cost accounting-3

Chapter 4 COST ACCOUNTING 

E.g. Fig. 4.4 A Typical Journal Page

Date  Analysis 2009  April 3 Salaries Cash Payment of Salaries for week ending  4 Rent Cash Building rental for month of April 5 Cash Sales Product „A‟ to “X‟ company as per invoice No. 6839 8 Equipment Notes Payable 6%, 90-days note to „Y‟ company  10 Purchase „Z‟ company   Tools on open account  –  Terms  –  30-days 1

F

Debit Credit (Rs.) (Rs.)

403 112

37900.00

314 112

15000.00

112 201

52050.00

104 521

90000.00

608 842

4400.00

37900.00

15000.00

52050.00

90000.00

4400.00

Compiled by Prof. Prasad Parulekar 

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E.g. Fig. 4.5 Typical Ledger Sheet That has been closed and Balanced

Date  Analysis 2009  April Balance 1 Forward 5 10 11 11 12 18 22 28 29 30

F Debit (Rs.)  J-1

47250.0

Sales

 J-1

52050.0

Sales

 J-2

4300.0

„R‟ Company 

 J-2

35000.0

Sales

 J-2

27500.0

Sales

 J-2

4700.0

Sales

 J-3

60000.0

Sales

 J-3

8750.0

Sales

 J-3

27400.0

Sales

 J-3

31500.0

Sales

 J-3

37000.0

 Total Balance Forward

Date  Analysis F Credit 2009 (Rs.)  April 3 Salaries  J-1 37900.0 4 10 12 13 17 21 29 30

Rent

 J-1

15000.0

Purchase

 J-2

8750.0

Insurance

 J-2

22750.0

 Taxes

 J-2

43750.0

Salaries

 J-3

41050.0

Purchase

 J-3

49250.0

Office Supplies

 J-3

7900.0

Purchase

 J-3

7700.0

302150.0

Balance

68100.0

68100.0

 Total

302150.0

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Compiled by Prof. Prasad Parulekar 

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Methods Of Cost Accounting Cost accounting --- determination of cost for producing product or rendering service; helps in future cost predictions Cost estimation --- cost accounting itself   Accountant --- maintain records of actual expenses for variety of activities; interpretation of  these records --- “Actual” or “Post-mortem” cost accounting  Standard cost accounting --- prediction of  future cost --- determines future capital requirements & income  Variance --- deviation of standard costs from actual costs  Various types of systems --- for reporting various costs One common type is Cost Estimation (Manufacturing cost & General expenses) Each industry --- use own method of cost distribution on account Overall procedure remains same (journal, ledger, balance sheet, income statement) 

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 Accumulation,

Inventory

&

Cost-of-Sales

 Account Basic cost accounting methods --- requires posting  of all costs --- accumulation accounts Series of accumulation accounts--- handles various costs for each product 

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Compiled by Prof. Prasad Parulekar 

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 At the end of given period --- accumulated costs  –  transferred to inventory account Inventory account --- summary of all expenses in given time period --- shows, amount of all materials produced or consumed Information in inventory account  –  combined with data on amount of product sales --- together transferred to --- cost-of-sales account Cost-of-sales account  –  helps in determining  profit or loss for each product sold Plant producing several products & by-products --allocation of cost to each product  –  must be made on some predetermined basis  Allocation of costs  –  method depends on policies of company  Fig. 4.6: Example of Accumulation Account Item:Chemical „A‟ for use in producing product, „X‟

Date Received Cost 2009 (lb) (Rs. /lb) May 2 5000 1.8 15 10000 2.0 17

Balance on Delivered hand (lb) for use in  process (lb) 5000 15000 9000 6000

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Compiled by Prof. Prasad Parulekar 

Fig. 4.7: Inventory Account Manufacturing Cost Works Inventory Refining of Crude Product, „D‟ For month of Sept. 2009 Cost Element Name Unit

Units on hand Start End of  of  month month

Crude Product „D‟ Operating   wages Operating  supplies Maintenance  wages Maintenance materials Utilities Depreciation

13,000

Overhead  Total cost & Production

1.5

 Total units used or  produced (c) (c=a × b) 1,50,000

Hours

0.0150

Hours

0.0250

Gallons

Units used per unit  produced (b)

11,000

Rs. Investment Gallons

250.00

5,000

 Total Cost per cost unit (Rs.)  produced (e) (f) (e=c×d) (f=e/a)

13.94

20,91,000

20.91

1,500

62.50

93,750

0.9375

2,500

100.00

2,50,000

2.5

5,25,000

5.25

0.5

4,00,000 1,25,000

4.00 1.25

36.75

1,90,000 36,74,750

1.90 36.75

2,50,00,000

4,000

Price  per unit (Rs.) (d)

1,00,000 (a)

