Study Notes on Cost Accounting

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Compilations of study notes from different chapters of cost accounting! The below given notes will help you for prepare for various competitive examination. If you are preparing for Civil Service Examination Examination,, these notes will definitely help you to get an overall idea about the subect. Contents: . "otes on Cost and Cost #ccounting $. "otes on %anageme men nt #ccountancy in &elation to Cost '. "otes on (rere)uisites of Costing System *. "otes on Classification of %ethods of Costing +. "otes on on %a %aterial Co Control in in Co Cost #ccounting . "otes on on -e -epartme men nts In Involved in in Co Controlli lin ng a abour Co Cost /. "otes on Classification of 0verhead of Co Costs 1. "otes on Contract Costing 2. "otes on (rocess Cost 3. "otes on %otor Transport Costing . "otes on on In Integrated #ccounting Sy System $. "ote "o tes s on on &e &eco con nci cili lia ati tio on of of Co Cost and 4in 4ina anc ncia iall #c #cco coun unts ts '. "otes on Cost 5olume (rofit #nalysis *. "otes on Standard Costing

1. Notes on Cost and Cost Accounting: Aspects of Cost: Costs may be ascertained6  #-5E&TISE%E"TS6

7i8 9istorically: i.e. after they have been incurred: or  7ii8 ;y predetermine predetermined d standards combined with subse)uent analysis of variances between these standards, and the actual cost incurred: and 7iii8 ;y the use of marginal methods of presentation for either 7a8 or 7b8, involving the differentiation between et conditions, so as to ensure that no orders for supply of products are lost. 7ii8 %anagement tool for identifying and controlling efficiency6 It is used as a managementt tool to indicate to the management inefficiencies managemen inefficiencies of various departments, plants and machinery. The management?through cost analysis ?can identify the wea> areas of operations and can ta>e proper and prompt action and, thus, can lead the business unit to its desired goal.

 #-5E&TISE%E"TS6

7iii8 (reparation of budgets and standard costs6 It provides data to the management for the preparation of budgets and standard costs. #n analysis of variances between budgeted figures and actuals or standard and actuals throw light on the wea> areas of business operations and guides the management in ta>ing corrective action to remove the unfavorable cost variances. 7iv8 (reparation of 4inancial Statements6 It is used to provide data for the preparation of periodical (rofit and oss #ccount and ;alance Sheet at such intervals as may be desired. It also provides a perpetual inventory of stores and other materials, so that interim financial statements can be prepared without stoc> ta>ing. So, an important obective of cost accounting is the creation of useful cost data and information for the purpose of planning and control. They influence and facilitate both short? and long@run decisions. Cost accounting provides for a basis for operating policies li>e6 7a8 -etermination of cost@volume@profit relationship, 7b8 Ahether it would be economical to buy certain articles or components from outside, 7c8 Ahether to replace the existing plant and machinery, or  7d8 Ahether to continue the business or to shut it down.

Thus, there is a direct relationship between information needs of management, cost accounting obectives, and techni)ues and tools used for the analysis. Financial Accounting and Cost Accounting: 4inancial #ccounting is concerned with historical cost. It consists of recording, classification 7ledger8 and analysis of the business transactions in a subective manner. It presents income statements showing the financial result of the business for a particular financial year and a ;alance Sheet on a specific date to exhibit the state of affairs of a business unit. It fails to throw light on the aspects of planning, control and decision ma>ing. 4or these purposes, we need Cost #ccounting. To achieve the above obectives Cost #ccounting records business expenditures in an obective manner, i.e. according to the purpose for which costs are incurred. Cost Accounting and Management: Cost #ccounting provides useful data to management for ta>ing managerial decisions in the following areas6 7i8 Establishing business unitBs profit goal: 7ii8 -etermining departmental goals: 7iii8 %easuring and controlling business performance with the help of budgetary control: 7iv8 %a>ing decisions about improvements and adustments in the operation of  the business for achieving predetermined business obectives: and

7v8 To coordinate the entire organisational efforts and tas>s. In doing so, cost accounting performs the following tasks: 7a8 Cost #ccounting helps in determination and analysis of costs and income of a business unit. This facilitates comparison of costs of one period with those relating to a different period in order to evaluate the operating efficiency of each division or segment or product. Control of Materials: 7b8 It helps management in controlling cost. In every t ype of cost accounting, materials and supplies are accounted for?in terms of departments and processes. # rational and scientific system of receiving, handling and issuing materials is strictly observed. The perpetual inventory method is used to control properly the materials in stores. Control of raw materials and of parts follows production until goods are completed. Control of Wages and Salaries: abour cost is controlled through proper accounting for labour by obs and by operations. In many manufacturing concerns, daily summary reports are prepared to show the number of hours and wage rate for each wor>er, per ob or operation. In cost accounting, costs are classified into direct and indirect items, indirect costs are generally termed as overheads. 0verheads are further classified as controllable and uncontrollable items. This classification allows the cost accountant to concentrate his attention on those costs which can be reduced or eliminated. c! Curtailment of losses due to seasonal conditions:

In many industries higher costs and lower profits arise due to seasonal changes in activities. The cost accountant may ma>e an attempt to alleviate the situation by presenting figures showing costs and losses that result from irregular employment of labour, plant and machinery. The cost reports can exhibit the idle time of wor>ers and machinery, cost of storing raw materials and finished products, unabsorbed overhead costs and general decay in the morale of personnel that result from subnormal operations. The use of budgetary control combined with cost accounting may go a long way to bring about stability in industrial activity which will ultimately benefit the shareholders, employers and the society at large. d! Cost Accounting and e"pansion policy: Every business unit has to face national and international changes that occur fre)uently due to changes in governmentsB political and economic policies. These changes have considerable effect on costs. %oreover, the management has to adopt policies to face the ever growing competition, to develop new mar>ets for its products. The cost accountant is re)uired to investigate and to prepare reports to >eep the management abreast of the relative advantages and profitability of one policy as compared to others. e! #udgeting: (articipation of cost accounting in the formulation and execution of budgets and standards6 Cost information for managerial decision ma>ing and planning is the most important ustification of a sound cost accounting system.

The following diagram shows the accounting cycle by which information reaches the decision ma>ers6

The use of budget helps the management to correct inefficiencies. It helps to identify the wea> areas by ma>ing a comparative study of estimated figures with the actuals. 5ariances are studied carefully and corrective measures are ta>en in time to avoid wastage and losses. We may now conclude that cost accounting is so closely linked with management that it $ecomes difficult to indicate where the work of the cost accountant ends and managerial control $egins% In $rief, it may $e said that: er.

2. Notes on Management Accountancy in Relation to Cost:

The #merican #ccounting #ssociationsB 7###Bs8 Committee on %anagement  #ccounting has defined %anagement #ccounting ing of rational decisions with a view towards achieving these obectives. It includes the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performance. Its study involves consideration of ways in which accounting information may be accumulated, synthesied, analyed and presented in relation to specific problems, decisions and day to day tas>s of business management=. %anagement #ccounting embraces both 4inancial and Cost #ccounting. %anagement #ccounting emphasies the preparation of reports of an organisation, for its internal users such as ;oard of -irectors, %anaging -irector and for other top level management for the formulation of business policies. Thus, management accounting reports attempt to fill the information needs of managers with respect to a specific problem, situation, or decision. %anagement #ccounting is generally indistinguishable from Cost #ccounting. They are closely lin>ed as both of them use common basic data and reports. Cost #ccounting largely uses data about production, sales, wages, overheads. %anagement #ccounting uses the same data to prepare budgets, performance reports, control reports for ma>ing decisions in different areas.

