management accountingsymfinal 5th 6th12th and 13thngt accounting 1219997610445818 9

7/28/2019 Management Accountingsymfinal 5th 6th12th and 13thngt Accounting 1219997610445818 9

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Management

AccountingSCDL

By

Prof. AUGUSTIN AMALADASM.COM., AICWA.,PGDFM.,B.Ed.


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1.Production

Prime Cost1.Godown

1.canteen

2

Cost of sales

6.sales

5.profit

1.Factory administration

4.Sales and distribution3.General administration

Total cost

Bin card

Stores ledger

Cost calculations/operating activity

+ + =

+

+

Danger

Facilitydepartment

Factory cost/works cost


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FLOW OF CASH/SHORT TERMAND LONG TERM

information

Accounts payable

RAW mATERIAL

ADRLong term loansPreference

Shares

Bad debts

Accounts receivable

DebtorsWork in progress

information

OverheadsLabour

Equityshares

CASH

GDR

information

Information


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FLOW OF CASH - LONG

TERM

ADRLong term loans

Preference

SharesEquityshares

CASHShort term

GDR

land

furniture

investments

goodwill

building

Patent rightsKnow how

Copy right


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FLOW OF CASH-SHORT

TERM information

Accounts payable

RAW mATERIAL

Bad debts

Accounts receivable

DebtorsWork in progress

information

OverheadsLabour

information

Information

Discounting billscreditorsCash creditBank overdraftSale of investments

Bad debts

Bad debts

Issue of long term fundSale of fixed assets

Bank overdraft

cash cash


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marketing

Costing

technical

MANAGEMENT ACCOUNTS

INFORMATIONINFORMATION

INFORMATIONINFORMATION

INFORMATION


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Techniques in managementaccounting

Management Accounting

Cost accounting

Mathematics

operation research

statisticsRatios

Financial accounts

Budgetary control

Cash flow statementFFS Trend percentages

Marginal costing

Variance analysis

Comparitive statement

Common size statements


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Structure of the

syllubusChapter-1

Financial accounting

1. Introduction

2. BasicAccounting

3. Process ofaccounting5. Rectification of

Errors

Final accounts


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Cost Accounting

6. CONCEPTS

7. ELEMENTS OF COST

8. MATERIAL

9. LABOUR

10. OVER HEADS

11. MARGINAL COSTINGtechniques

12. BUDGETARYCONTROL

13.STANDARD COSTINGTECHNIQUES

14. UNIFORM COSTING

CONTROL


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Anything incurred during the production of thegoods or service to get the output into the hands

of the customer The customer could be the public (the final

consumer) or another business

Controlling costs is essential to businesssuccess

Not always easy to pin downwhere costs are arising!

Costs


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Differences between cost accounting/ManagementAccounting/financial accounting

Financial Accounts Cost Accounts Management Accounts

1.Recording

2.Outsiders3.Past

4.Statutory

5.Preparation ofprofit/loss A/c

And balance sheet6.Audit& reporting

1.Estimation and control

2.Internal3. Future

4. Not all organisations

5.Costing records

6.Cost audit once in two

years

1.Collection Analysis

and decision making2.Management

3.Future

4.Non-statutory

5.Using various

techniques6.Supply the requiredinformation

To correct persons ontime


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Users of information

organisation

shareholders

public

Benefactors

governmentbanks

Debenture holders

Loan vendor

Preference shareholderscreditors debtors

customers

dividend

liquidity

Dividend/value in the share market

Interest/return of capital

Interest/return of capital

Timely payment Timely supply

Good product

Less pollution

Good name

tax


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Techniques in managementaccounting

Management Accounting

Cost accounting

Mathematics

operation research

statisticsRatios

Financial accounts

Budgetary control

Cash flow statementFFS Trend percentages

Marginal costing

Variance analysis

Comparitive statement

Common size statements


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See you in the next chapterBRS

Life education

God and Poor man


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Chapter-2: Basics of financial

accounting 1.Concepts

2.system of accounting

3.Types of Expenditure 4.Terms used in financial accounts

5.Double entry / Single entry

6. Depreciation methods 7. Practical consideration relating to

depreciation


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1.concepts& conventions Meaning: Basic assumptions upon which the basic

process of accounting based. a] Business entity concept-

b] Dual aspect concept

c] Going concern concept

d] Accounting period concept

e] Cost concept f] Money measurement concept

g] Matching Concept

Conventions

CoservativismMateriality

Consistency


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a] Business entity concept-

Business is different from the owner

We pass Journal entry when owner contributes

towards capital. When amount / goods withdrawn for personal

use we make an entry in the business

When Income tax paid by the owner out of

business money we make an entry In the booksof accounts.


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b] Dual aspect concept

Every debit has equal amount of credit

Asset =Liability

Liability creates asset

If asset>Liability= profit

If Liability> Assets= loss


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c] Going concern concept

Business will go for at least for areasonable period.

Depreciation is provided based on thisassumption.

If this assumption is not made all Fixed

assets will be valued at realised value likecurrent assets.

d] A ti i d t


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d] Accounting period concept

Fixing time limit for accounts

Profit for the period

It can be one week or two weekor 6months/one year or 5 years

But to find profit we normally consider 12months period

Financial year for income tax point of view 1stApril-31st March of the following year

Calendar yearJanuary to December

Divali to Divali


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e] Cost concept

The cost to the organisation (Actual) isrecorded in the books

Assets are not recorded according to themarket price every year.

Depreciation is calculated on cost notbased on market price

Accounting records may not show thereal worth of the business

Market price may be disclosed with inbracket in the balance sheet


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f] Money measurement concept

Every thing which can be expressed interms of Money is recorded in the books

Beautiful women are working /Handsomeboys working in IBM /Efficient engineersworth 5000 croresHow do you record?.

Good working environment?

Highly motivated employees?


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g] Matching Concept

Matching Cost with revenue

It is used to estimate correct profits

Accrual/ cash basis of accounting Even cash paid /received if it belongs to accounting

period we consider them as expenditure /income

Salary outstanding for the last month?

Income from Investments yet to be received?

Rent received in advance for next year?


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Conventions

Customs and traditions that are followedby the accountants while preparing the

financial statements. Why do we respect elders?

Why do we shake hands?

Why do Young Indians hate receivingdowry?


