Acma- 3-4
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WHY WE DO BUSINESS TO EARN PROFIT
Cost represents the source that has been or must be sacrificed to attain a particular objective.
COST
Tangible – Machine, Materials Services – Wages, Rent, Power Direct – Cash Indirect – Opportunity cost
SALE PRICE - COST = PROFIT SALE PRICE = COST + PROFIT
COST ACCOUNTING – WHY ?????
WE CAN INCREASE PROFIT BY a) REDUCING COST b) INCREASING SALE PRICE THE PRESENT ERA OF COMPITITION COST
THE EXPENSES INCURRED FOR PRODUCING A PRODUCT OR FOR PROVIDING A SERVICE. 1
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Effective Decisions : An effective decision accomplishes the goals that management seeks
Management can not avoid making decision
Efficient Decisions : An efficient decision consumes minimum amount of resources to achieve the desired goal
A good management decision should be both effective and efficient. For this Data/Information is required. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
2
CLASSIFICATION OF COST COST CONTROL / CONSCIOUSNESS
Basis of Element
WHY ???????
Material
1. TO INCREASE PROFIT 2. TO AVOID UNNECESSARY EXPENSES
DM
Basis of Time
Labour IDM
OH
DL
Estimated / Future
IDL
3. TO PROVIDE A STANDARD FOR CHECK
Basis of Function
4. FOR EXISTENCE IN THE MARKET DOH
5. IMPROVED EFFICIENCY AT LOW COST
IDOH
6. BETTER UTILISATION OF RESOURCES
8. EFFECTIVE UTILISATION OF CAPACITY Unit
9. TO IMPROVE OVERALL IMAGE OF THE
Job
Mfg. Or Product cost – Dir. Matrl + Dir. Labour + Prdn. OH Administrative cost – Indirect cost – salary, training
Basis of Method
7. MINIMISATION OF WASTAGES
Process
Selling & Distribution Advertisement
Cost
–
R&D cost – Indirect cost
COMPANY Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Historical / Postmortem
3
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Preproduction Expenses.
cost-
Preliminary 4
1
CLASSIFICATION OF COST
CLASSIFICATION OF COST Basis of Managerial decisions
Other Cost
Basis of variability Fixed
Variable
SV
Marginal cost – aggregate direct cost/ prime cost
Conversion cost – conversion of WIP to FG
Out of pocket cost – depreciation – no cash outlay
Common cost – Stationary
Increamental cost – added cost for a new unit
Traceable cost – Direct cost
Uniform cost – incurred on different cc of an undertaking using similar method of costing- FIFO, LIFO
Joint cost - Common cost Normal cost
Basis of Control
Opportunity cost
Avoidable and unavoidable cost
Replacement cost – cost for replacement
Total cost – sum of the all cost Controllable
Inputed cost – Hypothecated cost, no cash outlay, Interest on owner’s capital
Uncontrollable
Sunk cost - Historical cost not related to the decision. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
5
AREAS WHICH ARE CLOSELY RELATED TO THE COST
AREAS WHICH ARE CLOSELY RELATED TO THE COST
I. AREAS RELATED TO THE MAN POWER - COST OF RECRUITMENT - COST OF TRAINING & DEVELOPMENT - FIXED EXPENSES RELATED TO THE MAN POWER - COST RELATED TO THE EMPLOYEE WELFARE ACTIVITIES - COST OF IDLE TIME, ETC. II. AREAS RELATED TO THE MACHINE : - COST OF MAINTENANCE - COST OF LUBRICATION - COST OF IDLE TIME - OPPORTUNITY COST - COST OF RUNNING - POWER CUNSUMPTION - COST OF SAFETY MEASURES, ETC. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
6 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
III. OTHER AREAS : - PRODUCTIVITY - COST OF BUILDING MAINTENANCE - OTHER OVERHEADS EXPENSES - COST OF QUALITY - COST OF INVENTORY, ETC.
