cost accounting manual (1)

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Cost Accounting Manual 2013

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Table of ContentsCIMACIMACIMACIMA OFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGY .................................................................................... 3

COST OFCOST OFCOST OFCOST OF GOODS SOLD FORMULEGOODS SOLD FORMULEGOODS SOLD FORMULEGOODS SOLD FORMULE ................................................................................ 13

COST CLASSIFICATIONCOST CLASSIFICATIONCOST CLASSIFICATIONCOST CLASSIFICATION .................................................................................................. 17

PROCESS COSTINGPROCESS COSTINGPROCESS COSTINGPROCESS COSTING ..................................................................................................... ...... 18

BYBYBYBY----PRODUCTPRODUCTPRODUCTPRODUCT ...................................................................................................................... 30

DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING ..................................................................................................... ...... 35

BUDGETINGBUDGETINGBUDGETINGBUDGETING ........................................................................................................................ 66

STANDARD COSTINGSTANDARD COSTINGSTANDARD COSTINGSTANDARD COSTING ...................................................................................................... 76

MATERIAL COSTINGMATERIAL COSTINGMATERIAL COSTINGMATERIAL COSTING .................................................. ................................................... . 100

FACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEAD ................................................................................................... 112

BREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSIS .................................................. ............................................ 117

ABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTING ........................................................................ 128

LABORLABORLABORLABOR ................................................................................................................................. 134

COST CYCLECOST CYCLECOST CYCLECOST CYCLE ...................................................................................................................... 139

JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING .................................................................................................... 148

PAST PAPERSPAST PAPERSPAST PAPERSPAST PAPERS ................................................................................................................... 150

IMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERSIMPORTANT POINTS IN EACH PAST PAPERS ...................................................... 169

EXAM RUBRICEXAM RUBRICEXAM RUBRICEXAM RUBRIC .................................................................................................................. 173




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CIMACIMACIMACIMA OFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGYOFFICIAL TERMINOLOGY

Ters +efinitions

ost accounting Gathering of cost information and its attachment to cost

objects, the establishment of bdgets, standard costs and

actal costs of o!erations, !rocesses, acti"ities or !rodcts#

and the anal$sis of "ariances, !rofitabilit$ or the social se

of fnds.

ost ob-ect % !rodct, ser"ice, centre, acti"it$, cstomer or distribtion

channel in relation to &hich costs are ascertained.

ost unit 'nit of !rodct or ser"ice in relation to &hich costs are

ascertained.• %s a non, cost is ()he amont of cash or cash

e*i"alent !aid +.

• %s a "erb, cost is ()o ascertain the cost of a s!ecified

thing or acti"it$.

• )he &ord cost can rarel$ stand alone and shold be

*alified as to its natre and limitations.

Industry sector Cost unit

ric-ma-ing 1,000 bric-s

/lectricit$ ilo&atthor &

rofessional ser"ices hargeable hor/dcation /nrolled stdent

Activity Cost unit

redit control %ccont maintained

elling stomer call

ðrodct costing ö cost nit ost enter ن cost nit ر !

Type of cost centre Examples

er"ice location tores, canteen

nction ales re!resentati"e%cti"it$ alit$ control

tem of e*i!ment ac-ing machine

ost c!assification %rrangement of elements of cost into logical gro!s &ith

res!ect to their natre fi:ed, "ariable, "ale adding,

fnction !rodction, selling or se in the bsiness of the

entit$.

+irect cost /:!enditre that can be attribted to a s!ecific cost nit, for

e:am!le material that forms !art of a !rodct.

.rie cost )otal of direct material, direct labor and direct e:!enses.




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Indirect cost or o0erhead /:!enditre on labor, materials or ser"ices that cannot be

economicall$ identified &ith a s!ecific saleable cost nit.

.roduct cost ost of a finished !rodct bilt ! from its cost elements..eriod cost ost relating to a time !eriod rather than to the ot!t of

!rodcts or ser"ices.

Fied cost ost incrred for an acconting !eriod, that, &ithin certain

ot!t or trno"er limits, tends to be naffected b$

flctations in the le"els of acti"it$ ot!t or trno"er

i:ed costs are the same, no matter ho& man$ nits are

!rodced. ;ote, ho&e"er, that as the nmber of nits

increases, the fi:ed cost %er unit actall$ decreases.

)his conce!t ma$ seem confsing at first and it<s best to

thin- in terms of nmbers.

20X1 20X2

i:ed cost =s 50,000 50,000

;o of nits !rodced 500 1,000 'nits ha"e increased

i:ed cost !er nit

=s> 50,000?no. of nits 100 50 ost !er nit has decreased

/"en thogh the costs are fi:ed, &e still sometimes loo- at

the cost !er nit. @on<t let this confse $o A total fi:ed

costs are fi:ed and do not "ar$ &ith acti"it$ le"els.

2ariab!e cost ost that "aries &ith a measre of acti"it$.

Sei30ariab!e cost ost containing both fi:ed and "ariable com!onents and

ths !artl$ affected b$ a change in the le"el of acti"it$.

4e!e0ant cost of an asset =e!resents the amont of mone$ that a com!an$ &old

ha"e to recei"e if it &ere de!ri"ed of an asset in order to be

no &orse off than it alread$ is. Be can call this the de%ri0a!

0a!ue.

/:am!le> @e!ri"al "ale of an asset

% machine cost =s> 14,000 ten $ears ago. t is e:!ected that

the machine &ill generate ftre re"enes of =s> 10,000.

%lternati"el$, the machine cold be scra!!ed for =s> 8,000.

%n e*i"alent machine in the same condition &old cost =s>9,000 to b$ no&. Bhat is the de!ri"al "ale of the

machineC

oltion

irstl$, let s thin- abot the rele"ance of the costs gi"en to

s in the *estion.

ost of machine D =s> 14,000 D !ast?sn- cost

tre re"enes D =s> 10,000 D re"ene e:!ected to be

generated

;et realiEable "ale D =s> 8,000 D scra! !roceeds




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=e!lacement cost D =s> 9,000

Bhen calclating the de%ri0a! 0a!ue of an asset, se the

follo&ing diagram.$6784 6F

=/F%//;) G/= H

H) =s> 10,000

=s> 9,000

;=I /J/)/@ =/I/;'/

=s> 8,000 =s> 10,000

)herefore, the de!ri"al "ale of the machine is the lo&er of

the re!lacement cost and =s> 10,000. )he de!ri"al "ale is

therefore =s> 9,000.

4e!e0ant range %cti"it$ le"els &ithin &hich assm!tions abot cost

beha"ior in brea-e"en anal$sis remain "alid

)he rele"ant range also broadl$ re!resents the acti0it

!e0e!s at 9hich an organiation has had e%erience of

o%erating at in the %ast and for &hich cost inforation is

a0ai!ab!e. t can therefore be dangeros to attem!t to

!redict costs at acti"it$ le"els &hich are otside the rele"ant

range.

A%%ortion )o s!read indirect re"enes or costs o"er t&o or more cost

nits, centers, acconts or time !eriods.

4e3a%%ortion )he res!read of costs a!!ortioned to ser"ice de!artments

to !rodction de!artments.

60erhead absor%tion

rate

% means of attribting o"erhead to a !rodct or ser"ice,

based for e:am!le on direct labor hors, direct labor cost

or machine hors. )here are a nmber of different bases of

absor%tion or <o"erhead reco0er rates< &hich can be

sed. /:am!les are as follo&s.

1 % !ercentage of direct materials cost

2 % rate !er machine hor

3 % !ercentage of direct labor cost

4

% rate !er direct labor hor5 % !ercentage of !rime cost

6 % rate !er nit

;argina! cost art of the cost of one nit of !rodct or ser"ice that &old

be a"oided if the nit &as not !rodced, or that &old

increase if one e:tra nit &ere !rodced.

ontribution ales "ale A "ariable cost of sales

;argina! (or 0ariab!e#

costing

%ssigns onl$ "ariable costs to cost nits &hile fi:ed costs are

&ritten off as !eriod costs.

FIF6 (first in, first out# 'sed to !rice isses of goods or materials based on the cost




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of the oldest nits held, irres!ecti"e of the se*ence in

&hich the actal isse of nits held ta-es !lace. losing

stoc- is, therefore, "aled at the cost of the oldest!rchases.

$IF6 (!ast in, first out# 'sed to !rice isses of goods or materials based on the cost

of the most recentl$ recei"ed nits. ost of sales in the

income statement is, therefore, "aled at the cost of the

most recent !rchases.

A0erage cost 'sed to !rice isses of goods or materials at the &eighted

a"erage cost of all nits held.

ost30o!ue3%rofit

ana!sis (2.

td$ of the effects on ftre !rofit of changes in fi:ed cost,

"ariable cost, sales !rice, *antit$ and mi:.

=reake0en %oint Fe"el of acti"it$ at &hich there is neither !rofit nor loss.>S ratio (.>2 ratio# % measre of ho& mch contribtion is earned from each

=s> 1 of sales.

;argin of safet ndicates the !ercentage b$ &hich forecast re"ene e:ceeds

or falls short of that re*ired to brea- e"en.

%s &ell as being interested in the brea-e"en !oint,

management ma$ also be interested in the amont b$

&hich actal sales can fall belo& antici!ated sales &ithot a

loss being incrred. )his is the argin of safet"

$iiting factor or ke

factor

%n$thing &hich limits the acti"it$ of an entit$. %n entit$

see-s to o!timiEe the benefit it obtains from the limitingfactor. /:am!les are a shortage of s!!l$ of a resorce or a

restriction on sales demand at a !articlar !rice.

t is assmed in limiting factor anal$sis that management

&ishes to ma:imiEe !rofit and that %rofit 9i!! be aiied

9hen contribution is aiied gi"en no change in fi:ed

cost e:!enditre incrred. n other &ords, argina! costing

ideas are a%%!ied.

Standard cost lanned nit cost of a !rodct, com!onent or ser"ice.

Standard costing ontrol techni*e that re!orts "ariances b$ com!aring

actal costs to !reset standards so facilitating action

throgh management b$ e:ce!tion.

;anageent b

ece%tion

ractice of concentrating on acti"ities that re*ire attention

and ignoring those &hich a!!ear to be conforming to

e:!ectations. )$!icall$ standard cost "ariances or "ariances

from bdget are sed to identif$ those acti"ities that re*ire

attention

.erforance standard Idea! standards are based on the most fa"orable o!erating

conditions, &ith no &astage, no inefficiencies, no idle time

and no brea-do&ns. )hese standards are li-el$ to ha"e an




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nfa"orable moti"ational im!act, becase em!lo$ees &ill

often feel that the goals are nattainable and not &or- so

hard.Attainab!e standards are based on efficient bt not

!erfect o!erating conditions. ome allo&ance is made for

&astage, inefficiencies, machine brea-do&ns and fatige. f

&ellset the$ !ro"ide a sefl !s$chological incenti"e, and

for this reason the$ shold be introdced &hene"er

!ossible. )he consent and coo!eration of em!lo$ees

in"ol"ed in im!ro"ing the standard are re*ired.

urrent standards are standards based on crrent &or-ing

conditions crrent &astage, crrent inefficiencies. )he

disad"antage of crrent standards is that the$ do notattem!t to im!ro"e on crrent le"els of efficienc$, &hich

ma$ be !oor and ca!able of significant im!ro"ement.

=asic standards are standards &hich are -e!t naltered

o"er a long !eriod of time, and ma$ be otofdate. )he$ are

sed to sho& changes in efficienc$ or !erformance o"er an

e:tended time !eriod. asic standards are !erha!s the least

sefl and least common t$!e of standard in se.

2ariance )he difference bet&een a !lanned, bdgeted, or standard

cost and the actal cost incrred. )he same com!arisons

ma$ be made for re"enes.

+irect ateria! tota!

0ariance

easrement of the difference bet&een the standard

material cost of the ot!t !rodced and the actal

material cost incrred.

+irect ateria! %rice

0ariance

@ifference bet&een the actal !rices !aid for the !rchased

materials and their standard cost.

+irect ateria! usage

0ariance

easres efficienc$ in the se of material, b$ com!aring

standard material sage for actal !rodction &ith actal

material sed, the difference is "aled at standard cost.

+irect !abor tota!

0ariance

ndicates the difference bet&een the standard direct labor

cost of the ot!t &hich has been !rodced and the actal

direct labor cost incrred.+irect !abor rate

0ariance

ndicates the actal cost of an$ change from the standard

labor rate of remneration.

+irect !abor efficienc

0ariance

tandard labor cost of an$ change from the standard le"el of

labor efficienc$.

+irect !abour id!e tie

0ariance

Hccrs &hen the hors !aid e:ceed the hors &or-ed and

there is an e:tra cost cased b$ this idle time. ts

com!tation increases the accrac$ of the labor efficienc$

"ariance.




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2ariab!e %roduction

o0erhead tota! 0ariance

easres the difference bet&een "ariable o"erhead that

shold be sed for actal ot!t and "ariable !rodction

o"erhead actall$ sed.2ariab!e %roduction o0erhead

e%enditure 0ariance ndicates the actal cost of an$ change from the standard

rate !er hor.

2ariab!e %roduction 62H

efficienc 0ariance

tandard "ariable o"erhead cost of an$ change from the

standard le"el of efficienc$.

Sa!es %rice 0ariance hange in re"ene cased b$ the actal selling !rice

differing from that bdgeted.

Sa!es 0o!ue

contribution 0ariance

)he sales "olme "ariance in nits is the difference bet&een

the actal nits sold and the bdgeted *antit$. )his

"ariance in nits can be "aled in one of three &a$s>

• n terms of standard re"ene,• tandard gross margin or

• tandard contribtion margin.

a %t the standard gross %rofit argin %er unit. )his is the

sa!es 0o!ue %rofit 0ariance and it measres the change in

!rofit in an absor!tion costing s$stem cased b$ the sales

"olme differing from bdget.

b %t the standard contribution %er unit. )his is the sa!es

0o!ue contribution 0ariance and it measres the change

in !rofit in a marginal costing s$stem cased b$ the sales

"olme differing from bdget.c %t the standard re0enue %er unit. )his is the sales

0o!ue re0enue 0ariance and it measres the change in

sales re"ene cased b$ sales "olme differing from that

bdgeted.

!!ose that a com!an$ bdgets to sell 8,000 nits of

!rodct K for =s> 12 !er nit. )he standard "ariable cost !er

nit is =s> 4 and the standard fll cost is =s> 7 !er nit.

%ctal sales &ere 7,700 nits, at =s> 12.50 !er nit.

)he sales "olme "ariance in nits is 300 nits ad"erse8,000 nits bdgeted A 7,700 nits sold. )he "ariance is

ad"erse becase actal sales "olme &as less than

bdgeted. )he sales "olme "ariance in nits can be

e"alated in the three &a$s described abo"e.

a ales "olme !rofit "ariance D 300 nits L standard gross

!rofit margin !er nit

D 300 nits L =s> 12 A 7 D 4s: 1,5 (A#





b ales "olme contribtion "ariance D 300 nits L

standard contribtion !er nit

D 300 nits L =s> 12 A 4 D 4s: ),/ (A#

c ales "olme re"ene "ariance D 300 nits L standard

re"ene !er nit

D 300 nits L =s> 12 D 4s: *,< (A#

;ote that the sales "olme !rofit "ariance in an absor!tion

costing s$stem and the sales "olme contribtion "ariance

in a marginal costing s$stem can be deri"ed from the sales

"olme re"ene "ariance, if the !rofit mar-! !ercentage

and the contribtion to sales ? ratio res!ecti"el$ are-no&n.

n or e:am!le the !rofit mar-! !ercentage is 41.67M =s>

5?=s> 12 and the ? ratio is 66.67M =s> 8?=s> 12.

)herefore the sales "olme !rofit "ariance and the sales

"olme contribtion "ariance, deri"ed from the sales

"olme re"ene "ariance, are as follo&s.

ales "olme !rofit "ariance D =s> 3,600 % L 41.67M D =s>

1,500 %, as abo"e

ales "olme contribtion "ariance D =s> 3,600 % L 66.67M

D =s> 2,400 %, as abo"e

K has the follo&ing bdget and actal figres for $ear 4.

Budget Actual

ales nits 600 620

elling !rice !er nit =s> 30 29

tandard fll cost of !rodction D =s> 28 !er nit.

tandard "ariable cost of !rodction D =s> 19 !er nit

alclate the follo&ing sales "ariances

a elling !rice "ariance c ales "olme contribtion

"ariance

b ales "olme !rofit "ariance d ales "olme re"ene

"ariance

%ns&er

a ales re"ene for 620 nits shold ha"e been L =s> 30

18,600 bt &as L =s> 29 17,980. elling !rice "ariance 620 %





b dgeted sales "olme 600 nits

%ctal sales "olme 620 nits

ales "olme "ariance in nits 20 nits ales "olme !rofit "ariance D 20 nits L =s> 30 A 28 D =s>

40

c ales "olme contribtion "ariance D 20 nits L =s> 30 A

19 D =s> 220

d ales "olme re"ene "ariance D 20 nits L =s> 30 D =s>

600

n this *estion $o &ere as-ed to calclate both the sales

"olme !rofit "ariance and the sales "olme contribtion"ariance to gi"e $o some !ractice. o&e"er, the t&o

"ariances &old ne"er be fond together in the same

s$stem in a real sitation. /ither a marginal costing s$stem is

sed, in &hich case the sale "olme contribtion "ariance is

calclated, or an absor!tion costing s$stem is sed, in &hich

case a sales "olme !rofit "ariance is calclated.

=udget %ur%oses dgets ma$ hel! in athoriEing e:!enditre,

commnicating objecti"es and !lans, controlling o!erations,

coordinating acti"ities, e"alating !erformance, !lanning

and re&arding !erformance. Hften, re&ard s$stems in"ol"e

com!arison of actal &ith bdgeted !erformance.

=udget antitati"e e:!ression of a !lan for a defined !eriod of

time. t ma$ inclde !lanned sales "olmes and re"enes#

resorce *antities, costs and e:!enses# assets, liabilities

and cash flo&s.

=udget %eriod eriod for &hich a bdget is !re!ared, and sed, &hich ma$

then be sbdi"ided into control !eriods.

=udget anua! @etailed set of gidelines and information abot the bdget

!rocess t$!icall$ inclding a calendar of bdgetar$ e"ents,

s!ecimen bdget forms, a statement of bdgetar$

objecti"es and desired reslts, listing of bdgetar$ acti"itiesand bdget assm!tions, regarding, for e:am!le, inflation

and interest rates.

.rinci%a! budget factor Fimits the acti"ities of an nderta-ing. dentification of the

!rinci!al bdget factor is often the starting !oint in the

bdget setting !rocess. Hften the !rinci!al bdget factor

&ill be sales demand bt it cold be !rodction ca!acit$ or

material s!!l$.

=udget f!eing le:ing "ariable costs from original bdgeted le"els to the

allo&ances !ermitted for actal "olme achie"ed &hile




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for estiated gro9th or inf!ation net ear. )his a!!roach

is -no&n as increenta! budgeting since it is concerned

mainl$ &ith the increments in costs and re"enes &hich &illoccr in the coming !eriod.

) 3 Eero3based budgeting

Eero3based budgeting in"ol"es !re!aring a bdget for each

cost centre from a Eero base. /"er$ item of e:!enditre has

then to be jstified in its entiret$ in order to be inclded in

the ne:t $ear<s bdget.

O rejects the assm!tion inherent in incremental

bdgeting that ne:t $ear<s bdget can be based on this

$ear<s costs.

* 3 4o!!ing budgets%s an organiEation and the en"ironment it o!erates in are

d$namic al&a$s changing management ma$ decide to

introdce a s$stem of ro!!ing budgets also called

continuous budgets.

% ro!!ing budget is a bdget &hich is continosl$ !dated

b$ adding a frther acconting !eriod a month or *arter

&hen the earlier acconting !eriod has e:!ired.

/ 3 .artici%ati0e budgeting

.artici%ati0e budgeting is <% bdgeting s$stem in &hich all

bdget holders are gi"en the o!!ortnit$ to !artici!ate in

setting their o&n bdgets<.

ash budget @etailed bdget of estimated cash inflo&s and otflo&s

incor!orating both re"ene and ca!ital items.

Fied budget dget set !rior to the control !eriod and not sbse*entl$

changed in res!onse to changes in acti"it$, costs or re"ene.

t ma$ ser"e as a benchmar- in !erformance e"alation.




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Format of cost of goods sold statement

H!ening =a& aterial JJJ

rchases JJJ

%dd@irect /:!enses JJJ

Fess A losing =a& aterial JJJ

+irect ;ateria! Used

@irect Fabor JJJ

@irect /:!enses JJJ

actor$ H"er ead? !!lementar$ ost A B> 2 JJJ

Tota! .roduction ost (Bora!# 7: 1

H!ening Bor-nrocess JJJ ost of Goods to be ade JJJ

losing Bor-nrocess JJJ

ost of oods ;anufactured (Bora!#

H!ening inished Goods JJJ

ost of Goods to be old JJJ

losing inished Goods JJJ

ost of oods So!d (Bora!#

%ddR'nder a!!lied JJJ

FessRH"er a!!lied JJJ

ost of oods So!d (Actua!#

731 D %lso called )otal anfactring ost 64 )otal ost

73) D actor$ H"erhead D ndirect aterial P ndirect Fabor P ndirect /:!enses

73* D %ctal H JJJ

%!!lied H JJJ

Under>60er A%%!ied

ormla to decide Under>60er A%%!ied is>

;H' ;egati"e> H"er a!!lied N ositi"e> 'nder a!!lied

ross .rofit D ales A ost of Goods old %ctal





Problems in preparation of cogs statement

Assume : Gross Profit = 290,000

Sales = 00,000

C!GS = 310,000

ross .rofit ;argin

4ate

ross .rofit argin rate J ross .rofit> Sa!es 1

)his ratio identifies the ratio of gross !rofit o"er sales. n this ratio

sale is held e*al to 100M. )he Mage of cost of goods sold is 100 A

the Mage margin. t means that if margin is 25M, then Mage cost of

goods sold &ill be 75M. /.g.> 290,000?600,000 : 100 D 48.33M.

ross .rofit

;arku% 4ate

ross .rofit arku% rate J ross .rofit>ost of goods so!d 1

)his ratio identifies the ratio of gross !rofit o"er cost of goods sold.

n this ratio cost of goods sold is held e*al to 100M. )he Mage ofsales is 100 P the Mage of mar-!. t means that if mar-! is 25M

then Mage of sales &ill be 125M. /.g.> 290,000?310,000 : 100 D

93.5M. )hese ratios are also -no&n as cost strctre ratios.

In case of In case of

;argin ;arku%

ales 100M 125M

ost of goods sold 75M 100M

Gross !rofit 25M 25M

%s sho&n abo"e in both of the cases gross !rofit is 25M bt the base

is different. Bhere the sale is 100M the cost of goods sold is 75M,&here the cost of goods sold is 100M the sales is 125M.

%t this stage sometimes sales figre is missing and it is re*ired to

calclate gross !rofit sing the margin rate based on sales. )he

gi"en information in this case is cost of goods sold. ost of the

stdents ma-e a common error, the$ straight a&a$ calclate gross

!rofit Mage on the figre of cost of goods sold, this is &rong in this

sitation as the base is the figre of sales &hich is not gi"en. ere

the follo&ing formla &ill be sed to calclate gross !rofit>

4eCuired inforation J

gi0en inforation Gage of reCuired inforation

Gage of gi0en inforation

n the abo"e sitation &here cost of goods sold is gi"en and gross

!rofit is to be calclated sing the margin rate based on sales,

follo&ing calclations &ill be follo&ed>

Gross !rofit D ost of goods sold absolte amont : 25M?75M

ame conce!t is follo&ed &here cost of goods sold figre is missing

and it is re*ired to calclate gross !rofit sing the mar-! rate




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based on cost of goods sold. )he gi"en information in this case is

that of sales. ost of the stdents ma-e a common error, the$

straight a&a$ calclate gross !rofit Mage on sales, this is &rong, asthe base shold be cost of goods sold &here mar-! rate is to be

sed. ere again the abo"e formla &ill be sed to calclate gross

!rofit>

4eCuired inforation J

gi0en inforation Gage of reCuired inforation

Gage of gi0en inforation

n the abo"e sitation &here sales is gi"en and gross !rofit is to be

calclated sing the mar-! rate based on cost of goods sold,

follo&ing calclations &ill be follo&ed>

Gross !rofit D ales absolte amont : 25M?125M

Bet .rofit 4atio ;et rofit ratio D ;et rofit?ales : 100

In0entor Turno0er

4atio

n"entor$ trno"er ratio D ost of goods sold

%"erage in"entor$

%"erage in"entor$ D H!ening n"entor$ P losing n"entor$

2

In0entor Ho!ding

.eriod

n"entor$ holding !eriod in da$s D ;mber of da$s in a $ear

n"entor$ trno"er ratio

%lternati"el$ D %"erage in"entor$ : 365

ost of goods sold

Cost behavior - per unit of production

.er Unit Tota!

Fied ost ncrease onstant

2ariab!e ost onstant @ecrease

Tota! ost ncrease @ecrease



1? © For Suggestion

COSCOSCOSCOS

Cost Accounting Ma


CLASSIFICATICLASSIFICATICLASSIFICATICLASSIFICATI

nual 2013

hafi@gai!"co#

NNNN





PROCESS COSTINGPROCESS COSTINGPROCESS COSTINGPROCESS COSTING

.6IBTS T48AT;8BTS

ood units Foru!a D )ransfer P still P com!lete bt still

• )here &ill be no loss adjstment in 1st

de!artment as the

good nits &ill absorb the bad ? loss nits.

• f losses are in accordance &ith normal !ractice i.e.

standard le"els, the$ are termed as normal loss. f the$

are abo"e e:!ectation, the$ are -no&n as abnormal

losses.

Ad-ustent of !oss

units ()ndde%artent#

'nit loss Q nit cost of last de!tt

Good nits64

'nit cost after adjstment )otal cost ? good nits D JJJ

'nit cost before adjstment D JJJ

Bora! !oss at the

end

• ;o adjstment of loss nits

• Foss nits are inclded in /=

• ost transfer to ne:t de!tt )ransfer P Foss

• er 'nit ost > ost )ransfer

'nit )ransfer

Increase in units %djstment of er 'nit cost> ost recei"e b$ last de!ttGood 'nits

• ;ormal s!oilage in increase nits needs no adjstment.

• @oble line nder nit cost of last de!tt in increase nits

case onl$.

%djsted cost of last de!tt>

'nit still Q nit cost of last de!tt P adjstment of loss nit

n case of increase nits> 'nit still Q adjsted !er nit cost

In%ut ateria! &

ateria! introduced

aterial introdced is e:tra material needed in the !rocess N

shold al&a$s be sho&n se!aratel$ from in!t material.

Bhene"er there are !artl$ com!leted nits at the end of the

!eriod, the$ ma$ contain t&o classification of material i.e.

n!t aterial i.e. !re"ios !rocess costs D %l&a$s 100M

com!lete.

aterial ntrodced D &hich ma$ or ma$ not be

com!lete.

n!t material ma$ also be described as>

• 'nits )ransferred.

• ost of goods or nits transferred.

• re"ios rocess osts.





WORK IN PROGR!! "GINNING IN#N$OR% &'#CO(

• Fife is "er$ sim!le N eas$ in a"erage costing. )here is no need of

$frcating of finished goods N no remaining !ercentages are to be considered

for o!ening nits.

• lease add o!en B cost in !er nit cost calclation.

• )here is no need to add o!ening B cost to finished goods at the end.

FI4ST +8.A4T;8BT:

• ;o change in 8*i"alent .rodction 4e!ort 8.4.

• ost of Bor-nrocess beginning in"entor$ inclded in Sost harged to

de!artmentT. gnore nit cost.

• Unit ost ca!cu!ation:

B beginning in"entor$ cost Q cost charged b$ de!artment

/= nits

S86B+ & FU4TH84 +8.A4T;8BT:

• ;o change in 8*i"alent .rodction 4e!ort 8.4.

• ost of B beginning in"entor$ inclded in Sost harged to de!artmentT.

gnore nit cost.• Unit ost ca!cu!ation:

B beginning in"entor$ cost Q cost charged b$ de!artment

/= nits

• ost of %receding de%artent:

T"" U".

ost of last de!artment JJJ JJJ

ost of B o!ening in"entor$ JJJ JJJ





WORK IN PROGR!! "GINNING IN#N$OR% &FIFO(

• %l&a$s ta-e remaining M 100M M gi"en for o!ening in"entor$ in statement of

e*i"alent nit calclation.

• @o not add o!ening B cost in !er nit cost calclation.

• lease remember to add o!ening B cost to finished gods at the end.

• )otal of cost of o!ening B in"entor$ is to be &ritten in Sost harged to

de!artmentT.

• ;o nit cost &ritten on o!ening B in"entor$.

T4ABSF84 T6 B8T +8.A4T;8BT:

F46; U448BT .46+UTI6B nit transfer Q nit cost

F46; 6.8BIB 7I. IB28BT64K

n"entor$ ost %s gi"en in the *estion

@irect aterial B nit Q stage com!letion M Q nit cost

@irect labor B nit Q stage com!letion M Q nit cost

actor$ H"erhead B nit Q stage com!letion M Q nit cost

F46; $6SIB 7I. IB28BT64K

@irect aterial B nit Q stage com!letion M Q nit cost

@irect labor B nit Q stage com!letion M Q nit cost

actor$ H"erhead B nit Q stage com!letion M Q nit cost

A=B64;A$ $6SS

• %bnormal losses cannot be foreseen. t shold be e:clded from rotine

re!orting N onl$ normal costs charged to !rodction. %bnormal losses are

costed on the same basis as good !rodction.

• actors of %bnormal Foss>

lant brea- do&n.

ndstrial accidents.

nefficient &or-ing.

'ne:!ected defects.

'ne:!ected fa"orable conditions.

• Foru!a: %bnormal loss gain D %ctal loss A ;ormal loss.

• ;o adjstment of loss nits

• Foss nits are inclded in /=

• ost of abnora! !oss:




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Fast de!tt JJJ nit loss Q nit cost

aterial JJJ nit loss Q nit cost

Fabor JJJ nit loss Q nit costH JJJ nit loss Q nit cost

)*I#'+N$ PRO,*C$ION RPOR$

F64 FIF6

.re0ious

+e%tt

+irect

;ateria!

+irect

$abor

F6H

Transfer JJJ JJJ JJJ JJJ

6%ening 7I. ( i0en# JJJ JJJ JJJ JJJ

Abnora! $oss JJJ JJJ JJJ JJJ

Abnora! ain JJJ JJJ JJJ JJJ

urrent .roduction

6%ening 7I. (1 G L 1# JJJ JJJ JJJ JJJ

!osing 7I. ( i0en# JJJ JJJ JJJ JJJ

T6TA$ UBITS

F64 6TH84S

.re0ious +e%tt +irect;ateria!

