As we have covered so far the information relating to Financial Accounting where the

basic objective is to prepare the Profit & Loss Account and Balance Sheet. Features of
Financial Accounting are -

• Financial Accounting considers only transactions which can be expressed in terms

of money. For example transactions like pollution, strike etc will not have any place
in financial accounting unless and until they have any monetary transaction.

• Financial Accounting is historical accounting . It records the transactions which

have already taken place.

• Financial Accounting is a legal requirement. Keeping of records for business

transactions, getting them audited are the requirements ,particularly for company
form of business organization.

• Financial Accounting is for outsiders. Outsiders such as Govt, Banks, Suppliers,

Investors, shareholders are interested in Financial accounting and financial results
and that is why uniformity is ensured so that comparison is possible between
financial performance of two different entities.

• Financial statements are available at a particular point of time after the expiry of the
accounting period for example Balance sheet as on 31st March, 2006 can be
available after this date.

• Financial Accounting gives the result of the business as a whole. It does not give
the details about the individual departments, job wise information etc. Even though
now a days segment reporting etc are introduced, it is applicable only to limited
companies.

To overcome from the drawbacks of Financial Accounting, Cost Accounting was

developed . Financial Accountants are busy with recording of transactions and
preparation of Profit & loss Account and Balance sheets and various reports and
disclosures as per the requirements of banks and income tax and other
authorities. A specialized branch is necessary which can concentrate on cost and
cost related areas and that is why Cost Accounting has come into the picture.

Cost Accounting

Cost accounting focuses on manufacturing cost of a product. Cost means total expenditure
incurred to produce one unit or to provide one service.
Objects of Cost Accounting –

1. Ascertainment of cost 2.Control of Cost and 3. Presentation of information to the

management .

Costing and Cost Accounting are two different concepts. Costing means the process of
ascertainment of cost where as Cost Accounting indicates the process of recording the cost
in a systematic manner.

Concept of Cost Centre – While ascertaining the cost, it is necessary to decide the cost
centers relating to which we can consider all the costs. For example a branch, a
department , a machine , machine shop, paint shop, assembly shop etc

Let us consider the Profit & Loss Account given above. The net profit is Rs.60,000/- as
shown by the Financial Accounting. If we assume that the company has three different
products A, B and C, Cost Accounting can give the product wise information as below

• Cost Sheet
Particulars Total A B C

Sales 5,00,000 2,50,000 1,50,000 1,00,000

Material 1,50,000 70,000 50, 000 30,000
Wages 1,00,000 50,000 30,000 20,000
Factory Exp 50,000 25,000 15,000 10,000
Office Exp 90,000 40,000 30,000 20,000
Selling Exp 50,000 15,000 10,000 25,000
Profit/Loss 60,000 50,000 15,000 ( 5,000 )
The above Cost Sheet shows the total profit of Rs.60,000/- as shown by Financial
Accounting but it further shows that product A and B are running at Profit where as
Product C is incurring losses so here management can check why product C is incurring
losses.

Characteristics of Cost Accounting - As compare to Financial Accounting

• Cost accounting considers non-monetary items also. It does not restrict itself only
for monetary transactions.
• It is not a historical accounting. It can make projections for future period.
• It is not a legal requirement
• It is for internal management
• It gives cost data product wise, department wise etc
Classification of Cost

Cost is classified in various ways such as Direct & Indirect cost, Fixed & Variable cost,
Opportunity Cost, Differential Cost, Sunk Cost etc.

Direct Cost & Indirect Cost

Direct cost is the cost which can be directly attributable/charged to the cost center or
finished product whereas indirect cost can not be attributable/charged to the cost center or
finished product.

Direct Cost is divided as Direct Material cost, Direct Labour cost and Direct Expenses cost.
Similarly Indirect cost is divided as indirect material cost, indirect labour cost and indirect
expenses cost.

Direct material and Indirect material - Direct material costs are those which can be
conveniently and wholly identified with a specific production unit , job, process. Following
material comes under this category

• Material purchased for a particular job

• Primary packing material
• Material passing from one operation to other
• Semi finished or finished components purchased for a particular product or job or
process

Indirect material costs are those which can not be conveniently and wholly identified with a
specific production unit , job, process.

Direct and In direct wages - Direct wages means payment made to workers who are
directly engaged in manufacturing process where as indirect wages are those wages which
are paid to those who are not engaged directly in manufacturing process.

Direct Expenses and indirect Expenses

Direct expenses are also called chargeable expenses . These are the expenses which can be
conveniently allocated to a cost unit. Examples of Direct expenses

• Cost of hiring of special machine

• Cost of special moulds, designs and patterns
• Experimental costs on model
• Fees paid to architects, surveyors and other consultants
• Cost of patents and royalties
• Cost of transport and conveyance to the site of the job or operation
• Cost of special process or outside work
All Indirect material, Indirect wages and Indirect expenses are collectively called
overheads . Overheads incurred in Factory are called Factory Overheads, Overheads
incurred in office are called office Overheads and overheads incurred in Selling and
Distribution Department are called Selling & Distribution Overheads

Factory Overheads Office Overheads Selling & Distribution

Overheads
Indirect Material Indirect Material Indirect Material
Consumable stores, cotton Printing, Stationary used in Printing stationary, mailing
waste, lubricants, oil, grease office and other equipments literature, catalogue, price
etc list, cost of packing cases,
oil, grease, spare parts used
in maintenance of delivery
vans
Indirect Wages Indirect Wages Indirect Wages
Wages to supervisors, Salary and allowances to Salary, commission to sales
material handlers, time office staff, Directors staff, wages to packers, van
keeper, foreman, cleaner, remuneration, remuneration drivers, dispatch clerks etc
clerical staff in factory of auditors
Indirect Expenses Indirect Expenses Indirect Expenses
Rent of factory building, Office rent, insurance, Advertisement, rent of the
insurance in factory, works lighting, telephone, show room, insurance,
canteen welfare expenses, depreciation on office traveling, maintenance
designing, drawing, assets , legal charges, other expenses, expenses of
research, power, fuel, office expenses branch establishment,
lighting, heating , telephone transport, depreciation and
expenses, depreciation on running expenses of delivery
plant, machinery, vans
equipments used in factory

Some different expenses

Bad debts – Some bad debts are bound to occur if sales are made on credit therefore bad
debts to a reasonable limit should be treated as selling overheads however any abnormal
bad debts should not be included in cost accounts and should be written of from Profit &
Loss Account.

