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Tax Shield Education Pvt. Ltd. Cost Accounting-

Short Questions

1. Discuss the four different methods of costing along ith their a!!lica"ilit# to industr#.

Answer: Four different methods of costing along with their applicability to concerned industry

have been discussed as below :

1. Job Costing $ The objective under this method of costing is to ascertain the cost of eachjob order. A job card is prepared for each job to accumulate costs. The cost of the jobs isdetermined by adding all costs against the job when it is completed. This method ofcosting is used in printing foundries and general engineering wor!shops advertising etc.

". #atch Costing $ This system of costing is used where small components$ parts of thesame !ind are re%uired to be manufactured in large %uantities. &ere batch of similarproducts is treated as a job and cost of such a job is ascertained as discussed under 1above. 'f in a cycle manufacturing units rims are produced in batches of "()) unitseach then the cost will be determined in relation to a batch of "()) units.

*. Contract Costing $ 'f a job is very big and ta!es a long time for its completion thenmethod used for costing is !nown as Contract Costing. &ere the cost o each contract isascertained separately. 't is suitable for firms engaged in the construction of bridgesroads buildings etc.

+. ,perating Costing : The method of Costing used in service rendering underta!ings is!nown as operating costing. This method of costing is used in rendering services li!etransport supply of water telephone services hospitals nursing homes etc.

%. Define Product costs. Descri"e three different !ur!oses for com!uting !roduct costs.

Answer : -roduct costs are attributable costs. These are the costs which are assigned to theproduct. nder marginal costing variable manufacturing costs and under absorption costingtotal manufacturing costs constitute product costs.

-urposes for computing product costs : The three different purposes for computing productscosts are as follows :

i. Preparation of financial statements : &ere focus is on attributable costs.

ii. Product pricing : 't is an important purpose for which product costs are used. For thispurpose the cost of the areas along with the value chain should be included to ma!e theproduct available to the customer.

iii. Contracting with government agencies : For this purpose government agencies may notallow the contractors to recover research and development and mar!eting costs undercost plus contracts.

&.. 'o does a Production Account differ from a Cost Sheet.

Answer The following are the points of difference between a -roduction Account and a Cost/heet :

1. -roduction Account is based on double entry system whereas cost system whereas cost

sheet is not based on double entry system.

". -roduction Account consists of two parts. The first part shows cost of the componentsand total production cost. The second part shows the cost of sales and profit for theperiod. Cost sheet presents the elements of costs in a classified manner and the cost is

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ascertained at different stages such as prime cost0 wor!s cost0 cost of production0 cost ofgoods sold0 cost of sales and total cost.

*. -roduction account shows the cost in aggregate and thus facilitates comparison withother financial accounts. Cost sheet shows the cost in detail and analytical manner whichfacilitates comparison of cost for the purpose of cost control.

+. -roduction account is not useful for preparing tenders or %uotations. stimated costsheets can be prepared on the basis of actual cost sheets and these are useful forpreparing tenders or %uotations.

(. S!ecif# the methods of costing and cost units a!!lica"le to the folloing industries :

'ndustry 2ethod of costing nit of cost

i. Toy ma!ing #atch -er batchii Cement nit -er tonne or per bagiii. 3adio 2ultiple -er 3adio or per batch

iv. #icycle 2ultiple -er #icyclev. /hip building Contract -er /hipvi. &ospital ,perating -er #ed per day or

per patient per day.vii. City #us Transport 4o per -assenger 55 !ms.viii. &otels providing lodging facilities 4o per 3oom $ day

). *ne of the im!ortant and s!ecial !ro"lems in accounting of materials relates to thoseconcerning SC+AP, SP*LAE, /ASTE and DE0ECTES. Distinguish "eteen these and

state ho each of them shall "e accounted for. 'o are the# controlled 2

Answer.Scra! $

/crap is discarded material having some value. 't is also in the form of incidental residue tocertain type of manufacturing activities. 't usually has low value which is recoverable withoutfurther processing. /crap also represents loss of basic raw material which is conse%uentialresidue of some type of manufacturing activities. 't is always visible and it always visible and italways fetches some value. 6umerous e7amples of scrap may be given 8 turnings boringstrimmings filings shavings etc. from metals on which machine operations are carried out 0sawdust and trimmings in the timber industry0 dead heads and

bottom ends in foundries0 and cuttings pieces and splits and splits in leather industries.