'ray and (icketts esta$lish the relationship of Management Accounting with Cost Accounting in the following language: @force needed to meet anticipated production re)uirements and to estimate the cash re)uirements to meet wee>ly pay rolls. This represents the use of cost accounting data to develop managerial accounting data for planning decisions.= The historical data on labour costs might be compared with the estimated labour costs to determine if labour is being used effectively and efficiently. This represents the use of cost accounting data to develop managerial accounting data for control decisions. There is an intimate relationship between Cost #ccounting and %anagement  #ccounting. %anagement #ccounting communicates various information useful to the management for ma>ing decisions for the efficient running of the business. 4or this purpose, management accounting uses various techni)ues which include standard costing, marginal costing, uniform costing, budgetary control, brea> even and cost benefit analysis. In fact, management accounting is an extension of the managerial aspects of cost accounting: it utilies the principles and practices of both cost accounting and financial accounting in the best interests of the business. 4inancial #ccounting determines the financial results for a period and the state of affairs on the last day of the period. 4rom this point of view financial accounting may be treated as Stewardship #ccounting. Cost #ccounting, on

the other hand, generates information for controlling operations with a view to maximising efficiency and profit. So, it may be termed as Control #ccounting. Since %anagement #ccounting communicates necessary information to the management for efficient running of the business, it is >nown as -ecision #ccounting.

3. Notes on Prerequisites of Costing System: i! )etermination of o$*ecti+es: The obectives for which the costing system is installed are to be determined. In fact, if the obectives are not predetermined and well defined, the costing system will fail to accomplish the desired goal. ii! Sie layout and nature of the $usiness:  # close study of the sie, layout and nature of the business is very much essential to design the costing system. The choice of method of costing largely depends upon the nature of the business. iii! -roduction stages: Every costing system should follow the production stages because the cost at each stage of production is to be determined. The costing system should be designed in a way so that it can determine the cost at each significant stage. i+! .rganiational structure of the $usiness: The organiational set up of the business is to be closely studied. The methods of purchase, receipt of materials, issue and storage of materials should be examined and changes, if re)uired, are to be made so that these

departments can feed the costing department with the supply of accurate cost data. The maximum amount of re)uired information should flow to the system. +! /asy, simple, economical and fle"i$le: The system to be introduced should be simple and easy to operate. 4or this, form and records of original entry should be designed in such a way as to minimise clerical wor> and expenditure. The cost of the system to be installed should be considered. It should be >ept in mind that the installation and operation of the system should be economic. +i! Coordination and cooperation: 5arious departments that are involved in the system should be well coordinated so that they can function harmoniously and with a sense of cooperation to ma>e the system effective. The benefits that accrue from the system should be explained to various persons concerned and the sense of awareness should be created. +ii! Cost Control: The system should be so designed that cost control can effectively be exercised. +iii! Communication of information: The costing system should incorporate a suitable procedure for communicating re)uired information with promptness to the various levels of management for ma>ing appropriate decisions. i"! Interlocking of financial and cost accounts:

The cost and financial accounts could be interloc>ed into a single integral accounting system. If, that is done, the results of separate sets of accounts could be reconciled by means of control accounts for accuracy.

4. Notes on Classification of Metods of Costing: A% Classification of Methods on the #asis of Manufacturing -rocess: a! 0o$ Costing: This is a method of costing by which the cost of a definite ob, or of a specific order or a batch of finished products is determined. This method of costing is applied in those business concerns where production is carried out as per specific order. Dnder this method, costs are collected and recorded under a specific production order. Ahen an order is received, production control allots a

number to it. In ob costing all costs of direct materials, direct labour and other direct expenses are directly charged to the specific ob or product. ob cost sheets are used for the accumulation of ob costs. The ob cost sheets serve a control function. This method is very much popular in enterprises engaged in house building, ship building, production of machinery and repairs. ;atch costing, contract costing and composite costing are the other variations of ob costing. i! #atch Costing: ;atch costing refers to that method of costing which determines the cost of a group of identical products. This method is applied to general engineering factories which produce components in economical batches for subse)uent assembly. ;atch costing can conveniently be applied to companies engaged in manufacturing radios, televisions, watches, cars, electronic goods, medicines, biscuits, confectionery, etc. ii! Contract Costing: This method of costing is based on the principle of ob costing. # specific contract becomes the cost unit. # particular contract is treated as a whole ob and the cost of the contract is ascertained. It is also >nown as Terminal Costing since the ob cost is completed with the completion of the wor>. Contract costing is used in building and civil engineering wor>s, ship building and aircraft manufacture. iii! Composite Costing or Multiple Costing: Dnder this method of costing, costs for each component or each group of components to be assembled into a final product are ascertained separately.

Industries which manufacture radios, televisions, motor car, aircraft, etc. ma>e use of this method of costing. $! -rocess Costing: (rocess costing is a system which applies costs to li>e products that are mass produced in continuous fashion through a series of production steps >nown as processes. The finished goods of earlier processes become the raw materials of the latte processes. Costs are identified for each process and charged to that process. Cost of each process is ascertained separately. Chemical industries, oil refineries, gas and electricity generating concerns, textiles, paints, flour, food processing, paper, mining and cement industries etc. ma>e use of this system of costing. 0ther variations of process costing are6 operating cost, operation cost and single or output cost. i! .peration Cost: The cost unit is the FoperationB instead of the process. This system is used by the manufacturing concern where methods of production consist of a number of distinct operations. The per unit cost is arrived at the end of each accounting period by dividing the cost of an operation by the number of units completed in the operation centre. ii! .perating Cost: 0perating cost is used for finding out the cost of the appropriate cost unit for a particular service. It is used by those organisations which render services such as transport, power house, schools, catering, hospitals, boiler houses etc.

iii! Single or .utput Cost: This method is employed where production is uniform and consists of a single product or two or three types of similar products. The per unit cost is obtained by dividing the total cost by the total number of units manufactured. #% Classification on the #asis of 1ime: a! 2istorical Cost: These costs represent the cost of actual operational performance. It is a method of costing under which costs are determined after they have been incurred. 9istorical costs are Fpost@mortemB costs. 9istorical data are considered for predicting estimated costs of the alternative actions under consideration. ;y ma>ing comparisons, one of these alternative actions is selected and the decision is translated into action. So, in a decision@ma>ing process, historical costs play an important role. $! -redetermined Cost: i! Standard Costing: It is a techni)ue where standard costs are prepared in advance and used. Standard costs are fixed on the historical data. #fter the production, actuals are compared with the standard costs and variances are identified. 0nce the variances are determined, the management finds out the reasons for such variances for ta>ing remedial measures. So, it is a tool in the hands of the management to control cost and ensures accountability, as also efficiency in the use of factors of production. It is an extension of budgetary

control. This system of costing is useful in repetitive industries and obbing industries. I%C%M%A%3s definition of standard costing summaries its concept and purposes: ing conditions. It is built up from an assessment of the value of cost elements and correlates technical specifications and the )ualification of materials, labour and other costs to the prices andGor wage rates expected to apply during the period in which the standard cost is expected to be used. Its main purposes are to provide bases for control through variance accounting, for the valuation of stoc>s and wor>@in@progress, and in some cases, for fixing selling prices=. C% Classification for Making Managerial )ecisions: a! Marginal Costing: In marginal costing, costs are classified into fixed and variable costs. The fundamental approach of marginal costing is to relate variable costs to cost units: while fixed costs are attributed to the business in general. 5ariable costs are charged to production: fixed costs will be written off in full in the period to which they are attributable. %arginal costing assumes that the excess of sale price over variable cost contributes to a fund which will cover the fixed costs and provide the underta>ingBs profit. In other words, fixed overhead is not allocated to cost units.