+irect$abor

F6H

Transfer JJJ JJJ JJJ JJJ

!osing 7I. JJJ JJJ JJJ JJJ

Abnora! $oss JJJ JJJ JJJ JJJ

Abnora! ain JJJ JJJ JJJ JJJ

Bora! $oss ()nd +e%tt# JJJ JJJ JJJ JJJ

Bora! $oss at end JJJ JJJ JJJ JJJ

T6TA$ UBITS

6ST .84 UBIT D )otal costs>)otal e*i"alent !rodction nits

T6TA$ 6ST F64 .84I6+ D Iale of com!leted nits P Iale of B

• %n e*i"alent nit means (eCua! to one finished unit of out%utU.

• Hne fll$finished nit of !rodction D 1 e*i"alent nit

• Hne nit 50M com!lete D 0.50 e*i"alent nits. 400 nits 50M com!lete D 200

e*i"alent nits.

• Hne nit 20M com!lete D 0.20 e*i"alent nits. 400 nits 20M com!lete D 80

e*i"alent nits.




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• osts are shared bet&een finished nits and in"entor$ b$ calclating a cost !er

e*i"alent nit>

• ost !er e*i"alent nit D osts of the !rocess?;mber of e*i"alent nits!rodced

8Cui0a!ent units of

c!osing in0entor

t is normall$ assmed that direct materials are added to the

!rodction !rocess at the beginning of the !rocess and that

direct labor o!erations are carried ot throghot the !rocess.

Bhen this assm!tion is sed, nits of closing in"entor$ are>

• 100M com!lete for direct material costs added at the

beginning of the !rocess,

• Hnl$ !artl$com!lete for direct labor and !rodctiono"erhead costs,

• Hnl$ !artl$ com!lete for additional materials that are

added throghot the !rocess.

)he nmber of e*i"alent nits of direct materials cost in a

!eriod &ill therefore differ from the nmber of e*i"alent nits

of con"ersion costs direct labor and !rodction o"erhead.

8Cui0a!ent units:

9eighted a0erage

cost ethod

)he assm!tion is that all nits !rodced dring the !eriod and

all nits of closing in"entor$ shold be "aled at the same cost

!er e*i"alent nit for materials and the same cost !ere*i"alent nit for con"ersion costs.

%n a"erage cost !er e*i"alent nit is therefore calclated for

all nits of ot!t and closing in"entor$. )his incldes the nits

that &ere !artl$com!leted at the beginning of the !eriod and

&hich &ere therefore "aled as closing B at the end of the

!re"ios !eriod.

8Cui0a!ent units: fifo

ethod

t is assmed that all nits of ot!t in a !eriod ha"e the same

cost !er nit.

Bith the firstin, firstot H method of !rocess costing, it is

assmed that the o!ening nits of &or-in!rocess at the

beginning of the month &ill be the first nits com!leted. )he

cost of these nits is their "ale at the beginning of the !eriod

!ls the cost to com!lete them in the crrent !eriod.




)* © For Suggestions & Feedbacks, contact: ATAUSH SHAFI (ataushshafi@gai!"co#

PROC!! 'CCO*N$ - #'RI'$ION!

S"Bo Aerican A%%roach =ritish A%%roach

1 = rocess %?

) @e!artments rocesses

* Bor- in !rocess Bor- in !rogress

/ ;o abnormal gain conce!t abnormal gain conce!t

5 cra! "ale of ;ormal Foss is

ignored

cra! "ale of ;ormal Foss is considered

< ;ormal Foss is calclated at the end

of !rocess

;ormal Foss is considered from

beginning N considered s!ecific "ale

&hile com!ting cost of finished goods

? M of ;ormal Foss is a!!lied on in!t

?ot!t

M of ;ormal Foss is al&a$s a!!lied on

in!t

PROC!! 'CCO*N$ "RI$I!. 'PPRO'C.

.articu!ars Mt Aount .articu!ars Mt Aount

4s" 4s"

H!ening alance JJJ JJJ )ransfer to ne:t de!tt JJJ JJJ @irect aterial JJJ ;ormal Foss JJJ JJJ

@irect Fabor JJJ %bnormal Foss JJJ JJJ

actor$ H"erhead JJJ

%dditional H"erhead JJJ

@irect /:!enses JJJ

H %llocated JJJ

%bnormal Gain JJJ JJJ

T6TA$ T6TA$

Botes:

1" )he ot!t of one !rocess becomes the in!t to the ne:t ntil the finished

!rodct is made in the final !rocess.

)" rocess accont is no more than a ledger &ith debit N credit entries.

*" antit$ colmn is jst a memorandm colmn &hich means that &e jst ha"e

to balance it.

/" @irect labor N factor$ o"erhead ma$ be treated together as con"ersion cost.

5" Ialation of abnormal loss D )otal ost A cra!?;ormal !rodction

<" Ialation of abnormal gain D )otal ost A cra!?;ormal !rodction




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)ransfer P %bnormal Foss A %bnormal Gain

11" om!letion tages for /= as !er =4ITISH A..46AH>

Bora! $oss at the end 100M com!leted nits

Abnora! $oss 100M com!leted nits

Abnora! ain 100M com!leted nits

1)" Accounting for Scra% 2a!ues:

Bora! $oss redited to !rocess accont

Abnora! $oss redited to abnormal loss accont. rocess accont is

credited &ith !er nit cost onl$.Abnora! ain @ebited to abnormal loss accont. rocess accont is

debited &ith !er nit cost onl$.

1*" Foru!a to deterine Abnora! $oss> ain:

ST8. O 1

)otal n!t JJJ

/:!ected Ht!t JJJ

Bora! $oss

ST8. O )

%ctal Foss JJJ

;ormal Foss JJJ

Abnora! $oss

+8ISI6B 4U$8

.ositi0e Abnora! $oss

Begati0e Abnora! ain

1/" Abnora! $oss Account

• %bnormal loss is not e:!ected and shold not ha!!en. t therefore ma-es

sense to gi"e it a cost.

• )otal loss D ;ormal loss P %bnormal loss.

• 'nits of abnormal loss are gi"en a cost. f it is assmed that all losses in

!rocess occr at the end of the !rocess, nits of abnormal loss are costed in

e:actl$ the same &a$ in the as nits of finished ot!t.

• )he cost of nits of abnormal loss is treated as an e:!ense for the !eriod,

and charged as an e:!ense in the income statement for the !eriod.

• ;ormal loss has no "ale?cost, abnormal loss has a cost.




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• cra! "ale treatment of abnormal loss.

)he cost of e:!ected nits of ot!t is calclated in the sal &a$. n the B accontthe cost of abnormal loss D nits of abnormal loss L cost !er e:!ected nit of ot!t.

)he scra! "ale of abnormal loss is set off against the cost of abnormal loss in the

abnormal loss accont, not the !rocess accont B.

@ebit> ash D scra! "ale> mone$ from sale of the scra!!ed nits

redit> %bnormal loss accont abnormal loss nits L scra! "ale !er nit

)he net cost of abnormal loss D cost of abnormal loss mins its scra! "ale is then

transferred as a cost to the cost acconting income statement at the end of the

acconting !eriod.


4s" 4s"rocess %ccont JJJ JJJ cra! %ccont nits Q

scra! "ale

JJJ JJJ

rofit N Foss %ccont JJJ JJJ

T6TA$ T6TA$

15" Abnora! ain Account

• %ctal loss D ;ormal loss A %bnormal gain

• )he differences bet&een costing for abnormal loss and costing for abnormal gain

are that> %bnormal gain is a benefit rather than a cost> &hereas abnormal loss is

&ritten off as a cost at the end of the financial !eriod, abnormal gain is an

adjstment that increases the !rofit for the !eriod.

%bnormal gain is recorded as a debit entr$ in the !rocess accont, becase it

is a benefit.

)he other half of the doble entr$ is recorded in an abnormal gain accont.

%t the end of the !eriod, the balance on the abnormal gain accont is then

transferred to the income statement as a benefit for the !eriod, adding to

!rofit.

• Bhen loss has a scra! "ale, the "ale of abnormal gain is actall$ less than the

amont sho&n in the B accont. )his is becase actal re"ene from scra!

&ill be less than the e:!ected re"ene, de to the fact that actal loss is less

than the e:!ected loss.

• %cconting for the scra! "ale of abnormal gain is similar to acconting for the

scra! "ale of abnormal loss.

n the !rocess accont B, abnormal gain is "aled at the cost !er

e:!ected nit of ot!t.

)he scra! "ale of normal loss is normal loss nits L scra! "ale !er nit.




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)he scra! "ale of abnormal gain is the scra! re"ene that has been (lostU

becase actal loss is less than e:!ected loss. )his is abnormal gain nits L

scra! "ale !er nit. )he scra! "ale of abnormal gain is recorded as a debit entr$ in the abnormal

gain accont in a similar &a$ to recoding the scra! "ale of abnormal loss as

a credit entr$ in the abnormal loss accont.

)he scra! "ale of the abnormal gain is set off against the "ale of the

abnormal gain in the abnormal gain accont, not the !rocess accont.

)he balance on the abnormal gain accont is the net "ale of abnormal gain

D "ale of abnormal gain mins the scra! "ale not earned. )his balance is

transferred as a net benefit to the cost acconting income statement at the

end of the acconting !eriod.


4s" 4s"

cra! %ccont nits Q

scra! "ale

JJJ JJJ rocess %ccont JJJ JJJ

rofit N Foss %ccont JJJ JJJ

T6TA$ T6TA$





CO!$ OF PRO,*C$ION RPOR$ '/RIC'N 'PPRO'C.

MUABTITK SH8+U$8:

'nits tarted?!t into !rocess JJJ

'nits added JJJ

'nits recei"ed from last de!tt JJJ

'nits transferred to ne:t de!tt JJJ

'nits om!leted in de!tt JJJ

%bnormal Foss JJJ

;ormal loss at the end JJJ

6ST HA48+ =K TH8 +8.TT:

ost of %receding de%tt: Tota! ost Unit ost

ost of B H!ening in"entor$ H!en B 'nits > JJJ

ost of !re"ios de!tt Fast de!tt 'nits > JJJ

)otal 'nits > JJJ JJJ B1

ost added b the de%tt:

ost added dring month>

@irect aterial JJJ JJJ

@irect Fabor JJJ JJJ

actor$ H"erhead JJJ JJJ

ost of H!ening B>

@irect aterial JJJ JJJ

@irect Fabor JJJ JJJ


)otal ost %dded b$ the de!tt JJJ JJJ

%djstment of normal loss nits JJJ JJJ

Tota! ost To =e Accounted For

T6TA$ 6ST A6UBT8+ F64 AS F6$$67S:ost of goods transferred JJJ

ost of !receding de!tt?%djsted ost of last de!tt JJJ

losing B>

@irect aterial JJJ

@irect Fabor JJJ


Tota! ost Accounted For





Botes:

1" @irect labor N factor$ o"erhead ma$ be treated together as con"ersion cost.)" Bora! !oss t%es:

Start +uring 8nd

;ot inclded in /= ;ot inclded in /= nclded in /=

*" )here is no conce!t of %bnormal Foss in %merican s$stem.

/" )here is no conce!t of %bnormal Gain in %merican s$stem.

5" %djstment of normal loss nits 2nd @e!tt N %bo"e

'nit loss Q nit cost of last de!tt

Good 'nits<" ost er 'nit>

)otal cost A ;ormal Foss scra! "ale

/= nits

?" om!letion tages for /= as !er A;84IAB A..46AH>

Bora! $oss at the end ns!ection M

Abnora! $oss ns!ection M

Abnora! ain ns!ection M





BYBYBYBY----PRODUCTPRODUCTPRODUCTPRODUCT

/ain 0 1oin$ product2

Bhen t&o or more !rodcts arise simltaneosl$ in the corse of !rocessing, each of

&hich has a significant sale "ale in relation to each other.

Koint !rodct is a reslt of tiliEation of the same ra& material and same !rocessing

o!erations. )he !rocessing of a !articlar ra& material ma$ reslt into the ot!t of

t&o or more !rodcts.

• %ll the !rodcts emerging from the manfactring !rocess are of the sameeconomic im!ortance. n other &ords, the sales "ale of those !rodcts ma$ be

more or less same and none of them can be termed as the major !rodct.

• )he !rodcts are !rodced intentionall$ &hich im!lies that the management of

the concerned organiEation has intention to !rodce all the !rodcts.

• ome of joint !rodcts ma$ re*ire frther !rocessing or ma$ be sold directl$

after the s!lit off !oint.

• )he manfactring !rocess and ra& material re*irement is common ! to a

certain stage of manfactring. %fter the stage is crossed, frther !rocessing

becomes different for each !rodct. )his stage is -no&n as (s!lit offU !oint. )he

e:!enditre incrred ! to the s!lit off !oint is called as joint cost and thea!!ortionment of the same to different !rodcts is the main objecti"e of the

joint !rodct acconting.

• )he management has little or no control o"er the relati"e *antities of the

"arios !rodcts that &ill reslt.

• Koint !rodcts are commonl$ !rodced in indstries li-e, chemicals, oil refining,

mining, meat!ac-ing, atomobile etc. n oil refining, fel, oil, !etrol, diesel,

-erosene, lbricating oil are fe& e:am!les of the joint !rodcts.

"3 Product2

% !rodct &hich arises incidentall$ in the !rodction of the main !rodct N &hich has a

relati"el$ small sale "ale com!ared &ith the main !rodct. Bhate"er re"ene entit$

earns is the bons for them.

• )his term (b$!rodctsU is sometimes sed s$non$mosl$ &ith the term (minor

!rodctsU.

• )he b$!rodct is a secondar$ !rodct, &hich incidentall$ reslts from the

manfactre of a main !rodct.




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• $A!rodcts are also !rodced from the same ra& material and same !rocess

o!erations bt the$ are secondar$ reslts of o!eration. )he main difference

bet&een the joint !rodct and b$!rodct is that there is no intention to!rodce the b$!rodct &hile the joint !rodcts are !rodced intentionall$. )he

relationshi! bet&een the b$!rodct and the main !rodct changes &ith

changes in economic or indstrial conditions or &ith ad"ancement of science.

• Bhat &as once a b$!rodct of an indstr$ ma$ become a main !rodct and one

time main !rodct ma$ become a b$!rodct sbse*entl$. or e:am!le, dring

the econd Borld Bar, gl$cerin, a b$!rodct in soa! ma-ing &as in sch a

demand that it became "irtall$ the main !rodct &hile the soa! &as redced to

the b$!rodct.

• Bhat is b$!rodct of one indstr$ ma$ be a main !rodct of another indstr$.

• ;ormall$ in continos !rocess indstr$, the b$A!rodcts emerge. ome of thee:am!les of b$!rodcts are gi"en belo&>

n sgar manfactring, bagasse Vresidal of sgarcane after the

jice is e:tractedW, molasses Vresidal of sgarcane jice after the

im!rities are ta-en otW and !ress md are the three b$

!rodcts, &hich emerge at different stages of manfactring.

n cotton te:tile, the cottonseed, &hich is ta-en ot before the

manfactring !rocess, is a b$!rodct.

S%!it off %oint: !lit off !oint also called se!aration !oint consists of all the costs

incrred !rior to se!aration !oint.

)his is a !oint ! to &hich, in!t factors are commonl$ sed for !rodction of mlti!le

!rodcts, &hich can be either joint !rodcts or b$!rodcts. %fter this !oint, the joint

!rodcts or b$!rodcts gain indi"idal identit$. n other &ords, ! to a certain stage,

the manfactring !rocess is the same for all the !rodcts and a stage comes after

&hich, the indi"idal !rocessing becomes different and distinct. or e:am!le, in a dair$,

se"eral !rodcts li-e, mil-, ghee, btter, mil- !o&der, icecream etc. ma$ be !rodced.

)he common material is mil-. )he !asteriEation of mil- is a common !rocess for all the

!rodcts and after this !rocess# each !rodct has to be !rocessed se!aratel$. %ll costs

before s!lit off !oint? se!aration !oint is common cost or joint cost that is irrele"ant for

decision ma-ing !r!oses.

'oint osts: Koint cost is the !rese!aration cost of commonl$ sed in!t factors for

the !rodction of mlti!le !rodcts. n other &ords, all costs incrred before or ! to

the s!lit off !oint are termed as joint costs or !re se!aration costs and the

a!!ortionment of these costs is the main objecti"e of joint !rodct acconting. osts

incrred after the s!lit off !oint are !ost se!aration costs and can be easil$ identified

&ith the !rodcts.



*) © For Suggestion

"% PRO,*C$ C.

'CCO*N$ING FO

1. ncome from b$!

2. $rodct incom

3. ales income of th

!eriod

4. ;=I of the b$!ro

B42 ;8TH6+:

=e"ene b$ sale of b$ !ro

Fess ost of frth

ost of dis!o

Bet 4ea!iab!e 0a!ue

;=I of the b$!rodct is

&or-ing, to be dedcted

material of !re"ios cost.

;=I has same treatment

assign cost to b$!rodct

not sold is to be ta-en t

Cost Accounting Ma


'R$2

"% PRO,*C$ R#N*

odct added to sales of the main !rodct

treated as a se!arate sorce of income

e b$!rodct dedcted from the cost of !ro

ct dedcted from the cost of !rodction i

dct

r !rocessing JJJ

al JJJ

o be dedcted from cost of !rodction. n c

rom cost of material N more s!ecificall$ fro

as &e did &ith normal loss in !rocess costin

as &e not assign to normal loss. ;=I of b$!

"ale the b$!rodct in !rocess costing.

nual 2013

hafi@gai!"co#

ction in the

the !eriod.

JJJ

JJJ

se of details

the cost of

. Be &ill not

rodct !rodced




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Bora! $oss =3.roduct

cra! "ale ;=I

;ot assign cost ;ot assign cost

.84 UBIT 6ST F64;U$A:

)otal cost A scra! "ale of normal loss A ;=I of b$!rodct !rodced

/*i"alent nits A $!rodct

'++OC'$ION OF 1OIN$ CO!$!

;A4P8T 2A$U8> SA$8 2A$U8 ;8TH6+

)otal joint !rodct cost Q 100

)otal mar-et cost

D %ns&er Q each mar-et "ale D a!!ortionment of joint cost

)he assu%tion behind this method is that the !rice obtained for an item is directl$

related to its cost.

A284A8 UBIT 6ST ;8TH6+


)otal nmber of nit !rodced

D %ns&er Q *antit$ !rodce D a!!ortionment of joint cost

78IHT8+ A284A8 ;8TH6+


)otal nmber of nit &eight

D %ns&er Q indi"idal &eight D a!!ortionment of joint cost




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B42 ;8TH6+

inal sale "ale JJJ

Fess bse*ent !rocessing costs JJJ

'oint cost

B6T8:

• t mst be em!hasiEed that &hate"er method is sed for a!!ortioning joint

costs, it is a con"ention onl$ N its accrac$ cannot be tested. t is totall$

nsitable for an$ form of decision ma-ing.

• )he amont of joint cost N the method b$ &hich joint costs are a!!ortioned are

irrele"ant.

1OIN$ #! "% PRO,*C$2

+IFF848B8 '6IBT .46+UT =K .46+UT

SA$8 2A$U8 igh Fo&

FU4TH84 .468SS %fter s!it off !oint ;ot economical

A6UBTIB %llocate on "arios bases an$ ethods

IBT8BTI6B T6 .46+U8 ntentionall$ ;o intention

,ecision /a4ing Point2

1" Koint cost is irrele"ant for decision ma-ing.

)" Foss on indi"idal joint !rodct is irrele"ant. )he -e$ to decision is that

!rocess as a &hole is !rofitable.

*" ethod>

ncremental =e"ene D JJJ

ncremental osts D JJJ

Increenta! .rofit D




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DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING

.OW $O '$$/P$ ,CI!ION /'KING )*!$ION

FOR $WO PRO,*C$!

,$R/INING +I/I$ING F'C$OR 0 R!O*RC2

@emand Q er 'nit scarce or JJJ

Fess %"ailable hor JJJ

Shortfa!! (if %ositi0e#

N*/RIC'+ POR$ION2

ale er 'nit JJJ

Fess Iariable /:!enses er 'nit JJJ

ontribtion argin er 'nit JJJ

X X

er 'nit carce or JJJ

ontribution ;argin (.er Scarce Hour#

R'NKING F64;U$A D igh to lo& de!ending on ontribtion argin er carce

or

,/'N, D demand Q scarce hor

A!!ocate deand as %er ranking obtained"

Optimum Plan2

@emand Q ontribtion argin !er 'nit JJJ

@emand Q ontribtion argin !er 'nit JJJ@emand Q ontribtion argin !er 'nit JJJ

T6TA$ 6BT4I=UTI6B

Note2 'nit contribtion is not the correct &a$ to decide !riorities.




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/OR $.'N $WO PRO,*C$!





N*/RIC'+ POR$ION2

ale er 'nit JJJ

Fess Iariable /:!enses er 'nit JJJ


X X




or



'ppropriate /i52

@emand Q carce or JJJ



T6TA$ 6BT4I=UTI6B

/INI/*/ ,/'N, GI#N








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N*/RIC'+ POR$ION2

ale er 'nit JJJFess Iariable /:!enses er 'nit JJJ


X X




or



'ppropriate /i52




T6TA$ 6BT4I=UTI6B

)otal @emand inimm @emand Q carce or JJJ



T6TA$ 6BT4I=UTI6B

.OW /*C. $O "*% -- FOR/'$

Available Mix XXX

A – (Demand * Limiting factor) JJJ

JJJ

B – (Demand * Limiting factor) JJJ

JJJ

C – (Demand * Limiting factor) JJJ

"alance

If Demand of C is (Balance of B / Limiting factor of C) !# Demand is in less of !at e need"

t!en #nit bo#g!t ill be calc#lates as follos$

%otal Demand of C JJJ

Demand of C JJJ

$nits "oug%t





5" @e!reciation on ne& e*i!ment that is to be !rchased.

<" tre ost that differ bet&een alternati"es.

?" Iariable H"erhead." %dditional ost.

" %ctal H"erhead.

1" ncremental cost that cold be a"oided if contract not nderta-en. ro"ided that

this additional cost is a cash flo&.

11" @ifferential cost !ro"ided that this additional cost is a cash flo&.

1)" =ele"ant cost N re"ene are those that are affected b$ change in le"el of acti"it$.

1*" @irectl$ attribtable fi:ed cost that althogh fi:ed are rele"ant to decision>

1/" ncrease if certain e:tra acti"ities are nderta-en.

15" @ecrease or eliminated entirel$ if a decision &ere ta-en either to redce the

scale of o!eration or sht do&n entirel$.

IRR+#'N$ CO!$IRR+#'N$ CO!$IRR+#'N$ CO!$IRR+#'N$ CO!$

1" oo- "ale as it is !ast ? historical cost. oo- Iale is irrele"ant e"en if income

ta:es are considered. oo- Iale is essential information for !redicting the

amont N timing of ftre ta: cash flo&s, bt, b$ itself, the boo- "ale is

irrele"ant.

)" @e!reciation on old e*i!ment as it is !ast cost. istorical cost de!reciation that

has been calclated in the con"entional manner. ch de!reciation calclations

do not reslt in an$ ftre cash flo&s. )he$ are merel$ the boo- entries that are

designed to s!read the original cost of an asset o"er its sefl life.

*" i:ed cost is irrele"ant. i:ed o"erheads that &ill not increase or decrease as a

reslt of the decision being ta-en. f the actal amont of o"erhead incrred b$

the com!an$ &ill not alter, then the o"erhead is not a rele"ant cost. )his is tre

e"en if the amont of o"erhead to be absorbed b$ a !articlar cost nit alters as

a reslt of the com!an$Us cost acconting !rocedres for o"erheads.

/" 'nitiEed fi:ed cost.

5" @iscretionar$ cost is fi:ed cost.

<" %llocated?%bsorbed?General o"erhead.

?" 'na"oidable ost becase the decision &ill not affect the cost in an$ &a$.

" n- ? ast ost. Bater nder the bridgesRdo not affect the ftre." Hriginal cost is irrele"ant.

1" /stimation cost is !ast cost.

11" %dministration o"erhead, estimating N design de!artment cost is sn- cost.

1)" tre ost that donUt differ bet&een alternati"es. /"en among ftre costs,

those "ariable costs &hich &ill not differ nder "arios alternati"es are

irrele"ant. or e:am!le, a com!an$ !ro!oses to rearrange !lant facilities and

estimates its ftre cost nder t&o alternati"e choices, as nder>





.articu!ars +o not re3arrange 4e3arrange

4s" 4s"@irect materials cost?nit 10.00 10.00

@irect labor cost?nit 5.00 4.00

n the abo"e e:am!le, the direct material cost remains constant nder both the

alternati"es, hence it is irrele"ant to the decision Sas to &hether !lant facilities are to be

rearranged or notT. Hnl$ direct labor cost &hich differs nder the t&o alternati"es is

rele"ant. ince there is a sa"ing of =e. 1 !er nit in the second alternati"e, the com!an$

is ad"ised to go in for rearrangement of !lant facilities.

1*" ost of material in stoc- ? com!onent no longer sed in !rodction !rocess.1/" =eallocation of e:isting o"erhead is irrele"ant for decision ma-ing !r!oses.

15" ommitted cost. /:!enditre that &ill be incrred in the ftre, bt as a reslt of

decisions ta-en in the !ast that cannot no& be changed. )hese are -no&n as

committed costs. )he$ can sometimes case confsion becase the$ are ftre

costs. o&e"er, a committed cost &ill be incrred regardless of the decision

being ta-en and therefore it is not rele"ant. %n e:am!le of this t$!e of cost cold

be e:!enditre on s!ecial !ac-aging for a ne& !rodct, &here the !ac-aging has

been ordered and deli"ered bt not $et !aid for. )he com!an$ is obliged to !a$

for the !ac-aging e"en if the$ decide not to !roceed &ith the !rodct# thereforeit is not a rele"ant cost.

8ercise)est $or nderstanding of rele"ant and nonrele"ant costs b$ seeing if $o can identif$

&hich of the follo&ing costs are rele"ant>

a )he salar$ to be !aid to a mar-et researcher &ho &ill o"ersee the de"elo!ment of a

ne& !rodct. )his is a ne& !ost to be created s!eciall$ for the ne& !rodct bt the =s>

12,000 salaries &ill be a fi:ed cost. s this cost rele"ant to the decision to !roceed &ith

the de"elo!ment of the !rodctC

b )he =s> 2,500 additional monthl$ rnning costs of a ne& machine to be !rchased tomanfactre an established !rodct. ince the ne& machine &ill sa"e on labor time,

the fi:ed o"erhead to be absorbed b$ the !rodct &ill redce b$ =s> 100 !er month. %re

these costs rele"ant to the decision to !rchase the ne& machineC

c Hffice cleaning e:!enses of =s> 125 for ne:t month. )he offi ce is cleaned b$

contractors and the contract can be cancelled b$ gi"ing one monthUs notice. s this cost

rele"ant to a decision to close the officeC

d /:!enses of =s> 75 !aid to the mar-eting manager. )his &as to reimbrse the

manager for the cost of tra"elling to meet a client &ith &hom the com!an$ is crrentl$




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negotiating a major contract. s this cost rele"ant to the decision to contine

negotiationsC

So!utiona )he salar$ is a rele"ant cost of =s> 12,000. @o not be fooled b$ the mention of the

fact that it is a fi:ed cost, it is a cost that is rele"ant to the decision to !roceed &ith the

ftre de"elo!ment of the ne& !rodct. )his is an e:am!le of a directl$ attribtable

fi:ed cost. % directl$ attribtable fi:ed cost ma$ also be called a !rodcts!ecific fi:ed

cost.

b )he =s> 2,500 additional rnning costs are rele"ant to the decision to !rchase the

ne& machine. )he sa"ing in o"erhead absor!tion is not rele"ant since &e are not told

that the total o"erhead e:!enditre &ill be altered. )he sa"ing in labor cost &old be

rele"ant bt &e shall assme that this has been acconted for in determining theadditional monthl$ rnning costs.

c )his is not a rele"ant cost for ne:t month since it &ill be incrred e"en if the contract

is cancelled toda$. f a decision is being made to close the office, this cost cannot be

inclded as a sa"ing to be made ne:t month. o&e"er, it &ill be sa"ed in the months

after that so it &ill become a rele"ant cost sa"ing from month 2 on&ards.

d )his is not a rele"ant cost of the decision to contine &ith the contract. )he =s> 75 is

sn- and cannot be reco"ered e"en if the com!an$ does not !roceed &ith the

negotiations.

NO$ION'+ CO!$NO$ION'+ CO!$NO$ION'+ CO!$NO$ION'+ CO!$)he "ale of benefit &here no actal cost is incrred. )here is no actal otflo& of cash.

;otional costs sch as notional rent and notional interest. )hese are onl$ rele"ant if

the$ re!resent an identified lost o!!ortnit$ to se the !remises or the finance for

some alternati"e !r!ose. n these circmstances, the notional costs &old be

o!!ortnit$ costs.

PPPPOIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!OIN$! $O CON!I,R IN C+O! OF "*!IN!!

1. @ifficlt to reca!tre mar-et de to hea"$ ad"ertising e:!enses.

2. ear of retrenchment of &or-er.

3. Foss to re!tation of bsiness.

4. )em!orar$ close do&n is not good if relationshi! &ith s!!lier ad"ersel$

affected in an$ &a$.

5. ear of noncollection of des.

6. lant become obsolete N hea"$ ca!ital e:!enditre needed to restart the

bsiness.




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CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$CON$IN* PRO,*C$ION IF !'+ PRIC I! "+OW /'RGIN'+ CO!$

1. ntrodcing ne& !rodct.2. /:!loring foreign mar-et.

3. rchase of large *antit$ of material.

4. /liminate com!etitor.

5. erishable natre of goods.

6. /m!lo$ee cannot be retrenched.

7. ale of one !rodct at belo& marginal cost !shes ! sale of other !rodct.

,CI!ION /'KING $IP!,CI!ION /'KING $IP!,CI!ION /'KING $IP!,CI!ION /'KING $IP!

1. n hea"$ demand Q igh ? ratio &ill earn high !rofit de to high contribtion.2. n Fo& demand Q Fo& rea- /"en oint means high !rofit as it starts earning

!rofit at lo& le"el of sales.

3. @onUt eliminate the !rodct if the contribtion is !ositi"e.

4. @onUt acce!t order from local mar-et if !rice is belo& sale !rice as it &ill affect

the relationshi!.

5. )o foreigner, it shold be acce!ted if !rice is belo& sale !rice.

6. ost that is rele"ant in one sitation might be irrele"ant in other sitation.

/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING/'K OR "*% 0 O*$!O*RCING

t is the !rocess of obtaining good?ser"ice b$ otside s!!lier.

=e"ene JJJ

Fess ost JJJ

a"ings JJJ

%"oidable cost JJJ JJJ

*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%*$I+I!'$ION OF !$OR'G C'P'CI$%

%cce!t orders if these *estions are re!lied in SKesT>

1. !are ca!acit$ a"ailable.

2. ontribtion is !ositi"e.

ncremental =e"ene JJJ

ncremental ost JJJ

Increenta! ontribution




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!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR!C'RC R!O*RC 0 +I/I$ING F'C$OR

%n$thing that limits the acti"it$ of an entit$ is called limiting factor. /.g>

1. @emand

2. aterial

3. Fabor hor

4. achine hor

Bo $iiting Factor igh ratio is good.

