BY

PROF AJAY PANDEY

COST AND MANAGEMENT

ACCOUNTS
HISTORY

Accounting for management

Management accounting is a collection and presentation of
relevant economic information relating to an enterprises
for planning, controlling and decision making
It serves for the following purposes
Formulation of policy
Planning controlling
Decision making
Disclosure of entity
Safe guarding assets
Role of cost in decision making

 Analysis and estimates the profitability.

 It assist in setting the prices so as to cover cost and generate an
acceptable level of profit
 It help in formulation of policies
 It helps in formulation of operational efficiency
 It help in determination of break even point
 It enables to distinguish between profitable and non profitable
 Costing checks recklessness and avoids occurrence of mistake
 It helps in estimation of and duties by the government
 It helps in allocation of actual result with expected result
 It helps in investment decision.
Management Vs cost
Cost Accounting:-
 Concern with ascertainment,allocation,distribution of accounting aspect of cost
 Its data generally serve as a base to which tools and techniques of management
system
 Scope is narrow
 It deals with collection, analysising relevance, interpretation and presentation
for various problem of management
 It is planned by the lower level of hierarchy
 It does not include financial accounting or tax accounting
 It concerned with short term planning
 It is historical in its approach as projects about past
 It concerned with monitory aspect only
 It is basically concerned with collection, classification and analysis of cost data
Management Vs cost

Management accounting
 It concerned with impact and effect aspect of cost
 Its data derived from both cost and financial accounting
 Scope is wider
 It deals with determination of policy and formulation of plan
 It is planned and placed at a higher level of hierachy
 It include both financial and tax accounting
 It concerned with long term planning
 It is also concerned with non monitory aspect as well
 It concerned with various department , division of the
bussiness,
Types of cost
 Classification of cost by :
 Nature
Material cost:- Cost of material in any form for the purpose of production
Labour cost :- Labour cost includes salary of the permanent or wages of temporary
employee
--Cost centre
Direct cost :- It is also known as traceable cost, but in nut shell it is the cost which can
be recovered after sales
 Direct material
 Direct labour
 Direct expenses
Indirect Cost It is also known as common cost, which is generally incurred after the
completion of production
Indirect Material
Indirect Labour
Indirect expenses
Types of cost
Function/activities
Total cost
Production cost
Prime cost
Factory cost
Administrative cost
Selling and distribution cost
Research and development cost
Time
Historical Cost:- It is the actual cost determined after occurrence of the event
Pre-determined cost :- This cost is of the product which are computed in advance
Standard cost
Estimated cost
Types of cost
 Decision making
Marginal cost:-It is defined as the amount at any given volume of output
by which aggregate costs are changed if the volume of output is increased
or decreased
Differential cost:- It is also known as incremental cost, it is nothing but
the difference in the total cost that will arise from selection of one
alternative to other
Opportunity cost:- It is value of benefits sacrificed in favour of an
alternative course of action.
Replacement cost :- It is a cost of replacing an asset
at any given point of time.
Relevant cost:- It is a cost appropriate in aiding to make specific
management decision.
Sunk cost:- It is one for which the expenditure has taken place in the past.
Other than the discussed costs there are some
more-

 Normal cost  Out of Pocket cost

 Abnormal cost  Book cost
 Avoidable cost
 Shut Down cost
 Unavoidable cost
 Urgent cost
 Product cost
 Traceable cost  Variable cost
 Common cost  Semi-Variable cost
 Controllable cost  Fixed cost
 Short run/Long run cost  Semi Fixed cost
 Past/Future cost
Elements of Cost

 Material
 Labour
 Overhead
Material

 Direct Material  Indirect Material

“Goods purchased for The cost incurred on
incorporation into material used to
product for sale is Raw further the
material”. And raw manufacturing process
material is also known which cannot be traced
as direct material. The into an end product are
direct material costs called indirect material.
are those which can be
identified easily.
Components of Direct Material