Packing cost – Packing material required as ink, paste should be taken as indirect material
cost however if packing cost is incurred to put the product in a nice looking case then it
should be covered under advertisement under Selling Overheads
Discount – Trade discount is deducted from purchases/sales as the case may be where as
cash discount given to customers is purely financial item and should be excluded from cost
accounts

Interest on Capital – There is controversy on this item. Some people believes that it is
element of cost where as contends that it should be excluded from cost
accounts. Considering the practical difficulties, interest on capital is not
entertained in cost accounts.

Research & Development – Research expenses incurred for a new or improved product if
can be identified with specific product or process then it can be charged to such
product or process. If cost is heavy it can be treated as deferred revenue
expenditure . Any excess expenditure not recovered is charged to Costing
Profit & Loss Account.

Development starts where research ends. If the development cost incurred can be identified
with specific product then it can be charged to that product or process If cost is
heavy it can be treated as deferred revenue expenditure . Any excess
expenditure not recovered is charged to Costing Profit & Loss Account.

Fixed Cost and Variable cost

Fixed cost is the cost which is fixed irrespective of number of units produced. This cost is
related to the period than production. The example are rent of the factory, salary of
manager , insurance etc. Fixed costs are further divided in Discretionary Fixed cost and
Compulsory Fixed cost. Discretionary fixed costs are Research & Development,
advertisement etc whereas Compulsory fixed costs are rent of the factory, managers salary
etc.

Variable cost is the cost which is directly related to the production and increase and
decrease in the same proportion according to the increase and decrease in production. For
example direct material used, direct wages.

There are some expenses which are called semi-variable or semi-fixed. To a certain extent
they are fixed and then becomes variable. The examples are depreciation, salary of
supervisor. Suppose in a factory for every eight workers, one supervisor is appointed so till
the workers are eight or below eight only one supervisor is required so cost on his salary is
fixed but once the number of worker are more than eight another supervisor is required to
be appointed so the salary cost of the supervisors increases.

Opportunity Cost

Opportunity cost is the cost which considers the benefit or advantage foregone because the
facilities are used for other purpose. For example a company can produce either product A
or B. If it decides to produce Product A it for gone the profit which it can make on Product
B.
Differential Cost

The difference in total costs between two alternatives is termed as differential cost. This
can be due to different scale of operations or different strategy For example at present a
company is producing a part which is used in the finished product in its own factory and
the cost to produce such spare part is say Rs.50/ per unit now if it decides to purchase it
from outside then it can purchase it at a price of Rs.45 per unit so here the differential cost
is Rs.5. ( decremental )

Cost Sheet – Format

Opening stock of Raw Material XXXX

Add: Purchases XXXX
Less: Closing stock of Raw Material XXXX
Raw Material Consumed XXXX
Add: Direct Wages XXXX
Add: Direct Expenses XXXX
Prime Cost XXXX
Add: Factory Overheads XXXX
Add: Opening Work in Progress XXXX
Less: Closing Work in Progress XXXX
Works Cost XXXX
Add: Office/Administration Expenses XXXX
Cost of Production XXXX
Add: Opening stock of Finished goods XXXX
Less: Closing stock of Finished goods XXXX
Cost of goods sold XXXX
Add: Selling & Distribution Expenses XXXX
Cost of Sales XXXX
Add: Profit XXXX
Sales XXXX
Problem on preparation of Cost Sheet

The books and records of Anand Manufacturing Company Private Limited for the month of
August, 2007

Raw Material on 1st August Rs.8,000

Raw material on 31st August Rs.,8,600
Work in Progress on 1st August Rs. 8.000
Work in Progress on 31t August Rs.12.000
st
Finished Goods on 1 August Rs.14,000
Finished Goods on 31t August Rs.18,000
Purchases of raw material during the month Rs.36,000
Direct Wages Rs.16,000
Direct Expenses Rs. 5,600
Factory Overheads Rs.10,000
Office Expenses Rs. 2,600
Selling Expenses Rs.3,400
Sales for the month Rs.75,000

Problem No.2- From the following extract, prepare a Cost Sheet

Opening stock of raw material 50,000

Closing stock of raw material 80,000
Purchase of raw material 1,70,000
Carriage Inward 10,000
Direct Wages 1,50,000
Indirect wages 20,000
Direct Expenses 30,000
Factory Rent 10,000
Office Rent 1,000
Indirect Material 1,000
Depreciation – Plant 3,000
Depreciation – Office furniture 200
Salaries 5,000
Salesman salary 4,000
Office expenses 1,800
Factory expenses 11,400
Managing Directors Remuneration 24,000
Selling Expenses 2,000
Traveling expenses 2,200
Carriage Outward 2,000
Sales 5,00,000
Advance Income tax paid 30,000
Advertisement 4,000

Managing Directors remuneration is to be allocated as Rs.8,000 to the factory, Rs.4,000 to

the office and Rs12,000 to selling department
Problem No.3

Following details are available from the books of accounts of M/s A Limited for the year
ended on 31st March, 2005

Stock of materials – Opening 1,88,000

Stock of materials – Closing 2,00,000
Materials purchased during the year 8,32,000
Direct wages paid 2,38,400
Indirect wages 16,000
Salaries to administrative staff 40,000
Freight – Inward 40,000
Freight – Outward 32,000
Cash discount allowed 14,000
Bad debts written off 18,800
Repairs to plant and machinery 42,400
Rent, rates and taxes - Factory 12,000
Rent, rates and taxes - Office 6,400
Traveling expenses 12,400
Salesman’s salaries and commission 33,600
Depreciation written off – Plant and Machinery 28,400
Depreciation written off – Furniture 2,400
Directors fees 24,000
Electricity charges ( factory ) 48,000
Fuel ( for boiler ) 64,000
General charges 24,800
Manager’s Salary 48,000
Dividend paid 20,000

The managers time is shared between the factory and the office in the ratio of 20: 80
From the above prepare the cost sheet.

