Management Accounting SCDL

1
Management Accounting SCDL

• By
• Prof. AUGUSTIN AMALADAS
• M.COM., AICWA.,PGDFM.,B.Ed.

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4.Sales and distribution

3.General administration
5.profit
6.sales
Cost of sales
Total cost



1.canteen
2
Factory cost/ works cost


1.Production Prime Cost
1.Factory administration
Stores ledger
Facility department
1.Godown
Danger
Bin card
Cost calculations/operating activity
3
FLOW OF CASH/SHORT TERM AND LONG TERM
information
information
Information
Work in progress
information
Debtors
Accounts receivable
Accounts payable
Overheads
Labour
Bad debts
RAW mATERIAL
CASH
GDR
Preference Shares
Long term loans
Equity shares
ADR
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FLOW OF CASH - LONG TERM
Know how
goodwill
Patent rights
Copy right
building
investments
land
furniture
CASH Short term
Preference Shares
GDR
ADR
Long term loans
Equity shares
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FLOW OF CASH-SHORT TERM
information
information
Information
Work in progress
information
Debtors
Accounts receivable
Accounts payable
Overheads
Labour
Bad debts
Bad debts
RAW mATERIAL
Bad debts
cash
cash
Sale of fixed assets
Issue of long term funds
Discounting bills
creditors
Bank overdraft
Sale of investments
Cash credit
Bank overdraft
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INFORMATION
INFORMATION
technical
Accounting
technology
Labour laws
MANAGEMENT ACCOUNTS
political
marketing
INFORMATION
production
Share market
statistical
Costing
INFORMATION
INFORMATION
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Techniques in management accounting
Ratios
Variance analysis
statistics
Cost accounting
operation research
Management Accounting
Financial accounts
Mathematics
Budgetary control
Marginal costing
Cash flow statement
Trend percentages
FFS
Comparitive statement
Common size statements
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Structure of the syllubusChapter-1
Financial accounting
2. Basic Accounting
4. BRS
Final accounts
3. Process of accounting
5. Rectification of Errors
1. Introduction
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Cost Accounting
14. UNIFORM COSTING
13.STANDARD COSTING TECHNIQUES
6. CONCEPTS
CONTROL
12. BUDGETARY CONTROL
7. ELEMENTS OF COST
11. MARGINAL COSTING techniques
8. MATERIAL
10. OVER HEADS
9. LABOUR
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Costs

• Anything incurred during the production of the
  goods or service to get the output into the hands
  of the customer
• The customer could be the public (the final
  consumer) or another business
• Controlling costs is essential to business
  success
• Not always easy to pin down where costs are
  arising!

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Differences between cost accounting/Management
Accounting/financial accounting
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Users of information
liquidity
tax
banks
government
Dividend/value in the share market
shareholders
Good name
Benefactors
Debenture holders
organisation
Interest/return of capital
Less pollution
public
Loan vendor
Interest/return of capital
customers
Good product
Preference shareholders
debtors
creditors
dividend
Timely payment
Timely supply
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Techniques in management accounting
Ratios
Variance analysis
statistics
Cost accounting
operation research
Management Accounting
Financial accounts
Mathematics
Budgetary control
Marginal costing
Cash flow statement
Trend percentages
FFS
Comparitive statement
Common size statements
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See you in the next chapterBRS

• Life education
• God and Poor man

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Chapter-2 Basics of financial accounting

• 1.Concepts
• 2.system of accounting
• 3.Types of Expenditure
• 4.Terms used in financial accounts
• 5.Double entry / Single entry
• 6. Depreciation methods
• 7. Practical consideration relating to
  depreciation

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1.concepts conventions

• Meaning Basic assumptions upon which the basic
  process of accounting based.
• a Business entity concept-
• b Dual aspect concept
• c Going concern concept
• d Accounting period concept
• e Cost concept
• f Money measurement concept
• g Matching Concept
• Conventions
• Coservativism
• Materiality
• Consistency

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a Business entity concept-

• Business is different from the owner
• We pass Journal entry when owner contributes
  towards capital.
• When amount / goods withdrawn for personal use we
  make an entry in the business
• When Income tax paid by the owner out of business
  money we make an entry In the books of accounts.

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b Dual aspect concept

• Every debit has equal amount of credit
• Asset Liability
• Liability creates asset
• If assetgtLiability profit
• If Liabilitygt Assets loss

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c Going concern concept

• Business will go for at least for a reasonable
  period.
• Depreciation is provided based on this
  assumption.
• If this assumption is not made all Fixed assets
  will be valued at realised value like current
  assets.

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d Accounting period concept

• Fixing time limit for accounts
• Profit for the period
• It can be one week or two weekor 6 months/one
  year or 5 years
• But to find profit we normally consider 12 months
  period
• Financial year for income tax point of view 1st
  April-31st March of the following year
• Calendar year January to December
• Divali to Divali

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e Cost concept

• The cost to the organisation (Actual) is recorded
  in the books
• Assets are not recorded according to the market
  price every year.
• Depreciation is calculated on cost not based on
  market price
• Accounting records may not show the real worth of
  the business
• Market price may be disclosed with in bracket in
  the balance sheet

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f Money measurement concept

• Every thing which can be expressed in terms of
  Money is recorded in the books
• Beautiful women are working /Handsome boys
  working in IBM /Efficient engineers worth 5000
  crores How do you record?.
• Good working environment?
• Highly motivated employees?

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g Matching Concept

• Matching Cost with revenue
• It is used to estimate correct profits
• Accrual/ cash basis of accounting
• Even cash paid /received if it belongs to
  accounting period we consider them as expenditure
  /income
• Salary outstanding for the last month?
• Income from Investments yet to be received?
• Rent received in advance for next year?