$iiting Factor igh contribtion !er scarce resorce is

good.

INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!INCR/N$'+ 'N'+%!I!

ncremental anal$sis considers onl$ that item of re"ene, cost N "olme that &ill change

if ne& !rogram is im!lemented.

/:!ected ? /:!ected sale Q ? ratio JJJ

re"ios ? Hld sale Q ? ratio JJJ

ncreased ? JJJ

Fess %dditional ales JJJ

Increased Bet 6%erating Incoe




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,CI!ION /'KING /O,+,CI!ION /'KING /O,+,CI!ION /'KING /O,+,CI!ION /'KING /O,+

!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR!'/ C0/ PR +I/I$ING F'C$OR

SA$8S A = er limiting

factor

48 40 40

4anking 1 ) )

1. Bhen there is same contribtion margin !er limiting factor, firm is indifferent in

that case.

2. rodct mi: is irrele"ant here.

3. Bhate"er !rodct entit$ made, it ne"er matters.

Identif&

6b-ecti0es

Search for

.ossib!e

,ourses ofActions

Identif& Statesof Bature

$ist .ossib!e

6utcoes

;easure

.a&offs

Se!ect ,ourse

of Action





W.NW.NW.NW.N $O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO$O *! WIG.$, '#RG' R'$IO

1. antit$ is different N cost is different, total cost &ill be distribted b$ &eighted

a"erage cost.

2. )otal cost N brea- ! not gi"en, calclated &eighted a"erage ratio.

3. ore than one ratio gi"en for calclating cost, se &eighted a"erage ratio.

Illustration to above concept 6 782

)otal Iariable ost 836000

I =atio 1 1.5 1.75

'nits 15000 10000 10000

!olution to above illustration 6 782

t$ =atio 1.5 1 1

I =atio 1 1.5 1.75

Beighted %"erage 1.5 1.5 1.75

2 %er unit: )</>15 J

1?"<

)</>1J)<"/ *>1J*"

Illustration to above concept 6 792

irm con"ert into com!an$ on 010509. inancial $ear ends on 31st

dec, 2011

re incor!orate sale D =s> 300000

ost incor!orate sale D =s> 900000

HG D =s> 800000

;o change in sales bt HG redces b$ 10M in !ost incor!oration !eriod.

4eCuired: re N ost incor!oration !eriod.

!olution to above illustration 6 792

.re .ost Tota!

ales 300000 900000 1200000

HG 216216 583783 800000

Gross rofit *?/ *1<)1? /

Gross rofit M 27.93M 35.13M





Bor-ing> Beighted a"erage is calclated as follo&s

t$ 3 9

I 1 0.9 110M

* "1

IG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KINGIG.$ COR CONCP$! OF ,CI!ION /'KING

1" /INI/*/ PROFI$ J t is to be ignored as it is irrele"ant cost.

)" CO!$ OF $N,R : F'!I"I+I$% !$*,%

rrele"ant for decision ma-ing as it is common cost &hich is to be !aid

regardless of acce!tance or rejection.

*" FO.

FI8+ 6STS:

1. hange as a decision D ncrease in fi:ed costs is incremental cost N

is rele"ant for decision.2. ;ot change as a decision D rrele"ant for decision. i:ed costs are

ignored as there is no incremental fi:e costs e:!enditre.

2ariab!e F6H J %l&a$s rele"ant Fied>Absorbed> A!!ocated>

A%%ortioned F6H J %l&a$s

irrele"ant



5 © For Suggestion

I

;o

Fabor 2

!

Cost Accounting Ma


/" +'"OR - 8

+'"OR - 9

Fabor

riable ost

of hr Q !er hrrate

ommitted ost

1 rrele"ant !tocommitted le"el

2 =ele"ant o"er Nabo"e that le"el

hift in

1 Iaria

2 H!!ort;o of hr

contrib

ll a!acit$%dditional &or-cannot be done?

nderta-en

ire

;ot i

re a!acit$%dditional &or- can

be done? nderta-en;F =ele

nual 2013

hafi@gai!"co#

Fabor

le ost

nit$ ost !er hr

tion

taff rrent a$

re taff

1 Iariable /:!ense

P

2 Fost ontribtion

ant ost




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@e!reciation is not rele"ant for decision ma-ing bt sing machiner$ &ill in"ol"e some

incremental costs. )hese costs ma$ be referred to as ser costs N the$ inclde re!air

costs arising from se, hire charges Nan$ fall in resale "ale of o&ned assets &hich

reslt from their se.

" R)*IR,0'#'I+'"+

C'! 6 78

C'! 6 79

C'! 6 7;

4IT84IA:

1 A =e*ired is more.

2 A %"ailable is less.

3 A =eglar ses

=e*ired 'nit D JJJ

%"ailable 'nit D JJJ Q crrent

re!lacement !rice

alance D Q crrent

re!lacement !rice

4IT84IA:


2 A %"ailable is less.

3 A ;on =eglar ses

=e*ired 'nit D JJJ

%"ailable 'nit D JJJ Q dis!osal cost

alance D Q crrent

re!lacement !rice

4IT84IA:

1 A =e*ired is less.

2 A %"ailable is igh.

3 A =eglar ses

4eCuired Unit L current re%!aceent

%rice





C'! 6 7<

C'! 6 7=

AS8 O <

C'! 6 7>

C'! 6 7?

Fu!! cost is re!e0ant

4IT84IA:


2 A %"ailable is none.

3 A Bill ha"e to b$

4IT84IA:

1 A =e*ired is less.

2 A %"ailable is high.

3 A ;on =eglar ses

4eCuired Unit J L dis%osa! cost

4IT84IA:

=e*ired D %"ailable.

4eCuired Unit J

64

A0ai!ab!e Unit J L dis%osa! cost

4IT84IA:

1 A dle hor

2 A =ate as !er agreement

E846 re!e0ant cost





• bstitte indicates that o!!ortnit$ cost e:ists.

• f t&o o!!ortnit$ costs are gi"en, then select the one &ith higher "ale.

• carce =esorce R %lternati"e se R H!!ortnit$ ost

• 6%%ortunit ost foru!a J

Fo&er of =e!lacement cost 64 igher of ;=I?@is!osal Iale H= Iale in

'se? /conomic 'se

TI.S

• gnore o!ening stoc- as &e assme constant stoc- !er le"el.

• /:istence of s!are ca!acit$ means O/=H =/F/I%;) H).

• ll &age cost is irrele"ant in short s!!l$.

,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING,IFFRN$I'+ #! INCR/N$'+ CO!$ING

+ifferentia! osting Increenta! osting

+efinition %lternati"e corse of action hange in de to increase or

decrease in ot!t

A%%roach %bsor!tion ? arginal costing ontribtion

Kard Stick ncrease or @ecrease in re"ene ontribtion arginHe!% anagerial N non acconting

decisions

%ll decisions. oth acconting N non

acconting

Fied ost is not added is added

)*!$ION! FO)*!$ION! FO)*!$ION! FO)*!$ION! FORRRR PR'C$I!PR'C$I!PR'C$I!PR'C$I!

Muestion O 1

G has been as-ed to !re!are a tender for a contract to !rodce a s!ecial batch of 200 !aints to be

com!leted b$ @ecember 31st

. \o ha"e obtained the follo&ing information>

1. /ach !aint re*ired>

aterial 4 -g of %

5-g of

Fabor 2 hrs for s-illed

3 hrs for semi s-illed





2. 1000 -g of material % is in stoc- for &hich the com!an$ has !aid =s> 3 !er -g. )he !rice of this

material has recentl$ risen to =s> 5 !er -g N is e:!ected to sta$ at that le"el for some time. )he

com!an$ ses the material reglarl$ for its normal !rodction.3. Iariable o"erhead are incrred at the rate of =s> 4 !er direct labor hor.

4. i:ed o"erhead are reco"ered at the rate of =s> 6 !er direct labor hor.

5. )he cost of !re!aring the tender is =s> 300.

6. -illed &or-ers are !aid =s> 7 !er hor &ith a garanteed &ee-l$ minimm of =s> 245 !er &ee-.

)he &or- forces of 85 are onl$ tiliEed for 30 hors !er &ee-.

7. emi s-illed &or-ers are !aid =s> 5 !er hor &ith time N a third for o"ertime. )he &or-forces of

100 are crrentl$ fll$ tiliEed.

8. % s!ecial machine &ill ha"e to be boght at a cost of =s> 3000 &hich cold sbse*entl$ be sold

for =s> 2500. %lternati"el$, the machine con"erted at a cost of =s> 1000 N retained for se

else&here in the bsiness# the com!an$ has intended to b$ an additional machine for this

!r!ose to&ards the end of 20JJ at a cost of =s> 3700.9. )he com!an$ has 600 -g of material in stoc-. t boght this sometime ago at a cost of =s> 4000

bt it crrentl$ is not in reglar se b$ G. )he crrent cost is =s> 9 !er -g. aterial cold be

sed to ma-e a different !rodct in !lace of a material that has a crrent !rchase !rice of =s> 5

!er -g sbstittion on a 1>1 basis. )here is none of this other material in stoc-.

So!ution O 1

;ateria! J

1000 Q 5 5000

% > 600 Q 5 3000

> 400 Q 9 3600$abor J

-illed 85 Q 5 425

emi -illed 100 Q 6.67 667

Bor-ing A 5 P5 Q1?3 D 1.67 [5 P1.67 D 6.67Y

2ariab!e 60erhead :

-illed 85Q4 340

emi -illed 100Q4 400

;achine J

Htflo& 3000

nflo& 2500 500

Htflo& 4000 3000P1000nflo& 3700 300

T6TA$ 1/)*)

Bote:

1. i:ed o"erhead are reco"ered at the rate of =s> 6 !er direct labor hor is ==/F/I%;) for decision

ma-ing.

2. )he cost of !re!aring the tender is =s> 300 are ==/F/I%;) for decision ma-ing.




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Muestion O )

r. ill Gates has been as-ed to *ote a !rice for a s!ecial contract. e ahs recentl$ !re!ared his tenderbt has as-ed $o to re"ie& it for him.

e has !ointed ot to $o that he &ants to *ote the minimm !rice as he belie"es this &ill lead to more

lcrati"e &or- in the ftre. r. ill Gates tender>

;ateria!:

% > 2000 -g ] =s> 10 !er -g 20000

> 1000 -g ] =s> 15 !er -g 15000

> 500 -g ] =s> 40 !er -g 20000

@ > 50 liter ] =s> 12 !er liter 600

$abor:

-illed > 1000 hrs ] =s> 25 !er hr 25000

emi -illed > 2000 hrs ] =s> 15 !er hr 30000

'n -illed > 500 hrs ] =s> 10 !er hr 5000

Fied o0erhead : 3500 hrs ] =s> 12 !er hr 42000

osts of %re%aring the tender :

r. ill Gates time 1000

Hther e:!enses 500

inimm !rofit 5M of total costs 7725

;iniu tender %rice 1<<)5

6ther inforation:

;ateria! A: 1000 -gs of this material is in stoc- of =s> 5 !er -g. r. ill Gates has no alternati"e se for

his material N intends selling it for =s> 2 !er -g. o&e"er, if he sold an$ he &old ha"e to !a$ a fi:ed sm

of =s> 300 to co"er deli"er$ costs. )he crrent !rchase !rice is =s> 10 !er -g.

;ateria! =: there is !lent$ of this material in stoc- at a cost of =s> 18 !er -g. . )he crrent !rchase !rice

ahs fallen to =s> 15 !er -g. )his material is constantl$ sed b$ r. ill Gates in his bsiness.

;ateria! : the total amont in stoc- of =s> 500 -gs &as boght for =s> 10000 some time ago for

another one off contract &hich ne"er ha!!ened. r. ill Gates is considering selling it for =s> 6000 in

total or sing it as a sbstitte for another material constantl$ sed in normal !rodction. f sed in this

latter manner, it &old sa"e =s> 8000 of the other material. rrent !rchase !rice is =s> 40 !er -g.

;ateria! +: there are 100 liters of this material in stoc-. t is dangeros N is not sed in this contract,

&ill ha"e to be dis!osed of at a cost to r. ill Gates of =s> 50 !er liter. )he crrent !rchase !rice is =s>

12 !er liter.

Ski!!ed $abor: r. ill Gates onl$ hires s-illed labor &hen he needs it. =s> 25 !er hor is the crrent horl$

rate.

Sei Ski!!ed !abor: r. ill Gates has &or-force of 50 semi s-illed laborers &ho are not crrentl$ fll$

em!lo$ed. )he$ are on normal contracts N the nmber of s!are hors crrentl$ a"ailable for this !roject





is =s> 1500. %n$ hors in e:cess of this &ill ha"e to be !aid for at time N a half. )he normal horl$ rate is

=s> 15 !er hor.

Un3ski!!ed !abor: these are crrentl$ fll$ em!lo$ed b$ r. ill Gates on jobs &here the$ !rodce a

contribtion of =s> 2 !er ns-illed labor hor. )heir crrent rate is =s> 10 !er hor, althogh e:tra cold

be hired at =s> 20 an hor if necessar$.

Fied 60erhead: this is considered b$ r. ill Gates to be an accrate estimate of the horl$ rate based

on e:isting !rodction.

osts of %re%aring the tender: r. ill Gates has s!ent 10 hors &or-ing on this !roject at =s> 10 !er

hor, &hich he belie"es is his chargeot rate. Hther e:!enses inclde the cost of tra"el N research s!ent

b$ r. ill Gates on the !roject.

.rofit: this is r. ill Gates minimm !rofit margin &hich he belie"es is necessar$ to co"er Sgeneral da$ toda$ e:!enses of rnning a bsinessT

So!ution O )

;ateria!:

% > 1000 -g ] =s> 10 !er -g 10000

1000Q2 D 2000 A 300 D 1700 [Bor-ing A =s> 300 are o!!ortnit$ sa"ingsY 1700

> 1000 -g ] =s> 15 !er -g 15000

> igher of =s> 6000? H= =s> 8000? 8000

@ > 50 Q 50 [ o!!ortnit$ sa"ingsY 2500

$abor:

-illed > 1000 hrs ] =s> 25 !er hr 25000emi -illed > =e*ired D 2000

%"ailable D 1500

hortfall D 500 500 Q 22.50

Bor-ing A o"ertime of =s> 22.50 15P50M &ill al&a$s be !aid at !remim.

11250

'n -illed > 500 Q 2 D 1000 N 10 Q 500 D 5000 D 1000P5000 D 6000 6000

;iniu Tender .rice ?//5

Botes:

1. i:ed H"erhead > O/=H. ==/F/I%;) for decision ma-ing.

2. osts of !re!aring the tender > O/=H. ==/F/I%;) for decision ma-ing.

3. rofit > O/=H. ==/F/I%;) for decision ma-ing.

Muestion O *

r. Binston hrchill rns a bsiness of manfactring air!lanes. e has recentl$ com!leted a s!ecial

cstom bilt aero!lane for a cstomer &ho ahs become insol"ent N is nable to ta-e deli"er$.

ortnatel$, the cstomer has !aid a nonretrnable de!osit of =s> 5000 on ordering the aero!lane N this

mone$ together &ith the cash !roceed of =s> 4000 no& a"ailable for scra!!ing the aircraft &ill co"er r.

Binston hrchill costs.





r. Binston hrchill has sddenl$ met a ne& cstomer, H, &ho is interested in b$ing the aircraft bt

onl$ after certain information. ob &ants to -no& ho& mch the aero!lane &ill cost N has as-ed r.

Binston hrchill to !re!are a tender for them.

r. Binston hrchill has in"estigated the modifications re*ired N !re!ared a costing statement>

;ateria!:

% > 5 -g ] =s> 100 !er -g 500

> 10 -g ] =s> 150 !er -g 1500

> 10 -g ] =s> 75 !er -g 750

@ > 7 -g ] =s> 10 !er -g 700

$abor:

-illed > 100 hrs ] =s> 10 !er hr 1000

emi -illed > 75 hrs ] =s> 7 !er hr 525

'n -illed > 80 hrs ] =s> 5 !er hr 400Iariable o"erhead > 255 hrs ] =s> 3 !er hr 765

i:ed o"erhead > 255 hrs ] =s> 2 !er hr 510

osts of !re!aring the statement 100

;iniu tender %rice <?5

e is ncertain abot the !rice at &hich to tender and has as-ed $o to re"ie& his figres for a fee of =s>

150. \o establish the follo&ings>

aterial A %> there are 12 -g in stoc- originall$ !rchased for =s> 100 !er -g. )he !rice has recentl$ risen

to =s> 130 !er -g. r. Binston hrchill normall$ sells material for =s> 120 !er -g. r. Binston hrchill

-ee!s stoc- of aterial A % as it is essential com!onent for all of his aero!lanes.

aterial A > the !rice of =s> 150 !er -g for material also re!resent the historical cost of !rchase of the

10 -g &hich are in stoc-. r. Binston hrchill normall$ sells material to his cstomers as se!arate

accessor$. e has recentl$ b$ing stoc-s at =s> 160 !er -g N selling them on for =s> 20 !er -g.

aterial A > this is no se else&here in the bsiness althogh r. Binston hrchill has 4 -g in stoc- N

cold sell these for a total of =s> 100. )he !rice on the costing statement &as the historical cost of

!rchase, &hich has not changed for some time.

aterial A @> there are 20 -g of this in stoc- N these are of no se else&here in the bsiness. t &ill be

necessar$ to dis!ose of an$ remaining aterial A @ at a lm! sm cost of =s> 200.

Fabor> s-illed labor is !aid on horl$ basis at a rate sho&n in the statement abo"e &ith a garanteedminimm &age rate of =s> 300 !er &ee-. r. Binston hrchill has 15 s-illed &or-ers, all of &hom are

&or-ing onl$ 25 hors !er &ee- at !resent. emi s-illed labor is crrentl$ fll$ em!lo$ed bt cold be

di"erted from a !rodct &hich earns a contribtion after semi s-illed labor of =s> 6 !er semi s-illed labor

hor. %lternati"el$ semi s-illed labor cold be hired at a cost of =s> 20 !er hor. 'ns-illed labor is hired on

a casal basis. )he contract &ill need to be com!leted in one &ee-.

H"erhead> the "ariable o"erhead reco"er$ rate of =s> 3 !er labor hor &or-ed &ere established b$ a

detailed in"estigation of the bsiness costs. )he fi:ed o"erhead absor!tion rate of =s> 2 !er hor is

designed to co"er general o"erhead of the &hole bsiness of =s> 210, the rent of &or-sho! to carr$ ot





the modification &or- of =s> 100 N the hire of a s!ecial machine costing =s> 200 needed to sha!e the

com!onents. =e*ired D determine the minimm !rice to be tendered. ho& all &or-ings.

So!ution O *

;ateria!:

% > higher of =s> 120? H= =s> 130? D 130Q5 650

> higher of =s> 200? H= =s> 160? D 200Q10 2000

> 4Q100 D 400 N 6 Q 75 D 450 > [400P450D950Y 950

@ 0

$abor:

-illed > 25Q10 250

emi -illed > 75Q6 D 400 N 75Q7D525

Bor-ing A lo&er of =s> 1500 75Q20D1500 H= =s> 975

975

'n -illed > 80Q5 400Iariable o"erhead 225Q3 765

=ent of &or-sho! for modification &or- 100

ash !roceeds 4000

ire of s!ecial machine 200

;iniu Tender .rice 1)

Muestion O /

% Ftd is deciding &hether or not to !roceed &ith a s!ecial order. 'se the details belo& to

determine the rele"ant cost of the order.

a aterials and &ill be sed for the contract. 100 tonnes of material &ill be needed andsfficient material is in stoc- becase the material is in common se in the com!an$. )he

original cost of the material in stoc- is =s> 1 !er tonne bt it &old cost =s> 1.20 !er tonne to

re!lace if it is sed for this contract. )he material re*ired is in stoc- as a reslt of !re"ios

o"er !rchasing. )his material originall$ cost =s> 500 bt it has no other se. )he material is

to:ic and if it is not sed on this contract, then % mst !a$ =s> 280 to ha"e it dis!osed.

b )he contract re*ires 200 hors of labor at =s> 5 !er hor. /m!lo$ees !ossessing the

necessar$ s-ills are crrentl$ em!lo$ed b$ the com!an$ bt the$ are idle at !resent de to a lll

in the com!an$Us normal bsiness.

c H"erhead &ill be absorbed b$ the contract at a rate of =s> 10 !er labor hor, &hich consists

of =s> 7 for fi:ed o"erhead and =s> 3 for "ariable.

d )he contract &ill re*ire the se of a storage nit for three months. % is committed torent the nit for one $ear at a rental of =s> 50 !er month. )he nit is not in se at !resent. %

neighboring bsiness has recentl$ a!!roached % offering to rent the nit from them for =s>

70 !er month.

e )otal fi:ed o"erheads are not e:!ected to increase as a reslt of the contract.

So!ution O /

a )he rele"ant cost of a material that is sed reglarl$ is its re!lacement cost. %dditional stoc-s

of the material &ill need to be !rchased for se in this contract. )he rele"ant cost of material




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is therefore =s> 1.20 !er tonne. aterial has a (negati"eU cost if sed for the contract. )hat is,

there is a rele"ant sa"ing made from not ha"ing to !a$ the dis!osal cost of =s> 280.

b )he rele"ant cost of labor is Eero. )he labor cost is being !aid an$&a$ and no e:tra cost&ill be incrred as a reslt of this contract.

c )he fi:ed o"erhead is not rele"ant becase &e are told that fi:ed o"erheads are not e:!ected

to increase. )he rele"ant "ariable o"erhead cost is> =s> 3 !er hor Q 200 hors D =s> 600. /"en if

$o are not s!ecificall$ told that fi:ed o"erheads &ill remain naltered, it is sal to assme that

the$ &ill not increase, stating the assm!tion clearl$.

d )he rental cost of =s> 50 !er month is not rele"ant becase it &ill not be affected b$ the

contract. )he rele"ant cost of sing the storage nit is the forgone rental income of =s> 70 !er

month.

Suar of re!e0ant costs

aterial A 120

aterial 280

Fabor 0

Iariable o"erhead 600

=ent forgone 210

Tota! re!e0ant cost <5

8ercise: ake or bu>outsourcing decision and acce%t>re-ect an order

% com!an$ manfactres t&o models of a !oc-et calclator. )he basic model sells for =s> 5, has

a direct material cost of =s> 1.25 and re*ires 0.25 hors of labor time to !rodce. )he othermodel, the cientist, sells for =s> 7.50, has a direct material cost of =s> 1.63 and ta-es 0.375

hors to !rodce. Fabor, &hich is !aid at the rate of =s> 6 !er hor, is crrentl$ "er$ scarce,

&hile demand for the com!an$Us calclators is hea"$. )he com!an$ is crrentl$ !rodcing 8,000

of the basic model and 4,000 of the cientist model !er month, &hile fi:ed costs are =s> 24,000

!er month.

%n o"erseas cstomer has offered the com!an$ a contract, &orth =s> 35,000, for a nmber of

calclators made to its re*irements. )he estimating de!artment has ascertained the follo&ing

facts in res!ect of the &or->

• )he labor time for the contract &old be 1,200 hors.

• )he material cost &old be =s> 9,000 !ls the cost of a !articlar com!onent not

normall$ sed in the com!an$Us models.

• )hese com!onents cold be !rchased from a s!!lier for =s> 2,500 or alternati"el$,

the$ cold be made internall$ for a material cost of =s> 1,000 and an additional labor

time of 150 hors.

4eCuireent

%d"ise the management as to the action the$ shold ta-e.

So!ution

n "ie& of its scarcit$, labor is ta-en as the limiting factor. )he decision on &hether to ma-e or

b$ the com!onent has to be made before it can be decided &hether or not to acce!t the

contract. n order to do this the contribtion !er labor hor for normal !rodction mst first

be calclated, as the contract &ill re!lace some normal !rodction.




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Normal products Basic Scientist

;ode! 3 1 ;ode! )4s: 4s:

elling !rice 5.00 7.50

aterials 1.25 1.63

Fabor 1.50 2.25 2.75 3.88

ontribution 2.25 3.62

X X

Fimiting actor 0.25 0.375

ontribution %er direct !abour hour " "<5

)herefore, if the com!an$ is to ma-e the com!onent it &old be better to redce !rodction of

the basic model, in order to accommodate the s!ecial order. )he com!an$ shold no& com!arethe costs of ma-ing or b$ing the com!onent. %n o!!ortnit$ cost arises de to the lost

contribtion on the basic model.

Special contract anufacture of component

=s>

aterials 1,000

Fabor =s> 6 Q150 hors 900

H!!ortnit$ cost 150 hors Q =s> 9.00 1,350

*,)5

ince this is higher than the boghtin !rice of =s> 2,500 the com!an$ &old be ad"ised to b$

the com!onent from the s!!lier if the$ acce!t the contract. )he contract can no& be

e"alated>

Contract contri!ution

4s:

ales re"ene 35,000

aterials 9,000

om!onent 2,500

Fabor =s> 6 Q 1,200 7,200 18,700

ontribution 16,300

ontribution %er direct !abour hour 1*"5

ince the contribtion is higher than either of the e:isting !rodcts, the com!an$ shold acce!t

the contract assming this &old not !rejdice the mar-et for e:isting !rodcts. %s the

cstomer is o"erseas this seems a reasonable assm!tion.

ecase the contribtion is higher for the cientist model it &old be &ise to redce !rodction

of the basic model. o&e"er, the hors s!ent on !rodcing the basic model !er month are

8,000 nits Q 0.25 hors D 2,000, and so the contract &old dis!lace more than a fortnightUs

!rodction of the basic model. )he recommendation assmes that this can be done &ithot

harming longterm sales of the basic model.




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8ercise: discontinuing a %roduct

B$e !lc ma-es and sells for !rodcts. )he !rofit and loss statement for %!ril is as follo&s>

"roduct # X $ % Total

4s: 4s: 4s: 4s: 4s:

ales 30,000 20,000 35,000 15,000 100,000

ost of sales 16,000 8,000 22,000 10,000 56,000

Gross !rofit 14,000 12,000 13,000 5,000 44,000

H"erhead cost>

elling 8,000 7,000 8,500 6,500 30,000

%dministration 2,000 2,000 2,000 2,000 8,000

Bet %rofit /, *, ),5 (*,5# <,

)he management team is concerned abot the reslts, !articlarl$ those of !rodct O, and it has

been sggested that B$e !lc &old be better off if it ceased !rodction of !rodct O. )he

!rodction manager has said that if !rodct O &as discontined the resorces &hich &old

become a"ailable cold be sed to increase !rodction of !rodct \ b$ 40 !er cent. \o ha"e

anal$Eed the cost strctres of each of the !rodcts and disco"ered the follo&ing>


4s: 4s: 4s: 4s: 4s:

Iariable costs 4,800 1,600 13,200 5,000 24,600

i:ed costs 11,200 6,400 8,800 5,000 31,400

)otal 1<, , )), 1, 5<,

)he total fi:ed costs figre incldes =s> 20,000 &hich is not s!ecific to an$ one !rodct, and

&hich has been a!!ortioned to each !rodct on the basis of sales "ales. f the *antit$ of an$

!rodct increases b$ more than 25 !er cent, then the s!ecific fi:ed !rodction costs of the

!rodct &ill increase b$ 30 !er cent.

)he selling o"erhead com!rises a fi:ed cost of =s> 5,000 !er !rodct !ls a "ariable cost

&hich "aries in !ro!ortion to sales "ale. )he fi:ed cost is not s!ecific to an$ !rodct bt the

sales director belie"es that it shold be shared e*all$ b$ the for !rodcts.

)he administration cost is a central o"erhead cost# it is not affected b$ the !rodcts made.

4eCuireents

a re!are a statement &hich sho&s clearl$ the reslts of contining to !rodce !rodcts B, J,

\ and O at the same "olmes as &ere achie"ed in %!ril. resent $or statement in a format

sitable for management decisionma-ing

b i re!are a statement sho&ing clearl$ the reslts if !rodct O is discontined, and

the nmber of nits of \ is increased in accordance &ith the !rodction managerUs statement.

%ssme that no change in selling !rice !er nit is necessar$ to sell the additional nits.

ii =econcile the !rofit calclated in a and b i abo"e# ad"ice the management team as to

&hether !rodct O shold be discontined.

c /:!lain briefl$ an$ nonfinancial factors &hich shold be considered before discontining a

!rodct.




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So!ution

a )he !rofit statement needs to be restated in a marginal costing format if it is to be sefl fordecisionma-ing.


4s: 4s: 4s: 4s: 4s:

ales 30,000 20,000 35,000 15,000 100,000

Iariable ost of sales 4,800 1,600 13,200 5,000

Iariable selling o"erheadQ 3,000 2,000 3,500 1,500

ontribtion 22,200 16,400 18,300 8,500

!ecific fi:ed costs B1 5,200 2,400 1,800 2,000

;et benefit 17,000 14,000 16,500 6,500 54,000

;ons!ecific fi:ed cost of sales 20,000

i:ed selling o"erhead B2 20,000%dministration costs 8,000

Bet %rofit <,

L)otal o"erhead less =s> 5,000 fi:ed cost

7orkings

1"


4s: 4s: 4s: 4s: 4s:

i:ed costs 11,200 6,400 8,800 5,000 31,400;ons!ecific fi:ed costQ 6,000 4,000 7,000 3,000 20,000

!ecific fi:ed costs 5,200 2,400 1,800 2,000 11,400

QGi"en as =s> 20,000 a!!ortioned on the basis of sales "ales 3>2>3.5>1.5

)" =s> 5,000 !er !rodct Q4 D =s> 20,000

b i O discontined

=s>

ontribtion from 40M additional sales of \ =s> 18,300 Q 0.4 7,320

%dditional s!ecific fi:ed costs =s> 1,800 Q 0.3 540

Foss of net benefit from O 6,500

Bet gain )

ii rofit reconciliation

=s>

/:isting !rofit 6,000

@iscontination of O 6,500

%dditional contribtion from \ 7,320

%dditional s!ecific fi:ed costs 540

rofit if O is discontined and sales of \ sbstitted <,)




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)he com!an$ shold therefore discontine !rodct O and sbstitte !rodction and sales of

!rodct \ in the !ro!ortions gi"en. t shold be noted, ho&e"er, that the incremental gain is not

significant and an$ errors in the estimates sed cold mean the &rong decision is ta-en.

c ;onfinancial factors to consider inclde>

• ossible redndancies among the &or-force#

• ignals &hich it ma$ gi"e to com!etitors, &ho ma$ !ercei"e the com!an$ as being

n&illing to s!!ort its !rodcts#

• )he reaction of cstomers, !articlarl$ those &ho ma$ recentl$ ha"e !rchased the

!rodct.

ometimes, e"en &hen management has made the decision to discontine a !rodct or

acti"it$, there is still a frther decision to be made> &hen to discontine it. )he follo&inge:ercise sho&s ho& sch a decision cold be made.

8ercise: deciding 9hen to c!ose a de%artent or factor

t is !ossible that some costs are a"oidable in the longer term bt not in the short term.

or instance, it ma$ be necessar$ to gi"e notice to cease renting a s!ace occ!ied b$ a

de!artment. f the notice re*ired is, sa$, three months then the rental is an na"oidable cost

ntil the three months U notice has e:!ired. %fter that time it becomes an a"oidable cost, as long

as notice is gi"en no&.