Problem No.4 - A Factory produces a standard product. Following information is given to

you fro which you are required to prepare a Cost Sheet

Opening Stock of Raw material Rs.10,000

Purchases Rs. 85,000
Closing Stock Rs. 4,000
Direct wages Rs. 20,000
Direct Expenses Rs. 10,000
Factory Overheads 100% of Direct Labour
Office Overheads 10% of Works cost
Selling & Distribution Rs.2 per unit sold
Opening finished stock 1,000 units Rs.16,000
Produced during the period 10,000 units
Closing stock 2,000 units
Find out selling price per unit, where management is expecting a profit of 20% on selling
price.

Job Costing

Job Costing is useful where each job is different, cost involved is different. For example
Printing, Furniture , Foundry, Ship Building, Interior decorators, advertisement.

Job costing includes estimation of cost, analysis of customers order and Production order.

Objective of Job costing

• To ascertain the cost of individual job

• To determine the profit or loss of each job
• To help for estimation of cost
• To serve as a cost control tool

Problem on Job Costing

Flying machine Company Private Limited intends to submit the tender . You are given the
following information

Finished Goods on 1st January Rs.72,800

Raw Material on 1t January Rs.33,280
Purchases of raw material Rs.7,59,200
Direct Wages Rs.5,16,880
Sales Rs.15,39,200
Factory Overheads Rs 1,29,220
Office Expenses Rs. 70,161
Finished Goods on 31st January Rs. 78,000
Raw Materials on 31t January Rs. 35,360

1.Prepare Cost Sheet 2. Calculate % of Factory Overheads to Wages 3. % of Office

expenses to Works cost

Based on the above mentioned percentage prepare a statement showing the amount of
tender for manufacturing a plant considering the following information

Cost of raw material to be consumed Rs. 52,000

Wages to be paid Rs. 31,200

The company must earn a net profit of 20% on selling price

Problem No.2

A factory uses a job costing system. The following cost data is available from the books of
the year ended 31st March, 2008.

Direct material Rs.9,00,000

Direct wages Rs.7,50,000
Profit Rs.6,09,000
Selling and distribution overheads Rs.5,25,000
Office overheads Rs.4,20,000
Factory Overheads Rs.4,50,000

Required

Prepare a cost sheet

In 2008-2009. the factory has received an order for number of jobs it is estimated that the
direct material would be Rs.12,00,000 and direct wages would cost Rs.7,50,000. What
would be he price for these jobs if the factory intends to earn the same rate of profit on
sales assuming that the selling and distribution overheads has gone up by 15% and the
factory recovers factory overheads as a % of direct wages and administration ands selling
overheads as a % of works cost, based on the cost rates prevalent in the previous year.

Problem No.3

Following figures have been obtained from the cost records of Rajashree Cement limited
for the year 2007

Cost of Materials Rs. 2,40,000

Wages Rs. 2,00,000
Factory Overheads Rs. 1,20,000
Distribution Expenses Rs. 56,000
Administration Expenses Rs. 1,34,400
Selling Expenses Rs. 89,600
Profit Rs. 1,68,000

A work order has been executed in 2008 and expenses have been incurred – Material
Rs32,000 and Wages Rs.20,000

Assuming that in the year 2008, the rate of factory overheads went up by 25%, Distribution
charges went down by 10% and selling and administration charges went up by 12.5%. At
what price should the product of the job be quoted so as to maintain the same rate of profit
on selling price? Show the full working. Assume factory overheads are based on wages and
Distribution, administration and selling expenses are based on the factory cost .
Material

Material is divided in two parts direct material and indirect material.

Material is important cost for any company and generally material cost consist of 60 to
65% of the total cost.

Stock or inventory is the most important asset considered under current assets. Stock
consist of raw material, work in progress and finished goods. For manufacturing
companies, generally out of total cost, the material cost consist of 60 to 65%. It is very
important to keep proper control on material cost to have control on total cost. Every
management tries to achieve maximum sales with the minimum investment in stock.
Management has to ensure that stock should be maintained at an adequate level. There
should not be excess stock than required or lesser stock than required. Suppose for a
construction company, adequate level of stock of cement is 500 bags and if the
management keeps on an average 750 bags then it involves cost similarly if management
keeps 250 bags then also cost is involved. Let us consider these two situations

Excess stock - If management keeps excess material, more funds are blocked in stock,
more space is required to keep the excess material, more handling charges are required,
more insurance cost, more buying cost etc.

Less stock – If management keeps less stock than required then there is always danger of
stoppage of production, management has to pay to the workers idle payment. At the last
movement has to go for purchase of required material at any price ( panic purchases ).

Basically two costs are involved first is buying cost and second is carrying cost. Buying
cost includes administrative expenses in purchase department, follow up with suppliers etc
whereas carrying cost includes rent of the stores, insurance cost, handling cost etc.

There are various techniques to keep proper control on stock such as ABC Analysis,
Fixation of Levels, Economic Order Quantity etc.

ABC Analysis – As per this technique, material can be classified in three categories, A
class where the material having high value but less in quantity is included, B class where
material having moderate value and moderate quantity is included and C class where
material with low value with high quantity is included. Management can accordingly
concentrate on A class material.

Fixation of Levels - Management can on the basis of consumption of material, time

required to receive the material from the supplier decides the various levels of stock. Such
as

Maximum level – the level beyond which stock should not be maintained
Minimum level – the level below which stock should not go at any point of time.
Reorder level – the level at which order should be given for fresh purchases
Danger level – if the stock reaches at this level there is danger of stoppage of production.

Economic Order Quantity (EOQ) – As we know basically to manage the cost is divided in
two , first is buying cost which includes cost associated with administrative efforts
connected with purchase of material and carrying cost that is the cost involved in holding
the stock such as go down rent, insurance cost etc. EOQ is such ordering quantity where
both the buying cost and carrying costs are minimum. There is a reverse relationship
between these two costs for example if purchase quantity is increased, buying cost may go
down but carrying cost will be higher and vice versa. A balance has to be maintained in
these two and it is possible through Economic Order Quantity.