S!oilages $

/poilage refers to production that does not meet with dimensional or %uality standard in such away that it can be rectified economically and is jun!ed and sold for a disposal value. 'trepresents loss of defective production which can not be finished. /poilage can be made torealise some value after application of some more material labour or overhead. This spoilagerepresents loss of material labour and overhead on production which can not be brought tofinished stage.

/aste $

9aste is define as discarded substances having no value. 't is that part of material which iseither lost shrin!s or evaporates in the manufacturing process and hence invisible or a residue

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which is visible but having no measurable recovery value. /ometime waste disposal entailsadditional e7pense vi. atomic waste. 9aste may be due to the following reasons :

vaporation of oil paints etc.

;osses inherent to brea!ing bul! as in the case of coal.

Absorption of moisture as in the case of lime etc.

6atural deterioration i.e. dusting.

Defective $

4efective products or units are those which do not meet with dimensional or %uality standardsand are rewor!ed for rectification of defects by application of material labour and $ or processingand salvaged to the point of either standard product or sub5standard product to be sold asseconds. 'f the defect is such that even after rewor! or reconditioning it can not be sold asseconds then it becomes scrap or as an e7treme case may be waste.

3. T'EACC*45T5*0SC+AP, SP*LAE, /ASTEA5DDE0ECTE/*+6S5*LEST'E0*LL*/5.

i. Costing or valuation of the scrap spoilage waste etc.ii. Accounting in product costsiii. Control of scrap spoilage and waste etc.

7. Scra! Accounting $

Accounting treatment of scrap depends on the realisable value.

9here value of scrap is negligible absorb the cost and the realised amount from sale of scrapwill be treated as other income.

9hen value of scrap is significant and identifiable with job or process the cost will be transferredto scrap account and the realisation from sales will be credited to job or process account. Thedifference will be transferred to costing profit and loss account.

9hen value is significant but scraps are not identified with particular job or process the netrealisation after deducting selling cost is transferred to either overheads or material account toreduce the overhead rate or material cost respectively.

Control of scra! $/crap control starts from the designing of product and process. fforts shall be made toma7imise utilisation of material and minimum wastage of material in the processing. A standardallowance for scrap should be fi7ed and actual should be compared against it. A periodicalreport indicating type of scrap nature of product good production units scrap units 8 actual andnormal < scrap to good units and standard allowance < and value of scrap etc. should beprepared from the data collected at the shop level and placed before the 4epartmental &ead forreview and remar!s.

S!oilage $Accounting $Cost of normal spoilage which is inherent in the operation is absorbed by charging either to the

production order or to production overheads. Cost of abnormal spoilage arising out of causesnot natural to the manufacturing process is charged to costing profit and loss account. Asregards charge to production there are two methods 8

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'dentifying loss arising out of spilage and

Absorbing in the value of good units so that spoilage %uantity or value is not identified.

'f spoiled units are reused as raw material in the same manufacturing process no separateaccounting treatment is re%uired. ,n the other hand if spoilage is used for any other process or

job a proper credit should be given to relevant process account or job account.

Control $

Control of spoilage is e7ercised by setting standards fi7ation of responsibility and systematicreporting.

/aste $Accounting $=ood units should absorb the cost of waste. &owever if any value is realised the processaccount concerned may be credited. Cost of abnormal waste should be e7cluded from the totalcost and charged to the costing profit and loss account.