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Conventions

• Customs and traditions that are followed by the
  accountants while preparing the financial
  statements.
• Why do we respect elders?
• Why do we shake hands?
• Why do Young Indians hate receiving dowry?

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Coservativism

• To be on the safer side
• Expect future losses as current year loss
• not future income is treated as current year
  income.
• Stock is valued cost price / market price which
  ever is lower
• Making provision for bad debts is based on this
  assumptions.

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Materiality

• Material impact on profitability are considered
• Insignificant transactions ignored from recording
• Pen purchased, pencil purchased?
• Wine purchased regularly?

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Consistency

• Accounting policies and proceedures should be
  followed consistently
• Method of depreciation should be followed
  consistently.
• Stock valuation- cost/market price whichever is
  lower is consistently followed
• If not followed it amount to change in the policy
  of the company

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2.system of accounting (26)

• 1.Cash system
• unless cash received /paid in the accounting
  year can not be considered as income/expenses
  respectively

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2.Mercantile

• Mercantile/Accrual/due concept
• Even cash received/paid but due for payment/due
  for receipt (yet to be received/payable) if they
  belong to current accounting year are considered.
• If last year expenditure paid this year?
• If you receive/paid in advance ?

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Mercantile love!!!!???

• Last year I loved her? Next year I shall love him
  depends on type of bike model!!!!

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Life Education

• If I do not get married to him I will not be
  happy- Girl said
• If I do not get married to her I will not be
  happy- Boy said
• If both get married what will happen!!!!

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3.Types of Expenditure(30)

• A) Capital expenditure
• B) Revenue expenditure
• C) Deferred Revenue expenditure

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A) Capital expenditure(30)

• Expenditure incurred which will
• Increase Production capacity
• Increase earning capacity
• Reduction in the cost of operation.
• Example purchase of fixed assets
• Purchase of Machinery
• purchase of investment
• If such expenditure is not to do with the basic
  functions of the business such expenditure is
  capital expenditure.
• How do you consider if you buy goodwill, copy
  right or patent right?

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Capital expenditure-continue(page-30)

• Both tangible and intangible assets included
• Intangible assets such as patent right, copy
  right, technical know-how, francises, goodwill
  etc.,
• Depreciation is provided on fixed assets which
  will appear in the profit and loss account
• They appear in the Balance sheet
• The life is more than one year
• They should not appear in the profit and loss
  account

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Revenue Expenditure(page-30)

• Expenditure incurred which will
• Not Increase Production capacity
• Not Increase earning capacity
• maintain the capacity
• No Depreciation is provided on fixed assets
  which will appear in the profit and loss account
• They appear in the profit and loss account
• The life is not more than one year
• They should not appear in the balance sheet

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Deferred revenue expenditure(page-30)

• Deferred means- postponed
• Heavy revenue expenditure
• Vodafone incurred 200 crores for advertisement
  after merger with Hutch
• It can not be written off within a year
• It appears in the balance sheet as last item
• Every year some portion is written off in the
  profit and loss account.
• Research and deveopment expenditure, initial
  advertisement expenditure, preliminary
  expenditure are example

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Terms(page-27)
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Terms used in costing(unit 7)
Factory over heads
Office and administration overheads
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Selling and distribution
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Life education

• Lady in a seashore

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5.Double entry / Single entry

• Is Accounting based on business concept or
  religious concept?
• Giving first and receiving later.
• Giving cash receiving machinery
• We consider both aspects such as debit and credit

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Rules of acccounting

• Personal rule/Account-supplier debtors, owner,
  banker, outstanding wages
• Real rule/Account- cash, bank, building,
  furniture, goodwill, patent rights
• Nominal rule/account income and expenditure
  salary, rent , insurance, commission, internet
  expenses, cell phone expenses.

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Personal rule

• Debit the receiver
• credit the giver
• Example Computer chips purchased on credit from
  wipro
• Here credit Wipro as Wipro is the giver of
  computer.
• Sold goods to Meena
• Meena is the receiver-debit

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Excercise

• Amount collected from debtors?
• Amount deposited to bank?

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Real rule

• These are the accounts of assets and liabilities
• Rule debit what comes in
• Credit what goes out

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Excercise

• Goods supplied for cash
• Cash withdrawn from bank
• Cash withdrawn from bank for personal use
• Land purchased by giving a cheque
• Building sold on credit

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Nominal rule

• Related to Expenses and income
• Rule Debit all expenses and losses
• Credit all incomes and gains

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Excercise

• Rent paid Rs 50,000
• Wages paid Rs.1,00,000
• Wages outstanding-Rs.60,000
• Commission received-25,000
• Discount allowed to customer Rs.1,000
• Telephone bills paid-Rs.2500
• Shares issued at premium-Rs.2,00,000

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Suitable questions to pass journal entry

• If cash transaction, person is not important
• Every birth of an account there is a death of the
  account
• Ask what comes in?
• Or what goes out?

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Depreciation Accounting(34)

• Reduction in the value of assets
• Use factors, time factor,obsolescence are the
  factors
• Statutory requirement
• AS(6)
• Fixed assets are depreciated
• Current assets are not depreciated
• Land and cattle are not depreciated.