Q= 2XAXO
---------------
C

Q = Economic Order Quantity

A = Annual requirement of material in units
O = Cost of placing an order
C = Carrying cost per unit

Now if A is the annual requirement and Q is the size of one order so total number of orders
= A/Q and total ordering cost will be A/QXO

Similarly if the size of one order is Q then the average inventory will be Q/2 and carrying
cost per unit is C, the total carrying cost = Q/2 X C

Thus Total cost = Ordering cost + Carrying cost

A Q
----- X O + ------ X C
Q 2

2XAXO
---------------
C

Problem No.1

A manufacturer uses 200 units of a component every month and buy them entirely from
outside supplier. The order placing and receiving cost is Rs.100 and annual carrying cost is
Rs12

2XAXO
-------------
C

2 X 2400 X 100
-------------------
12

= 200 units
Problem No.2

From the following data work out the EOQ of a particular component

Annual demand 5,000 units, Ordering cost Rs.60 per order , Price per unit Rs.100 and
carrying cost is 15% of the price per unit.

Problem No.3

Annual demand 50,000 units, Ordering cost Rs.45 per order , Price per unit Rs.1.20 and
carrying cost is 15% of the price per unit.

Problem No.4

Annual demand 75,000 units, Ordering cost Rs.18 per order , Price per unit Rs.1.50 and
carrying cost is 20% of the price per unit.

Problem No.5

A company needs 24,000 units of raw material which cost Rs.20 per unit and Ordering
cost expected to be Rs.100 per order. The company maintains safety stock of 1 month’s
requirement to meet emergency. The holding cost of carrying inventory is supposed to be
10% per unit of average inventory, find out EOQ.

Valuation of Issues

Whenever a company buys material it will be kept in Stores. As and when material is
required by production department or any other department, material will be issued from
the stores. While issuing material from the stores for production, it is necessary to decide
the issue price because at one point of time there can be different lots of materials which
are available in stores. For example on 10th February, 2010 there are two lots of a material
are available – first lot of 100 bags purchased @ Rs.10 per unit and second lot of 200 bags
purchased at Rs.10.50 per bag. Now on 11th of February, production department requires 50
bags , now question arises what should be the price for 50 bags ? Rs.10 or Rs.10.50 ? To
decide this there are various methods which can be used such as FIFO, LIFO, Simple
Average Method and Weighted Average Method.

Question No.1

From the following information, prepare a store ledger on the basis of FIFO, LIFO, Simple
Average and Weighted Average method

April
1 Opening balance 500 units @ Rs.6.
5. Purchased 100 units @ Rs.7.00 per unit
7 Issued 400 units
9 Purchased 300 units @ Rs.8 per unit
19 Issued 250 units
22 Issued 50 units
25 Purchased 300 units @ Rs.7.50 per unit
30 Issued 250 units
Question No.2

From the following information prepare a Store Ledger on the basis of LIFO Method
April
8 Opening balance 50 kg @ Rs.10.
9 Issued 30 kg
4 Purchased 60 kg
5 Issued 25 kg
6 Stock verification reveals a shortage of 1 kg
10 Goods returned to stores 10 kg ( previously issued @ Rs.9.)
15. Issued 40 kg
25 Purchased 25 kg @ Rs.12
30 Issued 35 kg.

Question No.3
From the following information prepare a Store Ledger for the month of November, 2009
on the basis of Simple Average Method
Receipts

Nov. 1 Received 400 units @ Rs.10 per unit

Nov. 4 Received 300 units @ Rs.11 per unit
Nov. 16 Received 200 units @ Rs.12 per unit
Nov. 25 Received 400 units @ Rs.13 per unit

Issues

Nov.10 Issued 500 units

Nov.15 Issued 100 units
Nov.17 Issued 200 units
Nov.26 Issued 100 units
Nov.28 Issued 200 units

Question No.4

From the following information prepare a store ledger on the basis of FIFO method

Jan.1 Opening balance 50 units @ Rs.4 per unit

Jan.5 Purchased 40 units @ Rs.3 per unit
Jan.8 Purchased 30 units @ Rs.4 per unit
Jan.15 Purchased 20 units @ Rs.5 per unit
Jan.26 Purchased 40 units @ Rs.3 per unit
Issues

Jan.10 70 units
Jan.12 10 units
Jan.20 20 units
Jan24 10 units

On 15th of January, stock verification reveals a shortage of 5 units and on 30th January, a
surplus of 4 units

Question No.5

Oil India is a bulk distributor of high octane petrol. A periodic stock of petrol on hand is
taken when the books are closed at the end of each month. The following summary of
information is available for the month

Opening stock 1,00,000 litres @ Rs.3/- per unit

June 1 Purchases 2,00,000 litres @ 2.85 per litre
June 29, purchases 1,00,000 litres @ Rs.3.03 per litre
June 30, closing stock 1,30,000 litres

Calculate value of closing stock as per LIFO and Weighted Average Method

Question No.6

Opening stock as on 1st March, 1,25,000 litres @ Rs.6.50 per litre

Purchases on 5th March 1,50,000 litres @ Rs.7.10 per litres
Purchases on 27 th March, 1,00,000 litres @ Rs.7.00 per litre

Closing stock as on 31st March, 2006 1,30,000 litres

Calculate value of closing stock if FIFO and LIFO methods of pricing are used.
Labour

After material, labour is the important element of total cost. It has a direct and indirect
impact on the overall performance of the organization. The important departments relating
to labour are personnel department who ensures the availability of right workers, Time
keeping department who records the workers time and cost accounting department who
accumulates and classifies the data relating to labour and present it to the management.

For time keeping there are number of methods such as hand written method, Token or Disk
method, Clock Method etc.

Time booking records the time spent by every worker for individual cost centers with the
preparation of daily time sheets, weekly time sheet, job card etc.

Principles of a good wage payment system

• The efficiency standards should not be very high at the same time more efficient
workers be properly reworded.

• The wage system should be simple to understand and should be communicated to

the workers properly.

• Monetary punishments should be avoided workers should not be punished where

they are not directly responsible.

• There should not be any frequent changes in wage systems.

• Wage system should be such that increases the morale of the workers which
ultimately increases the productivity.

Generally wages are paid in the form of –

Time Rate basis

Piece Rate basis

Incentives – Individual and Group.