)he idea of costs being na"oidable in the short term adds a ne& dimension to or decision

ma-ing. ;ot onl$ is it necessar$ to decide &hether costs are inherentl$ a"oidable, bt &e ma$also need to determine &hen the$ &ill become a"oidable.

n the "er$ short term almost all costs are na"oidable. n the long term almost all costs are

a"oidable becase the &hole organiEation cold be sht do&n com!letel$. ere &e are tal-ing

abot time horiEons in bet&een these t&o e:tremes.




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BUDGETINGBUDGETINGBUDGETINGBUDGETING

=udgetar contro! 'se of bdget to control organiEation acti"ities.

Beed for budgeting • )o set standards.

• )o moti"ate managers.

• erformance e"alation

• )o coordinate bet&een different managers.

• )o coordinate bet&een different de!artments.

;aster budget mmar$ of com!an$ !lan that sets s!ecific target for sale,

!rodction, distribtion N financing acti"ities.

4es%onsibi!it accounting anager shold be held res!onsible for those items that manager

sall$ control to significant e"ent or for an$ de"iation.

4o!!ing>continua!>%er%etu

a! budgeting

)&el"e months bdget that rolls for&ard one month as crrent

month is com!leted. t sho&s crrent !rices.

Huan factor in

=udgeting

dget !rogram &ill be scceeded if bdget ha"e com!lete

acce!tance N s!!ort of !erson &ho occ!$ -e$ management

!ositions. )o! management shold not se bdget to

blame?!ressriEe em!lo$ees. 'se of bdget in sch a negati"e &a$

&ill breed hostilit$, tension, mistrst rather than coo!eration N

!rodcti"it$.

Increenta! a%%roach

budgeting

n this a!!roach, !re"ios $ear bdget is a baseline. ast data is

sed to forecast ftre. ts biggest disad"antage is that anomalies

ha"e been transferred to ftre.

Eero base budgeting Kstif$ all bdgeted e:!enditres before its inclsion in the bdget.

ts baseline is Eero rather than last $ear bdget. t re*ires

considerable docmentation. % more detailed a!!roach N !ast

mista-es can not be carried for&ard.

8stiate redetermination of ftre e"ent either on sim!le gess or

scientific !rinci!les.

Forecast %ssessment of !robable ftre e"ent.

=udget .adding 'nderestimating re"ene N o"er estimating cost.

=udget m!lication of a forecast N related to !lanned e"ent.

=udgetar S!ack )he difference bet&een the re"ene or cost !rojection that a

!erson !ro"ides N a realistic estimate of the re"ene or cost.

"*,G$ #! FORC'!$"*,G$ #! FORC'!$"*,G$ #! FORC'!$"*,G$ #! FORC'!$

=U+8T F648AST

4e!ate to %!anned e0ent" oncern 9ith %robab!e e0ent"

o%rise 9ho!e business unit" o0er !iited function"

.!anned se%arate! for each account %eriod" o0er !ong %eriod"

Too! of contro!" Bot a too! for contro!"

=udget starts 9hen forecast ends & con0ert it into

budget"

Forecast end 9ith forecast of !ike! e0ent"




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$%P! OF "*,G$$%P! OF "*,G$$%P! OF "*,G$$%P! OF "*,G$

FI@,2

t is da&n for one le"el of acti"it$ N one set of condition. t is rigid N is based on

assm!tion that there &ill be no change in bdgeted le"el of acti"it$.

F!eib!e dget designed to change in accordance &ith le"el of acti"it$

attained.

=asic t is !re!ared for se for a long !eriod of time.

urrent =elate to crrent condition N is sed o"er short time !eriod.

$ong ter t is !re!ared for more than one $ear e.g.

• a!ital /:!enditre dget.

• =esearch N @e"elo!ment dget.

!.OR$ $R/2

.eriod t is !re!ared for less than 12 months.

Usefu! For • Fo&er management le"el.

• ontrol !r!oses. e.g.

$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION$. OR,R OF "*,G$ PRP'R'$ION

%ssming that the !rinci!al bdget factor has been identified as being sales, the stages

in"ol"ed in the !re!aration of a bdget can be smmariEed as follo&s.

a )he sa!es budget is !re!ared in nits of !rodct and sales "ale. )he finished goods

in0entor budget can be !re!ared at the same time. )his bdget decides the !lanned

increase or decrease in finished goods in"entor$ le"els.

b Bith the information from the sales and in"entor$ bdgets, the %roduction budget

can be !re!ared. )his is, in effect, the sales bdget in nits !ls or mins the increase

or decrease in finished goods in"entor$. )he !rodction bdget &ill be stated in terms

of nits.

c )his leads on logicall$ to bdgeting the resources for %roduction. )his in"ol"es

!re!aring a ateria!s usage budget, achine usage budget and a !abor budget.





d n addition to the materials sage bdget, a ateria!s in0entor budget &ill be

!re!ared, to decide the !lanned increase or decrease in the le"el of in"entor$ held.

Hnce the ra& materials sage re*irements and the ra& materials in"entor$ bdget are-no&n, the !rchasing de!artment can !re!are a ra9 ateria!s %urchases budget in

*antities and "ale for each t$!e of material !rchased.

e @ring the !re!aration of the sales and !rodction bdgets, the managers of the

cost centers of the organiEation &ill !re!are their draft bdgets for the de!artment

o0erhead costs. ch o"erheads &ill inclde maintenance, stores, administration, selling

and research and de"elo!ment.

f rom the abo"e information a budgeted incoe stateent can be !rodced.

g n addition se"eral other bdgets mst be !re!ared in order to arri"e at thebudgeted stateent of financia! %osition. )hese are the ca%ita! e%enditure budget

for noncrrent assets, the 9orking ca%ita! budget for bdgeted increases or

decreases in the le"el of recei"ables and acconts !a$able as &ell as in"entories, and a

cash budget.

P*RC.'! "*,G$P*RC.'! "*,G$P*RC.'! "*,G$P*RC.'! "*,G$

dgeted 'nit old JJJ

%dd /nding n"entor$ of inished Goods JJJ

)otal needs JJJFess eginning n"entor$ of inished Goods JJJ

4eCuired %roduction>Units to be %roduced

,IRC$ /'$RI'+,IRC$ /'$RI'+,IRC$ /'$RI'+,IRC$ /'$RI'+ P*RC.'!P*RC.'!P*RC.'!P*RC.'!0*!'G 0*!'G 0*!'G 0*!'G "*,G$"*,G$"*,G$"*,G$

)he materials !rchases bdget is the bdget for the !rchase cost of materials that &ill

be !rchased in the bdget !eriod. )he materials !rchases bdget might be !re!ared

for all materials, direct and indirect, or for direct materials onl$.

)he !rchases bdget differs from the materials sage bdget b$ the amont of the!lanned increase or decrease in in"entor$ le"els of materials in the bdget !eriod.

=a& aterial needed to meet the !rodction schedle JJJ

%dd /nding n"entor$ of ra& material JJJ

)otal =a& aterial needs JJJ

Fess eginning n"entor$ of ra& material JJJ

4a9 ;ateria! to be %roduction





!'+! "*,G$!'+! "*,G$!'+! "*,G$!'+! "*,G$

ale in nits JJJ

ale !rice !er nit JJJ

Tota! .rice

a-ing a sales forecast is li-e shooting an arro&. ajor factors to consider &hile

forecasting sales incldes>

1. ast sales le"el N trends.

2. General economic trends.

3. olitical N legal e"ents.

4. lanned ad"ertising N !rodct

!romotion.

5. ntended !ricing !olic$.

6. /:!ected action of com!etitors.

7. /conomic trends in com!an$

indstr$.

8. ar-et research stdies.

,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$,IRC$ +'"O*R "*,G$

t is a statement of the *antities of direct labor re*ired for !rodction, and its cost.

)he bdget is !re!ared for different grades of labor se!aratel$, bt the total labor

cost shold also be sho&n.

or each grade of labor, the e:!ected hors of &or- shold be calclated, for ma-ing

the bdgeted !rodction *antities of !rodct indi"idall$ and then for all the !rodctsin total. )he total bdget in hors for each grade of labor is con"erted into a cost at the

standard?bdgeted rate !er hor for the grade of labor.

=e*ired rodction from !rodction bdget JJJ

@irect labor hor JJJ

)otal direct labor hor needs JJJ

@irect labor cost !er hor JJJ

Tota! direct !abor cost

O#R.',! "*,G$!O#R.',! "*,G$!O#R.',! "*,G$!O#R.',! "*,G$!

H"erheads bdgets are !re!ared for each de!artment or cost centre, in !rodction,

administration and sales and distribtion.

1. )o !re!are e:!enditre bdgets for each o"erhead cost centre, o"erhead

e:!enditre is allocated and a!!ortioned sing a"ailable methods.

2. n an absor!tion costing s$stem, an o"erhead absor!tion rate shold then be

calclated from the total bdgeted e:!enditre and the bdgeted "olme of




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Fle5ed budgets

1" % fle:ed bdget is a bdget !re!ared to sho& the re"ene, costs and !rofits thatshold ha"e been e:!ected from the actal "olmes of !rodction and sale.

)" % fle:ed bdget is !re!ared for the actal "olme of sales and ot!t, and it

allo&s for the fact that sales re"enes and "ariable costs shold be e:!ected to

increase or fall &ith increases or falls in sales and ot!t.

*" % fle:ed bdget is !re!ared at the end of the bdget !eriod &hen the actal

reslts are -no&n. t is sed to com!are>

1. the actal reslts &ith the fle:ed bdget

2. the fi:ed bdget &ith the fle:ed bdget.

/" f a fle:ed bdget is com!ared &ith the actal reslts for a !eriod, the

differences bet&een the t&o "ariances are mch more meaningfl than if thefi:ed bdget and actal reslts are com!ared.

Fle5ible budgets

le:ible bdgets are not the same as fle:ed bdgets, althogh the$ are similar.

F!eed budgets are !re!ared at the end of a bdget !eriod and loo- bac- at &hat costs,

re"enes and !rofits shold ha"e been in a !eriod based on actal acti"it$ le"els. )he$

are sed to calclate "ariances for the !r!ose of management control and control

re!orting budgetar contro!.

F!eib!e budgets are for&ardloo-ing and are !re!ared at the beginning of a bdget

!eriod &hen the fi:ed original bdget is !re!ared. le:ible bdgets are !re!ared to

sho& the reslts that &old be e:!ected at different le"els of acti"it$, for e:am!le, at

75M, 80M and 85M of the fll ca!acit$. )he$ might be !re!ared &hen there is

ncertaint$ abot &hat the actal "olmes of sales and !rodction &ill be, and se"eral

bdgets are therefore !re!ared for a nmber of different !ossible otcomes.

C'!. "*,G$C'!. "*,G$C'!. "*,G$C'!. "*,G$

6%ening ash ba!ance KKK EEE

%dd =ecei!ts from debtors JJJ \\\ OOO

%dd ales of a!ital items JJJ \\\ OOO

%dd %n$ loan recei"ed JJJ \\\ OOO

%dd roceed for share isses JJJ \\\ OOO

%dd %n$ other cash recei!ts JJJ \\\ OOO

J Tota! ash A0ai!ab!e KKK EEE

Fess a$ments to creditors JJJ \\\ OOO

Fess ash !rchases JJJ \\\ OOO




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"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!"*,G$'R% CON$RO+ 'N'+%!I!

Fied

=udget

F!eib!e

=udget

Actua!

budget

=udget

2ariances

rodction N ales 'nits JJJ JJJ JJJ JJJ

ales JJJ JJJ JJJ JJJ

Iariable osts JJJ JJJ JJJ JJJ

@ JJJ JJJ JJJ JJJ

@F JJJ JJJ JJJ JJJ

I?H JJJ JJJ JJJ JJJ

emi A Iariable osts JJJ JJJ JJJ JJJ

i:ed osts JJJ JJJ JJJ JJJ )otal costs JJJ JJJ JJJ JJJ

.rofit

B6T8:

1. Iariances are calclated b$ com!aring actal reslts N the fle:ible bdgets, not

actal bdgets N the original bdgets.

2. )he correct a!!roach is as follo&s>

• dentif$ fi:ed N "ariable costs

• rodce a fle:ible bdget sing marginal costing techni*es.

Fle5ible "udgeting2 m!ortant !oints inclde>

1" ;o concern &ith actal reslts.

)" lassification of cost b$ beha"iors is the most im!ortant element in

fle:ible bdgeting.

*" f cost is "ariable, identif$ that it is "ariable &ith reference to> no of nits?

no of hors.

/" f cost is semi "ariable, then normall$ high N lo& method is sed to

a!!ortion fi:ed N "ariable !ortion.

5" lease remember that +6 B6T fle: fi:ed cost.

!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R!$P! IN $. PRP'R'$ION OF C'PI$'+ @PN,I$*R"*,G$!"*,G$!"*,G$!"*,G$!

Ste% 3 1> %n accountant or budget officer shou!d be res%onsib!e for the

ca!ital e:!enditre bdget. )heir tas-s shold inclde commnicating bet&een

interested !arties, !ro"iding necessar$ data to assist in bdget !re!aration, dra&ing !

a timetable to ensre that !ro!er consltation ta-es !lace and so on.




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Ste% 3 )> ales, !rodction and related bdgets co"er, in general, a 12

month !eriod. % detailed ca%ita! e%enditure budget shou!d be %re%ared for the

budget %eriod but additiona! budgets shou!d be dra9n u% for both the ediu and!ong ter" )his re*ires an inde!th consideration of the organisation<s re*irements

for land, bildings, !lant, machiner$, "ehicles, fi:tres and fittings and so on for the

short, medim and long term.

Ste% 3 *: )he budget co0ering the 1) onth %eriod shold be broken do9n into

onth! or Cuarter! s%ending, and details incor!orated into the cash

bdget.

Ste% 3 / itable financing mst be arranged as necessar$.

Ste% 3 5 )he ca!ital e:!enditre bdget shold take account of the %rinci%a!

budget factor. f a"ailable fnds are limiting the organisation<s acti"ities

then the$ &ill more than li-el$ limit ca!ital e:!enditre.

Ste% 3 < %s !art of the o"erall bdget coordination !rocess, the ca!ital

e:!enditre bdget mst be re0ie9ed in re!ation to the other budgets. ro!osed

e:!ansion of !rodction ma$ &ell re*ire significant noncrrent asset e:!enditre

&hich shold be reflected in the bdget.

Ste% 3 ? )he ca!ital e:!enditre bdget shold be u%dated on a regu!ar basis

since both the timing and amont of e:!enditre can change at shortnotice.

PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+PRP'R'$ION OF F+@I"+ "*,G$!"*,G$!"*,G$!"*,G$!

Ste% 3 1 )he first ste! in the !re!aration of a fle:ible bdget is the deterination

of cost beha0iour %atterns, &hich means deciding 9hether costs are

fied, 0ariab!e or sei30ariab!e.

^ i:ed costs are eas$ to s!ot. )he$ remain constant as acti"it$ le"els change.

^ or nonfi:ed costs, di"ide each cost figre b$ the related acti"it$ le"el. f the

cost is a "ariable cost, the cost !er nit &ill remain constant. f the cost is a semi"ariable cost, the nit rate &ill redce as acti"it$ le"els increase.

Ste% 3 ) )he second ste! in the !re!aration of a fle:ible bdget is to calclate the

budget cost a!!o9ance for each cost item.

=udget cost a!!o9ance J budgeted fied costL (nuber of units L

0ariab!e cost %er unit# LL

Q ;il for "ariable cost

QQ ;il for fi:ed cost




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emi"ariable costs therefore need s!litting into their fi:ed and "ariable com!onents so

that the bdget cost allo&ance can be calclated.




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$%P!

=asic • Use for co%arison"

• Unchanged o0er !ong %eriod"

Idea! • =e!resent !erfect !erformance.

• inimm cost !ossible nder !erfect information.

• ;ot sed in real &orld de to ad"erse im!act on

em!lo$ee moti"ation.

urrent! attainab!e • 'se for !lan N control.

• hold be incrred nder efficient o!erating condition.

• @ifficlt not im!ossible to achie"e.

"RI$I!. ,CI!ION R*+

%ctal is G Ad0erse

%ctal is FHB Fa0orab!e

B6T8: The abo0e ru!e 9i!! not a%%! to Sa!es & 2o!ue 2ariances"

'/RIC'N ,CI!ION R*+

ositi"e Fa0orab!e

;egati"e Ad0erse

'/RIC'N 'PPRO'C. $O #'RI'NC 'N'+%!I!

$WO #'RI'NC

CON$RO++'"+ #'RI'NC2

%ctal H JJJ

dgeted H for a!acit$ %ttained JJJ

Q dgeted H for a!acit$ %ttained D i:ed ost P tandard or Q

tandard Iariable =ate





!PN,ING 0 @PN,I$*R #'RI'NC2


%ctal H JJJ

Qdgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard Iariable =ate

+8ISI6B 4U$8

%ctal igh Ad0erse

%ctal Fo& Fa0orab!e

FFICINC% #'RI'NC2

%ctal or Bor-ed Q tandard =ate JJJ

tandard or %llo&ed Q tandard =ate JJJ

+8ISI6B 4U$8

%ctal igh Ad0erse %ctal Fo& Fa0orab!e

FO*R #'RI'NC

C'P'CI$% #'RI'NC2

%!!lied H JJJ


Q %!!lied H D tandard or Q )otal tandard =ate

Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard Iariable

=ate

+8ISI6B 4U$8

dgeted igh Ad0erse

dgeted Fo& Fa0orab!e





!PN,ING 0 @PN,I$*R #'RI'NC2


%ctal H JJJ

Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard

Iariable =ate

+8ISI6B 4U$8

%ctal igh Ad0erse

%ctal Fo& Fa0orab!e

FI@, FFICINC% #'RI'NC2

%ctal or Bor-ed Q tandard i:ed =ate JJJ

tandard or %llo&ed Q tandard i:ed =ate JJJ

+8ISI6B 4U$8

%ctal igh Ad0erse

%ctal Fo& Fa0orab!e

#'RI'"+ FFICINC% #'RI'NC2


dgeted H for tandard or Bor-ed JJJ

Q dgeted H for a!acit$ %ttained D i:ed ost P %ctal or Q tandard

Iariable =ate

Q dgeted H for tandard or Bor-ed D i:ed ost P tandard or Q

tandard Iariable =ate

+8ISI6B 4U$8

dgeted igh Ad0erse

dgeted Fo& Fa0orab!e





/'$RI'+ #'RI'NC!

=4ITISH A;84IAB

%ctal ost A tandard ost tandard cost of material A %ctal cost of

aterial

64

tandard base on actal ot!t Q standard

rate A %ctal sage Q %ctal rate

Bhere,

tandard base on actal ot!t D nit

made Q !er -g ? hr

%ctal =ate D ost ? hrs

aterial Iariances are di"ided into t9o "ariances>

1" aterial rice Iariance.

)" aterial antit$?'sage Iariance.

=4ITISH %ctal t$ %= A =

64

%ctal ost A %ctal t$

Q =

64

% Q %= A % Q =

A;84IAB %ctal t$ = A %=

=4ITISH = %ctal t$ A %

[ tandard t$ %llo&ed Y

A;84IAB tandard rate tandard

based on actal ot!t A

%ctal sage

Bhere,

1. tandard base on

actal ot!t D

nit made Q !er -g

? hr

2. %ctal =ate D ost

? hrs

Tota! ;ateria! 2ariance: aterial rice Iariance P aterial 'sage Iariance

Tota! +irect ;ateria! 2ariance

+irect ;ateria! .rice 2ariance +irect ;ateria! Usage 2ariance





PRIC #'RI'NC #'RI'$ION!

1 3 P*RC.'! )*'N$I$%

4a9 ;ateria!

rchase % Q %= rice Iariance % %==

t$ Iariance = % %

B % Q =

losing toc- %ctal t$ A t$ onsmed Q =

B6T8: !osing stock is recorded at S4"

=4ITISH

%ctal ost A tandard ost

D % Q =

% D onsme cost not !rchase cost

H?%F P '= A ?%F



=4ITISH %ctal t$ %= A =

H=

%ctal ost A %ctal t$

Q =







) 3 CON!*/ )*'N$I$%

4a9 ;ateria!

rchase % Q %= rice Iariance %==

t$ Iariance = % %

B % Q =

losing toc- %ctal t$ A t$ onsmed Q %=

B6T8: !osing stock is recorded at A4"

=4ITISH


D % Q =

% D onsme cost not !rchase cost

H?%F P '= A ?%F



2A$U8 6F $6SIB ST6P 6F 4A7

;AT84IA$

A$U$ATI6B 6F .4I8 2A4IAB8

tandard ost aterial rchased

%ctal ost aterial 'sed

,IFFRNC "$WN $WO /$.O,!

.U4HAS8 MTK 6BSU;8 MTK

eriod ost rodct ost

;ot considered for stoc- "alation onsidered for stoc- "alation

ost charge in !eriod in &hich it is incrred ost charge in !eriod in &hich it is sold

=4ITISH onsmed t$ %= A =







W.IC. /$.O, $O *!

.U4HAS8 MTK 6BSU;8 MTK

losing stoc- is "aled at = losing stoc- is "aled at %=

Iariance is considered as !eriod cost Iariance is considered as !rodct cost

Iariance is recorded at earliest stage

IB+IATI6B: ;o indication is gi"en R se !rchase *t$ method.

+'"OR #'RI'NC!

=4ITISH %ctal ost A tandard ost

A;84IAB tandard cost of Fabor A %ctal cost of Fabor

H=

tandard base on actal hor Q standard rate A

%ctal hor Q %ctal rate

Bhere,

1. tandard base on actal hor D nit hor Q

!er -g ? hr

2. %ctal =ate D ost ? hrs

=4ITISH %ctal r %= A =

64

%ctal ost A %ctal r Q =

A;84IAB Actua! Hr ( S4 A4#

%ctal hor N !rodcti"e

hor is same thing.rodcti"e hor D %ctal

hor A dle hor

=4ITISH S4 (Actua! Hr SHA#

[ tandard r %llo&ed Y

%ctal \ield Q tandard time

!er nitA;84IAB Standard rate (Standard

based on actua! hr Actua!

hr#

Bhere,

tandard base on actal hr D

nit hr Q !er -g ? hr

%ctal =ate D ost ? hrs

Tota! +irect $abor 2ariance

+irect $abor 4ate 2ariance +irect $abor 8fficienc 2ariance





GRO!! PROFI$ 'N'+%!I!

dgeted %ctal

ales 'nits 10000 9800

ales er 'nit 10 10.8

ost er 'nit 9 8.6

ales 100000 105840

ost of ales 80000 84280

ross .rofit ) )15<

B6T8: last $ear actal figres are assmed to be bdgeted if t&o $ears are

in"ol"ed. )his $ear &ill be actal $ear.

*! OF !)' : ")

tandard antit$ %llo&ed =a& aterial

dgeted antit$ inished Goods

,CI!ION R*+ FOR GP 'N'+%!I!

. > Sa!es is .ositi0e %IH'=%F/

. > Sa!es is Begati0e %@I/=/

S is .ositi0e %@I/=/

S is Begati0e %IH'=%F/

Tota! ross .rofit +ifference

%ctal G A d eted G

Sa!es 2ariance

%ctal ales A dgeted ales

S 2ariance

%ctal G A dgeted G

.rice 2ariance

% %==

Mt 2ariance

= %

.rice 2ariance

% %==

Mt 2ariance

= %





C'+C*+'$ION! OF GP 'N'+%!I!

ross .rofit +ifference 21560 A 20000 D 1560 %

Sa!es 105840 A 100000 D 5840

S 84280 A 80000 D 4280 %

Sa!e .rice 980010.810 D 7840

Sa!e Muantit 10980010000 D 2000 %

S .rice 98008.68 D 5880 %

S Muantit 8980010000 D 1600

$WO OR /OR /I@ C'!!

ost 2o!ue Sa!es 2o!ue J Bet 2o!ue > Sa!es ;argin

= of Gross rofit % 2980010000 D 4000 %

S4 of ross .rofit (AM at Actua! ;i 3 =M#

ollo&ing three "ariance are sed in Gross rofit anal$sis>

1" ale !rice

)" ost !rice

*" ;et "olme

!$'N,'R, CO!$ R'$IO!

.roduction 2o!ue 4atio =% Z %? Q 100

.roduction a%acit 4atio =% Q %? Q 100.roducti0it>8fficienc 4atio =%% Q % ?% Q 100

+8ISI6B 4U$8

8fficient Greater than 100M

In3efficient Fess than 100M

C'+N,'R #'RI'NC

= of i:ed ost !er da$ dgeted @a$s A %ctal @a$s

SA$8S ;I 2A4IAB8

= of Gross rofit % at %ctal

i: A % at tandard i:

SA$8S 26$U;8 2A4IAB8

= of Gross rofit % at tandard

i:





/I@ #'RI'NC!

• )his in"ol"es t&o or more ra& material.

• )his incldes mi: N $ield "ariances.

'PPRO'C. 6 78 &$.I! ON I! RCO//N,,(

+; Tota! ost 2ariance


.4I8 2A4IAB8 USA8 2A4IAB8% %= A= = % at %ctal i: A %

% A % Q = %Q= A %Q=

%Q%= A %Q=

Usage 2ariance is di0ided into ;i & Kie!d 2ariance

;I 2A4IAB8 KI8$+ 2A4IAB8= % at %ctal i: A % at tandard i: = % at tandard i: A %

%Q= )otal %QBeighted er 'nit ost

././././0000 = = = = antit$ > > > >tandard i: ? @ ? @ ? @ ? @Beighted %"erage

cost !er nit 3 A B , C 4 D($3B 3 A B , C 4 D($3B 3 A B , C 4 D($3B 3 A B , C 4 D($3B <

4a9 ;ateria! Pg 4ate .er Pg ost

% 12 5 60

8 12.5 100

20 (1<>)# 160

• 8 is the &eighted a"erage cost !er nit

• )he &eighted a"erage cost !er nit is sed &here *antities are gi"en in theratio of 60>40 of standard.

'PPRO'C. 6 79

;ateria! .rice 2ariance %Q%Q%= A %Q%Q=

;ateria! ;i 2ariance %Q%Q= A %QQ=

;ateria! Kie!d 2ariance %QQ= A QQ=





!)A!/ is calculated as folloBs2

S"Bo ases Foru!ae

1 'nit rodce is gi"en 'nit !rodce Q )otal %ctal t$ ? )otal %ctal t$ A Foss

) 'nit rodce is not

gi"en

)otal %ctal t$? )otal tandard t$ Q )otal tandard A

Foss

/aterial %ield #ariance can also be calculated asfolloBs2

%ctal \ield A tandard \ield on %ctal n!t Q =

• %ctal \ield D )otal 'nits A Foss 'nits

• = D )otal ost A ;ormal Foss scra! "ale

)otal 'nits A ;ormal Foss nits

O0! P*RC.'!! C0! I! GI#N

;ateria! .rice 2ariance rchases &ill be actal *antit$

;ateria! ;i 2ariance %ctal onsm!tion &ill be actal *antit$

;ateria! Kie!d 2ariance %ctal onsm!tion ? )otal tandard t$ Q )otal tandard

A Foss

%ctal onsm!tion D H!ening alance P rchases A losing alance

PR ',1*!$/N$

/= balance &ill be sed for tandard antit$ %llo&ed N tandard or %llo&ed in

aterial 'sage Iariance N Fabor /fficienc$ Iariance.

!tandard )uantit3 'lloBed &"ased on FIFO( D

%ctal 'nit Q tandard consm!tion !er nit

!tandard .our 'lloBed &"ased on FIFO( D

%ctal 'nit Q tandard time !er nit





W'!$'G!

1" ;ormal Foss is not inefficienc$.

)" Iariance is de to %bnormal Foss.

*" % D 8100 N % D 9000 N % of @ D 9070. o, 90708000 D 970 ;ormal Foss>

900 N %bnormal Foss> 70

/" Foss to be adjsted in % as follo&s> %ctal t$ Q 100M ? 100M ;ormal Foss M

+$ Tota! ost 2ariance


4AT8 2A4IAB8 8FFII8BK 2A4IAB8% %= A= = % at %ctal i: A %

% A % Q = %Q= A %Q=

%Q%= A %Q=

8fficienc 2ariance is di0ided into ;i & Kie!d 2ariance

;I 2A4IAB8 KI8$+ 2A4IAB8= % at %ctal i: A % at tandard i: = % at tandard i: A %

1" Fabor i: Iariance is also called Gang Iariance H= )eam om!osition Iariance.

)"

Fabor \ield Iariance is also called Gang rodcti"it$ Iariance H= )eamrodcti"it$ Iariance.

I+$8 H6U4 2A4IAB8

= % aid A %

I+$8 TI;8 2A4IAB8 48A$ 8FFII8BK 2A4IAB8= % aid A % &or-ed = % &or-ed A %

+$ 8FFII8BK 2A4IAB8

= % A %48A$ 8FFII8BK 2A4IAB8 KI8$+ 2A4IAB8

= % A% for tandard \ield = % for tandard \ield A % for %ctal \ield

SHA for Standard Kie!d D %ctal \ield Q in!t H= hor re*ired ? ot!t

SHA for Actua! Kie!d D tandard \ield Q in!t H= hor re*ired ? ot!t

Standard Kie!d > %ctal n!t Q Ht!t ? n!t





RCONCI+I'$ION OF "*,G$ : 'C$*'+ PROFI$ '"!ORP$ION CO!$ING

=udgeted .rofit (budgeted sa!es L standard %rofit# JJJale Iolme Iariance JJJ

Standard %rofit on actua! sa!es ( actua! sa!es L standard %rofit# JJJ

ale !rice "ariance JJJ

.rofit before cost 0ariance JJJ

ost 2ariance:

A+2 FA2

aterials A rice JJJ JJJ

'sage JJJ JJJ

Fabor =ate JJJ JJJ

/fficienc$ JJJ JJJ

Iariable H"erhead A !ending JJJ JJJ

/fficienc$ JJJ JJJ

i:ed H"erhead A /:!enditre JJJ JJJ

Iolme JJJ JJJ

a!acit$ JJJ JJJ

/fficienc$ JJJ JJJ JJJ

Actua! .rofit

Standard %rofit Dsales A direct material A direct labor A "ariable e:!ense A fi:ed H"erhead

RCONCI+I'$ION OF "*,G$ : 'C$*'+ PROFI$ /'RGIN'+ CO!$ING

dgeted rofit bdgeted sales Q standard contribtion JJJ

Fess dgeted fi:ed o"erhead cost JJJ

=udgeted ontribution JJJ

ale Iolme Iariance JJJ

Standard ontribution on actua! sa!es ( actua! sa!es L standard contribution# JJJ

ale !rice "ariance JJJ

ontribution before cost 0ariance JJJ

2ariab!e ost 2ariance:

A+2 FA2aterials A rice JJJ JJJ

'sage JJJ JJJ

Fabor =ate JJJ JJJ

/fficienc$ JJJ JJJ

Iariable H"erhead A !ending JJJ JJJ

/fficienc$ JJJ JJJ

i:ed H"erhead A dgeted JJJ JJJ

/:!enditre JJJ JJJ JJJ

Actua! .rofit





Standard contribution Dsales A direct material A direct labor A "ariable e:!ense.

