COSTING

SUMMARY BOOK
EDITION 3

REVISE ENTIRE COSTING IN JUST ONE HOUR

By
Prof. RAJ AWATE
(Always with u )

9860616258

INSPIRE ACADEMY
Premium academy for CS Course

PUNE
8888881719

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 BASIC CONCEPTS

✓ Cost : Cost can be either real or imaginary. Imaginary cost are called as notional cost.
All opportunity cost are notional cost.
✓ Costing & cost accounting : Costing is just calculation cost whereas cost accounting
involves calculation of cost & keeping control on cost. cost accounting in achieving its
three basic objectives namely-cost ascertainment, cost control and cost presentation
✓ Cost Accountancy has been defined as “the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of information derived there from
for the purpose of managerial decision making”.
✓ Cost accounting & financial accounting & management accounting : Costing :
determination of operational position _stock valued at cost_only internal user. Financial
accounting : financial position_stock valued at cost or market value whichever is
lower_internal & external user. Management accounting : involves both costing &
accounting _used for management control
✓ different bases of cost classification are:

(1) By time (Historical, Pre-determined).

(2) By nature or elements (Material, Labour and Overhead).
(3) By degree of traceability to the product (Direct, Indirect).
(4) Association with the product (Product, Period).
(5) By Changes in activity or volume (Fixed, Variable, Semi-variable).
(6) By function (Manufacturing, Administrative, Selling, Research and development, Pre-
production).
(7) Relationship with accounting period (Capital, Revenue).
(8) Controllability (Controllable, Non-controllable).
(9) Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential,
Joint, Common,Imputed, Out-of-pocket, Marginal, Uniform, Replacement).
(10) Others (Conversion, Traceable, Normal, Avoidable, Unavoidable, Total).
✓ Historical Costs: These costs are ascertained after they are incurred. Such costs are
available only when the production of a particular thing has already been done.
Pre-determined Costs: These costs are calculated before they are incurred on the
basis of a specification of all factors affecting cost. Such costs may be:(i) Estimated costs
(ii) Standard costs
✓ Fixed cost can be classified into the following categories for the purpose of analysis:

(a) Committed Costs: These costs are incurred to maintain certain facilities and cannot
be quickly eliminated. The management has little or no discretion in this cost, e.g., rent,
insurance

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 (b) Policy and Managed Costs: Policy costs are incurred for implementing particular
management policies such as executive development, housing, etc. Such costs are
often discretionary.
(c) Discretionary Costs: These are not related to the operations and can be controlled
by the
management. These costs result from special policy decisions, new researches etc., and
can be
eliminated or reduced to a desirable level at the discretion of the management.
(d) Step Costs: Such costs are constant for a given level of output and then increase by
a fixed
amount at a higher level of output.

✓ Cost as per element : material, labour, expenses

✓ DM +DL +DE = prime cost IDM +IDL +IDE = overheads
✓ Production cost= Direct material + Direct wages + Direct expenses + production
overhead
Conversion cost = Direct wages + Direct expenses + production overhead
✓ Normal loss : unavoidable loss_ loss due to evaporation_ absorbed by remaining units_
due to this rate per unit increases. Abnormal loss : avoidable loss_ loss due to fire and
theft_ transferred to costing P & L a/c_ due to this rate per unit remains same
✓ Marginal cost : change in cost due to change in number of units

✓ Differential Cost: change in costs due to change in the level of activity or pattern or
method of production.

✓ Opportunity cost = income forgone due to taking another option = non real cost =
imaginary cost = notional cost.
✓ Out-of-pocket Costs: for this cash is paid _ it is relevant for decision-making,

✓ Imputed Costs: These are notional costs appearing in the cost accounts only _ also called
imaginary cost.

✓ Discretionary Costs: These are "escapable" or "avoidable" costs. These can be avoided
if a particular course of action is not chosen.

✓ Sunk Cost: It is a cost which has already been incurred or sunk in the past _ not relevant
for decision making.

✓ Committed Cost: it has been already committed by the management_not relevant for
decision-making. Committed cost :unavoidable. discretionary costs : avoidable costs.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 ✓ Explicit cost :They requires immediate payment of cash _also called as out of pocket
cost. Implicit cost :They do not require immediate payment of cash _also called as
economic cost or notional cost or imputed cost.
✓ Classification according to nature :- Fixed Costs, Variable Costs ,Semi-variable Costs
: Certain costs are partly fixed and partly variable _also called as ‘stepped costs’.
✓ Shut-down Costs: These are incurred even though business is shut-down, e.g. rent,
rates, depreciation. They are fixed cost.
✓ Controllable Cost: cost which can be influenced by its budget holder”.
Non-Controllable Cost: cost which is not controlled by any managerial supervision.
certain fallacies (misconceptions) about controllable costs:
(i) All variable costs are controllable and fixed are not.
(ii) All direct costs are controllable and indirect costs are not.
(iii) All long-term costs are controllable.

✓ Methods of costing :Job Costing :printing press, automobile garage, repair shop, ship-
building, house building, engine and machine construction, etc. Contract Costing
:building construction. Batch Costing .Terminal Costing.Operation Costing.Process
Costing .Unit or Single-output Costing .Operating Costing :railways, road transport,
water supply undertakings, telephone services, electricity companies, hospital services,
municipal services, etc. Multiple or Composite Costing :motor cars, aeroplanes,
machine tools, type-writers, radios, cycles, sewing machines, etc. Departmental Costing
When costs are ascertained department by department, the method is called
“Departmental Costing”.

✓ Unit costing refers to the costing procedure, which is ideally used in case of concerns
producing a single article on large scale by continuous manufacture.

Cost sheet is a document which provides for the assembly of the detailed cost of a cost
centre or cost unit.

