cost and management accounts
TRANSCRIPT
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COST AND MANAGEMENTACCOUNTS
BYPROF AJAY PANDEY
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HISTORY
Accounting for management
Management accounting is a collection andpresentation of relevant economic information
relating to an enterprises for planning,controlling and decision making
It serves for the following purposes
Formulation of policy
Planning controllingDecision making
Disclosure of entity
Safe guarding assets
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Role of cost in decision making
Analysis and estimates the profitability.
It assist in setting the prices so as to cover cost and generate anacceptable level of profit
It help in formulation of policies
It helps in formulation of operational efficiency
It help in determination of break even point
It enables to distinguish between profitable and non profitable
Costing checks recklessness and avoids occurrence of mistake
It helps in estimation of and duties by the government
It helps in allocation of actual result with expected result
It helps in investment decision.
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Management Vs cost
Cost Accounting:-
Concern with ascertainment,allocation,distribution of accounting aspectof cost
Its data generally serve as a base to which tools and techniques of
management system Scope is narrow
It deals with collection, analysising relevance, interpretation andpresentation for various problem of management
It is planned by the lower level of hierarchy
It does not include financial accounting or tax accounting
It concerned with short term planning
It is historical in its approach as projects about past
It concerned with monitory aspect only
It is basically concerned with collection, classification and analysis of cost data
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Management Vs cost
Management accounting
It concerned with impact and effect aspect of cost
Its data derived from both cost and financial accounting
Scope is wider It deals with determination of policy and formulation of
plan
It is planned and placed at a higher level of hierachy
It include both financial and tax accounting
It concerned with long term planning It is also concerned with non monitory aspect as well
It concerned with various department , division of thebussiness,
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Types of cost
Classification of cost by : Nature
Material cost:- Cost of material in any form for the purpose of production
Labour cost :- Labour cost includes salary of the permanent or wages of
temporary employee--Cost centre
Direct cost :- It is also known as traceable cost , but in nut shell it is the costwhich can be recovered after sales
Direct material Direct labour
Direct expenses
Indirect Cost It is also known as common cost, which is generally incurredafter the completion of production
Indirect Material
Indirect LabourIndirect expenses
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Types of cost
Function/activities
Total cost
Production cost
Prime cost
Factory cost
Administrative cost
Selling and distribution cost
Research and development cost
Time
Historical Cost:- It is the actual cost determined afteroccurrence of the event
Pre-determined cost :-This cost is of the product which arecomputed in advance
Standard cost
Estimated cost
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Types of cost
Decision making
Marginal cost:-It is defined as the amount at any givenvolume of output by which aggregate costs are changed if thevolume of output is increased or decreased
Differential cost:- It is also known as incremental cost, it isnothing but the difference in the total cost that will arise fromselection of one alternative to other
Opportunity cost:- It is value of benefits sacrificed in favourof an alternative course of action.
Replacement cost :- It is a cost of replacing an asset
at any given point of time.
Relevant cost:- It is a cost appropriate in aiding to makespecific management decision.
Sunk cost:- It is one for which the expenditure has takenplace in the past.
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Other than the discussed costs
there are some more- Normal cost
Abnormal cost
Avoidable cost
Unavoidable cost
Product cost
Traceable cost
Common cost
Controllable cost
Short run/Long run cost
Past/Future cost
Out of Pocket cost
Book cost
Shut Down cost
Urgent cost
Variable cost
Semi-Variable cost
Fixed cost
Semi Fixed cost
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Material
Direct MaterialGoods purchased for
incorporation intoproduct for sale is Rawmaterial. And rawmaterial is also knownas direct material. The
direct material costsare those which can beidentified easily.
Indirect MaterialThe cost incurred on
material used tofurther themanufacturing processwhich cannot be tracedinto an end product are
called indirectmaterial.
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Components of Direct Material
Indirect Tax.
Transportation, Storage,and Delivery
Charges. Quantity Discount.
Trade Discount.
Cash Discount. Packing and Container Charges.
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Illustration
The following details are available in respect of aconsignment of 1250 kg of material-
Invoice Price- Rs 20/kg, Excise Duty- 25% on I/P, Sales tax-
8% on I/P including E/D, Trade Discount- 10% on I/P,Insurance- 1% on Net Price, Delivery Charges- Rs 250.
Cost of Container @ Rs 60/container for 50 kg of material.
Rebate @ 40% if Container is returned within six weekswhich is a normal feature.
One container load of material was rejected on inspectionand not accepted. Cost of unloading and handling [email protected]% cost of material.
Calculate the landing cost of material.
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Method of Pricing Material
Issued FIFO Method.
LIFO Method.
HIFO Method. Simple Avg. Cost Method.
Weighted Avg. Cost Method.