Control $

Control is e7ercised over the %uantum of waste arising in a process or operation usually throughstandard set for the normal percentage of visible and invisible wastes that may be anticipated toarise in various manufacturing processes or operations.

'n order to !eep a control on waste a periodical report should be prepared by each departmentindicating >a? 6ature of waste >b? @uantity of waste generated >c? alue if any and >d?-ercentage comparison between normal and actual waste. Control action consists of review bydepartmental head and corrective action is ta!en especially if wastage is abnormal.

Defective $Accounting $

Cost of defectives includes reprocessing e7penses such as material labour direct e7penseswhich will add to the cost of job or process as a direct e7pense.

&owever if the e7pense is not identifiable with the particular job or process and the amount is notsignificant the total e7penses shall be collected by way of a standing order number and chargedto the departmental overheads or general overheads. 'f defectives are abnormal and are due tocauses beyond the control of the organisation0 say power failure at the time of rewor!ing the costof rewor! should be debited to costing profit and loss account. 't should be noted that cost of

remedying imperfection is not the cost of the particular job on which the defective wor! wasdiscovered. The cost of defective wor! is considered as an item of manufacturing overhead.

Control $

ffective control has to be e7ercised on the physical units of defectives as well as on the cost ofsalvaging. #est way is to fi7 standard or norms for defectives and rewor! and rectification costsand compare actual against them.

3eports on defective wor! should shown the reasons for the e7cess defective wor! and shouldbe prepared for each department or each department or each foreman for proper fi7ation ofresponsibility. The reports may also be made out for each individual job or production order in

which case the details of material labour and overhead costs up to the point or stage ofrejection may also be shown.

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8. Scra!s and S!oilage During Trial +un of E9ui!ments:

9hen a new e%uipment is installed generally it ta!es some time for it to wor! with normalefficiency. 'nitially some trial runs are re%uired to ma!e sure the e%uipment is running oncapacity.

4uring such trial runs the e%uipments may result into substantial scraps and spoilage withoutany commensurate output. /uch abnormal scrap ta!ing place at the initial stage should not becharged to normal output because the normal cost could then be vitiated. 2ost concerns preferto boo! the value of initial scrap due to teething problems as part of the capital cost of thee%uipment. Alternatively this may be charged to deferred revenue a$c. and recovered over aperiod of ne7t five years. A third alternative is to boo! the entire scrap to Costing -rofit and ;ossAccount -rovided the amount is not large and can be absorbed in one year.

:. Small tools are mechanical a!!liances used for various o!erations on or; !lace,s!eciall# in engineering industries. Such tools drill "its, chisels, scre cutter, files etc.

Treatment of cost of small tools of short effective life :

>i? /mall tools purchased may be capitalied and depreciation over life if their life isascertainable. 3evaluation method of depreciation may be used in respect of very smalltools of short effective life. 4epreciation of small tools may be charged to :

55 Factory overheads

55 ,verheads of the department using the small tool

>ii? Cost of small tools should be charged fully to the departments to which they have beenissued if their life is not ascertainable.

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1%. =ad De"ts $

#ad debts occur when some of the debtors fails to honour the commitments to pay and theorganiation suffers a loss in the sense that they do not receive the price for goods sold orservices rendered. #ad debts are usually considered part of selling and distribution overhead. 'tis also a debatable point in the sense that some accountants feel that bad debts arise out of

financial policy and should not be ta!en into cost accounting altogether.

These e7penses should be charged off directly in the Costing -rofit and ;oss Account. 'n casewhen bad debts are included in costing and are considered as part of selling overheads thisshould be divided into normal and abnormal elements. 9hen bad debts are within normal limitsthey should be absorbed in selling overheads as normal charge and when they are beyond thenormal limits they should be charged off to -rofit and ;oss Account thereby not being consideredin the cost.