Production account is an account giving details of cost of production, cost of sales and
profit made during a particular period.

Job costing ascertains the cost of a job that is produced as per the requirements of the
customers._ considers job a cost unit. A job is a cost unit which consists of a single order
or contract.

Batch costing system is used when production is in batches. _A batch is a cost unit•

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Contract costing is that form of specific order costing which applies where work is
undertaken as per customers’ special requirements and each order is of long duration.

Process costing method is applicable where the output results from a sequence of
continuous or repetitive operations or processes and products are identical and cannot be
segregated.

Service Costing is a Method Costing applied to undertaking which provides service rather
than production of commodities.

✓ Techniques of costing : Historical (or Conventional) Costing _Standard

Costing_Marginal Costing_Uniform Costing_Direct Costing_Absorption Costing_Activity
Based Costing

✓ Management accounting is an integral part of management concerned with identifying,

presenting and interpreting information used for: (a) formulating strategy; (b) planning and
controlling activities; (c) decision taking; (d) optimisin the use of resources; (e) disclosure
to shareholders and others external to the entity; (f) disclosure to employees; (g)
safeguarding assets.

✓ The tools and techniques of management accounting includes - financial planning,

financial statement analysis, marginal costing, differential costing, capital budgeting,
cash flow analysis, standard costing and budgetary control, techniques of linear
programming, statistical quality control, investment chart, sales and earning chart, etc.
✓ Financial accounting, cost accounting and management accounting are distinct from each
other.

✓ Cost centres may be classified as follows :

(i) Productive, Unproductive and Mixed Cost Centres

(ii) Personal and Impersonal Cost Centre

(iii) Operation and Process Cost Centre

✓ Cost period :The period for which cost is calculated is called Cost Period.

✓ Cost unit : It is a unit of product for which cost is calculated.

✓ Some important cost units are :

For production industries :

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Automobile : Per car, per scooter Sugar industry : Kg / tonne Chemical
industry : Litre Furniture :Per article
Telemarketing : Per customer calls made Construction : per contract

For service industry ( composite units ) :

Transportation industry :Tonne-kms Hospital : Patient -day, bed-days

Hotel : Per person-per plate Education : Per student-year

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 MATERIAL

✓ Centralized purchasing : purchase by single purchase dept_ bulk purchase _ purchase

at discounted rate _ requires more time. De-centralised purchasing : each production
dept purchases on its own _ more cost of material _ less time
✓ The routine followed for the purchase of materials may involve: indenting for
materials, issuing of tenders and receiving quotations, placing of order, inspecting stores
received, receiving the stores, and checking and passing bills for payment.
✓ Storekeeping is the function of receiving materials, storing them and issuing these to
workshops or departments.
✓ Objectives of inventory control : (i) To provide continuous flow of required materials
(ii) To minimise investment in inventories (iii) inventories are protected from loss by fire
and theft (iv) To keep surplus and obsolete items to minimum.
✓ The following are the common techniques of inventory control:
(i) Min-max Plan
(ii) The Two-bin System
(iii) Order Cycling System
iv) ABC Analysis
(v) Fixation of various levels
(vi) Use of Perpetual Inventory System and Continuous Verifications
(vii) Use of Control Ratios
(viii) Review of Slow and Non-moving Items.
✓ Bill of material : a document which shows complete list of all materials & components,
parts required for a particular job including small items like nuts , bolts, screws etc is
called as bill of material _used for production of new product
✓ Bin card :records only quantity of material_maintained by storekeeper
Storeledger :records quantity & amount of material_ maintained by costing dept
✓ Economic order quantity ( EOQ ) : size of order which should be placed so that overall
2 ×Annual requirement ×cost per order
cost is minimum. EOQ = √ carrying cost p.u.p.a.
Annual ordering cost = cost per order * Number of orders
Where, number of orders = AR / order size
Annual carrying cost = carrying cost p.u.pa. * Average inventory
Where, average inventory = order size /2

✓ Inventory level :
Reorder level ( ROL) : It shows level of stock at which order must be placed.
ROL = Maximum lead time * Maximum consumption rate
= Safety stock + Avg lead time * Avg consumption rate
Minimum level = ROL– Avg lead time * Avg consumption rate
Maximum level = ROL + ROQ – Min lead time time * Min consumption rate
maximum level+Minimum level ROQ
Average level = 2
= minimum level + 2
Danger level = emergency lead time * normal consumption rate

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 ✓ Perpetual inventory system is a method of recording stores balances after each
receipt and issue to facilitate regular checking and obviate closing down for stock taking.
✓ Normal loss : unavoidable_ loss due to evaporation _It is absorbed by remaining goods.
Because of normal loss, rate per unit increases.
Abnormal loss : avoidable in nature _ loss by theft_ loss by fire _transferred to debit side
of costing P & L a/c _ rate per unit remains same
✓ Materials losses may arise in the form of waste, scrap, spoilage or defectives
✓ .Waste comprises of invisible loss, visible loss that cannot be collected and also the
unsaleable portion of the collected loss. Normal Waste: treated as part of the product
cost. Abnormal Waste: transferred to the Costing Profit and Loss Account
✓ Spoilage are those materials or components which are so damaged in the
manufacturing process that theycannot be repaired or reconditioned.
✓ Defectives are that portion of the process loss which can be rectified.
✓ Scrap is the residue from certain types of manufacture, usually of small amount and low
value. _ unavoidable Defective:units of production which can be rectified & converted
into good units_ avoidable .
✓ ABC Analysis : important technique of inventory control on selective basis.
Category % in total % in total Extent of control
value quantity
A 70% 10% Constant and strict control
B 20% 20% Need periodic review not strict as excessive.
C 10% 70% Little control