$! 4niform Costing: Dniform costing is not a system of costing. This system refers to a system used by several underta>ings. They use the same costing principles or practices to enable them to enoy benefits of a uniform s ystem. This method of  costing is useful to ma>e inter@firm comparisons. c! .pportunity Costs: These costs refer to costs which result from the use of material, labour and other facilities, in a particular manner and which have been discarded in favour of an alternative use. In other words, the benefit from resources which has been foregone for not being used in the manner originally planned. So, opportunity cost is the foregone benefit which might have been drawn from the resources had they been used in an alternative manner. 4or example, a saving of &s.+3,333 may earn an interest of &s.,333 if deposited with a ban> for two years or more. "ow, this amount is invested in a business for earning profit. 9ere, the opportunity cost will be the amount of interest, i.e. &s.,333 which has been foregone for its alternative use. d! (eplacement Costs: This cost refers to the cost of replacement of an asset at current mar>et price. Suppose, the written down value of a particular machine is &s.'3,333. If the machine is bought at current mar>et price, it would cost, say, &s.'+,333. So, the amount of &s.'+,333 is the replacement cost of the machine. In replacement cost, the current mar>et price of an asset or materials is considered but not its original cost or written down cost. e! Imputed Costs:

These are notional costs. They do not involve cash outlay. 4rom this point of view, it is similar to opportunity cost. These costs are computed only for the purpose of decision ma>ing. They are also used for evaluating the performance of profit centres. Chart showing the method of costing applica$le to industry:

!. Notes on Material Control in Cost Accounting: .$*ecti+es of Material Control: A good system of material control should ha+e the following o$*ecti+es: 7i8 Supply of the desired )uality and )uantity shall be ensured for efficient and uninterrupted production.

7ii8 %aterials should be purchased in economic )uantities to enoy the benefits of economic purchases. 7iii8 %aterials are to be properly stored to preserve )uality and )uantity arid to avoid pilferage and obsolescence. 7iv8 The investment in materials shall be maintained at lowest level to avoid unnecessary bloc>age of wor>ing capital. 7v8 (urchase of materials must be made at the most favourable prices under the best possible terms. 7vi8 Issues of materials should be properly authorised and accounted for. 7vii8 %aterials received should be properly inspected to test the )uality of materials. 7viii8 (ayment should be made only when .payment vouchers have been properly passed by authorised officer. 7ix8 (ayment should be made for those materials which have been received after proper inspection. Importance of Material Control: In an effective cost accounting system there must be a proper system for the control of material from the time an order is placed until the material is issued to production. Since materials represent an important asset and is the largest single item of cost in almost every manufacturing concern, the success or failure of a

concern may depend largely upon efficient materials purchasing, storage, utilisation and proper accounting. Ahere materials are not systematically controlled, excess stoc>s of some items are li>ely to occur as a result of which unnecessary tying up of capital and loss through obsolescence and deterioration ta>e place. 4urther more, haphaard buying and lac> of control of materials is bound to r esult in the purchase of material of too good or too poor a )uality for the purpose for which it is intended.  #n efficient buyer ma>es a valuable contribution to the success of a business by ordering the right )uality and )uantity of material at the most favourable price and by ensuring the continuous flow of materials to the production departments. Efficient material control cuts out losses and forms of wastes. So, incoming materials should be chec>ed against orders to ensure that the correct )uantity and )uality have been received. Theft, brea>age, deterioration, and the use of  excessive floor space can be reduced to a minimum by proper controls. 4inally, the most important thing to the cost accountant is that, it is impossible to produce reliable costing information system if the records of material issues are unsatisfactory. So, an efficient purchase officer should >now when to purchase, how much to purchase, where to purchase. 1herefore, effecti+e material control is +ery important in order to: 7i8 (rovide better )uality of goods to the customers at reasonable price by eliminating wastage and by reducing cost,

7ii8 (roduce goods at the maximum efficiency, 7iii8 %anage inventories to control investment in inventories, 7iv8 #void abnormal wastage by exercising direct control, and 7v8 #void over@stoc>ing of materials by ma>ing proper planning of materials and fixation of levels well in advance. The stoc> should be maintained at such a level so that materials can be supplied to production departments as and when they re)uire. It is also to be seen that wor>ing capital is not bloc>ed unnecessarily in stoc> of materials. /ssentials of Materials Control: 1he essentials of materials control from the costing +iewpoint can $e summarised as follows: 7i8 %aterials of appropriate )uality and specification should be purchased. 7ii8 The suppliers of materials chosen should represent an appropriate balance between )uality, price and delivery. 7iii8 %aterials should be properly inspected and received. 7iv8 #ppropriate storage facilities should be provided to preserve the )uality of materials. 7v8 There must exist co@ordination and co@operation between the various departments li>e (urchase, Inspection, Storage, #ccounts and Cost. 7vi8 Efficient purchase organisation.

7vii8 The documentation, accounting systems and controls at each stage should be well designed and effective. 7viii8 (lanning of re)uirement of materials is to be done very carefully. 7ix8 Aell organised system of reporting to management regarding materials purchase, storage, utiliation, returns, spoilage, defective goods, obsolete stoc>s and inventory balances should be introduced. 7x8 -irect materials used in production should be charged to production on an appropriate and consistent pricing basis. 7xi8 Stoc> ta>ing must be well organised to ensure that sufficient )uantities of stoc> on hand are available when re)uired. 7xii8 There must be efficient system of internal chec>s and internal audit. Materials control consists of controls at two le+els: 7i8 Huantity controls and 7ii8 4inancial controls. The production department in a manufacturing organisation aims at )uantity controls while the finance department aims at >eeping the investment on materials at the lowest point. So, in materials control an e)uilibrium has to be maintained between the two opposite needs. In the opinion of #. %at, 0. . Curry and eorge A. 4ran>? 5A $asic o$*ecti+e of good materials control is to $e a$le to place an order at

right time from the right source to ac6uire the right 6uantity at the right price and 6uality7% Inefficient materials control results in loss through misuse, and waste of resources may be caused by many factors li>e buying the wrong articles, buying materials of inade)uate )uality, buying too much, buying too little. 4inancial loss results from materials stolen, pilfered, spoilage and damage to materials before use, scrap and spoilage during use. #ll these lead to Ineffective employment of wor>ing capital. #n inade)uate system of material control proves to be costly to the business firm and reduces competitiveness in the mar>et because of high cost of the product. Ad+antages of Material Control: 1he following are the ad+antages of material control: 7i8 Efficient material control eliminates wastages in course of purchases, storage handling and production: 7ii8 It ensures continuous flow of materials for use in production: 7iii8 It also facilitates preparation of accurate monthly or periodical statement re)uired for management information:B 7iv8 &educes, to the minimum the wor>ing capital loc>ed up in various inventories: 7v8 &educes the ris> of fraud and theft: and 7vi8 (rovides for accountability on the part of those who are involved in the process of material management.

-rocedure of Material Control: In $rief, the materials controls procedures include: 7i8 (urchasing, &eceipt, Storage and issue, Inventory control and associated costing procedures. 7ii8 The purchasing function is of paramount importance which aims at buying proper type o materials at competitive price. It aims for an appropriate balance of price, )uality and delivery. 7iii8 The purchase re)uisition giving precise details of )uantity re)uired, specification, delivery etc. initiates the main purchasing procedures. 7iv8 The purchasing procedures consist of search for Supplier, Selection of Supplier, placing of order to the selected supplier and expediting the deliveries. 7v8 oods supplied must be properly received. ;efore ta>ing delivery of goods they should be verified with reference to (urchase 0rder, inspected and to be entered in oods &eceived "ote 7&"8. 7vi8 The .&.". is an ac>nowledgement of goods received and is used for ma>ing payment to supplier. 7vii8 Store >eeping involves receipt and issue of materials, preservation of materials and storage space organiation. 7viii8 %aterials should be issued to production departments on the basis of %aterials &e)uisition to be issued by a responsible authority of the production department concerned.

