecost)=ProfitorSales-Variablecost=Fixedcost+ProfitS-V=F+P

Ø The ratio or percentage of contribution margin to sales is known as P/V ratio. This ratio is alsoknownasmarginalincomeratio,contributiontosalesratio,orvariableprofitratio.

Ø Marginofsafetyisthedifferencebetweentheactualsalesandsalesatbreak-evenpoint.Ø AccordingtotheCIMA,Londonthebreak-evenchartmeans“achartwhichshowsprofitorlossat

various levels of activity, the level atwhich neither profit nor loss is shown being termed as thebreak-evenpoint”.

Ø Profit planning is the planning of future operations to attain maximum profit or to maintain aspecifiedlevelofprofit


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Ø Absorption costing means that all of the manufacturing costs are absorbed by the total unitsproduced.

Ø Absorptioncostingisalsoreferredtoasfullcostingorthefullabsorptionmethod.Itisalsoreferredtoasthefull-costtechnique

Ø Absorptioncostingisrequiredforexternalfinancialreportingandforincometaxreporting.Ø Absorptioncostingisacostingtechniquethatincludesallmanufacturingcosts,intheformofdirect

materials, direct labour, and both variable and fixedmanufacturing overheads,while determiningthecostperunitofaproduct

Ø Inventoryvalueunderabsorptioncosting=Directmaterial+Directlabour+variablemanufacturingcosts+Fixedmanufacturingcosts

Ø BreakevenChartshowsnotonlytheBEPbutalsotheeffectsofcostsandrevenueatvaryinglevelsof sales. The break-even chart can therefore, bemore appropriately called the cost-volume-profitgraph.

Ø TheanglewhichthesaleslinemakeswithtotalcostlinewhileintersectingitatBEPiscalledangleofincidence.Alargeangleofincidencedenotesagoodprofitpositionofacompany.

Ø EvaluationofPerformanceofeachsuchsectorcanbebroughtoutbymeansofcostvolume-profitanalysisorthecontributionapproach.Theanalysiswillhelpthecompanytotakedecisionthatwillmaximisetheprofits.

Ø Whenthemanagementisconfrontedwiththeproblemwhetheritwouldbeeconomicaltopurchasea component or a product from outside sources, or to manufacture it internally, marginal costanalysisrendersusefulassistance.

Ø Incasetheproposalistobuyfromoutsidethen,whatisalreadybeingmade,andthepricequotedbytheoutsidershouldbelowerthanthemarginalcost.Iftheproposalistomakesomethingwhatisbeingpurchasedoutside,thecostofmakingshouldincludealladditionalcostslikedepreciationonnewplant,interestoncapitalinvolvedandthatcostshouldbecomparedwiththepurchase.

Ø Closure of a Department or Discontinuance of a Product that gives least contribution should bediscardedexceptforashortperiod

Ø One of the best ways for sales promotion is to offer quotations at low rates. The companymayquoteanyamountabovemarginalcost,becauseitwillgiveanadditionalmarginalcontributionandhenceprofit.

Ø Ifthereisadditionalsalebecauseofexportorders,goodsmaybesoldatapricebelowthenormal.Ø Whenalternativeuseofproduction facilities oralternativemethodsofmanufacturing a product

areavailable,contributionanalysisshouldbeusedtoarriveatthefinalchoice.Thealternativewhichwillyieldhighestcontribution,shallgenerallyandobviouslybeselected.

Ø Inreallife,theremaybeseveralfactorswhichmayputalimitonthenumberofunitstobeproducedeven if theproducts give ahigh contribution, theseare calledkey factors, scarce factors, limitingfactors,principalbudgetfactorsorgoverningfactors.Contributionperunitofkeyfactorshouldbeconsideredand that course of action should be adoptedwhich gives the highest contribution perunitofkeyfactor.

Ø Marginal costinghelps to a great extent in thedeterminationofmostprofitableproductor salesmix.Thebestproductmixisthatwhichyieldsthemaximumcontribution.


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BUDGET

Ø Kohlerdefinesbudgetas:1.Anyfinancialplanservingasanestimateofandacontroloverfutureoperations.2.Hence,anyestimateoffuturecosts.3.Anysystematicplanfortheutilisationofmanpower,materialorotherresources

Ø TheCharteredInstituteofManagementAccountants,London,(terminology)definesabudgetas“Aplanexpressedinmoney.Itispreparedandapprovedpriortothebudgetperiodandmayshowincome,expenditureandthecapitaltobeemployed.Maybedrawnupshowingincrementaleffectsonformerbudgetedoractualfigures,orbecompiledbyzero-basedbudgeting.”

Ø Budgetingisthecompleteprocessofdesigning,implementingandoperatingbudgets.TheCIMA,LondondefinesBudgetarycontrolas“theestablishmentofbudgets,relatingtheresponsibilitiesofexecutivetotherequirementsofapolicyandthecontinuouscomparisonofactualwithbudgetedresultseithertosecurebyindividualactiontheobjectivesofthatpolicyortoprovideafirmbasisforitsrevision”.

Ø Thebudgetisablue-printoftheprojectedplanofactionexpressedinquantitativetermsandforaspecifiedperiodoftime.

Ø budgetingistheartofplanning,budgetarycontrolistheactofadheringtotheplan.Ø budgetarycontrolinvolvescontinuouscomparisonofactualresultswiththebudgetsandtaking

appropriateremedialactionpromptly.Ø budgetarycontrolmeanslayingdowninmomentaryandquantitativetermwhatexactlyhastobe

doneandhowexactlyithastobedoneoverthecomingperiodandthentoensurethatactualresultsdonotdivergefromtheplannedcoursemorethannecessary.

Ø RowlandandWilliamintheirbookentitledBudgetingforManagementControlhasgiventhedifferencebetweenbudget,budgetingandbudgetarycontrolasfollows:“Budgetsaretheindividualobjectivesofadepartment,etc.whereasbudgetingmaybesaidtobetheactofbuildingbudgets.BudgetaryControlembracesallthisandinadditionincludethescienceofplanningthebudgetsthemselvesandtheutilisationofsuchbudgetstoeffectanoverallmanagementtoolforthebusinessplanningandcontrol”.

Ø abudgetisafinancialplanandbudgetarycontrolresultsfromtheadministrationofthefinancialplan.

Ø Aforecastisanassessmentofprobablefutureevents.Ø Forecastisamereestimateofwhatislikelytohappen.Itisastatementofprobableeventswhichare

likelytohappenunderanticipatedconditionsduringaspecifiedperiodoftime.Ø Forecastshavewiderscope,sinceitcanbemadeinthosespheresalsowherebudgetscannot

interfere.Ø Budgetshowsthatpolicyandprogrammetobefollowedinafutureperiodunderplanned

conditions.Ø Budgetarycontrolaimsatmaximisationofprofitsthrougheffectiveplanningandcontrolofincome

andexpenditure-directingcapitalandresourcestothebestandmostprofitablechannel.Ø Budgetarycontrolstartswiththeformulationofbudgetswhicharemereestimates.Therefore,the

adequacyorotherwiseofbudgetarycontrolsystem,toaverylargeextent,dependsupontheadequacyoraccuracywithwhichestimatesaremade.

Ø Forformulationandefficientexecutionoftheplan,aBudgetCommitteeshouldbesetupØ Thebudgetsshouldbecomprehensive,complete,continuousandrealistictoattain.Ø Forthesuccessofabudgetarycontrolsystem,itisessentialthatthereshouldbeasound

organisationforbudgetpreparation,budgetmaintenance,andbudgetadministration.ThebudgetarycontrolorganisationisusuallyheadedbyatopexecutivewhoisknownvariouslyastheBudgetController,BudgetDirector,orBudgetOfficer,whomayhaveunderhimaBudgetCommittee


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constitutedwiththerepresentativesofvariousdepartmentslikepurchases,sales,production,development,administrationandaccounts.

Ø Anorganisationalchartisastatementdefiningfunctionalrepresentativesofexecutivesresponsibleforaccomplishmentoforganisationalobjectives.

Ø Abudgetcentreisasectionoftheorganisationoftheundertakingdefinedforthepurposeofbudgetcontrol.Budgetcentreshouldbeestablishedforcostcontrolandallthebudgetsshouldberelatedtocostcentres.