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 LABOUR

✓ Time basis system : Earning = Hours worked * Rate per hour

Piece basis system :Earning = Units produced * Piece rate
Rate per hour
Here, Piece rate = rate per unit =
Standard or normal units per hour

✓ Taylor’s differential piece rate system :

Efficiency Piece rate payable
Below standard ( < 100% ) 83% of normal piece rate
At & above standard 125% of normal piece rate

✓ Merrick’s differential piece rate system :

Efficiency Piece rate payable
Upto 83% normal piece rate
83 % to 100% 110% of normal piece rate
Above 100% 120% of normal piece rate

✓ Emersion’s efficiency plan:

Efficiency Wage rate payable
Upto 66.66% Normal times wages
66.66% to 100% Normal time wages + bonus from 0-20%
Above 100% Normal time wages + 20% bonus + 1% extra
bonus for every 1% efficiency above 100%

✓ Barth’s variable sharing plan:Earning = rate per hour * √Actual hours * standard hours

✓ Bedaux point system :

Bedaux points saved * rate per hour
Earning = Hours worked * Rate per hour + 75% of
60

✓ Halsey plan :Earning = Hours worked * rate per hour + 50% ( time saved * Rate per hr)
Rowan plan :
Time taken
Earning = Hours worked * rate per hour + * ( time saved * Rate per hour)
Time allowed
When TT = TS : Earning under Halsey = Earning under rowan

✓ Group Bonus Plans : Some jobs are produced by collective team efforts of the workers. In
such cases, if team shows more efficiency then every member in team is given bonus
irrespective of their individual performance. Such plans are called group bonus plan.

✓ Labour turnover is the rate of change in the composition of the labour force in an organization.

✓ Idle time represents the time lost by workers who are paid on time basis.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

✓ The payroll is a record which shows details of the gross wages earned by each worker in a
particular period, the
deductions made and the net wages payable. The payroll can be prepared at weekly, fortnightly
or monthly periods.
It can be prepared department wise or shift wise.
✓ Labour turnover :

Causes of Labour Turnover :

Personal causes : Death_Family problems _Retirement _No liking for job
Avoidable causes : Poor wages _Odd hours of work _Bad working conditions _Lack of
incentives and promotions _Lack of transport, house, medical facilities

Effects of Labour Turnover : Cost of selecting/replacing workers _Cost of training

imparted to new workers _Loss due to defectives and wastage

Measurement of Labour Turnover

Number of Separationduringagivenperiod
a) Separation Rate Method =Averagenumberofworkersduringtheperiod * 100

Numberofreplacementsduringagivenperiod
b) Replacement method = Average number of workersduringtheperiodx 100

c) Flux method =
[Number of separation during a period] + [Number of new employees during a given period]
x100
(Averagenumberofworkforceduringthegivenperiod)

✓ treatment of overtime premium will be as follows:

1. If the overtime is resorted to at the desire of the customer, then the entire amount of
overtime
including overtime premium should be charged to the job directly
2. If it is due to a general pressure of work to increase the output, the premium as well as
overtime
wages may be charged to general overheads.
3. If it is due to the negligence or delay of workers of a particular department, it may be
charged to the
concerned department.
4. If it is due to circumstances beyond control, it may be charged to Costing Profit & Loss
Account.
✓ Time keeping : records the attendance of workers _Finding out the labour cost of a
job/product/service _To provide internal check against dummy workers.
Time-Booking : To calculate the labour cost of jobs done _ to ascertain idle time
for the purpose of control _To find out that the time during which a worker is in the factory
is properly utilized;
Different methods used for time booking are:Daily Time Sheets _ Weekly Time Sheets
_Job Cards

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 OVERHEADS

✓ Types of Direct Expenses are as under:

(i) Royalties if it is charged as a rate per unit.
(ii) Hire charges of plant if used for a specific job.
(iii) Sub-contract or outside work, if jobs are sent out for special processing.
(iv) Salesman’s commission if it is based on the value of units sold.
(v) Freight, if the goods are handled by an outside carrier whose charges can be related to
individual units.
(vi) Travelling, hotel and other incidental expenses incurred on a particular contract.
(vii) Cost of making a design, pattern for a specific job.
(viii) Cost of any special process not forming part of the normal manufacture like water
proofing for canvas cloth.
✓ Expenses excluded from costs :
(a) Matters of pure finance including interest paid and received, dividend received on
investments, rent received, profit or loss on sale of investments or company’s property,
transfer fees received etc.
(b) Appropriation of profits including income-tax paid, dividends paid, transfer to sinking
fund, general reserve, excessive depreciation, goodwill or other fictitious assets written off,
etc.
✓ For the collection of overhead expenses the following are some of the primary
documents used:-
(i) Stores requisitions
(ii) Job cards or tickets
(iii) Invoices or purchase voucher
(iv) Salary or pay bills
(v) Cash book
(vi) Subsidiary records.

✓ Semivariable cost :They are also called Step Costs It may remain fixed within a certain
activity level, but once that level is exceeded, they vary without having direct relationship with
volume changes. Examples are depreciation, telephone charges, repair and maintenance of
buildings, machines and equipment etc. Semi-variable expenses usually have two parts—
one fixed and other variable
✓ Methods of segregating semi-variable costs into fixed and variable costs : Graphical
Presentation Method_Least square method _High and low points method _Analytical
method_Comparison by period or level of activity method_Ascertaining Marginal Cost:
Decision Making:
✓ Advantages of classification of overheads into fixed and variable
Effective cost control
.
Preparation of budget estimatesDistribution of overheads is carried out in 3 Steps :-

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

✓ Primary distribution : In this entire factory overheads are allocated between production
dept& service dept using suitable basis.
Secondary distribution : Here expenses of service dept are charged to production dept
using suitable method.
Absorption of overheads :Here, overheads of production dept are absorbed by units
produced in that dept.
✓ Allocation:-When items of overhead are specifically known for particular department. Then
it is called as allocation of overheads. They do not require any basis.
Apportionment:- When items of overhead are not known for particular dept then they should
be divided among various dept. Such distribution of overhead is called as apportionment. It
requires suitable basis for distribution.