7ix8 Ideal stoc> level should be maintained by the stores so that replenishment of stoc> can ta>e place at an appropriate time. It should see that the production departments do not suffer from dearth of materials. 7x8 Stoc> ta>ing is carried out on a periodic or continuous basis. Continuous stoc> ta>ing is essential for perpetual inventory systems.

". Notes on #e$artments %n&ol&ed in Controlling 'a(our Cost: A% -ersonnel )epartment: Most firms of any sie ha+e a -ersonnel )epartment which has responsi$ility for numerous tasks in+ol+ing la$our% 1he tasks include: 7i8 #dvertising, recruiting and engaging labour. 7ii8 -ischarge, transfer and administration of and appraisal of schemes. 7iii8 Industrial relations and negotiations with unions to settle industrial disputes. 7iv8 Staff development, training and educational schemes including day release, apprenticeships and courses. 7v8 Execute the policies, regarding appointment, promotion, wage and incentive systems etc. 7vi8 Communication of information to the management on such matters as absenteeism, lateness, labour turnover, normal and overtime wor>ed.

7vii8 Aelfare, sports and social facilities, safety and medical facilities. 7viii8 %anpower planning and forecasting. In brief, the personnel department has the responsibility to provide an efficient labour@force which is cost effective and to >eep labour turnover to a minimum. #% /ngineering )epartment6 This department helps to maintain control over wor>ing conditions, production methods, ob performance. It is also responsible for maintaining safety and efficient wor>ing conditions. It has to initiate and supervise research and development 7& J -8 and to ma>e method study, motion study and time study. %a>ing ob evaluation, merit rating and ob analysis are the important functions of the Engineering -epartment. This department should aim at improving labour efficiency or productivity, thereby cutting down the effective labour cost. The Engineering -epartment maintains control over wor>ing conditions and production methods for each  ob or process by performing the above functions. C% 1ime89eeping )epartment6 The function of this department is to maintain the exact time for which each wor>er has wor>ed. -roper time8keeping in la$our costing and control is +ery important $ecause of the following reasons: 7a8 It accumulates the total number of hours wor>ed by each wor>er so that his total periodical earnings can be computed.

7b8 #bsence of proper time@>eeping arrangement is sure to create frustration among sincere and punctual employees. This situation will adversely affect the morale of employees resulting in low productivity and production and increased costs. 7c8 Certain retirement benefits li>e pension, gratuity, leave with pay,, provident fund and salary are lin>ed with continuity of service of employees. #ttendance records can be immensely helpful and useful in the determination of various retirement benefits and other fringe benefits. 7d8 Time@>eeping is of paramount importance in the tas> of apportionment of overhead costs on the basis of labour hours. 7e8 Time@>eeping records are also useful for analysis purposes. 1ime (ecording for -iece Worker 6 1ime recording for workers who are paid on piece rate $asis is essential for the following reasons: 7i8 Time recording is necessary to ensure discipline in the factory. 7ii8 Ahen the wor>ers are guaranteed minimum wages, time recording becomes necessary to ascertain the time spent by the wor>ers irrespective of their individual output. 7iii8 Time recording is important because it facilitates the preparation of pay roll as a whole and calculation of dearness allowance. 7iv8 In fixing up differential wage rates, time recording becomes essential.

7v8 Time recording also facilitates the apportionment of overheads on the basis of labour hours. .$*ects of 1ime8keeping: 1he main o$*ecti+es of time keeping function are: 7i8 To maintain wor>ersB activity records to meet statutory re)uirements: 7ii8 To maintain basic data re)uired for the preparation of payroll: 7iii8 To generate statistical data to ascertain productivity of labour and to control labour cost: 7iv8 To find out the labour cost and to control labour cost: 7iv8 To find out the labour cost of a ob or product or service: 7v8 To maintain discipline in attendance: provide: 7vi8 To nationalie basis of overhead distribution in various situations: 7vii8 To calculate overhead cost of a ob. )% -ayroll )epartment: The tas>s of preparing pay rolls are complicated as some specified amounts li>e income tax, professional tax, cooperative loan, contribution to (.4., employeesB contribution to E.S.I, etc. are withheld from the earnings of employees. 1here are three ma*or pro$lems that in+ol+e the preparation of payrolls: 7a8 #llocating labour costs to products, departments:

7b8 #ccurate computation of earnings and prompt payment to individual employees: and 7c8Computing and remitting withholdings to proper authorities li>e government, local authority etc. 4rom the view@point of employees, promptness of payments and pinpoint accuracy are the foremost criteria for udging the merits of any payroll system. The functions of a payroll department is an intermediary function between the time>eeping and the cost accounting departments. 1he main functions of pay roll department are: 7i8 To compute employeesB wages accurately: 7ii8 To ma>e prompt payment to employees: 7iii8 To compute the deductions to be made from employeeBs earnings under different heads and to remit them to the appropriate authority in time, for example, income tax, professional tax, E.S.I, etc. : 7iv8 To compile labour statistics for management to formulate labour policy: 7v8 To maintain a permanent pay roll record for each employee: 7vi8 To maintain a record of ob classification, department and wage rate for each employee: 7vii8 To verify and summarise the time of each wor>er as shown on the daily time cards. -ayment of Wages:

-ue care should be ta>en for payment of wages to employees to ensure proper payment i.e. right amount to the right persons. In order to maintain a@ control to safeguard the payroll against the inclusion of ghost wor>ers or the names of those employees who have already left their obs, the paymaster should re)uire the identity of each employee at the time of payment of wages by one of the following6 7i8 (ersonal identification by foreman or authority of the department: 7ii8 Identification card or badge: 7iii8 Signed receipt for comparison with a personal signature on file in the personnel department. -reparation of -ay (oll6 The preparation of pay roll is the responsibility of the pay roll accounting department. Aages for each wor>er is calculated in wage sheet or pay roll. 1he following documents are used to prepare the pay roll of the workers: 7i8 Time cards 7ii8 (iece@wor> cards, and 7iii8 ob cards. Care should be ta>en at the time of preparing pay roll to avoid errors and frauds. It is to be seen that no wage bill has been drawn in the names of dummy wor>ers.

/% Cost Accounting )epartment: This department is responsible for the accumulation and classification of all the cost data of which labour cost is one of the most important elements. There must be a proper coordination and close relationship between cost department and time >eeping and pay roll departments. In the determination of labour cost time >eeping and pay roll departments feed the costing department with necessary data in respect of time ta>en 7labour hours8 by each wor>er and his remuneration. Time@>eeping is the first function in the labour accounting process. The pay roll department computes the earnings of each employee after ma>ing necessary deductions. The cost accounting department is responsible for the accumulation and classification of all cost information of which labour is one element. )irect and Indirect a$our: )irect la$our: The Institute of Cost and %anagement #ccountants 7D.K.8 defines direct labour cost as ers: salaries and related costs of production management: Indirect materials and materials of little individual value used in production L screws, nails, bolts, nuts etc.: Carriage inwards on materials purchased: "ormal wastage of materials: Canteen and Aelfare expenses: Tool room expenses, production control and progress department expenses: 0il, rags and other factory supplies.

