Cost & Management Accountancy

accounts • Financial accounts : recording financial transaction, preparing P&L A/C, balance sheet, cash flow statement. • Cost accounts: providing detailed cost information to various levels of management for efficient performance of their functions: “ The technique & process of ascertaining costs” • Management accounts: using accounts (both financial and cost) as a tool for management ie for decision making

Costing and cost accounting • Costing means finding the cost of products or services • Cost accounting means the technique used to find the cost & includes cost control and cost audit

Limitation of financial accounting • • • • • •

Shows only overall performance Historical in nature No performance appraisal No material control system No labour cost control Costs are not classified as variable, fixed, controllable and uncontrollable • No analysis of losses • No information of product prices • No data for decision ( make or buy, rent or own etc).

Objective and function of cost accounts • Ascertainment of cost • Cost control and cost reduction : standard costing, budgetary control, inventory control etc • Guide to business policy • Determination of selling price ( very important during depression)

cost • “price paid for something” • “ the amount of expenditure (actual or notional) incurred or attributable to a given thing” CIMA London • “ cost is a measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services” ICWA of India • To make it clearer cost has to be defined ie fixed cost, variable cost, marginal cost, controllable cost, material cost etc.

Cost vrs expenses vrs losses • Expenses is an expired cost resulting from a productive usage of an asset. • Used productively is expired cost ie dep. • Unexpired cost: benefit yet to be received ie lubricants purchased but not yet used • Loss an expired cost that generates no benefit.

Cost centre • “ a location person, or item of equipment for which costs may be ascertained and used for the purpose of cost control”

Cost unit • “ unit of product or services in relation to which costs are ascertained” CIMA London

Classification of cost • • • • • • •

Direct and indirect cost Fixed and variable cost Committed and discretionary cost Product cost and period cost Controllable and non controllable cost Historical cost and pre-determined cost Normal cost and abnormal cost

Other cost • • • • • •

Relevant cost & irrelevant cost Sunk cost Differential cost Opportunity cost Replacement cost Future cost

Components of cost cost Direct cost material

labour

Indirect cost expenses

material

labour

expenses

Components of cost • Direct material : material, components and primary packing material • Indirect material : grease, oil, soap, sandpaper, jute for cleaning etc. • Direct labour : wages • Indirect labour : supervisor, cleaner • Direct expenses: commission, royalty etc • Indirect expenses : insurance, repair advertisement.

Material control (inventory control) • “ systematic control & regulation of purchase, storage and usage of material in such a way so as to maintain an even flow of production at the same time avoiding excessive investment in inventories”

Objective of inventory control • • • • • •

No under stocking No over stocking Economy in purchasing Proper quality Minimum wastage Information about material

Technique of inventory control • ABC technique • Maintain stock level : maximum, minimum & reorder level • Economic order qty (EOQ) • Proper purchase of material • Proper store keeping • Proper identification of slow moving, non moving and obsolete material : inventory turnover, average stocking period

• Inventory turnover= cost of mat. Consumed/average stock • Average stock = O/S + C/s / 2 • Cost of material consumed = O/S + purchase – closing stock • Average stocking period = 365/ inventory turnover

Records to be maintained • • • • • •

BIN card Store ledger A/c Goods received note (GRN) Material requisition note Material return note Material transfer note

Methods of pricing material issue • • • • •

FIFO LIFO Simple average price Weighted average price Standard price

Prepare a store ledger using FIFO method • • • • • • • • •

1/4/07 Opening stock 2/4/07 purchase 3/4/07 issued 8/4/07 purchase 10/4/07 issued 13/4/07 issued 14/4/07 issued 15/4/07 purchase 16/4/07 issued

50 kg @ Rs 20/- per kg 40 kg @ RS 21/- per kg 60 kg 80 kg @ RS 24/50 kg 20 kg 10 kg 50 kg @ Rs 25/- per kg 40 kg

LABOUR COST • Direct Labour • Indirect Labour :(supervisor ,clerks ,peon , watchman) • Labour Turnover : No. of workers left / Average no. of workers Average no. of workersA : no. of workers in the beginning + no.of workers at the end / 2

WORK & MOTION STUDY • For repetitive work : • Work study • Motion study

OVERHEAD COST CLASSIFICATION OF OVERHEADS

Function : Production overhead Administrative overhead Selling & dist overhead

Element : Indirect material Indirect labour Indirect exp

Behavior :

Fixed Variable Semi variable

Problem on semi variable cost • From the given information find the fixed and variable cost incurred by the co. MONTH

OUTPUT

SEMI VARIABLE COST

Jan

80 units

Rs.2200

Feb

40 units

Rs.1600

Mar

120 units

Rs.2800

STEPS IN OVERHEAD DISTRIBUTION • Classification & collection of overhead • Allocation & apportionment of overhead to production & service dept. • Apportionment of service dept. cost to production dept. • Absorption of overhead of each production dept. in cost units