✓ Cases of secondary distribution :

a) Direct distribution method :
S1→ P1 , P2
S2→ P1 , P2
b) Partial service :In this case, step cost method or step ladder method is used
S1→ P1 , P2 , S2
S2→ P1 , P2
c) Reciprocal services :
i. Repeated distribution method
ii. Simultaneous equation method
iii. Trial & error method
S1→ P1 , P2 , S2
S2→ P1 , P2, S1

✓ Service department costs and Basis of apportionment

1. Maintenance department : Hours worked for each department.
2. Employment/personnel department :Rate of labour turnover or number of employees in each
department.
3. Payroll or time department : Direct labour hours, machine hours number of employees.
4. Stores keeping department : No. of requisitions, quantity or value of materials.
5. Welfare department : No. of employees in each department.
6. Internal transport service : Truck hours, truck mileage or tonnage.
7. Building service department :Relative area of each department.
8. Power house “Floor area, cubic contents.
✓ Predetermined overhead absorption rate / recovery rate :

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Budgeted overhead
Overhead absorption rate =
Budgeted basis
Budgeted overhead
Overhead rate as % of direct material : = Budgeted direct material * 100
Budgeted overhead
Overhead rate as % of direct labour = Budgeted direct labour * 100
Budgeted overhead
Overhead rate as % of prime cost = Budgeted prime cost * 100
Budgeted overhead
Labour hour rate ( LHR) =
Budgeted labour hours
Budgeted overhead
Machine hour rate ( MHR ) : = Budgeted machine hours

✓ Blanket overhead rate refers to the use of one single or general overhead rate for the whole
factory.
Departmental rate : When different rates are computed for each producing department,
service department, cost centre, each product or product line, each production factor, and for
fixed overhead and variable overhead, then they are known as multiple rates.
✓ Under or over absorption of overheads :
If overheads absorbed are lower than overheads incurred then difference is called as under
absorbed overheads.
If overheads absorbed are more than overheads incurred then difference is called as over
absorbed overheads.
✓ Treatment of under or over absorbed overhead in cost acconuting :
Use of supplementary OH absorption rates. : Where the amount of under or over-
absorption is considerable or large , the cost of jobs or products is adjusted by means of a
supplementary rate. This rate may be positive or negative
Write off to costing P & L A/c. Where the difference between actual or absorbed
overheads is not large, the simple method is to write it off to the costing profit and loss
account.
Carrying of overheads

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 MARGINAL COSTING

✓ Marginal costing is the accounting system in which variable costs is charged to cost units
and fixed costs of the period are written-off in full against the aggregate contribution. Its special
value is in decision-making.This technique of costing is also known as “Variable Costing”,
“Differential Costing” or “Out-of-pocket” costing
✓ Absorption costing is a method of costing by which all direct costs and applicable
overheads are charged to products or cost centres for finding out the total cost of production.
Absorbed cost includes production cost as well as administrative and other costs. It is a
principle whereby fixed as well as variable costs are allotted to cost units, i.e. full costs are
charged to production.
✓ Sales
- Variable cost
---------------
Contribution
- Fixed cost
---------
Profit

✓ Contribution = Sales - Variable cost of sales

= Fixed cost + Profit

✓ P / v ratio = Contribution / sales * 100

= Change in profit / change in sale * 100

✓ BEP : At break-even point, there is no profit no loss.

If actual sales level is below break-even point the company will incur loss.
If actual sales level is above break-even point the company will incur profit.
B.E.P ( in units ) = Fixed cost / contribution per unit
B.E.P ( In Rs) = Fixed cost / PV ratio

✓ Actual Sales –B.E.P. sales = Margin of safety.

✓ CVP Analysis ( cost-volume-profit analysis) :

It is the analysis of three variables, viz. cost, volume and profit _As quantity increases VC
increases but FC remains same. So total cost also increases_ As quantity increases value
of sale also increases PInitially when company sells small quantity of units total cost is
greater than sales. So it incurs loss _ As it sells more & more quantity, sales exceeds total
cost. So it makes profit _Level at which there is no profit no loss is called as B.E.P. (break
even point )

Analysis of cost-volume-profit involves consideration of the interplay of the following factors:

(i) Volume of sales;

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

(ii) Selling price;
(iii) Product mix of sales;
(iv) Variable costs per unit; and
(v) Total fixed costs.
✓ Angle of incidence : It is angle between sales line & cost line. _ Greater is the angle of
incidence, lower is the B.E.P. smaller is the angle of incidence, more is the BEP _If the break-
even point is low and angle of incidence is large, the margin of safety is large and the business
enjoys financial stability.
✓ Break-even point can be determined by the following methods:
1. Algebraic methods:
(i) Contribution Margin Approach
(ii) Equation technique
2. Graphic presentation:
(i) Break-even chart
(ii) Profit volume chart
✓ Application of Marginal Costing Technique: Marginal cost is essentially a technique of
decision-making. It is used in following fields.
1. Fixation of selling price :
2. Decision relating to the most profitable product mix :
3. Decision relating to make or buy,
4. Shut down or continue of determination or output level in period of recession of
depression

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 CONTRACT COSTING

✓ It is method of costing where cost is calculated for each contract _Cost unit is contract.