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Depreciation methods

• Straight line method
• Written down value method
• Sinking fund method
• Machine Hour rate method
• Unit cost method
• Depletion asset method
• Depreciation Fund method
• Sum of digits method
• Accelerated depreciation method

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Impact on books

• Depreciation Expense
• Net income
• Asset
• Equity
• Return on assets
• Return on Equity
• Turnover Ratios
• Cash flow
• NPV
• IRR
• Pay back

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Impact of Tax

• Block asset method
• Purchase of Asset
• Sale of Asset
• Short term/Long-term Capital asset
• Asset used less than 180 days during the previous
  year
• Asset purchased preceding previous year but put
  into use less than 180 days during the current
  previous year

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Divisible profit and depreciation(Page39-41)

• Profit after adequate depreciationSec.205(2)
• Profit after interest-depreciation of the current
  year- Depreciation of the previous year- loss of
  the previous year
• Depreciation as per Schedule XIV of the Companies
  Act
• Section 350 calculated on WDV

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Methods(35)

• 1. straight line method
• Cost (- )estimated scrap value
• Estimated life in years
• 2. written down value or diminishing balance
  method.
• cost of the asset1,00,000 rate of depreciation
  10
• Depreciation for the 1st year1,00,0001010,000
  
• Value at the end of first year 1,00,000-10,000
  90,000
• Second year depreciation90,000109000

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Methods(37)

• 3. production unit method
• Depreciation (cost-scrap)(units produced
  during the year)
• no of units the machine
• can produce during its life
• Suppose cost1,00,000 scrap5000 total life in
  units10000 units. No. of units produced during
  the year3000
• Depreciation(1,00,000-5000)(3000)/10,000
• Rs 28,500

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Production hour method

• It depends on number of hours produced instead
  of units produced
• We calculate production hour rate
• Multiply the no.of hours used during the year
  with the rate gives depreciation

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Joint factor rate method(38)

• Both fixed element and variable elements are
  considered
• Cost is divided into fixed and variable
• Fixed part is divided based on time
• Variable elements are divided by total units
  which gives rate per unit

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Annuity method

• Cr
• Depreciation
• n
• 1- 1/(1r) - 1
• Depreciation is constant
• It depends on future cash inflows
• It assumes that the capital invested would have
  earned interest had been invested otherwise

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Sinking fund method

• Amount available would be equivalent to the
  original cost
• Cr
• Depreciation n
• (1r) 1
• Calculation of 26380 is wrong. I should be 16380.

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Endowment policy method

• Insurance policy is taken to replace the asset.
• The depreciation is equal to the insurance
  premium paid

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Renewal method(39)

• When asset is renewed full amount is written off.

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Bye-bye to chapter-2
Life education

• Chineese tree

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Chapter-3

• Journalising
• Ledger (subsidiary books)
• Posting
• Trial balance
• Trading and profit and loss account
• Balance sheet

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Final Accounts Adjustments

• Direct expenses
• Indirect expenses
• Opening stock given in adjustment
• Closing stock given in the adjustment
• Wages outstanding in trail balance
• Income from investment due given in trail balance
• Meaning of adjustment
• Income tax
• Life insurance premium
• Goods drawn by the owner

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Final Accounts Adjustments

• Domestic house hold Expenses
• Income tax refund
• Income from house property
• Accrual basis of Accounting
• Un expired insurance
• Income received in Advance
• Interest on Capital
• Provision on Doubtful debts
• provision for Discount on debtor
• Deffered revenue expenditure

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Final Accounts Adjustments

• Reserve Fund
• Goods Distributed as free sample
• Managers Commission
• Goods on sale or approval basis
• Hidden adjustments

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Terms used in final accounts

• Trading account
• Profit and loss account
• Profit and loss appropriation account
• Balance sheet
• Capital
• Long term liabilities
• Current liabilities
• Fixed assets

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Terms

• Investments
• Current assets
• Adjustments
• Closing stock
• Depreciation
• Outstanding expenses
• Prepaid expenses

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Terms

• Accrued income
• Income received In advance
• Bad debts
• Provision for doubtful debts
• Interest on capital
• Drawings
• Deferred revenue expenses

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Terms

• Abnormal expenses
• Goods distributed as free sample
• Goods sent on approval
• Commission payable to manager

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Important adjustments In various problems

• Illus2 page-77 i) repairs tp plant ii)Income tax
  of X
• Iii) Provision for bad debts
• Iv) adjustment no.b,e and f
• V) calculation of works managers commission and
  general managers commission

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Important adjustments In various problems

• Illustration 3 i) adju.e and I and trading
  account purchases and sales
• Illustration 4 bank loan, adj. a,d and g.
• Illustration 5 loan, adj.b and c.
• Illustration 6 adj b,f and h
• Illustration 7 adjb and d
• Illustration 8 adj.f
• Illustration 9 adj. d and e
• Illustration 10 loan, adj.a

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Bank reconciliation statement

• Cash book
• Pass book
• Cheques issued but not debited
• Cheques deposited but not cleared
• Bank charges entered in the pass book
• Income from investments entered in the pass book
• Electricity, water, telephone , internet bills
  paid directly by bank entered in the pass book
• Clerical errors in the pass book or cash book

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Exercise-11 page121

• Q.2 page-116 and questions no.6 page-119 .

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Life education

• Child likes to hug in the evening

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Chapter 5 Rectification of Errors(page-126)

• Reasons for errors in accounting
• 1.error of omission
• 2.error of commission
• 3.Error of principle
• 4. Compensating error

79
Errors not affecting trial balance

• 1.error of omission
• 2.Error of principle
• 3.compensating error
• 4. complete omission
• 5.error of commission

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Suspense Account

• If trial Balance does not tally ie debit is not
  equal to credit then temporarily to close down we
  open a suspense Account on the deficit side known
  as suspense account.

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Rectification Steps

• Rectify only the account in which error is
  committed.
• Book means complete set of accounts
• Accounts means mistake only in the account
• If suspense account is given and if one side
  error suspense account has to be either debited
  or credited accordingly.