$! .ffice and Administration .+erhead Costs: Cost of Indirect materials used, indirect remuneration paid to the office and administrative staff and indirect expenses incurred in office management are the constituent factors of office and administration overhead costs. It is the sum total of those costs of general management, and of secretarial, accounting and administrative services, which cannot be directly r elated to the production, mar>eting, research and development functions of the enterprise. .ffice and %administration o+erhead costs include the following: 0ffice rent, rates and taxes and insurance. 0ffice lighting, heating and cleaning. &epairs to office buildings, furniture and fittings and e)uipment. Salaries, overtime, bonus of office staff, printing and stationery used in the office. Salaries of administrative directors and other managerial personnel.  #udit fees, legal charges and ban> charges. c! Marketing, Selling and )istri$ution .+erhead Costs: %ar>eting Cost has been defined by the I.C.%.#., ondon, as 5the Cost incurred in pu$liciing and presenting to customers the products of the undertaking in suita$ly attracti+e forms and at accepta$le prices, together with the costs of all rele+ant research work, the securing of orders and, usually, deli+ery of the goods to customers% In certain cases, after8sales ser+ice and=or order processing may also $e included7.

Sometimes it becomes useful in most businesses to subdivide the mar>eting cost into selling, publicity and distribution costs. %ar>eting overhead costs include the following indirect materials, labour costs and indirect expenses incurred in connection with mar>eting the products6 Selling: Salaries, commissions and travelling expenses of technical representatives and sales engineers and salesmen. ;ad debts written@off. %aintenance and administration costs of Sales 0ffices. -u$licity: Cost of advertisement, Cost of printing catalogues, price lists, Cost of maintenance of showrooms, Salaries of showroom personnel, Stationery used in showrooms, Cost of participation in industrial exhibitions. d! )istri$ution .+erhead Cost6 Carriage outwards, Cost of pac>ing materials, (ac>ing charges, Costs of running and maintaining of delivery vehicles, Costs of maintenance of warehouse. (esearch and )e+elopment Costs6 1hey include the following e"penses:

Salaries of aboratory technicians, Aor>@study engineers, &esearch  #ssociates etc. Cost of raw materials used in research. -epreciation of aboratory E)uipment. Cost of technical ournals. (atent fees. Subscriptions for &esearch #ssociation etc. ii% /lement8Wise Classification6 4nder this method total indirect e"penses are classified as: 7a8 Indirect materials: 7b8 Indirect labour and 7c8 Indirect expenses. These have been discuss and earlier. iii% #eha+iour8Wise classification: .+erhead costs can $e classified into: 7a8 4ixed: 7b8 5ariable: and 7c8 Semi@variable costs. a! Fi"ed Costs:

)efinition: 4ixed Costs are those which remain fixed and do not vary with the increase or  decrease in volume of output for a given period of time. /"amples: &ent of building, (roperty taxes, %anagement salaries, ;uilding depreciation, Salaries of Aor>s %anagers, Supervisors, #ccountants, Stationery, (rinting etc. $! >aria$le Costs: )efinition: 5ariable Costs refer to those costs which do vary with the change in the level of production. This type of cost tends to vary in direct proportion to changes in the volume of output. /"amples: Indirect labour: Indirect material: (ower and 4uel: ighting : (ower : &epairs and %aintenance : Tools and Spares : 0vertime pay etc. c! Semi8+aria$le Costs6 )efinition: Costs that contain both fixed and variable elements, which are, therefore, partly affected by fluctuations in the volume of output or turnover are >nown as semi@variable costs. These costs remain fixed in total amount over a relatively short range of variation in output and then are abruptly changed to a new level of production. /"amples:

"ormal maintenance of buildings, salaries and wages of administration, stationery and postage, wages of service department, wages of supervisors etc. i+% Control8Wise classification: Costs may also $e classified as: 7a8 Controllable and 7b8 Dncontrollable costs. Controllable costs refer to those costs which can be controlled effectively if proper managerial control is exercised. Dncontrollable costs are those which are beyond the control of the management. They are bound to occur.

+. Notes on Contract Costing: Features of Contract Costing6 1he following features are common to most contract costing system: a! 2igher proportion of direct costs: ;ecause of the self contained nature of most site operations, many items of indirect expenses can be identified specifically with a contract and, thus, can be charged directly. 4or example, telephones installed on site, site power usage, site vehicles, transportation design and planning salaries are charged directly to contract account. $! ow indirect costs: 4or most contracts, the only item of indirect cost would be a charge for 9ead 0ffice expenses. This forms a very small portion of the total cost of contract

and is absorbed on some overall basis, such as a percentage of total contract cost. c! Surplus Materials:  #ll materials bought for a contract would be charged directly to the contract. #t the end of the contract, the contract account would be credited with the cost of  materials not used. If the materials are transferred to any other contract the new contract account is to be debited. d! )ifficulties of Cost Control: There exists fre)uently maor problems of cost control concerning materials usage and losses, pilferage, labour supervision and utilisation, damage to and loss of plant and tools etc. because of the scale of some contracts and the sie of the site. e! Materials: %aterials purchased or supplied from the stores shall be debited to contract account. %aterials returned to stores and amount received from sale of materials will appear on the credit side. The accruing profit or loss being the difference between cost and sale price is transferred to (rofit J oss #ccount. Ahen the materials are transferred from one contract to another or from one site to another to avoid transportation, expenses in returning them to central stores and issuing them again, contract receiving the materials is debited with the cost of such materials and contract transferring the materials is credited. "ormal wastage of materials and store should be charged to the contract at a price at which they are priced out. f! Wages:

 #ll wor>ers employed at the contract site shall be treated as direct labour and, as such, wages paid to them should be debited to Contract #ccount. g! Contract -lant: -lant includes cranes, trucks, e"ca+ators, mi"ers and lorries% 1he usual ways in which cost of plant is dealt with are as follows: A% When plant is purchased: 1he following two methods are in common use: 7i8 Charge new plant at cost to the contract. Ahen the plant is no longer re)uired and is transferred to another contract, the original contract is credited with the depreciated value of the plant. In this way the contract bears the charge of depreciation. 7ii8 Ahere plant is moved fre)uently from contract to contract, each contract is charged a daily or wee>ly rental. #% When -lant is leased: The leasing charges are charged directly to the contract. Note: Ahatever method is followed, the ordinary running costs li>e fuel, repairs and insurance, would be charged direct to the Contract #ccount. -rofit on Incomplete Contracts6  # contract may ta>e more than one financial year for its completion. In such a case problem arises as to how much profit shall be credited to ( J  #Gc. It becomes necessary to compute profit on partly completed contract and ta>e credit for a part of it in the accounts at the year end.