 Indirect Tax.
 Transportation, Storage,and Delivery
Charges.
 Quantity Discount.
 Trade Discount.
 Cash Discount.
 Packing and Container Charges.
Illustration

The following details are available in respect of a consignment of

1250 kg of material-
Invoice Price- Rs 20/kg, Excise Duty- 25% on I/P, Sales tax- 8% on
I/P including E/D, Trade Discount- 10% on I/P, Insurance- 1% on
Net Price, Delivery Charges- Rs 250.
Cost of Container @ Rs 60/container for 50 kg of material.
Rebate @ 40% if Container is returned within six weeks which is
a normal feature.
One container load of material was rejected on inspection and
not accepted. Cost of unloading and handling is @.25% cost of
material.
Calculate the landing cost of material.
Method of Pricing Material Issued

 FIFO Method.
 LIFO Method.
 HIFO Method.
 Simple Avg. Cost Method.
 Weighted Avg. Cost Method.
Inventory Control System

 Input Output Ratio:- Input/Output*100.

 Stock Turnover Ratio:- Cost of Material used during
the period/Avg. Stock of Material during the period.
 Economic Order Quantity:- Square root of 2AB/CS,
wherein
A= Annual Consumption
C= Cost per unit
B= Cost of placing an order
S= Storage and Carrying cost
Contd.
 VED Analysis:- It divides item into three categories in descending order-
V= Vital Item
E= Essential Item
D= Desirable Item
 FNSD Analysis:- It shows the moving position of stock or inventory.
F= Fast Moving
N= Normal Moving
S= Slow Moving
D= Dead Stock
 ABC Analysis:- It divides the stock into three categories namely
Class ‘A’- Constitute the most important class of Inventories
Class ‘B’- Constitute intermediate position
Class ‘C’- Are quite negligible
Labour

 Direct Labour:- The  Indirect Labour:- Here

labour cost incurred on the labour are not
the employees who are directly involved in the
engaged directly in process of production
making the pdt, their instead of others non-
work can be identified production activity.
clearly in the process of
converting the raw
materials into finished
pdt is called direct
labour.
Items of labour Cost

 Monetary:- Salaries & Wages and other

Allowances.
 Monetary Benefits after sometime in the
future like EPF, PF, Pension, Gratuity, Bonus
etc.
 Non-Monetary:- Perquisites.
Job Evaluation Method

 Job Ranking Method.

 Grade Description Method (Grades are given
on the basis of education, experience etc).
 Factor Comparision Method (Mental
Requirement, Skill, Physical Requirement,
Responsibilty, Work Condition).
 Point Rating Method (Same as Grade).
Remuneration Method

 Time Rate.
 Piece Rate.
Time Rate
 Flat Time Rate Method- Wages=  Rowan Premium Bonus Plan-
Hrs worked*Wage rate/hr. (Here no %age is fixed). Total
 High Day System- Wages= Hrs Wages= (Time taken*Hourly
worked * High day rate. rate ) + Time saved/Std. time*
Time taken* Hour rate.
 Different Time Rate ( Here
 Halsey-Wair Plan- It is modified
different time rate is fixed
according to efficiency and skill ). system of Halsey Premium Bonus
Plan. This is called as 33 1/3% - 66
 Halsey Premium Bonus Plan- It is
2/3% sharing plan under which
calculated at 50 % of time saved. 331/3% to employee and 662/3 %
Total Wages=( Time to employer as bonus. Total
Taken*Hourly rate + 50/100 * Wages= (Time Taken * Hourly
time saved * hourly rate ). rate) + 331/3 / 100 * Time saved *
Hrly rate.
• Accelerated Premium Bonus Plan

 Under this the worker will be paid bonus with

increase in its efficiency.
• Emerson’s Efficiency Bonus
Plan
Efficiency % Bonus
 Below 662/3%  Time Wage no bonus
 662/3% to 100%  .01% to 20%
 Over 100 %  20% above basic wages +
1% increase in efficiency.
Time Rate