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Coservativism

To be on the safer side

Expect future losses as current year loss

not future income is treated as currentyear income.

Stock is valued cost price / market price

which ever is lower Making provision for bad debts is based

on this assumptions.


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Materiality

Material impact on profitability areconsidered

Insignificant transactions ignored fromrecording

Pen purchased, pencil purchased?

Wine purchased regularly?


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Consistency

Accounting policies and proceeduresshould be followed consistently

Method of depreciation should be followedconsistently.

Stock valuation- cost/market pricewhichever is lower is consistently followed

If not followed it amount to change in thepolicy of the company


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2.system of accounting

(26)

1.Cash system:

unless cash received /paid inthe accounting year can not

be considered asincome/expenses respectively


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2.Mercantile

Mercantile/Accrual/due concept:

Even cash received/paid but due forpayment/due for receipt (yet to be

received/payable) if they belong to currentaccounting year are considered.

If last year expenditure paid this year?

If you receive/paid in advance ?


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Mercantile love!!!!???

Last year I loved her? Next

year I shall love himdepends on type of bike

model!!!!


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Life Education

If I do not get married to him I willnot be happy- Girl said

If I do not get married to her I willnot be happy- Boy said

If both get married what will happen!!!!


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3.Types of Expenditure(30)

A) Capital expenditure

B) Revenue expenditureC) Deferred Revenue

expenditure


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A) Capital expenditure(30)

Expenditure incurred which will :a) Increase Production capacityb) Increase earning capacityc) Reduction in the cost of operation.

Example: purchase of fixed assetsPurchase of Machinerypurchase of investment

If such expenditure is not to do with the basic

functions of the business such expenditure iscapital expenditure.How do you consider if you buy goodwill, copy right

or patent right?


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Capital expenditure-continue(page-30)

Both tangible and intangible assets included

Intangible assets such as patent right, copy right,technical know-how, francises, goodwill etc.,

Depreciation is provided on fixed assets which

will appear in the profit and loss accountThey appear in the Balance sheet

The life is more than one year

They should not appear in the profit and lossaccount


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Revenue Expenditure(page-30)

Expenditure incurred which will :a) Not Increase Production capacityb) Not Increase earning capacityc) maintain the capacityNo Depreciation is provided on fixed assets which

will appear in the profit and loss accountThey appear in the profit and loss accountThe life is not more than one year

They should not appear in the balance sheet


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Deferred revenue

expenditure(page-30) Deferred means- postponed

Heavy revenue expenditure

Vodafone incurred 200 crores for advertisement after

merger with Hutch It can not be written off within a year

It appears in the balance sheet as last item

Every year some portion is written off in the profit and

loss account. Research and deveopment expenditure, initial

advertisement expenditure, preliminary expenditure areexample


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Terms(page-27)

AccountDebit

Credit

Journal

Ledger

Narration

casting

PolioBroughtforward(B/f)

Trail balance

AssetsLiabilities

Capital

Drawings

Debtors

depreciation

CreditorsBalance sheet

Accountsreceivable

Accounts

payable

Debit note

Credit note

Trade discount

Cash discount

Debentures

Equity shares

Preferenceshares


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Terms used in costing(unit 7)Direct material

Direct labourDirect expenses

Prime cost

Raw material; cost per unit can be

identified, in the individual costcentre;

Engaged in manufacturing process

Hire charges of machinery-directexpenses

Factory

Indirect material

Indirect labour

Indirect expenses +

Works cost

Consumable stores, cotton waste ,oil

Wages to storekeeper, foremen,works managers salary, repairs to

factory building, insurance tomachinery factory lighting

Factory

Indirect material

Indirect labour

Stationary, salaries to accounts staff,postage, internet, bank charges,

audit, administration expenses,depreciation

Administr

ationsection

Factory over heads

Office and administration overheads


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Indirect material

Indirect labour

Indirect overheads

Cost of sales+Profit

Sales

Packing material,samples,salaries to

salespersonnel,commission to salesmanager,warehousecharges,advertisement,repairs todistribution van,discount to

customers

Sales departmentSelling and distribution


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Life education

Lady in a seashore


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5.Double entry / Single entry

Is Accounting based on business conceptor religious concept?

Giving first and receiving later. Giving cash receiving machinery

We consider both aspects such as debit

and credit


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Rules of acccounting

Personal rule/Account-supplier debtors,owner, banker, outstanding wages

Real rule/Account- cash, bank, building,furniture, goodwill, patent rights

Nominal rule/account: income and

expenditure: salary, rent , insurance,commission, internet expenses, cell phoneexpenses.


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Personal rule

Debit the receiver

credit the giver Example: Computer chips purchased on creditfrom wipro

Here credit Wipro as Wipro is the giver of

computer. Sold goods to Meena

Meena is the receiver-debit


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Excercise

Amount collected from debtors?Amount deposited to bank?


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Real rule

These are the accounts of assets and liabilities

Rule:

debit what comes in Credit what goes

out


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Excercise

Goods supplied for cash

Cash withdrawn from bank

Cash withdrawn from bank for personaluse

Land purchased by giving a cheque

Building sold on credit


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Nominal rule

Related to Expenses and income

Rule:

Debit all expenses andlosses

Credit all incomes andgains


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Excercise

Rent paid Rs 50,000

Wages paid Rs.1,00,000

Wages outstanding-Rs.60,000

Commission received-25,000

Discount allowed to customer Rs.1,000

Telephone bills paid-Rs.2500

Shares issued at premium-Rs.2,00,000


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Suitable questions to pass

journal entry If cash transaction, person is not important

Every birth of an account there is a death

of the accountAsk what comes in?

Or what goes out?


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Depreciation Accounting(34)

Reduction in the value of assets

Use factors, time factor,obsolescence are

the factors Statutory requirement

AS(6)

Fixed assets are depreciated Current assets are not depreciated

Land and cattle are not depreciated.