Fig. 4.8: Cost-of-Sales Account Cost – of  – Sales - Account Product ‘E’

Item Sales, (lb)

For Month of Sept. 2009

This Month 4,75,000

Last Month 5,90,000

 Year to date 32,20,000

Rs. / unit

Rs. / unit

Rs. / unit

10.00

10.00

10.00

06.00 00.35 00.90 01.25 00.50

05.00 00.40 01.00 01.00 00.40

05.25 00.35 00.80 01.10 00.40

 Total cost of sales

09.00

07.80

07.90

Profits before taxes

01.00

02.20

02.10

Selling price: Cost of sales:

Manufacturing cost Freight & delivery Selling expense  Administrative expense Research expense

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Compiled by Prof. Prasad Parulekar 

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Materials Cost Price fluctuations --- varies cost--- may cause difficulty to transfer from accumulation account to inventory & cost-of-sales account E.g. consider fig. 4.6 : 2 different costs for chemical „A‟ (i.e. Rs. 1.8 & Rs. 2 / lb) on different dates in same month For such case 3 basic methods can be used while transferring  1.  The current Average method: average price of  all inventories on hand at time of delivery is used e.g. fig. 4.6: Rs. 1.93/lb for chemical, „A‟ 2. The First-In-First-Out (fifo) method: assumes oldest material is always used first e.g. price of  6000 lbs of chemica l „A‟ would be Rs. 1.8 for first 5000 lbs & Rs. 2 for remaining 1000 lb 3. The Last-In-First-Out (lifo) method: the most recent price are always used e.g. price for 6000 lb of chemical „A‟ would be Rs.2  Any one of 3 methods can be used Current average method --- gives best picture of  true cost in given time interval ; misleads if used for predicting future costs

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Compiled by Prof. Prasad Parulekar 

Meaning

of Some Frequent & Important Terms in Cost Accounting 1. Consolidated Balance sheet: document with all financial data for parent as well as subsidiary  companies if any  2. Balance sheet--- contains --- Real figures--- (cash, marketable securities), Estimated numbers--(inventories, accounts receivable), Fictitious numbers-- (numbers difficult to assess) 3.  Accounts receivable: goods sold to customer on 30-, 60- or 90- days basis, full payment not received as of the date of balance sheet 4.  Allowances: made for uncollected bills from customers who are unable to pay  5. Inventories: raw materials, goods in process, finished goods ready for shipment, etc. Costing of  inventories --- raw material  –  at cost; goods in process --- at raw material cost plus one half the conversion cost; finished goods  –  at market price; frequently inventory costs --- carried at slightly less than these figures --- to allow for deterioration, decline, obsolescence 6. Prepaid Expenses: insurance premiums, leases for equipments, computers, office machineries, etc. securities: 7. Marketable commercial papers, government bonds Item 3 to 7 --- combines to --- current asset 8.  Accounts payable: invoices for raw materials, supplies, purchased from supplier, for which payment due within 30- , 60-, or 90- days 7

Compiled by Prof. Prasad Parulekar 

9. Notes Payable: money owed to banks, other creditors (promissory notes) 10.  Accrued expenses payable: salaries, wages, interests on loans, insurance premiums, pensions

Items 8 to 10 + Income taxes payable --combines to --- current liabilities 11. Deferred Income Taxes: encouraged by  government as tax incentives  –  benefits economy  e.g. accelerated depreciation ; net effect  –  to reduce full amount to be paid by company as in future 12. Stockholder’s total interest that Equity: stockholders have in the business; equal to (total asset) – (total liabilities) Capital Stock: Preferred Stock: have preference over shareholders regarding dividends or distribution of asset; some preferred stocks  –  called as cumulative  – preferred stock holders receive dividends before common stock holders; don‟t have voice in company affairs or  voting rights Common Stock: no limitations on dividends paid to them; company earnings high  – high dividends are paid; if earnings are low --- no dividends are paid

13. Capital surplus: amount of money stockholder paid for stock over & above the par value of stock  14. Par value of stock, bond: face value; value at the time of issue 8

Compiled by Prof. Prasad Parulekar 

15. Accumulated retained earnings: also called earned surplus = (Net profit)  –  (Dividends paid to stockholders) Item 12 to 14 --- combines to --- total stockholder’s equity 16. Depreciation: money kept aside as operating  expenses for devalue of asset due to wear & tear Depletion: diminishing of natural resources  Amortization: decline in useful value of tangible asset such as patent 17. Some selected Financial ratios a. Liquidity Current liquidity  Cash liquidity  b. Leverage Date to total assets  Times interest earned Fixed charge coverage c.  Activity Inventory turnover  Average collection period Fixed asset turnover  Total asset turnover d. Profitability Gross profit margin Net operating margin Profit margin on sales Return on net worth Return on total assets

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Compiled by Prof. Prasad Parulekar