COSTING AND COST ACCOUNTING

1. Costing is a systematic procedure of calculating the cost of the product being management or service
which is provided to the customer. The objective is to identify the true cost of the product or the
service.
2. The information regarding the true cost price is very helpful to the management for the purpose of
deciding the justified selling price which is to be charged from the customer.
3. If the cost price is not correctly identified it may lead to fixation of unjustified selling price, which may
for more or less thus type situation may not be regarded as a sound policy or long-term survival
4. Cost Accounting is the formal system of regarding cost in the book of accounts.

OBJECTIVES/IMPORTANCE/ADVANTAGES OF COST ACCOUNTING

1. The ultimate objective of cost accounting is to calculate the true cost of the product which is sold or
the service which is proceeded ascertaining the true cost, the management is able to decide the
justified selling price which is to be charged from the customer.
2. Cost accounting has to focus on cost centred and cost reduction, therefore, the management is able to
improve its efficiency level and increase the project earning capacity of the business organisation.
3. During the trade recession, the matter of survival because the most important factor. Only those
organisations can survival such period who are aware of their true cost price.
4. Efficiency is improved when weaknesses we located and rectified. Cost accounting is helpful in
identifying such activities which are leading to wastage or unproductive time. It is the responsibility
of the management to take necessary step the wastage is minimised.

LIMITATIONS OF COST ACCOUNTING

1. Cost accounting lacks uniformity different organisation prepare those cost recrates under different
formats as pen there (conversion). We are not able to compare the cost recorders of one organisation
with the other organisation
2. (Cost Accounting concentrate to much on problems when as feasible solution is provided) for e.g. in
material cost we concentrate too much on wastage of amatorial in labour cost, we concentrate too
much on unproductive time. However no feasible solution is provided on stoppage of wastage on
avoidance of impeditive
3. Cost accounting is heavily dependents upon assumption & it requires a lot of judgemental power.
4. Small & medium business organisation may consider it may expensive proposition because the
installation of cost Accounting system may be regarded as a burden him addition to financial A/c

FINANCIAL ACCOUNTING V/S COST ACCOUNTING

Financial Accounting Cost Accounting
1. It is only concerned with the activity of recording It records and analysis the past cost records
the past financial transaction from future projection
2. Shareholders and other external parties are Management and other internal parties are
interested in profit & loss A/c & Balance sheet interested in cost rewords.
3. The objective is to record the financial transaction The objective is to deep the cost with in
contortive limits
4. This is mandatory under various loess This is optional except in some specified
industries (e.g. sale)

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 ESSENTIALS OF GOOD COST ACCOUNTING SYSTEM
1. It should be suitable to the nature of the business for e.g. the technique of operating costing is useful
to the service providing industry and the technique of contract costing is useful to the business houses
how are engaged in constructible Activities.
2. It should be economical to operate i.e. the benefit derived from the system should be more than the
cost incurred on the system.
3. It should provide correct information regarding actual cost at regular intervals. Such actual cost is in
be compared with the standard cost This comparison is helpful in taking future corrective action.
4. It should lead to cost centred initially and cost reduction later on.

COST UNIT
1. In any business the cost is incurred on the input but it is revered from customers by selling the output
or providing the service to the customers.
2. Cost unit is the limit of the product in terms of which. the cost is expressed for recovery from customer.
3. Examples: -
Industry Cost unit
 Coaching classes per student
 Petrol /Diesel Per litre
 Bananas per derzen
 Transport Service per km. per passenger, per passenger km, per ton-km, etc.
 Textile per metre
 Gold per 10 gm (per tola)
 Electricity per unit of electricity
 Hotels per room per day

4. The objective of determination of cost unit is to arrive at some suitable position where the cost can be
recovered from the customers.

COST CENTRE
1. Any business organisation can be divided into suitable member of segments or departments, e.g.
marketing, production, purchase finance. R & D Human resource, Accounts etc. It is ascertaining the
cost which can be identified with each and every division or segment or department
2. Cost Centre is each and every part of the business organisation which requires cost in the incurred.
We must ascertain the cost for each and every cost centre for the purpose of recovery from the
customer.
3. Each production and the service department can be regarded as a separate cost centre. Production
department are Basically income earning departments and service department gived assessment to
the production department.
4. Cost centre, in any organisation, must be established for control purposes that is to endure the system
where it is observed that the actual cost does not deviate much from standard.

Profit Centre
1. It means such part (Segment or division or department) of business organization which is responsible
to: -
a. Absorb cost
b. Generate reserve
c. Realise profit

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2. These are basically the income earning department and popularly known as [production department
we can also say that the profit centre guarantees. the survival of business and ensures future growth.
3. they are supposed to absorb their own cost as well as the cost of service department. Service
departments are those departments which provide assistance to services department
4. Each profit centre has its own forget profit and adopt such policies which are necessary for achieving
the target profit.

RESPONSIBILITY CENTRE
1. Any business organisation can be divided into suitable number of functions e.g. production
department, sales department, purpose department account department, HRD (Human reserves
Department R and D (Research and development), etc.
2. Each junction works under the control of a manager who is responsible for its performance. In other
words, the questions regarding good performance or bad performance of a particular apartment are
required to be answered by the person who is in charge of such particular department.
3. Each cost centre is profit centre in the business organisation can also be termed as a separate
responsibly centre.
4. Each responsibility centre has its own objective which is to be achieved such objective may be cost
minimization or profit marinization.