✓ For payment of money, work done is divided into work certified & work uncertified.
Work certified = at cost + profit Work uncertified = at cost

✓
Fixed contract Cost plus contract
Contract price is decided before the start of Contract price id decided on completion of
contract. contract by adding fixed profit margin to cost
incurred.
Contract price( CP ) is fixed. Contract price is not fixed.
As contract price is fixed initially, so Contractee has right to check the books of
contractee has no right to check the books of accounts of contractor.
account of contractor.
Contractee has idea about how much amount As contract price is not fixed, so contractee is
he has to pay at the end of contract. not aware of actual amount to be paid.
As CP is fixed, so contractor can earn more CP depends upon cost incurred, so
profit by using low quality material. contractor uses high quality material.
Escalation clause exists. Escalation clause does not exist.

✓ Contract account

Particulars Rs. Particulars Rs.

To direct material By work certified
To direct labour By work uncertified
To direct expenses By plant ( at site )
To overheads By material ( at site)
To plant ( at cost )
To notional profit c/d

To P & L a/c ( profit transferred) By notional profit b/d

To profit reserved

✓ Methods of transfer of profit on incomplete contract :

To obtain profit on a contract for a year, a contract account is prepared & notional
profit is calculated.
% of work completion Profit transferred
Upto 25% Nil
25 – 50% Cash received
1/3 * notional profit *work certified

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 50 – 90% Cash received
2/3 * notional profit *
work certified
Above 90 % As per estimated profit basis

work certified
% of work completion = contract price
* 100

✓ Transfer of profit as per estimated profit :

Estimated profit = Contract price – estimated cost

= Contract price – ( cost to date + further cost )
Where, Estimated cost = total cost of entire contract

Profit is transferred by using following formula :

work certifid Cash received
Profit transferred = estimated profit * Contract price * work certified

✓ Escalation clause :
“ When price of material &labour increase beyond certain limit then contract price can be
increased proportionately. “ _ applicable only in case of fixed contract.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 RATIO ANALYSIS

✓ Balance sheet ratios :Both numerator & denominator in these ratio are taken from balance
sheet. e.g.Current ratio ,Liquidity ratio ,Proprietorship ratio
Income statement ratios : Here, both terms are taken from income statement.
Gross profit ratio Net profit ratio Operating ratio
Mixed ratios : Here, one term is taken from balance sheet & other is taken from income
statement. E.g Stock turnover ratio,Debtors turnover ratio ,

✓ Classification according to purpose :

Profitability ratio : Gross profit ratio , Net profit ratio, Capital employed ratio
Liquidity ratio : Current ratio,Liquidity ratio
Turnover ratio : Stock turnover ratio, Debtors turnover ratio, Fixed asset turnover
Leverage ratio: Debt- equity ratio ,Capital gearing ratio ,Proprietary ratio

✓ Current ratio : = Current Assets ideal current ratio = 2 :1

Current liability
✓ Quick ratio := Quick Assets ideal quick ratio = 1:1
Quick Liability

Where, Quick Assets = Current Assets – Stock.

Quick Liability = Current liability– Bank OD
sales
✓ STR = ( use this formula when gross profit is not known)
average stock

cost of sales
STR = ( use this formula when gross profit is known)
average stock

365 days
Stock velocity =Finished goods storage period = Stock Turnover ratio ( STR)

Net Credit Sales in a year

✓ Debtors’ Turnover Ratio( DTR ) = Average Stock of Debtors and Receivables

365 days or 12 months

Average Collection Period = Debtors′ turnover Ratio ( DTR )
Net Credit purchases in a year
✓ Creditors’ Turnover Ratio( CTR ) = Average of creditors and payables

365 days or 12 months

Average payment Period = Creditors′ turnover Ratio ( CTR )
Net Sales
✓ Fixed Assets Turnover Ratio =Fixed Assets
Net sales
✓ Capital Turnover Ratio =Average Capital Employed

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Profit After Tax
✓ Return on Equity =
Equity

Here, Equity = Equity share capital + Preference Share Capital + R & S

✓ Gross profit = Sales – COGS

✓ Operating expenses = Administration expenses + Selling & distribution expenses

✓ Operating profit = Gross profit – Operating expenses

✓ Working capital = Current asset – Current liability

✓ Capital employed = Fixed asset + Current asset – current liability

✓ Capital employed = Net worth + long term loans

✓ Net worth = Proprietor’s fund = owner’s fund =

= equity share capital + preference share capital + reserve & surplus

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 CASH FLOW STATEMENT

✓ Financial statements generally refer to balance sheet or position statement and Statement
of Profit and Loss or income statement. a business may also prepare a statement of
retained earnings and a cash flow statement.
✓ Financial statements are prepared on the basis of (i) recorded facts; (ii) accounting
conventions; (iii) postulates; (iv) personal judgements, and (v) accounting standards and
guidance notes.
✓ Attributes of financial statements cover – relevance, accuracy and freedom from bias,
comparability, analytical presentation, promptness, generally accepted principles,
consistency, authenticity and compliance with laws.
✓ Financial statements are very much relevant to – the management, the public, the
shareholders and the lenders, the labour and trade unions, the country and economy.
✓ Fund flow statement also referred to as statement of “source and application of funds”
✓ Fund = Working capital = Current assets – Current liability
✓ Flow of funds include both “inflow” and “outflow”.

❖ Direct Method:This method is applicable when income statement or P & L is given.

Particulars Rs. Rs.