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Problems in errors Problem7 page-139
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Problem6 page-138
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Life education
Thomas Cooper Dictionary
86
Chapter-6 Cost Accountancy-terms

• Cost centre
• Impersonal and personal cost centre
• production and service cost centre
• Concept of cost

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Chapter-6 Cost Accountancy-terms

• Cost centre
• Impersonal and personal cost centre
• production and service cost centre
• Concept of cost

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The bottom line is that the organization is out
"hard" or "real" money.1
Examples Hardware and software purchases
Professional services Maintenance Labor
Medical benefits Insurance Internet
Service Provider fees Wide area network fees
89
Economic Costs

• Economic costs are "opportunity costs." Instead
  of doing X, you had to do Y. These are not
  hard-currency costs and it is dangerous to lump
  them into the cost-savings category with
  accounting costs because their effects will not
  necessarily show up on the bottom line.

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Chapter-6 Cost Accountancy-terms

• Cost centre
• Impersonal and personal cost centre
• production and service cost centre
• Concept of cost

91
Economic Costs

• Economic costs are "opportunity costs." Instead
  of doing X, you had to do Y. These are not
  hard-currency costs and it is dangerous to lump
  them into the cost-savings category with
  accounting costs because their effects will not
  necessarily show up on the bottom line.

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Chapter-6 Cost Accountancy-terms

• Cost centre
• Impersonal and personal cost centre
• production and service cost centre
• Concept of cost

93
The bottom line is that the organization is out
"hard" or "real" money.1
Examples Hardware and software purchases
Professional services Maintenance Labor
Medical benefits Insurance Internet
Service Provider fees Wide area network fees
94
Economic Costs

• Economic costs are "opportunity costs." Instead
  of doing X, you had to do Y. These are not
  hard-currency costs and it is dangerous to lump
  them into the cost-savings category with
  accounting costs because their effects will not
  necessarily show up on the bottom line.

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Terms in costing

• Accounting Costs

These are costs that impact an
organizations general ledger. For example,
buying a product results in a chain of events
wherein a purchase order is processed, a
product/service is received, then an invoice
arrives from the vendor
96
Economic Costs

• Economic costs are "opportunity costs." Instead
  of doing X, you had to do Y. These are not
  hard-currency costs and it is dangerous to lump
  them into the cost-savings category with
  accounting costs because their effects will not
  necessarily show up on the bottom line.

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Example

• Reducing firefighting on incidents related to
  problematic changes is robbing resources from
  planned work (projects) and applying them to
  unplanned, reactive work (incidents).
• If you say that better change management reduced
  unplanned work by 20 percent, that is not an
  accounting cost savings, but it did free up
  resources to work on projects.
• It would be wise to identify what project
  progress was enabled through the action.

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Example-2

• By training users, incidents handled by the
  service desk decreased 5 percent. Again, this is
  not an accounting cost savings unless a resource
  is dismissed, thus impacting labor, benefits and
  so on.

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mixing accounting and economic cost

• mixing accounting and economic cost savings
  together and instead wrap both types of costs
  with a business case explaining the benefits of
  the proposal.

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Overhead

• These are indirect costs that are absorbed by IT.
  For example, a portion of building rent is often
  allocated to IT based on some cost driver such as
  percent of floor space allocated.

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illustration

• If IT occupies 10 percent of a building, then
  accounting will likely allocate 10 percent of the
  rent to IT. This overhead cost must then be
  factored into the services that IT offers in
  order for proper charge backs, pricing and so on

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Sunk Costs

• These are costs that, once spent, cannot be
  Recovered. If something is purchased that cannot
  be returned or sold off, then that item should be
  considered a sunk cost.
• Most of the times they are irrelevant to take
  future decision.

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Cost Drivers

• When determining costs, it is worthwhile to
  understand what drives the costs. In other words,
  if you do X, then you see a corresponding
  increase in cost Y. To illustrate, if you must
  buy a PC and software licenses for each new
  person hired, then the addition of new users is
  one of the cost drivers for the associated PC and
  software expense accounts.

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Salvage Value/Salvage Costs

• If you can sell an asset for more than its book
  value, then you are actually booking another form
  of income. On the other hand, if the salvage
  value is lower than the book value, then
  accounting will need to write the asset off.
• If you have to pay someone to take things away
  due to hazardous materials laws, then you may
  even incur expenses relating to the disposal of
  the asset.

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Differential cost

• Increased or decreased cost due to the increased
  or decreased volume of operations.
• Additional cost due to operation.

106
Normal cost and abnormal cost(150)

• Normal costs incurred at a certain level of
  output
• Abnormality in cost due to unforeseen situations

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Relevant cost and relevant benefit

• Required for decision making
• Costs that are affected by by the decision
• Costs and benefits that are independent of a
  decision are not relevant and need not be
  considered.
• Future cash inflows and future outflows are
  relevant.
• Sunk costs are irrelevant
• Allocated common costs are irrelevant
• Opportunity costs are relevant (shadow price)
• Incremental costs are relevant incremental
  benefits are relevant.
• Avoidable costs are relevant and unavoidable
  costs are irrelevant for decision making.

108
Relevant and irrelevant

• Five engineers already employed on monthly salary
  but will not be sent out if not employed in an
  another project. The salary paid to those
  engineers are relevant or irrelevant to estimate
  the price for the project?
• Two more engineers are selected exclusive to the
  new project-are the costs relevant to take
  decision for new project?

109
Direct and indirect costs

• Direct Costs are costs that can be specifically
  and exclusively identified with the particular
  object (product)
• Salary of processing associate
• Indirect Costs are costs that can not be
  specifically and exclusively identified with the
  particular object (product)
• Salary of team leader
• Direct costs are allocated. Indirect costs are
  apportioned.

110
product costs Period costs

• Product cost are those costs that are identified
  with goods purchased or produced for resale.
• Period costs are those costs that are not
  included in the inventory valuation and as a
  result are treated as expense in the period in
  which they are incurred.
• Product costs will generate income.but period
  costs do not generate income.