Ø Abudgetmanualisadocumentwhichsetsoutstandinginstructionsgoverningtheresponsibilitiesofpersonsandtheprocedures,formsandrecordsrelatingtothepreparationanduseofbudgetsanditisabookletcontainingstandinginstructionsregardingtheprocedurestobefollowedandthetimeschedulestobeobserved.

Ø TolineupthevariousfunctionsofBudgetCommittee,tobringthemtogetherandtoco-ordinatetheireffortsinthematterofpreparationoftargetfigures,thereshouldbeapersonusuallydesignatedastheBudgetController,whocanprovidereadydatarelatingtoallthefunctions.

Ø Thebudgetcommitteeisagroupofrepresentativesofvariousfunctionsinanorganisation.Ø CIMAdefinesbudgetperiodas“theperiodforwhichabudgetispreparedandused,whichmaythen

besub-dividedintocontrolperiods”.Ø BudgetPeriodreferstotheperiodoftimecoveredbyabudget.Ø AbudgetkeyfactororprincipalbudgetfactorisdescribedbytheCIMALondonterminologyas:“a

factorwhichwilllimittheactivitiesofanundertakingandwhichistakenintoaccountinpreparingbudgets”.

Ø Approvedtargetsforindividualfunctionsareknownas“functionalbudgets”.Ø Theconsolidationofallfunctionalbudgetsisknownasthe“MasterBudget”.Ø Thesalesbudgetisaforecastoftotalsales,expressedintermsofmoneyandquantity.Ø Theproductionbudgetisaforecastoftheproductionforbudgetperiod.Itispreparedintwoparts,

viz..,productionvaluebudgetforthephysicalunitsoftheproductstobemanufacturedandthecostofmanufacturingbudgetdetailingthebudgetedcosts.


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Ø Theoperationofaproductionbudgetresultsinvariousadvantages,mainbeing:optimumutilisationofproductiveresourcesoftheenterprise,productionofgoodsaccordingtoscheduleenablingtheconcerntoadheretodeliverydates,properschedulingoffactorsofproduction.

Ø Materialsrequirementbudget,commonlyknownasmaterialsbudget,assistthepurchasedepartmentinsuitablyplanningthepurchases,fixingthemaximumandminimumlevelsofmaterials,componentsetc.

Ø PlantUtilisationBudgetispreparedfortheestimationofplantcapacitytomeetthebudgetedproductionduringthebudgetedperiod.

Ø Amasterbudgetisthesummarybudgetincorporatingitscomponentfunctionalbudgetandwhichisfinallyapproved,adoptedandemployed.

Ø Afixedbudgetisabudgetdesignedtoremainunchangedirrespectiveofthelevelofactivityactuallyattained.

Ø TheCharteredInstituteofManagementAccountants,Londondefinesflexiblebudgetasabudgetwhichbyrecognisingdifferentcostbehaviourpatterns,isdesignedtochangeasvolumeofoutputchanges.

Ø Themaincharacteristicofflexiblebudgetisthatitshowstheexpenditureappropriatetovariouslevelsofoutput.

Ø Basicbudgethasbeendefinedasabudgetwhichispreparedforuseunalteredoveralongperiodoftime.

Ø Basicbudgetdoesnottakeintoconsiderationcurrentconditionsandcanbeattainableunderstandardconditions.

Ø Acurrentbudgetcanbedefinedasabudgetwhichisrelatedtothecurrentconditionsandispreparedforuseoverashortperiodoftime.

Ø Along-termbudgetcanbedefinedasabudgetwhichispreparedforperiodslongerthanayear’Ø Thisbudgetisdefinedasabudgetwhichispreparedforaperiodlessthanayearandisveryuseful

tolowerlevelsofmanagementforcontrolpurposes.Ø Zerobasebudgeting,maybebettertermedas“Denovabudgeting”orbudgetingfromthebeginning

withoutanyreferencetoanybase-pastbudgetsandactualhappeningØ Zerobasebudgetingmaybedefinedas“aplanningandbudgetingprocesswhichrequireseach

managertojustifyhisentirebudgetrequestindetailfromscratch(hencezerobase)andshiftstheburdenofprooftoeachmanagertojustifywhyheshouldspendanymoneyatall.Theapproachrequiresthatallactivitiesbeanalysedindecisionpackageswhichareevaluatedbysystematicanalysisandrankedinorderofimportance”.

Ø CIMAdefineszerobasebudgetingas“amethodofbudgetingwherebyallactivitiesarere-evaluatedeachtimeabudgetisset.Discretelevelsofeachactivityarevaluedandacombinationchosentomatchfundsavailable.”

Ø Zerobasebudgetingisnotbasedonincrementalapproach,soitpromotesoperationalefficiencybecauseitrequiremanagerstoreviewandjustifytheiractivitiesorthefundrequested.

Ø ZeroBaseBudgetingweedsoutinefficiencyandreducesthecostofproductionbecauseeverybudgetproposalisevaluatedonthebasisofcostbenefitanalysis.

Ø Aprogrambudgetisabudgetdesignedforaspecificactivityorprogram.Ø Performancebudgetingislookeduponasabudgetbasedonfunctions,activitiesandprojectsandis

linkedtothebudgetarysystembasedonobjectiveclassificationofexpenditure.Ø Aperformancebudgetpresentsestimateforexpenditureandearningsintermsoffunctions,

programmes,activitiesandprojects.Ø Performancebudgetinginvolvesevaluationofperformanceofanorganizationinthecontextofboth

specificaswellasoverallobjectivesoftheorganization.Performancebudgetinglaysemphasisonachievementofphysicaltargets.


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STANDARDCOSTING

Ø “Standardcostingdisclosesthecostofdeviationsfromstandardandclassifiestheseastotheircauses,sothatmanagementisimmediatelyinformedofthesphereofoperationsinwhichremedialactionisnecessary.”–W.W.Bigg

Ø TheCharteredInstituteofManagementAccountants,London,definesstandardcostas“astandardexpressedinmoney.Itisbuiltupfromanassessmentofthevalueofcostelements.Itsmainusesareprovidingbasesforperformancemeasurement,controlbyexceptionreporting,valuingstockandestablishingsellingprices.”

Ø CIMAdefinesstandardcostingas“acontroltechniquewhichcomparesstandardcostsandrevenueswithactualresultstoobtainvarianceswhichareusedtostimulateimprovedperformance”.

Ø Standardcostinginvolvesnotonlypre-determinedquantitystandardsbutalsostandardsinrespectofpricesandrates.

Ø Standardcostingwillenableobjectivejudgementofthepeopleandtothatextentthesystemsofpromotions,etc.,willbemoreacceptableinthefirm.

Ø BasicStandardisa“standard”whichisestablishedforuse,unalteredoveralongperiodoftime.Ø CurrentStandardstandardsarefixedonthebasisofscientificstudiesbutadjustedforcurrent

subjectivefactors.Ø Acurrentstandardisastandardforacertainperiod,forcertainconditionandforcertain

circumstances.Ø Iftargetsarefixedforacertainbudgetedperiod,takingintoaccounttheexpectedconditions,itcan

beknownas“expectedstandard”or“attainablestandard”.Ø ItisdefinedbyCIMA,Londonas“astandardwhichcanbeattainedifastandardunitofworkis

carriedoutefficiently,amachineproperlyoperatedoramaterialproperlyused.Allowancesaremadefornormallosses,wasteandmachinedowntime.”

Ø IdealStandardisdefinedbytheTerminologyas:“Thestandardwhichcanbeattainedunderthemostfavourableconditions,withnoallowancefornormallosseswasteandmachinedowntime”.

Ø Theobjectofsettingthematerialsusagestandardistoachievemaximumefficiencyinmaterialsusage.

Ø Alistispreparedshowingthedetailsofmaterials-size,grade,quantityetc.-forsettingthestandard.Thisisknownasa‘StandardMaterialsSpecification.’

Ø Theaimofsettingmaterialspricestandardistoachievemaximumefficiencyinthesefunction,andthusminimisedirectmaterialscosts.

Ø StandardLabourTimeindicatestheprecisetime(hours)thatlabourofaparticulargradeshouldtaketoperformagivenoperation.

Ø Themainobjectofsettingstandardlabourtimeistoderivemaximumefficiencyintheuseoflabourtime.

Ø LabourRateStandardreferstothewageratesexpectedtobepaidtodifferentgradesoflabouremployedintheorganisation.