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Depreciation methods

Straight line method Written down value method

Sinking fund method

Machine Hour rate method Unit cost method

Depletion asset method

Depreciation Fund method Sum of digits method

Accelerated depreciation method


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Impact on books

Depreciation Expense Net income Asset

Equity Return on assets Return on Equity Turnover Ratios Cash flow NPV IRR Pay back


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Impact of Tax

Block asset method

Purchase of Asset

Sale of Asset Short term/Long-term Capital asset

Asset used less than 180 days during theprevious year

Asset purchased preceding previous year but putinto use less than 180 days during the currentprevious year


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Divisible profit and

depreciation(Page:39-41) Profit after adequate

depreciation[Sec.205(2)]

Profit after interest-depreciation of thecurrent year- Depreciation of the previousyear- loss of the previous year

Depreciation as per Schedule XIV of theCompanies Act

Section 350calculated on WDV


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Methods(35)

1. straight line method: Cost (- )estimated scrap value

Estimated life in years

2. written down value or diminishing balance method. cost of the asset=1,00,000; rate of depreciation =10%

#Depreciation for the 1st year=1,00,000*10%=10,000

Value at the end of first year= 1,00,000-10,000= 90,000

##Second year depreciation=90,000*10%=9000


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Methods(37)

3. production unit method: Depreciation= (cost-scrap)(units produced during the year)

no of units the machine

can produce during its life

Suppose cost=1,00,000; scrap=5000; total life inunits=10000 units. No. of units produced during theyear=3000

Depreciation=(1,00,000-5000)(3000)/10,000

=Rs 28,500


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Production hour method

It depends on number of hours producedinstead of units produced

We calculate production hour rate Multiply the no.of hours used during the

year with the rate gives depreciation


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Joint factor rate method(38)

Both fixed element and variable elementsare considered

Cost is divided into fixed and variable Fixed part is divided based on time

Variable elements are divided by total

units which gives rate per unit


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Annuity method

C*r

Depreciation= n

1- 1/(1+r) - 1

Depreciation is constant

It depends on future cash inflows It assumes that the capital invested would have

earned interest had been invested otherwise


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Sinking fund method

Amount available would be equivalent tothe original cost

C*r

Depreciation= n

(1+r) 1Calculation of 26380 is wrong. I should be 16380.


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Endowment policy method

Insurance policy is taken to replace theasset.

The depreciation is equal to the insurancepremium paid


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Renewal method(39)

When asset is renewed full amount is

written off.


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Bye-bye to chapter-2

Chineese tree

Life education


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Chapter-3

Journalising

Ledger (subsidiary books)

Posting

Trial balance

Trading and profit and loss account

Balance sheet

Final Accounts Adjustments


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Direct expenses

Indirect expenses Opening stock given in adjustment

Closing stock given in the adjustment

Wages outstanding in trail balance

Income from investment due given in trail balance Meaning of adjustment

Income tax

Life insurance premium

Goods drawn by the owner


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Domestic house hold Expenses

Income tax refund

Income from house property

Accrual basis of Accounting Un expired insurance

Income received in Advance

Interest on Capital

Provision on Doubtful debts provision for Discount on debtor

Deffered revenue expenditure


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Reserve Fund

Goods Distributed as free sample

Managers Commission

Goods on sale or approval basis

Hidden adjustments


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Terms used in final accounts

Trading account

Profit and loss account

Profit and loss appropriation account Balance sheet

Capital

Long term liabilities Current liabilities

Fixed assets


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Terms

Investments

Current assets

Adjustments

Closing stock

Depreciation

Outstanding expenses

Prepaid expenses


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Terms

Abnormal expenses

Goods distributed as free sample

Goods sent on approval

Commission payable to manager


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Important adjustments In

various problems Illus:2 page-77 i) repairs tp plant ii)Income

tax of X

Iii) Provision for bad debts Iv) adjustment no.b,e and f

V) calculation of works managers

commission and general managerscommission


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Bank reconciliation statement

Cash book Pass book Cheques issued but not debited Cheques deposited but not cleared Bank charges entered in the pass book Income from investments entered in the pass

book Electricity, water, telephone , internet bills paid

directly by bank entered in the pass book Clerical errors in the pass book or cash book


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Exercise:-11 page121

Q.2page-116 and questions no.6 page-119 .


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Life education

Child likes to hug in the

evening

Ch t 5 R tifi ti f


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Chapter 5: Rectification of

Errors(page-126) Reasons for errors in accounting:

1.error of omission

2.error of commission 3.Error of principle

4. Compensating error


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Errors not affecting trial balance

1.error of omission

2.Error of principle

3.compensating error 4. complete omission

5.error of commission


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Suspense Account

If trial Balance does not tally ie debit is notequal to credit then temporarily to close

down we open a suspense Account on thedeficit side known as suspense account.


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Rectification: Steps

Rectify only the account in which error iscommitted.

Book means complete set of accountsAccounts means mistake only in the

account

If suspense account is given and if oneside error suspense account has to beeither debited or credited accordingly.

Problems in errors Problem:7


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Problems in errors Problem:7page-139

1. Drawings A/c debitto General expenses a/c

credit

2. Sales Account debit

to Machinery A/c credit

3. Rent a/c debit

To land lord a/c

4. Repairs a/c

To Building

5. Suspense a/c debitTo Harish a/c

To Cash A/c

2500

1300

160

245

500

2500

1300

160

245

250

250


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Problem:6 page-138particulars amount amount

a.Machinery Dr.

To Purchases a/c

To Wages a/c

b.Suspese a/c Dr.

to Mohan a/c

Cash a/cDr.

To Mohan

1100

2700

400

700

400

2700

400

particulars


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particulars

Mohan a/c Dr.

To sales susp.

c. Suspensea/c

ToYogesh a/c

d.Furniture a/cdr

To P/L a/c

e.Machi.a/cdr.To Purchases

To trade exp.

700

900

600

18200

700

900

600

17000

1200


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Life education

Chapter 6 Cost Acco ntanc


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Chapter-6 Cost Accountancy-

terms Cost centre

Impersonal and personal cost centre

production and service cost centre Concept of cost

Chapter 6 Cost Accountancy


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terms Cost centre




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The bottom line is that theorganization

is out "hard" or "real" money.[1Examples:

Hardware and software purchases Professional services

Maintenance Labor

Medical benefits Insurance

Internet Service Provider fees

Wide area network fees

Economic Costs


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Economic Costs

Economic costs are "opportunity costs."Instead of doing X, you had to do Y. Theseare not hard-currency costs and it is

dangerous to lump them into the cost-savings category with accounting costs

because their effects will not necessarilyshow up on the bottom line.



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terms Cost centre



Economic Costs


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Economic Costs


dangerous to lump them into the cost-

savings category with accounting costsbecause their effects will not necessarily

show up on the bottom line.