 Barth Variable Bonus Plan – Earnings= Hourly

Rate * Square root of Std. Time * Actual
Time.
 Bedaux Points Plan = Wages – Time Taken *
Hrly rate, Bonus = 75/100 * Bedaux point
saved * point rate.
Piece Rate

 St. Piece Rate Method- Wages= No. of pieces

produced * rate per piece.
 Piece Rate with Guaranteed Time rate
method.
 Group Bonus Plans.
 OVERHEADS

 “The arrangement of items in logical groups

having regard to their nature or purpose to be
fulfilled”
 Allocation of Overhead “The charging of
discrete, identifiable items of cost to cost
centre or cost units , where a cost can be
clearly identified with a cost centre or cost
unit , then it can be allocated at particular
cost centre or unit.
Apportionment of Overhead

 “The allotment of two or more cost centre of

proportion of the common item of the cost
and the estimated bases of benefit received”
Types of ovrhd Basic of
appor
 Rent ,rates heating,  Area occupied (Floor
repair, depreciation area)
 Lighting and heating  No. of Points
 Power hour  Horse power of
machines
 Marketing and  Sale value
distribution
 Method of apportionment

 A) Direct Method
 B) Step down method
 C) Repeated Distribution method
 D) Simultaneous Equation Method
 Method of Absorbtion of
Overhead
 A) Production unit method
 B) %age of direct cost method
 C) % age of direct Labour cost method
 D) %age of Prime cost method
 E) Machine hour rate method
 F) Direct hour rate method
Absorption

• Production Unit Method (PUM)-: Budgeted or

Actual Overhead/No. of unit produced or budgeted.
Eg- Budgeted Overhead is Rs 2,00,000 p.a. and
budgeted production is 50,000.
PUM = 2,00,000/50,000 = 4 per unit.
• %age of Direct Material Cost Method(PDMCM):-
Budgeted or Actual Overhead/Budgeted or Actual
Direct Material Cost* 100. Eg- Budgeted Overhead =
Rs 1,00,000 , Material Cost = Rs 4,00,000, PDMCM=
100000/400000*100= 25% of Direct Labour Cost.
Absorption

 %age of Direct Labour Cost Method(PDLCM):-

Budgeted or Actual Overhead Cost/Budgeted or
Actual Direct Labour Cost* 100. Eg- Budgeted
Overhead =Rs 100000, Actual Direct Labour= Rs
500000, PDLCM= 100000/500000*100= 20% of
Direct Labour Cost.
 %age of Prime Cost Method (PPCM):- Budgeted or
Actual Overhead/Budgeted Prime Cost%100. Eg-
Budgeted Overhead- Rs 200000, Prime Cost- Rs
800000. PPCM= 200000/800000*100= 25% of Prime
Cost.
Cost Sheet & Method of Costing

 Reconciliation of Cost and Financial a/c.

• Need for Reconciliation – 1) The reason for
difference in P/L. 2) To check accuracy of cost
accounting. 3) Reliability of cost a/c data. 3) To
promote co-ordination and co-operation
between fin. a/c and cost a/c. 4) To identify the
reason of deviation in profit.
• Method of Reconciliation- a) Memorandum
Reconciliation a/c. b) Reconciliation Statement.
A) Memorandum Reconciliation
Account
 To under absorption in  By profit as per cost a/c.
cost a/c.  By over absorption in cost
a/c.
 To under valuation of
 By items only charged in
opening stock in cost cost a/c.
a/c. -Interest on Own Capital.
 To over valuation of -Rent on Own Buildings.
closing stock in cost  By over valuation of
a/c. opening stock in cost a/c.
 By under valuation of
closing stock in cost a/c.
A) Memorandum Reconciliation
A/C
 To item that only effect in fin. a/c  By income received
- Brokerage.
only credited in
Underwriting Commission.
Donation.
financial a/c.
Income Tax. -Interest Received.
Goodwill written off. -Dividend Received.
Preliminary expenses written off.
Discount on issue of share & -Rent Received.
debentures. -Transfer fee collected.
Fines and Penalties.
 By profit on sale of
Bank interest.
 To Net profit as per financial a/c. assets.
B)Reconciliation Statement