1&. nterest on "orroings for or;ing ca!ital $

/ince wor!ing capital is a part of the ownerBs fund the remuneration for this is earned by the

owners and partners by way of profit or share of profit or dividend as the case my be. Thereforeinterest on wor!ing capital funds should not normally feature in costing and in product cost.9here however a part of the wor!ing capital is borrowed from ban!s$financial institutions orfrom other sources the interests on such borrowing may justify inclusion in costing being an itemof e7penditure chargeable to the -rofit and ;oss Account.

1(. *"solescence

't represents the loss arising as a result of having to discard an asset due to its suppression infavour of a more productive asset at an earlier date than planned$contemplated. 't is sometimescalled e7ternal depreciationD because the e7isting asset is replaced by a new asset on account

of invention$innovation.

The loss due to obsolescence to fi7ed assets may be dealt with in the following manner :

>i? 'n industries which are vulnerable to the ris!s of obsolescence e.g. electronics it issomewhat predictable that obsolescence will ta!e place with certain fre%uency. 'n suchcase higher rates of depreciation may be charged to ta!e care of such obsolescence.

>ii? For industries which are not vulnerable to fre%uent obsolescence it is prudent to create areserve fund to ta!e care of such eventualities.

>iii? For other industries bearing a remote possibility of obsolescence in the event ofobsolescence ta!ing place loss is to be written off to -rofit and ;oss Account.

1). Tool Cost $

Tools may be classified as >a? large tools and >b? small tools large tools are normally capitalisedand depreciation charged to Factory ,verheads. For small tools the following treatment mayapply :

>'? Capitaliation 2ethod5in line with large tools.

>ii? 3evaluation 2ethod5At the end of the year revaluation for unused life of the tools is madeand the difference between original cost and revalued cost is charged as factoryoverheads.

>iii? 9rite5off 2ethod. 9henever such small tools are issued to department the department isdebited with the cost. Alternatively cost of tools issued during a period is accumulated anddistributed to various departments on some suitable basis e.g. hours wor!ed.

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13. Controlla"le costs and uncontrolla"le costs $

Costs which can be influenced by the action of a specified person in an organisation are !nownas controllable costs. Cost which remains unaffected by the action off such a person are termedas uncontrollable. 'n a business organisation heads of each responsibility centre are responsibleto control costs. Costs which they are able to control are !nown as controllable and includes

material0 labour and direct e7penses. Cost which they fail to control includes fi7ed costs and allallocated costs.

't may be noted that controllable and uncontrollable cost concepts are related to the authority of aperson in the organisation. An e7penditure which may be uncontrollable by one person may becontrollable by another. 2oreover in the long run all costs may be controllable.

17. Chargea"le Ex!enses $

These are the e7penses which can be charged directly to jobs products processes cost centresor cost units. These are also !nown as direct e7penses. 4epending on the situation the sameitem of e7penses may be treated as a chargeable e7pense or an indirect cost. For e7ample the

rent charges of a machine specifically hired to complete a particular job will be a direct charge onthe job. #ut if the same machine is used for various purposes then the rent charges will betreated as an indirect cost and are apportioned to concerned cost centres on an e%uitable basis.The following may also be treated as chargeable e7penses in relation to a product or job :5

1. Cost of patents.". &ire charge in respect of special machinery or plant.*. Architects surveyors and other consultantBs fees.+. Traveling e7penses to site.(. Freight inward on special material.

18. Cash Discount >on !urchase of materials?

These are discounts obtained for settlement of invoices for purchase of materials within the timestipulate by the supplier. There are divergent views on the treatment of cash discount in costaccounts. ,ne view is that discount represents a reduction of material cost and therefore shouldbe deducted from invoice price. The other view is that Cash 4iscount is available because ofgood financial management and therefore the discount should not be deducted from invoiceprice. 'f the former view is accepted it may lead to complications because if the discounts are notultimately availed they have to be added bac! to materials cost which may have been alreadyissued to production. 't is preferable to treat this as an item of finance and e7clude the same fromcost accounts. 'f however the cash discounts are regularly availed of through prompt paymentmaterials cost may be reduced by such discount.