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terms Cost centre




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The bottom line is that theorganization

is out "hard" or "real" money.[1Examples:

Hardware and software purchases Professional services

Maintenance Labor

Medical benefits Insurance

Internet Service Provider fees

Wide area network fees

Economic Costs


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Economic Costs






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Terms in costing

Accounting Costs : These are coststhat impact an organizations

general ledger.For example, buying a product results ina chain of events wherein a purchase

order is processed,a product/service is received, then aninvoice arrives from the vendor

Economic Costs


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Economic Costs






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Example :

Reducing firefighting on incidents related toproblematic changes is robbing resources fromplanned work (projects) and applying them to

unplanned, reactive work (incidents). If you say that better change management

reduced unplanned work by 20 percent, that isnot an accounting cost savings, but it did freeup resources to work on projects.

It would be wise to identify what projectprogress was enabled through the action.


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Example-2

By training users, incidents handled bythe service desk decreased 5 percent.

Again, this is not an accounting costsavings unless a resource is dismissed,thus impacting labor, benefits and so on.

mixing accounting and


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mixing accounting and

economic cost mixing accounting and economic cost

savings together and instead wrap both

types of costs with a business caseexplaining the benefits of the proposal.

Overhead


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Overhead

These are indirect costs that are absorbedby IT. For example, a portion of building

rent is often allocated to IT based on somecost driver such as percent of floor spaceallocated.

illustration


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illustration

If IT occupies 10 percent of a building,then accounting will likely allocate 10

percent of the rent to IT. This overheadcost must then be factored into theservices that IT offers in order for propercharge backs, pricing and so on

Sunk Costs


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Sunk Costs

These are costs that, once spent, cannotbe Recovered. If something is purchased

that cannot be returned or sold off, thenthat item should be considered a sunkcost.

Most of the times they are irrelevant totake future decision.

Cost Drivers


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Cost Drivers

When determining costs, it is worthwhile tounderstand what drives the costs. In other words,if you do X, then you see a correspondingincrease in cost Y. To illustrate, if you must buy aPC and software licenses for each new person

hired, then the addition of new users is one ofthe cost drivers for the associated PC andsoftware expense accounts.

Salvage Value/Salvage


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Salvage Value/SalvageCosts

If you can sell an asset for more than its book

value, then you are actually booking another formof income. On the other hand, if the salvagevalue is lower than the book value, thenaccounting will need to write the asset off.

If you have to pay someone to take things awaydue to hazardous materials laws, then you mayeven incur expenses relating to the disposal ofthe asset.

Differential cost


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Differential cost

Increased or decreased cost due to theincreased or decreased volume ofoperations.

Additional cost due to operation.

Normal cost and abnormal


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Normal cost and abnormalcost(150)

Normal costs incurred at a certain level of

outputAbnormality in cost due to unforeseen

situations

Relevant cost and relevant benefit


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Relevant cost and relevant benefit

Required for decision making

Costs that are affected by by the decision

Costs and benefits that are independent of a decision are

not relevant and need not be considered. Future cash inflows and future outflows are relevant.

Sunk costs are irrelevant

Allocated common costs are irrelevant

Opportunity costs are relevant (shadow price) Incremental costs are relevant incremental benefits are

relevant.

Avoidable costs are relevant and unavoidable costs areirrelevant for decision making.


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Relevant and irrelevant

Five engineers already employed on monthlysalary but will not be sent out if not employed inan another project. The salary paid to those

engineers are relevant or irrelevant to estimatethe price for the project?

Two more engineers are selected exclusive to

the new project-are the costs relevant to takedecision for new project?


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Direct and indirect costs

Direct Costs are costs that can be specificallyand exclusively identified with the particularobject (product)

Salary of processing associate Indirect Costs are costs that can not be

specifically and exclusively identified with theparticular object (product)

Salary of team leader Direct costs are allocated. Indirect costs are

apportioned.


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product costs Period costs

Product cost are those costs that are identifiedwith goods purchased or produced for resale.

Period costs are those costs that are notincluded in the inventory valuation and as aresult are treated as expense in the period inwhich they are incurred.

Product costs will generate income.but periodcosts do not generate income.

Treatment of period andproduct costs


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product costs

Product code

Period code

Manufacturing cost

Non manufacturing costs

Recorded as an assetIn the balance sheet

And becomes anExpense in the P/L

A/CWhen the product

Is sold

Recorded as anExpense in the P/L A/c

In the currentAccounting year

unsold

Variable, fixed, semi variable and


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a ab e, ed, se a ab e a dsemi fixed

Cost (Rs.) Variable cost

cost(Rs.)

Out put(units)

fixed cost

Activitylevel(units)

S fi d


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Step fixed cost

Total

Fixed cost

Activity level(Units)

Variable fixed semi variable and


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Variable, fixed, semi variable andsemi fixed.Fixed cost Supervisors salary, leasing

charges for cars, depreciation onbuilding

In the long run all costs arevariable.

Variablecosts

Semivariable

cost

direct material, direct labour anddirect expenses.

Both fixed and variable elements inthe costs.

Incremental costs and Marginal


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Incremental costs and Marginalcost

Differential costs and revenues are thedifference between costs and revenues for

the corresponding item under eachalternative being considered.

Marginal cost/revenue - one extra unit ofoutput cost/revenue.


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Red Car Inc Cost of Goods Manufactured


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Red Car, Inc. Cost of Goods ManufacturedSchedule For the Year Ended March, 20xx

Direct materials usedBeginning raw materials inventory

Add: Cost of raw materials purchased

Total raw materials available

Less: Ending raw materialsinventory

Total raw materials used

direct labor

Manufacturing overheadIndirect materials

Indirect labor

C ti ti


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Continuation

Depreciationfactory building

Depreciation-factory equipment

Insurance-factory

Property taxesfactoryTotal manufacturing overhead

Total manufacturing costs

Add: Beginning work-in-process inventory

Less: Ending work-in-process inventory Cost of goodsmanufactured

ADVANTAGES OF COST


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ADVANTAGES OF COSTACCOUNTING

It reveals profitable and unprofitable activities.