Monetary incentives such as profit sharing/bonus, co-ownership etc

Non-Monetary incentives such as Canteen facilities, medical, education, pension, loans at

reduced rates etc.

Labour Turnover

Process of employees leaving the organization and joining new employees is called labour
turnover.

Causes of labour turnover can be avoidable and un avoidable causes.

Avoidable causes

Not happy with job, remuneration, working conditions, hours of work, relationship with
supervisors etc.

Unavoidable causes are

Betterment, illness, shifting from the locality, marriage, death etc.

Costs of labour turnover

Preventive costs

Cost of welfare services, medical services, retirement benefits etc.

Replacement costs

Inefficiency of new workers, cost of selection process, training costs, increased costs for
defectives etc

Measurement of labour turnover

Separation Method

No.of separations in the period

----------------------------------------
Average number of workers

Replacement Method

No.of replacements in a period

----------------------------------------
Average number of workers

Flux Method

No.of separations + No.of replacements

--------------------------------------------------
Average no.of workers

Idle Time

Idle time is time for which wages are paid but no production has taken place during the
period.

The causes of idle time may be machine breakdown, power failure, waiting for non-
availability of material, tools or administrative causes such as no sufficient work to be
performed or economic causes such as product is of seasonal nature.

Treatment of idle time

If idle time is normal and controllable it should be classified as overheads. If it is normal
but uncontrollable the labour rate should be accordingly adjusted.

If idle time is abnormal and uncontrollable it should not be charged as overheads but
should be written off to Costing Profit & Loss Account.

Overhead Cost
Basic objective of cost accounting is ascertaining cost not only in totality but cost center
wise. The cost center may be a factory, a department in the factory, a departmental head
etc. Broadly costs are divided in direct costs and indirect costs. Direct costs are those costs
which can be identified with individual cost centers. Overheads are those expenses which
can not be identified with individual cost center.

Overheads are divided on the basis of element of cost such as indirect material, indirect
Labour and indirect expenses.

They are also divided as Factory overheads, Office/administrative overheads and Selling &
distribution overheads.

They are also divided as fixed and variable overheads and Semi- variable overheads and
also as controllable and uncontrollable overheads.

While allocating overheads, overheads which can be allocated to a particular department,

can be charged to that department however sometimes there are overheads which are
incurred for the company as a whole, common to all departments then they have to be
apportioned among all the departments on some suitable basis which is called primary
distribution.

The examples are

Item of expenditure Base

Canteen Expenses No.of workers

Rent/taxes Area

Power HP/KWH/ No.of workers

General lighting No.of light points

Depreciation Value of asset

Supervision No.of employees/wages paid

Telephone expenses No.of telephone calls made

Insurance Value of stock / asset
Management Accounting

Management Accounting is an advanced stage of cost accounting .Management

Accounting uses both Financial data and cost data. Earlier when businesses were of small
size, the owners were able to control the business. After second world war and industrial
revolution, large scale of production was stared. Number of transactions in the business
were growing, resulting in complexities in business operations. Company form of
organization became popular and separation between ownership and management was
accepted.

Some system was necessary where the management can get readymade filtered information
so that they can concentrate only on the information and can take decisions for the
business. Management Accounting was introduced for this purpose. It focuses on
presenting of information to the management in such a way so that management can take
correct decisions with speed.

Basic objectives of Management Accounting are

Making available accounting and other data to the management.

Measuring the actual performance
Computation of deviation of actual performance from the standard
Presenting the management the operating and financial statements at reasonable intervals to
enable the management to take decisions.

Management Accounting uses various tools are

Marginal Costing
Standard costing
Budgetary Control
Uniform Costing

Scope of Management Accounting is very wide. It uses both cost and financial data. It
covers Reporting, Taxation, Audit etc.

Budgeting

Budgeting is the most important and commonly used technique under Management
Accounting. It starts with Sales Budget and accordingly all other budgets can
be prepared on that basis such as Production Budget, Purchase Budget,
Expenditure Budget, Cash Budget, Capital Budget etc. Let us consider Cash
budget
Cash Budget

In current assets most important asset is cash in hand and cash at bank. Manager can not
keep excess cash than required because this will not generate additional funds so funds will
be blocked and at the same time he can not keep less amount than required.

Cash Budget is a technique where Finance Manager has to forecast about the requirement
of cash for a period of say next three months. The basic objective is if there is any
shortage of cash he can arrange the funds from the banks and if there is surplus cash
then he can plan for investment.

Suppose in the month of December a company is preparing a cash budget for the next
three months i.e. January to March. Now while preparing Cash Budget first he has to
consider all likely receipts in the coming three months and all likely payments. If we
consider a medium scale manufacturing company, likely routine receipts are cash sales,
collection from debtors where as non-routine receipts are dividend/interest received on
investments, Issue of shares, sale of fixed assets etc. similarly likely routine payments are
payment to suppliers, payment of wages, payment of expenses, payment of taxes whereas
non-routine payments are purchase of assets etc.

Practically it is possible to predict for the likely receipts and payments on the basis of past
figures.

While preparing Cash Budget we have to start with Opening balance of cash for every
month and then we have to add all likely receipts so as to calculate total receipts and then
we have to deduct likely payments for that month to calculate closing balance of cash.
Closing balance of cash for earlier month will be the opening balance for the next month.

For example for the month of January, a companies opening balance for cash is Rs.5,000
and likely cash sales for the month are Rs.8,000 and collection from debtors are
Rs.25,000/-. Further payment to suppliers is to be made Rs.18,000/-, Payment of wages are
Rs.7,000/- and payment of other expenses are Rs.4,000/-.