Ø Theprimaryobjectofstandardcostingistorevealthedifferencebetweenactualcostandstandardcost.

Ø A‘variance’instandardcostingreferstothedivergenceofactualcostfromstandardcost.Ø TheCharteredInstituteofManagementAccountantsLondon,definesvarianceas

“thedifferencebetweenplanned,budgeted,orstandardcostandactualcost;andsimilarlyforrevenue”.

Ø Varianceanalysiscanbedefinedas“theanalysisofperformancebymeansofvariances”.Ø Iftheactualcostislessthanstandardcost,thedifferenceisknownasafavourablevariance,credit

varianceorpositivevariancedenotedby(F)orCr.-itincreasestheprofit.Ø ifactualcostexceeds,standardcosts,thedivergenceisknownasanunfavourablevariance,debit

variance,negativevarianceoradversevariancedenotedby(A)orDr.-itreducestheprofit.


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Ø aparticularindividualordepartmentalheadisresponsibleforthevariance,thevarianceisknownasacontrollablevariance.

Ø Anuncontrollablevarianceisonewhichisnotamenabletocontrolbyindividualordepartmentalaction.

Ø Thedifferencebetweentheoriginalstandardandrevisedstandardisknownas“RevisionVariance”.Ø Materialscostvarianceisthedifferencebetweenthestandardcostofmaterialsspecifiedandthe

actualcostofmaterialsused.Ø Thisisthatportionofthematerialcostvariancewhichisduetothedifferencebetweenthestandard

pricespecifiedandtheactualpricepaid.Ø Thisisthatportionofmaterialcostvariancewhichisduetothedifferencebetweenthestandard

quantityofmaterialsspecifiedandtheactualquantityused.Ø Afavourablevariancemaynotalwaysbeadvantageousfortheconcern.Forinstance,asavingin

materialusagemayperhapsbeeffectedbyareductioninwastagebyslowingdowntheworkbuttheresultingincreaseinthelabourandoverheadcostsmayfarexceedthefavourablematerialsusagevariance.

Ø Yieldvarianceisthedifferencebetweenthestandardyieldspecifiedandtheactualyieldobtained.Ø Ahighactualyieldindicatesefficiency,butaconstanthighyieldisapointerfortherevisionofthe

standard.Ø Labourcostvariance(alsotermedasdirectwagevariance)isthedifferencebetweenthestandard

directwagesspecifiedfortheactivityachievedandtheactualdirectwagespaid.Ø Thisisthatportionofthewagesvariancewhichisduetothedifferencebetweentheactualrateand

standardrateofanyspecified.Ø Labourefficiencyvariance,isthatportionofthedirectwagesvariancewhichisduetothedifference

betweenthestandardlabourhoursspecifiedandtheactuallabourhoursexpended.Ø Idletimevariancewhichformsaportionofwagesefficiencyvariance,isrepresentedbythestandard

costoftheactualhoursforwhichtheworkersremainidleduetoabnormalcircumstances.Ø Idletimevarianceisalwaysadverse.Ø LabourmixvarianceisalsoknownasGangCompositionVarianceØ Labouryieldvarianceisduetothedifferenceinthestandardoutputspecifiedandtheactualoutput

obtained.Ø Thetotaloverheadcostvarianceisthedifferencebetweenthestandardcostofoverheadallowed

fortheactualoutputachievedandtheactualoverheadcostincurred.Ø Variableoverheadvarianceisthedifferencebetweenthestandardvariableoverheadcostallowed

fortheactualoutputachievedandtheactualvariableoverheads.Ø Fixedoverheadrepresentsallitemsofexpenditurewhicharemoreorlessremainconstant

irrespectiveofthelevelofoutputorthenumberofhoursworked.Ø Fixedoverheadcostvarianceisthedifferencebetweenthestandardcostsoffixedoverheadallowed

fortheactualoutputachievedandtheactualfixedoverheadcostincurred.Ø Expenditurevarianceisalsoknownasbudgetvariance.Ø Thedifferencebetweenoverheadabsorbedonactualoutputandthoseonbudgetedoutputis

termedasvolumevariance.Ø Iftheactualoutputismorethanthestandardoutput,thereisover-recoveryoffixedoverheadsand

volumevarianceisfavourableandviceversaiftheactualoutputislessthanthestandardoutput.Ø Efficiencyvariancearisesduetothedifferencebetweentheoutputactuallyachievedandtheoutput

whichshouldhavebeenachievedintheactualhoursworked.Ø Capacityvarianceisthatportionofthevolumevariancewhichisduetoworkingathigherorlower

capacitythanthestandardcapacity.Ø Ifthecapacityutilizationismorethanthebudgetedcapacity,thevarianceisfavourable,otherwiseit

willbeadverse.


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Ø Revisedcapacityvarianceindicatesthedifferenceincapacityutilizationduetoworkingformoreorlessnumberofdaysthanthebudgetedone.

Ø Calendar(idletime)varianceisthatportionofthevolumevariancewhichisduetothedifferencebetweenthenumberofworkingdaysanticipatedinthebudgetperiodandtheactualworkingdaysintheperiodtowhichthebudgetisapplied.Iftheactualworkingdaysexceedstandarddays,thevariancewillbefavourableandvice-versa.

Ø Benchmarkingistheprocessofidentifying"bestpractice"inrelationtoproductandtheprocessesbywhichthoseproductsarecreatedanddelivered.

Ø Theobjectiveofbenchmarkingistounderstandandevaluatethecurrentpositionofabusinessororganisationinrelationto"bestpractice"andtoidentifyareasandmeansofperformanceimprovement.

Ø Theprimarypurposeofreportingtomanagementistoenablethemtotakecorrectiveactionandarrestunfavourablevariancestotheextentpossible.


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ANALYSISANDINTERPRETATIONOFFINANCIALSTATEMENTS

Ø FinancialstatementscompriseBalanceSheetorPositionStatementandStatementofProfit&LossorIncomeStatement.

Ø Thebalancesheetshowsthefinancialpositiononaparticulardateusuallyattheendofoneyearperiod.

Ø Thefollowinggroupshaveadirectinterestinthefinancialstatementsofcompanies:Suppliersandpotentialsuppliersoffunds,i.e.,shareholders,debentureholders,employees,customers,suppliersofgoodsandservicesoncredit,taxauthorities,etc.

Ø Financialaccountsandstatementsareofaverygreathelpinunderstandingtheprogress,positionandprospectsofthebusinessvis-a-vistheindustry.

Ø Itisthroughthereleaseoffinancialstatementsthatthemanagementscommunicatetheirperformancetovariouspartiesandjustifytheirexistence,andactivities.

Ø Itshouldbenotedthatthesefinancialstatementsareavailabletothepublicincaseofjointstockcompanies.Incaseofproprietorshipsorpartnerships,andotherformofownershipnosuchstatementsarepublishedormadeavailabletothepublic.

Ø Throughacriticalexaminationofthefinancialstatementstheshareholdersandlenderscancometoknowabouttheefficiencyandeffectivenessofthemanagementandposition,progressandprospectsofthecompany.

Ø Financialstatementsaretheresultoftheaccountingprocesswhichbeginswithrecordingoftransactions.

Ø Accountingprocessinvolvesrecording,classifyingandsummarisingbusinesstransactions.Ø Financialstatementsaretheresultofthethirdprocessviz.summarising.Ø Financialstatementstakeintoconsiderationonlythefinancialfactors.Theyfailtobringoutthe

significanceofnon-financialfactorswhichmayhaveconsiderablebearingontheoperatingresultsandfinancialconditionsofanenterprise.

Ø Unscrupulousmanagementsgenerallyresortto‘windowdressing’inthepreparationofFinancialstatements.Itisnotalwayspossibletodiscoverfalsefiguresinfinancialstatements.

Ø Infinancialstatementsonlyhistoricalfactsarepresentedandthetruecurrentworthisnotreflected.Ø Owingtothefactthatfinancialstatementsarecompiled,onthebasisofhistoricalcosts,whilethere

isamarkeddeclineinthevalueofthemonetaryunitandresultantriseinprices,thebalancesheetlossesitsfunctionasanindexoncurrenteconomicrealities.