CO!$ RCONCI+I'$ION !$'$/N$

Standard ost

ost Iariance>

Ad0 Fa0

JJJ JJJ

JJJ JJJ

JJJ JJJ

JJJ JJJ JJJ

Actua! ost

1" a"orable A F/

)" %d"erse D %@@

*" t incldes onl$ cost "ariance.

PROFI$ RCONCI+I'$ION !$'$/N$

=udgeted .rofit

ale Iariance>

Ad0 Fa0JJJ JJJ

JJJ JJJ

JJJ JJJ

JJJ JJJ JJJ

ost Iariance>

Ad0 Fa0

JJJ JJJ

JJJ JJJ

JJJ JJJ

JJJ JJJ JJJActua! ost

1" a"orable A %@@

)" %d"erse D F/

*" t incldes cost N sales "ariance.





PROFI$ RCONCI+I'$ION !$'$/N$ &FOR /'RGIN'+

CO!$ING(=udgeted .rofit

%dd dgeted i:ed ost JJJ

dgeted ontribtion JJJ

ale Iariance>

Ad0 Fa0

JJJ JJJ

JJJ JJJ

JJJ JJJ

JJJ JJJ JJJost Iariance>

Ad0 Fa0

JJJ JJJ

JJJ JJJ

JJJ JJJ

JJJ JJJ JJJ

Actua! ontribution





tandard i: D 400

Beight = !er -g

% 30 240

, 25 320

%ctal i: D 192

Beight %= !er -g

% 16 230

, 13 308

tandard *antit$ allo&ed &ill be calclated as follo&s>

f tandard i:?rodction D 400 )hen standard *antit$ D 30

f %ctal i:?rodction D 192 )hen standard *antit$ allo&ed D C

the formla &ill be> %ctal i:?rodction Q ndi"idal tandard *antit$

tandard i:?rodction

A 192 Q 30 D 14.4

400

= 192 Q 25 D 12

400





tandard Gi: D 1000

Beight = !er -g

% 450 20

, 400 40

250 60

1100

Foss 100

1000

%ctal Gi: D 20000

Beight %= !er -g

% 10000 19

, 8500 42

4500 65

tandard *antit$ allo&ed &ill be calclated as follo&s>

f tandard Gi:?rodction D 1000 )hen total standard *antit$ D 1100

f %ctal Gi:?rodction D 20000 )hen standard *antit$ allo&ed D C

the formla &ill be> %ctal Gi:?rodction Q )otal tandard *antit$

tandard Gi:?rodction F/ an$ Foss

20000 Q 1100 D 22000

1000

) abo"e 22000 is total nit &hich &ill be allocated as follo&s>

A 22000 Q 450 ? 1100 D 9000

= 22000 Q 400 ? 1100 D 8000

22000 Q 250 ? 1100 D 5000

))(((

Bote that in !oss

case, 9e 9i!! take

tota! standard

Cuantit&" 7e 9i!! not

take indi0idua!

standrad Ct&





tandard Gi: D 1000 -g

t$ = !er -g

% 450 20

, 400 40

250 60

1100

tandard Foss 100

tandard Ht!t 1000

%ctal Gi: D 20000 -g

t$ = !er -g

% 10000 19

, 8500 42

4500 65

;ateria! .rice 2ariance J

% 10000

, 17000 %

22500 %

29500 %

;ateria! ;i1 2ariance J

% 11820 %

, 5480 %

43620

26320

% D 9409

, D 8363

D 5227

;AT84IA$ ;I 2A4IAB,8S I$$UST4ATI6B

23000 Q 450 ?1100

23000 Q400 ?1100

23000 Q250 ? 1100

%ctal t$ %= =

= %ctal t$ at %ctal Gi: %ctal t$ at tandard Gi:

%ctal t$ at tandard Gi: is calclated as follo&s>

10000 1920 D

8500 4240 D

4500 6560 D

20 10000 9409 D

40 8500 8363 D

60 4500 5227 D





;ateria! Kie!d 2ariance J

% 8180 %

, 14520 %

13620 %

36320 %

f tandard Gi:?rodction D 1000 )hen standard *antit$ D 450

f %ctal Gi:?rodction D 20000 )hen standard *antit$ al lo&ed D C

the formla &il l be> %ctal Gi:?rodction Q ndi" idal tandard *anti t$

tandard Gi:?rodction

A 20000 Q 450 D 9000

1000

= 20000 Q 400 D 8000

1000

, 20000 Q 200 D 5000

1000

;ateria! Usage 2ariance J

% 20000 %

, 20000 %

30000

10000 %

64

;ateria! Usage 2ariance J Gaterial Gi: Iariance PGaterial \ield Iariance

26320 P 36320 % D 10000 %

;ateria! ,ost 2ariance J

D 10000 Q 19 . 9000 Q 20

8500 Q 42 . 8000 Q 40

4500 Q 65 . 5000 Q 60

D 190000P357000P292500 . 180000P320000P300000

D 839500 . 800000 D 39500 %

64

;ateria! ,ost 2ariance J Gaterial rice Iariance PGaterial 'sage Iariance

29500 % P 10000 % D 39500 %

%ctal ost . tandard ost

= %ctal t$ at tandard Gi: . tandard t$ %llo&ed

= %ctal t$ at %ctal Gi: . tandard t$ %llo&ed

20 10000 . 9000 D

40 8500 . 8000 D

60 4500 . 5000 D

tandard t$ %llo&ed is calclated as follo&s>

20 9409 . 9000 D

40 8363 . 8000 D

60 5227 . 5000 D





,dgeted sales is as follo&s>A 800 nits ] 100 !er nit

= 700 nits ] 200 !er nit

%ctal sales is as follo&s>

A 900 nits ] 110 !er nit

= 800 nits ] 180 !er nit

ost !er nit>

A 80

= 170

,a!cu!ate sa!es 0ariances"

Sa!es .rice 2ariance J

% 9000

, 16000 %

7000 %

Sa!es ;i1 2ariance J

% 140 %

, 210

70

% D 907

, D 793

% 100 80 D 20

, 200 170 D 30

Sa!es 2o!ue 2ariance J

% 2140

, 2790

4930

Sa!es Usage 2ariance J

% 2000

, 3000

5000

30 800 700 D

= of Gross roft is calclated as follo&s>

= of Gross rofit %ctal t$ at %ctal i: %ctal t$ at tandard i:

%= of Gross roft is calclated as follo&s>

tandard ales tandrad ost

%ctal ales tandrad ost

20 900 907 D

30 800 793 D

%ctal t$ at tandard i: i s calclated as follo&s>

1700 Q 800?1500

1700 Q700?1500

= of Gross rofit %ctal t$ at tandard i: ,dgeted t$

20 907 800 D

30 793 700 D

= of Gross rofit %ctal t$ at %ctal i: ,dgeted t$

20 900 800 D

%ctal t$ %= =

900 110100 D

800 180200 D

SA$8 ;IH 2A4IAB,8S I$$UST4ATI6B





MATERIAL COSTING

MATERIAL COSTING

/'$RI'+ CO!$ING /$.O,!

• irst in first ot H

• Fast in last ot FH

• ighest in first ot H

• tandard osting D antit$ issed Q standard cost

• =e!lacement osting = D antit$ issed Q re!lacement cost

• %"erage osting %IH

1. mlati"e %"erage osting % D normal method that &e se.

2. eriodic %"erage osting %

ost of nit recei"ed P cost of o!ening stoc- ? ;o of nit recei"ed P no of o!ening stoc-

D ans&er Q *antit$ issed indi"idal JJJ

Fess ost of nit recei"ed P cost of o!ening stoc- JJJ

Iale of losing stoc-

+IFO #! FIFO CO/P'RI!ON

;ethod .rice Incoe Stateent 8ffect =a!ance Sheet 8ffect

S BI

$IF6 ncrease igh Fo& Fo& /nding n"entor$

FIF6 ncrease Fo& igh igh /nding n"entor$

$IF6 @ecrease igh igh igh /nding n"entor$

FIF6 @ecrease Fo& Fo& Fo& /nding n"entor$

FIF6 $IF6 7A66S consists of irst !rchased Fast !rchased %"erage cost of all

item

8nding In0" consists of ost recent

!rchase

/arliest

!rchase

%"erage cost of all

item





IN#N$OR% #'+*'$ION /$.O,!

• ost

• ale !rice

• Fo&er of cost or mar-et "ale

• Fo&er of cost or net realiEable "ale

• Fo&er of cost or re!lacement "ale

FOR/*+'

Tota! ;ateria! Turno0er: aterial 'sed?%"erage aterial

Finished oods Turno0er: inished Goods old>%"erage aterial A0erage ;ateria!: H!ening stoc- P losing stoc-?2

+a 4eCuireent in A0erage In0entor: 365 ? )rno"er ratio

+ate before Bet 6rder: • re*enc$

• @a$ !!l$ left D nit in in"entor$ ?

/H Q re*enc$

• ;e:t Hrder > !!l$ Feft A Fead )ime

+OWR OF CO!$ : /'RK$ #'+*

AS8 6ST ;A4P8T $;

4e%!aceent

ost

B42>ei!ing Ad- B42>

F!oor

;arket ($td b

f!oor & cei!ing#

JJ JJ JJ JJ JJ JJ JJ

1 2 3 2nd

nmber is

sho&n here

Fo& of

mar-et or

cost2 1 3

* ) 1

!$OR +,GR C'R,

;>S

Store !edger card > bin card

(;ethod nae#

+AT8 488I28+ ISSU8+ =A$AB8

Unit U"." Aount Unit U"." Aount Unit U"." Aount

JJJJ200J JJ JJ JJ JJ JJ JJ JJ JJ JJ

JJJJ200J





,FC$I# *NI$!

S.8IFI (7I.# 8BTI48 (F6H# Bor- in rocess A aterial

Bor- in rocess A Fabor

Bor- in rocess A H

aterial

Fabor

actor$ H"er ead

Bor- in rocess A aterial


Bor- in rocess A H

aterial

Fabor

actor$ H"er ead



Bor- in rocess A H

aterial

Fabor

actor$ H"er ead

actor$ H"er ead

aterial

Fabor

actor$ H"er ead

inished Goods



Bor- in rocess A H

inished Goods



Bor- in rocess A H

!POI+'G *NI$!

S.8IFI (7I.# 8BTI48 (F6H# Bor- in rocess A aterial


Bor- in rocess A H

aterial

Fabor

actor$ H"er ead



Bor- in rocess A H

aterial

Fabor

actor$ H"er ead

!oiled Goods

actor$ H"er ead



Bor- in rocess A H

ost of !oilage D @P@FPH A !oilage cra!

!oiled Goods



Bor- in rocess A H

inished Goods



Bor- in rocess A H

inished Goods



Bor- in rocess A H





!POI+'G C'+C*+'$ION

S.8IFI (7I.# 8BTI48 (F6H# =eco"er$ =eco"er$ P loss

er nit cost change er nit cost do not change

G cost> )otal cost P %dditional cost A !oilage

cost

G cost> )otal cost A !oilage cost

!oilage distribtion> !oilage cost ? total cost

Q 100

!oilage distribtion> articlar cost ? nit

made Q 100

IN#N$OR% CON$RO+!

7ITH6UT SAF8TK ST6P 7ITH SAF8TK ST6P

6rder $e0e! > .oint >

4e36rder $e0e!:

a:imm sage dring lead time

64

a:imm sage Q a: lead time

;ormal ?%"erage sage dring

lead time P afet$ toc-

64

;ormal ?%"erage sage Q

lead time P afet$ toc-

;iniu $e0e! > Sock

> .oint> =uffer $e0e!

Hrder Fe"el ;ormal ?%"erage

sage dring lead time

64

Hrder Fe"el A ;ormal ?%"erage

sage Q lead time

64

a:imm dail$ sage ;ormal

?%"erage dail$ sage Q lead time

;aiu $e0e! >

Stock > .oint

Hrder Fe"el P /H inimm

sage dring lead time

64

Hrder Fe"el P /H A inimm

dail$ sage Q lead time

Hrder Fe"el P /H ;ormal

?%"erage sage dring lead

time

64

/H P afet$ toc-

Safet Stock: a:imm 'sage A %"erage 'sage

Q lead time

A0erage Stock $e0e!: _ inimm Fe"el P a:imm

le"el

64

_ H!ening toc- P losing toc-

/H?2 P afet$ toc-

+anger $e0e! ;ormal ?%"erage sage dring lead

time for rgent s!!l$

64

;ormal ?%"erage dail$ sage Q lead

time for rgent s!!l$





CONO/IC OR,R )*'N$I$%

86M D ` 2 Q %= Q H

P Q .'.

Buber of 6rders ;H > %= ? /H

Tota! 6rdering ost )H > H; Q )H

A0erage In0entor '% > /H ? 2

Tota! arring ost ) > '% Q )

FreCuenc of 6rders 365 ? ;H

)his formla is based on three assu%tions>

1. rice &ill remain constant throghot the $ear and *antit$ discont is not in"ol"ed.

2. attern of consm!tion, "ariable ordering costs !er order and "ariable in"entor$

carr$ing charge !er nit !er annm &ill remain the same throghot, and

3. /H &ill be deli"ered each time the stoc- balance is jst redced to nil.

CONO/IC "'$C. )*'N$I$%0")0'/N,, CONO/IC OR,R )*'N$I$%

86M D ` 2@

1 A @?=

et! ost.

+ %nnal @emand.

H olding ost.

4 rodction =ate !er time !eriod.

!'#ING! C'+C*+'$ION

8ISTIB B87

6rdering ost %= Q H ? /H %= Q H ? /H arring ost Q Q ' Q /H ? 2 Q Q ' Q /H ? 2

.urchase ost 'nit made Q !er nit cost 'nit made Q !er nit cost

SA2IBS @ifference of /:isting N ;e&





FOR/'$FOR/'$FOR/'$FOR/'$

1" actor$ cost D JJJontribtion re*ired D P ) ? total limiting factor hrs Q limiting factor hr D JJJ

=/ D )" Fo&est !rice> asic nit P ;et rofit A H!ening rofit ? a!acit$

IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$IN#N$OR% '!!OCI'$, CO!$

%nnal !rchase cost D rrele"ant

%nnal ordering cost D =ele"ant

%nnal carr$ing cost D =ele"ant

CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$CO/PONN$ OF P*RC.'! CO!$

1" n"oice !rice

)" @iscont

*" nsrance in transit

/" ommission or bro-erage

5" rchase related ta:es N dties non refndable N non adjstable

<" )rans!ortation cost if constant !er nit

?" ;on retrnable container N !ac-ing

CO/PONN$ OF OR,RCO/PONN$ OF OR,RCO/PONN$ OF OR,RCO/PONN$ OF OR,RING CO!$ING CO!$ING CO!$ING CO!$

1" lerical cost !er order

)" ns!ection cost !er order

*" )rans!ortation cost if constant !er order

CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(CO/PONN$ OF C'RR%ING CO!$ &.O+,ING CO!$ 0 !$OR'G CO!$(

1" nsrance

)" Bastage

*" aterial handling cost

/" torage charged if constant !er order

5" nterest ? &or-ing ca!ital cost

@ /H D =a& aterial

B / D rodction

G Bor-ing a!ital anagement D tore

@/)H= @ebtor anagement

%





'"C 'N'+%!I! '"C 'N'+%!I! '"C 'N'+%!I! '"C 'N'+%!I!

1" areto anal$sis

)" 80>20 rle

*" %l&a$s better control

/" %l!habetical a!!roach to in"entor$ management

5" electi"e in"entor$ management

<" ../. i.e. ontrol b$ im!ortance N e:ce!tion

?" I./.@. i.e. Iital, @esirable, /ssential

IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$IN#N$OR% /'N'G/N$

• /H

• =eorder

• ;ormal ma:

• %bsolte ma:

• afet$ stoc- ? bffer ? in stoc-

IB28BT64K 4864+IB SKST8;1" eriodic s$stem )" er!etal s$stem

'nder this s$stem, the "ale of in"entor$

is determined at the end of the $ear

throgh a !h$sical cont of in"entor$ in

store?&arehose. t does not maintain a

continos record of mo"ement of each

in"entor$ item.

'nder this s$stem, a com!lete and

continos record of mo"ement of each

in"entor$ item is maintained. er!etal

records are sefl in !re!aring monthl$

*arterl$ or other financial statement.

=ecord sed is normall$ a Sstore ledger

cardT s!ecif$ing *antit$ &ise recei!t,isse and balance together &ith "ales in

chronological se*ence.

T76 =IB SKST8; irst bin D o"er N abo"e reorder le"el econd bin D reorder le"el

4eorder !e0e! sste ) bin under reorder

!e0e! sste

.eriodic re0ie9 sste

'nit of reorder le"el

/:cess nits

• @esired

closing stoc-

• ale nit

• )otal re*ired

• H!ening stoc-

to be boght





O)O)O)O)

Annua! ordering cost J Annua! carring cost

%@ Q H ? /H J /H Q ? 2 64 /H Q ' Q M?2

/H 2

J 2 Q %@ Q H?' Q M

/H J ` 2 Q %@ Q H?' Q M

A284A8 6BSU;.TI6B B64;A$ 6BSU;.TI6B

H!ening P closing ? 2 1. ighest fre*enc$

2. onsme most of time

1" 'se normal consm!tion. f normal consm!tion not gi"en, then se a"erage

consm!tion.

)" onsm!tion N lead time D base !arameter &ill al&a$s be same

1" @%\ D @%\

)" B// D B//

!$OCK O*$ CO!$!$OCK O*$ CO!$!$OCK O*$ CO!$!$OCK O*$ CO!$

1" =estarting cost)" Foss of good&ill N cstomers

*" Foss of contribtion margin

/" /:tra cost associated &ith emergenc$ !rchase

5" onsm!tion Y ;ormal D toc- ot costs occrs

<" arr$ing cost of safet$ stoc- D safet$ stoc- nit Q !er nit

?" ;ote> &ill not be di"ided b$ 2 as it is not sed on reglar basis.

" toc- ot cost > 1 er time N ) er nit

'NN*'+ ,/'N, 'NN*'+ ,/'N, 'NN*'+ ,/'N, 'NN*'+ ,/'N,ash sales nit JJJ

redit sales nit JJJ

)otal sales nit JJJ

%dd A losing G JJJ

Fess A H!ening G JJJ

4eCuired





O$.R $%P! OF "PO$.R $%P! OF "PO$.R $%P! OF "PO$.R $%P! OF "P

ash =8. n the ash /, fi:ed cost ta-en at cash cost onl$ ash cost. ;o

non cash item &ill be considered. /.g. @e!reciation, %mortiEation

etc. %lso called SOut of pocket fixed cost T. )his / is sed in slac-

!eriod for short time.

o%osite =8.

(60era!! =8.#

/ in case of t&o or more than t&o !rodcts combined / for

one com!an$.

Muestion:

.articu!ars Unit A Unit =

ales =s. 20 =s. 45

Iariable cost =s. 15 =s. 30ontribtion =s. 05 =s. 15

ales mi: 6000 'nit 4000 'nit

?I =atio 1?4 1?3

rodct % and sales different !rodct at different !rice and

!rodct ha"e different cost and different sales mi:. =e*ired to find

combined / of com!an$ in %mont &hen fi:ed cost D360,000C

Ans9er:

IB UBIT 4ATI6 A A0g" contribution %er unit

5Q6 P 15Q4?10 D =s. 9 !er combo nit360,000?9 D 40,000 nits

%> 40000?10 Q 6 D 24000, > 40000?10 Q 4 D 16000

IB SA$8S 4ATI6 A A0g" .>2 ratio %er unit

5Q6 P 15Q4?20Q6 P 45Q4 D 30M

360,000?30M D 1200,000

=8. in case of

o%ening stock

Muestion: H!ening stoc- 6000 'nit ] =s.10.00 I at 60M D

60,000

rodction 44000 'nit ] fi:ed cost D 187000 D 484,000

elling rice D =s.10.50 in crrent $ear.

Ans9er:

.articu!ars Tota! ost 2ariab!e cost .er U" Fied cost

H!ening stoc- 60,000 36,000 6.00 ;ot tr. n this

$ear

rodce nits 484,000 297,000 6.75 187,000

ontribtion re*ired for absor!tion of fi:ed cost D =s. 187,000

ontribtion earn b$ o!ening nits 6,000 Q10.56 D =s. 27,000

alance contribtion D =s. 160,000

D 160,000?3.75 D 42,667

D )otal sale of nits D 6,000P42,667 D 48,667.





=8. in case of

change in

0ariab!e cost at0arious !e0e! of

%roduction"

Muestion: irst 5000 'nits ] =s. 3.00 ontribtion 2.00

;e:t 'nits ] =s. 2.80 ontribtion 2.20

ales !rice D =s. 5.00 and fi:ed cost D =s. 27500Ans9er: 5,000 P 12,500 D 17,500

=8. in case of

+ifferentia! fied

cost at

differentia!

%roduction !e0e!s:

Muestion: ales !rice D 20.00 and I D 15.00

i:ed cost, =s. 30,000 ! to 8000 nits and =s. 45000 abo"e 8000

'nit.

Ans9er:

/ ! to 8000 nits> 30,000?5 D 6,000 nits

/ abo"e 8000 nits> 45,000?5 D 9,000 nits.

ost =8. t is sed for !rofit earning ca!acit$ after a s!ecific le"el of

!rodction.Muestion:

.articu!ars .!ant A .!ant =

Iariable cost !er nit 8.00 6.50

i:ed cost 90,000 120,000

Bhich is more !rofitable and state the le"el in nits and com!are

the cost !ar nit &hen !rodction is 15000 nits or 25000 nitsC

Ans9er: 120,00090,000 ? 8.006.50 D 20,000 'nits.

=8. in case of

sei 0ariab!e cost

Muestion:

/ngine fi:ed cost D 32,000, )rain bogie i:ed cost D 12,000

a!acit$ D 60 !ersons !er bogie, )ic-et ontribtion D =s. 300

@etermine the / in ogie nmber and in !ersonsC

Ans9er:

ontribtion !er bogie D 300Q60 A 12000 D 6,000.00

ogie re*ired for / D 32,000 ? 6000 D 5.3333 or 6.00

/ tic-ets D 104,000 ? 300 D 347 tic-ets

.rofit =8. IB A;6UBT: i:ed cost P @esired !rofit ? I ratio

IB UBIT: i:ed cost P @esired !rofit ? ontribtion !er nit

=8. in case of

erger of %!ants

> co%an

Muestion:

.articu!ars .!ant A .!ant =

Bor-ing ca!acit$ 70M 60M

ales 350 240I 280 180

ontribtion 70 60

i:ed cost 50 45

rofit 20 15

1. ind ot the combined / of com!an$C

2. ind ot !rofit?loss at 50M ca!acit$C

Ans9er:

(1# i:ed cost D 50.00 P 45.00 D 95.00





a%acit at 1G A = Tota!

ales 500 400 900

Fess> I 100M 400 300 700ontribution 1 1 )

ommon ?I ratio D 200?900Q100 D 22.22 M

ales "ale on / D 95?22.22M D =s.427.50

()# At 5 G ca%acit

ales 900 Q 50M D 450

ontribtion 450 Q 22.22M D 100

Fess > i:ed cost D 95

.rofit J 5

/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$/*+$I PRO,*C$ PROFI$ !$'$/N$

Sa!e JJ

$ess 3 2 JJ

ontribution JJ

$ess S%ecific Fied ost JJ

Tota! JJ

$ess3 enera! Fied ost JJ

.rofit





FACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEADFACTORY OVERHEAD

O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.O#R'++ #'RI'NC 0 $O$'+ #'RI'NC 0 O#R OR *N,R 'PP+I, FO.

%ctal H i:ed P Iariable JJJ

%!!lied H %ctal ca!acit$ attained Q H %!!lied =ate JJJ

Under > 60er A%%!ied

F6H A%%!ied 4ate : /stimated H?/stimated a!acit$ le"el

'nder a!!lied? @r? 'nfa"orable & H"er a!!lied? r? a"orable

C'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NCC'P'CI$% 0 #O+*/ #'RI'NC

%!!lied H JJJ

dgeted GH for ca!acit$ attained i:ed H P %ctal ca!acit$

attained Q H "ariable rate

JJJ

F6H 2ariab!e 4ate : /stimated Iariable H?/stimated a!acit$ le"el

!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R!PN,ING0 "*,G$, 0 @PN,I$*R


%ctal H JJJ

FOR/*+'FOR/*+'FOR/*+'FOR/*+'

Fied F6H /stimated )otal H A Iariable H

Tota! F6H i:ed H P Iariable H

F6H a%%!ied rate (if 0ariab!e F6H

is gi0en#

i:ed H?/stimated ca!acit$ P Iariable rate

=udgeted 0o!ue> nora!

ca%acit > standard acti0it !e0e!

i:ed H?i:ed H rate )otal rate A Iariable rate

2ariab!e F6H 4ate hange in bdgeted H?hange in acti"it$ le"el

=udgeted Fied F6H )otal bdgeted H Iariable H dgeted "olme Q

"ariable rate

Fied ost Iariable H P dgeted fi:ed H

=udgeted F6H i:ed cost P Iariable cost dgeted "olme Q "ariable

rate

ost of Unused a%acit /stimated fi:ed H A i:ed H %!!lied

Stages of absor%tion costing %llocation P %!!ortionment P %bsor!tion

=!anket > .!ant 9ide> Sing!e 4ate )otal H of the factor$?)otal acti"it$ le"el of the factor$

+e%artenta! 4ate )otal H of de!tt?)otal acti"it$ le"el of the de!tt





Actua! 4ate )otal %ctal H?)otal actal acti"it$ le"el

=ases of Acti0it $e0e! 1 achine or 2 Aantit$ 3 rime cost

4 @ cost 5 @F cost 6 @F horsActua! osting %ctal @irect aterial ost P %ctal @irect Fabor ost P

%ctal @irect /:!enses ost P %ctal H ost

Bora! osting %ctal @irect aterial ost P %ctal @irect Fabor ost P

%ctal @irect /:!enses ost P %!!lied H ost

Under>60er a%%!ied +ecision 4u!e B6.U

;egati"e D H"er a!!lied N ositi"e D 'nder a!!lied

4eason of Under>60er a%%!ied 1 %ctal H"erhead costs are different from bdgeted

o"erhead

2 %ctal H"erhead acti"it$ le"els are different from

bdgeted o"erhead

3 %ctal H"erhead costs N acti"it$ le"els are differentfrom bdgeted o"erhead

'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$

Absor%tion osting ;argina! osting

.rie ost rodct ost rodct ost

2ariab!e F6H rodct ost rodct ost

Fied F6H rodct ost eriod ost

Adin 2ariab!e eriod ost eriod ost

Adin Fied eriod ost eriod ostSe!!ing 2ariab!e eriod ost eriod ost

Se!!ing Fied eriod ost eriod ost

PRPRPRPR----,$R/IN, FO. R'$,$R/IN, FO. R'$,$R/IN, FO. R'$,$R/IN, FO. R'$

=ased on Actua! a%acit Attained: /stimated H at actal ca!acit$ attained

/stimated a!acit$ le"el at actal ca!acit$

attained

=ased on Bora! a%acit: /stimated H at normal ca!acit$

/stimated a!acit$ le"el at normalca!acit$

8stiated F6H at nora! ca%acit

i:ed /:!ected actal ca!acit$ P normal ca!acit$ hors Q "ariable rate

2ariab!e 4ate: Iariable %ctal a!acit$ %ttained?%ctal a!acit$ %ttained ors





FO.FO.FO.FO. C'P'CC'P'CC'P'CC'P'CI$I!I$I!I$I!I$I!

&'le(#ate(T%eoreticalCa)acit*

& ' stimated r#nning + !r a da," -. da,s in a ,ear ' stimated mac!ine !o#r +*-.*&0 12.00

Mac!ine 3o#rs

Practical Ca)acit* 1 /stimated rnning D 20 hr a da$, 5 da$s !er &ee-, 50

&ee-s !er $ear

2 /stimated machine hor D 20Q5Q50Q10 D 50000 achine

ors

+ormal("u'gete'

Ca)acit*

1 'sed for long rn !lanning.

2 oresee ca!acit$

3 ased !on !ast e:!erience considering !resent

circmstances.

-)ecte' Actual Ca)acit* 'sed for short rn !lanning. /.g. seasonal.

.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!.IG.0+OW 'N'+%!I!

Ste% 1 )a-e the acti"it$ le"el and cost for>

• )he highest acti"it$ le"el

• )he lo&est acti"it$ le"el.

Ste% ) )he difference bet&een the total cost of the highest acti"it$ le"el and the total

cost of the lo&est acti"it$ le"el consists entirel$ of "ariable costs. )his is becase

the fi:ed costs are the same at all le"els of acti"it$.

Acti0it !e0e! V

igh % )otal cost of %

Fo& )otal cost of

+ifference: (A =# units T of A T of =

• rom this difference, &e can therefore calclate the "ariable cost !er

nit of acti"it$.

• 2ariab!e cost %er unit D ) of % A ) of ? % A nits

Ste% * a"ing calclated the "ariable cost !er nit, a!!l$ this "ale to the cost of either

the highest or the lo&est acti"it$ le"el. t does not matter &hether $o se the

high le"el or the lo& le"el of acti"it$. \or calclation of fi:ed costs &ill be the

same. alclate the total "ariable costs at this acti"it$ le"el.

Ste% / )he difference bet&een the total cost at this acti"it$ le"el and the total "ariable

cost at this acti"it$ le"el is the fi:ed cost.

Substitute in the W!o9X eCuation ost

V

)otal cost of lo& "olme of acti"it$ ) of

Iariable cost of lo& "olme of acti"it$ I

)herefore fi:ed costs !er !eriod of time T of = 3 2

\o no& ha"e an estimate of the "ariable cost !er nit and the total fi:ed costs.





de%artent

+e!i0er e%enses Beight, "olme or ton-ilometre

4e%airs of %!ant Iale of !lant.

Su%er0ision no. of machine?em!lo$ee or @irect &ages

Fire Insurance Iale of %sset or area occ!ied

;achine sho% e% achine hors or Fabors hors.

enera! 8% @irect Bages or ;o. of /m!lo$ees

Audit Fees ales or total cost

;aintenance of bui!ding %rea or labor hors

4e%air and ;aintenance ost Iale of assets or hors &or-ed for each de!artment

Stores +e%artent ;o. of stores re*isitions

anteen 8% ;o. of meal ser"ed or no. of em!lo$ees.

Trans%ort +e%t Beight or "olme or ton-m.

i0i! Ser0ice +e%t %rea.