INVESTMENT CENTRE
1. Funds are arranged by way of shareholders & funds or long-terms borrowings such capital is required
to be invested. In fibbed assets and working capital. Hence, arranged capital is equal to the invested
capital
2. Investment centre is such function of the business organisation which is responsible for making
optimum investment in fired assets and working capital, any wrong decision in this contract may have
an adverse, impact on survival and growth.
3. Investment centre in any organisation is profit centre as well as responsibility centre
4. The profit earning capacity is to be ascertain by comparing operating profit with the capital employed.

ROCF = x 100

Comparison is most be decided whether are result is good or bad.

EXPLICIT COST
1. It is also known as “out of packet cost”. This so because it has direct impact on the cash balance,
although such impact may not be immediate.
2. Explicit cost is such type of cost in the running of the business which requires cash payment for
example: - Purchase of material payments of rent salaries etc.
3. Thus, type of cost increase under the increasing trends of the business & it decrease under the
declining trends of the business. In other words, those expenses and directly related to the demand of
the product which is manufactured or the services s which are provided to the customer.
4. Explicit cost is regarded as very important cost for the purpose of flirtation of selling price particularly
during the period of recession

IMPLICIT COST
1. Cost may either be explicit or implicit. Explicit cost requires cash payment whereas implicit cost does
not require any cash payment

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2. Depreciation is regarded as a prominent example of implicit cost. Another example a person may
requires some current of funds for the purpose of purchased stock. If he utilises his own funds for such
purpose there is no need to pay interest an such amount. However, such interest is in the nature of
opportunity cost in the sense that such funds could have been invested at same other place for
profitable purpose.
3. Even of there is no case payment, the impact of implicit cost not be voided and has to be recorded for
the purpose of calculating the true cost
4. Depreciation is regarded as very important cost in those situations where plant & machinery is
required to be purchased or replaced.

COST CONTROL
1. First of all, the standards are established for each function thereafter, it is the responsibility of the
management to ensure that such targets also achieved. In other words, the activity of formation of
standards and the achievement of such standards must go hand in hand
2. Similarly, the standard cost must be decided in advance so that the actual cost can be composed with
such standard cost. The comparison of standard cost with actual cost is very useful for future
improvement
3. Cost control refers to the activity of keeping the cost within the prescribed limit. It refers to the
adoption of necessary policies which must be taken by the management out for controlling two
business expenses
4. The activity of cost control is in the nature of preventive function. i.e., the standards are established
before the actual event

COST REDUCTION
1. Cost control established the standards whereas cost reduction challenges the standards
2. Cost reduction mems real and permanent decrease in cost without sacrificing he quality and suitability
of the product. In other words, cost reduction is the procedure of identifying the unnecessary expenses
which can be avoided without noting nay negative impact on the quality of the product on the service
which is provided to the customers
3. The important point to be Noted that the Reduction in cost must be real & permanent, i.e. it should not
be imaginary and it should not be temporary.
4. The activity of cost Reduction is in the nature of corrective action, i.e. it challenges the standards

VARIOUF REPORTS PREPARED BY COST ACCOUNTING DEPARTMENT

1. Cost sheet sharing various stages of cost. e.g. prime cost, factory cost or production, cost of sales, sales
& profit.
2. Material labour of overheads cost statement to be compered with standard cost. Such comparison is
helpful in taking future corrective action
3. Budgeted sales to be compared with actual sales if there are variance necessary steps should be taken
for avoiding the re-accuracy of some variance in future.
4. Reconciliation of costing profit with the financial profit
5. Profit last are to the reason of wastage of material & unproductive labour time
6. Any other report may also be prepared which is desired by the management and which can prepare
by cost accounting department

UNIFORM COSTING AND UNIFORM COSTING MANUAL

1. The costing technique adopted by different organisations may not be same and therefore it is very
difficult to compare the costing information of one organisation with the other origination

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2. Uniform Costing is a recantation for the purpose of implementation of some cost accounting principals
by different organisation. In other words, it is advised to adopt common procedure for calculator cost
price of the production which is manufactured or the service which is provided.
3. This system will be helpful in following two-way: -
a. Cost & profit information of one organising may be compared with the other organisation
b. Pat performance can also be compared with the current performance
4. Uniform costing manual is a formal written document containing the instruction regarding
implantation of uniform costing system.

COST AUDIT AND COST AUDIT MANUAL

1. Cost audit means the audit procedure which is conducted to establish the accuracy of cost accounts
2. The objective of cost audit is to detect errors and prevent fraud in costing records and details
3. Cost audit ensure cost control initially and cost reduction later a therefor, the profit earning capacity
will ultimately get increase
4. Cost audit manual is a formal written document containing: -
a. Objective of cost audit
b. Schedule, procedure and time limit in which such audit is to be completed
c. Least of various documents and records which are required to be investigated

INTER – FIRM COMPARISON

1. It means the activity of comparison of cost and profit earning capacity of various organisation for the
purpose of improvement in overall efficiency of all the organisation
2. It can be implemented only when the technique of uniform costing is successfully adopted.
3. Advantages: -
a. It is helpful in identifying the strengths and weaknesses
b. It develops the attitude of cost consciousness
4. Disadvantages: -
a. Top management fear that the secrecy will not be unmaintained
b. In the absences of suitable cost accounting system, the figure provided by various organisation may
not be. considered reliable for inter-firm comparison

COST PLUS CONTRACTS

1. In this type of contract, the contract price is decided by adding a specific amount or percentage to the
cost price of the contract in other words, two contractors are paid for allowed espouses plus on
additional payment in the form of profit.
2. The main advantage to the contractor in that he is assured of same Amount of profit. In other words,
there is no possibility or risk of loss in this type of contract.
3. The contractee will have the right to examine and investigate the books of Accounts and documents of
the contractor
4. This type of contract is normally applicably in those cases where it is difficult to decide in Advance the
cost price of the contract, we can conclude that the system of “cost plus contract is recommended to
be adopted when the contractor fines a difficult or unreasonable t decide the two-cost price of the
contract