Ø Highlightsareusuallyshownatthebeginningoftheannualreportsothattheusersmaycomeacrosstheimportantfactsofthecompanyimmediatelyasheopensthereport.Itmayusuallycoverinformationaboutsales,production,profitbeforeandaftertax,capitalprojects,workingcapital,fixedassets,sharecapital,importantlandmarksoftheyear,etc.

Ø Astatementofcashflow,reportsthecashreceipts,cashpaymentsandnetchangesincashresultingfromoperating,investingandfinancingactivitiesofanenterpriseduringaperiodinaformatthatreconcilesthebeginningandendingcashbalances.Itreportsanetcashinfloworoutflowforeachactivityandfortheoverallbusiness.

Ø Progressivecompaniesdiscloseaccountingpoliciesintheirpublishedaccountsonthebasisofwhichtheyhavepreparedtheirfinancialstatements.Thisisdonewithaviewtogivingbetterunderstandingofthefinancialstatementstothepublic.

Ø InordertomakethebalancesheetandStatementofProfit&Lossascompactaspossible,separateschedulesfordifferentheads(e.g.sharecapital,reservesandsurplus,securedloans,unsecuredloans,currentliabilitiesandprovisions,fixedassets,investments,currentassets,loansandadvances,miscellaneousexpenditure,etc.)arepreparedanddetailsregardingtheseheadsasprescribedintheCompaniesActaregivenintheseschedules.

Ø TheSachharCommitteehasrecommendedthatcompaniesshouldbegiventheoptiontoroundoffthefiguresoffinancialstatementstothenearestthousandand/orhundredortenrupees.


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Ø AccordingtoMyers,“financialstatementanalysisislargelyastudyofrelationshipamongthevariousfinancialfactorsinbusinessasdisclosedbyasinglesetofstatementsandastudyofthetrendofthesefactorsasshowninaseriesofstatements”.

Ø Analysisoffinancialstatementsreferstothetreatmentofinformationcontainedinthefinancialstatementinawaysoastoaffordafulldiagnosisoftheprofitabilityandfinancialpositionofthefirmconcerned.

Ø Processofanalysingfinancialstatementsinvolvestherearranging,comparingandmeasuringthesignificanceoffinancialandoperatingdata.

Ø Interpretation,whichfollowsanalysisoffinancialstatements,isanattempttoreachtologicalconclusionregardingthepositionandprogressofthebusinessonthebasisofanalysis.

Ø Financialstatementsareinterimreportsandthereforecannotbefinalbecausethefinalgainorlosscanbecomputedonlyattheterminationofthebusiness.

Ø Whenfinancialstatementsforanumberofyearsarereviewedandanalysed,theanalysisiscalled‘horizontalanalysis’

Ø Itisfrequentlyusedforreferringtoratiosdevelopedforonedateorforoneaccountingperiod.Verticalanalysisisalsocalled‘StaticAnalysis’

Ø ObjectiveofmakingLong-termAnalysisananalystsistoknowwhetherinthelong-termtheconcernwillbeabletoearnaminimumamountwhichwillbesufficienttomaintainareasonablerateofreturnontheinvestmentsoastoprovidethefundsrequiredformodernisation,growthanddevelopmentofthebusiness.

Ø TheobjectiveofShort-termAnalysisistoknowwhetherintheshort-runabusinessenterprisewillhaveadequatefundsreadilyavailabletomeetitsshort-termrequirementsandsufficientborrowingcapacitytomeetcontingenciesinthenearfuture.

Ø Acomparativebalancesheetshowsthebalanceofaccountsofassetsandliabilitiesondifferentdatesandalsotheextentoftheirincreasesordecreasesbetweenthesedatesthrowinglightonthetrendsanddirectionofchangesinthepositionovertheperiods.

Ø Comparativeincomestatementshowstheoperatingresultsforanumberofaccountingperiodsandchangesinthedatasignificantlyinabsoluteperiodsandchangesinthedatasignificantlyinabsolutemoneytermsaswellasinrelativepercentage.

Ø Commonsizefinancialstatementsarethoseinwhichfiguresreportedareconvertedintopercentagestosomecommonbase.

Ø Inacommonsizeincomestatementthesalesfigureisassumedtobeequalto100andallotherfiguresofcostsorexpensesareexpressedaspercentagesofsales.

Ø Inacommonsizebalancesheet,totalofassetsorliabilitiesistakenas100andallthefiguresareexpressedaspercentageofthetotal.

Ø Trendratioscanbedefinedasindexnumbersofthemovementsofthevariousfinancialitemsinthefinancialstatementsforanumberofperiods.

Ø Accountingratiosarerelationships,expressedinarithmeticalterms,betweenfigureswhichhaveacauseandeffectrelationshiporwhichareconnectedwitheachotherinsomeothermanner.

Ø BalanceSheetRatiosarealsoknownasfinancialpositionratiossincetheyreflectthefinancialpositionofthebusiness.

Ø OperatingRatiosorProfitandLossRatiosreflecttheoperatingconditionsofabusiness,theyarealsoknownasoperatingratios,e.g.,grossprofittosales,costofgoodssoldtosales,etc.

Ø SinceboththestatementsareinvolvedinthecalculationofCombinedRatios,theyarealsoknownasinterstatementratios.

Ø SecondaryRatiosareratioswhichhelptoanalysethefactorsaffecting“PrimaryRatio”.Ø SupportingRatiosareratioswhichreflecttheprofit-earningcapacitiesofthebusinessandthus

supportthe“PrimaryRatio”.Ø ExplanatoryRatiosareratioswhichanalyseandexplainthefactorsresponsibleforthesizeofprofit

earned.


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Ø Profitabilityratiosgivessomeyardsticktomeasuretheprofitinrelativetermswithreferencetosales,assetsorcapitalemployed.

Ø TurnoverRatiosorActivityRatiosareusedtomeasuretheeffectivenessoftheuseofcapital/assetsinthebusiness.

Ø FinancialRatiosorSolvencyRatiosarecalculatedtojudgethefinancialpositionoftheorganisationfromshort-termaswellaslong-termsolvencypointofview.

Ø MarketTestRatiosaresomeprofitabilityratios,havingabearingonthemarketvalueoftheshares.Ø Ameasureof‘profitability’istheoverallmeasureofefficiency.Ø ReturnonInvestmentisalsoknownasoverallprofitabilityratioorreturnoncapitalemployed.Ø Operatingprofitmeansprofitbeforeinterestandtax.Ø Capitalemployedcomprisessharecapitalandreservesandsurplus,long-termloansminus

nonoperatingassetsandfictitiousassets.Itcanalsoberepresentedasnetfixedassetsplusworkingcapital(i.e.currentassetsminuscurrentliabilities).

Ø ReturnonShareholders’Fundsisalsoreferredtoasreturnonnetworth.Ø Theratiosusedtomeasuretheeffectivenessoftheemploymentofresourcesaretermedasactivity

ratios.Ø Theseratiosrelatetotheuseofassetsforgenerationofincomethroughturnovertheyarealso

knownasturnoverratios.Ø CapitalTurnover(SalestoCapitalEmployed)RatioThehighertheratiothegreateraretheprofits.Ø AhighTotalAssetsTurnoverratioisanindicatorofovertradingoftotalassetswhilealowratio

revealsidlecapacity.Ø FixedAssetsTurnoverRatioisanindicatoroftheextenttowhichinvestmentinfixedassets

contributestogeneratesalesØ ToolargeaninventorywilldepresstheStockTurnoverratio;controloverinventoriesandactivesales

promotionwillincreasetheratio.Ø Debtors’collectionperiodshowsthequalityofdebtorssinceitmeasuresthespeedwithwhich

moneyiscollectedfromthem.Ø CreditorsTurnoverRatioindicatesthespeedatwhichthepaymentsforcreditpurchasesaremadeto

creditors.Ø theratiostobecomputedforjudgingthefinancialpositionarealsoknownassolvencyratiosand

thoseratioswhicharecomputedforshort-termsolvencyareknownasliquidityratios.Ø Currentratioalsoknownastheworkingcapitalratio.Ø GenerallyCurrentratio2:1ratioisconsideredidealforaconcern.Ø ThisratioisalsoknownasQuickRatioorAcidTestRatio.Ø Generally,aliquidratioof1:1isconsideredasidealasthefirmcaneasilymeetallcurrentliabilities.Ø Debt-equityratioistherelationbetweenborrowedfundsandowners’capitalinafirm,itisalso

knownasexternal-internalequityratio.Ø NormallyinIndiaanidealdebtequityratioisconsideredtobe2:1.Ø ProprietaryRatioindicatestheextenttowhichshareholders’fundshavebeeninvestedintheassets.Ø FixedAssetsRatioshouldnotbemorethan1.Itistheprincipleoffinancialmanagementthatnot

merelyfixedassetsbutapartofworkingcapitalalsoshouldbefinancedbylong-termfunds.Ø Debt-ServiceRatioalsoknownasFixedChargesCoverorInterestCover.Ø IdealDebt-Serviceratioshouldbe6to7times.Ø Theproportionbetweenfixedinterestordividendbearingfundsandnon-fixedinterestordividend

bearingfundsinthetotalcapitalemployedinthebusinessistermedascapitalgearingratio.Ø Incasethefixedincomebearingfundsaremorethantheequityshareholders’funds,thecompanyis

saidtobehighlygeared.Ø Alowcapitalgearingimpliesthatequityfundsaremorethantheamountoffixedinterestbearing

securities.Ø EarningPerShareratiomeasurestheprofitavailabletotheequityshareholdersonapersharebasis.