7
8 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
2
Why science: Constantly determining the relationship between reasons and consequences.
COST ACCOUNTING Cost accountancy is a subject that provides knowledge to take effective and efficient decision for cost control, ascertainment of profitability and internal and external reporting. Decision may be of three types:
Why an art of a Cost Accountant: Knowledge, skill, ability, imagination & innovation quality.
1) Profit decision 2) Investment decision 3) Dividend decision
Functional Activities of Cost Accounting Cost Book Keeping
Cost Accountancy is a comprehensive terms. It is used to describe the principles, convention, techniques and systems that are employed in a business to plan and control the utilisation of its resources. The application of costing, cost accounting principles, method and techniques to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of decision making.
Cost Control
Cost Reporting
Cost Analysis
Cost Finding
Cost Comparison
Cost Reduction
9
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
10 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Accounting, Financial Accounting and Management Accounting: Financial accounting
Cost accounting
preparation of financial statements which summaries the results of operations for selected period of time and show the financial position of the company at a particular date.
determination of cost of something (product, service, operation, and process) according to the costing objective of the management. A cost accountant is primarily charged with the responsibility of providing cost data for whatever purposes they may be required.
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Planning
Mgt. accounting application of appropriate techniques and concepts, which help management in establishing a plan for reasonable economic activities and making rational decisions for accomplishment of these objectives. Any technique whether it is drawn from financial accounting,cost accounting, economics, mathematics, and statistics can be used in management 11 accounting.
IMPORTANCE 1. -
General: Determination of the profitable and non profitable product. Fixation of the selling price of the product under different situation Cost ascertainment and comparison with past for trend purpose Relate cost data e.g. input output ratio, scrap, wastage, idle time, etc. Designing standard formats for cost control purposes, e.g. inventory related, job card, wage analysis sheet, etc. Presentation of monthly P&L a/c process or product wise Proper valuation of closing stock
2. -
Cost Control and Cost Reduction: Variance analysis with the help of standard Division of Cost in fixed and variable part for cost control Continuous effort to minimise cost and reduce standard cost also
3. -
Decision Making: Managerial decisions – Allocation of resources Technical decisions – Inventory control, Plant scheduling Non Routine Decisions – Make or Buy decisions 12
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
3
Unit Costing
Cost Accounting
Designing Costing For an Organisation:
Batch Costing
Costing Systems
Process Costing
Thorough study of the organisation and it’s process also objective
Selection of suitable costing system
Division of total cost into direct and indirect category
Contract Costing Operating Costing
Tools & Techniques For Cost Control
Marginal Costing
CVP Analysis
Budgetory Control
Standard Costing
A unit of quantity of output in relation to which costs are ascertained or expressed i.e. unit of output
Sugar – Tonne Steel – Tonne Power – KW Hour Bricks – 1000 numbers Chemical – Litre, KG, Gallon, Tonne Limitation of Cost Accounting : 1. Not an exact science and involves inherent element of judgement 2. Cost varies with purpose 3. It is not solution but helps in getting solution. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Allocation of persons or equipment or group of this for which the cost is to be ascertained. The basic purpose is cost control. For the purpose of Responsibility Accounting
Types: 1) Impersonal – Location, Equipment’s 2) Personal – Persons, Group of peoples 3) Process Cost Center – Chemical Industries 4) Cost centers related to area, location, sales, depo etc. 5) Production cc – Machine shop, welding shop, assembly shop, etc. 13
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Unit:
Cost Center:
15
Direct costs are directly allocable to the cost centers. But indirect costs are not directly allocable. e.g. service cost centers – Powerhouse, maintenance, personnel, canteen, etc. 14
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost sheet showing the cost of --------Particulars Cost of raw material consumed Cost of labour Cost of Direct Factory OH PRIME COST Indirect Factory OH MFG. COST/ WORKS COST / FACTORY COST Admn. OH COST OF PRODUCTION S&D OH COST OF GOODS SOLD Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Rs.
Rs.