1:. Cost control and Cost +eduction $

Cost Control is the guidance and regulation by e7ecutive action of the costs of operating anunderta!ing. 't includes planning communication motivation reputing and decision ma!ing. Costreduction may be defined as the achievement of real and permanent reduction in the unit cost ofthe products manufactured. 't thus aims at achieving real savings in the various costs relating toproduction sales distribution etc. The following distinction may be made between them55

>'? Cost Control implies setting up for norms or targets through budgets standards forecastsetc. and efforts made to achieve them. Cost reduction donates systematic efforts toimprove the targets set by better designs improved planning and organiation.

>ii? 'n Cost Control /tandards or #udgets once set up are accepted and not challengedwhereas in the case of cost reduction the very standards$budgets are challenged andefforts are made to improve upon them.

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>iii? Cost control is a basically preventive function where by the result$goal is achieved by!eeping to a standard. Cost reduction is a corrective action and continuous efforts aremade to correct or adjust the present standards or budgets.

>iv? Cost reduction has dynamic approach with a much wider there embracing product designfactory layout production control etc. whereas Cost Control is not so dynamic having

limited scope of staying within the predetermined standards and budgets.

% up to factory level? one unit of product A is 3s. E( and the directmaterial cost per unit is 3s. ") then the conversion cost per unit of A is 3s. >E(5")? 3s. ((.

The concept of conversion cost is used in case when the direct materials are of standard natureand is not a significant factor in terms of the total cost of production. 9hen the budgetary control

system is in operation conversion cost concept may become very useful in ma!ing the system asuccess.

/un! cost:&istorical costs or the costs incurred in the past are !nown as sun! cost. They play no role in thecurrent decision ma!ing process and are termed as irrelevant costs. For e7ample in the case of adecision relating to the replacement of a machine the written down value of the e7isting machineis a sun! cost and therefore not considered.

,pportunity cost:'t refers to the value of sacrifice made or benefit of opportunity foregone in accepting an

alternative course of action. For e7ample a firm financing its e7pansion plan by withdrawingmoney from its ban! deposits. 'n such a case the loss of interest on the ban! deposit is theopportunity cost for carrying out the e7pansion plan.

%1. Canteen Su"sid#

Canteen /ubsidy is generally treated as an overhead cost. Canteen e7penses are boo!ed in aseparate standing order number and all receipts from the wor!ers are credited to the same. Thenet cost representing the canteen subsidy met by the organiation is then apportioned to thecost$profit$service centers in any of the following basis

>'? Total wage cost

>ii? Total number of employees employed.>iii? Total number of employees served.>iv? Total number of meals served.

%%. Data Processing Cost

4ata processing is a service activity and the related cost should be allocated to variousdepartments who use the services of the 4ata processing department. The most accurate basisof allocation of this cost should be number of cards punched or tapes processed relating tovarious user5departments. 'n large organiations this basis may prove to be impractical. Thealternative methods which may be used are >a? 6umber of reports processed pointed >b?standard percentage >c? computer hours >d? man5hours in 4ata processing department. The

operating divisions may also bear the cost on the ability to payD basis. /ince this is an indirectcost there may be various methods available for allocation but any method once selected shouldnot be changed too fre%uently unless compelled to so than the consistency of allocation may bemaintained.

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%&. Directors@ fees and Salaries.

4irectorsB Fees etc. represent Administrative ,verheads. 4irectorsB remuneration is sharablebetween wor!s administration selling and distribution when they loo! after different functions onthe basis of time devoted to each function. 9hen there is separate directors to loo! after suchfunctions vi. /ales Finance personnel -roduction etc. their fees and salaries should be

grouped under such functional costs and thereafter apportioned to cost units as overhead costs.