The amount of profit that is to be credited to (rofit J oss #Gc depends upon the fact that how far the contract has advanced i.e. the stage of completion it has reached. 1he computation of profit is done in the following ways: 7i8 (rofit should be considered in respect of wor> certified only. Aor> uncertified should always be valued at cost. 7ii8 4or contract which has been ta>en ust in hand or which has not advanced far or G*th has been completed, no profit should be ta>en to the credit of (rofit and oss #Gc. This is because it would be too early to forecast or estimate profit with a reasonable degree of accuracy. 7iii8 In case of a contract which is covered by #rchitectBs certificate, profit is computed by deducting the cost of contract from wor> certified. # portion of this notional profit is ta>en to new (rofit J oss #ccount and the balance of notional profit is carried forward as profit in suspense. Conventionally, G' or ? $G'rds of profit is credited to (rofit and oss #ccount. If less than ?@ $ut more than B? of contract is completed then the portion of profit to $e taken to the credit of profit and loss account is computed as follows: =D " Notional profit " Cash recei+ed E Work certified! #ut, where more than ?@ $ut less than ? of contract is completed then -rofit is computed for taking to -rofit and oss Account: B=D " Notional -rofit " Cash recei+ed E Work certified!% 7iv8 Ahere the contract is almost complete, an estimated total profit is ascertained by deducting the total cost and additional expenditure to be

incurred to complete the contract from the contract price. The (rofit and oss  #ccount should be credited with that proportion of total estimated profit on a cash basis, which the wor> certified bears to the total contract price. 1he formula is as follows: /stimated total profit " >alue of work certified E Contract price!: 7v8 If there is any loss, the total loss should be transferred to (rofit and oss  #ccount by crediting the Contract #ccount. (rofit J oss #ccount -r. To Contract #ccount 1he Costing /ntries6  # separate account will be maintained for each contract with the obect of finding out the overall (rofit or oss of the contract. 1o do this, a proforma of a contract account is shown on the ne"t page:

,. Notes on Process Cost: 1he /lements of -rocess Cost: 1he elements of Cost of a -rocess consist of: 7i8 %aterial Cost: 7ii8 Cost of abour: 7iii8 -irect Expenses: and 7iv8 (roduction 0verhead.  #n account is maintained for each process to which all costs of material, labour, direct expenses and overhead are debited. i! Materials6 %aterials re)uired for production are issued to the first process. The finished goods of first process are passed to the next process, each process merely performs some operation on the material passed from the earlier process. The finished goods of (rocess I become the raw materials of (rocess II and so on. There are some systems where extra or new materials may be needed and added to the finished goods passed from earlier process and this may continue until completion. The method to be followed depends upon the nature of the product. Ahatever method is followed, sufficient supply of raw materials should be assured to meet production needs. It is to be seen that production does not come to a halt due to paucity of raw materials. ii! a$our:

;oth direct and indirect wages paid to direct wor>ers and indirect wor>ers li>e supervisory staff are debited to the (rocess #ccount. 9owever, where wor>ers are engaged in more than one process, the gross wages are distributed to each process on the basis of time spent on each process. enerally, the cost of direct labour forms a very small part of the cost of production in industries that adopt process costing. iii! )irect /"penses: -irect expenses which can easily be directly allocated to a particular process are >nown as direct expenses. Examples of such expenses are cost of design, cost of electricity, depreciation and hire charges of e)uipment. These expenses are debited to (rocess #ccount. i+! -roduction .+erhead6 In process costing the overhead element forms a maor part of total cost. So, great care should be ta>en to ensure that each process is charged with a reasonable share of overhead. 0verheads are to be apportioned where they cannot be directly allotted and actual overhead in respect of a particular process should be charged orB debited to the (rocess concerned. 0verhead may be recovered at a predetermined rates and charged to the (rocess. 9aving discussed the elements of cost we now proceed towards the preparation of (rocess #ccount where there is no process loss. 1he following steps are in+ol+ed in costing procedure: 7i8 -ebit the cost of basic raw materials to the first process account showing both )uantity and amount.

7ii8 -ebit costs of other materials, direct labour and direct expenses pertaining to each process. 7iii8 -ebit each process account with production overheads as given or on some e)uitable basis. 7iv8 Credit the process account with realisable value of scrap. 7v8 #scertain the total cost of the process and calculate average cost per unit. 7vi8 If the whole output of a process has been transferred to the next process, the total cost may be shown on the credit side as transfer to next process and the same shall be shown on the debit side of the next process account. 7vii8 If a portion of the output has been earmar>ed for sale or has been sold show its cost as transfer to stores and the balance as transfer to the next process. It should be noted that when a portion of output has been sold, the process account should credited only with its cost and not the sale value. 7viii8 The cost of containers used for pac>aging the finished goods should be debited to the last process account. 7ix8 The total cost of the last process shall be transferred to 4inished Stoc>  #ccount 1reatment of -rocess osses, Scrap and Wastage 6 In the course of production through different processes, some losses are bound to occur. The )uantity and weight of the process output will be@less than the )uantity, weight or volume of the materials input.

1his may happen due to +arious reasons: 7i8 Evaporation, residuals, 7ii8 Dnavoidable handling, brea>age and spoilage losses. So, it is imperative that accurate records are to be maintained to have control over materials. The cost department must be >ept informed of the losses through the medium of scrap tic>ets, materials credit notes and loss reports. This information is essential for ascertainment of actual cost of the final product. %aterials which have been processed and later on are found to be defective and scrapped have surely incurred their share of labour cost and overhead cost up to the point of reection. %ore defective and scrapped materials mean financial loss to the concern. Classification of -rocess oss: -rocess losses may $e classified as: 7i8 "ormal (rocess oss and 7ii8 #bnormal (rocess oss. i! Normal -rocess oss: This type of loss is caused by the factors li>e evaporation, pilferage and which is inherent in large scale production. This loss cannot be avoided but sure to occur. This loss may not be a total loss but may often include scrap and waste. The amount of normal process loss is reduced by selling the scrap and waste.

ii! A$normal -rocess oss:  #bnormal (rocess oss is caused by unexpected or abnormal conditions. The causes are substandard materials, accidents, carelessness. %oreover, it may happen sometimes that the percentage of wastage or loss may exceed the predetermined percentage of normal wastage or loss. So, any wastage exceeding the normal wastage is termed abnormal wastage or loss. #ll abnormal losses must be thoroughly investigated, and, where necessary, all possible steps should be ta>en to prevent its occurrence in future. 1reatment of Normal and A$normal oss in -rocess Costing: i! Normal -rocess osses6 "ormal oss is normally expressed as a percentage of the )uantity of output. oss arising out of normal wastage is absorbed in the cost of good units i.e. it becomes the part of total cost and surely, increases the total cost of output. If any value can be recouped from the sale of imperfect articles or materials then the amount so realised shall be credited to relevant (rocess #ccount which will reduce the cost of output of that process. ii! A$normal -rocess osses6  #bnormal loss or wastage is not treated as a part of production cost or total cost. Its value is credited to the concerned (rocess #Gc and debited to Costing (rofit J oss #ccount. 1he +alue of a$normal loss is calculated with the help of the following formula:

 # separate account is opened for abnormal losses to which is debited the cost of materials, labour and proportionate overhead incurred by the wastage. Since the value of abnormal loss is not treated as a part of cost of production it is written off to the Costing (rofit and oss #ccount. 1reatment of A$normal 'ain in -rocess Costing:  #bnormal ain arises when the actual loss is smaller than estimated loss.  #ccording to Aheldon, 5sometimes the actual loss in a process is smaller than was e"pected, in which case an a$normal gain results7 . The value of  abnormal gain is calculated at the rate at which the effective output would have been valued if normal wastage had ta>en place according to expectation. &elevant (rocess #ccount is debited with the value of #bnormal ain and  #bnormal gain #Gc is credited by (rocess #Gc. The #bnormal ain #Gc is debited with the Scrap Sales #Gc and the balance is written off to (rofit and oss #Gc.  #bnormal ain M "ormal oss L #ctual oss 5alue of #bnormal ain

1-. Notes on Motor rans$ort Costing: In motor transport underta>ing most of the data re)uired for computation of cost and cost control purpose are obtained from -aily og ;oo>. The og

;oo> should be filled up by the driver of the vehicle furnishing necessary details of trips made by vehicle during a specified period of time?usually on daily basis. A specimen of og #ook is gi+en $elow:

The above log sheet helps the management to avoid unnecessary or duplicate trips, to avoid under@utiliation of capacity by low burdening or over@ utiliation of extra loading and to avoid waste or idle running capacity. Selection of 4nit: In transport costing, a composite cost unit such as passenger >ilo@meter or ton >ilo@metre is usually adopted. The main advantage of selecting of a composite unit cost is that it ta>es into account both the number of passengers or weight of goods carried and distance covered.