0 0 0 0 0 0 0 0 0 0 16
4
Cost represents the source that has been or must be sacrificed to attain a particular objective.
COST
Tangible – Machine, Materials Services – Wages, Rent, Power Direct – Cash Indirect – Opportunity cost
SALE PRICE - COST = PROFIT SALE PRICE = COST + PROFIT
COST ACCOUNTING – WHY ?????
WE CAN INCREASE PROFIT BY a) REDUCING COST b) INCREASING SALE PRICE THE PRESENT ERA OF COMPITITION COST
THE EXPENSES INCURRED FOR PRODUCING A PRODUCT OR FOR PROVIDING A SERVICE. 1
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Effective Decisions : An effective decision accomplishes the goals that management seeks
Management can not avoid making decision
Efficient Decisions : An efficient decision consumes minimum amount of resources to achieve the desired goal
A good management decision should be both effective and efficient. For this Data/Information is required. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
2
CLASSIFICATION OF COST COST CONTROL / CONSCIOUSNESS
Basis of Element
WHY ???????
Material
1. TO INCREASE PROFIT 2. TO AVOID UNNECESSARY EXPENSES
DM
Basis of Time
Labour IDM
OH
DL
Estimated / Future
IDL
3. TO PROVIDE A STANDARD FOR CHECK
Basis of Function
4. FOR EXISTENCE IN THE MARKET DOH
5. IMPROVED EFFICIENCY AT LOW COST
IDOH
6. BETTER UTILISATION OF RESOURCES
8. EFFECTIVE UTILISATION OF CAPACITY Unit
9. TO IMPROVE OVERALL IMAGE OF THE
Job
Mfg. Or Product cost – Dir. Matrl + Dir. Labour + Prdn. OH Administrative cost – Indirect cost – salary, training
Basis of Method
7. MINIMISATION OF WASTAGES
Process
Selling & Distribution Advertisement
Cost
–
R&D cost – Indirect cost
COMPANY Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Historical / Postmortem
3
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Preproduction Expenses.
cost-
Preliminary 4
1
CLASSIFICATION OF COST
CLASSIFICATION OF COST Basis of Managerial decisions
Other Cost
Basis of variability Fixed
Variable
SV
Marginal cost – aggregate direct cost/ prime cost
Conversion cost – conversion of WIP to FG
Out of pocket cost – depreciation – no cash outlay
Common cost – Stationary
Increamental cost – added cost for a new unit
Traceable cost – Direct cost
Uniform cost – incurred on different cc of an undertaking using similar method of costing- FIFO, LIFO
Joint cost - Common cost Normal cost
Basis of Control
Opportunity cost
Avoidable and unavoidable cost
Replacement cost – cost for replacement
Total cost – sum of the all cost Controllable
Inputed cost – Hypothecated cost, no cash outlay, Interest on owner’s capital
Uncontrollable
Sunk cost - Historical cost not related to the decision. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
5
AREAS WHICH ARE CLOSELY RELATED TO THE COST
AREAS WHICH ARE CLOSELY RELATED TO THE COST
I. AREAS RELATED TO THE MAN POWER - COST OF RECRUITMENT - COST OF TRAINING & DEVELOPMENT - FIXED EXPENSES RELATED TO THE MAN POWER - COST RELATED TO THE EMPLOYEE WELFARE ACTIVITIES - COST OF IDLE TIME, ETC. II. AREAS RELATED TO THE MACHINE : - COST OF MAINTENANCE - COST OF LUBRICATION - COST OF IDLE TIME - OPPORTUNITY COST - COST OF RUNNING - POWER CUNSUMPTION - COST OF SAFETY MEASURES, ETC. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
6 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
III. OTHER AREAS : - PRODUCTIVITY - COST OF BUILDING MAINTENANCE - OTHER OVERHEADS EXPENSES - COST OF QUALITY - COST OF INVENTORY, ETC.
7
8 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
2
Why science: Constantly determining the relationship between reasons and consequences.