Cash Flow from operating activity :
Cash received from customers
Less : Cash paid to supplier
Less : Cash paid to employee
Less : Cash paid for other operating expenses
_______________________________
Cash generated from operations
Less : Tax paid ____
___________________________
Cash flow from operating activity

❖ Indirect Method :
Particulars Rs Rs
. .
Net profit before tax& dividend
Add : adjustment for P & L a/c
_________________________________________
Net operating profit before working capital changes
Add :Changes for working capital
_________________________________________
Cash generated from operations
Less : Tax paid
______________________________________
Cash flow from operating activity

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

✓ IMP Accounts for investment activity : For purchase & sale of asset
Assets Account
To bal b/d By depreciation a/c
To profit on sale By loss on sale
To Purchase By sale
By bal c/d

Depreciation
To depreciation on assets sold By bal b/d
(asset account)
To bal c/d By current year depreciation (P & L a/c [this
amount should be taken at non – cash items
place )

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 BUDGET

✓ A budget is a precise statement of the financial and quantitative implications of the

course of action that management has decided to follow in the immediate next period of
time (usually a year).
✓ Budgetary control is the establishment of budgets, relating the responsibilities of
executive to the requirements of a policy and the continuous comparison of actual with
budgeted results either to secure by individual action the objectives of that policy or to
provide a firm basis for its revision.
✓ Budget manual is a document which sets out the responsibilities of the persons
engaged in the routine of and the forms and records required for budgetary control.
✓ Budget key factor also known as limiting factor, governing factor or principal budget
means the factor which limits the size of output. It is the factor the extent whose
influence must first be assessed in order to ensure that functional budgets are capable
of fulfillment. The influencing factors are: (a) customer demand, (b) plant capacity (c)
availability of raw material, skilled labour and capital, (d) availability of accommodation
for plant, raw materials and finished goods and (e) governmental restrictions, etc.
✓ Fixed budget is a budget designed to remain unchanged irrespective of the level of
activity actually attained.
✓ A flexible budget is a budget which is designed to change in relation to the level of
activity attained.
✓ Zero base budgeting is a method of budgeting whereby all activities are re-evaluated
each time a budget is set.
✓ Performance budgeting involves evaluation of performance of an organization in the
context of both specific as well as overall objectives of the organization. Performance
budgeting lays emphasis on achievement of physical targets.
SELF TEST QUESTIONS

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 STANDARD COSTING

✓ Standard costs are pre-determined estimates of cost of a single unit or a number of units
of a product service.
✓ Standard costing is a method of preparation of standards and their uses for comparison with
actual costs by variance analysis.
✓ Application of Standard Cost :Effective planning and controlling costs _Pricing decisions
including submission of quotations, answering tenders etc _ Identification and measurement
of variances from standards _Designing performance measurement systems
✓ Types of various standards are basic, current, expected, normal, ideal.
✓ Variance is the difference between standard cost and actual cost incurred.
✓ The examination of variances in detail and evaluation of them is known as variance
analysis.
✓ Variance can be divided into two part:
Variance related to cost
Variance related to sales.
Variance Related to Cost :- Cost can be divided into three part i.e. Material cost, Labour
cost & Overhead cost.
✓ Favourable variance is that variance which effect profit in a favourable manner which
may be due to reduction in cost.
✓ Basic Standard: This is a “standard” which is established for use, unaltered over a long
period of time.
Current Standard: A current standard is a standard for a certain period, for certain
condition and for certain circumstances. Basic standards are more idealistic whereas
current standards are more realistic. Most companies use current and not basic
standards.
Expected or Attainable Standard: A standard though idealistic should also be realistic.
If targets are fixed for a certain budgeted period, taking into account the expected
conditions, it can be known as “expected standard” or “attainable standard”.
Allowances are made for normal losses, waste and machine downtime.”
Normal Standard: the average standard which it is anticipated can be attained over a
future period of time, preferably, long enough to cover one trade cycle”.
Ideal Standard: This standard refers to the target which can be attained under most
ideal conditions. The standard which can be attained under the most favourable
conditions, with no allowance for normal losses waste and machine down time.

✓ Material cost variance = standard cost for actual output – actual cost
= std qty (for actual output) * std rate - actual qty * actual rate

Material usage variance (MUV) = std rate * ( std qty – actual qty)

Material price variance (MPV) = std qty * ( std rate – actual rate)

Material mix variance (MMV) = std rate * ( std mix – actual mix)

Material yield variance (MYV) = std output rate * ( std output – actual output )

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Note : std mix = actual qty divided into std ratio

Note : standard output rate = std cost / actual output

✓ Labour cost variance = standard cost for actual output – actual cost
= std hrs (for actual output) * std rate - actual hrs * actual rate

Labour efficiency variance (LEV) = std rate * ( std hrs – actual hrs)

Labour rate variance (LRV) = std hrs * ( std rate – actual rate)

Labour mix variance (LMV) = std rate * ( std mix – actual mix)

Labour yield variance (LYV) = std rate * ( std hrs – std mix )
M

Note : std mix = actual hrs divided into std ratio

✓ Variable overhead variance :

SRR /unit = budgeted overhead / budgeted units

SRR/ hr = budgeted overhead / budgeted hrs

Variable overhead variance = standard overheads for actual output – actual overhead
= ( SRR/ unit * actual output ) - actual overheads

Overhead efficiency variance = SRR/ hr ( std hrs - actual hrs )

Overhead expenditure variance = actual hrs ( SRR/hr – actual rate/hr )

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

❖ Process costing :
- It is a method of costing where cost is calculated for each process.
- It is used when production process is continuous.
- The output of one process becomes the input of the following process.
- Output of last process is finished product.
- If there remains in stock any partly finished product( closing WIP) , then it is expressed
in terms of “equivalent production units”.
- This method is useful in the manufacturing of products like steel, soap, chemicals,
rubber, vegetable oil, paints, varnish, etc.
✓ Process costing is used when :
a)The production is continuous
(b) The product is homogeneous
(c) The process is standardized
(d) Output of one process become raw material of another process
(e) The output of the last process is transferred to finished stock
(f) Costs are collected process-wise
g) Both direct and indirect costs are accumulated in each process
(h) If there is a stock of semi-finished goods, it is expressed in terms of equivalent units
(i) The total cost of each process is divided by the normal output of that process to find out
cost perunit of that process.