Less:- Exp not considered in cost a/c-

Profit/Loss as per cost a/c- * *
 Add:- Income not considered  Abnormal losses- *
in cost a/c
 Expenses relating to
Trading Profit- * previous yr- *
Profit from other activity- *
 Lay off wages- *
Income from Investment- *
 Differences in
Previous yrs income- *
Depreciation- *
Profit on sale of investment- *
 Delay in payment charges
Profit on sale of raw materials- *
for bill- *
Abnormal/Non-recurring earning-
*
Reconciliation
Statement(Contd.)
 Add/Less in difference in opening & closing
stock as per
A) Financial a/c- *
B) Finished goods a/c- *
C) Work in progress- *
P/L as per financial a/cs - ***
Unit-II, Marginal Costing

 Marginal costing is defined as the amount on

any given volume of output by which
aggregate cost are charged if the volume of
output is increased or decreased by one unit.
Diff. betwn Absorption & Marginal
Costing
Absorption Marginal
 Total cost i.e both fixed and  Only variable cost is
variable is charged to the charged to products.
cost of product.  It is not included .
 Fixed cost is included in the  Profitability is judged by
cost of products. the contribution made by
 Profitability is measured by various products or deptt.
profit earned by various
product or deptt.
 Diff btwn sales and total
cost is profit.
Marginal Cost Equation

 Sales = Variable cost + Fixed Exp +/- P/L.

 S-V= C (C=Contribution).
 Contribution©= Fixed exp+Profit
Practical

 Determine the amount of fixed expenses from the following:-

Sales= Rs 2,40,000, Direct Material= Rs 80,000, Direct Labour=
Rs 50,000, Variable Overhead= Rs 20,000, and Profit= Rs 50,000.
 Solution- Marginal Cost Equation= S-V=F+P
Variable Cost= DM+DL+Variable Overhead
VC= 80,000 + 50,000 + 20,000
V= 1,50,000
Therfore, S-V=F+P
2,40,000-1,50,000=F+50,000
90,000-50,000=F
F= 40,000.
Contd.

 In order to understand the mathematical

relationship between cost, volume and profit,
we need to know the following four concepts-
 1) Contribution.
 2) Contribution/Sales or Profit Volume Ratio.
 3) Break Even Analysis.
 4) Margin of Safety.
1) Contribution

 Contribution means difference between the

sales and the marginal cost of sales and its
contribution towards fixed expenses and
profit.
 A) Contribution = Selling Price – Marginal
Cost Or
 B) Contribution = Fixed Exp + Profit Or
 C) Contribution = Fixed Exp - Loss
2) Contribution/Sales or
Profit/Volume Ratio
 The profit volume ratio studies the profitability
operation of a business and establishes the
relationship between contribution and sales.
 P/V Ratio = Contribution/Sales (C/S). Or Fixed
Exp+ Profit/Sales (F+P/S). Or Sales – Variable
Cost/Sales (S-V/S) Or Change in profit or
Contribution/ Change in Sales.
 P/V ratio is very useful and is used for the
calculation of:-
Contd.

 i) BEP= Fixed Cost/P/v ratio.

 ii) Value of sales to earn a desired amount of
profit= Fixed cost + Desired Profit/P/v ratio.
 iii) VC= Sales (1-p/v ratio).
 iv) Profit = (Sales * p/v ratio)- FC.
 v) FC= (Sales*p/v ratio)-Profit.
 vi) Margin of Safety= Profit/p/v ratio.
Practical

 Eg- Calculate p/v ratio from the following information:

