CHAPTER 1 |
Student’s Tip – Students should prepare this chapter thoroughly from two view points, namely, one in every examination some marks are attributed to this chapter and two, unless students understand the concepts discussed here, they will not be able to grasp the following chapters easily.
SYNOPSIS :
1. Cost Accountancy |
2. Cost Accounting |
2.1 Definition of Cost Accounting
2.2 Objectives of Cost Accounting
2.3 Importance of Cost Accounting
2.4 Advantages of Cost Accounting
2.5 Limitations of Cost Accounting
2.6 Reports Generated by Cost Accounting Department
3. Installation of Cost Accounting System |
3.1 Basic Considerations
3.2 Steps in Introduction
3.3 Essentials of a Good Cost Accounting System
3.4 Difficulties in Introduction
4. Role of a Cost Accountant |
5. Cost Accounting, Financial Accounting & Management Accounting |
5.1 Cost Accounting and Financial Accounting
5.2 Cost Accounting and Management Accounting
6. Cost – Concepts and Terms |
6.1 Cost
6.2 Pre-determined Cost
6.3 Standard Cost
6.4 Estimated Cost
6.5 Marginal Cost
6.6 Differential Cost
6.7 Discretionary Cost
6.8 Decision Driven Cost
6.9 Managed / Policy Cost
6.10 Postponable Cost
6.11 Imputed / Notional Cost
6.12 Inventoriable / Product Cost
6.13 Opportunity Cost
6.14 Out-of-pocket Cost
6.15 Joint Cost
6.16 Period Cost
6.17 Sunk Cost
6.18 Committed Cost
6.19 Shut down Cost
6.20 Relevant Cost
6.21 Replacement Cost
6.22 Absolute Cost
6.23 Cost Centre
6.24 Cost Unit
6.25 Cost Allocation
6.26 Cost Apportionment
6.27 Cost Absorption
6.28 Responsibility Centre
7. Elements of Costs |
7.1 Material Cost
7.2 Labour Cost
7.3 Expenses
7.4 Overheads
8. Classification of Costs |
8.1 By Nature
8.2 By Behaviour
8.3 By Element
8.4 By Function
8.5 By Controllability
8.6 By Normality
8.7 By Time When Computed
9. Types / Techniques of Costing |
9.1 Historical Costing
9.2 Uniform Costing
9.3 Standard Costing
9.4 Direct Costing
9.5 Marginal Costing
9.6 Absorption Costing
9.7 Difference Between Various Types of Costing
10. Methods of Costing |
10.1 Job Costing
10.2 Batch Costing
10.3 Contract Costing
10.4 Process Costing
10.5 Operating Costing
10.6 Single Output or Unit Costing
10.7 Multiple Costing
11. Analysis of Last Questions |
11.1 Scanning of Questions Asked in Past Examinations
11.2 Frequency Table Showing Distribution of Marks
1. COST ACCOUNTANCY |
The Institute of Cost and Management Accountants of England defines Cost Accountancy as follows:
“The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information, derived therefrom for the purpose of managerial decision making.”
Thus cost accountancy is a very comprehensive term.
2. COST ACCOUNTING |
2.1 Definition of Cost Accounting :
Based on the terminology published by the Institute of Cost and Management Accountants of England, Cost Accounting is defined as the process of accounting for cost. This process begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for the purpose of ascending and controlling costs.
2.2 Objectives of Cost Accounting :
Following are the main objectives of Cost Accounting –
(i) Ascertainment of Cost:
It can be done in two ways, namely,
(a) Post Costing, where the ascertainment of cost is done based on actual information as recorded in financial books.
(b) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where cost information is available as and when a particular activity is completed, so that the entire cost of a particular job is available the moment it is completed.
(ii) Determination of Selling Price:
Though there are various other considerations for fixing the selling price of a product (like the market conditions etc.), cost of the product is an important factor which cannot be sidelined.
(iii) Ascertainment of Profit :
The purpose of any business activity is to earn a profit and profit can be computed by matching the revenue and cost of that particular product/activity.
(iv)Cost Control and Cost Reduction:
Cost Control and Cost Reduction are two different concepts.
Cost Control aims at maintaining the costs in accordance with established standards. It involves the following steps –
Cost Reduction on the other hand aims at improvement established targets. It is defined as “the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.”
The difference between Cost Cost Control and Cost Reduction can be summarized as under:
[May’94]
Cost Control | Cost Reduction |
1. It represents efforts made ds towards achieving a target or a goal. | 1. It represents achievement of reduction of cost . |
2. The process of cost control is to Set-up a target, investigate the variations and take remedial action. | 2. Cost reduction is not contended merely with the maintenance of performance with standards. |
3. It assumes existence of norms or Standards which are not challenged. | 3. It assumes that the standards can be improved. |
4. It is preventive function. | 4. It is a corrective function. |
5. Sometimes, it lacks a dynamic approach. | 5. It is continuous process of analysis of all the factors affecting cost. |
(v) Facilitation of Inventory Valuation :
As per the Accounting Standard 2 on Valuation of Inventories, Inventories are to be valued at “lower of cost and net realisable value”. Costing accounting determines the ascertainment of this “cost” based on which the inventory is valued.
(vi) Assisting Management in Decision-making :
Decision-making is a process of choosing between two or more alternatives, based on the resultant outcome of the various alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved through a good cost accounting system.
2.3 Importance of Cost Accounting :
The importance of cost accounting can be highlighted through the following benefits which accrue to any business concern:
(i) Control of Material Cost :
Normally, material cost constitutes a major portion of the cost of the product. Hence control of material cost can ensure a good amount of benefit. Control of material cost can be exercised as follows :
(ii) Control of Labour Cost :
Labour cost control can be exercised as follows:
(iii) Control of Overheads :
Overheads are nothing but indirect expenses incurred at the factory, office and sales depots. Again control over overheads will ensure a control over the total cost of the product and a higher profit margin.
(iv) Determination of Selling Price :
Refer 2.2 (ii) above.
(v) Budgeting :
Any commercial activity begins with the preparation of budgets for the same. A budget serves as a guideline against which the actual performance can be measured and continuous corrective action can be taken to ensure that the budget is adhered to.
(vi) Measuring Efficiency :
Efficiency can be measured by comparing actuals against standards and corrective action can be taken.
(vii) Strategic Decision-making:
Cost accounting enables the management to take up various strategic decisions like “Make or Buy”, “Shut down or Continue”, “Replace or Continue”, ” Status quo or Expansion” etc.
2.4 Advantages of Cost Accounting :
(i) Helps optimum utilization of men, materials and machines
(ii) Identifies areas requiring corrective action
(iii) Identifies unprofitable activities, losses, inefficiencies
(iv) Helps price fixation
(v) Facilitates cost control and cost reduction
(vi) Facilitates use of various cost accounting techniques, like, variance analysis, value analysis etc.
(vii) Helps management in formulation of policies
(viii)Helps management in making strategic financial decisions. For eg: the technique of marginal costing helps the management in making various short term decisions.
(ix) Helps in formation of cost centres and responsibility centres to exercise control
(x) Marginal Cost having a linear relationship with production volume enables in formulation and solution of “Linear Programming Problems”.
(xi) Provides a data-base for reference by government, wage tribunals and trade unions etc.
2.6 Limitations of Cost Accounting :
2.6 Reports Generated by Cost Accounting Department :
The Cost Accounting Department generates the following reports as a routine, for use of its executives:
3. INSTALLATION OF COST ACCOUNTING SYSTEM |
[May’96, Nov’99]
3.1 Basic Considerations in Installation of Cost Accounting System :
A system is an established set of procedures for the purpose of achieving specific objectives at minimum cost. A lot of problems can be avoided if the cost accounting system is introduced carefully. Before setting up a system of cost accounting, the under mentioned factors should be studied :
3.2 Steps in Introduction of Cost Accounting System : [Nov’93]
The introduction of a cost accounting system will involve the following steps:
3.3 Essentials of a Good Cost Accounting System : [Nov’93, May’96]
3.4 Difficulties Likely to be Experienced in the Introduction of a Cost Accounting System :
Following initial difficulties are likely to be experienced when a new costing system is introduced :
4. ROLE OF A COST ACCOUNTANT IN A MANUFACTURING ORGANISATION |
A cost accountant in a manufacturing organisation plays several important roles
Usually, the functions performed by a cost accounting department includes -cost ascertainment, cost comparison, cost reduction, cost control and cost reporting.