It helps in controlling costs with specialtechniques like standard costing and budgetarycontrol

It supplies suitable cost data and other related

information for managerial decision making suchas introduction of a new product, replacement ofmachinery with an automatic plant etc

ADVANTAGES OF COST


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ADVANTAGES OF COSTACCOUNTING It helps in deciding the selling prices, particularly during

depression period when prices may have to be fixedbelow cost

It helps in inventory control

It helps in the introduction of a cost reductionprogramme and finding out new and improved ways toreduce costs

Cost audit system which is a part of cost accountancyhelps in preventing manipulation and frauds and thus

reliable cost can be furnished to management

ESSENTIALS OF A GOOD COST


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ACCOUNTING SYSTEM

The method of costing adopted. It should be suitable tothe industry

It should be tailor made according to the requirements of

a business. A ready made system can not be suitable It must be fully supported by executives of various

departments and every one should participate in it In order to derive maximum benefits from a costing

system, well defined cost centres and responsibility

centres should be built within the organisation



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ESSENTIALS OF A GOOD COSTACCOUNTING SYSTEM

controllable and uncontrollable costs of eachresponsibility centre should be separately shown

cost and financial accounts may be integrated in order toavoid duplication of accounts

well trained and educated staff should be employed tooperate the system

It should prepare an accurate reports and promptlysubmit the same to appropriate level of management sothat action may be taken without delay

resources should not be wasted on collecting andcompiling cost data not required. Only useful costinformation should be compiled and used wheneverrequired.



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SS S O GOO COSACCOUNTING SYSTEM-continues

It helps in deciding the selling prices, particularly duringdepression period when prices may have to be fixedbelow cost

It helps in inventory control

It helps in the introduction of a cost reductionprogramme and finding out new and improved ways toreduce costs

Cost audit system which is a part of cost accountancyhelps in preventing manipulation and frauds and thusreliable cost can be furnished to management

Lif d ti


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Life education

Threat is an opportunity

Strength is your weakness Strengthen your weakness

Unit 7 Elements of costs


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Unit-7 Elements of costs

Learning:

Cost sheet

Elements of cost Operating cost

Operating profit

Non operating profit

Terms used in costing(unit7)


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7)Direct material

Direct labour

Direct expensesPrime cost

Raw material; cost per unit can be identified, in theindividual cost centre;

Engaged in manufacturing process

Hire charges of machinery-direct expenses

Factory

Indirect material

Indirect labour

Indirect expenses +

Works cost

Consumable stores, cotton waste ,oil

Wages to storekeeper, foremen, works managers

salary, repairs to factory building, insurance tomachinery factory lighting

Factory

Indirect Office and

administration overheadsmaterial

Indirect labour

Indirect expenses +

Total cost

Stationary, salaries to accounts staff, postage,internet, bank charges, audit, administration

expenses, depreciation

Administration

section

Factory over heads

Packing material Sales departmentSelling and distribution


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Indirect material

Indirect labourIndirect overheads

Cost of sales+

Profit

Sales

Packing material,samples,salaries to

salespersonnel,commission to salesmanager,warehouse

charges,advertisement,repairs todistribution van,discount tocustomers

Sales departmentSelling and distribution

Marginal costing cost sheet


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Marginal costing cost sheet

Sales Revenue xxxxx

Less Marginal Cost of Sales Opening Stock (Valued @ marginal cost) xxxx Add Production Cost (Valued @ marginal cost) xxxx Total Production Cost xxxx Less Closing Stock (Valued @ marginal cost) xxx) Marginal Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxx Marginal Cost of Sales (xxxx)

Contribution xxxxx Less Fixed Cost (xxxx) Marginal Costing Profit xxxxx

ABSORPTION COSTING PRO-


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FORMA

Sales Revenue xxxxxLess Absorption Cost of SalesOpening Stock (Valued @ absorption cost) xxxxAdd Production Cost (Valued @ absorption cost) xxxx

Total Production Cost xxxxLess Closing Stock (Valued @ absorption cost) (xxx)Absorption Cost of Production xxxxAdd Selling, Admin & Distribution Cost xxxxAbsorption Cost of Sales (xxxx)Un-Adjusted Profit xxxxx

Fixed Production O/H absorbed xxxxFixed Production O/H incurred (xxxx)(Under)/Over Absorption xxxxxAdjusted Profit xxxxx

Reconciliation Statement for Marginal Costing


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and Absorption Costing Profit

$ Marginal Costing Profit xx

ADD

(Closing stock opening Stock) x OAR xx = Absorption Costing Profit xx

Where OAR( overhead absorption rate) =Budgeted fixed production overheadBudgeted levels of activities

Cost sheet


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Cost sheet

Prime cost+

Factory over heads

Factory cost/works cost+

Administration over heads Office cost+

Selling overheads

Total cost

Profit sales

5.sal

4 fit3.Sales and distribution2.General administration


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Factory cost/

works cost

1.Production

Prime Cost

1.Godown

1.canteen

Cost of sales

les4.profit


Total cost

Bin card

Stores ledger


++ =

+

+

Operating activity Non- operating activity


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Dealers in furniture

Dealers in housesMy house is for sale

My furniture is for sale

?

?

Profitsareo

perating

profits

Nonop

erating

profit

Operating/ Non operating


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Operating (OP) Non operating (NOP)1.Profits derived bydoing basic functions

2.Efficiency depends onoperating profit

3.Gross Profit- Office

and administrationoverheads- selling anddistributionoverheads=OP

1.Profits derived otherthan basic functions

2.We should notconsider NOP to studyefficiency except on saleof company/firm.

3. Sale of asset-cost ofsuch asset=NOP

BPOs


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BPOs

Self-less service canteen

Self help roomWhat activity?


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Exercise Number: 3 page-175 unit 7.