❖ Items on the Debit side of Process A/c

(a) Cost of materials used in that process.
(b) Cost of labour incurred in that process.
(c) Direct expenses incurred in that process.
(d) Overheads charged to that process on some pre determined.
(e) Cost of ratification of normal defectives.
(f) Cost of abnormal gain (if any arises in that process)
Items on the Credit side:
Each process account is credited with
(a) Scrap value of Normal Loss (if any) occurs in that process.
(b) Cost of Abnormal Loss (if any occurs in that process)
❖ Equivalent production :
Equivalent production statement is prepared when there is closing WIP

Statement of equivalent production

Input Particulars Output Equivalent production
material Labour overheads

Equivalent units of production. = Actual no. of units in WIP x Percentage of work

completed.
e.g.
If the units in WIP be 200 and 60% work is completed then

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Equivalent Units = 200 x 60%
= 120 units.

❖ Methods of valuation of WIP in process costing :

WIP is valued in two ways

1. FIFO (First-in-first out) method :

- When the prices of raw material and rate of labour and overhead are more of less stable
WIP is valued by FIFO method.
- It also preferred when % of opening WIP is available.
- Under this method it is assured that the raw materials issued to WIP pass through the
finished goods in a progressive cycle i.e. what comes out first goes out first.
- The closing WIP is valued at costs during the new period while opening WIP is valued at
costs of the old period.

2. Average cost method.It is preferred when % of opening WIP is not available.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY
RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY
RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY
 JOINT PRODUCT & BY PRODUCT

❖ Joint products : During the manufacturing process, two or more products are obtained
simultaneously. If all the products are of equal economic importance ( nearly same sale value)
and none of them can be termed as major products, then they are called as joint products.
Some of the examples of joint products are given below:
a) In dairy industry – skimmed milk, butter, cream and ice-cream.
b) In petroleum industry – Petrol, diesel, liquid petroleum gas and kerosene.

joint products imply the following :

(i) They are produced from the same basic raw materials.
(ii) They are comparatively of equal importance.
(iii) They are produced simultaneously by a common process.
(iv) They may require further processing after the point of separation.
Examples of joint products are gasoline, diesel, kerosene, lubricants, tar, paraffin and asphalt
obtained from
crude oil. Different grades of lumber resulting from a lumbering operation is another
example.
❖ By-product :During the manufacturing process, two or more products are obtained
simultaneously. If any one of the product is having very low economic value as compared to
main product then it is called as by product.
- By product has value lower than main product ( joint product) but greater than scrap.
- In sugar industry, mollasys is obtained along with sugar. Here mollasis is by product.

❖ Joint costs : Joint costare those costs which are common to the processing of joint-products
or by products up to the point of separation. In other words, joint costs represent pre-
separation cost of joint products or by-products.

❖ Methods of allocation of joint cost :

(i) Physical measure method.:

- Under this method, total cost up to the point of separation (joint cost)isallocated in the
ratio of number of units.
(ii) Contribution margin Method :
- The variable costs are alloacated on the basis of units produced or other physical
quantities.
- fixed cost is allocated on the basis of contribution made by the various products.
(iii) Market Value Method :
It has following sub-methods
a. Market value at split-off point :Here, joint cost allocated in the ratio of sales value at
split off point.
b. Market value after further process :
- Here, joint cost is allocated on the basis of sales value after further process.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 c. NRV method :
- NRV ( Net Realizable Value) means net incomes obtained by joint product.
- It is calculated by deducting profit, selling expenses & further cost from final sales
value ( sales value after further process).
- This is the best method of allocation of joint cost in all the circumstances.

ACTIVITY BASED COSTING

✓ The Activity-Based Costing (ABC) is a costing system, which focuses on activities

performed to produce products.
✓ ABC is that costing in which costs are first traced to activities and then to products.
✓ ABC is developed due to many deficiencies of Traditional Cost systems.
✓ In traditional product costing system, costs are first traced not to activities but to an
organizational unit, such as department or plant and then to products.

Traditional system ABC system

Overheads are first related to departments Overheads are first related to activities or
cost centres (Production and Service Cost grouped into Cost Pools.
Centres)
Only two types of activities viz. Unit Level levels of activities in the manufacturing cost
Activities and Facility Level Activities are hierarchy viz. Unit Level, Batch Level,
identified. Product Level and Facility Level are
identified.
This method relates overheads to cost his method relates overheads to the causal
centres i.e. locations. It is not realistic of the factori.e. driver. Thus, it is more realistic of
behaviour of cost behaviour.
costs.