In brief, one may say that there is hardly any activity in a manufacturing organisation with which a cost accountant is not directly associated in some form or the other.
5 COST ACCOUNTING, FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING |
5.1 Cost Accounting And Financial Accounting :
Financial Accounting is concerned with the preparation of financial statements, which summarise the results of operations for a selected period of time and show the financial position of the organisation as at a particular date. It helps to assess the overall progress of an organisation, its strength and weakness. It facilitates effective control over the assets of the organisation.
However, there are serious limitations of financial accountancy from the point of view of the management. It is on account of these limitations that “Costs Accounting” has been developed for the purpose of management control and internal reporting.
The limitations of financial accounting together with procedures that over come the limitations are given below:
Limitations of Financial Accounting | Overcome By Cost Accounting |
Forecasting and Planning
Financial accounts cannot provide information required for future planning. | Budget technique of cost accounting overcomes this hurdle. |
Decision-making
Day-to-day decision making like –
Cannot be facilitated by financial accounting. | The technique of marginal costing overcomes the decision-making limitation. The management can make accurate decisions by analysis of the cost incurred / to be incurred. |
Control and Assessment
Financial accounting does not provide management with the information required to assess the performance of various departments / persons. | The techniques of budgeting and standard costing enable management to perform this function. |
Thus the important limitations of financial accountancy namely, lack of analysis of data and absence of yardsticks is very well overcome by cost accountancy.
5.2 Cost Accounting and Management Accounting :
The scope of management accounting is broader than that of cost accounting. In cost accounting, the main emphasis is on cost and it deals with its collection, analysis, relevance, interpretation and presentation for various problems of the management. Management accountancy utilizes the principles and practices of financial accounting in addition to other modern management techniques for efficient operation of the organisation.
The main emphasis in management accountancy is towards determining policy and formulating plans to achieve the desired objective of the management.
Management accountancy has been defined by CIMA as under :
“An internal part of concerned with identifying, presenting and interpreting information used for:
6. COST – CONCEPTS AND TERMS |
6.1 Cost – Cost represents the amount of expenditure (actual or notional) incurred on or attributable to a given thing. It represents the resources that have been or must be sacrificed to attain a particular objective.
6.2 Pre-determined cost – It is the cost which is computed in advance, before the production starts, on the basis of specification of all the factors affecting the cost.
6.3 Standard cost – It is a pre-determined cost which is arrived at, assuming a particular level of efficiency in utilisation of material, labour and other indirect services. It is the planned cost of a product and is expected to be achieved under a particular production process under normal conditions. It is often used as a basis for price fixing and cost control.
6.4 Estimated Cost – It is an approximate assessment of what the cost will be. It is based on past data adjusted to anticipated future changes.
(Note : Standard cost Vs Estimated cost [Nov’92]
Although pre-determination is the essence of both standard cost and estimated cost, they differ from each other in the following respects:
6.5 Marginal cost – It is the amount at any given volume of output by which aggregate cost changes if the volume of output changes increases/decreases) by one unit.
6.6 Differential cost – It is the difference in the total cost between alternatives calculated to assist decision making Thus, it represents the change in total cost (both fixed and variable) due to a change in the level of activity, technology, process or method of production, etc.
6.7 Discretionary cost – It is an “escapable” or “avoidable” cost. In other words, it is that cost which is not essential for the accomplishment of a particular objective.
6.8 Decision-driven cost – It is that cost which is incurred following a policy decision and continues to be incurred till that decision is altered. It does not vary with changes in output or with operational activities.
6.9 Managed / Policy cost – It is that cost which is incurred as a matter of policy eg: R & D cost. This cost has two important features :
(Note : Decision-driven cost Vs Managed / Policy cost while managed / policy cost arises from periodic decisions (usually annual), decision-driven cost has no such fixed frequency).
6.10 Post-ponable cost – It is that cost which can be shifted to the future with little or no effect on the efficiency of the current operations.
6.11 Imputed / Notional cost – CIMA defines notional cost as “the value of benefits where no actual cost is incurred”. Thus, imputed cost is that cost which does not involve any cash outlay. Though it is a hypothetical cost, it is relevant for decision making. Interest on capital, the payment for which is not actually made, is an example of imputed cost.
6.12 Inventoriable / Product cost – It is the cost which is assigned to the product. For eg : Under marginal costing ® variable manufacturing cost. Under absorption costing ® total manufacturing cost (fixed and variable) constitute product or inventoriable cost.
6.13 Opportunity cost – It refers to the value of sacrifice made or benefit of opportunity forgone in accepting an alternative course of action. For e.g. If Mr. A works in his brother’s firm instead of working in X Ltd., then the loss of salary Mr. A suffers by foregoing employment in X Ltd., is the opportunity cost of working in his brother’s firm.
6.14 Out of pocket cost – It is that portion of total cost which involves cash outlay. It is a short term cost concept and is used in short- term decision making like make or buy, price fixation during recession. Out of pocket cost can be avoided if a particular proposal under consideration is not accepted.
6.15 Joint cost – It is the cost of the process which results in more than one main product.
6.16 Period cost – It is the cost which is not assigned to the product but is charged as an expense against the revenue of the period in which it is incurred. All the non-manufacturing costs like administrative, selling and distribution expenses are treated as period costs.
6.17 Sunk cost – Historical cost which is incurred in the past is known as sunk cost. This cost is not relevant in decision making in the current period. For eg. In the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost and hence irrelevant to decision making.
6.18 Committed cost – It is a fixed cost which results from decisions of prior period and is not subject to managerial control in the present. Examples of committed cost are depreciation, insurance premium and rent.
6.19 Shut down cost – The fixed cost which cannot be avoided during the temporary closure of a plant is known as shut down cost. Examples of shut down cost are depreciation and rent.
6.20 Relevant cost – CIMA defines relevant cost as ” cost appropriate to a specific management decision”.
6.21 Replacement cost – It is the cost of replacement in the current market.
6.22 Absolute cost – It is the total cost of any product or process. For e.g.: in a cost sheet, both absolute cost and cost per unit are depicted.
6.23 Cost centre – [May’95, May’97]
Meaning – For the installation of a cost accounting system, the organization is divided into sub-units. Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. It is defined as a location, a person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of cost control.
Types – Primarily , there are two types of cost centres, namely:
Functionally, there are two types of cost centres, namely:
Considerations – Formation of appropriate cost centres is very important for the purpose of cost control. Important considerations for the formation of cost centres are as follows:
6.24 Cost unit – Meaning – Once the cost of various cost centres is ascertained, the need arises to express the cost of output (product / service). A cost unit is defined as a unit of quantity of product, service or time (or a combination of these) in relation to which costs may be ascertained or expressed.
Cost units are usually units of physical measurement like number, weight, time, area, length, volume etc.
Examples – A few typical examples of cost units are given below :
Industry | Cost Unit Basis |
Automobile | Number |
Bicycle | Number |
Transport | Tonne-kilometer Passenger-kilometer |
Furniture | Each article |
Bridge construction | Each contract |
Interior decoration | Each job |
Advertising | Each job |
Nursing home | Bed or day |
Power | Kilowatt hour |
Bricks | Number |
Cement | Tonne, bag |
Steel | Tonne |
Chemical | Litre, gallon, tonne,kilogram |
Sugar | Tonne |
Coal | Tonne |
6.25 Cost allocation – Cost allocation refers to the allotment of whole items of costs to cost centres. For example, if a worker is employed in department “A”, then the wages paid to the worker are allocated or charged to department “A”. This process of charging the entire wages (being ‘cost’) of the worker to department “A” is termed as cost allocation.
6.26 Cost apportionment – It is the process of distributing an item of cost over several cost centres or cost units. Thus, one item of cost is charged to two or more cost centres or cost units. Normally overheads (indirect costs) are charged to cost centres or cost units by way of apportionment in proportion to the anticipated benefits.