ESCALATION CLAUSE
1. It is a provision untainted in the agreement which allows one party to recover the burden of increased
cost from the other party completely or partially. In ease of contract agreement, the escalation clause

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 mans the provision in the agreement in which the contractor will have the power to recover the
increased cost from the contravene, completely or partially.
2. This clause is provided in the agreement as a safeguard against the likely increase in prices of material
wages & other expenses during the execution & the contract.
3. If during the execution of contract, the prices or rates of material wages and other expenses gets
increased beyond a specific limit in such a case, the burden of increased cost may be recovered from
contract as per the terms and condition mentioned in the agreement
4. De-escalation clause is opposite to escalation clause in the service, that the benefit of decreased cost
may be given to the contractee as per the terms and condition mentioned in the agreement

SUB-CONTRACTS
1. Sometime the contractor may not fine it feasible to do the entire work himself and he nay be inserted
in delegating a portion of the contract to another person who is called the sub-contractor and the work
which is so delegated is called the sub-contract
2. The sub-contractor is accountable to the main contractor and not the contractee.
3. The procedure of sub-Contractee is normally applicable in compere or complicated projects where the
contractor finds it deflect or not management to execute the total contract himself
4. Advantage of Sub-Contracting: -
a. It leads to quick completion of contract
b. expertise of sub-contractor may be availed in a particular field.
c. Cost may also be saved because the main contractor may find it more expensive to execute the total
contract by its efforts

JUST – IN – TIME (JIT) PURCHASING

1. It means the activity of purchasing the material immediately before consumption for e.g. In case pf car
manufacturing company, there is complete dependence upon the supply chain which assures the
supply of material as and when required
2. Although this policy is adopted by purchase department, following 2 advantages will arise to the stores
department: -
a. Storage cost is reduced
b. Wastage is reduced stopped or minimised.
3. In orders to make this policy effective successful, it is necessary to enter into an agreement with the
suppliants of material in which they are willing to supply the material as when required even in small
quantities
4. There will always remain the risk of non-availability of material under emergency or conditions.

WASTAGE OF MATERIAL
1. Wastage, in any industry, is the result of using the material inefficiently. It means such portion of raw
material which is last or shrinks in the manufacturing process. It has no realisable value.
2. Wastage may be normal or abnormal in a particular ease normal situation is decided on the basis of
nature of business past experiences.
3. If wastage arises due to normal reasons the cost associated with units of wastage is to be absorbed by
renaming good quality by inflating the cost per unit which is to be recovered from the customers. We
can conclude that the burden of normal wastage is ultimately passed on the customers.
4. If wastage due to abnormal reason the cost associated with the units of wastage is to be self-absorbed
and charged to profit & loss A/c abnormal situation arises due to inefficiency & unexpected events.

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 SCRAP OF MATERIAL
1. It means loss of material in the manufacturing procedure which is in the nature of “left-oved” or
“residue”
2. It is generally of very small value and it recoverable without any father processing the scrap of material
ma be normal or abnormal in a particular case. Normal situation is decided on the basis of nature of
business & past experience.
3. If scrap arises due to normal reason, the realisable value reduces the manufacturing cost. This way,
the cost per unit of the final product will get reduce and the management may also decide to reduce
the selling price to be charged form customer.
4. If scrap arises due to abnormal reason the cost associated with such unit comment be recover from
the customer. It is to be self-absorbed and charged to profit & loss A/c abnormal situation arises due
to inefficiency & unexpected event

SPOLLAGO OF MATERIAL
1. it refers to the situation where some units of output are so damaged that it cannot be rectified by
spending reasonable expenditure. It has to be disposed without further processing
2. “Cost of spoilage” means cost incurred on spillage units as reduced by realisable value it any
3. If spoilage is normal the cost of spoilage is to be absorbed by remaining good quantity -by-inflating the
cost per unit. This way, the management may also decide to increase the selling price, to be charged
from customer. Hence, the burden of normal spoilage is passed on the customer
4. If spoilage is abnormal, it is to be self-absorbed and charged to profit & loss A/c abnormal loss means
such type of loss which arises due to inefficiency and unexpected events

DEFECTIVES
1. It refers to the situation where some units of output are so damaged that it can be rectified by speeding
reasonable expenditure
2. The cost which is to be incurred for the purpose of rectification of defect is known as “Rectification
Cost”.
3. It the defect is normal; the rectification cost is to be treated as part of factory overreads. This way the
total cost will get increase and the management may decide to increase the selling price, to be charged
from customers Hence, the burden of normal loss is passed on the customers
4. If the defect is abnormal, it is to be self-absorbed and charged to profit & loss A/c Abnormal loss it such
type of loss which arises due to in officiary & unexpected event

MATERIAL CONTROL
1. It means the procedure to adopted for controlling the actuations of purchasing, storage and
consumption of raw material this system will ensure regular and timely supply of raw material by
unordinary over- stocking and under stocking.
2. Material contract ensure that right and quality raw material is made available as and when. required.
This system will lead to minimises of wastage of material
3. Purchasing of material should be almost in appropriate line, i.e. neither ton early nor too late. Also, the
purchasing of material should be at most favourable prices under the relevant circumstances.
4. Material should be properly stored and under the contract of authorised person. It is advised to adopt
internal cheque system for the purpose of auditing the misappropriation of material.