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Inventory Control System
Input Output Ratio:- Input/Output*100. Stock Turnover Ratio:- Cost of Material used
during the period/Avg. Stock of Material during
the period. Economic Order Quantity:- Square root of
2AB/CS, wherein
A= Annual Consumption
C= Cost per unitB= Cost of placing an order
S= Storage and Carrying cost
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Contd.
VED Analysis:- It divides item into three categories in descending order-
V= Vital Item
E= Essential Item
D= Desirable Item
FNSD Analysis:- It shows the moving position of stock or inventory.
F= Fast Moving
N= Normal Moving
S= Slow Moving
D= Dead Stock
ABC Analysis:- It divides the stock into three categories namelyClass A- Constitute the most important class of Inventories
Class B- Constitute intermediate position
Class C- Are quite negligible
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Labour
Direct Labour:- Thelabour cost incurred onthe employees who are
engaged directly inmaking the pdt, theirwork can be identifiedclearly in the process of
converting the rawmaterials into finishedpdt is called directlabour.
Indirect Labour:- Herethe labour are notdirectly involved in the
process of productioninstead of others non-production activity.
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Items of labour Cost
Monetary:- Salaries & Wages and other
Allowances.
Monetary Benefits after sometime in thefuture like EPF, PF, Pension, Gratuity, Bonusetc.
Non-Monetary:- Perquisites.
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Job Evaluation Method
Job Ranking Method.
Grade Description Method (Grades are given
on the basis of education, experience etc). Factor Comparision Method (Mental
Requirement, Skill, Physical Requirement,
Responsibilty, Work Condition).
Point Rating Method (Same as Grade).
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Remuneration Method
Time Rate.
Piece Rate.
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Time Rate
Flat Time Rate Method-Wages= Hrs worked*Wagerate/hr.
High Day System- Wages=
Hrs worked * High day rate. Different Time Rate ( Here
different time rate is fixedaccording to efficiency andskill ).
Halsey Premium Bonus Plan-It is calculated at 50 % of timesaved. Total Wages=( TimeTaken*Hourly rate + 50/100 *time saved * hourly rate ).
Rowan Premium Bonus Plan-(Here no %age is fixed). TotalWages= (Time taken*Hourlyrate ) + Time saved/Std.
time* Time taken* Hour rate. Halsey-Wair Plan- It is
modified system of HalseyPremium Bonus Plan. This iscalled as 33 1/3% - 66 2/3%sharing plan under which
331/3% to employee and662/3 % to employer asbonus. Total Wages= (TimeTaken * Hourly rate) + 331/3 /100 * Time saved * Hrly rate.
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�Accelerated Premium Bonus Plan
Under this the worker will be paid bonus with
increase in its efficiency.
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�Emersons Efficiency Bonus Plan
Efficiency % Bonus
Below 662/3%
662/3% to 100% Over 100 %
Time Wage no bonus
.01% to 20% 20% above basic wages +
1% increase in efficiency.
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Time Rate
Barth Variable Bonus Plan Earnings= Hourly
Rate * Square root of Std. Time * Actual
Time. Bedaux Points Plan = Wages Time Taken *
Hrly rate, Bonus = 75/100 * Bedaux point
saved * point rate.
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Piece Rate
St. Piece Rate Method- Wages= No. of pieces
produced * rate per piece.
Piece Rate with Guaranteed Time ratemethod.
Group Bonus Plans.
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OVERHEADS
The arrangement of items in logical groups
having regard to their nature or purpose to be
fulfilled Allocation of Overhead The charging of
discrete, identifiable items of cost to cost
centre or cost units , where a cost can be
clearly identified with a cost centre or costunit , then it can be allocated at particularcost centre or unit.
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Apportionment of Overhead
The allotment of two or more cost centre of
proportion of the common item of the cost
and the estimated bases of benefit received
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Types of ovrhd Basic of
appor
Rent ,rates heating,repair, depreciation
Lighting and heating
Power hour
Marketing anddistribution
Area occupied (Floorarea)
No. of Points
Horse power of machines
Sale value
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Method of apportionment
A) Direct Method
B) Step down method
C) Repeated Distribution method D) Simultaneous Equation Method
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Method of Absorbtion of
Overhead
A) Production unit method
B) %age of direct cost method
C) % age of direct Labour cost method
D) %age of Prime cost method
E) Machine hour rate method
F) Direct hour rate method
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Absorption
� Production Unit Method (PUM)-: Budgeted orActual Overhead/No. of unit produced orbudgeted. Eg- Budgeted Overhead is Rs
2,00,000 p.a. and budgeted production is 50,000.PUM = 2,00,000/50,000 = 4 per unit.