.urchase +e%artent ;o. of !rchase orders !laced or "ale of materials

!rchased for each de!artment.

rane ser0ice rane hors or &eight of materials handled

Tie3kee%ing ;o. of em!lo$ees

.o9er house eat area of cbic contents or B

Too! 4oo @irect Fabor hors

Ins%ection ;mber of nits

Hos%ita! and +is%ensar ;mber of nits





BREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSISBREAK EVEN ANALYSIS


=reake0en %oint 4ixed Cost/C/M 5atio (Contrib#tion Margin 5atio)

• C/M 5atio Contrib#tion / 6ales * &00

75

4ixed Cost

& – 8ariable cost / 6ales

75

4ixed Cost

Contrib#tion 9er #nit (6:;: ;er <nit – 8:C: ;er <nit)

I= 8AL<64ixed Cost

C/M 5atio (Contrib#tion Margin 5atio)

• C/M 5atio Contrib#tion / 6ales * &00

• Contrib#tion Margin Contrib#tion 6ale ' ;rofit

8ol#me:

In o%ening stock 'nits from o!ening stoc- P total fi:ed cost A total contribtion

from o!ening stoc-?rrent ontribtion !er nit

ontribution argin ale A Iariable /:!ense

.rofit co%utation ale Q ? =atio A i:ed ost

Be9 fied cost ale ? A argin of safet$ Q ?

6!d fied cost ale A 100 A argin of safet$ Q ? =atio

2ariab!e e%enses 1 ? =atio Q ales

ontribution argin ratio ontribtion Q 100

ales

64

hange in rofit Q 100

hange in ales

64

hange in ontribtion Q 100

hange in ale

64hange in )otal ost Q 100

hange in ale

64

ale A Iariable /:!ense Q 100

ales

+ecision !ue J

igher the ? ratio Z more &ill be the !rofit.

Fo&er the ? ratio Z lo&er &ill be the !rofit.

Sa!e %ro-ection i:ed ost P rofit Foss rojection

? =atio ontribtion argin =atio





64

i:ed ost P rofit rojection ? 1ta: rate

? =atio ontribtion argin =atio8tra units so!d to aintain

sae %rofit

=e"ised 'nits A /:isting 'nits

Increase in se!!ing %rice Bhen marginal cost is =s> J1J, the selling !rice is =s> J2J

Bhen marginal cost is =s> J3J, the selling !rice is =s> J2J Q

J3J ? J1J.

ncrease in selling !rice D ;e& rice A Hld rice

Bo of unit so!d to get desired

!e0e! of %rofit

IB UBITS:

)otal =e*ired ontribtion i:ed cost P )arget !rofit

ontribtion !er nit ale !er nit A Iariable cost !er

nit

IB 2A$U8S:)otal =e*ired ontribtion i:ed cost P )arget !rofit

? =atio ontribtion argin =atio

• ? =atio D ontribtion ? ales Q 100

Ta i%act hange in "olme in nits Q contribtion margin !er

nit Q 1 A ta: rate

Bet dec!ine in contribution

argin

@ecline in =e"ene nit !rodce Q old sale !rice A ne&

sale !rice JJJ

@ecline in ost rther rocessing ost JJJ

;ote> ;o offer acce!tance if net decline in contribtion

margin N "ice "ersa.;argin Safet 4atio elected sale figre A brea- e"en !oint Q 100

elected sale figre

64

rofit ? ? =atio Q 100

IB UBITS J %ctal?dgeted nit sold A brea- e"en nit

$aan 4u!e )otal ost D )otal =e"ene

Accountant 4u!e ontribtion argin D P rofit

ash =8. ash i:ed ost

ash ? er 'nit

• ash means all e:clding @e!reciationP

%mortiEation P all non cash items.• t determines at !oint &here total cash cost N

total sales line intersect each other.

4e0ised .>2 ratio =e"ised contribtion margin !er nit

=e"ised sale !rice !er nit

Be9 ontribution Gi"en ontribtion A Iariable osts

4u!e ;o "ariable e:!ense, all sale !rice &ill be ?

.rofit margin of safet$ M Q ? M

;argin of safet total sales A brea- e"en sales

;argin of safet G total sales A brea- e"en sales ? total sales





Tota! sa!es argin of safet$ !rofit

.rofit ales Q margin of safet$ M Q ? M

4eCuired ontribution i:ed ost P )arget rofit A )arget Foss A @onation Aht do&n

;argin of Safet rofit

? M

64

rofit

? er 'nit

Sa!e .rice i:ed ost?'nit P Iariable ost er 'nit

At =reak 80en $e0e! ale A I A D rofit64

ale D I P P rofitTarget .rofit ale D I P P rofit

ost =reak e0en %oint t is the !rodction le"el at &hich !rodction cost is

same irres!ecti"e of the alternati"e ado!ted.

ost ./.. D @ifference in fi:ed costs

@ifference in "ariable costs

Ta I%act efore @i"ide D %fter )a: ncome?1t

%fter lti!l$ D efore )a: Q 1t

ale Q ? ratio D P rofit

rea- e"en sale Q ? ratio D A rea- e"en sales

.rofitabi!it ontribtion ? -e$ factorontribution > ke factor %nnal !rodction ? nstall ca!acit$

rea- e"en sale P ? ratio Q ? ratio D ontribtion

rea- e"en sale P ? ratio Q ? ratio Q ? ratio D P rofit

/ ales M P H ales M D 100 M

ontribtion at / D i:ed cost

ontribtion at H D rofit

ontribtion on / P ontribtion on H D )otal ontribtion

i:ed ost D / ales Q I =atio

rofit D H sales Q I =atio

Iariable cost D !er nit cost is constant bt change in total amont.i:ed cost D hange in !er nit cost bt total cost are constant.

emi "ariable ost D t is ombination of Iariable cost and fi:ed cost.

f sales !rice constant than "ariable cost change in same ratio to sales changes.

f sales !rice is change bt sales t$ is same than Iariable cost also constant bt onl$

change in ?I =atio.

estion sa$ find ot increase in sales !rice to re*. / at +.M )han M increase in ales

!rice D rrent / A =e"ised / ? =e"ised /





POIN$!POIN$!POIN$!POIN$!

1. t is the le"el of acti"it$ &here total cost e*als sale !rice.2. t is the !oint &here contribtion is e*al to fi:ed cost.

3. t is a !oint of no !rofit N no loss.

4. t is the !oint a"ailable to co"er fi:ed e:!enses N then to !ro"ide !rofits for the

!eriod.

5. t is the logical e:tension of arginal osting.

6. t is a !o&erfl instrment for decision ma-ing.

7. ontribtion means contribtion to&ards fi:ed cost N !rofit.

8. rea- e"en !oint D Oero !rofit !oint

'!!*/P$ION! '!!*/P$ION! '!!*/P$ION! '!!*/P$ION!

1. %ll costs can be se!arated in fi:ed N "ariable costs.

2. ;o change in o!erating efficienc$.

3. ;mber of nits !rodced N sold &ill be the same so that there is no o!ening N

closing stoc-.

4. %ll fi:ed costs &ill flctate N &ill not change &ith change of acti"it$ le"el.

5. Hnl$ !rodct or in case of man$ !rodcts, !rodct mi: &ill remain nchanged.

6. elling !rice &ill remain constant des!ite com!etition or change of "olme.

7. Iariable cost &ill flctate in same !ro!ortion in &hich "olme of ot!t "aries.

C.CKC.CKC.CKC.CK

Sa!e JJJ

$ess 2ariab!e ost JJJ

ontribution JJJ

$ess3 Fied ost JJJ

.rofit

/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO/'RGIN !'F$% R'$IO

ale or ot!t behind brea- e"en !oint is called margin of safet$. argin of safet$ is

that sales or ot!t &hich is abo"e brea- e"en !oint. %ll fi:ed costs are reco"ered at

brea- e"en !oint, so fi:ed e:!enses ha"e been e:clded from the formla of margin of

safet$. )he margin of safet$ at brea- e"en !oint is nil as actal nit sold is e*al to brea-

e"en nit sold. t can be increased b$>

1. ncrease in le"el of !rodction.

2. ncrease in sale !rice.

3. =edce fi:ed cost or "ariable cost or both.




1)1 © For Suggestions & Feedbacks, contact: ATAUSH SHAFI (ataushshafi@gai!"co#

4. bstitte e:isting !rodcts b$ more !rofitable !rodcts.

$arge ;argin of Safet ndicator of strength as sbstantial redce in sales N!rodction, !rofit &ill be made.

Sa!! ;argin of Safet ndicator of &ea-ness as small redce in sales N !rodction,

loss &ill be made.

'NG+ OF INCI,NC 'NG+ OF INCI,NC 'NG+ OF INCI,NC 'NG+ OF INCI,NC

t is an angle at brea- e"en !oint &here sales line cts total cost line. t sho&s the rate at

&hich the !rofit is made.

Farge %ngle of ncidence rofit at high ratemall %ngle of ncidence rofit at lo& rate

R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$R)*IR, !'+ $O 'RN $'RG$ PROFI$

In 4u%ees In G

i:ed cost P target !rofit ? M i:ed cost ? M )arget rofit M

'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION! 'F$R $'@ C'+C*+'$ION!

In 4u%ees In G

i:ed cost P ;et rofit ? 1t ? M i:ed cost P ? M ;et rofit ? 1t

PRO,*C$ /I@PRO,*C$ /I@PRO,*C$ /I@PRO,*C$ /I@

In G .er Unit

i:ed cost P )arget rofit ? M i:ed cost P )arget !rofit ? !er nit

• ? M D total contribtion ? total sales Q 100

• ? !er nit D total contribtion ? total sales

Bote: n !rodct mi:, there is onl$ one fi:ed cost. )hat is common for all the

!rodcts.

Head Increase to be sho9n in

)otal

I er nit




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R)*IR, !'+!R)*IR, !'+!R)*IR, !'+!R)*IR, !'+!

i:ed ost P )arget rofit JJJ

Fess J N \ ontribtion @emandQontribtion er 'nit JJJ

OUs ontribtion JJJ

@i"ided $

er 'nit contribtion of OUs JJJ

4eCuired sa!es

'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$ 'CCO*N$'N$ #! CONO/I!$

A6UBTABT 86B6;IST

Hne / )&o /

)otal ost is straight line )otal ost is not a straight line

first redce N then climb as !er la& of

diminishing retrn

=e"ene Fine is straight line =e"ene Fine is not straight line

less stee! to de!ict the need to gi"e

discont to achie"e higher sale "olme

i:ed ost is straight line

gnore economies ? diseconomies of scale,

elasticit$ of demand# discont to secre

increase in "olme.

=ecogniEe economies ? diseconomies of

scale.

rea- e"en time D sale D P I rea- e"en time D %"erage re"ene D

%"erage cost

'se is limited to area &ithin rele"ant

range.

@ifficlt to ma-e chart &hen ste!

occrs.

3 )o increase sale, !rice redctions ha"e to

be offered N as ot!t increase, marginal

cost of additional !rodction increases.

3 /conomist arges that accontantdistinction bet&een N I is nrealistic.

n realit$, &hether cost is fi:ed or "ariable

de!ends on time frame ta-en.

3 rea- e"en !oint is intersection of line

re!resenting t&o fnctions




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"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!"R'K#N C.'R$ !$P!

Step& 1 Select appropriate scales for t'e axes and dra( and la!el t'em) t the

e:tremes of the a:es right at the end of the a"ailable s!ace. )he frthest !oint on the

"ertical a:is &ill be the monthl$ sales re"ene, that is, 1, 700 nits Q =s> 50 D =s> 85,000

)he frthest !oint on the horiEontal a:is &ill be monthl$ sales "olme of 1,700 nits.

a-e sre that $o do not need to read data for "olmes higher than 1,700 nits before

$o set these e:tremes for $or scales.

Step& 2 *ra( t'e fixed cost line and la!el it) )his &ill be a straight line !arallel to

the horiEontal a:is at the =s> 20,000 le"els. )he =s> 20,000 fi:ed costs are incrred in

the short term e"en &ith Eero acti"it$.

Step& + *ra( t'e total cost line and la!el it) )he best &a$ to do this is to

calclate the total costs for the ma:imm sales le"el, &hich is 1,700 nits in ore:am!le. ar- this !oint on the gra!h and join it to the cost incrred at Eero acti"it$,

that is, =s> 20,000

4s:

Iariable costs for 1,700 nits 1,700 Q =s> 30 51,000

i:ed costs 20,000

)otal cost for 1,700 nits ?1,

Step& , *ra( t'e revenue line and la!el it) Hnce again the best &a$ is to !lot the

e:treme !oints. )he re"ene at ma:imm acti"it$ in or e:am!le is 1,700 Q =s> 50 D =s>

85,000. )his !oint can be joined to the origin, since at Eero acti"it$ there &ill be no sales

re"ene.Step& - ar. any re/uired information on t'e c'art and read off solutions as

re/uired)

hec- that $or chart is accrate b$ reading off the measres that &e ha"e alread$

calclated the brea-e"en !oint, the margin of safet$, the !rofit for sales of 1,700 nits.

Step& C'ec. t'e accuracy of your readins usin arit'metic) t is al&a$s good

e:amination !ractice to chec- the accrac$ of $or ans&ers and ma-e adjstments for

an$ errors in $or chart if $o ha"e time




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PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.PROFI$0#O+*/ &P0#( GR'P.

)he %rofit>0o!ue .>2# gra%h is a "ariation of the brea-e"en chart and illstrates the

relationshi! of !rofit to sales "olme.

6BST4UTI6B 6F A .46FIT>26$U;8 4A.H

(a# << is on the $ a:is and actall$ com!rises not onl$ <!rofit< bt contribtion to !rofit in

monetar$ "ale, e:tending abo"e and belo& the : a:is &ith a Eero !oint at the

intersection of the t&o a:es, and the negati"e section belo& the : a:is re!resenting

fi:ed costs. )his means that at Eero !rodction, the firm is incrring a loss e*al to the

fi:ed costs.

(b# <I< is on the : a:is and com!rises either "olme of sales or "ale of sales re"ene.

(c# )he !rofit"olme line is a straight line dra&n &ith its starting !oint at Eero !rodction

at the interce!t on the $ a:is re!resenting the le"el of fi:ed costs, and &ith a gradient of

contribtion?nit or the ? ratio if sales "ale is sed rather than nits. )he ?I line

&ill ct the : a:is at the brea-e"en !oint of sales "olme. %n$ !oint on the ?I line

abo"e the : a:is re!resents the !rofit to the firm as measred on the "ertical a:is for

that !articlar le"el of sales.

Fet s dra& a ?I gra!h for or e:am!le. %t sales of 120,000 nits, total contribtion &ill be

120,000 L =s> 1 A 0.5 D =s> 60,000 and total !rofit &ill be =s> 20,000.




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A+2ABTA8S 6F TH8 .>2 4A.H

(a# f the bdgeted selling !rice of the !rodct in or e:am!le is increased to =s> 1.20, &iththe reslt that demand dro!s to 105,000 nits des!ite additional fi:ed costs of =s>

10,000 being s!ent on ad"ertising, &e cold add a line re!resenting this sitation to or

?I chart.

(b# %t sales of 105,000 nits, contribtion &ill be 105,000 L =s> 1.20 A 0.50 D =s> 73,500

and total !rofit &ill be =s> 23,500 fi:ed costs being =s> 50,000.

(c# )he diagram sho&s that if the selling !rice is increased, the brea-e"en !oint occrs at a

lo&er le"el of sales re"ene 71,429 nits instead of 80,000 nits, althogh this is not a

!articlarl$ large decrease &hen "ie&ed in the conte:t of the !rojected sales "olme. t

is also !ossible to see that for sales abo"e 50,000 nits, the !rofit achie"ed &ill be

higher and the loss achie"ed lo&er if the !rice is =s> 1.20. or sales "olmes belo&50,000 nits the first o!tion &ill $ield lo&er losses.

(d# )he ?I gra!h is the clearest &a$ of !resenting sch information# t&o con"entional

brea-e"en charts on one set of a:es &old be "er$ confsing.

(e# hanges in the "ariable cost !er nit or in fi:ed costs at certain acti"it$ le"els can also be

incor!orated easil$ into a ?I gra!h. )he !rofit or loss at each !oint &here the cost

strctre changes shold be calclated and !lotted on the gra!h so that the

!rofit?"olme line becomes a series of straight lines.

(f# or e:am!le, s!!ose that in or e:am!le, at sales le"els in e:cess of 120,000 nits the

"ariable cost !er nit increases to =s> 0.60 !erha!s becase of o"ertime !remims that

are incrred &hen !rodction e:ceeds a certain le"el. %t sales of 130,000 nits,

contribtion &old therefore be 130,000 L =s> 1 0.60 D =s> 52,000 and total !rofit&old be =s> 12,000.

8A;.$8

% com!an$ manfactres a single !rodct &hich incrs fi:ed costs of =s> 30,000 !er annm.

%nnal sales are bdgeted to be 70,000 nits at a sales !rice of =s> 30 !er nit. Iariable costs

are =s> 28.50 !er nit.

(a# @ra& a !rofitA"olme chart, and se it to determine the brea-e"en !oint. )he com!an$

is no& considering im!ro"ing the *alit$ of the !rodct and increasing the selling !rice

to =s> 35 !er nit. ales "olme &ill be naffected, bt fi:ed costs &ill increase to =s>45,000 !er annm and "ariable costs to =s> 33 !er nit.

(b# @ra&, on the same gra!h as for !art a, a second !rofitA"olme chart and comment on

the reslts.




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S6$UTI6B)he t&o lines ha"e been dra&n as follo&s>

Situation (a#" )he !rofit for sales of 70,000 nits is =s> 75,000.

=s> 000

ontribtion 70,000 Q =s> 30 28.50 105

i:ed costs 30

rofit ?5

)his !oint is joined to the loss at Eero acti"it$, =s> 30,000, that is, the fi:ed costs.

Situation (b " )he !rofit for sales of 70,000 nits is =s> 95,000.=s> 000

ontribtion 70,000 Q =s> 35 33 140

i:ed costs 45

rofit 5

)his !oint is joined to the loss at Eero acti"it$, =s> 45,000, that is, the fi:ed costs.

oent on the resu!ts

)he chart de!icts clearl$ the larger !rofits a"ailable from o!tion b. t also sho&s that the

brea-e"en !oint increases from 20,000 nits to 22,500 nits bt that this is not a large increase

&hen "ie&ed in the conte:t of the !rojected sales "olme. t is also !ossible to see that for

sales "olmes abo"e 30,000 nits the !rofit achie"ed &ill be higher &ith o!tion b. or sales

"olmes belo& 30,000 nits o!tion a &ill $ield higher !rofits or lo&er losses.

)he !rofitA"olme chart is the clearest &a$ of !resenting information li-e this. f &e attem!ted

to dra& t&o con"entional brea-e"en charts on one set of a:es the reslt &old be a jmble

that &old be "er$ difficlt to inter!ret.





ABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTINGABSORPTION/MARGINAL COSTING

;argina! costing @irect aterial P @irect Fabor P Iariable H

Absor%tion costing @irect aterial P @irect Fabor P )otal H

Fied F6H (under absor%tion# i:ed H Q %ctal ca!acit$?rodction

;ormal a!acit$

Bote: f actal ca!acit$ is missing, it is assme that normal

ca!acit$ is actal ca!acit$.

Finished goods in0entor )otal HG Q !rchase nit P H!ening stoc- A sale

nit

%ctal ca!acit$?!rodction

;argina! cost )he marginal cost of an item is its "ariable cost.• arginal !rodction cost D @irect materials P @irect labor P

Iariable !rodction o"erhead.

• arginal cost of sale for a !rodct D @irect materials P @irect

labor P Iariable !rodction o"erhead P Hther "ariable

o"erhead for e:am!le, "ariable selling and distribtion

o"erhead.

• arginal cost of sale for a ser"ice D @irect materials P @irect

labor P Iariable o"erhead.

t is sall$ assmed that direct labor costs are "ariable marginal

costs, bt in some sitations, direct labor costs might be fi:ed costs,

and so &old not be inclded in marginal cost.

'+$RN'$I# CONCP$ '+$RN'$I# CONCP$ '+$RN'$I# CONCP$ '+$RN'$I# CONCP$!!!! OF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$INGOF /'RGIN'+ CO!$ING

)o econoist, marginal cost is the additional cost incrred b$ the !rodction of one e:tra nit.

)o accountant, marginal cost is a"erage "ariable cost &hich is con"entionall$ !resmed to act

in linear fashion i.e. marginal cost !er nit is assmed to be constant on the short rn.

'!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING '!!*/P$ION! IN /'RGIN'+ CO!$ING

1" /"er$ additional nit of ot!t or sale, or e"er$ additional nit of acti"it$, has the same

"ariable cost as e"er$ other nit. n other &ords, the "ariable cost !er nit is a constant

"ale.

)" i:ed costs are costs that remain the same in total in each !eriod, regardless of ho&

man$ nits are !rodced and sold.

*" osts are either fi:ed or "ariable, or a mi:tre of fi:ed and "ariable costs. i:ed costs

can be se!arated into a "ariable cost !er nit and a fi:ed cost !er !eriod. )echni*es

sch as high?lo& anal$sis or linear regression anal$sis shold be sed to do this.

/" )he marginal cost of an item is therefore the e:tra cost that &old be incrred b$

ma-ing and selling one e:tra nit of the item.



1) © For Suggestions &

'b 'b 'b 'b

Cost Accounting

Feedbacks, contact: ATAUSH SHAFI (ataushsha

arginal Costing ,iagram2 arginal Costing ,iagram2 arginal Costing ,iagram2 arginal Costing ,iagram2

sorption Costing ,iagram2sorption Costing ,iagram2sorption Costing ,iagram2sorption Costing ,iagram2

anual 2013

i@gai!"co#





'"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING '"!ORP$ION0F*++0$R',I$ION'+0CON#N$ION'+ CO!$ING

Sa!e JJJ

$ess3 ost of oods So!d:

+irect ;ateria! JJJ

+irect $abor JJJ

Factor 60erhead A%%!ied (Fied 2ariab!e# JJJ

ost of ood ;anufactured JJJ

Add 6%ening Finished oods JJJ

$ess !osing Finished oods JJJ

ost of oods So!d JJJ

Add Under A%%!ied JJJ

$ess 60er A%%!ied JJJ

ost of oods So!d (Ad-usted# JJJ

ross .rofit JJJ

$ess 6%erating 8%enses:

Se!!ing o0erhead (Fied 2ariab!e# JJJ

Adinistration o0erhead (Fied 2ariab!e# JJJ JJJ

6%erating .rofit> Bet .rofit

Botes:

1" )o calclate fi:ed H, see formla abo"e.

)" a!acit$ &ill be of t&o t$!es> 1> dgeted 2> ;ormal. 'se bdgeted ca!acit$. f not

gi"en, then se ;ormal ca!acit$.

*" H!ening inished Goods D ost of Good anfactred?rodction 'nits Q

H!ening toc- 'nits

/" losing inished Goods D ost of Good anfactred?rodction 'nits Q

losing toc- 'nits

5" H!ening toc- 'nits &ill be gi"en in the *estion.

<" losing toc- 'nits &ill be calclated as follo&s> H!ening toc- 'nits P rchases A ales

?" Gross rofit D ales A HG

" 'nder ? H"er a!!lied as calclated as !er H method. oth i:ed N Iariable Iariances&ill be considered here.




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/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING/'RGIN'+0,IRC$0#'RI'"+ CO!$ING

Sa!e JJJ

$ess3 ost of oods So!d:

+irect ;ateria! JJJ

+irect $abor JJJ

Factor 60erhead A%%!ied (2ariab!e on!# JJJ

2ariab!e ost of ood ;anufactured JJJ

Add 6%ening Finished oods JJJ

$ess !osing Finished oods JJJ

ost of oods So!d JJJ

Add Under A%%!ied JJJ

$ess 60er A%%!ied JJJ

ost of oods So!d (Ad-usted# JJJ

ross ontribution JJJ

$ess 2ariab!e se!!ing & adinistration o0erhead JJJ

Bet ontribution JJJ

$ess 6%erating 8%enses:

Se!!ing o0erhead (Fied# JJJ

Factor o0erhead (Fied# JJJ

Adinistration o0erhead (Fied# JJJ JJJ

6%erating .rofit> Bet .rofit

Botes:

1" H!ening inished Goods D Iariable ost of Good anfactred?rodction

'nits Q H!ening toc- 'nits

)" losing inished Goods D Iariable ost of Good anfactred?rodction

'nits Q losing toc- 'nits

*" H!ening toc- 'nits &ill be gi"en in the *estion.

/" losing toc- 'nits &ill be calclated as follo&s> H!ening toc- 'nits P rchases A ales

5" 'nder ? H"er a!!lied as calclated as !er H method. Hnl$ Iariable Iariances &ill be

considered here.

RCONCI+I'$IONRCONCI+I'$IONRCONCI+I'$IONRCONCI+I'$ION

;et income %bsor!tion costing

Fess @ifference in closing stoc- JJJ

%dd @ifference in o!ening stoc- JJJ

Bet incoe (;argina! costing#

+ifference in %rofit under t9o costing sste is due to different stock 0a!uation ethods use"




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CONCP$!CONCP$!CONCP$!CONCP$!

A J ; ame rofit

A R ; igh rofit

A Y ; Fo& rofit

Tota! ontribution R F rofit

Tota! ontribution J F ;o rofit N no loss

Tota! ontribution R F Foss

.roduction R a%acit H"er a!!lied

.roduction Y a%acit 'nder a!!lied

/'RGIN'+/'RGIN'+/'RGIN'+/'RGIN'+ CO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$INGCO!$ING #! '"!ORP$ION CO!$ING

A=S64.TI6B 6STIB ;A4IBA$ 6STIB

• arginal cost is the !art of the cost of

one nit of !rodct or ser"ice &hich

&old be a"oided if that nit &as not

!rodced or &hich &old increase if

one e:tra nit &ere !rodced.

• arginal cost is the "ariable cost ofone nit of !rodct or ser"ice.

• f "olme of sales falls b$ one nit,

!rofit &ill fall b$ amont of

contribtion earned from that nit.

i:ed !rodction cost are absorbed into the

cost of nits N carried for&ard.

i:ed !rodction cost are treated as !eriod

cost N &ritten off as incrred.

%bsor!tion costing &ill re!ort high !rofit &hen

stoc- le"el increases as fi:ed o"erhead &ill be

carried for&ard to closing stoc-.

losing stoc-s are "aled at fll !rodctioncost.

losing stoc-s are "aled at marginal?"ariable!rodction cost.

%bsor!tion costing &ill re!ort lo& !rofit &hen

stoc- le"el decreases.

Bhen nit of !rodct is made, the e:tra cost

incrred in its manfactre is "ariable

!rodction costs. i:ed costs are naffected N

no e:tra fi:ed costs are incrred &hen ot!t

is increased.




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,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING,IFFRNC "$WN #'RIO*! $%P! OF CO!$ING

;argina! osting 2>S Absor%tion osting

arginal cost e:cldes fi:ed costs. 'nder absor!tion costing, e"en fi:ed costs

are charged to the !rodct?ser"ice.

arinal Costin 34S *irect Costin 'nder marginal costing onl$ "ariable cost

both direct and indirect is charged to the cost

nit

'nder direct costing, onl$ direct cost both

fi:ed and "ariable is charged to the cost nit.

!sorption Costin 34S *irect Costin 'nder absor!tion costing, all costs both direct

and indirect are assigned to the cost nit.

'nder direct costing onl$ direct cost is

assigned to the cost nit. n both t$!es of

costing, "ariabilit$ of cost is ignored.

*ifferential Costin 34S arinal Costin

*ifferential costin ;argina! osting

Scope

Bider than marginal costing. ;arro&er than differential costing.

2ariabi!it

oth fi:ed and "ariable costs are

considered

Hnl$ "ariable costs are considered.

+efinition

annot be !recisel$ defined e:ce!tin terms of increase or decrease in

total costs.

an be defined as !rime cost !ls"ariable o"erheads.

=asis of +ecision ;aking

om!arison of differential cost

&ith incremental ? decremental

re"ene.

argin of contribtion and !rofit

"olme.

Incor%oration in Accounting Sste

)his t$!e of costing does not find a !lace in

the acconting s$stem as it in"ol"es ftre

corse of action. o&e"er, it ma$ beincor!orated in the bdgets.

arginal costs ma$ be

incor!orated in the acconting

s$stem.

A%%!icabi!it

%!!licable to both, long term as &ell as

short term decision ma-ing.

%!!licable onl$ to short term

decision ma-ing.




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LABORLABORLABORLABOR

$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION$.R $%P! OF R/*NR'$ION

1" Tie 9ork: Bages D ors &or-ed Q rate of !a$ !er hor

H"ertime D aid at a !remim rate.

a. H"ertime !remim is e:tra rate !er hor &hich is !aid. t is not the &hole of the

!a$ment for the o"ertime hors.

b. asic rate is =s# 4!er hor and o"ertime is !aid at time and a *arter. /ight hors

of o"ertime is !aid as follo&s>1. asic a$ 8Q4 D 32

2. H"ertime 8Q1 D 8

c. hift !remim is gi"en &hen em!lo$ees &or- for nsocial hors. t is similar to

o"ertime !remim. t is the e:tra amont !aid !er hor abo"e the basic horl$

rate.

)" .iece 9ork: Bages D 'nits !rodced Q rate of !a$ !er nit

a. Garanteed minimm &age rate is gi"en to !iece &or-ers.

*" =onus>incenti0e sste

i. igh da$ rate s$stem

ii. ndi"idal bons scheme

iii. Gro! bons scheme

i". rofit sharing scheme

". ncenti"e scheme in"ol"ing shares

"i. Iale added incenti"e scheme> Iale added D sales A cost of

boght in material N ser"ices.

"ii. asle$ constant !artial sharing scheme

"iii. )a$lor differential !iece rate !lan

i:. G%;)) tas- N bons !lan

:. /merson efficienc$ bons !lan

:i. =o&an "ariable sharing !lan

:ii. eda: !oint !lan

:iii. erth "ariable sharing !lan




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Has!e constant %artia! sharing schee Bage rate Q 50M Q time sa"e

Ta!or differentia! %iece rate %!an Bage rat e Q time sa"e ? time allo&ed Q time ta-en

Unit rodction

Tie or

Unit $abor ost Fabor ? 'nits

Unit 60erhead ost H ? 'nits

on0ersion ost .er Unit @F P H ? 'nits

.46+UTI2ITK

1 3 6ut%ut an %er hour )otal Ht!t ? )otal an hors

) 3 $abor Hour %er unit of %roduction )otal Fabor or? )otal Ht!t

* 3 8tent of ineffecti0e>$ost tie an hors Fost ? ossible an ors Q 100

/ 3 Actua! Tie co%ared 9ith

standard tie

%ctal )ime tandard )ime

5 3 6ther ;ethods

ale Iale ? ;o of &or-ers

@irect Bages ? ;o of nits

%dded "ale of the !rodct ? )otal &ages cost

.reiu osting ;ethods

@irectl$ charged to !rodction

)reated as o"erhead element

harged to income statement as !eriod costs

8ffecti0e .er hour )otal Bee-l$ /arnings ? )otal ors

$abor Turno0er ;ethods

;mber of em!lo$ees lea"ing

%"g nmber on !a$roll

64

;mber of em!lo$ees lea"ing P joining


64

;mber of em!lo$ees re!laced


Id!e tie foru!a dle hors ? total hors Q 100

Ha!se37eir %!an /arnings D ors &or-edQrate !er hor P 30M of

time sa"edQrate !er hor

antt Task and bonus sste a Ht!t belo& standard D ;et !a$ment is of

garanteed time rate

b Ht!t at standard D ;et !a$ment is 120Mof time

rate

c Ht!t abo"e standard D ;et !a$ment is 120M of

!iece rate

8erson 8fficienc .!an a /fficienc$ belo& 662?3MD ;o bons, onl$

garanteed time rate




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b rom662?3M to 100M D t changes at "arios

le"els, at 100M bons rate is 20M of the )ime &ages

c %bo"e 100M D 120M of time &agesP 1M increasefor e"er$1M increase in efficienc$ be$ond 100M

=edau .ont Sste /arningsD hors &or-edQ rate !er hor P 75Mof

hors sa"edQrate !er hor

Ta!orXs Sste a /fficienc$ Fess than 100M D a$ment is 80M of

!iece rate

b /fficienc$ of 100M or more D a$ment is 120M of

!iece rate

;errick differentia! %iece rate Sste a or efficienc$ ! to 83M D !a$ment is ordinar$

!iece rate

b or efficienc$ from 83M to 100M D !a$ment is110M of ordinar$ !iece rate

c or efficienc$ more than 100M D a$ment is 120M

of ordinar$ !iece rate

=arth Sste /arnings D rate !er hor Q `standard hor Q hors

&or-ed

RoBan variable sharing planRoBan variable sharing planRoBan variable sharing planRoBan variable sharing plan

1. ase &age are generall$ garanteed ! to tas-. %bo"e sch tas-, bonses are !aid

according to a "ariable share of the time sa"ed.2. )ime sa"ed is the fnction of standard time allo&ed &hereas in other bons !lan, it is

the fnction of actal time &or-ed.

