IPCC COST ACCOUNTING · CA IPCC CA VINOD KUMAR AGARWAL Save transportation time. Can revise any...

COST

ACCOUNTING

IPCC

REVISION BATCH NOTES

CA RAKESH V. AGRAWALLIVING DICTIONARY OF COSTING

ONE DAY

04/22/15

1

CA. Rakesh Agrawal 1

IPCC – Costing – Quick Revision• Our today’s schedule shall be as follows :• First Session : 7 to 9 AM• Break 1 : 9 to 9:15 AM• Second Session : 9:15 to 11:15 AM• Break 2 : 11:15 to 11:30 AM• Third Session : 11:30 AM to 1:30 PM• Important Note : As it is a quick revision session,

please do not waste your time in writing, but focus your attention only on revising.


Three Elements of Cost

OverheadsPrime CostTotal Cost

Indirect Expenses

Direct Expenses

Expenses

Indirect LabourDirect LabourLabour Cost

Indirect MaterialDirect materialMaterial Cost


Overheads• It is further divided in to –1. Factory overheads. Also known as works

overheads, Production overheads, Manufacturing overheads etc.

2. Administration Overheads. Also known as Office overheads and

3. Selling and Distribution overheads.


Simple Cost Sheet FormatParticulars Amount (Rs.)DIRECT MATERIAL ---Add : Direct Labour ---Add : Direct Expenses ---• PRIME COST ---Add : Factory / Works Overheads ---• FACTORY COST ---Add : Administrative Overheads ---• COST OF PRODUCTION ---Add : Selling & Distribution Overheads ---• COST OF SALES ---Add / Less : Profit / (Loss) ---• SALES ---


Cost Sheet with Stock AdjustmentParticulars Amount (Rs.)DIRECT MATERIAL : Op. Stock

(consumed) Add : PurchasesLess : Clo. Stock ------- ---

Add : Direct Labour ---Add : Direct Expenses ---• PRIME COST ---Add : Factory / Works Overheads ---• GROSS FACTORY / WORKS COST ---Add : Opening Work-in-Progress ---Less : Closing Work-in-Progress ---• NET FACTORY COST OF FINISHED GOODS ---Add : Administrative Overheads ---• COST OF PRODUCTION ---Add : Opening Stock of Finished Goods ---Less : Closing Stock of Finished Goods ---• COST OF GOODS SOLD ---Add : Selling & Distribution Overheads ---• COST OF SALES ---Add / Less : Profit / (Loss) ---• SALES ---


Material Cost

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EOQ• EOQ is such a quantity at which the total

cost of ordering and carrying for the year is lowest and thus economical.

• EOQ can be calculated using wilson’s formula, as follows :


EOQ Formula

2 x Annual Consumption x Ordering cost per order

Carrying cost per unit p.a.


Total Ordering Cost p.a.= No. of orders p.a. x ordering cost per order

= Annual consumption x ordering cost per orderOrder Size


Total Carrying Cost p.a.= Average Inventory x Carrying cost per unit p.a.

= Order Size x [ Purchase price p.u.2 x C.C. % p.a. ]


At EOQ• [ Total ordering cost p.a. + Total carrying

cost p.a. ] is minimum • i.e. Total inventory Management Cost is

minimum and• Total ordering cost p.a. = Total carrying

cost p.a.


EOQ with Discount• Normally when we calculate EOQ using

Wilson’s square root formula, it is based on an assumption that the purchase price per unit of raw material is constant and that there is no discount.

• However, when the purchase price of raw material changes, the above formula does not work. We have to use another approach to calculate the answer.

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EOQ with Discount• The logic of EOQ however, remains the

same i.e. minimisation of total cost.• Now we will have to calculate the total of

[purchase cost p.a. + carrying cost p.a. + ordering cost p.a.]. If this cost is minimum, then we have reached at EOQ.

• In the formula based EOQ, we tried to minimise only two costs i.e. [ carrying cost p.a. + ordering cost p.a.].


Inventory Levels• In order to manage the inventory better,

management may fix certain inventory levels. These are :

1. Reorder Level 2. Maximum Level3. Minimum Level4. Average Stock Level and5. Safety Stock Level or Danger Level


Inventory Levels• Calculation of inventory levels depend on

3 factors, which are :1. Reorder Qty.2. Reorder Period or Lead Time3. Consumption Speed or Usage Rate


Points to remember1. Reorder Qty. : It provides the answer of

how much to order ? 2. Reorder Level : It provides the answer of

when to order ?3. Reorder Period : It is the time gap

between placing an order and physical receipt of material.


Reorder Qty.• It is the quantity which we order to the

supplier of material.• It is generally EOQ or any other Qty. as

given in the question.• This quantity is fixed. It means, every

time you will give an order for this much quantity only.


Reorder Period or Lead Time• It is the time gap between placing an

order and actual receipt of material.• Based on past experience, it may be

further classified in to (a) Minimum lead time (b) Maximum lead time and (c) Average or Normal lead time.