%(. Dismantling and re-installation of achiner# in the Same Sho!? $

't may be found over a time span that the original layout is ineffective with the changes in timeoutloo! troth in business technological development etc. necessitating readjustment of locationand of resting of 2achineries. 'n such a situation such cost may be written off to profit and lossA$c.

'f on the contrary reinstallation is planned to result in an improvement in productivity this may betreated as factory overhead either as current or deferred cost. 'f the benefits are to be derivedover a longer period the cost may be treated as deferred revenue and spread over a period of (

years. 9hatever be the cause of dismantling and re5sitting the cost should be treated as revenuecost unless the dismantling is for the purpose of e7pansion of shop or factory.

%). Excavation Ex!enses for an a"andoned !roBect.

This is an unusual e7penditure and therefore should be !ept outside the purview of costsaccounts and charged directly to -rofit and ;oss Account. 'f the amount involved is considered tobe unreasonably burdensome during an accounting period then the same may be spread overan appropriate number of years but the period should not be too long.

%3. o" Costing and Process Costing

Job Costing -rocess Costing

1. Job costing is a specific order costing. -rocess costing is a method is a method of .costing used to ascertain the cost of a . product at each process or stage of .manufacture.

". Cost5here is determined on job basis. Costs are accumulated for each process .separately for a given period of time.

*. ach job needs special treatment and no Finished product of one process becomes

two jobs are ali!e. The raw material for the ne7t process.

+. The cost of each job is complied The unit cost here is the average cost ofseparately by adding materials labour the process for a given period. 'ts correctand overhead costs. computation re%uires the measurement of production at various stages of manufacture.

(. Costs are computed when job is Costs are computed for each process atcompleted. the end of each period.

G. As each job is distinct or is of different As the processes operations arestandardised

nature more details supervision and sed accumulation of costs and supervisioncontrol are necessary. and control are comparatively easier.

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%7. oods +eturned "# Customers on +eBection

'f the goods returned by customers are resalable in alternative mar!ets only the cost of outwardfreight and the e7penses incurred on getting the goods bac! from the original customer will betreated as selling overheads. 'f the goods are rejected on %uality grounds and there is no chanceof their being sold an management has to scrap the product then the cost of production less the

net realiable value of the scrap if any will have to be treated as factory overheads.

/imilarly if the goods have deteriorated in %uality while in storage at sales depots and have beenultimately rejected by the Customer the cost of sales less net realiable value of scrap if anymay be treated as selling overheads.

The above treatments apply to normal losses. 'n case of unusual loss caused due to suchrejection the same may be transferred to Costing -rofit$;oss Account.

%8. 'istorical Costing:

Costing is a techni%ue and process of ascertainment of costs. The techni%ue in costing consists

of principles and rules which govern the procedure of ascertaining costs of products or services.The techni%ue is dynamic and changes from time to time and according to circumstances. Thereare many types of costing of which historical costing is one and widely used. 'n H&istoricalCostingB cost are ascertained after they are incurred. &istorical Costing therefore means theactual cost and does not consider any standard or estimated cost. This type of costing thoughpresenting the actual cost is losing importance to the

%:. nterest on Ca!ital:

There are divergent views on this item. /ome argue for its inclusion in HcostB and have points insupport and others do not regard it as a part of HcostB.

The argument for inclusion of interest in cost are that interest is a reward for capital and that realprofit cannot be ascertained without ta!ing interest into account. 'n order to ma!e intelligentcomparison of cost it is necessary to include notional interest when financing is done out of owncapital. #ut the argument against inclusion of interest in cost are that the re%uired of capital isprofit and not interest. Comparison of costs can be drawn up on a proforma basis withoutcomplicating cost accounts by including interest. 'nterest on borrowed capital is a matter ofconvenience and as such need not be brought into accounts. #alance of opinion is againstinclusion of interest in costs. #ut at the same time the inclusion or e7clusion of interest in costshould not influence the management in formulating policy decisions because the impact ofinterest will have to be considered by then while arriving at decisions.