 #t present many organisations provide facilities for canteen to wor>ers. The wor>ers are provided with food at subsidied prices. It may be considered a service by the company. 1he following are the main items of costs relating to canteen costing: a! -ro+isions: (rovisions will include items li>e meat, fish poultry egg, tea, coffee, mil>, flour, rice, soft drin>s etc. $! a$our 6 a$our will include: Aages and salaries of canteen staff such as coo>s, waiters, >itchen assistants, supervisors etc. c! Ser+ices: It will include steam, gas, electricity, power, light and water. d! Consuma$le Stores6 They will include items li>e linen, cutlery, croc>ery, glass wares, mops, washing up clothes, dustpans, cleaning materials and brushes e! .+erheads: 0verhead charges will include rent, rates, insurance, depreciation. (eceipts: 1he receipts will consist of: 7i8 Subsidy received from company, 7ii8 Sale of coupons.

11. Notes on %ntegrated Accounting System: Meaning of Integral Accounts6  # single boo>@>eeping system which contains both financial and cost accounts is termed an integral accounting system. 1his system contains two types of account: 7i8 Simple accounts and 7ii8 Control accounts. The former represent assets, liabilities etc.: while each of the latter forms a connecting lin> with a subsidiary ledger in which the detailed composition of the control account balance is recorded. In fact, this system tends to merge cost and financial accounting to form one inseparable accounting function and precisely, integrated accounting is a system of recording both financial and costing transactions in one integrated set of boo>s. Features of Integrated Accounting System6 1he essential features of integrated system are as follows: 7i8 The integrated system records financial items not re)uired for cost accounting. 4or examples L #ccounts for capital expenditure, Sundry -ebtors and Creditors, share capital, cash and ban> balances, prepaid expenses and accruals are opened.

7ii8 Store transactions are recorded in the Stores Control #ccount. 4or store purchased Store Control #ccount is debited and credited to CashG;an>GCreditors #ccount. 7iii8 (ayment of wages is debited to Aage Control #ccount. Similarly, for overhead expenses incurred 0verhead Control #ccount is debited and Sundry CreditorsG CashG;an> #ccount is credited. 7iv8 #t the end of the accounting period, the total of Aages Control #Gc, Stores Control #Gc and 0verhead Control #Gc is transferred to Aor>@in@(rogress  #ccount. The entry is6 Aor>@in@(rogress Control #Gc -r. To Stores Control #Gc To Aages Control #Gc To 0verhead Control #Gc 7v8 #ll accruals are debited and advance payments are credited. Ahile capital expenditure is separated in the process of Cost analysis and debited to Capital #ssets #ccount. Ad+antages of Integrated Accounting System6 1he following are the ad+antages of integral accounting system: 7a8 -uplication in accounting and analysis can easily be avoided.

7b8 Since the need for maintaining of separate sets of financial and Cost accounts ledgers is absent, preparation of reconciliation statement is not re)uired. 7c8 There is an automatic chec> on the correctness of the cost data, which creates confidence in the management. 7d8 Centralisation of accounting function leads to economy. 7e8 #s Cost accounts are posted immediately from the original entries, there is no delay in obtaining cost data.

12. Notes on Reconciliation of Cost and /inancial  Accounts: Introduction to (econciliation of Cost and Financial Accounts6 Cost accounts are maintained independent of financial accounts. The two accounts have a different order of recording revenue and expenses. In cost accounting expanses are analysed and recorded in obective form while in financial accounting expenses are recorded in the boo>s of accounts in subective form.  #s a result, there occurs a difference between profit shown by Cost accounting and that of financial accounting. Therefore, it becomes imperative to reconcile two accounts which enables to test the reliability of cost accounts.

Need for (econciliation of Cost and Financial Accounts6 Accounts 6 In a manufactu m anufacturing ring concern both financial and cost accounting are maintained. "aturally, two sets of accounts disclose profit which will not agree with each other. (rofit (rofit disclosed by the financial accounting does not agree with the profit disclosed by the cost accounting. ;ut this does not happen when a manufacturing company uses an integrated accounting system i.e. no separate cost and financial accounts are maintained. So, when cost and financial accounts are maintained separately and independently of each other, profit disclosed by one system tends to differ from that of the other accounting systems. This difference in profit creates problems and the need of reconciling the accounting systems arises to arrive at one profit figure. (easons for )isagreement $etween (econciliation of Cost and Financial Accounts66 Accounts )isagreement $etween Cost and Financial accounts generally arises due to the following factors: i% Items that are included only in financial accounts: 1he following items of purely financial nature are included in financial accounts $ut not in cost accounts: 7a8 Interest received on ban> deposits 7b8 (rofit on sale of assets 7c8 &ents receivable 7d8 Interest and dividend on investments

7e8 oss on sale of #ssets 7f8 oss on sale of investment 7g8 Interest paid on ;an> oan, -ebentures 7h8 -amages payable 7i8 (ayment of income@tax 78 (ayment of dividend 7>8 Transfer to &eserves 7l8 Creation of provisions 7m8 -onations 7n8 Ariting off fictitious #ssets li>e (reliminary expense, -iscount on issue of shares, debentures 7o8 Ariting of intangible fixed assets li>e oodwill, (atent &ights etc. ii% 4nder or o+er8a$sorptio o+er8a$sorption n of o+erhead e"penses6 e"penses 6 In cost accounts overheads are absorbed at predetermined rates which are based on past data. 0n the other hand, in financial accounts the actual amount of expense incurred is only considered. 9ence difference arises. iii% Adoption of different $ases for stock +aluation6 +aluation 6 In financial accounts stoc>s are valued either at cost or at mar>et value whichever is less. ;ut in cost accounts stoc> of materials are issued to

production departments at cost by using 4I40, I40, Simple #verage, Aeighted #verage method. This leads to a difference. i+% #ases of )epreciation6 )epreciation 6 1he methods of charging depreciation and the rates may $e different which surely leads to difference:

13. Notes on Cost 0olume Profit Analysis: )efinition of Cost >olume -rofit Analysis6 Analysis 6 (rofit of an underta>ing depends upon a large number of factors, the most important of which are cost of manufacture, volume of sales and selling prices of products sold. The three factors of cost volume and profit are interlin>ed and interdependent.  #s we >now, >now, profit depends depends upon upon sales: selling price: to a great great extent: depends upon cost: volume of sales depends upon volume of production which, in turn, is related to cost. In cost@volume@profit analysis an attempt is made to measure variation in cost with variation in volume. Cost@5olume@(rofit Cost@5o lume@(rofit analysis is the analysis of three variables, vi., cost, volume and profit, that see> to explore the relationship existing amongst costs, revenues, activity levels and the resulting profit. (rofit, as a variable, is a reflection of a number of internal and external conditions which exert their influence on sales, revenue and costs. &evenue depends upon selling prices, costs, volume of sales, demand, competition etc. #lthough none of these can be singled out as the most

important, the volume is considered to be a dominant factor. This is probably because changes in volume are more fre)uent, ta>e place rapidly and are outside the purview of management control. 4urther, Costs rarely vary in direct proportion to the volume and hence, a small change in the volume may have a more than proportionate effect on profits than the other factors. It is thus, the volume which is perhaps the largest single factor that influences cost. Therefore, there exists an intimate relationship amongst costs, volume and profit. The cost@volume@profit analysis is an extension of marginal costing and ma>es use of the principles of marginal costing. It is important tool of short@term planning and is more relevant where the proposed changes in the level of activity are relatively small. Therefore, it is very much useful in ma>ing short@ run decisions. Importance of Cost >olume -rofit Analysis6 The relationship between cost, volume and profit ma>es up the profit structure of an underta>ing. This analysis may be useful for profit planning, cost control and decision ma>ing. 1he main o$*ecti+es of cost8+olume8profit analysis are discussed $elow: i! -rofit -lanning: In (rofit planning it becomes essential to >now the relationship between cost, volume and profit. The most important feature of cost@volume@profit analysis is the manner in which it relates cost, selling price and volume and enables calculation to be made to show the effect of change in these on profit.