Now for the month of January we have to start with opening balance of cash i.e Rs.5,000/-
then we have to add Rs.8,000 and Rs.25,000 so total likely receipts are Rs.38,000 out of
which total payment will be Rs.29,000 ( i.e. payment to suppliers, wages and expenses ) so
closing balance of cash will be Rs.9,000/-

However while solving the problems it is not so very easy because while calculating
collection from debtors we have to check the credit period allowed to debtors, any discount
to be allowed on receipt etc. For example we have sold goods on credit of Rs.14,000 in the
month of January and credit period allowed to debtors is one month then we will receive
the money from debtors in the month of February. Similarly we have to consider credit
period allowed by suppliers to us to make the payment, lag in payment of wages, expenses
etc.
Question No.1
From the following information prepare a Cash Budget for the quarter ended December,
2009
Months Sales Material Wages Overheads
August 50,000 32,400 7,600 3,800
September 52,000 30,000 7,600 4,200
October 66,000 36,000 8,000 4,600
November 60,000 30,000 8,400 4,800
December 70,000 38,000 9,000 5,000

Additional Information

1. Cash balance as on 1st October, 2009 is Rs.8,000/-

2. all sales are credit sales. sales are collected in the following month of sale
3. Advance Tax of Rs.5,000 is payable in each month, September and December
4. 10% of the creditors for materials are paid promptly and balance in the next month
5. Wages and overheads are paid in the same month

Question No.2

From the following information prepare a Cash Budget for the quarter ended December,
2009
Months Sales Material Wages Overheads
August 40,000 20,400 7,600 3,800
September 42,000 20,000 7,600 4,200
October 46,000 19,600 8,000 4,600
November 50,000 20,000 8,400 4,800
December 60,000 21,600 9,000 5,000

Additional Information

6. Cash balance as on 1st October, 2009 is Rs.8,000/-

7. all sales are credit sales. 50 % of the sales are collected in the month of sale and
remaining 50% in the following month
8. Advance Tax of Rs.5,000 is payable in each month, September and December
9. 10% of the creditors for materials are paid promptly and balance in the next month
10. Wages and overheads are paid in the same month

Question No.2

Prepare a Cash Budget for the three months ended 30th September, 2009 based on the
following information

Cash in hand on 1st July, 2009 Rs.22,000

Monthly interest payable Rs. 5,000

Particulars June July August September

Cash Sales 1,20,000 1,40,000 1,52,000 1,21,000
Credit sales 1,00,000 80,000 1,40,000 1,20,000
Purchases 1,60,000 1,70,000 2,40,000 1,80,000
Other expenses 18,000 20,000 22,000 21,000
Wages 21,000 22,000 23,000 24,000

Credit sakes are collected 50% in the month of sale and 50% in the month following.
Collection from credit sales are subject to 10% discount if received in the month of sale
and to 5% if received in the month following

10% of the purchases are paid in the same month and remaining in the next month
Lag in payment of wages is one month

Question No.3

From the following information prepare a Cash Budget for the quarter ended June, 2006
Months Sales Material Wages Overheads
February 60,000 36,000 9,000 4,000
March 62,000 38,000 8,000 4,200
April 64,000 33,000 10,000 4,600
May 58,000 35,000 8,500 4,800
June 56,000 39,000 9,500 4,000

Additional Information

Cash balance as on 1st April, 2006 is Rs.5,000/-

10% sales are cash sales. 50 % of the credit sales
are collected in the month of sales and remaining 50% in the following month
Advance Tax of Rs.8,000 is payable in each
month, June and September
All purchases are credit purchases, Credit period
allowed by creditors is one month
Lag in payment of wages is ½ month
Marginal Costing

Marginal costing is a technique which considers only two costs i.e Variable cost and fixed
cost. Variable cost is the cost which relates to the production where as fixed cost is a cost
which is related to the period and not to the production hence in short run while making
any decisions it is better to ignore the fixed cost since its remain same irrespective of the
level of activity in fact it gives confusing picture if is considered.

Contribution

In Marginal costing a new concept is introduced called “ Contribution ”. As mentioned

earlier if we ignore fixed cost from the cost structure, only variable cost becomes relevant.
Hence contribution means Sales – Variable Cost. We can calculate contribution by another
equation i.e. Contribution = Fixed Cost + Profit. To under stand this let us consider an
example where Sales Price per unit is Rs.100, Variable Price per unit is Rs.60, Fixed Cost
is Rs.30. Here the first equation will be

Sales – Total cost = Profit

100 – 90 = Rs.10

Second equation is

Sales –Variable Cost – Fixed Cost = Profit

Rs.100 – Rs.60 – Rs.30 = Rs.10

Changing the position

Sales – Variable cost = Fixed Cost + Profit

100 – 60 = 30 + 10

Basically the contribution shows the amount generated from the sale of one unit after
recovering variable cost . All the decisions under Marginal Costing are taken on the basis
of Contribution .

Profit Volume Ratio

This ratio shows the relation between contribution and sales and is calculated as below

Contribution
___________ x 100
Sales

Profit & Volume Ratio can be calculated by using another formula

Change in Profit
______________ x 100
Change in Sales
Break Even Point

This is that level of sales where there is no profit no loss. In short this is that level of sales
where company is able to recover its variable and fixed cost. Every management has to
achieve this level then company can start making profit. the break even point can be
calculated either in sales in rupees or number of units. To calculate the Break Even Point
in rupees, the formula is

Total Fixed Cost

______________
P/V Ratio

To calculate the Break Even Point in number of units

Total Fixed Cost

_________________
Contribution per unit

To calculate the expected sales in rupees, so as to earn the expected profit , the
formula is

Total Fixed Cost + Expected Profit

____________________________
P/V Ratio

Margin of Safety

Margin of safety is that level of sales which are above the Break Even Sales. For example
if actual Sales are Rs.1,00,000 and break Even Sales are Rs.75,000. It means company is
having a safety of Rs.25,000 where company can make profit. The formula is

Actual Sales – Break Even Sales

Margin of safety can be calculated by using another formula

Profit
________
P/V Ratio

To understand the basic concepts let us consider one example.