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Ø AlowE.P.S.meanslowerpossibledividendsandsolowermarketvalue,whileahighEPShasafavourableeffectonthemarketvalueoftheshares.

Ø PriceEarningRatioestablishesrelationshipbetweenthemarketpriceofthesharesofacompanyandit’searningpershare(EPS).

Ø Ahigherpayoutratiomaymeanlowerretentionandploughingbackofprofits,adeterioratingliquiditypositionandlittleornoincreaseintheprofit-earningcapacityofthecompany.

Ø Itshouldbenotedthatinthecalculationofallthemarkettestratiospreferencesharesareignoredandtheirdividendisadjustedagainstincome,beforeitisconsideredfortheseratios.

Ø Accountingratiossummariseandsystematisetheaccountingfiguresinordertomakethemmoreunderstandableinalucidform.Theyhighlighttheinter-relationshipwhichexistsbetweenvarioussegmentsofthebusinessexpressedbyaccountingstatements.

Ø Ratiosareatbest,onlysymptoms;theymayindicatewhatistobeinvestigated-onlyacarefulinvestigationwillbringoutthecorrectposition.

Ø Astatementofcashflowsreportstheinflows(receipts)andoutflows(payments)ofcashanditsequivalentsofanorganisationduringaparticularperiod.

Ø Astatementofcashflowreportscashreceiptsandpaymentsclassifiedaccordingtotheentities’majoractivities-operating,investingandfinancingduringtheperiod.

Ø Cashcomprisescashinhandanddemanddepositswithbanks.Demanddepositsmeanthosedepositswhicharerepayablebybankondemandbythedepositor.

Ø Cashequivalentsareshortterm,highlyliquidinvestmentsthatarereadilyconvertibleintoknownamountsofcashandwhicharesubjecttoaninsignificantriskofchangesinvalue.

Ø Cashflowsareinflowsandoutflowsofcashandcashequivalents.Ø Thedifferencebetweenthecashinflowsandoutflowsisknownasnetcashflowwhichcanbeeither

netcashinflowornetcashoutflow.Ø Cashflowsexcludemovementsbetweenitemsthatconstitutecashorcashequivalentsbecause

thesecomponentsarepartofthecashmanagementofanenterpriseratherthanpartofitsoperating,investingandfinancingactivities.

Ø Operatingactivitiesaretheprincipalrevenue-producingactivitiesoftheenterpriseandotheractivitiesthatarenotinvestingandfinancingactivities.

Ø investingactivitiesincludetransactionsandeventsthatinvolvethepurchaseandsaleoflong-termproductiveassets(e.g.land,building,plantandmachineryetc.)notheldforresaleandotherinvestments.

Ø Financingactivitiesareactivitiesthatresultinchangesinthesizeandcompositionoftheowners’capital(includingpreferencesharecapitalinthecaseofacompany)andborrowingsoftheenterprise.

Ø Unrealisedgainsandlossesarisingfromchangesinforeignexchangeratesarenotcashflows.Ø Thecashflowsassociatedwithextra-ordinaryitemssuchasbaddebtsrecovered,claimsfrom

insurancecompanies,winningofalawsuitorlotteryetc.aredisclosedseparatelyasarisingfromoperating,investingorfinancingactivitiesasthecasemaybe,inthecashflowstatement.

Ø Inthecaseoffinancialenterprises,Cashflowsarisingfrominterestpaidandinterestanddividendsreceived,shouldbeclassifiedascashflowsfromoperatingactivities.

Ø Cashflowsarisingfromtaxesonincomeshouldbeseparatelydisclosedandshouldbeclassifiedascashflowsfromoperatingactivitiesunlesstheycanbespecificallyidentifiedwithfinancingandinvestingactivities.

Ø Theaggregatecashflowsarisingfromacquisitionsandfromdisposalsofsubsidiariesorotherbusinessunitsshouldbepresentedseparatelyandclassifiedasinvestingactivities.

Ø Non-cashTransactionsshouldbeexcludedfromacashflowstatement.Ø Thenecessaryadjustmentsshouldbemadeforbaddebts,salesreturns,purchasesreturns,discount

allowed,discountreceivedetc.whilecalculatingtheamountreceivedfromthecustomersorpaidtosuppliers,asthecasemaybe.


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Ø Itemslikedepreciation,amortisationofintangibleassets(suchasgoodwill,patent,trademarketc.)orofdebenturediscount,preliminaryexpenses,premiumonredemptionofdebenturesandpreferencesharesareignoredfromthecashflowstatementsincethemethodanalysesandincludesonlycashtransactionsandtherefore,non-cashitemsareomittedfromastatementofcashflows.

Ø IndirectMethodisapartialconversionofaccrualbasisprofittocashbasisprofit.Thennecessaryadjustmentsaremadeforincrease/decreaseincurrentassetsandcurrentliabilitiestoobtainnetcashfromoperatingactivities.

Ø Fundmeansworkingcapital.Ø Theterm“flowoffunds”means“Transferofeconomicvaluesfromoneassetstoanotherandone

liabilitytoanother.”Ø “Fundsflowstatementisamethodbywhichwestudychangesinthefinancialpositionofabusiness

enterprisebetweenbeginningandendingfinancialstatementdates.Itisastatementshowingsourcesandusesoffundsforaperiodoftime.”

Ø “Astatementofsourcesandapplicationoffundsisatechnicaldevicedesignedtoanalysesthechangesinthefinancialconditionofabusinessenterprisebetweentwodates.”—ByFoulke

Ø “Thefundsflowstatementdescribesthesourcesfromwhichadditionalfundswerederivedandtheusetowhichthesesourceswereput”.—ByAnthony

Ø Ifcurrentassetsaremorethanpreviousyearcurrentassets,itmeansincreaseinworkingcapital.Ø Ifcurrentassetsarelessthanpreviousyearcurrentassets,itmeansdecreaseinworkingcapital.

Becauserelationshipbetweencurrentassetsandworkingcapitalispositiveandifanychangesincurrentassets,workingcapitalwillchangeinsamedirection

Ø Ifcurrentliabilitiesaremorethanpreviousyearcurrentliabilities,itmeansdecreaseinworkingcapital.

Ø Ifcurrentliabilitiesarelessthanpreviousyearcurrentliabilities,itmeansincreaseinworkingcapital.Ø Relationshipbetweenworkingcapitalandcurrentliabilitiesareinverse.Ø Cashflowstatementispreparedoncashbasis.Ø Fundsflowstatementispreparedonaccrualbasis.Ø CashflowstatementismoreusefulinshorttermanalysisandcashplanningØ Fundsflowstatementismoreusefulinlong-termanalysisoffinancialplanning.Ø Managementreportingisthatpartofmanagementcontrolsystemwhichprovidesvarious

informationtothemanagementintheformofreportandstatementatregularinterval.Managementreportingistheinstrumentformakingcontrolanddecisioneffective.

Ø MISisdefinedtobesystemofcollection,processing,retrievingandtransmissionofdatatomeettheinformationrequirementofdifferentlevelsofmanagersinanorganization.

Ø AccordingtoCIMAMISisasetofproceduresdesignedtoprovidemanagersatdifferentlevelsintheorganizationwithinformationfordecisionmaking,andforcontrolofthosepartsofthebusinessforwhichtheyareresponsible.