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 PERPETUAL INVENTORY SYSTEM
1. It means the activity of contracting the inventory under continuous checking system the receipt and
issue procedure of row material is required to be observed and manage a regular basis or day to day
basis
2. It is superior in periodic inventory system in the : -
a. Regular and accurate details are provided regarding raw material purchased consumed and not yet
consumed
b. If any mis-match is observed between book stock and physical stock, it com be retied and adjusted
an prompt basis.
3. This type of system is helpful in maintaining the ideal safety stock level. This is further helpful in
avoiding the “stock -out” situation
4. This type of system is to be develop taxing into consideration the nature continuance and
requirements of the business organisation

VED ANALYSIS
1. It is classification of inventory on the basis of three broad categories, i.e., vital assertion and desirable,
this classification is based upon the feature of critical requirements.
2. Vital items: - These are those items without which the production activities would come to a halt or
at least drastically affected. These items cam be regarded as life-blood of the production procedure.
3. Essential items: - These are those items which are considered necessary but without these items, the
system would not fail. Care must be taxer to see that the essential items are always in the stock
4. Desirable items: - These are those items which do not affect the production immediately but
availability of such items lead to more efficiency and less

IDLE TIME
1. In contact of labour cost idle time refers to such time for which the payment has been made to the
worker but the work is not affectively alone.
2. In any business organisation, the problem of idle time may be normal or abnormal as per the relevant
circumstances. Normal situation is decided on the basis of past experience and nature of business
3. If the problem of idle time is normal the labour cost in this contort is to be treated as part of cost and
its burden is shifted upon the customers. It means that the customers has to ultimately bear the burden
of normal idle time
4. If the problem of idle times is abnormal, the labour cost in this contract has to be self -absorbed and it
comment be recovered from the customer. It is to be charged to profit and loss A/c. Abnormal situation
arises due to inefficiency and unaerated events.

IDLE FACILITIES
1. It refers to the situation where the business organisation is not able to make full utilisation of available
facilities or capacities
2. For example: - If there is space in the building which is vacant and not used for business purposes,
such vacant space can be regarded as “Idle facilities”. Similarly, there may be same workers in the
organisation who are considered unnecessary due to recession.
3. If the existence of Idle facility is normal, the cost incurred in this contort us to be recovered from the
customers. Hence the cost in contract of normal idle facility is to be absorbed from the customer.
4. If the existence of idle facility is abnormal, the cost incurred in this contort is to be self-absorbed and
charged to profit & loss A/c abnormal situation arises due to efficacy and unexpected events

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 LABOUR TURNOVER
1. It means change in workforce due to the reason of resignation or retrenchments. High labour turnover
indicates instability and law labour turnover indicates stability among the workers
2. Labour turnover arise due to following reasons: -
a. Dis – satisfaction with the job
b. Inadequate remuneration
c. unsafe or unhealthily conditions
d. Conflicts with the management
e. lack of growth of opportunities
f. unrealistic expectations
3. Labour turnover may prove. to be very expensive to the employer. Therefore, every effort must be
made to remove all those reasons which are leading to the problem of labour turnover
4. Wage system including the bonus plan must evaluated from time to time so that the problem of labour
turnover may be minimised. It is a fact that when the workers reviews goods remuneration other
factors costing labours turnover may be ignored by him.

JOB EVALUATION
1. It is a systematic procedure of ascertaining the value or worth of a job as compared to other job in the
same organisation
2. This evaluation procedure takes into consecrator various factors such as: -
a. Qualification required
b. Shill requirement
c. Remissibility taken
3. The objective of job evaluation is to determine which job should be more remuneration as compared
to other. In fact, the job evaluation is regarded as prime factor in wages and salary negotiation
4. Methods of job evaluation: -
a. Ranking method: - This method compares the rank or the position of one job with the others
b. Factor method: - This method compares the skill requirement of one job as compared to the others
c. Points Method: - This method compares the rants as well as the skill of one job as compared to the
others

MERIT RATING /PERFORMANCE RATING

1. It means the systematic evaluation of performance of workers taking into consideration the standard
requirements of two job
2. Following factor are required to be evaluated: -
a. Quantity of work
b. Quality of work
c. Education Qualification
d. Discipline
e. Character
f. sense of repressibility
g. Team work
h. honesty
i. Shill requirement
3. Performance rating is helpful in deciding the fair amount of bonus and total remuneration payable to
the workers
4. Performance rating is also helpful is deciding the policies of promotion and transfer of the employees

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 PRINCIPLES OF GOOD WAGE SYSTEM
1. Wage system is the basis of giving financial remuneration to the workers due to the reason of time and
efforts given by the workers as per requirements of the employer.
2. “Good wage System” is essential because: -
a. It increases the satisfaction level among the workers due to the reason of good amount of
renumeration and reduced labour turnover.
b. It increases the production capacity of the company and there by the profit earning capacity also
gets increased
3. The wage system must have the following feature: -
a. It should be easily understanding
b. It should be favourable to both the employer and the employees
c. It should provide more wages to efficient workers
d. It should encourage the inefficient workers for gaining the efficiency
e. It should follow government rules regulation
4. the wages system must be permanent i.e. it should not charge very offer

COST ALLOCATION
1. Cost allocation or cost assignment it the procedure of allocation of overheads to various cost object. A
cost object is product a department or a project.
2. For example: - If a businessman consists of various departments and a separate electricity metre is
installed in each department, in such a case, that electricity bill of the business may be allocated among
various departments on the basis of respective electricity conjuration of each department.
3. Cost allocation is helpful in analysing and evaluating the costing information of various departments
it will be further helpful in making inter-firm comparison and intra-firm comparison
4. “Cost allocation” is also known as traceable overheads because it represents those express which can
be fully identified with a particular department or a project or a product