� %age of Direct Material Cost Method(PDMCM):-Budgeted or Actual Overhead/Budgeted or
Actual Direct Material Cost* 100. Eg- BudgetedOverhead = Rs 1,00,000 , Material Cost = Rs4,00,000, PDMCM= 100000/400000*100= 25%of Direct Labour Cost.
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Absorption
%age of Direct Labour Cost Method(PDLCM):-Budgeted or Actual Overhead Cost/Budgeted orActual Direct Labour Cost* 100. Eg- Budgeted
Overhead =Rs 100000, Actual Direct Labour= Rs500000, PDLCM= 100000/500000*100= 20% of Direct Labour Cost.
%age of Prime Cost Method (PPCM):- Budgeted
or Actual Overhead/Budgeted Prime Cost%100.Eg- Budgeted Overhead- Rs 200000, Prime Cost-Rs 800000. PPCM= 200000/800000*100= 25% of Prime Cost.
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Cost Sheet & Method of Costing
Reconciliation of Cost and Financial a/c.
� Need for Reconciliation 1) The reason fordifference in P/L. 2) To check accuracy of costaccounting. 3) Reliability of cost a/c data. 3)To promote co-ordination and co-operationbetween fin. a/c and cost a/c. 4) To identifythe reason of deviation in profit.
� Method of Reconciliation- a) MemorandumReconciliation a/c. b) ReconciliationStatement.
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A) Memorandum Reconciliation
Account To under absorption in
cost a/c.
To under valuation of
opening stock in cost a/c. To over valuation of closing stock in cost a/c.
By profit as per cost a/c.
By over absorption incost a/c.
By items only charged incost a/c.
-Interest on Own Capital.
-Rent on Own Buildings.
By over valuation of opening stock in cost a/c.
By under valuation of closing stock in cost a/c.
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A) Memorandum Reconciliation
A/C To item that only effect in fin. a/c
- Brokerage.
- Underwriting Commission.
- Donation.
- Income Tax.
- Goodwill written off.
- Preliminary expenses writtenoff.
- Discount on issue of share &
debentures.- Fines and Penalties.
- Bank interest.
To Net profit as per financial a/c.
By income received onlycredited in financial a/c.
-Interest Received.
-Dividend Received.
-Rent Received.-Transfer fee collected.
By profit on sale of assets.
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B)Reconciliation Statement
Profit/Loss as per cost a/c- *Less:- Exp not considered incost a/c- *
Add:- Income not consideredin cost a/c
Trading Profit- *Profit from other activity- *
Income from Investment- *
Previous yrs income- *
Profit on sale of investment- *
Profit on sale of raw materials-*
Abnormal/Non-recurringearning- *
Abnormal losses- *
Expenses relating toprevious yr- *
Lay off wages- *
Differences in
Depreciation- * Delay in payment charges
for bill- *
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Reconciliation
Statement(Contd.) Add/Less in difference in opening & closing
stock as per
A) Financial a/c- *B) Finished goods a/c- *
C) Work in progress- *
P/L as per financial a/cs - ***
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Unit-II, Marginal Costing
Marginal costing is defined as the amount on
any given volume of output by which
aggregate cost are charged if the volume of output is increased or decreased by one unit.
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Diff. betwn Absorption & Marginal
CostingAbsorption Marginal
Total cost i.e both fixedand variable is charged tothe cost of product.
Fixed cost is included in thecost of products.
Profitability is measured by
profit earned by variousproduct or deptt.
Diff btwn sales and totalcost is profit.
Only variable cost is
charged to products. It is not included .
Profitability is judged by
the contribution made by
various products or deptt.
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Marginal Cost Equation
Sales = Variable cost + Fixed Exp +/- P/L.
S-V= C (C=Contribution).
Contribution©= Fixed exp+Profit
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Practical
Determine the amount of fixed expenses from thefollowing:- Sales= Rs 2,40,000, Direct Material= Rs 80,000,Direct Labour= Rs 50,000, Variable Overhead= Rs 20,000,and Profit= Rs 50,000.
Solution- Marginal Cost Equation= S-V=F+PVariable Cost= DM+DL+Variable Overhead
VC= 80,000 + 50,000 + 20,000
V= 1,50,000
Therfore, S-V=F+P
2,40,000-1,50,000=F+50,000
90,000-50,000=F
F= 40,000.
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Contd.
In order to understand the mathematical
relationship between cost, volume and profit,
we need to know the following four concepts- 1) Contribution.
2) Contribution/Sales or Profit Volume Ratio.
3) Break Even Analysis.
4) Margin of Safety.
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1) Contribution
Contribution means difference between the
sales and the marginal cost of sales and its
contribution towards fixed expenses andprofit.