111
Treatment of period and product costs
Recorded as an asset In the balance sheet And
becomes an Expense in the P/L A/C When the
product Is sold
Product code
Manufacturing cost
unsold
sold
Recorded as an Expense in the P/L A/c In the
current Accounting year
Period code
Non manufacturing costs
112
Variable, fixed, semi variable and semi fixed

• Cost (Rs.) Variable cost
• cost(Rs.)
• Out put(units)
• 
  
• 
  fixed cost

Activity level(units)
113
Step fixed cost

• Total
• Fixed cost
• Activity level(Units)

114
Variable, fixed, semi variable and semi fixed.
115
Incremental costs and Marginal cost

• Differential costs and revenues are the
  difference between costs and revenues for the
  corresponding item under each alternative being
  considered.
• Marginal cost/revenue - one extra unit of output
  cost/revenue.

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Red Car, Inc. Cost of Goods Manufactured Schedule
For the Year Ended March, 20xx
118
Continuation

• Depreciationfactory building  
• Depreciation-factory equipment
•  Insurance-factory 
•  Property taxesfactory   
•  Total manufacturing overhead
• Total manufacturing costs
• Add Beginning work-in-process inventory
• Less Ending work-in-process inventory Cost of
  goods manufactured

119
ADVANTAGES OF COST ACCOUNTING

• It reveals profitable and unprofitable
  activities.
• It helps in controlling costs with special
  techniques like standard costing and budgetary
  control
• It supplies suitable cost data and other related
  information for managerial decision making such
  as introduction of a new product, replacement of
  machinery with an automatic plant etc

120
ADVANTAGES OF COST ACCOUNTING

• It helps in deciding the selling prices,
  particularly during depression period when prices
  may have to be fixed below cost
• It helps in inventory control
• It helps in the introduction of   a cost
  reduction programme and finding out new and
  improved ways to reduce costs
• Cost audit system which is a part of cost
  accountancy helps in preventing manipulation and
  frauds and thus reliable cost can be furnished to
  management
•  

121
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM

• The method of costing adopted. It should be
  suitable to the industry
• It should be tailor made according to the
  requirements of a business. A ready made system
  can not be suitable
• It must be fully supported by executives of
  various departments and every one should
  participate in it
• In order to derive maximum benefits from a
  costing system, well defined cost centres and
  responsibility centres should be built within the
  organisation
•  

122
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM

• controllable and uncontrollable costs of each
  responsibility  centre should be separately shown
  
• cost and financial accounts may be integrated in
  order to avoid  duplication of accounts
• well trained and educated staff should be
  employed to operate the system
• It should prepare an accurate reports and
  promptly submit the same to appropriate level of
  management so that action may be taken without
  delay
• resources should not be  wasted on collecting and
  compiling cost data not required. Only useful
  cost information should be compiled and used
  whenever required.

123
ESSENTIALS OF A GOOD COST ACCOUNTING
SYSTEM-continues

• It helps in deciding the selling prices,
  particularly during depression period when prices
  may have to be fixed below cost
• It helps in inventory control
• It helps in the introduction of   a cost
  reduction programme and finding out new and
  improved ways to reduce costs
• Cost audit system which is a part of cost
  accountancy helps in preventing manipulation and
  frauds and thus reliable cost can be furnished to
  management
•  

124
Life education

• Threat is an opportunity
• Strength is your weakness
• Strengthen your weakness

125
Unit-7 Elements of costs

• Learning
• Cost sheet
• Elements of cost
• Operating cost
• Operating profit
• Non operating profit

126
Terms used in costing(unit 7)
Factory over heads
127
Selling and distribution
128
Marginal costing cost sheet

•  Sales Revenue 
  xxxxx
• Less Marginal Cost of Sales 
• Opening Stock (Valued _at_ marginal cost)
  xxxx
• Add Production Cost (Valued _at_ marginal cost)
  xxxx 
• Total Production Cost
  xxxx 
• Less Closing Stock (Valued _at_ marginal cost)
  xxx) 
• Marginal Cost of Production
  xxxx
•  Add Selling, Admin Distribution Cost
  xxx
•  Marginal Cost of Sales
   (xxxx)
• Contribution 
  xxxxx
• Less Fixed Cost
   (xxxx)
• Marginal Costing Profit
   xxxxx

129
ABSORPTION COSTING PRO-FORMA
 Sales Revenue
xxxxx Less
Absorption Cost of Sales   Opening Stock (Valued
_at_ absorption cost)
xxxx  Add Production Cost (Valued _at_ absorption
cost) xxxx  Total Production
Cost
xxxx  Less Closing Stock
(Valued _at_ absorption cost)
(xxx)  Absorption Cost of Production
xxxx Add
Selling, Admin Distribution Cost
xxxx Absorption Cost of
Sales 
(xxxx) Un-Adjusted Profit 

xxxxx Fixed Production O/H absorbed

xxxx  Fixed Production O/H incurred

(xxxx)  (Under)/Over Absorption 

xxxxx Adjusted Profit

xxxxx
130
Reconciliation Statement for Marginal Costing and
Absorption Costing Profit

•    Marginal Costing Profit
  xx
• ADD(Closing stock opening Stock) x OAR xx
• Absorption Costing Profit xx

Where OAR( overhead absorption rate) Budgeted
fixed production overheadBudgeted levels of
activities
131
Cost sheet

• Prime cost
• Factory over heads
• Factory cost/works cost
• Administration over heads
• Office cost
• Selling overheads
• Total cost
• Profit
• sales