COST APPORTIONMENT
1. If allocation is not feasible, the cost has to be apportioned among various cost objects on same suitable
basis. A cost object may be a product a department as a project
2. For example, off a business organisation consist various departments and separate electricity meter is
not installed for each department, in such a case total electricity bill has to be apportioned among
various department on same suitable basis, for example the no. of light profits may be considered for
this purpose
3. another example if a building is taken on rent and such building is divided into various rooms or
departments, the amount of rent may be apportioned on the basis of floor area of occupied by various
rooms
4. Various types of basis for the purpose of apportionment may be classified into following two
categories
a. Potential Benefit basis (Generally the fixed expenses) are apportioned on this basis)
b. Actual Benefit Basis (Generally the variable are apportioned on this basis)

RECOVERY OR ABSORPRION OF OVERHEADS

1. It means recovery of overheads from the customers on some suitable basis taking into consideration
the nature and convenience of the business organisation
2. Factory overheads are recommended to be recovered by the following basis
a. On the basis of labour hours
b. “ “ “ “ Machine hours
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 c. “ “ “ “ Direct labour cost
d. “ “ “ “ Direct Material cost
e. “ “ “ “ Prime cost
f. “ “ “ “ No. of jobs (customers)
3. Office & advance overheads are recommended to be recovered on the basis of words cost / factory
cost
4. Belling & Distribution overheads ore recommended to be recovered on the basis of cost of production

COST OF PACKING
1. Packing of goods may be considered necessary for: -
a. Manufacturing of goods
b. Transportation of goods to various centres
c. Transportation of goods to as per the requirement of customers
2. Packing cost in context of manufacturing of goods is known as “primary packing. It is to be treated as
part of direct material cost. it means such packing without which the product cannot be monocultured.
3. Packing cost in context of transportation of goods to various centres it to be treated as part of
“Distribution Overhead”
4. Any other packing cost it to be treated as part of selling overheads

EXPENSES ON RESEARCH AND DEVELOPMENT

1. Research and development non-a-days is regarded as very important factor for survival, growth and
success of the business organisation
2. If the research is related to manufacturing activities, the openness in this contract is to be recorded as
part of “Factory overheads”
3. If the research is related to marketing activities the expenses in this context is to be recorded as part
of “Selling and distribution overheads”
4. If the research is related to management activities the expenses in this context is to be recorded as a
part of “office and advance Overhead”.
5. In any other cases, the opuses incurred on research and development is to be treated as differed
expenditure and charged in profit and loss A/c over a number of terms

INSURANCE PREMIUM
1. If the premium is paid for insurance of direct material it is to be treated as part of direct material cost.
this way such amount becomes part of prime cost.
2. If the premium is paid for insurance of indirect factory material or fixed assets installed in the factory,
the premium paid for such purpose is to be treated as part of “Factory overheads” or “words
overheads” or “Production overheads”.
3. If the premium is paid for insurances of Indirect office material or fixed assets installed in office, the
premium paid for such purpose is to be treated as paid of “office overreads”
4. If the premium is paid for insurance of Indirect selling material or fixed assets installed in selling
(selling activity), the premium paid for such purpose is to be treated as part of “selling overbends”

VARIOUS CAPACITY LEVELS

1. Maximum capacity /installed capacity / Theoretical capacity /rated capacity  It refers to maximum
possible production which can be achieved if there is no loss of operating time during the specific
period for example: - If working time is 8 hrs/day and 1 unit can be produced in 1 minutes, the installed
capacity is 365 days x 8 hrs/day x 60 units/hr.
= 1,75,200 units.

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2. Practical capacity or operating capacity  It refers to the maximum possible production which can be
achieved attesting into consideration the factors of normal loss for e.g. Repairs, mainlines holiday etc.
3. Normal Capacity  It refers to the production level which can be achieved takin in to consideration
the overage capacity utilisation over a period of time for e.g. if we take average of capacity utilisation
of last 5 years, it can be termed as normal capacity utilisation for the next period / year.
4. Actual Capacity  It refers to such production level which is actually achieved during a particular
period

PRINCIPLES OF BUDGETARY CONTRAL AND STANDARD COSTING

1. For each activity of the business it is necessary to establish the forget keeping in nine the overall
objective of the business organisation. A company may be interested in increasing the profit margin
by at least 20% as compared to previous year for this purpose the objective is to be established for
budgeted sale budgeted purchases & budgeted production for the next year.
2. For each activity of the business it is necessary to establish a system in which budgeted performance
is to be compared with actual performance. without this comparison, no business can improve.
3. For each activity of the business, it is essential to identify and investigate the variance. It is also
essential to firm the responsibility of each & every variance.
4. For each activity of the business, it is essential to introduce the future corrective action. This is for the
purpose of avoidance of controllable variances in the future

ADVANTAGES OF BUDGETARY CONTRAL

1. It is regarded as very powerful tod for controlling the expenses for example: the expense incurred on
marketing and stray paid to the sales manager and stray paid to the sales manger is to be justified in
contract of achievement of sales
2. Resources are always limited however big or rich the organisation may be the technique of budgetary
control helpful making effective utilisation of available reseurer like: - Money, machinery, material etc.
3. It develops the attitude of cost consciousness the profit earning capacity may be increased either by
increasing sales or by decreasing cost in the competitive market, the option of increasing the sales may
be tough and therefore, the option of cost control & cost Reduction may be regarded as more
appropriate
4. In nutshell, the activity of Budgetary control leads in: -
a. Effective utilisation of available sources
b. Effective conduct of Business activities
c. Increase in profit by controlling & Reducing the Expenses