Ø TheMISsatisfiesthediverseneedsthroughavarietyofsystemssuchasQuerySystems,AnalysisSystems,andDecisionSupportSystems.

Ø MIShelpsinStrategicPlanning,ManagementControl,OperationalControlandTransactionProcessing.

Ø FinancialstatementsgenerallyrefertobalancesheetorpositionstatementandStatementofProfitandLossorincomestatement.Ofcourse,abusinessmayalsoprepareastatementofretainedearningsandacashflowstatement.

Ø Financialstatementsarepreparedonthebasisof(i)recordedfacts;(ii)accountingconventions;(iii)postulates;(iv)personaljudgements,and(v)accountingstandardsandguidancenotes.

Ø Attributesoffinancialstatementscover–relevance,accuracyandfreedomfrombias,comparability,analyticalpresentation,promptness,generallyacceptedprinciples,consistency,authenticityandcompliancewithlaws.


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Ø Financialstatementsareverymuchrelevantto–themanagement,thepublic,theshareholdersandthelenders,thelabourandtradeunions,thecountryandeconomy.

Ø Inadditiontothestatutoryrequirements,therecenttrendsinpresentingfinancialstatementsmayinclude-summarisedStatementofProfitandLossandbalancesheet,highlights,cashflowstatements,importantaccountingratios,disclosureofaccountingpolicies,charts,graphsanddiagrams,schedules,impactofpricelevelchanges,roundingoffoffigures,etc.

Ø Accordingtomodusoperandiofanalysisfinancialstatement,analysismaybehorizontalandvertical.Ø Accordingtotheobjectiveoftheanalysisfinancialstatement,analysiscanbelong-termandshort-

term.Ø Analyticalmethodsanddevicesusedinanalysingfinancialstatementsinclude-comparative

statements,commonsizestatements,trendratios,ratioanalysisandcashflowstatements.Ø Accountingratiosarerelationships,expressedinarithmeticalterms,betweenfigureswhichhavea

causeandeffectrelationshiporwhichareconnectedwitheachotherinsomeothermanner.Ø Ratiosmaybeclassifiedaccordingtothestatementuponwhichtheyarebased,functionand

importance.Ø Thefunctionalratioscanbefurtherclassifiedinto-profitabilityratios,turnoverratiosoractivity

ratios,financialratiosorsolvencyratiosandmarkettestratios.Ø Fundflowstatementalsoreferredtoasstatementof“sourceandapplicationoffunds”Ø Fund=Workingcapital=Currentassets–CurrentliabilityØ Flowoffundsincludeboth“inflow”and“outflow”.


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Activity-BasedCosting(ABC)

Ø TheActivity-BasedCosting(ABC)isacostingsystem,whichfocusesonactivitiesperformedtoproduceproducts.

Ø InABCcostsarefirsttracedtoactivitiesandthentoproducts.Ø CIMAdefinesActivityBasedCostingas,

‘costattributiontocostunitsonthebasisofbenefitreceivedfromindirectactivitiese.g.ordering,settingup,assuringquality.’

Ø ABChasalsobeendefinedbyCAM-1organisationofArlintonTexasas“thecollectionoffinancialandoperationperformanceinformationtracingthesignificantactivitiesofthefirmtoproductCosts”.

Ø Activity-basedcosting(ABC)isatwo-stageproductcostingmethodthatfirstassignscoststoactivitiesandthenallocatesthemtoproductsbasedontheeachproduct’sconsumptionofactivities.

Ø TheconceptsofABCweredevelopedinthemanufacturingsectoroftheUnitedStatesduringthe1970’sand1980’s

Ø ActivityCostDriverRatescanbeusedtoascertaincostofproductsandalsocostofothercostobjectssuchascustomersegments,distributionchannels.etc.

Ø ACostObjectisanitemforwhichcostmeasurementisrequirede.g.Product,joboracustomer.Ø InanABCsystem,theallocationbasisthatareusedforapplyingcoststoservicesorproceduresare

calledcostdrivers.Ø Costsarecausedbyagroupofthingsbeingmade,handledorprocessedatasingletimearereferred

toasbatchlevelcosts.Ø Acostcausedbythedevelopment,productionoracquisitionofdifferentitemsiscalledaproduct

levelorprocesslevelcost.Ø Activitiescompriseofunitsofworkortasks.Ø Activitiesbasicallyfallintofourdifferentcategories,knownasthemanufacturingcosthierarchy.

ThesecategorieswerefirstidentifiedbyCooperin1990andhelptodeterminethetypeofactivitycostdriverrequired.

Ø Unitlevelactivitiesareactivitiesforwhichtheconsumptionofresourcescanbeidentifiedwiththenumberofunitsproduced.

Ø ImplementationofABCwillemphasisonmorepreciseprofitanalysis,moreaccuratecosting,betterallocationofoverhead,improvedcostcontrolandcostmanagement.

Ø StagesindevelopedABCsystemasunder:•Identifyresources•Identifyactivities•Identifycostobjects•Determineresourcedrivers•Determinecost(activity)drivers•Assigncoststothecostobjects


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UnitCosting

Ø Unitcostingreferstothecostingprocedure,underwhichcostsareaccumulatedandanalyzedunderdifferentelementsofcostandthencostperunitisascertainedbydividingthetotalcostbynumberofunitsproduced.

Ø Unitcostingisideallyusedincaseofconcernsproducingasinglearticleonlargescalebycontinuousmanufacture.

Ø Thissystemofcostingissuitableforbreweries,collieries,cementworks,steel,brickmaking,flourmillsetc.

Ø Theworksandadministrationexpensesactuallyincurredalsoareincludedinthetotalcost.Ø Costsheetisadocumentwhichprovidesfortheassemblyofthedetailedcostofacostcentreorcost

unit.Ø Ifthedetailsofcostsheetorproductionstatementareshownintheformofaledgeraccount,itis

knownasproductionaccount.Ø Productionaccountispreparedinthreeparts-thefirstpartgivesthecostofproduction,thesecond

partgivesthecostofgoodssoldandthethirdpartshowscostofsalesortotalcostfortheperiod.

BatchCosting

Ø anotherformofjobcostingwhichisadoptedincaseofmanufacturingofalargenumberofcomponentsofmachinesorofotherarticles

Ø Abatchisacostunitwhichconsistsofaseparate,readilyidentifiablegroupofproductunitswhichmaintainsitsseparateidentitythroughouttheproductionprocess.

Ø Batchissmallgroupofunitswhichisproducedforproductionpurposes.

JobCosting

Ø MethodofcostingisusedinJobOrderIndustrieswheretheproductionisaspertherequirementsofthecustomer.

Ø Jobcostingmaybedefinedasasystemofcostinginwhichtheelementsofcostareaccumulatedseparatelyforeachjoborworkorderundertakenbyanorganisation.

Ø Thesystemofjobcostingcanbesub-dividedintotwocategoriesviz.(a)Factoryjobcostingand(b)Contractcosting

Ø Jobcostingisapplicabletoengineeringconcern,constructioncompanies,ship-building,furnituremaking,machinemanufacturingindustries,repairshops,automobilegaragesandsuchotherinfactorieswherejobsororderscanbekeptseparately.

Ø Everyproductionorderisassignedanumbercalledthejobnumber,job-ordernumber,workordernumber.

Ø Jobcostingenablesabusinesstoascertainthecostofajobonthebasisofwhichquotationforthejobmaybegiven.

Ø Thecostofanincompletejob,i.e.,ajobonwhichsomemanufacturingoperationisstilldueistermedaswork-in-progress.

Ø :Ajobcardorjobticketisusedtorecordthetimespentoneachjob,havingaspecifiedworkorderorjobordernumber.

Ø Jobcardsmaybeoftwotypes,one,whichisajobcostcard,andcontainsinformationregardingmaterialconsumptionaswellastimespentbyoperators.Theotheroneis,ineffect,ajobticket,whichisissuedtoanoperatorbythesupervisorandcontainsonlytheoperationdetails.

Ø Companiesthatarelikelytouseajobcostingsystemhaveawidevarietyofproductsorservices.Ø Jobcostinghelpsmanagementtodetectwhichjobsareprofitableandwhicharenot.