ABSORBTION OF OVERHEAD METHODS OF ABSORBTION 1) Direct material cost % rate Prod Overheads / Direct Material X 100 2) Direct labour cost % rate Prod Overheads / Direct Labour X 100 3) Direct labour hour rate Prod Overheads / Direct Labour Hour 4) Machine hour rate Prod Overheads / No. of Machine Hours 5) Rate per unit of output Prod Overheads / No. of Units Produced

TYPE OF OVERHEAD RATE 1) Actual Rate Actual Overhead /Actual Base 2) Predetermined Rate Budgeted overhead / Budgeted Base 3) Blanket Rate Total Overhead Of The Factory / Total Prod Of The Factory

TREATMENT OF SPECIAL ITEMS & OVERHEADS > INTEREST ON CAPITAL > DEPRECIATION : Methods of calculating -Straight line method cost of assets – scrap value / life of assets -Diminishing balance method -Production unit method cost of assets – residual value / expected prod during the life of the asset -Machine hour method cost of assets – residual value /expected machine hours during the life of the asset > RENT

problem • Usha martin has 3 prod deptt. Wire deptt, rope deptt,and annealing deptt. And 2 service deptt. Canteen & security. From the following information apportion the costs to various deptt. And prepare overhead distribution summary. • Rent 5000, indirect wages 1500, dep. 10000, general lighting 600, power 15000, misc. exp 5000. • Other information .

wire

rope

anneali cantee securit ng n y

Floor 4000 space

5000

6000

4000

1000

Light point

20

30

40

20

10

No.of 30 worker

20

30

15

5

HP of 60 m/c

30

50

10

nil

Value 60000 80000 10000 5000 of m/c 0

5000

Basic accountancy Mohan started his business with Rs 500000 which he received from his brother shyam in cash on 1 st april 2007. his other transactions during the year was 1 sold goods to hari on credit for Rs 1500000 and received Rs 1300000 cash during the year. 2 purchased goods from lucky enterprises for Rs 1400000 on credit but paid 1200000 cash during the year. 3 purchased a machine for Rs 20 lakh ( basic rate) on 1 st Oct. which was financed by SBI to the extend of 90 % of the basic rate. VAT @ 12.5 %, Excise @ 14 % , education cess 3 % and transporting Rs 10000 paid extra 4 other expenses carriage inwards 5000, salary 60000, rent 72000, carriage out 84000, wages 24000, telephone 12000. 5 charge depreciation @ 20 % PA , Intrest to SBI @ 12 % PA 6 stock as on 31/3/2008 was Rs 150000 Prepare journal entry, ledger, trial balance, P& L a/c and balance sheet

METHODS OF COSTING • • • • • • •

Output or unit/operation costing Contract Costing Batch Costing Process Costing Job order Costing Service/operating Costing Composite Costing

TECHNIQUE OF COSTING • • • • •

Standard Costing Budgetary Control Marginal Costing Total Absorption Costing Uniform Costing

OUTPUT OR UNIT COSTING • When production is uniform and on a continuous basis. • Only one product is produced. • Sugar, cement are some examples • Cost sheet is prepared with total cost and per unit cost.

Job costing • Cost sheet of each job is prepared ie making of a machine, ship • Cost and profit of each job is determined • Cost sheet is prepared but stock is not considered.

Batch costing • Suitable in industry where production is in batches ie tyre : truck, car, cycle etc. • Cost of each batch is found • Cost sheet for each batch is prepared • Determine the economic batch qty. • Set up cost: the cost to set the machine • Carrying cost : the cost of keeping the stock • Economic batch quantity: the batch qty that gives the max. profit.

Economic batch quantity • EBQ = • U=no. of units to be produced in a year • S=setup cost per batch • C=carrying cost per unit of production

problem • The following is the data of bata India for its NO. 8 Hush Puppy Shoe. • Monthly demand 750 units • Setting-up cost per batch Rs 2000/• Cost of Mfg. per unit Rs 1000/ • Rate of interest 10% • Calculate Economic Batch Qty ( EBQ)

Contract costing • Dam, bridge, road etc. • Generally take more than a year • Jobs are done in the factory but contracts at site. • Essentially a contract is a bigger job. • Fixed price contract/ cost plus contract

• Material at site at the end is credited • P&M is debited & at the end the value of machine is credited. • If M/c is hired hire charges is debited • Work in progress is work certified/ work un certified • If work is not completed profit is estimated

Notional profit • Value of work certified • Value of work un certified • • Less cost of work to date • notional profit

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Transfer to P&L a/c • If less than 25 % completed then ignored • 25 % to 50 % completed: 1/3 of notional profit. • More than 50 % less than 90% completed : 2/3 of notional profit. • 90% and more : estimated profit * work certified/contract price

problem • From the following data of L&T prepare a contract a/c. • Materials14,00,000, labour 10,00,000, plant 10,00,000, overhead 5,00,000 • Total value of contract 1,20,00,000 • Cash received 28,80,000 being 80 % of work certified • Cost of work uncertified 1,00,000 • Value of material in hand 5,00,000 • Depreciation on plant 20 %