Exercise Number: 6 page-177 unit 7

5.sale4.Profit

3.Sales and distribution2.General administration

+

5000+20 257 16031


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Factory cost/

works cost

Prime Cost=R.material=40,000D. labour=12,000

Components=50,000Primary packing=50001.Godown

1.canteen

Cost of sales=1,76,338

es

44084


Total cost=1,60 307

Bin card

Stores ledger


+=

+

+

p.3

Consumable=4000

Royalty=8000FOH=16050

5000+20,257 16031

2,20,422

Exercise:6/177

particulars Units 500 @old price

Units500@current

Units 600


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p @price)

Direct Material[(40,000*600/500)*120/100]

Direct labour[(60,000*600/500)*105/100]

Prime Cost

Manufacturing Cost[25% on prime cost]

Factory cost

Administration cost:

Management expensesRent

General Expenses

TOTAL COST

Selling expenses

Cost of salesProfit [20%on sales=25% on cost]

sales

40,000

60,000

1,00,000

25,000

1,25,000

30,0005,000

10,000

1,70,00015,000

1,85,00015,000

2,00,000

48,000

63,000

1,11,000

27,750

1,38,750

30,0005,000

10,000

1,83,75015,000

1,98,75049,688

2,48,438

57,600

75,600

1,33,200

33,300

1,66,500

30,000

5,000

10,000

2,11,50015,000

2,26,50056,625

2,83,125

Material cost-stages in the movement of material


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1.Purchase requisition

3.Purchase order

4.Receipts and inspection

5.Cheking invoice

6.Accounting for purchase

7.Receipt of material

8.Issue of material

9.Return of material

10.Transfer of material

2.Selection of source of supply

Valuation of material movements


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Basic cost

Less: Trade discount

Add: Container cost

Add: Sales tax-on basic cost after tradediscount

- on container

Add: insurance

freight Less: Credit for drums

Total cost

Add: Stores overhead on total cost

Unit cost = Overall cost /No. of Units-normal loss units

Normal loss and abnormal loss


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Normal loss and abnormal loss

Effective cost per unit=

Costs incurred before abnormalloss period-recovery from normal loss units

Number of units-normal loss units

Abnormal loss units * Effective cost per unit=Abnormal loss

example Page 200 unit-1


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example

Units purchased= 10,000 Costs of purchases=1,00,000 Due to leakages number of units lost=50 Loss of units due to breakages=2000;

insurance claim initiated. Effective cost per unit=1,00,000-0/10,000-

50 =Rs.10.05025Abnormal loss=2000*10.05025=20100.50 How do you calculate normal loss?

Calculate normal loss?


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Calculate normal loss?

We do not calculate normal loss but tocalculate effective rate per unit weconsider normal loss units and recoveryfrom normal loss.

Valuation of issues


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Valuation of issues

FIFO

LIFO

Average price method Weighted Average method

Highest In First method

Specific price Standard Price

Points to remembered for stock


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valuation under various methods

1.All the methods used for the calculation ofissues to production

The costs of purchase and other related costsshould be passed on to customers

Any deficit in stock taking to be consideredas issue

Any excess will be considered as purchase at thelatest price

Goods returned from production to be valued at theprice of issue.

ExampleMaximum levelD i ti

FIFO


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Date Particulars Receipts Issues Balance

Qty. Rate Rs. Qty Rate Rs. Qty Rate Rs.

1stJan08

5th

6th

8th

Op. balance

Purchase

Purchases

Issue

100 7.00 700

200 8.00 1600

250 ?

500 6.00 3,000

Stores ledgerMaximum levelMinimum level

Re-order level

DescriptionUnit

Location

ExampleMaximum levelD i ti

LIFO


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1stJan08

5th

6th

Op. balance

Purchase

Issue

100 7.00 700

500 6.00 3,000


Re-order level

DescriptionUnit

Location

Stores ledger Maximum levelDescription

Average price method


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1stJan08

5th

6th

Op. balance

Purchase

Issue

100 7.00 700

500 6.00 3,000

Stores ledger Maximum levelMinimum level

Re-order level

DescriptionUnit

Location

Maximum levelDescription

Weighted Average method


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1stJan08

5th

6th

Op. balance

Purchase

Issue

100 7.00 700

500 6.00 3,000


Re-order level

DescriptionUnit

Location

Techniques of Inventory control(U i 8 211)


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(Unit 8-page 211)

1. Economic Ordering Quantity

2. Fixation of inventory levels

3. Inventory Turnover 4. ABC Analysis

5. Bill of Materials

6. Perpetual Inventory system

1.Economic ordering Quantity(212)


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EOQ=Root of (2AO/C)

Where A=annual demand in units

O= Cost of placing order (cost fromthe time we order till we receive goods)

C= Carrying cost per unit per year

(measured in terms of percentage on costper unit)

Assumptions: normally on an average ofthe units are in the store all the time.

Exercise:14 page 248


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Exercise:14 page 248

EOQ=Root of (2AO/C)

= Root of(2*600*400/(40%*15)

= Root of 80000

=282.845 units Total cost of inventory

annually=(600*15)+(3*400)+(1/2*282*40%*15)=9000+1200+846

=Rs.11,046.

If 10% discount is given cost per unit=15-(10%of 15)=13.5T t l


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Total

cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5) = 8100+800+1350 = Rs.10,250 Advise: Purchase 500 units as annual cost of

inventory is cheaper.

If safety stock is required at any point of timein order to calculate holding cost we add thesafety stock with the of EOQ stock.

Holding cost includes storage and intereston locked up capital

If 10% discount is given


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If 10% discount is given cost per unit=15-(10%of15)=13.5

Total cost=(600*13.5)+(2*400)+(1/2*500*40%*13.5) = 8100+800+1350

= Rs.10,250 Advise: Purchase 500 units as annual cost of

inventory is cheaper. If safety stock is required at any point of time in

order to calculate holding cost we add the safety

stock with the of EOQ stock. Holding cost includes storage and interest on locked

up capital, handling, insurance of godown

2. Fixation of inventory level(218)


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Re-order level=Maximum leadtime

*Maximum usage Minimum level= Reorder level-(Normal

usage*Normal lead time) Maximum level=Re-order level+ Re-order qty-

(Minimum usage*Minimum Lead time Average level=(Maximum level+ Minimum

level)/2 Danger level=Normal usage*Lead time for

emergency purchases

Note:Re-orderquantity=EOQ

See page-220 and 223 illustrations


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See page 220 and 223 illustrations

EOQ is calculated inorder to find Re- orderquantity

Re-order quantity is different from Re-order level

Sometimes minimum stock=safety stock

See page 222

3. Inventory (Stock) turnover ratio


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It explains operating efficiency of theorganisation.

How quickly raw material are convertedinto finished goods and also gives numberof days of conversion.