132

3.Sales and distribution
2.General administration
4.profit
5.sales


Cost of sales
Total cost

• Factory cost/
• works cost

1.canteen


1.Production Prime Cost
1.Factory administration
Stores ledger
1.Godown
Bin card
Cost calculations/operating activity
133
Operating activity
Non- operating activity
My house is for sale
Dealers in houses
Non operating profit
Profits are operating profits
My furniture is for sale
Dealers in furniture
?
?
134
Operating/ Non operating
135
BPOs
Self-less service canteen
Self help room
What activity?
136

• Exercise Number 3 page-175 unit 7.
• Exercise Number 6 page-177 unit 7

137

3.Sales and distribution
2.General administration
4.Profit 44084
5.sales

500020,257
16031

Cost of sales1,76,338
Total cost1,60 307

2,20,422

• Factory cost/
• works cost

1.canteen
Consumable 4000 Royalty8000 FOH16050
p.3


Prime Cost R.material40,000 D.
labour12,000 Components50,000 Primary
packing5000
1.Factory administration
Stores ledger
1.Godown
Bin card
Cost calculations/operating activity
138
Exercise6/177
139
Material cost-stages in the movement of material
10.Transfer of material
1.Purchase requisition
9.Return of material
2.Selection of source of supply
8.Issue of material
3.Purchase order
6.Accounting for purchase
7.Receipt of material
4.Receipts and inspection
5.Cheking invoice
140
Valuation of material movements

• Basic cost
• Less Trade discount
• Add Container cost
• Add Sales tax-on basic cost after trade
  discount
• - on container
• Add insurance
• freight
• Less Credit for drums
• Total cost
• Add Stores overhead on total cost
• Unit cost Overall cost /No. of Units-normal
  loss units

141
Normal loss and abnormal loss

• Effective cost per unit

Costs incurred before abnormal loss
period-recovery from normal loss units
Number of units-normal loss units
Abnormal loss units Effective cost per
unit Abnormal loss
142
example
Page 200 unit-1

• Units purchased 10,000
• Costs of purchases1,00,000
• Due to leakages number of units lost50
• Loss of units due to breakages2000 insurance
  claim initiated.
• Effective cost per unit1,00,000-0/10,000-
• 
  50
• Rs.10.05025
• Abnormal loss200010.0502520100.50
• How do you calculate normal loss?

143
Calculate normal loss?

• We do not calculate normal loss but to calculate
  effective rate per unit we consider normal loss
  units and recovery from normal loss.

144
Valuation of issues

• FIFO
• LIFO
• Average price method
• Weighted Average method
• Highest In First method
• Specific price
• Standard Price

145
Points to remembered for stock valuation under
various methods

• 1.All the methods used for the calculation of
  issues to production
• The costs of purchase and other related costs
  should be passed on to customers
• Any deficit in stock taking to be considered as
  issue
• Any excess will be considered as purchase at the
  latest price
• Goods returned from production to be valued at
  the price of issue.

146
Example
FIFO
Maximum level Minimum level Re-order level
Description Unit Location
Stores ledger
147
Example
LIFO
Maximum level Minimum level Re-order level
Description Unit Location
Stores ledger
148
Average price method
Maximum level Minimum level Re-order level
Description Unit Location
Stores ledger
149
Weighted Average method
Maximum level Minimum level Re-order level
Description Unit Location
Stores ledger
150
Techniques of Inventory control (Unit 8-page 211)

• 1. Economic Ordering Quantity
• 2. Fixation of inventory levels
• 3. Inventory Turnover
• 4. ABC Analysis
• 5. Bill of Materials
• 6. Perpetual Inventory system

151
1.Economic ordering Quantity(212)

• EOQRoot of (2AO/C)
• Where Aannual demand in units
• O Cost of placing order (cost from
  the time we order till we receive goods)
• C Carrying cost per unit per year
  (measured in terms of percentage on cost per
  unit)
• Assumptions normally on an average ½ of the
  units are in the store all the time.

152
Exercise14 page 248

• EOQRoot of (2AO/C)
• Root of(2600400/(4015)
• Root of 80000
• 282.845 units
• Total cost of inventory annually(60015)(3400)
  (1/22824015)90001200846
• Rs.11,046.

153

• If 10 discount is given cost per unit15-(10of
  15)13.5
• Total cost(60013.5)(2400)(1/25004013.5)
• 81008001350
• Rs.10,250
• Advise Purchase 500 units as annual cost of
  inventory is cheaper.
• If safety stock is required at any point of time
  in order to calculate holding cost we add the
  safety stock with the ½ of EOQ stock.
• Holding cost includes storage and interest on
  locked up capital

154
If 10 discount is given

• If 10 discount is given cost per unit15-(10of
  15)13.5
• Total cost(60013.5)(2400)(1/25004013.5)
• 81008001350
• Rs.10,250
• Advise Purchase 500 units as annual cost of
  inventory is cheaper.
• If safety stock is required at any point of time
  in order to calculate holding cost we add the
  safety stock with the ½ of EOQ stock.
• Holding cost includes storage and interest on
  locked up capital, handling, insurance of godown

155
2. Fixation of inventory level(218)

• Re-order levelMaximum leadtime
  Maximum usage
• Minimum level Reorder level-(Normal usageNormal
  lead time)
• Maximum levelRe-order level Re-order
  qty-(Minimum usageMinimum Lead time
• Average level(Maximum level Minimum level)/2
• Danger levelNormal usageLead time for emergency
  purchases

Note Re-order quantityEOQ
156
See page-220 and 223 illustrations

• EOQ is calculated inorder to find Re- order
  quantity
• Re-order quantity is different from Re-order
  level
• Sometimes minimum stocksafety stock
• See page 222

157
3. Inventory (Stock) turnover ratio

• It explains operating efficiency of the
  organisation.
• How quickly raw material are converted into
  finished goods and also gives number of days of
  conversion.
• It explains number of times in a year raw
  material are converted into finished goods

158
3.Stock turnover ratio
Page-225

• Value of materials consumed in a year
• Average stock
• Average stock (Opening stock Closing Stock)/2

159
ABC analysis
Always Better Control
Control Always Better
Better Control Always

• Classify the various inventories according to
  their importance(70 of the value)
• A-High cost per unit but less quantity (70 of
  the value)-large investment-effective control on
  supply
• B- Moderate price per unit but moderate quantity
  (20 in value)
• C-less cost per unit but large quantity(10 in
  value)-control on availability of material

160
5. Bill of materials

• Bill of materials is a list of materials required
  for a job.. It also indicates quantity required
  for each item.
• It helps in cost computation, material to be
  purchased by purchase department, that the order
  to be executed indicator.