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The loss due to obsolescence to fi7ed assets may be dealt with in the following manner :5

>i? 'n industries which are vulnerable to the ris!s of obsolescence e.g. electronics it issomewhat predictable that obsolescence will ta!e place with certain fre%uency. 'n suchcases higher rate of depreciation may be charged to ta!e care of such obsolescence.

>ii? For industries which are not vulnerable to fre%uent obsolescence it is prudent to create areserve to ta!e care of such eventualities.

>iii? For other industries bearing a remote possibility of obsolescence in the event ofobsolescence ta!ing place loss is to be written off to -rofit and loss Account.

&%. *"solescence.

2ay be relating to fi7ed assets products finished goods materials and wor! in progress.,bsolescence with regard to fi7ed assets arises when before the e7piry of normal life of anasset it needs replacement by a new and improved asset. 't may also arise due todiscontinuance of the product or alternative wor! for the fi7ed asset being available.

-roduct obsolescence arises when due to technological changes a better product is developedand therefore e7isting product cannot meet the mar!et competition. #ecause of productobsolescence obsolescence in finished goods >e7isting product? wor! in progress and materials>re%uired for the production of the product that has become obsolete ta!es place?.

&&. +ectification /or;

The rectification wor! on finished goods or a job may be carried out at the factory premisesbefore dispatch to customers or at customersB place subse%uent to dispatch. The reasons forcarrying out such rectification wor! may be attributable to manufacturing defects use of sub5

standard components mishandling during transit etc. 2inor rectification wor! can be treated asmanufacturing overheads or selling overheads as the case may be. &owever cost of majorrepairs and replacement of e7ceptional nature should be treated either as a deferred charge orwritten off to Costing -rofit$;oss Account.

&(. Sales Promotion Ex!enses

As the name suggests /ales -romotion 7penses are incurred to promote sales of anorganiation. These e7penses are incurred to promote sales promotion which in turn dependson the business policy of the organiation. nli!e manufacturing e7penses where nature andamount of the e7penses are closely lin!ed with production sales promotion e7penses are lin!edwith the mar!eting policy of the organiation.

=enerally sales promotion e7penses include advertisements in /ouvenir -osters /ign5boards6eon5signs etc. /ales promotion e7penses should be treated as deferred revenue e7penditure tobe charged off as overheads over a period because the benefits arising out of sales promotionpolicy are e7pected to accrue over a fairly long period of time say E$1) years. The apportionmentof such costs on to particular products may be done on incremental sales achieved due to thepromotional drive. 'f the sales promotion is underta!en for a short period and the amount spent isnot large e7penses on such promotion may be written off in the same year under selling anddistribution overheads.

&). alue Anal#sis

't is one of the important tools of modern management in the area of cost reduction. 't is also!nown by other names such names such as value engineering value control and productresearch. alue analysis is the process of systematic analysis and evaluation of varioustechni%ues and functions with view to improve organiational performance. 't aims at reducing

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and controlling the cost of a product form the point of view of its value by analysing the valuecurrently received. 't investigates into the economic attributes of value analysis believes in aplanned action to improve performance and thereby generates higher value in a product andultimately causes reduction in its cost.

The meaning of the term value may vary from person time to time and place to place. &owever

in the conte7t of cost reduction and control it refers to the Huse valueB.

The reduction in the costs of a production in the costs of a product and thus increasing theprofitability of a concerns is the main advantage of value analysis.

The benefits of value analysis are being derived in many industries e.g. engineering buildingconstruction and the oil industry. 't is being applied to components of a product finished productand also to the methods of pac!ing.

The various steps involved in value analysis are0

i. identification of the problem0

ii. collection information about the function design material labour overhead costs etc. of theproduct and finding out the availability of the competitive products in the mar!et0 and

iii. e7ploring and evaluating alternatives and developing them.

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