7orker 1 7orker )

Standard tie a!!o9ed in

hours

8 8

Actua! tie taken in hours 4 6

G bonus (Standard tie

a!!o9ed in hours 3 Actua!

tie taken in hours# >

Standard tie a!!o9ed in

hours

84?8Q100 D 50M 86?8Q100 D 25M

merson efficienc3 bonus planmerson efficienc3 bonus planmerson efficienc3 bonus planmerson efficienc3 bonus plan

1. /m!irical scale of bons ratios

2. 66M efficienc$ D O/=H bons

3. 87.5M efficienc$ D agreed M bons




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Assue nora! 9age rate 7.50<<G efficienc O/=H

?"5G efficienc 7.50P10M D 8.25

1G efficienc 7.50P20M D 9

11G efficienc 7.50P21M D 9.075

G'N$$ tas4 : bonus planG'N$$ tas4 : bonus planG'N$$ tas4 : bonus planG'N$$ tas4 : bonus plan

Standard .roduction =e!o9 .roduction Abo0e .roduction

iece rodced 300 291 345

rodction M to standard 100M 97M 115M

Bages alclation

;ormal Bage ;ormal Bage ;ormal Bage

ons ons

%dditional ons

&age P bons Q M

"edau5 point plan"edau5 point plan"edau5 point plan"edau5 point plan

1. )ime sa"ed D 75M

2. =emaining time of 25M to foreman, ser"iceman, other indirect !ersonnel

3. ;ormal !erformance inde: D 60M not 100M on assm!tion that 60 nits of standard

time can be !rodced &ith normal effort in 60 mintes of actal time. )echnicall$, one

!oint D one minte.

4. or first 60 !oints, &or-er &ill get normal &ages. or additional !oints, sa$ 75 A 60 D 15

!oints &ill be distribted in 75>25 ratio.

PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%PRO,*C$ION #! PRO,*C$I#I$%

.roduction .roducti0it

antit$ or "olme of ot!t !rodced. easre of efficienc$ &ith &hich ot!t has

been !rodced.

=elati"e measre of hors actall$ ta-en N the

hors that shold ha"e been ta-en to ma-e

the ot!t.

m!ro"ed !rodcti"it$ is the mean of redcing

total nit costs.





+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R+'"OR CO!$ ".'#IO*R

1" a$ment in !iece&or- basis D "ariable cost)" Fabor cost is often mi:ed costs de to bons, o"ertime !remim, and commission.

*" a$ment in da$ rate &age D !a$ !er &ee- is fi:ed regardless of "olme.

,IFFRNC "$WN,IFFRNC "$WN,IFFRNC "$WN,IFFRNC "$WN ,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR,IRC$ : IN,IRC$ +'"OR

=asic %a of direct 9orker Direct cost

=asic %a of indirect 9orker ndirect cost nless cstomer as-s for order &hich

in"ol"e dedicated se of indirect &or-er time

=onus ndirect cost

7age of su%%ort staff ndirect costsId!e tie ndirect costs

ost of 9ork on ca%ita! eCui%ent %dded to cost of e*i!ment

8%!oers Bationa! insurance contribution ndirect labor costs

60ertie %reiu to direct or indirect

9orkers

ndirect costs. /:ce!tions are>

• H"ertime &or-ed at s!ecific re*est of

cstomer to get his order com!leted,

direct costs

• H"ertime is &or-ed reglarl$ b$

!rodction de!tt in normal corse of

o!eration, o"ertime !remim !aid to

direct &or-ers &ill be direct costs.

'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$ 'CCO*N$ING $R'$/N$

I+$8 TI;8

Bora! Id!e tie Should be charged to the cost of production

Abnora! Id!e tie Should be charged to Costing Profit and Loss account.





COST CYCLECOST CYCLECOST CYCLECOST CYCLE8B84A$ H8A+ 6FFI8 FAT64K

.urchase of ;ateria!: aterial ontrol

Iocher?%ccont a$able

.urchase of ;ateria!:actor$ Fedger

Iocher?%ccont a$able

.urchase of ;ateria!: aterial ontrol

General Fedger

4eturn of ;ateria!: Iocher?%ccont a$able

aterial ontrol

4eturn of ;ateria!:Iocher?%ccont a$able

actor$ Fedger

4eturn of ;ateria!: General Fedger

aterial ontrol

;ateria! Issued: Bor-inrocess

actor$ H"erhead

aterial ontrol

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;ateria! Issued: Bor-inrocess

actor$ H"erhead

aterial ontrol

;ateria! 4eturned: aterial ontrol

Bor-inrocess

actor$ H"erhead

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;ateria! 4eturned: aterial ontrol

Bor-inrocess

actor$ H"erhead

Factor 60erhead: actor$ H"erhead

re!aid /:!enses

%llo&ance for @e!

Iarios redits

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

F6H .aent: Iarios redits

Iocher a$able

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

F6H +is%osa!: Iocher a$able

ash

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

F6H A%%!ied: Bor-inrocess

H %!!lied

F6H A%%!ied:actor$ Fedger

H %!!lied

F6H A%%!ied: Bor-inrocess

General Fedger

+is%osa! F6H A%%!ied: H %!!lied

H ontrol

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

.aro!!: a$roll

ncome ta: &ith held

ro"ident fnd

%ccred a$roll

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

.aro!! .aent: %ccred a$roll

Iocher a$able

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

.aro!! +is%osa!: Iocher a$able

ash

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.





.aro!! +istribution: Bor-inrocess

actor$ H"erheadelling H"erhead

@istribtion H"erhead

a$roll

.aro!! +istribution:actor$ Fedger

elling H"erhead@istribtion H"erhead

a$roll

actor$ ledger &ill be sed

for B N H

.aro!! +istribution: Bor-inrocess

actor$ H"erheadGeneral Fedger

General ledger &ill be sed for H

N @H

.aro!! ontribution: Bor-inrocess

actor$ H"erhead

elling H"erhead


ncome ta: &ith held

ro"ident fndocial ecrit$ nd

.aro!! ontribution:actor$ Fedger

elling H"erhead


ncome ta: &ith held

ro"ident fnd

ocial ecrit$ nd

.aro!! ontribution: Bor-inrocess

actor$ H"erhead

General Fedger

Finished oods: inished Goods

Bor-inrocess

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

Finished oods: inished Goods

Bor-inrocess

ost 6f oods So!d: ost Hf Goods old

inished Goods

ost 6f oods So!d:ost Hf Goods old

actor$ Fedger

ost 6f oods So!d: General Fedger

inished Goods

redit Sa!e: )rade @ebtor

ale

;H /;)=\ BFF / =/H=@/@

%) /%@ H/.

;H /;)=\ BFF / =/H=@/@ %)

%)H=\ H/.

Bote: Be &ill al&a$s se General Fedger for ead Hffice N actor$ Fedger for actor$ &hile

recording jornal entries.

IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/

n the integrated acconting s$stem, se!arate set of acconts nder cost acconting and

financial acconting s$stems are not maintained. )he acconts are integrated and onl$ a single

set of acconts are maintained. )his enables a firm to eliminate se!arate rofit and Foss

%cconts nder financial acconting and cost acconting s$stems and onl$ one rofit and Foss%ccont is !re!ared. )hs there is no *estion of t&o se!arate amonts of !rofits being

disclosed from the t&o different set of boo-s. )he need for reconciliation of !rofits sho&n b$

cost acconts and financial acconts is therefore is eliminated.

NONNONNONNON ---- IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/IN$GR'$, 'CCO*N$ING !%!$/

'nder the nonintegrated s$stem, se!arate ledgers are maintained for financial transactions

&hile the cost acconts de!artment is res!onsible for maintaining cost acconts.




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• )he cost of sa!es account records the total cost of sales, &hich consists of !rodction

costs, administration costs and sales and distribtion costs.

osts incurred are recorded as debit entries in these acconts.

6STS 6F .46+UTI6B AB+ TH8 7I. A6UBT

Bature: )he B accont is sed to record the costs of !rodction A

direct materials, direct labor and !rodction o"erheads

absorbed.

+ebit redit

1 @irect materials issed

from stores to !rodction

B accont =a& materials accont

stores accont

2 @irect labor costs in

!rodction

B accont Bages and salaries

accont3 rodction o"erheads

absorbed into !rodction

costs

B accont rodction o"erheads

%ccont

F46; 4A7 ;AT84IA$S T6 6ST 6F SA$8S

Bature: aterials !rogress throgh the !rodction s$stem, from ra&

materials to &or- in !rogress, from &or- in !rogress to

finished goods, and from finished goods to cost of sales.

+ebit redit

1 @irect materials issed

from stores to !rodction&or- in !rogress


stores accont

2 om!leted !rodction

transferred from B to

finished goods at !rodction

cost

inished goods

accont

B accont

3 inished goods sold to

cstomers

ost of sales

%ccont

inished goods accont

!rodction cost of sales

B6B3.46+UTI6B 6284H8A+S

Bature: ;on!rodction o"erheads are recorded initiall$ in an

administration o"erheads accont and a sales and distribtiono"erheads accont. )he$ are transferred from these acconts

to the cost of sales accont. )he cost of sales accont

therefore records the !rodction cost of finished goods sold,

administration o"erheads costs and sales and distribtion

o"erheads costs.

+ebit redit

1 %dministration o"erheads ost of sales

accont

%dministration

o"erheads accont

administration




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o"erheads for the !eriod

2 ales and distribtion

o"erheads

ost of sales

accont

ales and distribtion

o"erheads accont salesand distribtion

o"erheads for the !eriod

6.8BIB AB+ $6SIB IB28BT64K

1" )he ra& materials accont, &or-in!rogress accont incom!lete !rodction and

finished goods accont !ro"ide a record of the cost of o!ening and closing in"entor$ at

the beginning and end of each acconting !eriod.

)" )he "ale of the in"entor$ is the crrent balance on the in"entor$ accont. )his is

al&a$s either 0 or a debit balance.

*" o&e"er, at the end of an acconting !eriod, an accont is (closed offU for the !eriod,

and the balance on the accont is>1 carried for&ard as a closing balance for the !eriod that has jst ended, and

2 an o!ening balance at the beginning of the ne& !eriod.

/" )he closing in"entor$ at the end of a !eriod is entered on the credit side (abo"e the lineU

and the corres!onding doble entr$ is a debit entr$ (belo& the lineU as o!ening

in"entor$ at the beginning of the ne:t !eriod.

5" (b?fU means (broght for&ardU. \o might also see the letters (b?f&dU or (b?dU meaning

(broght do&nU. imilarl$, (c?fU means carried for&ard. \o might also see the letters

(c?f&dU or c?d for (carried do&nU. )he o!ening in"entor$ broght for&ard is called the

(balanceU on the accont at the beginning of the !eriod.

TH8 6STIB SKST8; IB6;8 STAT8;8BTBature: )here is an income statement in the cost ledger, for recording

the !rofit or loss in each acconting !eriod. )his is a !art of the

doble entr$ cost acconting s$stem. )he credit side of the

income statement records sales. )he debit side of the income

statement records the cost of sales. )here might also be other

items in this accont, sch as nder or o"erabsorbed

o"erheads in an absor!tion costing s$stem or "ariances in a

standard costing s$stem or abnormal loss or abnormal gain in

a !rocess costing s$stem.

)he balance on this income statement accont is>

1 % credit balance &hen sales are higher than the cost of

sales, and there is a !rofit.

2 % debit balance &hen sales are less than the cost of

sales, and there is a loss.

)he !rofit or loss for the !eriod is then transferred to a

retained !rofits accont, so that the balance on the income

statement becomes 0.

+ebit redit




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ales ales accont ncome statement accont

ost of sales ncome statement accont ost of sales accont

TH8 FIBABIA$ $8+84 6BT46$ A6UBT

Bature: )he cost ledger incldes acconts relating to costs. )here are

man$ other acconts that are not s!ecificall$ related to costs,

sch as the ban- accont, the accont for trade recei"ables,

the accont for trade !a$ables, an accont for accmlated

!rofits, and so on. n the cost ledger, a s!ecial accont called

the financial ledger control accont or the cost ledger control

accont ma$ be sed to record one of the doble entr$

transactions re*ired &hen the a!!ro!riate accont does not

e:ist in the cost ledger.

A6UBTIB F64 +I48T AB+ IB+I48T ;AT84IA$S AB+ $A=6U4 6STSBature: @irect materials costs and direct labor costs are direct costs

of !rodction and are charged to the &or-in!rogress

accont. ndirect materials costs and indirect labor costs are

o"erhead costs of !rodction and are charged to the

!rodction o"erhead accont, administration o"erhead

accont or selling and distribtion o"erheads accont, as

a!!ro!riate.

+ebit redit

@irect materials issed



in"entor$ accont@irect labor costs in

!rodction

B accont Bages and salaries

accont

Indirect ateria!s

ndirect materials issed


cost centres

rodction o"erheads

accont

=a& materials accont

in"entor$ accont

ndirect materials issed

from stores to

administration cost centres

%dministration

o"erheads accont

=a& materials accont

in"entor$ accont

ndirect materials issedfrom stores to sales and

distribtion cost centres

ales and distribtiono"erheads accont

=a& materials accontin"entor$ accont

Indirect !abour

ndirect labor !rodction

ost

rodction o"erheads

accont

Bages and salaries

accont

%dministration costs of

Fabor

%dministration

o"erheads accont

Bages and salaries

accont


labor costs


o"erheads accont

Bages and salaries

%ccont




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A=S64=8+ .46+UTI6B 6284H8A+S

Bature: rodction o"erheads are absorbed into the cost of

!rodction. )he balance on the !rodction o"erhead accont

is the nderabsorbed o"erhead or o"erabsorbed o"erhead.

%t the end of each acconting !eriod, this balance is

transferred to an nder or o"erabsorbed o"erhead accont.

rodction o"erheads

%bsorbed

B accont

%bsorbed o"erheads

are added to the cost

of !rodction

rodction o"erheads

accont

6;.$8TIB TH8 6ST A6UBTIB IB6;8 STAT8;8BT

Bature: )he cost ledger incldes an income statement &here sales are

matched &ith the cost of sales. Hther adjstments, sch as an

adjstment for nder or o"erabsorbed o"erheads, are also

recorded in the income statement, and the balance on the

accont is the !rofit or loss for the !eriod.

TH8 FIBISH8+ 66+S A6UBT

Bature: )he finished goods accont records the !rodction cost of

finished goods com!leted in the !eriod, and the !rodction

cost of goods sold in the !eriod.

TH8 6ST 6F SA$8S A6UBT AB+ TH8 SA$8S A6UBT

Bature:)he cost of sales accont records the total cost of sales in the

!eriod A the !rodction cost of sales and administration and

sales and distribtion o"erheads.

TH8 6ST A6UBTIB IB6;8 STAT8;8BT

Bature: )he !rofit or loss is recorded in a cost acconting income

statement. )he income statement also incldes an$ other

adjstments to !rofit, sch as nder or o"er absorbed

o"erhead, abnormal loss or gain, or standard cost "ariances.

)he balance on the income statement is the !rofit or loss for

the !eriod. )he matching doble entr$ is in the financial ledger

control accont accmlated !rofits.

RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!RCONCI+I'$ION OF CO!$ 'N, FIN'NCI'+ 'CCO*N$!

4easons for +ifference in .rofit

)he !rofit sho&n b$ financial acconts and cost acconts differ on accont of the follo&ing

reasons.




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W Items of 5inancial Nature not recorded in Cost Accounts& )he follo&ing items are not

recorded in cost acconts as the$ are of !rel$ financial natre and conse*entl$ the !rofits

differ as these items are recorded in the financial acconts.• nterest recei"ed on ban- de!osits.

• @i"idend, interest recei"ed on in"estments.

• =ent recei"ed

• Fosses on sale of assets

• ad debts &ritten off, reco"ered

• )ransfer fees recei"ed

• nterest on !ro!rietorUs ca!ital

• ines and !enalties !a$able

• om!ensation !a$able.

W Items C'ared to "rofit and 6oss Account !ut not 7ecorded in Cost Accounts& )he follo&ing

items are fond in the cost acconts bt not recorded in the financial acconts.

• or!orate ta:es

• %!!ro!riations ot of !rofits, sch as transfer of !rofits to reser"es

• ertain !a$ments li-e di"idend

• %dditional !ro"isions of de!reciation

• ertain amonts &ritten off sch as good&ill, !atents, !reliminar$

e:!enses, nder&riting commission etc.

W Items "eculiar in Cost Accounts& )he items described belo& are !ecliar in cost acconts&hile their treatment in financial acconts is different. ence there is a difference bet&een the

!rofits sho&n b$ both the s$stems

8ver'eads& n cost acconts, o"erheads are finall$ absorbed in the !rodcts b$ com!ting the

!redetermined rate of absor!tion. n sch cases, there ma$ be nder?o"er absor!tion of

o"erheads.

)his means that the o"erheads actall$ incrred &ill not tall$ &ith the o"erheads charged to the

!rodct. n financial acconts o"erheads are al&a$s ta-en at actal basis irres!ecti"e of

nder?o"er absor!tion of the same. n sch cases the !rofits sho&n b$ both the s$stems &ill

differ. o&e"er, if the nder?o"er absorbed o"erheads are charged to the costing !rofit and

loss accont, the !rofits sho&n b$ financial acconts and cost acconts &ill not differ.

3aluation of Closin Stoc. and #or.9in9"roress& )he !rinci!le of "alation of closing stoc-

in financial statements is cost !rice or mar-et !rice &hiche"er is less. o&e"er, in cost

acconts, "alation of closing stoc- ma$ be made on the basis of marginal costing &here onl$

the "ariable costs are ta-en into consideration &hile "aling the closing stoc-. )hs the closing

stoc- "alation ma$ differ. Bor-inrogress in cost acconts is often "aled on the basis of

!rime cost and sometimes "ariable manfactring o"erheads are added in the same. Hn the

other hand, in financial acconting, &or-in!rogress ma$ be "aled after ta-ing into




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consideration administrati"e e:!enses also. @e to this difference in "alation, !rofits sho&n

b$ cost acconts and financial acconts differ.

A!normal 6osses and :ains& n cost acconts, abnormal losses and gains are com!ted and

transferred to the osting rofit and Foss %?c. ;o sch com!tation is made in the financial

acconts. )his reslts in difference bet&een the !rofits sho&n b$ cost acconts and financial

acconts.

PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$PROFOR/' OF ' RCONCI+I'$ION !$'$/N$

.rofit as %er cost accounts

Add:

1. ncome and !rofits ta-en in financial acconts and not in cost acconts. JJ2. ;otional e:!enses ta-en in cost acconts and not in financial acconts. JJ

3. H"erabsor!tion o"erheads in cost acconts. JJ

4. /:cess "alation of o!ening in"entor$ in cost acconts as com!ared to "alation in

inancial acconts.

JJ

5. Fo&er "alation of closing in"entor$ in cost acconts as com!ared to "alation in

financial acconts.

JJ

6. /:cess de!reciation acconted for in cost acconts. JJ

$ess:

1. /:!enses and losses acconted for in financial acconts and not in cost acconts. JJ

2. %!!ro!riations in financial acconts onl$. JJ3. ;otional income ta-en in cost acconts and not in financial acconts. JJ

4. 'nderabsor!tion of o"erheads in cost acconts. JJ

5. Fo&er "alation of o!ening in"entor$ in cost acconts as com!ared to "alation in

financial acconts.

JJ

6. igher "alation of closing in"entor$ in cost acconts as com!ared to "alation in

financial acconts.

JJ

7. Fo&er de!reciation acconted for in cost acconts. JJ

.rofit or !oss as %er Financia! A>c





JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING JOB ORDER COSTING

1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$1O" CO!$ !.$ FOR/'$

'6= 64+84 6ST SH88T

Kob

stomer ;ame @ate tarted > JJJ

@escri!tion @ate Hrdered > JJJ

antit$ @ate Banted > JJJ

@ate om!leted > JJJ

+I48T ;AT84IA$

@ate @e!artment @escri!tion 'nit ost )otal

JJ JJ JJ JJ JJ

JJ JJ JJ JJ JJ

)H)%F JJJ

+I48T $A=64

@ate @e!artment @escri!tion or =ate )otal

JJ JJ JJ JJ JJ

JJ JJ JJ JJ JJ

)H)%F JJJ

A..$I8+ FAT64K 6284H8A+@ate @e!artment asis or =ate )otal

JJ JJ JJ JJ JJ

JJ JJ JJ JJ JJ

)H)%F JJJ

'%=\

@=/) %)/=%F > JJJ elling rice > JJJ

@=/) F%H= > JJJ Fess A actor$ ost JJJ

%F/@ %)H=\ HI/=/%@ > JJJ %dmin /:! JJJ > JJJ

)H)%F > JJJ rofit JJJ

+ate Started B

+ate Finished G

+ate So!d HG





PAST PAPERSPAST PAPERSPAST PAPERSPAST PAPERS

M O 1 Zs%ring )11[

A

ales 180000Q12Q110 273600

Fess aterial A % 2025000Q45 91125

aterial A 675000Q30 20250

Fabor 18000?200 D 90Q180000Q12Q20?60 64800

I?H 180000Q12?80M Q 15 40500

?H 10000

ost of Goods old 226675

ross .rofit /<)5

7orkings:

aterial> 180000Q12?80M D 2700000 aterial A %> 2025000 P aterial A> 675000

=

ales 180000Q12Q110 273600

Fess

aterial A % 1800000Q48 86400

aterial A 600000Q30 18000

Fabor ee Bor-ing 54108

I?H 180000Q12?90M Q 15 A 20M 28800

@e!reciation 7.5 illion?5 1500

?H 10000 15M 8500

ost of Goods old 197308

ross .rofit /))

7orkings:

aterial> 180000Q12?90M D 2400000 aterial A %> 1800000 P aterial A> 600000

Fabor> 18000?200 D 90Q180000Q12Q14?60 D 45360

720000504000 D 216000Q90Q45M D 8748

5/1





M O 5 Zs%ring )11[

.A4T 3 A

Sa!es Muantit J i:ed ost P )arget rofit D 61000P65660 ?208 D 608.942 nits

? er 'nit

)arget !rofit> rofit of > 1 D 62540

hortfall of > 2 D 3120 6254059420

<5<<

? er 'nit =e"ise ale rice 86015 D 845

I D 637

? D )

Bote J 464400?540000 D 860

F6H Se!!ing

580000 84660 26500

540000 80580 25500

/ / 1

2 ( .er Unit# 1) )5F )55 1)

I er 'nit> aterial 183.6?540 D 340

Fabor 91.8?540 D 170

H D 102

elling D 25

<*?

)otal H D 25500

elling D 12000

%dmin D 23500

<1





.A4T 3 =

;iniu Sa!es .rice J

)otal Iariable ost 650 Q 637 D 414050

)otal i:ed ost 61000 P 2500 D 63500

)arget rofit D 65600

)otal ale Iale =e*ired D 543210

Sa!e .rice 9i!! be D 543210?650000 D 835.70

M O / Zs%ring )11[;ateria!: 150000 nits re*ire 25000 -g Q 3 of at> D 75000 -g.

ar-et @emand D 75000 -g of at>

a!acit$> 100000 -g.

rchase> 50000 7500025000 from otside.

;ormal Foss> 4M

rodction> 250001000 25000Q4M D 24000 -gom!an$ &ill b$ 51000 -g of at> b$ otside. ;ormal Foss is also

there. o, com!an$ &ill b$ 51000?0.96 D 53125 -g of at> b$ otside.

I 25000Q200 D 5

et ! ost D

rchase cost D 53125 Q 225 D 115*1)5

Tota! J 5115*1)5 J 1?**1)5

2: 250Q230625 D 5?<5<)5

$abor: Fabor rate !er hr D 9000?200 D 45

Fabor re*ired for this job D 150000?100Q150 D 225000 hrs

;ormal Foss is there. o more labor hr &ill be needed.

D : 0.04 D 225000 Z : D 225000?0.04 D 234375





234375225000 D 9375 is ;ormal loss for total !rodction bt e ins!ect

60M of !rocess, the ;ormal Foss &ill be D 9375 Q 60M D 5625 hr.

)otal hr D 225000 P 5625 D 230625

dle hr D 20000

Fabor hr re*ired D 230625 A 20000 D 210625

t &ill be> 210625 Q 45 D 9478125

20000Q45Q60M D 540000

111)5

FI8+ F6H: Hnl$ incremental H &ill be charged. om!an$ is rnning at 80M

ca!acit$. !ecific order re*ires 30M additional ca!acit$. o 80M P

30M D 110M ca!acit$ is needed.

/nhance ca!acit$ D 110M 100M D 10M

22000000 for 100M

22000000?100M D 220000 for 10M ca!acit$

220000Q10 for 10M ca!acit$ Q 1.5 D **

Tota! cost 9i!! be:

aterial D 17033125

Fabor D 10018125

I?H D 5765625

?H D 3300000

*<11<?5

rofit is 20M of ale !rice

D J A 0.2: D 36116875 Q0.8: D 36116875 QJ D 36116875?0.8 D 45146093.75

Sa!e .rice J 45146093.75 ? 150000 D *"?





M O ZS%ring )1[

Sa!e: ale 99 D 6500

ale 2000 D 6000 7200?120M

@ecrease in *t$ D 500

=atio of fall in *t$ D 500?6500 D 1?13

;ateria!: @ecrease in *t$ is 1?13th

# I shold decrease to 12?13th

.

ost of 2000 D 3600 3900Q12?13

%ctal ost 2000 D 3400

=edction in D 200

Sa!e .rice: ale 7200?120M D 6000

%ctal ost D 7200

hange D 1200

Sa!e 2o!ue: 2600Q1?13 D 200

Hr

all in sale 6500Q1?3 D 500

all in I 3900Q1?13 D 300

all in D 200

Fied ost: ncrease in D 200

8ffect:

all in D 200

ncrease in D 1200

@ecrease in D 1000

ncrease in D 200

;et rofit D 1)





I!!ustration of abo0e:

Kear: 1

%ctal t$ D 10000 nit

onsm!tion of @ D 3 -g

@ consme D 30000 -g 10000Q3

%= D 4

% D =s> 120000 10000Q3Q4

Kear: )

%ctal t$ D 10M increase 10000P10M D 11000

onsm!tion of @ !er nit D 5M increase 3P5M D 3.15

%= D 15M increase 4P15M D 4.6

% D =s> 159930 11000Q3.15Q4.6

1)315* J ** (A#

heck:rice > 20790 % 159390 Q 15?115 H= 34650 4.64

IHF > 12000 % 120000 Q 10M

t$ > 6600 % alancing figre H= 4 3465033000 D6600%

rice P Iol P t$ D 20790 % P 12000 % P 6600 % D 39390 %

/fficienc$ Iar > = % A % D 43465033000 D 6600%

././././0000 ase $ear onsm!tion tandard !er -g





M O < ZAutun )/[

7ithout +iscount 7ith +iscountaterial 42Q37 1554

42Q36.9 1549.8

@irect Fabor 850 850

@irect aterial 300 300

Tota! 2ariab!e ost )?/ )<"

ale rice 2862 2862

>; 15 1<)")

%nnal 6007320 6307320

=8 Unit (F > ; %er unit# *)1 *<

M O < ZS%ring )5[

;ain .oint J Bo 2 is gi0en, then a!! Sa!e .rice 9i!! be assued to be >;"

4eC O 1

4550?4000 4550?5000

=8. 1138 910

4eC O )4e0ise F 3550 3550

>; 3000 3750

=8. 1138 947

4eC O *

Bote: /liminate the difference &ill be indifferent.

Sa0ing in F 1000?1000 4000Q25M 1000?1250 5000Q25M

Bo of Tickets (for indifferent%oint#

1000 800

4eC O /

1. @emand ? good &ill in mar-et

2. %"ailabilit$ of alternati"es

3. ;atre of concert

4. )aste of adience

5. %rea

6. /:!ectation of sale of tic-et





M O ? ZAutun )5[

ale rice D 1000 !er nit

Hther I D 600 !er nit

ommission N discont D 5M of ales

;ote for stdents>

Hther "ariable cost !er nit &ill remain constant in case for fall in sale !rice. Bhere

commission N discont !er nit &ill also fall if there is fall in sale !rice.

M O ? ZS%ring )<[

om!tation of sale !rice>

@irect aterial D 193600

@irect Fabor D 90000

H"er ead D 80000

%dmin D 30000

)otal ost 82M of sales D 393600

%dd A ommission 8M of sales > 393600Q8M D 38400

;et rofit 10M of sales

M O ) ZBo0 1<[

)here is nothing in the *estion. tdent &ill get confsed de to ar-s> 14 gi"en in the

*estionN &rote lot of irrele"ant material N lost !recios mar-s N time.

M O ZAutun )[

;et !rofit > 412500

D 127500

ontribtion D 540000

? !er nit 156 D 9

ales 540000?9 D 60000





M O 5 ZS%ring )/[

t is assme that minimm order *t$ is !rchase order. Fimiting factor is a"ailabilit$ of fnds.