161
6.Perpetual inventory control system(page-229)(Uni
t number 8)

• Stocks are recorded as soon as placed in the
  godown and also recorded immediately as soon as
  stock is taken out.
• They are recorded in Bin card and stores ledger.
• It helps if insurance claim initiated and also
  fixing various level of stock,adjusted for
  discrepancies and periodical profits are
  estimated.

162
Problems-clarification

• Problem number-02,10,16 from exercise
• Page-243,246 and248 respectively in unit-1

163
Labour costs-unit 9 page-252

• Selection,training,wage
  sheet preparation
• Recording, time keeping and time booking
• Analyse wage sheet, reports to mgt.

Personnel department
Time keeping department
Costing department
164
Methods of remunerating workers (unit 9 page-258)

• 1.Time basis
• 2.Result basis
• 3. Bonus systems
• 4. Indirect monetary remuneration
• 5. Non-monetary incentives

Individual
Group
Profit sharing
Co-partnership
165
Payment by results(page-261)
a) Straight piece rate No. unitsunits produced
Payment by results
b) Piece rate with guaranteed time rate
c) Differential piece rate
1.Taylor differential piece Rate(page262) No
guaranteed wage Below standard-low piece
rate Above standard-high piece rate
2.Merrick differential rate plan No guaranteed
wage Efficiency Piece rate Upto 83
Normal Upto 100 110 of normal
rate Above 100 130 of normal piece
3. Gantt task bonus Below standard -time rate At
standard- time wage increase in rate Above
std .-High piece rate
166
Individual Incentive systems
Halsey-weir system 1(W)2(ER) AH HR (Time
saved/3) HR Time rate guaranteed
Halsey premium system 50-50 AH HR (Time
saved/2) HR Time rate guaranteed
Rowan plan The more you save The more the
incentives (AHHR)(SH-AH)/SH
(AHHR)
ER
W
AH-Actual hours SH-Standard Hours HR-Hourly rate
167
Other Wage payment system
Bedaux Point system WageAHHR (75Of BSHR)/60
a.Barth premium system WageHourly rate Root of
SHR.AH
Every hour there are Standard pointsBS
Emersons Efficiency Bonus System Guaranteed
wages Wage(AHHR) Bonus(AHHR) Below 66
2/3-No bonus 66 2/3 to 100- upto 20 Above
100-Bonus201 for every1
increse in efficiency
Accelerated premium system
2 Wage (Y).8X Where YEarnings XEfficiency
168
Group Incentive schemeIndirect monetary
benefits(271)

• Profit sharing-Bonus-8.33 of wages statutory
  bonus.Maximum-20
• Copartnership-ESOP

169
Problems

• Page-292 prob-6 9
• Page-293 prob-11

170
Overheads-unit 10 page-295

• Classification of over heads
• Indirect material, indirect labour, indirect
  expenses
• Factory overheads, administration over head,
  selling and distribution over heads
• Fixed overheads, variable overheads, semi
  variable overheads
• Controllable and uncontrollable overheads
• Normal and abnormal overheads.

171
Classification(206)
Element wise Indirect material, indirect labour,
indirect expenses

• Normality
• Normal and
• Abnormal
• overheads.

• Function
• Factory
• administration,
• selling and
• distribution over heads

• Controllability
• Controllable and
• Uncontrollable
• overheads

Variability Fixed, variable, semi variable
overheads
172
Primary apportionment(page-299)

• Common over heads belong to production and
  service departments are apportioned on the
  following basis or any other suitable basis

1.Canteen-no.of workers 2.Rent-Area 3.Power-HP/KWH
4.General lighting-light points 5.Depreciation-va
lue of assets
1.Supervision -no.of employees 2.Telephone
expenses -no.of calls made 3.Fire
insurance -value of stock/asset
173
Secondary apportionment

• Apportionment of service department cost centre
  to production department

Methods of Apportionment(Page303)
Simultaneous Equation method
Repeated Distribution method
174
Overhead absorption rate(page-307)
Amount of overhead/direct Material cost or
/Direct Wage cost or
/Prime Cost or
/labour hours or
/Number of machine
Hours
Prob.-pages 309,336
175
Unit-11

• Marginal Cost-Volume-Profit Analysis and Relevant
  Costing

176
Marginal cost, Budgeting and standard costing

• Presented by

Prof. L. Augustin Amaladas M. Com.,
AICWA.,PGDFM.,B.ED.
6th January 2008
IBM
177
Learning Objectives

• 1. How is breakeven point computed and what does
  it represent?
• 2. How do costs, revenues, and contribution
  margin interact with changes in an activity base
  (volume)?

C6
178
Continuing . . . Learning Objectives

• 3. How does cost-volume-profit (CVP) analysis in
  single-product and multiproduct firms differ?
• 4. What are the underlying assumptions of CVP
  analysis and how do these assumptions create a
  short-run managerial perspective?