It explains number of times in a year rawmaterial are converted into finished goods

3.Stock turnover ratio=

Page-225


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3.Stock turnover ratio

Value of materials consumed in a year

Average stock

Average stock= (Opening stock+ Closing Stock)/2

ABC analysis

AlwaysBetterControl

ControlAlwaysBetter


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C a a ys s

Classify the various inventories according totheir importance(70% of the value)

A-High cost per unit but less quantity (70% ofthe value)-large investment-effective control onsupply

B- Moderate price per unit but moderate quantity(20% in value)

C-less cost per unit but large quantity(10% invalue)-control on availability of material

Better

Control Always

5. Bill of materials


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Bill of materials is a list ofmaterials required for a

job.. It also indicatesquantity required for each

item. It helps in cost

computation, material tobe purchased bypurchase department,that the order to beexecuted indicator.

6.Perpetual inventory controlsystem(page 229)(Unit number 8)


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system(page-229)(Unit number 8)

Stocks are recorded as soon as placed in thegodown and also recorded immediately as soonas stock is taken out.

They are recorded in Bin card and stores ledger.

It helps if insurance claim initiated and also fixingvarious level of stock,adjusted for discrepancies

and periodical profits are estimated.

Problems-clarification


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Problem number-02,10,16 from exercise

Page-243,246 and248 respectively in unit-

1

Labour costs-unit 9 page-252


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p g

Selection,training,wagesheet preparation

Recording, time keeping and time booking

Analyse wage sheet, reports to mgt.

Personnel department

Time keeping department

Costing department

Methods of remunerating workers(unit 9 page 258)


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(unit 9 page-258) 1.Time basis 2.Result basis 3. Bonus systems

4. Indirect monetary remuneration

5. Non-monetary incentives

Group

Individual

Profit sharing Co-partnership

Payment by results(page-261)

a) Straight piece rateN it * it d d


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Payment by results

No. units*units produced

b) Piece rate withguaranteed time rate

c) Differential piece rate

1.Taylor differential piece

Rate(page262)No guaranteed wageBelow standard-low piece rate

Above standard-high piece rate

2.Merrick differential rate planNo guaranteed wage

Efficiency Piece rate

Upto 83% NormalUpto 100% 110% of normal rate

Above 100% 130% of normal piece

3. Gantt task bonusBelow standard

-time rateAt standard-time wage+

increase in rateAbove std

.-High piece rate

Individual Incentive systems


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Halsey premium system

50-50AH* HR+ (Time saved/2)*

HRTime rate guaranteed

Halsey-weir system

1(W):2(ER)

AH* HR+ (Time saved/3)*HR

Time rate guaranteed

Rowan planThe more you save

The more the incentives

(AH*HR)+(SH-AH)/SH*(AH*HR)

W ER

AH-Actual hoursSH-Standard Hours

HR-Hourly rate

Other Wage paymentsystem


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Accelerated premium system2

Wage (Y)=.8*XWhere Y=Earnings

X=Efficiency

Group Incentive schemeIndirect monetarybenefits(271)


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benefits(271)

Profit sharing-Bonus-8.33% of wagesstatutory bonus.Maximum-20%

Copartnership-ESOP

Problems


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Page-292; prob-6 &9

Page-293; prob-11

Overheads-unit 10 page-295


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p g

Classification of over heads Indirect material, indirect labour, indirect

expenses

Factory overheads, administration over head,selling and distribution over heads Fixed overheads, variable overheads, semi

variable overheads Controllable and uncontrollable overheads Normal and abnormal overheads.

Classification(206)


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( )

Element wiseIndirect material,indirect labour,

indirect expenses

FunctionFactory

administration, selling and

distribution over heads

Variability

Fixed,variable,semi variable

overheads

ControllabilityControllable andUncontrollable

overheads

NormalityNormal andAbnormaloverheads.

Primary apportionment(page-299)

C h d b l t d ti


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Common over heads belong to production

and service departments are apportionedon the following basis or any other suitablebasis:

1.Canteen-no.of workers2.Rent-Area

3.Power-HP/KWH4.General lighting-light points5.Depreciation-value of

assets

1.Supervision-no.of employees

2.Telephone expenses

-no.of calls made3.Fire insurance

-value of stock/asset

Secondary apportionment

Apportionment of service department cost


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Apportionment of service department cost

centre to production department

Methods of

Apportionment(Page303)

SimultaneousEquation method

RepeatedDistribution method

Overhead absorptionrate(page-307)


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Amount of overhead/direct Material cost or/Direct Wage cost or

/Prime Cost or/labour hours or/Number of machine

Hours

Prob.-pages 309,336


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Unit-11Marginal Cost-Volume-Profit

Analysis and RelevantCosting

Marginal cost, Budgeting andstandard costing


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standard costing

Presented by

Prof. L. Augustin Amaladas

M. Com., AICWA.,PGDFM.,B.ED.

6th January 2008

IBM

Learning Objectives


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1. How is breakeven point computed and what

does it represent?

2. How do costs, revenues, and contribution

margin interact with changes in an activity

base (volume)?

C6

Continuing . . . Learning


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3. How does cost-volume-profit (CVP) analysis

in single-product and multiproduct firms

differ?

4. What are the underlying assumptions of CVP

analysis and how do these assumptionscreate a short-run managerial perspective?

C6

Objectives



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5. How do quality decisions affect the components

of CVP analysis?

6. What constitutes relevance in a decision-making

situation?

C6

Objectives



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7. How can management best utilize a scarce

resource?

8. What is the relationship between sales mix

and relevant costing problems?

Objectives

C6

Continuing . . . Learning Objectives


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9. How can pricing decisions be used to

maximize profit?

10. How can product margin be used to

determine whether a product line should be

retained or eliminated?

C6



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11. How are breakeven and profit-volume

graphs prepared? (Appendix 1)

12. What are the differences between

absorption and variable costing? ( Appendix

2)

13. Why is linear programming a valuable tool

for managers? (Appendix 3)

C6

Objectives

The Breakeven Point (BEP)


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The level of activity, in units or dollars,

at which

REVENUES = COSTS

Basic Assumption: RelevantRange


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Company is operating within the relevant

range of activity specified in determining therevenue

and cost information used.

Total

$

Act iv i ty L evel

RelevantRange

Basic Assumption: Revenue


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Total revenue fluctuates in direct proportion to levelof activity or volume. On a per unit basis, the selling

price remains constant.

Total

$

Act iv i ty L evel

Basic Assumption: VariableCosts


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Total variable costs fluctuate in direct proportion tolevel of activity or volume. On a per unit basis,

variable costs remain constant.