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Ø Jobcostingisparticularlysuitableforcostplusandsuchothercontractswheresellingpriceisdetermineddirectlyonthebasisofcosts.

Ø Jobcostinformationcanbeusedforestimationoffuturecostsonlyaftercarefuladjustmentsforvariationslikelytoariseovertimeaswellasforanydifferenceinthesizeoftheorder.

ContractCosting

Ø Incontractcostingeachcontractistreatedasacostunitandcostsareascertainedseparatelyforeachcontract.

Ø Escalationclauseprovidesthatincasepricesofitemsofrawmaterials,labouretc.specifiedinthecontractchangeduringtheexecutionofthecontract,beyondaspecifiedlimitoverthepricesprevailingatthetimeofsigningtheagreement,thecontractpricewillbesuitablyadjusted.

Ø Costpluscontractisacontractinwhichthevalueofthecontractisascertainedbyaddingacertainpercentageofprofitoverthetotalcostofthework.

Ø Whenacontractorisengagedonacontractforseveralyears,hecannotaffordtoblockalargeamountoffundsuntilthecompletionofthecontract.Therefore,incaseoflargecontractsthesystemofprogresspaymentisadopted.Thecontracteeagreestopayapartofthecontractpricefromtimetotimedependinguponsatisfactoryprogressofthework.

Ø AccountingStandard(AS-7)Revised2002–‘ConstructionContracts’issuedbytheInstituteofCharteredAccountantsofIndia.Itisstatedthatwhentheoutcomeofaconstructioncontractcanbeestimatedreliably,contractrevenueandcontractcostsassociatedwiththeconstructioncontractshouldberecognizedasrevenueandexpensesrespectivelybyreferencetothestageofcompletionofthecontractactivityatthereportingdate.Anexpectedlossontheconstructionshouldberecognizedasanexpenseimmediately.

ProcessCosting

Ø Processcostingmethodisusedinindustrieslikechemicals,textiles,steel,rubber,sugar,shoes,petroletc.

Ø Processcostingisamethodofcostingunderwhichallcostsareaccumulatedforeachstageofproductionorprocess,andthecostperunitofproductisascertainedateachstageofproductionbydividingthecostofeachprocessbythenormaloutputofthatprocess.

Ø CIMALondondefinesprocesscostingas“thatformofoperationcostingwhichapplieswherestandardizegoodsareproduced”

Ø ProcessCostingiscontinuous,homogeneousandstandardized.Ø Businessesthathavemultipledepartmentsusuallyuseprocesscostingsothatmanagementcan

assessthecostsaccumulatedbyeachdepartment.Ø Processcostingisbasedonaveragecostmethod,whichisnotthatsuitableforperformanceanalysis,

evaluationandmanagerialcontrol.Ø Normallossisanunavoidablelosswhichoccursduetotheinherentnatureofthematerialsand

productionprocessundernormalconditions.Ø Anylosscausedbyunexpectedabnormalconditionssuchasplantbreakdown,substandardmaterial,

carelessness,accidentetc.suchlossesareinexcessofpre-determinednormallosses.Thislossisbasicallyavoidable.

Ø Whentheactuallossislessthanthenormallossthenitiscalledasabnormalgain.Ø Advantageofthemethodistofindoutwhethertheparticularprocessismakingprofit(or)loss.This

willhelpthemanagementwhethertoprocesstheproductortobuytheproductfromthemarket.Ø Incompleteunitsmeanthoseunitsonwhichpercentageofcompletionwithregulartoallelements

ofcost(i.e.material,labourandoverhead)isnot100%.SuchincompleteproductionunitsareknownasWork-in-Progress.


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Ø Thetermequivalentunitmeansanotionalquantityofcompletedunitssubstitutedforanactualquantityofincompletephysicalunitsinprogress,whentheaggregateworkcontentoftheincompleteunitsisdeemedtobeequivalenttothatofthesubstitutedquantity.

Ø TheFIFOmethodofcostingisbasedontheassumptionofthattheopeningwork-inprogressunitsarethefirsttobecompleted.

Ø AverageCostMethodisusefulwhenpricefluctuatefromperiodtoperiodØ InLIFOmethodtheassumptionisthattheunitsenteringintotheprocessisthelastonefirsttobe

completed.

ServiceCosting

Ø Servicesaretermedasinternalwhentheyhavetobeperformedoninterdepartmentalbasisinfactoryitselfe.g.Powerhouseservices,canteenserviceetc.

Ø Servicesaretermedasexternalwhentheyaretoberenderedtooutsideparties.Ø Servicecostingisamethodofascertainingthecostofprovidingorservicesaservice.Itisalsoknown

asoperationcostingØ CIMALondon,definesServiceCostingas“thatformofoperationcostingwhichapplieswhere

standardizedservicesarerenderedeitherbyanundertakingorbyaservicecostrenterwithinanundertaking”.

Ø ServicecostingisextensivelyusedinTransportindustries.Hotelindustries,electricitycompanyetc.Ø UnitCostingreferstoacostingmethodwhichisusedwhencostunitsareidentical.Ø MultipleCostingreferstothemethodofcostingfollowedbyabusinesswhereinalargevarietyof

articlesareproduced,eachdifferingfromtheotherbothinregardtomaterialrequiredandprocessofmanufacture.

Ø Animportantfeatureofoperatingcostingisthatmostlysuchcostsarefixedinnature.Ø Intransportundertakings,thecostunitisnormallythetonne-kmorpassenger-km.Ø Intransportcostingtotalcostsconsistof:(i)Standingcharges;(ii)Runningcharges;(iii)Maintenance

charges.Ø Accumulationandcontrolofcostsintransportcostingareachievedthroughadailylogsheetand

operatingcostsheet.Ø Adailylogreportisadocumentwhichcontainsinformationregardingeachjourney.Ø Theoperatingcostsheetorcoststatementisalsoknownastheperformancestatementforeach

vehicle.Ø Themainpurposeofhospitalcostingistoascertainthecostofprovidingmedicalservices.

ByProductandJointProduct

Ø By-productsaredefinedas“anysaleableorusablevalueincidentallyproducedinadditiontothemainproduct”.

Ø CIMAhasdefineditas“twoormoreproductsseparatedinprocessing,eachhavingasufficientlyhighsaleablevaluetomeritrecognitionasamainproduct.”

Ø ifoneend-producthasgreaterimportanceandhighervalueandtheotherproductsareoflessimportanceandratheroflowvalue,thelattermaybeclassifiedasby-products.

Ø Jointproductsareproducedsimultaneouslybuttheby-productsareproducedincidentallyinadditiontothemainproduct.

Ø Jointproductsarenotidentifiableasseparateproductsuntilacertainpointorstageofproductioniscomplete.Thisstageisknownassplitoffpoint.

Ø .Costincurredpriortothesplitoffpointarereferredtoasjointcosts.Ø Costsincurredafterthisstagearereferredtoasseparateorsubsequentcosts.Ø maindefectofthismethodisthatitgivesequalimportanceandvaluetoallthejointproducts.Ø Surveymethodisalsoknownaspointsvaluemethod


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Ø Accordingtothismethod,jointcostsaresegregatedintotwoparts-variableandfixed.Thevariablecostsareapportionedoverthejointproductsonthebasisofunitsproduced(averagemethod)orphysicalquantities.

Ø Marketvaluemethodjointcostsareapportionedafterascertaining“whatthetrafficcanbear”.Ø Co-productsareparticulartypeofproductsbutproducedindifferentvarieties.Ø Co-productsaredistinguishedfromjointproductsinasmuchasthequantitiesofjointproducts

remaininlinearrelationshipbetweenthemwhereasco-productsareindependentonesandmaybeproducedindifferentquantitieswithoutanyco-relationshipwithothers.


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CostRecords

Ø Incostaccounting,thecostbooksarebasicallymaintainedunderthetwosystems.I]Non-integralornon-integratedcostaccountingandII]Integralorintegratedcostaccounting.

Ø Wherecostandfinancialaccountsaremaintainedinacombinedway,thesystemiscalledasintegratedwhileiftherecordsaremaintainedseparately,thesystemiscalledasnon-integratedsystemofmaintainingaccounts.

Ø itemsofexpenseswhichhaveabearingwithsalesor,productionorforthatmatteranyotheritemswhichareunderthefactorymanagementaretheonesdealtwithinnon-integratedsystemofaccounts.

Ø NonIntegratedAccountingSystemscontainfeweraccountswhencomparedwithfinancialaccountingbecauseoftheexclusionofpurchases,expensesandalsoBalanceSheetitemslikefixedassets,debtorsandcreditors

Ø Itemsofaccountswhichareexcludedarerepresentedbyanaccountknownascostledgercontrolaccount.

Ø Subsidiarybooksmaintainedundernon-integratedsystemofaccounting.Ø Storesledgerisusedtorecordboththequantityandamountofreceipts,issuesandbalanceof

materialsandsupplies.Ø Payrollandwageanalysisbookisusedtorecordthewages.Thebasisforrecordingthetransactions

are(a)clockcards,(b)timetickets,and(c)pieceworktickets.Ø Jobledgerisusedtorecordthematerialcost,wages,andoverheadsincurredinrespectofajob.Ø Finishedgoodsstockledgerisusedtorecordthereceiptoffinishedgoodsfromproduction

department,thesaleandstockoffinishedgoodsbothintermsofquantityandvalue.Ø Standingorderledgerisusedtorecordoverheadsincurred.Ø Debtors’Ledgercontainspersonalaccountsofalltradedebtors.Ø Creditors’Ledgercontainspersonalaccountsofalltradecreditors.Ø Generalledgeradjustmentaccountisalsoknownascostledgercontrolaccountornominalledger

controlaccount.Ø Storesledgercontrolaccountisdebitedwithpurchaseofmaterialsforthestoresandcreditedwith

issuesofmaterial.Ø InWagescontrolaccountthewagesaccruedandpaidandallocationofwagesinthisaccountare

recorded.Ø Workinprogresscontrolaccountincludesofalldirectmaterials,directwages,directexpenses,

specialpurchasesandexpenses.Ø Finishedgoodsstockledgercontrolaccountrepresentsfinishedgoodsstockledgertransactionsin

totalform.Ø IntegratedAccountingisasysteminwhichtheaccountsareintegratedandonlyasinglesetof

accountsaremaintainedforCost&Financialrecords.Ø noGeneralLedgerControlA/cispreparedinintegrated(integral)accountingsystem.Ø Itisalsoimportanttonotethatintegratedaccountsarelikeahybridbetweennon-integratedand

thefinancialsystemofaccountingasincaseofthenon-integratedsystem.Ø MemorandumReconciliationAccountisamemorandumaccountonlyanddoesnotformpartofthe

doubleentry.Ø ReconciliationstatementreconcilestheprofitasperCostAccountswiththeprofitasperFinancial

Accountsbyshowingallcausesofdifferencesbetweenthetwo.Ø Reconciliationplacesmanagementinbetterpositiontoacquaintitselfwiththereasonsforthe

variationinprofitspayingthewayformoreeffectiveinternalcontrol.


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CostAudit

Ø Costauditisanindependentexaminationofcostrecordsandotherrelatedinformationofanentityincludinganon-profitentity,whensuchanexaminationisconductedwithaviewtoexpressinganopinionthereon.

Ø costauditors’approachshouldbetoensurethatthecostaccountingplanisinconsonancewiththeobjectivessetbytheorganisationandthesystemofaccountingisgearedtowardstheattainmentoftheseobjectives.

Ø Section209oftheCompaniesAct1956dealswiththebooksofaccounttobemaintainedbyabodycorporate.

Ø Inexerciseofpowersconferredbysection642(1)readwithsection209(1)(d)oftheCompaniesAct,1956,theCentralGovernmentprescribesCostAccountingRecordRulesforthemaintenanceofcostrecordsrelatingtotheutilizationofmaterials,labourandotheritemsofcost,inthemannerasprescribed,byspecifiedclassofcompaniesengagedinproduction,processingmanufacturingorminingoperationsoftheprescribedproducts/activities.

Ø Section233BoftheCompaniesAct1956dealswiththeauditofCostAccountingrecords.Ø Anauditconductedbyanauditorundersection233Bshallbeinadditiontoanauditconductedby

anauditorappointedundersection224.Ø TheprimarypurposeofCostauditistoexpressanopiniononthecostaccountsofthecompany

whetherthesehavebeenproperlymaintainedandcompiledaccordingtothecostaccountingsystemfollowedbytheenterpriseornot.

Ø Section209(1)(d)oftheCompaniesAct,1956makesitobligatoryforacompanypertainingtoanyclassofcompaniesengagedinproduction,processing,manufacturingorminingactivitytomaintainsuchparticularsrelatingtoutilizationofmaterialorlabourorotheritemsofcostasmaybeprescribed,ifsuchclassofcompaniesisrequiredbytheCentralGovernmenttoincludesuchparticularsinthebooksofaccount.

Ø TheCentralGovernmentprescribestheseparatecostaccountingrecordsforeachclassofcompaniesandthesearecalledtheCostAccountingRecordsRulesforthatspecificindustryorclassofcompanies.

Ø ThelegalprovisionsrelatingtostatutorycostauditareapplicableonlytocompaniesregisteredundertheprovisionsofCompaniesAct,1956.

Ø ACostAccountantasdefinedinclause(b)ofsub-section(1)ofsection2oftheCostandWorksAccountantsAct,1959(23of1959)andwhoholdsavalidcertificateofpracticeundersub-section(1)ofsection6ofthatActandincludingFirmofCostAccountantscanbeappointedbyaCompanyascostauditor.

Ø Theauditcommitteeoftheboardisthefirstpointofreferenceregardingtheappointmentofcostauditors.

Ø Theauditcommitteeneedstotakeacertificatefromthecostauditorthatheisnotviolatingthelimitsspecifiedundersection224(1-B)oftheCompaniesAct,1956inacceptingtheappointment.

Ø TheCompanywouldberequiredtoFileForm23CwiththeCentralGovernmentwithin90daysfromthecommencementofeachfinancialyear,alongwiththeprescribedfeeandotherdocumentsi.e.certifiedcopyofboardresolutionproposingappointmentofcostauditorandCopyofcertificatefromtheauditorregardingcomplianceofsection224(1-B).TheapprovalwouldbedeemedtohavebeengrantediftheCentralGovernmentdoesnotraiseanyquerywithin30daysoffilingofForm23C.

Ø Section233B(4)oftheCompaniesAct,1956givesthecostauditorsamepowersasthefinancialauditorhasunderSection227(1).

Ø SendingtheReporttotheCostAuditBranchwithin180daysfromtheendofthefinancialyearwithonecopytothecompany.


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Ø InthosecompanieswhereconstitutionofanAuditCommitteeisnotrequiredbylaw,thefunctionsofthe“AuditCommittee”aspertheprocedurewillbedischargedbythe“BoardofDirectors.

Ø Costmanagementtechniquesindicatinghowanorganization’sassetsshouldbeallocatedovercompetingprojectsortodecidewhetheritisworthproceedingwiththeinvestment,keepinginviewproportionatevalueofexpenditureonsuchprojects.

Ø MonteCarloSimulation:Inthisanumberofvariablesaredrawnfromlargestatisticalpopulationwhichhaveequalchoiceofbeingselectedandobtainthebestsamplepossible.

Ø Costaudit,inordertobeeffective,shouldbecompletedatonetimeasfaraspracticable.Ø Theexactcontentofcostauditlargelydependsonthesizeoftheorganisation,rangeofproducts,

productionprocess,theexistenceofawellorganisedcostingdepartmentandofawelldesignedcostingsystem,andtheexistenceofacapableinternalauditingsystem.

Ø ACostAuditorisrequiredtosubmititsreporthis/her/itsreportintheformatasprovidedbytheCostAuditReportRules.

Ø TheMinistryofCorporateaffairshasrevisedtheCostAuditreportRulesinyear2011videG.S.R.430(E)datedthe3rdJune,2011.

Ø Costauditinvolves-checkingupthearithmeticalaccuracyofcostaccountsandverifyingwhethertheprincipleslaiddownhavebeenfollowedornot.

Ø Costauditdetectsandpreventserrorsandfraudsinpreparationofcostrecords.Ø Theauditingofcostaccountsactsasaneffectivetoolinthehandsofmanagementforthedetection

oferrors,frauds,inconsistenciesandirregularities.Ø Auditedcostaccountsarehelpfulinmakinginter-firmcomparison.Ø Section233BoftheCompaniesAct1956dealswiththeauditofCostAccountingrecords.

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