A0ai!ab!e funds:

Bor-ing a!ital D 800000

=nning inance D 50000

Fess A %dmin D 152700

ar-eting D 72842

inance ost 500000Q24MQ6?12 D 60000

)otal D )55/)

)otal Grand D 1014458

Sa!e 318 421 280

2 248 345 204

>; 70 76 76

>; G ( >; >2L1# 28M 22M 37M

4anking ) * 1

M O ? ZS%ring )?[ +ress Scraf Handbag

60M com!leted 11700 11700 11700

10M dress N scraf 1950 1950

20M dress N handbag 3900 3900

10M dress onl$ 1950

Tota! Units 15000 Q 30M D 19500 15 1*<5 15<

/:isting 'nits 15000

Increenta! Units /5 1*<5 15<

ncremental ales Iale

@ress 4500Q2000 9000000

craf 13650Q400 5460000

andbag 15600Q500 7800000

)otal ales 22260000

ncremental osts

aterial 4500Q3.5Q100 1575000

ost of designer 150000

oo-s 15600Q8 124800





=edction in =esale "ale>

/:isting 15000Q20 300000

=e"ised 19500Q5 97500 202500tting osts>

@ress 4500Q35 157500

craf 13650Q75 204750

andbag 15600Q20 312000 674250

Hther>

@ress 4500Q2000 Q 40M 3600000

craf 13650Q400Q55M 3003000

andbag 15600Q500Q60M 4680000 11283000

)otal osts 14009550

ncremental rofit 8250450 M O ? ZAutun )*[

4eC O 1

Sei Auto

$ ost 2000 2000

Iariable anfactring ost 1500 1200

a"ings 500 200

5000000 10000000

Muantit to -ustif (F >Sa0ings# 1 1)5

4eC O )

Sei Auto

%nnal =e*irement 15000 15000

a"ings 500 800

)otal a"ings 7500000 12000000

5000000 10000000

Bet Sa0ing )5 )

4eC O *

@ifference in I sa"ings D 300 !er nit

@ifference in D 5000000

antit$ to jstif$ allocation D 16667 5000000?300





M O * ZAutun )?[

inished Goods D 20000?97M D 20619

=a& aterial D 20619?98M D 21040

@irect aterial D 21040 Q 42.3 D 889992

%ssme D 1 -g e*als 1 nit.

M O * ZS%ring 1[

@t$ dra&bac- is an income in case of e:!ort. t is !aid on im!ort time N &ill be refnded later.

M O ZS%ring )5[

? er nit D 4500000?300000 P 30 D 45

8ffect on %rofit:

a titching elimination

Foss of ? 300000Q10M D 30000Q45 D 1350000

=edction of I 30000010M D 270000Q6 D 162000

;et enefit D )? b 'se of !lastic e$e

ost of glass e$e 30000010M D 270000Q2?95MQ4?100 D 227368

ost of !lastic e$e 30000010M D 270000Q2?90MQ3?100 D 180000

;et enefit D /?*<

c illing material

ost of s$nthetic 30000010M D 270000?2000Q1600 D 216000

;et loss of sing scra! 30000010M D 270000 Q1 D 270000

;et enefit D (5/#

B8T 8FF8T D )<**<

M O / ZAutun )1[

Bote: This Cuestion is a co% of sae Cuestion fro 1 Ms & As b hart Fou!k

$nch




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Unit %roduce:

ale 21000losing toc- 21000Q10M 2100

23100

H!ening toc- 19000Q5M 950

Unit ;ade ))15

Tota! & .er Unit Fied F6H J

%nnal i:ed H on 300611 6000000Q1.08 D 6480

)rain ost D 300

)otal D 6780

er 'nit 2011 D 6780?22150 D 306.09

er 'nit 2010 D 6000?18000 D 333.33

2 %er unit on *3<311 J

aterial 5 -g Q 95M D 4.75Q60Q4M 62.4

aterial ns!ect 4.75Q2 9.50

Fabor 4Q85MD3.4Q75Q1.1 280.50

Fabor ncenti"e 4Q15M D0.6Q82.575P10MQ30M 14.85I?H 15Q1.05Q3 47.25

Iariable elling 10 m Q 30M ?19000 157.89

)otal <"*

2 %er unit on *3<31 for 6%ening Stock J

aterial 5Q60 300

Fabor 4Q75 300

I?H 15Q3 45

)otal </5

.rofit: D 7610865 % D 7284740




1<) © For Suggestions & Feedbacks, contact: ATAUSH SHAFI (ataushshafi@gai!"co#

M O / ZS%ring )1)[

(a# Ho9 an units of the sa!! %ack of %roduct3= shou!d be so!d to achie0e break3e0enN4s"

i:ed ost 7600000Q12 91200000

)arget rofit

=e*ired ontribtion 91200000

Fess A % Farge D 250000Q120 [731Y 30000000

mall D 150000Q45 [73)Y 6750000

Farge D 225000Q150 [73*Y 33750000 70500000

20700000

X

mall ? er 'nit [73/Y 90

Buber of Unit So!d (Sa!! .ack: =# )*

731:

A J !arge .ack

? D ale A I

25M D 100M 75M

I D 120?25Q75 D 360

ale D 120?25Q100 D 480

? D 480360D120

73):

A D Sa!! .ack

I D 360Q67.5M D 243

%s the ratio of the selling !rice of both the !ac-s of !rodct% are same as the

ratio of their *antities, ales &ill be as follo&s>ale D 480Q3?5 D 288

? D 288243D45

73*:

= D !arge .ack

? D ale A I

%s the ratio of contribtion margin to "ariable cost for the large !ac- of !rodct

is 2>3, ? &ill be as follo&s>

ere, ? D 2

I D 3

? D ale A I

2 D 5 3ale D 150?2Q5 D 375

I D 150?2Q3 D 225

? D 325 A 225 D 150

73/:

= D Sa!! .ack

ale D 375Q64M D 240

%s the ratio of the I is not gi"en, &e &ill assme that I of both the !ac-s of

!rodct% are same as the ratio of their *antities, I &ill be as follo&s>

I D 225Q2?3 D 150

? D 240150 D 90




1<* © For Suggestions & Feedbacks, contact: ATAUSH SHAFI (ataushshafi@gai!"co#

(b# Ho9 an units of the sa!! %ack of %roduct3= shou!d be so!d to earn a net incoe of

4s" 1,5*,N A%%!icab!e ta rate for the co%an is )5G"

4s"

i:ed ost 7600000Q12 91200000

)arget rofit 10530000?1 A 0.25 14040000

=e*ired ontribtion 105240000

Fess A % Farge D 250000Q120 [731Y 30000000

mall D 150000Q45 [73)Y 6750000

Farge D 225000Q150 [73*Y 33750000 70500000

34740000

X

mall ? er 'nit [73/Y 90

Buber of Unit So!d (Sa!! .ack: =# *<

(c# =ased on the resu!ts of (b# abo0e %re%ares a %roduct 9ise and conso!idated incoe

stateent for the %eriod ending *1 +eceber )1)"

.46+UT 7IS8 IB6;8 STAT8;8BT

.roducts Sa!e .er

Unit

2 .er Unit Sa!e 2o!ue Sa!es 2 >;

A $arge .ack 480 360 250000 120000000 90000000 30000000

A Sa!! .ack 288 243 150000 43200000 36450000 6750000

= !arge .ack 375 225 225000 84375000 50625000 33750000= Sa!! .ack 240 150 386000 92640000 57900000 34740000

6BS6$I+AT8+ IB6;8 STAT8;8BT

4s"

ales 340215000

Fess I 234975000

? 105240000

Fess 91200000

dgeted rofit efore )a: 14040000

Fess )a: 3510000

=udgeted .rofit After Ta 15*

M O ZAutun )1)[

1" anager annal salar$ amonting =s> 2500? is irrele"ant as it is !ast cost.

)" i:ed H"erhead ] =s> 25? !er @F is irrele"ant for decision ma-ing.

*" otor adjstment &ill be as follo&s>




1<5 © For Suggestions & Feedbacks, contact: ATAUSH SHAFI (ataushshafi@gai!"co#

Be -no& that total cost is calclated as follo&s>

@irect aterial P @irect Fabor P @irect /:!enses P actor$ H"erhead

%!!l$ing the abo"e formla on data gi"en in the *estion>

.eta! $eaf

@irect aterial 20000 250Q80 16000 125Q128

@irect Fabor 18000 720Q25 24000 960Q25

actor$ H"erhead 18000 J 24000 J

%dmin H"erhead 20000 \ 16000 \

Tota! ost 5) (a!cu!ated as be!o9# 5< (a!cu!ated as be!o9#

Be -no& the formla of rofit i.e. rofit D ale A ost. %!!l$ this formla on data

gi"en in the *estion>

)5G 6B 6STJ

rofit D ale A ost

25M D 125M 100M

D 65000?125Q100 D 52000.

*G 6B SA$8S .4I8Jrofit D ale A ost

30M D 100M 70M

D 80000?100Q70 D 56000.

38000 P 18000 J P 20000 \ D 52000 /*> 1

40000 P 24000 J P 24000 \ D 56000 /*> 2

lti!l$ e*ation 2 &ith 0.75, &e &ill get>

30000 P 18000 J P 12000 \ D 42000

o, &e get this e*ation>

38000 P 18000 J P 20000 \ D 52000

30000 P 18000 J P 12000 \ D 42000

8000 P 0 J P 8000 \ D 10000

8000 \ D 100008000




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8000 \ D 2000

\ D 2000?8000 D 25M

%!!l$ing \> 25M on e*ation 01, &e &ill get>

38000 P 18000 J P 20000 0.25 D 52000

38000 P 18000 J P 5000 D 52000

43000 P 18000 J D 52000

18000 J D 52000 A 43000

18000 J D 9000

J D 9000?18000 D 50M

heck: f &e a!!l$ J> 50M N \> 25M on the "ariables gi"en in the table, &e &ill

get the same ans&ers.

.eta! $eaf

@irect aterial 20000 250Q80 16000 125Q128

@irect Fabor 18000 720Q25 24000 960Q25

actor$ H"erhead 9000 18000Q50M 12000 24000Q50M

%dmin H"erhead 5000 20000Q50M 4000 16000Q50M

Tota! ost 5) 5<

M O 5 ZAutun )1)[

4eCuired ;ateria! A ;ateria! =

%l!ha 900 P 200 D 1100 2200 1100Q2 2200 1100Q2

eta 3000 P 300 D 3300 0 3300Q0 9900 3300Q3

Gamma 5000 P 400 D 5400 16200 5400Q3 21600 5400Q4

18400 33700

A0ai!ab!e 22000 340008cess (*<# (*#

Fimiting factor &ill either be gi"en in the *estion or calclated as follo&s>

ost ? er or =ate




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A!%ha =eta aa Eeta

ale rice 66 88 106 40

@irect aterial % 8 0 12 @irect aterial 12 18 24 15 2.5Q6

@irect Fabor 25 30 25 10 A 10Q1

@irect aterial 3.1 3.2 2.7 1 A 0.4P0.6

ontribution 1?" *<" /)"* 1"/

X X X X

$iiting Factor ) * / )"5

.SH "5 1)")< 1"5? 5"<

4anking * 1 ) /

Iariable H"erhead for Oeta &ill be calclated as follo&s>

A!%ha =eta aa

;achine Hour ()# 1.6?8 D 0.2 1.4?7 D 0.2 1.2?6 D 0.2

$abor Hour (1# 1.5?2.5 D 0.6 1.8?3 D 0.6 1.5 ?2.5 D 0.6

Tota! .er Unit ost:

;achine Hour 2Q0.2 D0.4 2Q0.2 D0.4 2Q0.2 D0.4

$abor Hour 1Q0.6 D 0.6 1Q0.6 D 0.6 1Q0.6 D 0.6

Tota! 0.10 0.10 0.10

6%tia! ;i:

%"ailable D 34000

Fess A eta 3300Q3 D 9900

24100

Fess A Gamma 5400Q4 D 21600

2500

Fess A %l!ha 1100Q2 D 2200

300

Fess A Oeta 120Q2.5 D 300

BI$

Oeta &ill ha"e to ma-e 120 nits N b$ 480 600120 rest nits from otside.





M O ? ZAutun )1)[

5 ;onths ? ;onthsa%acit ?5

300000Q5?12Q70M

1<1

300000Q7?12Q92M

ale rice 87500Q34 2975000 N

@irect aterial 87500Q12 N 161000Q12 1050000 1932000

@irect Fabor igher of =s> 8? H= =s> 150000

!er month

750000 1288000

Iariable H"erhead 87500Q6 N 161000Q6 262500 472500

emi Iariable 262500 472500

i:ed H"erhead 750000Q5?12 N

750000Q7?12

312500 437500

.rofit ?5

ost for ? onths 5<

emi"ariable cost &ill be calclated as follo&s>

At 55G a%acit 37500 450000?12

At ?G a%acit 52500 4500000P180000

D 630000?12

)<)5 52500Q5

At )G a%acit 67500 630000P180000

D 810000?12

/?)5 67500Q7

Be -no& that re*ired sale !rice is calclated as> =e*ired contribtion?'nit rodced

)otal !rofit for the $ear D 5 onths rofit P 7 months rofit

936000 D 75000 P 7 months rofit

7 months rofit D 93600075000 D 861000

tting the data in the formla>

4eCuired ontribution J Fied ost Target .rofit

Unit .roduced

D 861000 P 5096000

161000

D =s> 37 er 'nit





IMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PASTIMPORTANT POINTS IN EACH PAST

PAPERSPAPERSPAPERSPAPERS

ATT8;.T J ZAUTU;B )1)[

M O 1(b#:

arginal re"enes and marginal costs can also be calclated in this fashion at different le"els of

demand.

Unit ;argina! 4e0enue ;argina! ost .rofit

1000 260001100 2 5553 1 2928 27500

1) 1 (5*35)# 1 ()3)?# *

1300 3 5249 1 2726 29900

a:imm !rofit &ill be at 1200 nits ] =s> 30000?.

M O ):

Fabor cost !er !iece at 10M inter"als bet&een 60M and 130M efficienc$, assming that at

100M efficienc$ 80 !ieces are !rodced !er da$ is calclated as follo&s>

8fficienc Inter0a!s 6ut%ut .iece 4ate Tota! 7ages $abor ost .er .iece

60M 48 3 168 3.5 168?48

70M 56 3 168 3 168?56

80M 64 3 192 3 192?64

90M 72 3.6 3Q120M 259 3.6 259?72

100M 80 3.6 3Q120M 288 3.6 288?80

110M 88 3.9 3Q130M 343 3.90 343?88

120M 96 3.9 3Q130M 374 3.90 374?96

130M 104 3.9 3Q130M 405 3.90 405?104

Ht!t &ill be calclated as follo&s>

100 80

60 C

60M D 60?100Q80 D 48.

70M D 70?100Q80 D 56.





80M D 80?100Q80 D 64.

90M D 90?100Q80 D 72.

100M D 100?100Q80 D 80.

110M D 110?100Q80 D 88.

120M D 120?100Q80 D 96.

130M D 130?100Q80 D 104.

M O <:

)ested nitsU means final !rodct read$ for sold. )here shold be de!artment for testingN the cost &old be associated to testing the nits. Be can refer to this as 'nit

)ransferred.

ATT8;.T J ZAUTU;B )11[

M O *:

1. rodction cost bdget D @ P @F PI?H P ?H

2. @irect Fabor &ill be calclated as follo&s>

75000?4 D 18750 P 10M D 20625?0.96 Q 3 D 64453.

M O /:

/= &ill be calclated as follo&s D B M Q om!letion M

50M Q 40M 20M

20M Q 30M 6M

30M Q 24.5M 7.35M

**"*5G

M O <:

1. Bhen "ariable cost &ill not be gi"en, then all "ariable cost is cost of good sold.

2. %"erage stoc- le"el D in P a: ? 2

ATT8;.T J ZAUTU;B )1[

M O 1:

1. @irect labor hr &ill be sed to allocate H.

2. ost !er nit D H cost ? nit !rodced




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M O *: )otal in!t A net in!t A loss Q 1.81.60.09 D 0.11

M O 5:

1. gnore cost of monthl$ !a$roll

2. gnore fi:ed H.

3. @irect labor cost is not !ossible to calclate here.

ATT8;.T J ZS.4IB )1[

M O 1:

losing stoc- D

i.

Beighted a"g A H!ening stoc- P !rchases

ii. H D rchases

ormla D ost of !rchase Q closing stoc-

rchases

M O ): %"erage n"entor$ D /H ?2 P afet$ toc-

6500?2P2000 D 5250

arr$ing ost D %"erage in"entor$ Q 17700 D 92925000 Q 1M D 9292500

Hrdering cost D 4224000Q10M D 422400

M O *:

;ateria! 6 is introduced at the start of the %rocess in de%artent A and subseCuent!

transferred to de%artent =" Bora! !oss in de%artent A is 5G of the units transferred"

)otal )ransfer P B P ;ormal Foss

664500 )ransfer P 24000 P ;ormal Foss

664500 A 24000 )ransfer P ;ormal Foss

640500 )ransfer P ;ormal Foss

105M 100 M P 5M

)ransfer to ne:t de!tt 640500 Q 100?105 D 610000

;ormal Foss of de!tt A % 640500 Q 5?105 D 30500

1G of the units %rocessed are e0a%orated before the ins%ection stage"

)his means this is ;ormal Foss N is calclated as follo&s>

'nit recei"ed b$ last de!tt Q 10M D 610000 Q 10M D 61000

+uring the ear, actua! e0a%oration in de%artent = 9as 1G higher than the estiated

nora! !osses because of high !e0e! of Su!%her contents in natura! gas used for %rocessing"

%ctal Foss D 110




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;ormal Foss D 100

Abnora! $oss D 10

%bnormal Foss %mont D 61000Q10?100 D 6100

M O /:

1. tandard *t$ P losing G A H!ening G D rchases

2. rchases are calclated as follo&s>

tandard t$ nit made Q !er hr JJJ

%dd A %d"erse aterial 'sage Iariance Iariance ?30 JJJ

Fess A a"orable aterial 'sage Iariance Iariance ?30 JJJ

%dd A losing G tandard t$ Q da$s gi"en ?365 JJJ

Fess A H!ening G tandard t$ Q da$s gi"en ?365 JJJ

ATT8;.T J ZAUTU;B )[

M O ):

1. %l&a$s record actal H in H distribtion sheet.

2. %ctal H &ill be fond at H distribtion sheet.

M O *:1. )otal contribtion M D )otal contribtion ? total sales Q 100

2. / D ? )otal contribtion M

M O /:

1. rchase ost D @emand Q nit !rice

2. )rans!ort ost D antit$ ? a!acit$ Q ;o of order D JJJ Q one tri! cost gi"en

3. ired ost D ighest /H Q third !art$ rate add in second nit




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EXAM RUBRICEXAM RUBRICEXAM RUBRICEXAM RUBRIC

DECISION MAKINGDECISION MAKINGDECISION MAKINGDECISION MAKING

8A; 4U=4I: rchase ne& e*i!ment &hich &old cost =s. 240 million and ha"e a sefl

life of si: $ears &ith no sal"age "ale. )he com!an$ ses straightline method of de!reciation.

A6UBTIB T48AT;8BT: % notion that de!reciation on ne& machine being a fi:ed cost &ill

be ignored is !artiall$ correct. t at the same time it is rele"ant cost as it cold, be a"oided if

the other e*i!ment &ere !rchased from e:ternal s!!lier.

8A; 4U=4I: i:ed o"erhead> 1# @e!reciation D 60 )# General o"erheads D 30

A6UBTIB T48AT;8BT: gnore fi:ed o"erhead of all t$!es nless a direction is gi"en in the

*estion. %nother o!tion &as to inclde these bt in that case one shold gi"e a note

e:!laining their assm!tion.

8A; 4U=4I: -illed labor can &or- on other contracts &hich are !resentl$ o!erated b$

semis-illed labor &ho ha"e been hired on tem!orar$ basis at a cost of =s. 325,000 !er month.

)he com!an$ &ill need to gi"e them a notice of 30 da$s before terminating their ser"ices.

A6UBTIB T48AT;8BT: -illed labor re*ired for this contract cold ha"e been sed to

re!lace the semis-illed &or-ers &ho &ere &or-ing on other contracts and had been hired on

tem!orar$ basis. )he amont !a$able to sch semis-illed &or-ers &as =s. 3.9 million

325,000:12. onse*entl$, man$ stdents too- =s. 3.9 million as the o!!ortnit$ cost. n

doing so, the$ ignored the information that e"en if the semis-illed labor &ere laid off, 30 da$s

salar$ &old ha"e to be !aid to them and conse*entl$ the com!an$ &ill onl$ be sa"ing =s.

3,575,000. Hn the other hand, man$ stdents erroneosl$ too- the o!!ortnit$ cost as =s.

4,225,000 i.e. e*al to 13 months salaries of the ns-illed labor.

8A; 4U=4I:

1. @ rate> 42.3

2. 'nit> 20000

3. =eject rate> 2M

A6UBTIB T48AT;8BT:

1. @ cost &ill be calclated as follo&s D 20000Q42.3Q100?98

2. G rejection rate &ill be calclated as follo&s D ost ?100M Q M

8A; 4U=4I: rchase cost !ls additional charges

A6UBTIB T48AT;8BT: ost Q 100?100PM




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8A; 4U=4I: Bhich com!onent to be !rchased from s!!lier

A6UBTIB T48AT;8BT: Fo&est cost &ill be ran-ed higher than highest cost.

8A; 4U=4I:

SA$8S K E

=efined 6 5.50 7

'nrefined 2.50 2.75 4

A6UBTIB T48AT;8BT: Bhen t&o re"ene figres are gi"en in the *estion, &e &ill

incremental re"ene.

SA$8S K E

=efined 6 5.50 7

'nrefined 2.50 2.75 4Increenta! 4e0enue *"5 )"?5 *

8A; 4U=4I:

.entagon Heagon 6ctagon

ales !rice !er nit =s. 2300 1550 2000

aterial cost !er g. =s. 250 250 250

Fabor time !er nit intes 20 30 45

achine time !er nit ors 4 2.5 3

;et &eight !er nit of finished !rodct g. 6 4 5

\ield M 90 95 92/stimated demand 'nits 10000 20000 9000

/ach &or-er is !aid monthl$ &ages of =s. 15,000 and &or-s a total of 200 hors !er month. FUs total

o"erheads are estimated at 20M of the material cost. i:ed o"erheads are estimated at =s. 5 million !er

month and are allocated to each !rodct on the basis of machine hors. 100,000 machine hors are

estimated to be a"ailable in ebrar$ 2012.

A6UBTIB T48AT;8BT:

aterial P Fabor P Iariable H &ill be calclated as follo&s>

.entagon Heagon 6ctagon

aterial ost aterial cost !er -g Q ;et

Beight ? \ield

250Q6?0.90 D

1666.67

250Q4?0.95 D

1052.63

250Q5?0.92 D

1358.70

Fabor ost 15000?200 D 75

Q 20?60 D 25

15000?200 D 75

Q30?60 D 37.5

15000?200 D

75Q45?60 D

56.25

Iariable H see bo: belo& for calclation 133.33 85.33 121.74




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2ariab!e F6H ca!cu!ation:

)otal H"erhead D i:ed H P Iariable H20M of aterial D i:ed H P Iariable H

H= /;)%GH;> 1666.67Q20M Z 333.33 D333.33 A 200 5000000?100000Q4 D 133.33

H= /J%GH;> 1052.63Q20M Z 210.53 D210.53 A 125 5000000?100000Q2.5 D 85.53

H= H)%GH;> 1666.67Q20M Z 271.74 D271.74 A 150 5000000?100000Q3 D 121.74

BREAK EVEN POINTBREAK EVEN POINTBREAK EVEN POINTBREAK EVEN POINT

B6T8:

1. Bhene"er sales increases. %ll "ariable cost &ill increase nless s!ecified.

2. ;o Iariable cost, all sales !rice &ill be contribtion margin.

8A; 4U=4I: om!te the brea-e"en !oint in nits if the com!an$ offers a discont of 10M

on !rchase of 20 bottles or more, assming that 20M of the sales &ill be to b$ers &ho &ill

a"ail the discont.

A6UBTIB T48AT;8BT: orrect discont calclation &ill be>

10M discont on 20M of =s> 16 Q 16Q20M D 3.2 Q10M D 0.32 !aisa !er bottle.

8A; 4U=4I:

)< )?

.roduction 175000 225000

Tota! osts 11900000 16518600

=ate of inflation in 2007> 15M

=e*ired> Iariable cost N fi:ed costs in real terms.

A6UBTIB T48AT;8BT: =eal =ate for crrent $ear D crrent $ear cost ?1P inflation rate

D 16518600?1.15 D 14364000.

.roduction Tota! osts

)? 225000 14364000)< 175000 11900000

+ifference 5 )/</

Iariable cost !er nit D 2464000?50000 D 49.28

i:ed cost D 14364000 A 225000Q49.28 D 14364000 A 11088000 D 3276000




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8A; 4U=4I: Bhen !er nit cost of sales N "ariable cost is not gi"en in brea-e"en mi: case.

A6UBTIB T48AT;8BT:

/ D J/@ H)

? Q indi"idal ratio

8A; 4U=4I: Bhat !rice !er nit to be *oted for the ne:t $ear if it is desired to earn 10M

!rofit on sales assming that the "ariable cost &ill increase b$ 10M, fi:ed cost b$ 10M N

!rodction b$ 10M.

Iariable cost D 4400 Q 'nit D 1100 Q D 1595000

A6UBTIB T48AT;8BT:

Bhen sales increase, "ariable e:!ense increases b$ same ratio.

ale D "ariable cost P fi:ed cost P !rofit

;o of nit Q sale !rice !er nit D ;o of nit Q "ariable cost !er nit P fi:ed cost P ;o of

nit Q sale !rice !er nit Q 10M

1100Q D 1100Q4400 P 1595000P 1100Q Q 10M

1100 D 4840000 P 1595000 P 110

1100 A 110 D 6435000

D 6435000 ? 990

D 6500 nits

ENTRIESENTRIESENTRIESENTRIES

8A; 4U=4I: )he "alation is carried ot b$ the inance @e!artment sing stores

memorandm record.

A6UBTIB T48AT;8BT: t e:hibits that onl$ *antit$ is recorded in the stores ledger.

LABORLABORLABORLABOR

8A; 4U=4I: bons hors

A6UBTIB T48AT;8BT: bons hors &ill be com!ared &ith direct hors &or-ed.





8A; 4U=4I:

@irect materials !er nit D 0.8 -g at =s. 60 !er -gFabor !er nit D 27 mintes at =s. 80 !er hor

Iariable !rodction o"erheads D =s. 40 !er labor hor

i:ed !rodction o"erheads, at a normal ot!t le"el of 105,000 nits !er month, are estimated at =s.

2,100,000.

A6UBTIB T48AT;8BT:

aterial P Fabor P Iariable H &ill be calclated as follo&s>

@irect materials !er nit D 120000Q0.8Q60 D 5760000

Fabor !er nit D 120000Q27?60Q80 D 4320000Iariable !rodction o"erheads D 120000Q27?60Q40 D 2160000

i:ed !rodction o"erheads D 2100000Q120000?105000 D 2400000

• Bhere mintes are gi"en, it &ill al&a$s be di"ided b$ 60.

• rodction ost @ P @F P H &ill be mlti!lied b$ !rodction nits N selling cost selling

H b$ sale nits nless stated other&ise N &rites this assm!tion in the !a!er as note.

MATERIAL MATERIAL MATERIAL MATERIAL

8A; 4U=4I: Godo&n rent of =s. 10,000 !er month

A6UBTIB T48AT;8BT: )his &ill not be inclded in carr$ing cost calclation.

8A; 4U=4I: Bhat &old be the safet$ stoc- and reorder !oint if the com!an$ is &illing to

ta-e>

1. a 20M ris- of being ot of stoc-C

2. a 10M ris- of being ot of stoc-C

A6UBTIB T48AT;8BT: f the com!an$ is read$ to ta-e 20M ris- of being ot of stoc-

meant that it needed to -ee! sfficient safet$ stoc- to ensre that it &old onl$ be ot of stoc-

if the lead time reached 13 da$s or in other &ords it &old need to reorder &hen 12 da$s stoc-&as left. i.e. the re order !oint shold be 12 da$s.

)he a"erage sage !er da$ &as 450 nits 162000?360

ince the sal lead time &as 11 da$s, safet$ stoc- shold be e*al to 1211D1 da$Us stoc- i.e.

450 nits N reordering !oint &as 450Q12 D 5400 nits





8A; 4U=4I:

6rdered Muantit Unit %rice 4s"'!to 999 nits 160.00

1000 to 1999 nits 158.40

2000 or more nits 156.80

A6UBTIB T48AT;8BT:

1. )a-e lo&er class bondaries i.e 999, 1000 N 2000 as annal demand for calclating /H.

2. antit$ discont &ill be calclated as follo&s>

i. rchase ost D nit made Q cost !er nit Q 100M M gi"en

ii. Hrdering ost D %nnal demand Q ordering cost ? /Hiii. arr$ing ost D /H Q arr$ing ost?2 Q 100M M gi"en

8A; 4U=4I: Bhen ne:t order be !lacedC

A6UBTIB T48AT;8BT:

1 re*enc$ D 365? ;o of order

2 A @a$s !!l$ left D 'nit in in"entor$ ?/H Q re*enc$

3 A !!l$ left A lead time

8A; 4U=4I: olding cost !er $ear

A6UBTIB T48AT;8BT: /H ?2 Q safet$ stoc- Q arr$ing cost

8A; 4U=4I: % %=)

;ateria! ode Kear! Usage Unit ost Tota! ost

)J01 10000 0.50 5000

)J02 7100 0.65 4615

)J03 2000 2.50 5000

)J04 5250 2.00 10500)J05 6000 1.75 10500

)J06 2750 0.80 2200

)J07 1500 1.00 1500

)J08 5500 1.85 10175





A6UBTIB T48AT;8BT:

1. er nit &ill decide &hich nit$ falls in %, N 2. 'nit N total cost &ill be sed for calclating %, N

3. 'nit?sage Q !er nit D total cost

;ateria! ode Kear! Usage Unit ost Tota! ost

)J03 2000 2.50 5000

)J04 5250 2.00 10500

A ?)5 (1"G# 155 (*1"*1G#

)J05 6000 1.75 10500

)J07 1500 1.00 1500

)J08 5500 1.85 10175= ))5 (5"/G# *?<?5 (?<"1)G#

)J06 2750 0.80 2200

)J01 10000 0.50 5000

)J02 7100 0.65 4615

/1 (1G# // (1G#

8A; 4U=4I: =econcile the !h$sical in"entor$ balances &ith the

balances as !er boo-.

A6UBTIB T48AT;8BT:

H!ening balance H!ening alance P =ecei!ts A sse JJJ

Fess A ontamination JJJ

%dd A ;ot inclded in oo-s JJJ

%dd A =etrn b$ !rodction @e!tt JJJ

Fess A Brong =ecording JJJ

%dd A eld on behalf of cstomer JJJ

.hsica! =a!ance




8A; 4U=4I: OF earns a gross !rofit of 25M of sales and niforml$ maintains stoc-s at

80M of the !rojected sale of the follo&ing month.

A6UBTIB T48AT;8BT:

G D ale A G

25M D 100M 75M

G D 55000?100Q25 D 13750

ebrar$ D G D 95000?100 Q75 D 71250

arch D G D 55000?100 Q75 D 41250

%!ril D G D 60000?100 Q75 D 45000

a$ D G D 65000?100 Q75 D 48750

6%ening Stock (G of S# .urchase !osing Stock J S

ebrar$ D 57000 P A 33000 D 71250

arch D 33000 P A 36000 D 41250

%!ril D 36000 P A 39000 D 45000

a$ D 39000 P A 45000 D 48750

cost accounting manual (1)

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