Total

$

Act iv i ty L evel

Basic Assumption: Fixed Costs


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Total fixed costs remain constant relative to activitylevel changes. Per-unit fixed costs decrease as

volume increases and increase as volume decreases.

Total$

Activity Level

Basic Assumption: Mixed Costs


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Mixed costs must be separated into variable and fixedelements.

Total$

Activity Level

Cost Behavior Example


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Selling price per ice bucket $40

Variable production cost per ice bucket $20Variable selling cost per ice bucket 4

Total variable cost per ice bucket $24

Fixed production costs $100,000

Fixed selling and administrative costs 20,000

Contribution Margin Per Unit


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Contr ibut ion margin per un i tequalsselling price per unit less variable cost

per unit.

sp -vc = cm

$40 - $24 = $16

Contribution Margin Ratio


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Contr ibut ion margin rat iois per-unit

contribution margin divided by sellingprice, or total contribution margin dividedby total sales dollars.

cm/sp=cm%

$16 / $40 = 40%

Breakeven Point


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Breakeven pointis the point at which

profits are zero because total revenuesequal total costs, or

Total revenues = Total variable costs + Total

fixed costs

Continuing . . . Breakeven Point


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Total fixed costsIn units = ---------------------

CM per unit

Total fixed costsIn sales dollars = ---------------------

CM ratio

Continuing . . . Breakeven Point


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$120,000In units = ----------- = 7,500 ice buckets

$16

$120,000In sales dollars = ----------- = $300,000

.40

CVP Analysis: Fixed Amount ofProfit Before Taxes (PBT)


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Total fixed costs + PBTIn units = ------------------------------

CM per unit

Total fixed costs + PBTIn sales dollars = ------------------------------

CM ratio

CVP Analysis: Fixed Amount ofProfit Before Taxes (PBT)


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$120,000 + $64,000Break evenIn units=------------------------ = 11,500 buckets

$16

$120,000 + $64,000In sales dollars =------------------------ = $460,000

.40

CVP Analysis: Variable Amountof Profit Before Taxes


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Assume PUBT desired is 25% on sales

Therefore, PUBT = .25 ($40) = $10

Total fixed costsSales in units =---------------------------

CM per unit - PUBT

$120,000

Sales in un its =---------------= 20,000 ice buckets

$16 - $6

CVP Analysis: Variable Amountof Profit Before Taxes


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Assume PUBT desired is 25% on sales

Therefore, PUBT = .25 ($40) = $10

Total fixed costsSales in $ = ---------------------

CM% - PUBT%

$120,000

Sales in $ =---------------=$800,000

.40 - .25

Income Statement


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Dollars Percentages

Sales $800,000 100%

Variable costs 480,000 60%

Contribution margin$320,000 40%

Fixed costs 120,000 15%

Income $200,000 25%======= ==

CVP Analysis - Multiple Products


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Ice Serving

Buckets Sets

Selling price $40 $24

Variable cost 24 12

Contribution margin $16 $12

Contribution margin ratio 40.0% 50.0%

Sales mix* 80.6% 19.4%

*5:2 ratio

Continuing . . .CVP Analysis -Multiple Products


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Ice Serving

Buckets Sets

Contribution margin ratio 40.0% 50.0%

Sales mix* 80.6% 19.4%

Weighted contribution margin 32.2% 9.7%

Contribution margin ratio per bag 41.9%

*5:2 ratio

Continuing . . . CVP Analysis -Multiple Products


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Total fixed costsBEP in sales dollars = -----------------------

CM ratio per bag

($120,000 + $30,000*)BEP in sales dollars = ----------------------------

.419

= $357,995

* $30,000 of additi onal f ixed cost is incur red to

produce both uni ts

Scarce Resource -- MachineHours


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Ice Juice

Crushers Extractors

Selling price per unit $15 $12

Variable production cost per unit:

Direct materials $3 $3Direct labor 4 2

Variable overhead 3 1

Total variable cost 10 6

Unit contribution margin $5 $6

Units of output per machine hour 30 20

Contribution margin per machine hour $150 $120

Sales Mix Decisions


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How many of each product?

Relevant Costs inProduct Line Decisions


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Revenues associated with product

Variable costs associated with product

Avoidable fixed costs

Consider product margin

Revenues - Variable costs - Avoidable f ixed co sts

Exhibit 6-12: Partial Product LineIncome Statement


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Electric

Skillet

Sales $75,000

Total direct variable expenses 43,750Total contribution margin $31,250

Total fixed expenses* 39,500

Net loss ($8,250)

*Fixed expenses:Avoidable fixed expenses $25,000

Unavoidable fixed expenses 4,500

Allocated common costs 10,000

Total $39,500

Exhibit 6-13: Product Margin forthe Electric Skillet Product Line


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Electric

Skillet

Sales $75,000

Total direct variable expenses 43,750

Total contribution margin $31,250

Avoidable fixed expenses 25,000

Product margin $6,250

CVP Graph


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Total$

Volume

Total Costs

Total RevenuesBE

P

Profit-Volume Graph


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BEP

Fixed Costs

Volume

Profit or Loss

Total$

Absorption Costing


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Also known as full costing

Treats costs of all manufacturing components asinventoriable, or product, costs

Direct materials

Direct labo r

Variable facto ry overhead

Fixed factory overhead

Presents expenses on income statement accordingto functional classifications

Cost of goods so ld

Sell ing expenses

Adm inistrat ive expenses

Variable Costing


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Also known as direct costing

Includes only variable production costs asinventoriable, or product, costs

Direct materials

Direct labo r

Variable facto ry overhead

Fixed factory overhead costs treated as periodexpenses

Income statement separates costs by cost behavior

May also present expenses by fun ct ion al

classi f icat ion s w ithin behavioral catego ries

Absorption CostingIncome Statement


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Sales XXXCost of Goods Sold:

Beginning inventory XXX

Cost of goods manufactured XXX

Cost of goods available XXX

Ending inventory XXXCost of goods sold XXX

Gross Margin XXX

Operating Expenses:

Selling XXX

Administrative XXX XXXIncome before Taxes XXX

Variable CostingIncome Statement


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Sales XXXCost of Go

management accountingsymfinal 5th 6th12th and 13thngt accounting 1219997610445818 9

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