 #ccordingly, the management can plan profit with reference to cost L volume  L profit analysis. ii! -reparation of Fle"i$le #udget: Cost L volume L profit analysis is of special help in the preparation of flexible budget that indicates cost and profit at various levels of activity. iii! )ecision Making6 Cost L volume L profit analysis is very much useful in ma>ing decisions li>e ma>e or buy, pricing, selection of a product mix, selection of the best channel of distribution, and selection of best method of production. i+! Cost Control6 In the area of cost control, cost L volume L profit analysis is of great assistance to the management. The effect on cost of changes in volume can be evaluated for the purpose of reviewing profits achieved and cost incurred.

14. Notes on Standard Costing: Introduction to Standard Costing: The concept of FControlB? a third and final lin> of managerial process?means the process of ensuring accomplishment of plan. This involves not only action to implement the plan but also the measurement of performance in comparison with the specified plan or some other standards, the

communication of results to the appropriate authorities for ta>ing corrective measures in time. Standard costs are predetermined costs and are used as a measure with which the actual cost as ascertained are compared. Standard costing see>s to measure the efficiency of performance and identify wea>ness in performance, if any, at an early stage so that appropriate managerial measures can be ta>en to remove the wea>ness for effective cost control. In standard costing, cost of a product or service is >nown in advance and deviations from actual are used for effective cost control purpose. Meaning of Standard Cost6 Standard cost may simply be defined as Fpredetermined costB. %ore formally, a standard cost may be defined as a predetermined calculation of how much costs should be under specified wor>ing conditions. 1he I%C%M%A% summaries the concept and purpose of standard dost as: ing condition.= It is built up from an assessment of the value of cost elements and correlates technical specifications and the )uantification of materials, labour and other costs to the prices and G or wage rates expected to apply during the period in which the standard cost is expected to be used. Its main purposes are to provide bases for control through variance accounting, for the valuation of stoc>s and wor> in progress, and, in some cases, for fixing selling prices.

The price and )uantity are the two constituents of cost elements for which standards are specified. The production engineer specifies the )uantity of materials to be re)uired and the purchasing manager sets a standard price for  the materials on the basis of current prices. Time department will set the labour times and wage rates will be set according to the type of labour re)uired and anticipated average rates. -irect expenses will be assessed and overhead absorption rates will be calculated as appropriate. Standards are set before the commencement of a period and should cover all aspects of production. Ad+antages of Standard Costing: 1he introduction of a system of standard costing may offer the following ad+antages: 7i8 The setting of standards leads to economics by determining best materials and methods. 7ii8 #ctual performance may easily be compared with the predetermined standards. Showing separately the favourable or unfavorable variance. 7iii8 # detailed analysis of variance enables the management to investigate the causes of inefficiencies of labour, of the use of materials and of the operation of plant and machineries. 7iv8 # target of efficiency can be set for the employees to reach and the sense of cost consciousness is thereby stimulated. 7v8 Since variances can be calculated, the operation of the principle Fmanagement by exceptionB becomes possible.

7vi8 ains and losses arising out of mar>et fluctuations in prices of raw materials, as distinct from variations due to manufacturing conversion are revealed. 7vii8 Standard costs provide a valuable aid to the management in fixing up prices and formulating policies. 7viii8 The effects of variations in the price and use of materials, the ratio of labour wages to other expenses and the volume of production are demonstrated at short intervals. 7ix8 It is a management tool for having effective cost control. 7x8 Costing procedures can be made simple. 7xi8 It facilitates the evaluation of stoc> and optimies the use of plant facilities, current assets and wor>ing capital. 7xii8 Since attention is focused on the variances, wea> areas can be identified, as a result, management can ta>e corrective and prompt actions on right spots. 7xiii8 ;etter allocations and utiliation of resources are possible due to critical study of all the operations, methods in respect of production, sales and administration. 7xiv8 # properly developed standards costing system with full participation and involvement creates a positive and cost effective attitude through all levels of management.

7xv8 Standard costing facilitates the integration of accounts so that reconciliation between cost accounts and financial accounts may be avoided. imitations of Standard Costing6 1he standard costing suffers from the following limitations: 7i8 It does not become effective without ;udgetary Control. 7ii8 Cost of its installation is very high. 7iii8 Its effectiveness depends upon the efficiency of historical costing. It becomes effective only when historical costing periodically supplements it. 7iv8 In volatile conditions with rapidly changing methods, rates and prices, standards become )uic>ly out of date and, thus, lose their control and motivational effects. This may cause resentment and loss of goodwill. 7v8 It may not be appropriate to the business to which it is applied. 7vi8 # badly conceived standards costs may yield inaccurate and misleading results and, therefore, may not enoy the confidence of the users of this system. Applica$ility of Standard Costing6 Standard costing in practice is a detailed process and re)uires considerable development wor> before it becomes a useful management tool for ta>ing managerial and economic decisions. It can gainfully be used in a variety of costing situations li>e batch and mass production, process manufacture, transport.

9owever, the greatest benefit can be gained when the manufacturing method involves a substantial degree of repetition. Its maor application in practice is in organisation involved in mass production andGor repetitive assembly wor>. 1ypes of Standard6 1here are different types of standard which are discussed $elow: i! Ideal Standard6 This is the standard which can be attained under the most favourable conditions possible. In other words, ideal standards are based on perfect performance. It is assumed that there is no wastage, no idle time, no inefficiencies or other imperfections in the manufacturing process. ;ut it is very difficult to attain such standards in practice. ii! /"pected Standard6 This is the standard which may be anticipated to be attained during a future specified budget period. Expected standards are based on expected performance. In setting these standards, a reasonable allowance is made for wastageBs and other inevitable lapses. It is more realistic than ideal standard. This type of standard is best suited from cost control point of view. iii! #asic Standard6 This is a standard which is established for use unaltered over a long period of time. ;asic standards are set up for some base year and is not changed as material prices and labour rates change. It is suited for those items of expenses which are fixed in nature. ;ut basic standard is of no practical importance from cost control point of view. i+! Normal8Standard:

This standard is based on average performances of the past. They are attainable under normal conditions. If there is stability in the past performances, such standards may be useful from cost ascertainment point of  view. ;ut, for cost control, it is not so much effective. Introduction of Standard Costing System in a Factory6 Standard costing is a system of cost accounting which ma>es use of predetermined standard costs relating to each element of cost?material, labour and overhead. It is basically a techni)ue of accounting which compares the standard cost of each product or service with the actual cost to determine the efficiency of the operations. So, that any remedial measure may be ta>en )uic>ly. It is the most effective method for controlling performance and cost. While introducing a standard costing system in a factory, the following preliminary steps are re6uired: i! (e+iew of /"isting System of Costing: ;efore introduction of standard costing system, it is important to review the existing system of costing with special reference to existing forms and records. ii! Study of 1echnical Aspect6 It is essential to study the technical aspects because standard costing must be based on actual conditions in the factory. Technical aspects involve methods of production, different processes or stages of production, normal and abnormal losses and gains and input@output relations etc. iii! .rganisation Chart: