Unit -V

Marginal Costing

Meaning:-

Marginal costing system is not a method of costing like job or batch costing or process costing
or contract costing or operating costing which are used for the purpose of calculating the cost of
products or services.

Definition:

Marginal Costing is a costing technique wherein the marginal cost, i.e. variable cost is charged
to units of cost, while the fixed cost for the period is completely written off against the
contribution.

The term marginal cost implies the additional cost involved in producing an extra unit of output,
which can be reckoned by total variable cost assigned to one unit. It can be calculated as:

Marginal Cost = Direct Material + Direct Labor + Direct Expenses + Variable Overheads

Characteristics of Marginal Costing

 Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of variability
into fixed cost and variable costs. In the same way, semi variable cost is separated.
 Valuation of Stock: While valuing the finished goods and work in progress, only variable cost
are taken into account. However, the variable selling and distribution overheads are not included
in the valuation of inventory.
 Determination of Price: The prices are determined on the basis of marginal cost and marginal
contribution.
 Profitability: The ascertainment of departmental and product’s profitability is based on the
contribution margin.
In addition to the above characteristics, marginal costing system brings together the techniques
of cost recording and reporting.

Features of Marginal Costing

Following are the main features of Marginal Costing:

(i) It is a technique of costing which is used to ascertain the marginal cost and to know the
impact of variable cost on the volume of output.

(ii) All costs are classified into fixed and variable cost on the basis of variability. Even semi
fixed cost is segregated into fixed and variable cost.
(iii) Variable costs alone are charged to production. Fixed costs are recovered from contribution.

(iv) Valuation of stock of work in progress and finished goods is done on the basis of marginal
cost.

(v) Selling price is based on marginal cost plus the contribution.

 Unit-IV

1) Job Costing
Definition of job costing

Job costing is a costing method used to determine the cost of specific jobs, which are
performed according to the customer’s specifications. It is a basic costing method which is
applicable where work consists of separate projects or contract jobs.

Features of Job Costing:

(a) It is a Specific Order Costing.

(b) The job is carried out or a product is produced to meet the specific requirements of the order.
It may be related to single unit or a batch of similar units.

(c) It is concerned with the cost of an individual job or batch regardless of the time taken to
produce it, but normally short duration jobs.

(d) Costs are collected to each job at the end of its completion.

(e) The costs of each job is ascertained by adding materials, labour and overheads.

(f) Only prime cost elements are traceable and the overheads are apportioned to each job on
some appropriate basis and sometimes it is difficult to select a suitable method of absorption of
overheads to individual jobs.

(g) Standardization of controls is comparatively difficult as each job differs and more detailed
supervision and control is necessary.

(h) Work-in-progress may or may not exist at the end of the accounting period.

Job Costing Advantages

1. Cost of each job as per order is ascertained separately. This helps in finding out the profit or
loss on each individual job.

2. It enables management to detect those jobs which are more profitable and those which are not
profitable.
3. It provides a basis for determining the cost of similar jobs undertaken in future. It thus helps
in future production planning.

4. It enables the management to know the trends in costs.

5. Profitability ratio of different jobs can be found out.

6. It helps the managements to fix selling price of specific job on the basis of cost.

7. It enables the management to provide quotations for similar type of jobs.

8. Spoilage and defective work can be easily identified with specified jobs or products.

9. It enables the management to take corrective steps for improving the efficiency in future.

10. It is essential for cost plus contracts.

2. Process Costing
Definition of Process Costing:
CIMA defines Process Costing as “the costing method applicable where goods or
services result from a sequence of continuous or repetitive operations or processes, costs
are averaged over the units produced during the period.”

Features of Process Costing:

The distinctive features of Process Costing are as follows:
(a) The process cost centres are clearly defined and all costs relating to each process cost centre
are accumulated.

(b) The cost and stock records for each process cost centre are maintained accurately. The
records give clear picture of the units introduced in the process or received from the preceding
process cost centre and also units passed to the next process.

(c) The total costs of each process are averaged over the total production of that process,
including partly completed units.

(d) The charging of the cost of the output of one process as the raw materials input cost of the
following process.

(e) Appropriate method is used in absorption of overheads to the process cost centres.

(f) The process loss may arise due to wastage, spoilage, evaporation etc.
(g) Since the production is continuous in nature, there will be closing work-in-progress which
must be valued separately.

(h) The output from the process may be a single product, but there may also be by-products
and/or joint products.

Types of Process Costing

A company can use several different methods of process costing to determine the total
costs incurred before, during and after production, as well as the total amount of units produced.
Standard process costing may be used for simply calculating production costs, while averaging
assigns costs to specific units of production, and first-in, first-out calculates unit costs as they are
started and completed.

A company may use one or all methods of calculating process costing, depending on
what they produce, how they produce it and how they track their production processes. The most
common methods of process costing include:

Standard cost
Standard cost refers to calculating costs for production units instead of actual costs. Actual
costs are compared with the total costs accumulated based on standard costs, and the difference
between the total costs accumulated and the actual costs accumulated is recorded and charged to
another account, in this instance, a variance account.

Weighted average
This type of process costing groups together all the costs associated with production and
assigns them to the units the company produced. This type of method may not take into account
the time period of production and can be the simplest type of process costing to calculate.

First-in First-out
This method of process costing focuses on assigning costs to units in the order that they are
produced. Products that are produced first are assigned a cost first, and then, they are the first
products to ship or otherwise put out. Furthermore, first-in, first-out assigns one set of costs to
products started in prior accounting periods but not finished, and another set of costs for products
started in the current accounting period.
 Unit-III

Question-1 Idle Time

Meaning of Idle Time:

If workers are paid on the basis of time, some difference may arise between the time for which

they are paid on the basis of time and the actual time they spend on production. The difference is

called Idle Time, i.e., the employer pays but, in return, derives no benefit. In short, it explains the

time for which wages are paid but produce no output or workers remain idle.

Idle Time = Total Time spent by a worker – Actual Time spent on production.

Causes of Idle Time:

There are three causes, viz.,
(a) Administrative Causes,
(b) Production-related Causes and,
(c) Economic Causes.
Types of Idle Time
1. Normal Idle Time:
Normal idle time is unavoidable loss of labour hours arising out of usual course of business.
It includes:
(i) Tea break, lunch break or time lost from factory gate to actual place of work;
(ii) Time lost during the period between finishing of one job starting of another one;
(iii) Setting the machines/tools or implements;
(iv) Time lost for overcoming fatigue.

2.Abnormal Idle Time:

1. Abnormal Idle Time is that time the wastage of which can be avoided if adequate

precautions are taken.Some of them are:

(i) Breakdown of machinery;
(ii) Power failure;
(iii) Non-availability of materials;
(iv) Strikes and lockout;
(v) Fire, Flood and other hazards;
(vi) Bottlenecks in production;
(vii) Stoppage of work as a result of bad policy decisions by the management;
(viii) Excessive time taken to rectify the defects;
(ix) Excessive automation, etc.
 Treatment of Abnormal Idle Time:

Abnormal Idle Time can be treated in the following two methods:

(a) Costing Profit and Loss Account Method:

Cost of abnormal idle time should be transferred or debited to Costing Profit and Loss Account.

Under this method, cost of abnormal idle time is not treated as a cost but the same is treated as a

loss to the firm.

(b) Overhead Method:

Under this method, abnormal idle time is a part of factory overhead. Thus, cost of idle time
should be apportioned among the different departments to have an idea about the same which is

very helpful to the management to take adequate remedial measures.

Question-2 Labor Incentives Schemes

Meaning
Many companies have come out with compensation programme that offer additional
benefit based on individual, group or organizational performance. They want every individual to
think of performance to succeed in a competitive business environment. Every employee has to
work hard, deliver results on a daily basis.

Types of Incentive Schemes

The following points highlight the top eight types of incentive schemes provided to
workers. The types are:
1. Halsey Premium Plan
2. Halsey-Weir Premium Scheme
3. Rowan Plan
4. Taylor’s Differential Piece Rate System
5. Merrick Differential Piece Rate Plan
6. Gantt Task and Bonus Plan

1. Halsey Premium Plan:

This plan was introduced by F. A. Halsey, an American engineer, in 1891. It recognizes
individual efficiency and pays bonus on the basis of lime saved. Under the method a worker is
given wages at the time rate for the time he actually worked and also paid a bonus if he can
complete the work in less than the time allotted to do the work.
The bonus is paid at a fixed percentage of the time saved, usually 50%, (though the percentage
varies from 30% to 70% of time saved). The remaining 50% of the time saved is shared by the
employer.

Total Earnings = T.T. × H.R. + 50% (T.S. × H.R.)

where, T.T. = Time Taken
H.R. = Hourly Rate

2. Halsey-Weir Premium Scheme:

The scheme was introduced by Weir Ltd. of Glasgow in about 1900. It is similar to
Halsey Scheme except that under this scheme the employee gets 33⅓% (often 30%) of the time
saved as bonus and the remaining 66⅔% goes to the employer.
Total Earnings = T.T. × H.R. + 33⅓% (T.S. × H.R.)
where, T.T. = Time Taken
H.R. = Hourly Rate
T.S. = Time Saved

3. Rowan Plan:
If the worker can complete the job in less than the time allowed, his bonus becomes equal to his
time wages for that proportion of the time taken as the time saved bears to the time allowed.
Total Earnings = T.T × H.R. + (T.T. × H.R.) × T.S./T.A.
where, T.T. = Time Taken

4. Taylor’s Differential Piece Rate System:

This system was first introduced by F. W. Taylor, the Father of Scientific Management. This

system provides no minimum guaranteed time wages.

5. Merrick Differential Piece Rate Plan:

This is a slight modification of Taylor’s System and uses three rates instead of two. Under

this system also day wages are not guaranteed.

 Unit-II

Question-1 inventory methods (or) Methods of pricing issues

The important methods followed in pricing of issue of materials are :-

1. Actual Cost Method

2. First-In First-Out (FIFO) Method
3. Last-In First-Out (LIFO) Method
4. Simple Average Cost Method
5. Weighted Average Cost Method
6. Standard Cost Method
7. Base Stock Method.

1. Actual Cost Method:

Where materials are purchased specially for a specific job, actual cost of materials is charged
to that job. Such materials will normally be stored separately and issued only to that particular
job.

2.First-In First-Out (FIFO) Method:

A method of pricing the issue of material using, the purchase price of the oldest unit in the stock.
Under this method materials are issued out of stock in the order in which they were first received
into stock. It is assumed that the first material to come into stores will be the first material to be
used.

3.Last-In First-Out (LIFO) Method:

Under this method most recent purchase will be the first to be issued. The issues are priced out at
the most recent batch received and continue to be charged until a new batch received is arrived
into stock. It is a method of pricing the issue of material using the purchase price of the latest
unit in the stock.

4.Simple Average Cost Method:

Under this method all the materials received are merged into existing stock of materials, their
identity being lost. The simple average price is calculated without any regard to the quantities
involved. The simple average cost is arrived at by adding the different prices paid during the
period for the batches purchased by dividing the number of batches
5. Weighted Average Cost Method:
It is a perpetual weighted average system where the issue price is recalculated every time after
each receipt taking into consideration both the total quantities and total cost while calculating
weighted average price.

6. Standard Cost Method:

Under this method, material issues are priced at a predetermined standard issue price. Any
variance between the actual purchase price and standard issue price is written off to the Profit
and Loss Account. Standard cost is a predetermined cost set by the management prior to the
actual material costs being known and the standard issue price is used for all issues to production
and for valuation of closing stock.

7. Base Stock Method:

Under this method, a specified quantity of material is always held in stock and is priced at its
original cost as buffer or base stock; and any issue of materials above the base stock quantity is
priced under any one of the methods discussed above.

This method indicates how prices are moving over a longer period of time. But this
method is not popular and also not accepted under standard accounting practice since it would
result in stock valuation totally unrealistic.