Mr.Anil is having one business where he is making and selling shirts. He sells shirts for
Rs.300 per piece. The variable cost including material, packing and the payment made to
the tailors who are paid on per shirt basis is Rs.200. Mr.Anil has taken the business place
on rental basis where he is paying total fixed expenses such as rent etc Rs.60,000 per
annum.
In the above example when sales are Rs.300 per piece, the variable cost is Rs.200. it means
each piece is generating a contribution of Rs.100. ( after recovering variable cost from
sales, the surplus amount left is Rs.100). If we calculate the P/V Ratio it will be

Rs.100
_______ x 100 = 33.33%
Rs.300

Now Mr.Anil wants to know that how many shirts he should make and sell so that he can
recover his full cost. Here he wants to know the break even point in number of units. Now
out of Rs.300 he has recovered the amount of variable cost so he has to recover now his
fixed cost. One unit is generating a contribution of Rs.100 so to generate Rs.60,000 ( Total
fixed cost ) he has to make and sell 600 pieces i.e

Fixed Cost
_________________

Contribution per unit

We can verify this

Sales = 600 pieces x Rs.300 = 1,80,000. Variable cost = 600 pieces x Rs.200 =
Rs.1,20,000

So the statement will be like

Sales Rs.1,80,000
Less : Variable cost Rs.1,20,000
Contribution Rs. 60,000
Less : Fixed cost Rs. 60,000
Profit /Loss 00

To calculate the Break even sales in rupees, the formula is

Total Fixed Cost

______________
P/V Ratio

Rs.60,000
__________ = Rs.1,80,000
33.33%
Now let us assume that Mr.Anil wants to earn a profit of Rs.Rs.50,000 per annum then how
many pieces he should sell?

We can use the earlier formula where we can add the expected profit in the Fixed Cost. So
the calculation will be

Total Fixed Cost + Expected Profit

____________________________
P/V Ratio

Rs.60,000 + Rs.50,000
____________________________
33.33%

i.e Rs.3,30,000 or number of pieces will be 1,100

Problem No.1

From the following information find out the profit earned during the year using the
marginal costing technique

Fixed Cost Rs.2,50,000

Variable Cost Rs. 10 per unit
Selling Price Rs.15 per unit
Output 75,000 units

Problem No.2

Sales are Rs.1,00,000, Profit is Rs.10,000 and Variable cost is 70%

Find out 1.P/V Ratio 2. Fixed Cost 3. Sales volume to earn a profit of Rs.40,000

Problem No.3

From the following data you are required to calculate

1.P/V Ratio 2. Break Even Sales 3. Sales required to earn a profit of Rs.4,50,000

Fixed Expenses Rs.90,000

Variable Cost per unit

Direct Material Rs.5

Direct Labour Rs.2
Direct Overheads 100% of Direct labour
Selling Price per unit Rs.12
Problem No.4

The sales and profit during two periods were as follows:

Period 1 Sales Rs.20,00,000 Profit Rs.2,00,000

Period 2 Sales Rs.30,00,000 Profit Rs.4,00,000

Calculate

a) P/V Ratio
b) Sales required to earn a profit of Rs. 5,00,000
c) Profit when sales are Rs.10,00,000

Problem No.5

The following figures of sales and profit for two periods are available in respect of a
concern
Sales Profit

Period I Rs.1,00,000 Rs.15,000

Period II Rs.1,20,000 Rs.23,000

You are required to find out

1. P/V Ratio
2. Break even Point
3. Profit at estimated sales of Rs.1,25,000
4. Sales required to earn a profit of Rs.20,000

Problem No.6 - Calculate the breakeven point in units and in rupees from the following
information

Estimate Sales ( 1,00,000 units ) Rs.20,00,000

Variable Cost Rs.12,00,000
Fixed Cost Rs. 4,00,000
-----------------
Total Cost Rs.16,00,000

Profit Rs. 4,00,000

Problem No.7 - The Modern Machine Co.Ltd is furnishing the following in formation

Year Sales Profit

2006 Rs.2,00,000 Rs.10,000
2007 Rs.2,20,000 Rs.14,000

Calculate
1. P/V Ratio
2. Break even point
3. Sales to earn a profit of Rs.18,000/-
Problem No. 8

The Containers and Cases Private Limited produces and markets industrial containers and
packing cases. Due to competition , the company proposes to reduce the selling price. if the
present level of profit is to be maintained, indicate the number of units to be sold if the
proposed reduction in selling price is a) 5% b) 10% c) 15%

The following additional information is available

Present Sales ( 30,000 units ) Rs.3,00,000

Variable cost ( 30,000 units ) Rs.1,80,000
Fixed Costs Rs. 70,000
--------------------
Rs.2,50,000
-----------------
Net Profit 50,000

Problem No.9

Texomat Private Limited has been manufacturing track suits for athletes. Currently its
output is at 70% of its capacity of 19,000 units per annum. One exporter has approved the
sample and has offered to buy 5,000 units at a special price of rs.150/- per suit. At present
the company is selling the track suit @ 210/-

The standard cost per unit is as under

Direct Materials Rs.82/-

Direct Labour Rs.25/-
Variable Expenses Rs.11/-
Fixed Cost Rs.42/-
----------
Total Cost Rs.160/-
----------
a) Should the company accept the offer?
b) What would be your advice if the exporter offers to buy 10,000 units instead of 5,000
units?

Problem No.10 - A manufacturing company manufacturing spare parts has given the
following information

Direct Material per unit - A Rs.16 B Rs.12

Direct Wages - A 48 hours @ 50 paise per hour B 32 hours @ 50 paise per hour

Variable overheads – 150% of wages

Fixed Overheads – Rs.1,500

Selling Price - A – Rs.50 B – Rs.40

The Directors wanted to be acquainted with the desirability of adopting any one f the
following alternative sales mixes in the budget for the nest period

A) 500 units of A and 500 units of B

B) 800 units of B only
C) 800 units of A and 200 units of B
D) 300 units of A and 700 units of B

State which of the alternatives you would recommend to the management

Problem No.11

The price structure of a spare part used in a cycle made is as follows

Per unit
Material Rs.60
Wages Rs.20
Variable overheads Rs. 20
Fixed overheads Rs.50
Profit Rs.50
Selling Price Rs.200

This is based on the manufacturing of 1,00,000 units of the spare part. The management of
the company thinks that due to competition, they will have to reduce the selling price but
they want to keep the total profit intact. What level of production will have to be reached
i.e how many units of the spare part will have to be produced if

1. the selling price is reduced by 10%

2. the selling price is reduced by 20%

Problem No.12 Laila Shoe Company sells five different styles of ladies chappals with
identical purchase cost and selling price . The Company is trying to find out the
profitability of opening of another shop which will have the following expenses and
revenues

Per Pair ( Rs)

Selling Price 30.00

Variable cost 19.50

Salesmen’s commission 1.50
Total Variable Cost ________
21.00
Annual Fixed Expenses are