( Note : Cost allocation Vs Cost apportionment. The former involves the process of charging direct expenditure to cost centres or cost units while the latter involves the process of charging indirect expenditure to cost centres or cost units.)
6.27 Cost absorption – It is the process of absorbing the overhead costs (indirect costs) allocated to or apportioned over a particular cost centre. Thus cost absorption follows cost allocation and cost apportionment. Selection of correct method of overhead absorption is very important for pricing policies, tenders and other managerial decisions. Overhead absorption is accomplished through overhead rates. For eg. the overhead costs of a ‘grinding centre’ may be absorped by using a rate per ” grinding” hour.
6.28 Responsibility centre – Meaning – When an organisation is divided into different sub-units according to the responsibility and for each sub-unit, a specified individual is made responsible, then the sub-unit thus formed is termed as a responsibility centre. Thus, a responsibility centre is defined as an activity centre of a business organisation entrusted with a special task.
The specified individual is held accountable only for those activities which he directly affects. Under modern budgeting and control, finance executives tend to apply the concept of responsibility centres for the purpose of control.
Types –
Responsibility centres can be classified as under:
7. ELEMENTS OF COST |
The following diagram depicts the various elements of cost:
7.1 Material Cost :
7.2 Labour Cost :
7.3 Expenses :
7.4 Overheads :
Overheads is the sum total of indirect materials, indirect labour and indirect expenses. Functionally overheads can be classified as under –
8. CLASSIFICATION OF COST |
8.1 Classification By Nature :
8.2 Classification By Behaviour :
8.3 Classification By Element :
Refer 7 above.
8.4 Classification By Function :
8.5 Classification By Controllability : [May’97]
Note: It may be noted that controllable and uncontrollable cost concepts are related to the authority of a person in the organisation. An expenditure which may be controllable by one person may not be controllable by another. Moreover, in the long run, all cost may be controllable.
8.6 Classification By Normality :
This cost is charged to the costing profit and loss account i.e., the product / process does not bear the abnormal cost.
8.7 Classification By Time when Computed :
9. TYPES / TECHNIQUES OF COSTING |
Following are the techniques of costing used in industries for ascertaining the cost of products / services:
9.1 Historical Costing – It is the ascertainment of costs after they have been incurred. This costing is based on recorded data and the cost arrived at are verifiable by past events. This type of costing has limited utility.
9.2 Uniform Costing –CIMA defines it as ” the use by several undertakings of the same costing system, i.e., the same basic costing methods, principles and techniques.”
9.3 Standard Costing –CIMA defines standard costing as ” a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance.”
9.4 Direct Costing –Under direct costing, a unit cost is assigned only the direct cost, i.e., all the direct costs are charged to the relevant operations, products or processes. The indirect costs are charged to the profit and loss account of the period in which they arise. As a result, inventory is valued at direct cost only.
9.5 Marginal Costing –Under marginal costing, marginal cost is ascertained by differentiating between fixed and variable costs. In this type of costing, variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution.
Marginal costing is of great importance in case of short-term decision making.
9.6 Absorption Costing – It is the technique of assigning all costs i.e. both fixed and variable, to the respective product/service.
9.7 Difference between various Types of Costing
Note : Please note the following distinctions
[May’94, Nov’97]
Differential Costing | Marginal Costing |
Scope
Wider than marginal costing. | Narrower than differential costing. |
Variability
Both fixed and variable costs are considered. | Only variable costs are considered. |
Definition
Cannot be precisely defined except in terms of increase or decrease in total costs. | Can be defined as prime cost plus variable overheads. |
Basis of Decision Making
Comparison of differential cost with incremental / decremental revenue. | Margin of contribution and profit volume. |
Incorporation in Accounting System
This type of costing does not find a place in the accounting system as it involves future course of action. However, it may be incorporated in the budgets. | Marginal costs may be incorporated in the accounting system. |
Applicability
Applicable to both, long term as well as short term decision making. | Applicable only to short term decision making. |
10. METHODS OF COSTING & THEIR APPLICABILITY |
The method of costing applied by a particular industry depends upon the nature of the industry.
Following are the various methods of costing which are commonly followed :
10.1 Job Costing– The objective under this method of costing is to ascertain the cost of each job order. A job card is prepared for each job to accumulate costs. The cost of the jobs is determined by adding all the costs against the job when it is completed.
This method of costing is used in printing press, foundaries, motor- workshops, advertising etc.
10.2 Batch Costing– This method of costing is used where small parts/components of the same kind are required to be manufactured in large quantities. Here a batch of similar products is treated as a job and the cost of such a job is ascertained as mention in (10.1) above
For e.g. in a cycle manufacturing unit, rims are produced in batches of 1,000 units each, then the cost will be determined in relation to a batch of 1,000 units.
10.3 Contract Costing– If a job is very big and takes a long time for its completion, then the method appropriate for costing is called contract costing. Here the cost of each contract is ascertained separately.
It is suitable for firms engaged in erection activities like construction of bridges, roads, buildings, dams etc.
10 4 Process Costing– This method of costing is used in those industries where the production comprises of successive and continuous operations or processes. Here specific units lose their identity in the manufacturing operation. Under this method of costing, costs are accumulated by ‘processes’ for a particular period regardless of the number of units produced.
This method of costing is followed by chemical industry, soap industry, rubber industry, paints industry.
10.5 Operating Costing – The method of costing used in service rendering undertakings is known as operating costing.
This method of costing is generally made use of by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.
10.6 Single Output/Unit Costing – This method of costing is used where a single product is produced. The total production cost is divided by the total number of units produced to get the unit/single output cost.
This method of costing is normally used in marble quarrying, mining, brick-kilns, breweries, etc.
10.7 Multiple Costing – It is a combination of two or more methods of costing mentioned above. Suppose a firm manufactures bicycles, including its components, the parts will be costed by way of batch costing but the cost of assembling the bicycle will be done by unit costing. This method is also called composite costing.
Some other industries using this method of costing are those manufacturing – radios, automobiles, aeroplanes etc.
11.ANALYSIS OF PAST QUESTIONS |
11.1 Scanning of Questions Asked in Past Examinations :
Nov’92 – Distinguish between : Standard costs and Estimated costs. (4 marks)
May’93 –Match the following : (1 mark each)
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May’93 – Indicate whether the following statements are True or False : All costs are controllable.
Nov’93 – Outline the steps involved in installing a costing system in a manufacturing unit. What are the essentials of an effective costing system? (16 marks)
May’94 – Distinguish between:
Marginal costing and Differential costing
Cost control and Cost reduction (8 marks)
May’95 – Write short notes on : Cost centre. (4 marks)
May’96 – What are the essentials of a good cost accounting system? (6marks)
May’96 – Narrate the essential factors to be considered while designing and installing a cost accounting system. (10 marks)
Nov’96 – A factory manufactures only one product in one quality and size. The owner of the factory states that he has a sound system of financial accounting which can provide him with unit cost information and as such he does not need a cost accounting system. State your arguments to convince him the need to introduce a cost accounting system. (4 marks)
May’97 – What is meant by ‘Cost Centre’ ? (4 marks)
May’97 – Distinguish between the following : Controllable costs and Uncontrollable costs. (4 marks)
Nov’97 – What is meant by ‘Profit Centre’? (4marks)
Nov’97 – Distinguish between : Differential costing and marginal costing
May’98 – Name the various reports ( Elaboration not needed) that may be provided by the Cost Accounting Department of a big manufacturing company for the use of its executives. (5 marks)
Nov’98 – Specify the methods of costing and cost units applicable to the following industries:
Nov’99 – Discuss the four different methods of costing along with their applicability to concerned industry. (4 marks)
Nov’99 – Enumerate the factors which are to be considered before installing a system of cost accounting in a manufacturing organisation. (5 marks)
11.2 Frequency Table Showing Distribution of Marks : |
Exam | Descriptive Questions | Practical Questions | Total Marks |
May’95 | 4 | – | 4 |
Nov’95 | – | – | – |
May’96 | 16 | – | 16 |
Nov’96 | 4 | – | 4 |
May’97 | 8 | – | 8 |
Nov’97 | 4 | – | 4 |
May’98 | 5 | – | 5 |
Nov’98 | 3 | – | 3 |
May’99 | – | – | – |
Nov’99 | 9 | – | 9 |
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Material
Introduction :-
These Chapter deals with Calculation & Control of Material Cost. Normally Stock of material is valued either at cost price or MKT Price whichever is lower. Under the Cost Price criteria method like FIFO [First In First Out], LIFO [Last In First Out], Weighted Average, Simple Average are used.