✓ Cost driver is an activity which generate cost. Costs are grouped according to what
drives them or causes them tobe incurred.
✓ A Cost Object: It is an item for which cost measurement is required e.g. Product , job or
a customer.
✓ Cost drivers type of Pure Volume, Weighted Volume, Situational, Motivational.
✓ Cost pool is created for each activity and such activities are related with each type of
product to determine the cost of such product.
✓ Stages in developed ABC system as under:
Identify resources
Identify activities
Identify cost objects
Determine resource drivers
Determine cost (activity) drivers
Assign costs to the cost objects
✓ Unit level cost: Use of indirect materials/consumables
Batch level cost: Material ordering, Inspection of Products.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 Product-level cost: engineering change orders, equipment maintenance, product
development and scrap

Facility-level cost: Cost of maintaining a building or plant security oradvertisement promoting

the organization. Plant Security, Production Manager’sSalary and Maintenance of buildings.
REVIEW QUESTIONS
✓ Human Resources : Facility-level
Parts management :Product-level
Purchasing :Batch-level
Quality Control Unit-level
Equipment set-up Unit-level
Training employees Facility-level
Assembly department Unit-level
Receiving department Batch-level

COST ACCOUNTING SYSTEM

❖ There are basically three cost accounting systems 1. Financial Accounting System 2. Non-
Integrated Accounting System 3. Integrated Accounting System
❖ Non-integral accounting system where separate accounts books are maintained to record
financial and cost transactions.
Non-integral accounting system is also known as ‘Cost Control Accounts’.
Two set of accounts books are kept in non-integral system one for recording cost
transaction another for financialtransaction.
❖ Double entry system is adopted for recording the transactions in both accounts books.
❖ Integral system is a system of accounting under which only one set of books of account
is maintained to record the both transactions (cost & financial). It is also known as
integrated accounts system. There is no need for cost ledger and cost ledger control
account.
❖ Integrated accounts are like a hybrid between non-integrated and the financial system of
accounting.
❖ In case of the non-integrated system, no personal or real accounts are prepared and all
entries are passed through the General Ledger Adjustment account.

❖ Journal entries under non-integral system :

The entries to be passed for various transactions under non-integral system are
summarized below :
No. Transactions Journal entries under non-
integral system
1 Material purchased Stores ledger Control A/c.
a) For Stock To General ledger adjustment
A/c.
b) For Jobs Work-in-progress A/c.
To General ledger adjustment
A/c.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 2. Material issued
a) Direct Material Work in progress A/c.
To Stores Control A/c.
b) Indirect Material Factory overhead A/c.
To Stores Control A/c.
3. Material returned from Stores Control A/c.
shop floors To Work-in-progress A/c.
4. Material returned to General ledger adjustment A/c.
supplier To Stores Control A/c.
5. Material transferred from Transfer Job A/c.
one Job to another job To transfer job A/c.
6. Salary and wages paid Wages control A/c.
To general ledger
adjustment A/c
7 Distribution of wages :
Direct wages Work in progress A/c
Factory overhead Factory overhead A/c
Office overhead Office overhead A/c
S & D expenses S & D overhead A/c
To wages control A/c
8. Direct Expenses incurred Work-in-progress A/c.
To general ledger
adjustment A/c
9. Factory Overhead incurred factory overhead A/c.
To general ledger
adjustment A/c
10. Factory Overhead Work-in-progress A/c.
recovered / observed To factory overhead A/c.
11. Under absorbed overheads Costing P & L A/c
To respective overhead A/c
12. over absorbed overheads Respective overhead A/c
To costing P & L A/c
13. OfficeOverhead incurred Office overhead A/c.
To general ledger
adjustment A/c
14. OfficeOverhead recovered Finished goods A/c.
/ observed To office overhead A/c.
15. SellingOverhead incurred Selling overhead A/c.
To general ledger
adjustment A/c
16. SellingOverhead recovered Cost of sales A/c.
/ observed To selling overhead A/c.
17. Finished goods produced Finished goods A/c.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 To Work-in-progress A/c.
18. Goods sold (At cost) Cost of Sales A/c
To Finished goods A/c.
19. For Sales General ledger adjustment A/c.
To Sales A/c.
20. Sales returned Sales A/c.
To General ledger
adjustment A/c.
21. Goods returned sold (At Finished goods A/c
cost) To Cost of sales A/c.
22. Capital Work Sundry Assets / capital WIP
A/c.
To Work-in-progress A/c.
23. Repair work Relevant Overhead A/c.
To Work-in-progress A/c.

JOURNAL ENTRY UNDER INTEGRTAED ACCOUNTING :

No. Transactions Journal entries under

integral system
1 Material purchased on
credit Stores Control A/c. Dr.
c) For Stock To Sundry Creditors
A/c. Dr
d) For Jobs Work-in-progress A/c.
To Sundry Creditors
A/c.
2. Material issued
c) Direct Material Work in progress A/c. Dr.
To Stores Control
d) Indirect Material A/c. Dr
Relevant overhead A/c.
To Stores Control
A/c.
3. Material returned from Stores Control A/c. Dr.
shop floors To Work-in-
progress A/c.
4. Material returned to Creditors A/c. Dr.
supplier To Stores Control
A/c.
5. Material transferred from Transfer Job A/c. Dr.
one Job to another job To transfer job A/c.

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY

 6. Salary and wages paid- Wages control A/c. Dr.
direct and indirect To Cash
7. Direct Expenses Work-in-progress A/c. Dr.
To Cash
8. Factory Overhead factory overhead A/c. Dr
incurred To cash A/c
9. Factory Overhead Work-in-progress A/c. Dr
recovered / observed To factory overhead
A/c.
10. Under absorbed P & L A/c Dr
overheads To respective
overhead A/c
11. Finished goods produced Finished goods A/c. Dr.
To Work-in-progress
A/c.
12. Goods sold (At cost) Cost of Sales A/c Dr.
To Finished goods
A/c.
13. For Sales Debtors A/c. Dr.
To Sales A/c.
14. Sales returned Sales A/c. Dr.
To Debtors A/c.
15. Capital Work Sundry Assets A/c. Dr.
To Work-in-progress
A/c.
16. Repair work Factory Overhead A/c. Dr.
To Work-in-
progress A/c.

BEST OF LUCK

RAJ AWATE ( always with U ) 9860616258 INSPIRE ACADEMY