Cost Acounting Presntation

Presenters: Chanda

Ayub Zulqernain Kanwal Shaukat Zeeshan Raza Mubasher Javed Mohammed Imran

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DEBT CONTRACT O W N E AND R S HACCOUNTING IP O ye who believe! When ye deal with each other, in transactions “ involving future obligations in a fixed period of time, reduce them to writing let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as Allah has taught him, so let him write. Let him who incurs the liability dictate, but let him fear his Lord Allah, and not diminish aught of what he owes. If the party liable is mentally deficient, or weak or unable himself to dictate, let his guardian dictate faithfully. And get two witnesses, out of your own men, and if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her. The witnesses should not refuse when they are called on (for evidence). Disdain not to reduce to writing (your contract) for a future period, whether it be small or big: it is juster in the sight of Allah, more suitable as evidence, and more convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on you if ye reduce it not to writing. But take witnesses whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye do (such harm), it would be wickedness in you. So fear Allah; for it is ”.Allah that teaches you. And Allah is well acquainted with all things )Surah Al-Baqarah:282)

Presentation

Some Key Concepts Cost

Behavior Fixed Cost Variable Cost Mixed cost

Total Fixed Cost

Monthly Line rent of Telephone Bill

A fixed cost is a cost whose total amount remains constant as the activity level changes. For Example monthly line rent of PTCL bill is fixed and does not change when you make more local calls.

Number of Calls

Total Variable Cost

Call Charges in a Telephone Bill

A variable cost is a cost whose total amount varies in direct proportion to changes in the activity level. For example total Call charges of PTCL bill is based on how many calls you made.

Number of Calls

Variable vs. Fixed Cost Summary of Variable and Fixed Cost Behavior Cost

In Total

Per Unit

Variable

Total variable cost is proportional to the activity level within the relevant range.

Variable cost per unit remains the same over wide ranges of activity.

Total fixed cost remains the same even when the activity level changes within the relevant range.

Fixed cost per unit goes down as activity level goes up.

Fixed

Mixed Costs Contain both variable and fixed components

 Part

of a mixed cost changes with volume or usage  Part is fixed over a particular period

Mixed Costs A mixed cost has both fixed and variable components. Some portion of it is fixed and some is variable. Total Cost

Y

l a t To

d e ix

t s co

m

Variable Cost per Unit

Number of units or Activity

X

Fixed Cost over a period

Mixed Costs For

planning and control purposes, mixed costs must be divided into their variable and fixed components These

components can then be grouped with other variable and fixed costs for analysis

Mixed Costs  Four

methods are used to separate mixed costs into variable and fixed components 1. 2.

3. 4.

Engineering method Scatter diagram method High-low method Statistical method Multiple approaches are often used because the results yielded by these methods are likely to differ.

High Low Method Identifies a linear relationship between activity level and cost by analyzing the highest and lowest volumes in an accounting period and their related costs Is a common, simple method Somewhat crude since it uses only the high and low data to predict cost behavior

The High-Low Method Three steps: 1. 2. 3.

Calculate the variable cost per unit or activity base Calculate the total fixed costs Calculate the formula to estimate the total costs within the relevant range

” n o i t a r “Illust

Step 1 Calculate the variable cost per activity base Select the periods of highest and lowest activity within the accounting period  Find the difference between the highest and lowest amounts for both machine hours and their related electricity costs. 

The High-Low Method Illustrated (cont’d) Step 1: Calculate variable cost per machine hour Difference in Cost Difference in Machine Hours $1,100 = 400 Machine Hours

Variable Cost per Machine Hour = The variable cost per machine hour will be used to calculate total fixed costs in Step 2 and total cost per month in Step 3.

= $2.75 per Machine Hour (MH)

The High-Low Method Illustrated Step 2: Calculate the total fixed costs Total Fixed Costs = Total Costs − Total Variable Costs 

Select the information from the month with either the highest or lowest volume

The High-Low Method Illustrated  December  

Total Costs = $24,700 Total Variable Costs = 6,450 MH x $2.75 per MH

Total Fixed Costs = $24,700 − (6,450 × $2.75 per MH) = $6,962.50 You can check your answer by recalculating total fixed costs using the month with the lowest activity.

August  

Total Costs = $23,600 Total Variable Costs = 6,050 MH x $2.75 per MH

Total Fixed Costs = $23,600 − (6,050 × $2.75 per MH) = $6,962.50

The total fixed costs in Step 2 will be used to calculate total cost per month in Step 3.

The High-Low Method Illustrated Step 3: Calculate the formula to estimate the total costs within the relevant range Total Costs per Month = Total Fixed Costs + Total Variable Costs From Step 2

From Step 1

Total Costs per Month = $6,962.50 + $2.75 per Machine Hour x No. of units

The High Low Method Can be represented as Follows: Y Y

= a+bx

= Total cost  a = Fixed Cost  b = Variable cost  x = Number of units or activity

Quick Quizz Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit

Quick Quizz Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? Units Cost a. $0.08 per unit High level 120,000 $ 14,000 Low level 80,000 10,000 b. $0.10 per unit Change 40,000 $ 4,000 c. $0.12 per unit $4,000 ÷ 40,000 units d. $0.125 per unit = $0.10 per unit

Advantages of High Low Method Useful

For Estimating Total Cost. Very simple to apply. Provide precise Mathematical equation. Reflects greatest possible variation in the activity. Can be applicable where cost and activity shows linear relation.

Disadvantages of High Low method Very

Limited. Focus only on two points. Periods with high and low data tends to be unusual. Less accurate as compared to other methods

Evaluation Though High Low Method is easy to use and very simple to apply but it has some limitations that restricts it to measure accurately. So, a manager who choose to use the high low method should do so with full awareness of its limitations.

True Or False A company has increased its level of activity, its fixed cost per unit would increase. ( False) Highly low method utilizes only two data points. (True)