MASTER BUDGET
1. After preparation of individual functional budgets, it is advised to prepare net summary of all the
budgets such net summary of all the budgets is in corporate in a separate budget which is known as
“Master Budget”.
2. Master Budgets represents the plan of operation for all the departments taken together and therefore,
it can be concluded that the master budget discloses the overall objective of the business organisation
3. After preparation of master budget, the employer and the employers have to treat it as a “Big picture”
for long term strategy and current year forecasting
4. Master budget has following two parts: -
a. Operating Budgets: - It represents the details regarding budgeted sales and Budgeted expenses
for the next period
b. Financial Budgets: - It represents the details regarding budgeted inflow or off low the cash during
the next period

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 FUNCTIONAL BUDGETS
1. Any Business organisation can be divided into suitable number of functions for example: -
Production department purchase department, marketing department, Accounts department, R & D
department finance department, etc.
2. It is very essential that the forgets must be established for each and every function so that the overall
objective of Business organisation may also be decided in fact, the overall objective is the summation
of individual objectives of each and every department of the business.
3. Functional Budget means the activity of preparing the budget each and every department of the
business organisation with the functional Budgets, each department can execute its activities in
efficient Manner.
4. Examples of functional Budgets: -
a. Sales Budgets
b. Purchases Budgets
c. Production Budget
d. Wages budget
e. Cash Expenditure
f. Research Budget, etc.

ZERO BASE BUDGETING (ZBB)

1. In conventional budgeting, the targets of next period are established taking into consideration the past
performance. In other words, the past performance is the basis for future projection
2. In zero bare budgeting, the targets of next period are decided taking into consideration the future
requirements ignoring the past performance. In other words, the activity IBB has to focus only on
future requirements and has to give no importance to the past results
3. ZBB can be regarded as a process of budgeting for future. It rejects the attitude of accepting the existing
situation blindly.
4. Disadvantage: -
a. ZBB can be very time-consuming process
b. It is very difficult to establish the future targets without taking any help from past period
c. It is very difficult to allocate the expenses in collection with the future targets which cannot be
associated with past performance

NECESSITY TO INTRODUCE THE BUDGETARY CONTROL & STD. COSTING

1. Cost Benefit Analysis: - If the Benefit obtained from the system is more than the cost increased from
system the system of Budgetary control and standard costing may be adopted by the business
organisation
2. Waste and scrap, if not corrected, will continue to increase. Therefore, the study of Budgetary control
& Standard costing in identifying those activities which are leading to waste and scrap
3. With the help of Budgetary control and standard costing, we are also able to identify the controllable
and uncontrollable variance therefore the management may decide to concentrate a controllable
variance and ignore uncontrollable variances
4. The management may also fir a limit for controllable variances which are required to be investigated
for e.g. The management may decide to ignore the variances up to 10% Because it may be considered
irrevellent for the purpose of investigation

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 NECESSITY TO CALCULATE THE VARIANCES
1. Variance are helpful in identifying the responsibilities to be fixed, e.g. material price. variance is to be
explained by the purchases manager and material usage variance is to be explained the by the
production manger
2. Waste and scrap if not corrected will continue to increase. therefore, when we calculate the variances,
we are also to identify those activities which are leading to waste & scrap. Hence the management has
to appropriate action for avoidance of same variance in future
3. Standard costing facilities motivation in the sense that the workers who are able to achieved the
achieved the standard performance may be rewarded, Hence, the technique of standard costing
improves the efficiency level of the works and its ulimately lead to increasing profit earning capacity
of the employer.
4. Standard costing is helpful in the function of cost avoid it in the service that if variances are property
explanted, the explained, the accuracy of costing may be softly assumed

PRE-REQUISITES OF INTERGRAED ACCOUNTING SYSTEM

1. Integrated Accounting System means such accounting system where cost and financial accounts are
simultaneously (combined) prepared. If it is beneficial the business may decide to adopt the integrated
accounting system.
2. Thus, should be proper coordination and corporation among the staff responsible for financial
accounting and cost accounting this type of coordination and co-operation is very essential for
generation correct information and utilising such manner in efficient manner
3. It should also be decided whether cost and financial books are required to be fully integrated or
partially integrated. In case of partial integration, the firm may inside to integrate up to a specific state
for example: - Prime cost, warless cost or cost of production.
4. For effective implementation of integrated accounting system, it is always advised to make proper
classification and codification of various accounts.

CIRCUMSTANCES IN WHICH A PRODUCT MAY BE SOLD AT A PRICE WHICH

IS LESS THAN VARIABLE COST
There are some abnormal circumstances in which the product may be sold at a price which is less than
variable cost following are some of such cases: -
1. When the product is of perishable nature
2. When the intention is on introduce the new product in the market
3. When the intention is to retain the future market
4. When the intention is to capture the Forgan market
5. When the intention is to maintain the sale of profitable product where the sale of such product is
related to sale of anther product which has to be sold at the price which less than variable cost

DIFFERENTIAL COSTING
1. In the course of Business, there are the situations when new orders are received and the decision has
to be taken regarding the acceptance or rejection of such order
2. Differential costing means the comparison of differential cost with the differential revenue so that, the
management may take the position for the purpose of acceptance or rejection of the order so long as
the differential reason is more than the differential cost the decision should be in favour of the
proposal

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3. The differential costing is different form marginal costing in the sense that marginal costing only deals
with variable cost where the defection costing has to deal with deferential cost which only fixed as
well as variable.
4. The technique of differential costing is also known as incremental costing when the cost gets increased
and decremental cost when the cost gets decrease

GRAPH OF BEP AND ANGLE OF INCIDENCE

Y
Sales
T Cost
BEP (in value)

Cost & Revenue V Cost

Angle of
incidence

0 X
Units
BEP (in units)

Angle of Incidence
This is the angle formed between “Sales” and “total Cost” while preparing the BEP chart this angle indicate
the rate or the speed at which the profit is realis after the situation of break even Higher the angle, better
it is (only when the sales is over and above the break-even level)