Selling Price= Rs 10/unit, variable cost= Rs 6/unit,
Sales & Profit for two years are- in 2005 S- Rs 1,50,000
& P- Rs 20,000. In 2006 S- Rs 1,70,000 & S- Rs 25,000.
 Solution- P/V Ratio= Contribution/Sales*100, wherein
C= S-V, C= 10-6=4, therefore P/V Ratio=
4/10*100=40%
 Now with the change in profit i.e from 2005 to 2006 is
Rs 5,000(25,000-20,000). P/V Ratio= Change in
Profit/Change in Sales*100. 50000/20000*100= 25%.
3) Break Even Point

 BEP is the point of sales where there is no

profit or no loss.
 BEP (in units)= Total fixed exp./ Selling price –
Marginal cost per unit). OR
Total Fixed Exp/Contribution.
Break Even Sales= F*S/S-V Or Fixed Exp/p/v
Ratio.
Illustration-6

 From the following particulars calculate- 1)

Contribution, 2) P/V Ratio 3) BEP in Units &
Rs. 4) what will be the selling price per unit if
the BEP is brought down to 25,000 units.
Fixed Expenses- Rs 1,50,000/-
Variable Cost/ unit- Rs 10/-
Selling Price/ unit- Rs 15/-
Solution:- 1) Contribution= SP-VC= 15-10=5, 2)
P/V Ratio= C/S*100= 5/15*100= 331/3%.
Contd.

 3) BEP(in units)= FE/Contribution per unit.

1,50,000/5=30,000. BEP (Rs)= FE/p/v ratio=
1,50,000/ 331/3/100= 15000000/331/3= Rs
4,50,000.
4) BEP (units)= F/C= 1,50,000/5= 30,000.
When BEP- 30,000, SP- 15; BEP- 25,000, SP- ?
?= 30,000/25,000*15= Rs 18.
Illustration-7

From the following data calculate-

 1) BEP expressed in amount of sales in
Rupees.
 2) Number of units that must be sold to earn
profit of 1,20,000 per year.
 3) How many units were sold in order to earn
a net income of 15% of sales.
 4) Number of units to be sold to earn a target
profit of Rs 1,05,000 after tax (IT rate is 50%).
Contd.

 Selling per unit= 40

 Variable Manufacturing cost/ unit= 22
 Variable Selling cost per unit= 3
 Fixed Overhead(Factory)= 1,60,000.
 Fixed Selling cost is Rs 20,000.
Solution:-

 1) BEP(in units)= FC/SP-MC, wherein FE-

160000+20000= 180000. Selling Price- 40
 Variable/Marginal= (22+3)=Rs 25/-
 Therefore BEP= 180000/40-25= 180000/15=
12000 units. Therfore in Rs= 12000* 40= Rs
4,80,000.
 2) Output to earn profit of Rs 1,20,000/-
 FE + Profit/Contribution per unit=
180000+120000/15= 20000 units.
Contd.

 3) Let the no. of unit be N

 BEP= F+P/Contribution.
 N= 180000+(15/100*N*40)/15
 N= 180000/15+N15/100*40
 N= 180000+N30/5/15
 N= 180000+6N/15
 15N= 180000+6N
 9N=180000
 N= 20000units.
Contd.

 4) Sales in Unit= F+Profit/tax/ Contribution

 S= 180000+105000/50000/15
 S= 180000+ 105000*2/15
 S= 180000+210000/15
 S= 390000/15
 S= 26000 units.
Decision making in respect
of BEP
 The need for a decision arises in business because a manager
is faced with a problem and alternative courses of action are
available. In deciding which option to choose he will need all
the information which is relevant to his decision; and he must
have some criterion on the basis of which he can choose the
best alternative. Some of the factors affecting the decision
may not be expressed in monetary value. Hence, the
manager will have to make 'qualitative' judgments, e.g. in
deciding which of two personnel should be promoted to a
managerial position. A 'quantitative' decision, on the other
hand, is possible when the various factors, and relationships
between them, are measurable.