COST ACCOUNTING Cost accountancy is a subject that provides knowledge to take effective and efficient decision for cost control, ascertainment of profitability and internal and external reporting. Decision may be of three types:
Why an art of a Cost Accountant: Knowledge, skill, ability, imagination & innovation quality.
1) Profit decision 2) Investment decision 3) Dividend decision
Functional Activities of Cost Accounting Cost Book Keeping
Cost Accountancy is a comprehensive terms. It is used to describe the principles, convention, techniques and systems that are employed in a business to plan and control the utilisation of its resources. The application of costing, cost accounting principles, method and techniques to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of decision making.
Cost Control
Cost Reporting
Cost Analysis
Cost Finding
Cost Comparison
Cost Reduction
9
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
10 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Accounting, Financial Accounting and Management Accounting: Financial accounting
Cost accounting
preparation of financial statements which summaries the results of operations for selected period of time and show the financial position of the company at a particular date.
determination of cost of something (product, service, operation, and process) according to the costing objective of the management. A cost accountant is primarily charged with the responsibility of providing cost data for whatever purposes they may be required.
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Planning
Mgt. accounting application of appropriate techniques and concepts, which help management in establishing a plan for reasonable economic activities and making rational decisions for accomplishment of these objectives. Any technique whether it is drawn from financial accounting,cost accounting, economics, mathematics, and statistics can be used in management 11 accounting.
IMPORTANCE 1. -
General: Determination of the profitable and non profitable product. Fixation of the selling price of the product under different situation Cost ascertainment and comparison with past for trend purpose Relate cost data e.g. input output ratio, scrap, wastage, idle time, etc. Designing standard formats for cost control purposes, e.g. inventory related, job card, wage analysis sheet, etc. Presentation of monthly P&L a/c process or product wise Proper valuation of closing stock
2. -
Cost Control and Cost Reduction: Variance analysis with the help of standard Division of Cost in fixed and variable part for cost control Continuous effort to minimise cost and reduce standard cost also
3. -
Decision Making: Managerial decisions – Allocation of resources Technical decisions – Inventory control, Plant scheduling Non Routine Decisions – Make or Buy decisions 12
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
3
Unit Costing
Cost Accounting
Designing Costing For an Organisation:
Batch Costing
Costing Systems
Process Costing
Thorough study of the organisation and it’s process also objective
Selection of suitable costing system
Division of total cost into direct and indirect category
Contract Costing Operating Costing
Tools & Techniques For Cost Control
Marginal Costing
CVP Analysis
Budgetory Control
Standard Costing
A unit of quantity of output in relation to which costs are ascertained or expressed i.e. unit of output
Sugar – Tonne Steel – Tonne Power – KW Hour Bricks – 1000 numbers Chemical – Litre, KG, Gallon, Tonne Limitation of Cost Accounting : 1. Not an exact science and involves inherent element of judgement 2. Cost varies with purpose 3. It is not solution but helps in getting solution. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Allocation of persons or equipment or group of this for which the cost is to be ascertained. The basic purpose is cost control. For the purpose of Responsibility Accounting
Types: 1) Impersonal – Location, Equipment’s 2) Personal – Persons, Group of peoples 3) Process Cost Center – Chemical Industries 4) Cost centers related to area, location, sales, depo etc. 5) Production cc – Machine shop, welding shop, assembly shop, etc. 13
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost Unit:
Cost Center:
15
Direct costs are directly allocable to the cost centers. But indirect costs are not directly allocable. e.g. service cost centers – Powerhouse, maintenance, personnel, canteen, etc. 14
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Cost sheet showing the cost of --------Particulars Cost of raw material consumed Cost of labour Cost of Direct Factory OH PRIME COST Indirect Factory OH MFG. COST/ WORKS COST / FACTORY COST Admn. OH COST OF PRODUCTION S&D OH COST OF GOODS SOLD Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Rs.
Rs.
0 0 0 0 0 0 0 0 0 0 16
4