JOINT PRODUCT, BY – PRODUCT AND CO -PRODUCT

1. The difference Between joint products & By – Products is very important in case of those industries
where the technique of process costing is adopted
2. Joint products refer to the situation of existence of more than one output from same Raw-material &
Common manufacturing procedure for e.g. in case of Business of dairy, various joint – products
obtained are milk, ghee, Butter, cream ice cream chess etc.
3. If the is huge difference in the value & importance of various products, the product with maximum
value & importance is known as “By product” For e.g. In case of sugar mfg. industry, the main product
is sugar & by product is molasses
4. Co-products refers to the situation of existence of more than one product which are contemporary to
each other and may not be produce stimulatingly form same raw-material & common manufacturing
procedure

JOINT PRODUCT V/S BY – PRODUCTS

1. Joint products are of equal value an importance where the value and importance of by-products is less
as compared to main product
2. Joint products are produced simultaneously only from same raw material and common manufacturing
procedure on the then hand by-products are products incidentally in the course of manufacture of
main product
3. In case of joint product, the intention is to calculate the profit or loss which can be identified with each
& every joint product for this purpose we first ascertain the sale value of the joint product and deduct
from it following two types of amount
a. Cost incurred on the joint product often split -off point (Separate cost)

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 b. Cost related to the joint product upto Split -off point (joint cost)
4. In case of by-product, the sale value of the by product has the impact of reducing the cost of main
product

RELATIONSHIP BETWEEN MOS AND OPERATING LEVERAGE

1. Margin of safely means the difference between actual sales and Break-even sales. On other words, it
represents such amount of sales which is in excess of break-even sales
2. Operating leverage means the relationship in which we ident the increase in operating income also to
the reasons of increase in sales
3. Uptil break-even level, the contribution has to absorb fired cost only After break-even level, the
contribution equals to the amount of profit
4. Therefore, MOS and operating leverage both taken together establishes the level of business income
which is obtain on such amount of sale which is in excess of break-even-level.

BUDGET MANUAL
1. Budgeting in large organisation is extreamly complicated last and even. the best budgeting process
suffers from limitations and inaccuracies. Hence, it is essential that the budget formation procedure
must incorporate all necessary perception
2. Budget manual is a formal written document containing a list of various instructions which must be
adopted in the budget making procedure. These instructions are very helpful in preparing the realistic
a growth-oriented budgets
3. Budget manual is a link between various functions of the business. Hence, the co-ordination among
various employees is promoted and master budget can be effectively prepared
4. As the business organisation become large & complex, it is not possible for one person to prepare all
the budgets of the organisation therefore, the budgeting procedure must ensure that there is co-
operating & co-ordination among various departments and employees. Budget manual is an effective
tod for achieving such coordination or co-operating.

INTER – PROCESS PROFITS

1. Under the normal circumstance the output of one process is transferred to the next process at the cost
price. In the other words no profit is added while transferring the output to the most process.
2. However, of same profit is considered while transferring the output to the next process, the profit so
considered is known as “inter-process profit”
3. The amount of profit which is to be considered is deciding. On the basis prevailing market condition
or the conditions prevailing in particular industry
4. Objective: -
a. To ascertain whether the cost of production is more or less than the prevailing market prices
b. To enable the transferee process to stand on its own efficiency

BACK-ORDER COST
1. It is a type of cost which is incurred by a company when it is unable to fulfil the order and must
complete it later on
2. Example: - A company sells a product online on a particular day, it offers 50% discount on a specific
product and it has received unprecedented order size of 50,000 units. However, the Qty. in band is
only 30,000 units. Therefore, the difference of 20,000 units are “Back -order units and the cost to be
incurred for producing additional 20,000 units can be termed as back-order cost”

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3. Back order cost may prove to be very expensive as back-order units may involve huge amount of
material cost, labour cost and overheads
4. The relationship between back order cost and holding cost (Storage & Carrying cost) will decide
whether the company should under-produce or even produce

EXCISE – DUTY
1. Excise duty is a type of tax which is imposed on those goods which are produced in India and meant
for home consumption
2. Output of one person may be input to the other person. Hence, at the time of purchase of raw material,
excise duty may be required to be paid which is brown or “Input tax”
3. Such “Input tax” may be advised against “output tax” of credit document are obtained therefore the
price of raw material shall be inclusive of input tax
4. The “input tax” cannot be adjusted against “output tax” of the credit documents are not obtained. In
such a case, the price of raw material shall be inducive of “input tax”.
E.g. In less services tax is gives sin also given service tax for out of hall so he gets credit of services tax on
put of hall 5+1 = 6 credit

MARGINAL COSTING v/s ABSORPTION COSTING

1. Absorption costing is “total cos technique” whereas marginal costing can only be regarded as “Variable
cos technical”
2. In absorption costing the stock valuation is done on the basis of total manufacturing cost which
induces both: variable as well as fixed cost. However, in marginal costing technique only variable
manufacturing cost taken into consideration. for the purpose of stock valuation this results in higher
valuation of stock in absorption cost
3. In absorption cost fixed from a part of decision-making process and there is every possibility of
undercover or over -recover of based cost. In marginal cost technique there is no possibility of
existence of this type of situation
4. In obsession costing technique tow decision are taken on the basis of profit whereas in marginal
costing technique the decision is taking on the basis of contribution