A) Contribution = Selling Price Marginal
Cost Or
B) Contribution = Fixed Exp + Profit Or
C) Contribution = Fixed Exp - Loss
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2) Contribution/Sales or
Profit/Volume Ratio The profit volume ratio studies the
profitability operation of a business andestablishes the relationship between
contribution and sales. P/V Ratio = Contribution/Sales (C/S). Or Fixed
Exp+ Profit/Sales (F+P/S). Or Sales VariableCost/Sales (S-V/S) Or Change in profit orContribution/ Change in Sales.
P/V ratio is very useful and is used for thecalculation of:-
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Contd.
i) BEP= Fixed Cost/P/v ratio.
ii) Value of sales to earn a desired amount of
profit= Fixed cost + Desired Profit/P/v ratio. iii) VC= Sales (1-p/v ratio).
iv) Profit = (Sales * p/v ratio)- FC.
v) FC= (Sales*p/v ratio)-Profit.
vi) Margin of Safety= Profit/p/v ratio.
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Practical
Eg- Calculate p/v ratio from the followinginformation: Selling Price= Rs 10/unit, variablecost= Rs 6/unit, Sales & Profit for two years are-
in 2005 S- Rs 1,50,000 & P- Rs 20,000. In 2006 S-Rs 1,70,000 & S- Rs 25,000. Solution- P/V Ratio= Contribution/Sales*100,
wherein C= S-V, C= 10-6=4, therefore P/V Ratio=4/10*100=40%
Now with the change in profit i.e from 2005 to2006 is Rs 5,000(25,000-20,000). P/V Ratio=Change in Profit/Change in Sales*100.50000/20000*100= 25%.
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3) Break Even Point
BEP is the point of sales where there is no
profit or no loss.
BEP (in units)= Total fixed exp./ Selling price Marginal cost per unit). OR
Total Fixed Exp/Contribution.
Break Even Sales= F*S/S-V Or Fixed Exp/p/v
Ratio.
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Illustration-6
From the following particulars calculate- 1)
Contribution, 2) P/V Ratio 3) BEP in Units &
Rs. 4) what will be the selling price per unit if the BEP is brought down to 25,000 units.
Fixed Expenses- Rs 1,50,000/-
Variable Cost/ unit- Rs 10/-
Selling Price/ unit- Rs 15/-
Solution:- 1) Contribution= SP-VC= 15-10=5, 2)
P/V Ratio= C/S*100= 5/15*100= 331/3%.
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Contd.
3) BEP(in units)= FE/Contribution per unit.
1,50,000/5=30,000. BEP (Rs)= FE/p/v ratio=
1,50,000/ 331/3/100= 15000000/331/3= Rs4,50,000.
4) BEP (units)= F/C= 1,50,000/5= 30,000.
When BEP- 30,000, SP- 15; BEP- 25,000, SP- ?
?= 30,000/25,000*15= Rs 18.
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Illustration-7
From the following data calculate-
1) BEP expressed in amount of sales in
Rupees. 2) Number of units that must be sold to earn
profit of 1,20,000 per year.
3) How many units were sold in order to earn
a net income of 15% of sales.
4) Number of units to be sold to earn a target
profit of Rs 1,05,000 after tax (IT rate is 50%).
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Contd.
Selling per unit= 40
Variable Manufacturing cost/ unit= 22
Variable Selling cost per unit= 3 Fixed Overhead(Factory)= 1,60,000.
Fixed Selling cost is Rs 20,000.
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Solution:-
1) BEP(in units)= FC/SP-MC, wherein FE-
160000+20000= 180000. Selling Price- 40
Variable/Marginal= (22+3)=Rs 25/-
Therefore BEP= 180000/40-25= 180000/15=
12000 units. Therfore in Rs= 12000* 40= Rs
4,80,000.
2) Output to earn profit of Rs 1,20,000/-
FE + Profit/Contribution per unit=
180000+120000/15= 20000 units.
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Contd.
3) Let the no. of unit be N
BEP= F+P/Contribution.
N= 180000+(15/100*N*40)/15 N= 180000/15+N15/100*40
N= 180000+N30/5/15
N= 180000+6N/15
15N= 180000+6N
9N=180000
N= 20000units.
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Contd.
4) Sales in Unit= F+Profit/tax/ Contribution
S= 180000+105000/50000/15
S= 180000+ 105000*2/15 S= 180000+210000/15
S= 390000/15
S= 26000 units.
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Decision making in respect
of BEP The need for a decision arises in business because a
manager is faced with a problem and alternativecourses of action are available. In deciding whichoption to choose he will need all the information
which is relevant to his decision; and he must havesome criterion on the basis of which he can choosethe best alternative. Some of the factors affectingthe decision may not be expressed in monetaryvalue. Hence, the manager will have to make
'qualitative' judgments, e.g. in deciding which of twopersonnel should be promoted to a managerialposition. A 'quantitative' decision, on the other hand,is possible when the various factors, andrelationships between them, are measurable.