179
Continuing . . . Learning Objectives

• 5. How do quality decisions affect the components
  of CVP analysis?
• 6. What constitutes relevance in a
  decision-making situation?

180
Continuing . . . Learning Objectives

• 7. How can management best utilize a scarce
  resource?
• 8. What is the relationship between sales mix and
  relevant costing problems?

181
Continuing . . . Learning Objectives

• 9. How can pricing decisions be used to
  maximize profit?
• 10. How can product margin be used to determine
  whether a product line should be retained or
  eliminated?

182
Continuing . . . Learning Objectives

• 11. How are breakeven and profit-volume graphs
  prepared? (Appendix 1)
• 12. What are the differences between absorption
  and variable costing? ( Appendix 2)
• 13. Why is linear programming a valuable tool for
  managers? (Appendix 3)

183
The Breakeven Point (BEP)
The level of activity, in units or dollars, at
which REVENUES COSTS
184
Basic Assumption Relevant Range

• Company is operating within the relevant
• range of activity specified in determining the
  revenue
• and cost information used.

Relevant Range
Total
Activity Level
185
Basic Assumption Revenue
Total revenue fluctuates in direct proportion to
level of activity or volume. On a per unit basis,
the selling price remains constant.
Total
Activity Level
186
Basic Assumption Variable Costs
Total variable costs fluctuate in direct
proportion to level of activity or volume. On a
per unit basis, variable costs remain constant.
Total
Activity Level
187
Basic Assumption Fixed Costs
Total fixed costs remain constant relative to
activity level changes. Per-unit fixed costs
decrease as volume increases and increase as
volume decreases.
Total
Activity Level
188
Basic Assumption Mixed Costs
Mixed costs must be separated into variable and
fixed elements.
Total
Activity Level
189
Cost Behavior Example
190
Contribution Margin Per Unit

• Contribution margin per unit equals selling price
  per unit less variable cost per unit.
• sp -vc cm
• 40 - 24 16

191
Contribution Margin Ratio

• Contribution margin ratio is per-unit
  contribution margin divided by selling price, or
  total contribution margin divided by total sales
  dollars.
• cm/spcm
• 16 / 40 40

192
Breakeven Point

• Breakeven point is the point at which profits
  are zero because total revenues equal total
  costs, or
• Total revenues Total variable costs Total
  fixed costs

193
Continuing . . . Breakeven Point

• Total fixed costs In units --------------
  ------- CM per unit
• Total fixed costs In sales
  dollars --------------------- CM ratio

194
Continuing . . . Breakeven Point

• 120,000 In units ----------- 7,500
  ice buckets 16
• 120,000 In sales dollars -----------
  300,000 .40

195
CVP Analysis Fixed Amount of Profit Before
Taxes (PBT)

• Total fixed costs PBTIn
  units ------------------------------
  CM per unit
• Total fixed costs PBTIn sales
  dollars ------------------------------
  CM ratio

196
CVP Analysis Fixed Amount of Profit Before
Taxes (PBT)

• 120,000 64,000Break evenIn
  units------------------------ 11,500
  buckets 16
• 120,000 64,000In sales
  dollars ------------------------
  460,000 .40

197
CVP Analysis Variable Amount of Profit Before
Taxes

• Assume PUBT desired is 25 on sales
• Therefore, PUBT .25 (40) 10
• Total fixed costsSales in units
  --------------------------- CM per unit -
  PUBT
• 120,000Sales in units ---------------
  20,000 ice buckets 16 - 6

198
CVP Analysis Variable Amount of Profit Before
Taxes

• Assume PUBT desired is 25 on sales
• Therefore, PUBT .25 (40) 10
• Total fixed costsSales in
  --------------------- CM - PUBT
• 120,000Sales in
  --------------- 800,000
  .40 - .25

199
Income Statement

• Dollars Percentages
• Sales 800,000 100
• Variable costs 480,000 60
• Contribution margin320,000 40
• Fixed costs 120,000 15
• Income 200,000 25

200
CVP Analysis - Multiple Products
201
Continuing . . . CVP Analysis - Multiple Products
202
Continuing . . . CVP Analysis - Multiple Products
Total fixed costs BEP in sales
dollars ----------------------- CM ratio
per bag (120,000 30,000) BEP in sales
dollars ---------------------------- .41
9 357,995 30,000 of additional fixed
cost is incurred to produce both units
203
Scarce Resource -- Machine Hours
204
Sales Mix Decisions
How many of each product?
205
Relevant Costs inProduct Line Decisions

• Revenues associated with product
• Variable costs associated with product
• Avoidable fixed costs
• Consider product margin
• Revenues - Variable costs - Avoidable fixed costs

206
Exhibit 6-12 Partial Product Line Income
Statement
207
Exhibit 6-13 Product Margin for the Electric
Skillet Product Line
208
CVP Graph
Total Revenues
BEP
Total Costs
Total
Volume
209
Profit-Volume Graph
BEP
Profit or Loss
Total
Volume
Fixed Costs
210
Absorption Costing

• Also known as full costing
• Treats costs of all manufacturing components as
  inventoriable, or product, costs
• Direct materials
• Direct labor
• Variable factory overhead
• Fixed factory overhead
• Presents expenses on income statement according
  to functional classifications
• Cost of goods sold
• Selling expenses
• Administrative expenses

211
Variable Costing

• Also known as direct costing
• Includes only variable production costs as
  inventoriable, or product, costs
• Direct materials
• Direct labor
• Variable factory overhead
• Fixed factory overhead costs treated as period
  expenses
• Income statement separates costs by cost behavior
• May also present expenses by functional
  classifications within behavioral categories

212
Absorption CostingIncome Statement
Sales XXX Cost of Goods Sold Beginning
inventory XXX Cost of goods manufactured XXX
Cost o