Rent Rs. 60,000

Salaries Rs.2,00,000
Advertising Rs. 80,000
Other fixed expenses Rs. 20,000
____________
Rs.3,60,000
_____________
 1. Calculate the Annual breakeven point in units and in value. Also determine the
profit or loss if 35,000 pairs of chappals are sold

2. Management wants to reduce the sales price by 5% and to discontinue the

salesmen’s commission and to pay a fixed amount of Rs.90,000 in salaries.
What will be the breakeven point in units

Problem No.13

Bindra Limited is running its plant at 50% capacity. The management has supplied you the
following details

Sales Rs. 5,60,000

Direct Material Rs. 1,60,000
Direct Labour Rs. 80,000
Variable overheads Rs. 2,40,000
Fixed Overheads Rs. 1,60,000
Loss Rs. 80,000

An Exporter offers to purchase 10,000 units @Rs.13 per unit and the company is hesitating
to accept the offer due to the fear that it will increase its already large operating losses

Advice whether the Company Should accept the offer?

Problem No.14

Swastik Rubber Private Limited has been manufacturing track suits for athletes. Currently
its output is at 70% of its capacity of 19,000 units per annum. One party from Russia has
approved the sample and has offered to buy 5,000 units at a special price of Rs.150/- per
suit. At present the company is selling the track suit @ 210/-

The standard cost per unit is as under

Variable cost
1)Direct Materials Rs.82/-
2)Direct Wages Rs.25/-
3)Variable Expenses Rs.11/-

Fixed Cost Rs.42/-

----------
Total Cost Rs.160/-
----------
Should the company accept the offer?
Standard Costing

The major aspect of managerial control is cost control . Hence it is very important to plan
and control costs. Standard costing is a technique which helps management to control costs
and business operations . It aims at eliminating wastes and increasing efficiency in
performance through setting up standards or formulating cost plans

Standard means yard stick or bench mark. The standard cost is predetermined cost which
determines in advance what each product or service should cost under given circumstances.

Standard costing helps the management in evaluating the performance of various cost
centers.

It helps management in formulating production planning

By comparing the actual cost with the standard cost, variance are determined.

Management by exception – Management can focus only on those areas where

performance is less than the standard.

Standard Costing helps I cost control and cost reduction

The setting of standard for different elements of costs required a detailed study of
manufacturing, administrative and selling expenses.

In standard costing, the first step is determining standard material cost, labour cost and
Overheads.

In deciding standard for Direct material, standard quantity of material and standard price of
material are required to be determined.

While setting the standard for Direct Labour cost, standard labour time and standard labour
rate are required to be determined.

While calculating standard overheads, determination of labour hours or unit manufactured

and deciding the overhead rate is important.

Variance

The deviation between standard cost, standard sales, profits and actual cost, sales, profits is
called deviation. The variance may be favorable and unfavorable. If actual cost is less than
the standard cost , the variance is favorable and if actual cost is more than the standard cost,
the variance is called unfavorable.
The variance may be classified in to following categories

Material Cost Variance

Labor Cost Variance
Overhead Cost variance
Sales and Profit Variance

Material Cost Variance

Material Cost Variance = Material Price Variance + Material Usage Variance

Material Usage Variance = Material Mix Variance + Material Yield Variance
Material Cost Variance = Material Price Variance + Material Mix Variance + Material
Yield Variance

Material Cost Variance = Standard Material Cost – Actual Material Cost

Standard Material Cost = Standard Price per unit X standard quantity of material
Actual Material Cost = Actual Price per unit X Actual quantity of material

Material Price Variance = Actual Quantity ( Standard Price – Actual Price )

Material Usage Variance = Standard Price ( Standard Quantity – Actual Quantity)

Problem No.1

Following is the data of a manufacturing company. From the figures given below ,
calculate
1. Material Cost variance
2. Material Price Variance
3. Material Usage Variance

The standard quantity of material required for one ton of output is 40 units with standard
price per unit of material is Rs.3. During a particular period 90 tons of output was
undertaken. The material required for actual production was 4,000 units @ Rs.3.50 per unit

Problem No.2

The standard material required for producing 100 units is 120 kgs. A standard price of 0.50
paise per kg is fixed and 2,40,000 units were produced during the period. Actual material
purchased were 3,00,000 kgs at a cost of Rs.1,65,000.

Calculate Material Variance

Problem No.3

From the date given below

Material Cost variance , Material Price Variance, Material Usage Variance

Product Standard Qty Standard Price Actual Qty Actual Price

( Units ) Rs. ( Units ) Rs.
A 1,050 2.00 1,100 2.25
B 1,500 3.25 1,400 3.50
C 2,100 3.50 2,000 3.75

Problem No.4

From the date given below

Material Cost variance , Material Price Variance, Material Usage Variance

Product Standard Price Standard Usage of Actual Usage Actual Price

of Material per material per unit of ( Kg ) Per Kg.of
Kg output per Kg material

X 5 3 300 9
Y 4 5 250 3
Z 10 4 218 8

Labour Cost Variance

Labour Cost Variance = Standard Labour Cost – Actual Labour Cost

( Standard Time X Standard Rate) – ( Actual Time X Actual Rate )

Labour Rate Variance = Actual Time ( Standard Rate – Actual Rate )

Labour Efficiency Variance = Standard Rate ( Standard time – Actual Time )

Problem No.5

Calculate Labour Variances from the following information

Wages Rs.28,080
Standard Hours 8,640
Standard Rate per Hour Rs.3
Actual Hors worked 8,200
Problem No.6

Calculate Labour Variances from the following information

Labour Rate 50 paise per hour

Hours per unit 10 hours
Units produced 500
Hours worked 6000
Actual labour cost 2,400

Problem No.7

Find out different labour variances

Particulars Standard Actual

Output 1,000 units 1,200 units
Rate of payment Rs.6 per unit Rs.8,000
Time taken 50 hours 40 hours

Problem No.8

The information regarding the composition and the weekly wage rates of labour force
engaged on a job scheduled to be completed in 30 weeks are as follows

Standard Actual
Category of No.of workers Weekly wage No.of workers Weekly wage
workers rate per worker rate per worker
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20