BUDGETS & BUDGETARY CONTROL

1. Budget is a formal written document containing: -
a. Targets to be achieved
b. Approach to be adopted for such purpose
c. Arrangement of resources for such purpose
2. Budgets control means “controlling the Budgets” when the budgets are prepared in the beginning it is
responsibility of the management to ensure that the budgets are also implemented It is also necessary
to fix the responsibilities on those executives who are in charge of their respective budgeted function
3. Regular comparison of budgeted performance with actual performance is essential to successful
implementation of budgetary control without this compression no business can improve
4. Budgetary control or ordinates various activities and promotes co-operation among various agitative
therefore the overall the approach of the business gets a positive direction with the help of co-
ordination or co-operation

CASH BUDGET
1. it represents estimation of future cash inflow and outflows of the business organisation for the next
period. It is different from cash A/c or cash flow student in the hence that the cash A/c the Cash flow
statement is prepared for past period whereas cash budget is prepared for next period or future period
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2. Cash Budgets are prepared to asses whether the organisation has sufficient cash balance. In order to
ascertain the future comment regarding payments this type of awareness is externally import for the
purpose of Adding the liquidity problem
3. Cash Budget is to be prepared in the following manner

Particulars Amount
Opening cost balance xxx
(+) Estimated cash receipts xxx
Total cash available xxx
(-) Estimated cash Payment xxx
Closing cash balance xxx

4. If cash budget indicates unusual excess balance, it is to be dealt with by making appropriate
investment similarly if this budget represents any-ve balance in the future period, such situation is
also in be property dealt with by taking the amount of loan or making other financial

FLEXIBLE BUDGET
1. A flexible Budget is the Budget which is flexible enough to be prepared at any level of production, i.e.,
it adjusts itself according to the volume of production this budget is more important than fixed budget
which remains unchanged ignoring the actual level of production
2. For the purpose of preparation of flexible it is necessary to classify various expenses in following three
categories
a. Variable expenses
b. fixed expenses
c. Semi-variable expenses
3. Since Forcible budget be restructures its Elyes per actual production level, it is regarded as very
powerful for evaluation of managers in the business organisation this is so because the managers is
more interest in comparing the actual performance with the budgeted performance or not vice versa
4. Flexible budget has following limitation: -
a. It requires extra managerial time
b. It delays the preparation of financial statements
c. Thus, is no system of revenue compression.

STANDARD COSTING
1. In any business, at the beginning of the period the standards must be established to
a. Cost to be incurred
b. Sales to be achieved
c. Profit to be realised
2. At the end of the period, it becomes necessary to ascertain the differences (variances) between: -
a. Budgeted cost & actual cost
b. Budgeted sales & actual sales
c. Budgeted profit & actual profit
3. The deference B/w the standard performance actual performance may be advise or favourable. In any
case, it represents either bad planning or bed erecting. It is the responsibility of the management to
ascertain the reasons for variances-
4. The technique of standard costing is helpful in identifying the proper reasons for the variances &
helpful to the management in taking future correction action

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 STOCK-OUT-COST
1. It means the economic consequence of not being able to meet the demand out of current inventory It
represents loss of profit due to the reason of loss of sale because stock is not available for the time
being
2. “Stock out” Situation can prove to be very expensive because the customer may get frustrated and
more towards another dealer the customer may also start using the substitute products and may get
used to such substitute. Hence the customer may be lost forever
3. Various retailers follow the policy of “Safety Stock” in order to avoid the “Stock out situation” “Safety
stock” is in be used under abnormal circumstances
4. Effective inventory management is the solution to the problem of “Stock out” Situation. It is also
advised to conduct regular audit of Inventory. Do as to identify the frequency of “Stock-out” Situation.
This way the management may also decide the quantum of safety stock to be maintain

EFFICIENCY LEVEL OF WORKER

1. Determination of efficiency level of worker is essential due to following two reasons: -
a. Giving incentives to efficient workers
b. Promoting inefficient worker for the purpose of gaining and improving efficiency
2. In terms of output, following formula may be applied: -
Level of efficiency = x 100
3. In term of time, following formula may be applied
Level of efficiency = x 100
4. Example: -
Given Information: -
a. Standard output = 5 units per hr.
b. Actual output is 60 units in 10 hrs.
Level of Efficiency = x 100
60 units x 100 = 120% (10 hrs x 5 units per her.) OR
= x 100
= x 100 = 120%

CASUAL WORKER & OUT WORKER

1. Casual Worker  These are those workers who are not in the list of regular employees but they are
given employment on casual basis whenever there is extra load of works or when the regular
employees is absent for a temporary. Period due to illness or any other reason
2. Out workers  These are those workers who work from outside the factory premises These workers
may be: -
3. Those workers who are not in regular employment but they are supplied material for execution of
words at their own premises
4. Those workers who are in regular employment bar they are asked to perform specified duties of the
place of the customers or any other place as per the requirements

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 GROUP BONUS
1. This type of bonus is paid for collective efforts made by group of workers. This bonus scheme is
introduced where the group as a whole is desired to be motivated and encouraged
2. The objective of group bonus scheme is to create collective interest and promote team spirit among
the various workers in fact the individual performance is also desired to be encouraged but the
ultimate objective is to encourage the team works
3. Advantage: -
a. Promotes term spirit
b. Output is increased
c. Wastage is minimised
d. automatic training
4. Disadvantages: -
a. Bonus is should by all workers ignoring the individual performance
b. Amount various workers the remissibility evasion may create a problem

MULTIPLE COSTING
Bin Card Stores Ledger
1. It records only the Quantity of materials It records only quantity as well as the amount of
received, issued & in hand materials received, issued and in hand
2. It is maintaining by the store keeper It is maintained by the accounts department
3. It facilitates easy physical identification of It does not facilitate easy physical identification of
inventory due to the reason of proximity to the inventory due to the reason of no proximity to the
materials materials
4. it does not enable the stock record to be It is enabling the stock records to be centralised
centroided and it

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