The Above Approach are related to calculation & valuation of material stock. However it is equally important to control the material cost. For controlling the cost , it is necessary to decide how much should be purchased, when to purchased, what should be stock level, How much discount should be demanded from the supplier etc. It is also necessary to keep check over material turnover. For controlling the material cost .
[1] ECONOMIC ORDER QUANTITY (EOQ) OR REORDER QUANTITY (ROQ)
It represent the quantity of material which should be purchased each time. These quantity is economical from the angle of the storages & ordering cost.
Where
A = Annual Consumption of Qty
B = Buying cost OR cost of placing one order.
CS = Cost of storing one unit of material for one year.
If the cost of the Investment is given then such cost also will be part of CS
Note :- Whenever Discount Factor given in a problem. These Formula will not be apply for calculating EOQ. |
[2] Reorder Period OR Delivery Period OR Lead Time :-
It represent the time gap involves between placement of order & Actual Receiving of the Delivery. Such Period is again divided into Maximum Period, Minimum Period, Average Period & Emergency Period.
[3] Reorder Level (ROL) :-
It represents that level of stock of which fresh quantity of material should be purchased. The Purchased Quantity will be EOQ.
ROL is calculated as follows :
A]
B]
C]
4] Maximum Stock Level
It represent minimum Qty of stock which should be maintained by Organisation.
5] Minimum Stock Level :-
It represent Minimum Qty of stock which should be maintained by Organisation
6] Average Stock Level :-
It represent on an average how much stock quantity should be maintained.
1]
2]
7] Danger Level :-
It represent that Level of stock below which production will stop.
8] Material Inventory Turnover Ratio :-
9] Material Inventory Period :-
It represents the period of one Consumption Cycle.
LABOUR
INTRODUCTION :-
This Chapter deals with Calculation of wages under Piece rate system & Time rate system. It is also covers Labour Turnover; it’s impact on profit & additional coverage will be General problem relating to labour calculation.
PART I
Piece rate system of labour Calculation :-
In this Approach wages are paid according to Quantity produced by the workers.
However efficient workers should be given some incentives & therefore following Approaches will be developed by Orthodox Cost Accountant..
[1] Taylor Approach :-
Level of Efficiency | Remuneration |
Less than 100% | 83% of Std Piece rate |
>=100% | 175% of Std Piece rate |
Note :- In the Institute Study Material it is given 125% which is not correct.
[2] Merrick Approach :-
Level of Efficiency | Remuneration |
Upto 831/3% OR 83.33% | Std Piece rate |
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Above 831/3% OR 83.33% but Upto 100% | 10% above Std Piece rate |
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Above 100% | 20% above Std Piece rate |
PART II
Time rate System of Labour Calculation :-
In this Approach Remuneration is Calculated according to actual time worked by the worker.
Following thinking are available
[1] HALSEY’S 50% PREMIUM APPROACH : –
Std Time :- It means Time allowed OR Std taken for Actual Production.
Actual Time :- It means Actual time take for Actual Production OR Actual Hrs Worked by the Worker.
Difference Between Std time & Actual Time , It represent Time Saved.
1st Part of the Formula Indicates Normal Wages
2nd Part of the Formula Indicates Bonus Amt or Incentives
[2] Rowan Approach :-
PART III
Mixed Approach :-
It is Developed by Gantt Task
This Approach is combination of Time rate system & Piece rate system.
Level of Efficiency | Remuneration |
< 100% | Actual Hrs Work X Std Rate Per Hour |
100% | Actual Hrs Work X [ Std Rate Per Hour + 20%] |
> 100%
| Actual Qty Produced X High Piece rate OR Actual Hrs Work X Std Rate per Hour + 1/3 |
* High Piece rate is fixed by the management.
Labour Turnover
It represent worker leaving the Job & New worker’s Appointed. Labour Turnover is essential for removal of inefficient worker & appointing of the new efficient workers. However high rate of turnover will result into loss of production, loss of sales, loss of profit & other administrative cost relating to selections, recruitment, training, etc of new workers.
Following method are available for calculation of labour turnover.
[1] Separation Method :
[2] Replacement Method :
[3] Flux Method:-
It is a Combination of 1st and 2nd
[4] Labour Turnover on the Basis of Hours
OVERHEADS
This chapter deals with detail analysis of Factory overhead, the Basis coverage is as under :-
[1] Distribution of Service Department Overheads to Production Department
[2] Treatment of Over Absorption & Under Absorption of overheads
[3] Calculation of Machine Hour Rate.
Distribution of Service Department Overheads to Production Department
These Department helping the Production Dept are known as “Service Department”.
For E.g;- Power Generation Dept
Repair & Maintenance Dept
Labour and Welfare Dept
Cost of such Department will be ultimately transfer to Production Dept . For this Purpose 3 Method are available.
[1] Simultaneous Equation Method
[2] Step and Ladder Method
[3] Repeted Cycle Method OR Continuous Distribution Method
Note : If Nothing is given in problem about method ,then [3] Method will be Apply. |
Treatment of Over Absorption and Under Absorption of Factory Overheads :
Absorption means Amt of Factory Overheads charge to WIP Account i.e. Production A/c.
Actual Overheads incurred is Different Amt & overheads charge to WIP is different Amt. Factory overheads charged to WIP on the basis of some predefined standard de to this situation of over and under Absorption arises.
If the amt of absorption is High as compared to amt actually incurred, it is represent “Over Absorption”
E.g :
Factory Overheads A/c
Actual Overheads Incurred | 100000 | Overheads charged to WIP | 120000 |
Over Absorption | 20000 | ||
[Bal Fig] | |||
120000 | 120000 |
If the amt of absorption is Less as compared to amt actually incurred, it is represent “Under Absorption”
E.g :
Factory Overheads A/c
Actual Overheads Incurred | 100000 | Overheads charged to WIP | 80000 |
Under Absorption | 20000 | ||
100000 | 100000 |
Overheads Absorption is Calculated as under :
METHOD I | ACTUAL LABOUR HOUR WORK X STD RATE LABOUR HOUR |
METHOD II | ACTUAL UNIT PRODUCED X STD FACTORY OVERHEADS PER UNIT |
|
|
METHOD IIII
| ACTUAL WAGES INCURRED X STD % OF OVERHEADS ABSORPTION WITH REF TO WAGES |
METHOD IV | ACTUAL MACHINE HOUR WORK X STD RATE OF OVERHEADS PER MACHINE HOUR |
If Standard rate of overheads absorption is not given then calculate as under :
[1]
[2]
[3]
[4]
* How to deal with Amount of Over or Under Absorbed Overheads :
APPROACH I | Amount will be carried forward to Next Year |
|
|
APPROACH II | Amount will be transferred to Costing P/L A/c. |
|
|
APPROACH III | Nullify the Over and Under Absorption Situation by revising std rate of absorption. |
Revise Std Rate of Absorption
Original Standard Rate [+/-] Supplementary Rate
In Case of Under Absorption Positive Supplimentary rate will be adopted & in case of over Absorption Negative supplimentary rate will be adopted.
Calculation of Machine Hour Rate
Machine Hour Rate represent expenses involved for using a machine for one Productive Hour.
Expenses of the Machine & Productive Hours of Machine, both should be calculated for the period operation.
In the Absence of Information Machine set up time will be considered as Productive time.
Cost Control [Integrated and Non Integrated Account]
This chapter deals with Accounting Treatment of costing transaction. Two Approach are available
1] Non Integrated Approach
2] Integrated Approach
Non Integrated Approach :-
It is pure costing approach in which Person A/c & Real A/c’s are ignored. In order to complete Double effects, Artificial Account is prepare ” General ledger Adjustment Account”
In this approach those item are ignored which are not considered in cost sheet .
We have to deal following account
[1] Stores Ledger Control Account
[2] Wages Control Account
[3] Factory Overheads Account
[4] WIP Account
[5] Office & Administration Account
[6] Finished Goods Account
[7] Selling and Distribution Account
[8] Cost of Goods Sold Account
[9] Costing Profit and Loss Account
[10] Sales Account
[11]General Ledger Adjustment A/c ( GLA A/c)
Flow of Transaction :-
[1] Total Material Purchased
Direct Material Transferred to WIP A/c
Indirect Material Transferred to Factory overheads A/c
[2] Total Wages
Direct Labour Transferred to WIP (Production) A/c
Indirect Labour Transferred to Factory overheads A/c
[3] For Direct Expenses WIP Account will be directly affected.
[4] Factory Overheads incurred Transferred to WIP Account
[5] WIP Account transferred to Finished Goods Account
[6] Office and Administration Transferred to Finished Goods
[7] Finished Goods Account Transferred to Cost of Sales Account
[8] Selling and Distribution Expense Transferred to Cost of Sales Account
[9] Cost of Sales Transferred to Costing Profit and Loss Account
[10] Cash/ Credit Sale done Transferred to Costing Profit and Loss Account.
[11] Costing Profit and Loss Account Transferred to GLA Account
1 | TOTAL MATERIAL PURCHASED | ||
STORES LEDGER CONTROL ACCOUNT ….. Dr | XX | ||
TO GENERAL LEDGER ADJUSTMENT ACCOUNT | XX | ||
2 | MATERIAL ISSUED TO PRODUCTION | ||
WIP ACCOUNT ….. Dr | XX | ||
TO STORES LEDGER CONTROL ACCOUNT | XX | ||
3 | REPAIRS AND MAINTENANCE MATERIAL [INDIRECT MATERIAL] | ||
FACTORY OVERHEADS ACCOUNT ….. Dr | XX | ||
TO STORES LEDGER CONTROL ACCOUNT | XX | ||
4 | TOTAL WAGES INCURRED | ||
WAGES CONTROL ACCOUNT ….. Dr | XX | ||
TO GENERAL LEDGER CONTROL ACCOUNT | XX | ||
5 | DIRECT LABOUR CHARGED TO PRODUCTION | ||
WIP ACCOUNT ….. Dr | XX | ||
TO WAGES CONTROL ACCOUNT | XX | ||
6 | REPAIRS AND MAINTENANCES [INDIRECT LABOUR] | ||
FACTORY OVERHEADS ACCOUNTS ….. Dr | XX | ||
TO WAGES CONTROL ACCOUNT | XX | ||
7 | DIRECT EXPENSES INCURRED | ||
WIP ACCOUNT ….. Dr | XX | ||
TO GENERAL LEDGER CONTROL ACCOUNT | XX | ||
8 | FACTORY OVERHEADS INCURRED | ||
FACTORY OVERHEADS ACCOUNT ….. Dr | XX | ||
TO GENERAL LEDGER ADJUSTMENT ACCOUNT | XX | ||
9 | SALE OF SCRAPE | ||
GENERAL LEDGER ADJUSTMENT ACCOUNT ….. Dr | XX | ||
TO FACTORY OVERHEADS ACCOUNT | XX | ||
10 | FACTORY OVERHEADS ABSORBED OR RECOVERED OR APPLIED OR ALLOCATED (TRANSFERRED) | ||
WIP ACCOUNT ….. Dr | XX | ||
TO FACTORY OVERHEADS ACCOUNT | XX | ||
11 | FINISHED GOODS PRODUCED | ||
FINISHED GOODS ACCOUNT ….. Dr | XX | ||
TO WIP ACCOUNT | XX | ||
12 | OFFICE AND ADMINISTRATION OVERHEADS INCURRED | ||
OFFICE OVERHEADS ACCOUNT ….. Dr | XX | ||
TO GENERAL LEDGER ADJUSTMENT ACCOUNT | XX | ||
13 | OFFICE OVERHEADS ABSORBED OR APPLIED OR ALLOCATED OR RECOVERED | ||
FINISHED GOODS ACCOUNT ….. Dr | XX | ||
TO OFFICE OVERHEADS ACCOUNT | XX | ||
14 | COST OF FINISHED GOODS SOLD | ||
COST OF SALES ACCOUNT ….. Dr | XX | ||
TO FINISHED GOODS ACCOUNT | XX | ||
15 | SELLING AND DISTRIBUTION OVERHEADS INCURRED | ||
COST OF SALES ACCOUNT ….. Dr | XX | ||
TO SELLING AND DISTRIBUTION OVERHEADS ACCOUNT | XX | ||
16 | CASH AND CREDIT SALE DONE | ||
GENERAL LEDGER ADJUSTMENT ACCOUNT | XX | ||
TO SALES ACCOUNT | XX | ||
17 | SALES TRANSFER TO COSTING PROFIT AND LOSS ACCOUNT | ||
SALES ACCOUNT ….. Dr | XX | ||
TO COSTING PROFIT AND LOSS ACCOUNT | XX | ||
18 | COST OF SALES TRANSFERRED TO COSTING PROFIT AND LOSS ACCOUNT | ||
COSTING PROFIT AND LOSS ACCOUNT ….. Dr | XX | ||
TO COST OF SALES | XX | ||
19 | PROFIT TRANSFERRED TO GENERAL LEDGER ACCOUNT | ||
GENERAL LEDGER ADJUSTMENT ACCOUNT ….. Dr | XX | ||
TO COSTING PROFIT AND LOSS ACCOUNT | XX |
Integrated Approach :-
It is a mixed Approach, which is combination of costing Approach and Financial Accounting Approach. It has 2 features
(1) Personal and Real Account will be considered. Therefore GLA Account will not be taken place. First 10 Account prepared as usual , followed by other Personal and Real Accounts.
(2) Non Costing Transaction will also be considered E.g Interest, discount, Dividend , Income Tax Etc.
The Flow of Transaction will be Considered here also.
JOB COSTING AND BATCH COSTING
JOB COSTING
When continuous production is not carried out but production depends on specific order received from customer, then in such case technique of Job costing is adopted for cost & profit calculation. Each order represent separate Job and we have to prepare Job cost sheet. The technique of Job costing is applied for preparation of Tender or Quotation.
In Absence of Information following points should be considered for preparing Job cost sheet.
[1] First a fall prepare cost sheet of running business or transaction took place in previous period.
[2] Calculate per unit cost of direct material, Direct labour, Direct Expenses and Selling & Distribution Overheads. Any Increase or Decrease will be adjusted to such per unit cost. The Revise per unit cost will be multiplied by Quantity of the Job order and we will get respective cost per job cost sheet.
[3] Calculate % of Factory overheads to Direct labour, using Data of previous period transactions.
[4] Apply this % on Direct Labour of Job cost sheet & we will get Factory overheads for Job cost sheet.
[5] Normally in Job Cost Sheet there will be no opening and closing WIP & Finished Goods. Even sale of scrape will not be taken place.
[6] Calculate % of office overheads to Works Cost using data of previous period. Apply this % to works cost of job cost sheet, & we will get office overheads for job cost sheet.
[7] Calculate % of Profit to cost of sale using data of previous period. Apply this % to cost of sale of Job Cost sheet & we will get the profit for job cost sheet.
BATCH COSTING:-
When Item produced is small in size identically nature , large scale production is carried out & cost per unit is quite lower, then the techniques of Batch Costing is utilised for calculation of cost.
We have to prepare cost sheet for particular Batch size. The Overall amount of fixed cost will not change according to Batch size but per unit fixed cost will be change according to Batch size.
If Semi variable expenses take place then it will be divided into Variable cost and Fixed cost.
This Techniques is utilised of manufacturing items like Pencils, Pins, Clips and Other small stationary Items, small Electrical Items, Etc.
OPERATING COSTING
Introduction
These Chapter deals with Calculation of Cost for Service Orientated Organisation.
E.g:- Hospitals, Theaters, Transportation Services, Educational Institution, Etc.
We have to Calculate Cost & Quantity for Period of Operation.
At the time of calculation cost Proper classification should be adopted in respect of variable cost, Fixed cost & Semi variable cost.
Variable Cost include those expenses which fully change according to the level of activity or level of Quantity.
Fixed Cost are those Cost which change according to time Factor & doesn’t have any relation with the quantity involves.
Normally Expenses like Rent, Depreciation, Interest, Etc are time based expenses or fixed expenses. Whenever we come across semi-variable expenses we have to divided into parts i.e Variable Cost and Fixed Cost. Normally Maintenance cost is semi variable cost.
Process Costing
Introduction
Process Account
Qty | Rate | Amt | Qty | Rate | Amt | ||
To Direct Material | xx | xx | xx | By Sale of Scrape | xx | xx | xx |
To Indirect Material | xx | xx | xx | By Sale of Wastage | xx | xx | xx |
To Direct Labour | xx | xx | xx | By Normal Loss | xx | xx | xx |
To Indirect Labour | xx | xx | xx | By Sale of Output | xx | xx | xx |
To Direct Exp | xx | xx | xx | By Loss on sale of Output | xx | xx | xx |
To Indirect Exp | xx | xx | xx | By Output transferred to Next Process | xx | xx | xx |
To Abnormal Gain | xx | xx | xx | ||||
To Profit on sale of Output | xx | xx | xx | ||||
xx | xx | xx | xx | xx | xx |
whenever it is possible to divide production procedure into separate function, then cost is calculated for each function separately by preparing Process Account. Process account will include all cost upto fact level.
Following are the Important Terms :-
1] Normal Loss :-
It represent Expected Loss of Output quantity which cannot be controlled. Such Quantity is estimated on the basis of Previous Experience. If Such Loss doesnot have sale value then it reflect as normal loss.
2] Expected Output = Input Quantity – Normal Loss
3]
4] Abnormal Loss :-
When actual Output obtained is lower as compare Expected output, then such loss of output is known as Abnormal Loss. Abnormal Loss take place due to Negligence.
Abnormal Loss Account Dr…… xx
To Process Account xx
5] Abnormal Gain
When Actual output obtained is higher as compare to Expected Output, then such Extra output obtained is considered as Abnormal Gain.
Process Account Dr…. xx
To Abnormal Gain Account xx
Note :- Effect of Abnormal Loss or Gain will be given only when actual output is given in the question.
INTER PROCESS PROFIT PROBLEM
When output of one process is transferred is transferred to another process by charging profit then it is Inter Process Profit Problem. In the Process account we have to give 3 column i.e Cost, Profit & Total. Total column is actual , All figure given in the problem are at total level, all calculation should be done with reference to amount of total column.
Output of 1st process will be transferred to second process by charging profit. Same procedure will be followed in subsequent process also. The opening & closing stock of 1st process will not have element of profit. However opening and closing stock subsequent process & finished goods will have profit element. We have to create stock reserves account for element pf profit in such stock. The stock reserves treatment will be covered in Costing P/L A/c.
The value of closing stock will be deducted from debit side instead of writing on credit side. The amount of profit will appear in Profit column & total column but never in cost column.
EQUIVALENT PRODUCTION
Introduction
In the Process Problem WIP is involved, then Equivalent Production Treatment will be apply. The cost of the process will be allocated between completed output and Incompleted Output depending on the level of completion derived in the current period.
Equivalent Production for the 1st Process using FIFO order:-
The opening WIP will be completed 1st & then fresh input will be completed , due to this Closing is available out of fresh Input. Following steps will be followed as working Note.
STEP I :- Prepare Process Account with Qty Data
STEP II :- Division of output quantity (using FIFO)
STEP III :- Statement of Equivalent Production
(QTY)
Particulars | Material | Labour | Fact. Overheads |
Opening WIP completed in current period (Apply Balance %) | xx | xx | xx |
Output from current Input (Always 100%) | xx | xx | xx |
Closing WIP completed in current period (Apply % Given) | xx | xx | xx |
Abnormal Loss (If scrape completion % is given then apply that % otherwise 100%) | xx | xx | xx |
(-) Abnormal Gain (always 100%) | xx | xx | xx |
Equivalent Quantity | xx | xx | xx |
Step IV Statement pf Equivalent Cost
Material | Labour | Factory Overheads | |
Rs. | Rs. | Rs. | |
Cost incurred in Current Period | xx | xx | xx |
(-) Sale of Scrape | xx | xx | xx |
Net Cost | xx | xx | xx |
/ |
|
|
|
Equivalent Qty | xx | xx | xx |
Equivalent C.P.U | x | x | x |
Step V :- Valuation Procedure
Part I Value of completed Output
(A) Value of opening WIP completed
Opening Cost B/d (given in the Problem) xx
(+) Current cost xx
[Equivalent Qty X Equivalent C.P.U]
xx
(+) Value of Output From Current Input
[Equivalent Qty X Total Equivalent C.P.U] xx
xx
Part II Value of closing WIP
Equivalent Qty X Equivalent CPU
Part III Value of Abnormal Loss
Equivalent Qty X Equivalent CPU
Part Iv Value of Abnormal Gain
Equivalent Qty X Equivalent CPU
After these working prepare Process Account which must tally.
CHAPTER 17 |
COST AUDIT & COST ACCOUNTING RECORD RULES |
Student’s Tip – This is another simple chapter and gives an introduction to cost audit and cost accounting record rules. The students should prepare this chapter from theoretical point of view.
SYNOPSIS :
1. Cost Audit |
1.1 Meaning of Cost Audit
1.2 Objectives of Cost Audit
1.3 Other Aspects of Cost Audit
1.4 Types of Cost Audit
1.5 Circumstances Under Which a Cost Audit is Ordered
1.6 Cost Audit Programme
1.7 Advantages of Cost Audit
1.8 Principal Functions of Cost Auditor.
2. Cost Accounting Record Rules |
2.1 Introduction
2.2 Accounting Records to be Maintained
2.3 Industries Covered
3. Analysis of Past Questions |
3.1 Scanning of Questions Asked in Past Examinations
3.2 Frequency Table Showing Distribution of Marks
1. COST AUDIT |
[May’92]
1.1 Meaning of Cost Audit :
The Institute of Cost and Management Accountants of England defines Cost Audit as follows – “the verification of cost records and accounts and a check on adherence to the cost accounting procedures and their continuing relevance”.
Thus, cost audit involves the following :
1.2 Objectives of Cost Audit : [Nov’99]
The objectives of cost audit can be summarised as follows –
a) To examine whether proper cost accounting records as per the provisions of the Companies Act have been maintained.
b) To check whether the records maintained as above give a true and fair view of the cost of production.
c) To verify the cost data and the reports generated therefrom.
d) To reduce wastage of materials and labour.
e) To maintain internal check and internal control in the various areas of operation.
(ii) Constructive Objectives
1.3 Other Aspects of Cost Audit : [Nov’97]
Apart from the aspects discussed above, cost audit also covers the following :
(i) Efficiency Audit :
Efficiency audit involves measurement of the efficiency of the performance of a company. Efficiency audit means comparison of actual performance with the set target, ascertaining the variances, investigating the reasons for the variances and instituting remedial action for the same.
Thus, the main purpose of efficiency audit is to ensure that –
(ii) Propriety Audit :
It means the audit of executive actions and plans bearing on the finances and expenditure of the company.
The cost auditor has to check the following aspects while conducting a propriety audit –
Thus, a propriety audit aims at supporting a reasonably high standard of financial prudence, so as to look after the interests of the shareholders.
Annexure to the Cost Audit (Report) Rules specifically provide for the cost auditor’s comments on “cases where the company’s funds have been used in a negligent or inefficient manner”.
1.4 Types of Cost Audit :
(i) Statutory Cost Audit :
Following are the features of statutory cost audit –
(ii) Cost Audit on behalf of the Management :
The management establishes a costing system so as to facilitate intelligent decision-making. The correctness of the decisions depends upon the reliability of the costing system and the accuracy of the cost data generated based on which such decisions are based.
A cost audit enables the management to –
(iii) Cost Audit on behalf of the Customer :
In the case of a “cost-plus contract” the contractee (or the customer), may insist on a cost audit so as to ascertain the correctness of the “cost”. Normally, the contract stipulates this facility for the contractee.
(iv) Cost Audit on behalf of the Government :
Such an audit is conducted under the following circumstances :
(v) Cost Audit on behalf of the Trade Association :
When a company becomes a member of a trade association, it may have to fulfill certain requirements of the trade association, one of which may be cost audit.
Such an audit helps the trade association to ascertain the reliability of the data submitted by the member company. It also facilitates the following –
1.5 Circumstances Under Which a Cost Audit is Ordered:
With reference to “Types of Cost Audit” in 1.4 above, following are the circumstances under which a cost audit is ordered –
1.6 Cost Audit Programme :
Meaning of Cost Audit Programme
A Cost Audit Programme is a plan of operations to be carried out while conducting a cost audit. It is a sequential arrangement of the activities to be carried out during a cost audit.
Contents of Cost Audit Programme
The contents of the Cost Audit Programme depends upon the following factors –
However, the Cost Audit Programme covers the following areas –
(i) General
Following are the general points to be considered during the preparation of the Cost Audit Programme
(iii) Audit Note Book
The Audit Note Book is systematic written record of the –
This book is useful while preparing the audit report.
(iv) Audit Procedures
This involves the various methodologies undertaken during the audit. These are as under –
(v) Audit Report
The Cost Audit Report has to be filed with the Government within 120 days of the end of the financial year for which the cost audit is conducted. To meet this requirement, he should prepare a detailed cost audit plan covering all the aspects to be reported.
(vi) Advantages of Cost Audit Programme
Following are the advantages of a cost audit programme –
(i) Work is done systematically.
(ii) Work is ready within the time limits.
(iii) Review of work done is easily possible.
(iv) No area of work is left unattended.
(v) There is documentary evidence of work done.
1.7 Advantages of Cost Audit : [May’99]
Following are the advantages of cost audit –
To The Management
To The Government
To the Society
To the Shareholders [Nov’97]
1.8 Principal Functions of Cost Auditor :
The Institute of Cost and Works Accountants has laid down the following principal functions of a cost auditor :
(i) Capacity Utilisation
The cost auditor has to ensure that –
(ii) Procedure For Issue of Stores
The cost auditor has to ensure that –
(iii) Labour
The cost auditor has to ensure that –
(iv) Overheads and Indirect Expenditure [Nov’95]
The cost auditor has to see that –
(v) Inventory
The cost auditor has to ensure that –
(vi) Opening and Closing Stocks
The cost auditor has to ensure that –
(vii) Work – in – Progress [Nov’96]
The cost auditor has to see the following –
2. COST ACCOUNTING RECORD RULES |
[May’99]
2.1 Introduction :
Before the imposition of statutory cost audit, the Government of India had issued Cost Accounting Record Rules under Section 209 (1)(d) of the Companies Act, 1956 in respect various products / industries. According to the rules, all the companies involved in production / manufacturing activity, for which certain cost accounting records have been prescribed, should maintain such records relating to utilization of materials, labour and other items of cost. The purpose of such a provision is that at any given point of time, product-wise cost of production and cost of sales can be easily ascertained. The cost accounting records prescribed as above have to be maintained in a specific format and their preparation has to be completed within the stipulated time limit. These rules are preliminary to statutory cost audit.
2.2 Accounting Records to be Maintained :
According to the Cost Accounting Record Rules, accounting records pertaining to the following need to be maintained for different industries –
(i) Raw materials
(ii) Labour
(iii) Overheads
(iv) Research and Development expenses
(v) Conversion Cost
(vi) Packing Cost
(vii) Interest
(viii) By-products and joint-products
(ix) Captive consumption
(x) Utilities and services
(xi) Capital expenditure
(xi) Work-in-progress
(xii) Cost of Production and Cost of Sales
(xiii) Reconciliation of Cost Accounts with Financial Accounts
(xiv) Computation of Variances
(xv) Physical verification
(xvi) Statistical data
2.3 Industries Covered :
The list of industries for which Cost Accounting Record Rules have been issued are as under :
(i) Cement
(ii) Cycles
3. ANALYSIS OF PAST QUESTIONS |
3.1 Scanning of Questions Asked in Past Examinations :
May’92 – Write explanatory note on : Cost Audit (8 marks)
Nov’95 – As a cost auditor what will you verify on the area of “overheads and indirect expenditure” (3 marks)
Nov’96 – What, as a cost auditor, will you verify in the area of work-in-progress ? (4 marks)
Nov’97 – What are the important aspects of cost audit ? How is it useful to the shareholders of a company ? (6 marks)
May’99 – How is cost audit useful to management, society, shareholders and government ? (4 marks)
May’99 – Write a brief note on Cost Accounting Record Rules (3 marks)
Nov’99 – Discuss the purpose of Cost Audit ? (3 marks)
3.2 Frequency Table Showing Distribution of Marks :
Exam | Descriptive Questions | Practical Questions | Total Marks |
May’95 | – | – | – |
Nov’95 | 3 | – | 3 |
May’96 | – | – | – |
Nov’96 | 4 | – | 4 |
May’97 | – | – | – |
Nov’97 | 6 | – | 6 |
May’98 | – | – | – |
Nov’98 | – | – | – |
May’99 | 7 | – | 7 |
Nov’99 | 3 | – | 3 |
*************************************************** END ****************************************************
Reconciliation of Costing and Finance
Introduction :-
In this Topic we reconcile or match costing Profit with Finance Profit. Costing Profit is calculated in Costing Department in the factory. Finance Profit is calculated in account department in head office. For any company for one accounting year, Profit figure must be same but in Actual Life this figure are never same. There is always difference between this profits. A Statement is Prepared regularly explaining the reason for differences. Such statement is known as statement of Reconciliation. Following are reasons for Difference :-
[1] Recording Of Expenses :-
In cost books expenses are record as estimate. In finance books expenses are recorded as actual . Estimate never equal to Actual.
[2] Method of Stock Valuation :-
In Cost Books stock is valued at cost of Production . In Finance books stock is valued at cost or Mkt Price which is less. As a method of stock valuation is different stock figure are different.
[3] Method Of Depreciation :-
In Cost records , Depreciation depends upon use of assets. In Finance books Dep depends upon SLM or RBM Method. As Method of Dep are Different and hence the profit is Different.
[4] There is a certain item which appear only in finance books or only in cost books. As a result figure are diferent and hence the Profit is different.
STATEMENT OF RECONCILIATION
Profit as Per Cost Books | xx | |
Add:- 1) | xx | |
2) | xx | |
3) | xx | xx |
xx | ||
Less :- 1) | xx | |
2) | xx | |
3) | xx | xx |
Profit as Per finance Books | xx |
Rules for Reconciliation Statement :-
[1] Exp are More , Profit is Less , Now You Add
[2] Exp are Less , Profit is More , Now You Less
[3] Income are Less, Profit is Less, Now You Add
[4] Income are More, Profit is More, Now You Less
Hint :- Opening Stock – Exp
Closing Stock – Income
COST SHEET
Every Business wants to earn maximum profits. For this Purpose, he has two options
[1] Increase in Selling Price
[2] Decrease the Cost
Rise in selling Price is not possible as there exists competition in the Mkt. Hence efforts are made to reduce the cost . The focus is on the future transaction of the company.
Cost Sheet :-
Cost Sheet is a statement in which all expenses are grouped under suitable heads for there analysis, Control, and Reduction. Aim is to earn maximum profit
Cost Sheet for the Year
Particulars | Amt | Amt | CPU |
Raw Material / Direct Material :- | |||
Opening Stock | xx | ||
Purchases | xx | ||
Carriage Inward/ Fright | xx | ||
xx | |||
(-) Sale of Material | xx | ||
Raw Material lost / destroyed | xx | ||
Purchase Return | xx | ||
Raw Material Consumed | xx | ||
Royalty | xx | ||
Production Wages | xx | ||
Factory wages | xx | ||
Direct Expenses | xx | ||
Chargeable Exp | xx | ||
Special tools | xx | ||
PRIME COST | xx | ||
Add :- Production / Factory / Works Overheads | |||
Factory Rent and Taxes | xx | ||
Power Electricity | xx | ||
Repairs and Maintenance | xx | ||
Manufacturing Exp | xx | ||
xx | |||
(-) Scrape Sale | xx | xx | |
(+) Opening Stock of WIP | xx | ||
xx | |||
(-) Closing Stock of WIP | xx | ||
FACTORY COST / WORKS COST | xx | ||
Add :- Office Overheads | |||
Printing and Stationary | xx | ||
Miscellaneous / General Exp | xx | ||
Managing Directors Salary | xx | xx | |
COST OF PRODUCTION | xx | ||
STATEMENT OF PROFIT / LOSS | |||
Opening stock of finished Goods | xx | ||
(+) Cost of Production | xx | ||
(+) Purchases of Finished Goods | xx | ||
xx | |||
(-) Closing Stock of Finished Goods | xx | ||
COST OF GOODS SOLD | xx | ||
Add :- Selling and Distribution of Goods | |||
Advertisement | xx | ||
Salesman Salary | xx | ||
Cash Discount | xx | ||
Bad Debts | xx | ||
Showroom Exp | xx | xx | |
TOTAL COST / COST OF SALE | xx | ||
Profit / Loss | xx / (xx) | ||
NET SALE | xx |
Note :-
[1] Interest paid on loan Dividend Paid , Bank charges Etc are Financial Exp not considered in Cost Sheet.
[2] In the absence of any instruction Cash Discount and Bad Debts are taken as selling Exp. Alternatively if they are taken as Finance Exp, they will not taken in Cost Sheet.
[3] Purchase of Fixed Assets is a Capital Expenditure never taken in Cost Sheet
CHAPTER 16 |
UNIFORM COSTING & INTER-FIRM COMPARISON |
Student’s Tip – This chapter is only of theoretical importance. However, students should study this chapter well for the following two reasons; one, that the chapter is very simple to understand and; two, that nearly every examination covers this chapter.
SYNOPSIS :
1. Uniform Costing |
1.1 Meaning of Uniform Costing
1.2 Applications of Uniform Costing
1.3 Objectives of Uniform Costing
1.4 Pre-requisites for installation of Uniform Costing System
1.5 Essentials of a good Uniform Costing System
1.6 Uniform Cost Manual
1.7 Advantages of Uniform Costing
1.8 Limitations of Uniform Costing
2.Inter-firm Comparison |
2.1 Meaning of Inter-firm Comparison
2.2 Procedure for Inter-firm Comparison
2.3 Pre-requisites for Inter-firm Comparison
2.4 Advantages of Inter-firm Comparison
2.5 Limitations of Inter-firm Comparison
3. Analysis of Past Questions |
3.1 Scanning of Questions Asked in Past Examinations
3.2 Frequency Table Showing Distribution of Marks
1.UNIFORM COSTING |
[May’92,May’96]
1.1 Meaning of Uniform Costing :
Uniform Costing is not a specific method of costing. It is only a system where several undertakings use a common set of costing principles, practices and procedures. The main objective of uniform costing is that the different undertakings in an industry should adopt a common method of costing and apply uniformly, the same principles and techniques so as to facilitate better cost comparison and cost control.
CIMA defines uniform costing as “the use by several undertakings of the same costing system, i.e., the same basic costing methods, principles and techniques.”
1.2 Applications of Uniform Costing :
The need for application of uniform costing arises in the following circumstances :
Members of the association are required to maintain uniform costing records. This ensures that cost data submitted by members is comparable and consistent. It also enables the trade association to fix common prices for the whole industry and measure the operating efficiency of the members.
1.3 Objectives of Uniform Costing :
The main objectives of uniform costing are summarised as follows :
1.4 Pre-requisites for installation of Uniform Costing System : [May’97]
For successful application of uniform costing system, the following conditions must be satisfied :
[May’98]
1.5 Essentials of a good Uniform Costing System :
A good uniform costing system essentially covers the following :
1.6 Uniform Cost Manual : [Nov’94]
Uniform Cost Manual is a written document, which may be in the form of a book or a bulletin, containing the principles, methods and procedures for the ascertainment and control of cost in uniform costing. It is necessary for the successful operation of uniform costing system. Such a manual provides guidelines to the participating firms to organise their cost accounting system on a uniform basis.
Following are the salient features of a uniform cost manual :
1.7 Advantages of Uniform Costing : [Nov’95, Nov’98]
1.8 Limitations of Uniform Costing : [Nov’96, Nov’98, Nov’99]
2. INTER-FIRM COMPARISON |
[May’96]
2.1 Meaning of Inter-firm Comparison : [May’95, Nov’97]
.Inter-firm comparison consists of voluntary exchange of information pertaining to the various aspects of the participating firms (like costs, productivity, profitability etc.) among the firms engaged in a similar business, so as to increase the efficiency of the firms concerned and the overall efficiency of the industry.
Inter-firm comparison is a technique of evaluating the performances, efficiencies, costs and profits of a firm with those of other firms in the industry. The process of evaluation is carried out by a neutral body, like a trade association. It enables the participating firm to compare its performance with that of the most efficient firm.
Inter-firm comparison follows the principle of “comparing like to like” and this is possible only a uniform costing system in use. Thus, uniform costing system is a pre-requisite to inter-firm comparison.
2.2 Procedure for Inter-firm Comparison:
The following procedure is adopted for inter-firm comparison :
2.3 Pre-requisites for Inter-firm Comparison : [May’95, Nov’97]
v) Method of collection and presentation of information – The methodology for collection and dissemination of information should be clearly laid down. Normally, the central body collects the information at fixed intervals, like quarterly, half-yearly or annually. This information is collected via specific forms or questionnaires. The information to be supplied by the member firms is normally in ratios. Absolute figures are not collected so as to safeguard the secrecy of the data supplied by the member firms. Such information collected is analysed and presented in the form of a report. This report is made available only to member firms.
2.4 Advantages of Inter-firm Comparison :
2.5 Limitations of Inter-firm Comparison : [May’97]
3. ANALYSIS OF PAST QUESTIONS |
3.1 Scanning of Questions Asked in Past Examinations :
May’92 – Write explanatory note on : Uniform costing (8 marks)
Nov’94 – Write short note on : Uniform cost manual (4 marks)
May’95 – Explain the meaning of ‘Inter-firm Comparison’. Describe the requisites to be considered while installing a system of inter-firm comparison by an industry (16 marks)
Nov’95 – A firm of printers is contemplating joining the uniform costing system being operated by it’s Trade Association but the Managing Director is doubtful about the advantages of becoming involved in the scheme.
Prepare a report to the Managing Director describing the advantages the firm is likely to gain. (7 marks)
May’96 – Write short notes on : Uniform costing, Inter-firm comparison (6 marks)
Nov’96 – State the limitations of uniform costing (4 marks)
May’97 – What are the requisites for installation of a uniform costing system ? (6 marks)
May’97 – Write four limitations of inter-firm comparison (4 marks)
Nov’97 – What is meant by ‘Inter-firm comparison’ ? Describe the requisites to be considered while installing a system of inter-firm comparison (8 marks)
May’98 – Write short note on : Points on which uniformity is essential before introducing uniform costing ( 4 marks)
Nov’98 – Explain in brief advantages and limitations of uniform costing (4 marks)
Nov’99 – Explain in brief the limitations of uniform costing (2 marks)
3.2 Frequency Table Showing Distribution of Marks :
Exam | Descriptive Questions | Practical Questions | Total Marks |
May’95 | 16 | – | 16 |
Nov’95 | 7 | – | 7 |
May’96 | 6 | – | 6 |
Nov’96 | 4 | – | 4 |
May’97 | 10 | – | 10 |
Nov’97 | 8 | – | 8 |
May’98 | 4 | – | 4 |
Nov’98 | 4 | – | 4 |
May’99 | – | – | – |
Nov’99 | 2 | – | 2 |
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