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Consumption Speed or Usage Rate• It is the speed of consumption of raw

material in production process.• Consumption speed depends on

production speed.• Based on past experience, we may

classify usage rate further in to 3 parts i.e. (a) Minimum usage rate (b) Maximum usage rate and (c) Average or normal usage rate.


Reorder Level :-It is the level of stock at which a fresh order for purchase is given. It is calculated as :

= Maximum usage rate x Maximum lead time

Note : In case of insufficient data, one may use the following formula of Reorder level= Average usage rate x Average lead time


Minimum Level :-• It is the level below which, stock is not expected to go. If the stock goes below this level, then the purchase manager has to initiate follow up action with the supplier. It can be calculated as:

= Reorder level - [ Average usage rate x Average lead time ]

•This level will ensure that there is no understocking of goods, and production is not hampered due to shortage of material.


Maximum Level :-It is the level beyond which stock is not expected to go. It is fixed to avoid overstocking.

Management will investigate the matter if stock goes beyond maximum level. It can be calculated as :

= Reorder level - (Min. usage rate x Min. lead time) + Reorder Qty. (EOQ)


Average stock Level :-This level just indicates that on an average how much stock is lying in the stores. There are 2 formulae to calculate average stock level :

A] = 1/2 (Minimum Level + Maximum Level)

OR

B] = Min Level + (1/2 of EOQ)


Safety Stock Level• It is also known as danger level.• Sometimes, management fixes reorder level

using the formula of [average lead time x average usage rate]. In such case, it is required to maintain the safety stock.

• There is no fixed formula for calculation of safety stock. Management uses it’s own discretion to decide safety stock level. However, the following formula is generally used.

• Normal usage rate x time required for urgent purchase

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Safety Stock Level

• If stock goes below this level, then purchase manager will initiate an action of emergency purchase of material from alternative supplier.

• If safety stock is given in the question, then the formula for Reorder Level shall be :

• Safety stock + [Av. usage rate x Av. lead time]• However, it is important to note that, if the

formula for reorder level changes, then all the remaining answers will automatically change.


ABC Analysis

• In manufacturing concerns, there are thousands of items of material. Management cannot pay equal attention to all the items in inventory. Management’s time is also costly and precious.

• In such case, all the items in inventory are divided in 3 parts, known as Category A, Category B and Category C.


ABC Analysis• Category A items are those, which are very few

in numbers but they account for very high value of annual consumption.

• Category C items are those, which are very high in number but have a very low consumption value and

• The leftover items are put in Category B.• Category A items are paid highest attention,

Category B items are paid moderate attention and Category C items are paid lowest attention.


Labour Cost

• It is a manpower cost.• Labour cost is divided in two parts : (1)

Direct cost and (2) Indirect cost• Direct labour cost is directly charged to

production as a part of prime cost • Indirect labour cost is charged to

respective overheads account.


Labour Remuneration system

• It is the most important area of Labour Cost topic.• We will try to understand various methods of labour remuneration using some key data.


Key Data Time Rate = Rs. 30 per hour Standard time allowed for one piece = 20 min.

Piece rate per unit = Rs. 30 x 20 min. 60 min

= Rs. 10 per unitActual production in a day of 8 hours -

Workers A = 30 units Workers B = 24 unitsWorkers C = 20 units

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1) Time Rate system -Wages = Rate per hour x no. of hours worked A’s wages = Rs. 30 x 8 hours

Rs. 240

B’s wages = Rs. 30 x 8 hours Rs. 240

C’s wages = Rs. 30 x 8 hours Rs. 240

In this system wages are provided irrespective of efficiency and output produced by worker.


2) Straight piece rate system:Wages = Rate per unit x no. of units produced

A’s wages = Rs. 10 x 30 units = Rs. 300

B’s wages = Rs. 10 x 24 units = Rs. 240

C’s wages = Rs. 10 x 20 units = Rs. 200


3) Differential piece rate:a) Taylor’s differential piece rate system –

125% of normal piece rate Equal to or more than 100%

83% of normal piece rate Less than 100%

Piece Rate Percentage of efficiency

Efficiency = Actual output x 100Standard output

Standard output expected in actual hours = 8 hours x 60 min. 20 min. / unit

= 24 units


A’s efficiency = 30 units x 100 = 125%24 units

B’s efficiency = 24 units x 100 = 100%24 units

C’s efficiency = 20 units x 100 = 83.33%24 units

Wages = No. of units produced x differential piece rate A’s wages = 30 units x (125% of Rs.10)

= 30 units x Rs.12.5 = Rs. 375B’s wages = 24 units x (125% of Rs.10)

= 24 units x Rs.12.5 = Rs. 300C’s wages = 20 units x (83% of Rs.10)

= 20 units x Rs. 8.3 = Rs. 166


b) Merrick’s Differential piece rate system –

Ordinary piece rate 110% of ordinary piece rate 130% of ordinary piece rate

Up to 83% Above 83% to 100%Over 100%

Payment of wages Efficiency

A’s wages = 30 units x (130% of Rs. 10)= 30 units x Rs.13 = Rs. 390

B’s wages = 24 units x (110% of Rs. 10)= 24 x 11 = Rs. 264

C’s wages = 20 units x (10 x 110%)= Rs. 220


4) Gantt Task Bonus Plan:

Guaranteed time wages120% of the time rate 120% of ordinary piece rate

Below standard At standard Above standard

PaymentOutput

A’s wages = No. Of units x 120% of Rs. 10(Above standard) = 30 units x Rs.12 = Rs. 360B’s wages = Time taken x 120% of Rs. 30(At standard) = 8 hrs. x Rs. 36 = Rs. 288C’s wages = 8 hrs. x Rs. 30(Below standard) = Rs. 240

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5) Halsey Premium Plan Total wages = Basic wages + Incentive bonus

= (Hours worked x rate per hour) + 50% (*Time saved x Rate / hour)

Time Saved = Time allowed – Time taken Time Allowed = Standard time required for actual outputTime taken = Actual hours worked for actual output


WORKER – A :Time allowed to A – 1 unit 20 minFor actual output 30 units ?

30 units x 20 min. = 600 minutes i.e. 10 hours

Time saved by A = 10 hrs. – 8 hrs. = 2 hrs

A’s wages = (Hours worked x Rate/hr.) + 50% (time saved x Rate/hr.) = (8 hrs. x Rs. 30) + 50% (2 hrs. x Rs. 30)= Rs. 240 + Rs. 30= Rs. 270


WORKER – B :

Time allowed = 24 units x 20 min. = 480 minutes = 8 hours Time saved by B = 8 hrs. – 8 hrs. = 0

As no time is saved by worker B, no bonus is payable to him. Only the basic wages shall be given. B’s wages = 8 hrs. x Rs.30 = Rs. 240


WORKER – C:

Time allowed = 20 units x 20 min. = 400 minutes = 6.67 hoursTime Saved = 6.67 – 8 hrs. = – 1.33 hrs.

Negative time saved is treated as no time saved. Hence only basic wages are payable. C’s wages = (8 hrs. x Rs. 30) = Rs. 240


6) Rowan System:Total wages = Basic wages + Incentive bonus

Total wages = (Hours worked x Rate per hour) +Time saved x (hours worked x Rate/hr.) Time allowed

Total wages = Basic wages + Time saved x Basic wages Time allowed

A’s wages = (8 hrs. x Rs. 30) + [2/10 x (8 hrs. x Rs.30)]= Rs. 240 + Rs. 48 = Rs. 288

Worker B and worker C have saved no time, hence, only the basic wages are payable to them i.e. Rs. 240 each.


7) Barth Variable sharing plan :

Wages = Rate per hour x Standard hours x Actual hours worked

A’s Wages = Rs.30 x 10 hrs x 8 hrs = Rs. 30 x 8.94 hrs.= Rs. 268.33

B’s Wages = Rs. 30 x 8 hrs x 8 hrs = Rs. 30 x 8 hours = Rs. 240

C’s Wages = Rs. 30 x 6.67 hrs x 8 hrs = Rs. 30 x 7.3 hrs = Rs. 219.14

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8) Emerson Efficiency Bonus :

20% plus 1% extra for each 1% efficiency in excess of 100%.

Over 100%20% of basic wages.At 100%

Between 0% to 20% of basic wages.

Above 66 2/3%Only time wages. No bonus.Below 66 2/3%

BonusEfficiency


A’s Efficiency = 125%A’s wages = (8 hrs x Rs. 30) + 45% x (8 hrs x Rs.30)

= Rs. 240 + 108= Rs. 348

B’s Efficiency = 100%B’s wages = (8 hrs x Rs. 30) + 20% x (8 hrs x Rs.30)

= Rs. 240 + Rs. 48= Rs. 288

C’s efficiency = 83.33%C’s wages = (8 hrs x Rs.30) + *10% ( 8 hrs x Rs.30)

= Rs. 240 + Rs. 24= Rs. 264

* 10% bonus is assumed. It will be given in the question paper.


9) Bedaux point premium system : -Total wages = (Hours worked x Rate / hr) +

75% (Bedaux point saved x Rate /hr.)60

Bedaux point saved = Time saved in minutesi.e. Time allowed (min) – Time taken (min)


Worker ATime saved by worker A = 2 hrs = 120 minutes Bedaux points saved = 120

A’s wages = (8 hrs. x 30) + 75% (120 min. x Rs. 30) / 60= Rs. 240 + Rs. 45= Rs. 285

Worker B and C have saved no time, hence no bonus. Only basic wages are payable, i.e. Rs. 240 each.


10) Accelerating Premium Plan:

Wages = 0.8 (X)² x basic wages Where X = efficiency

= 0.8 x (Efficiency)² x (hours worked x Rate/hr.)

A’s wages = 0.8 x (1.25)² x (8 hrs x Rs. 30) = 0.8 x 1.56 x 240= Rs. 300

B’s wages = 0.8 x (1) ² x (8 hrs x Rs. 30) = 0.8 x 1 x 240= Rs. 192

C’s wages = 0.8 x (0.8333)² x (8 hrs x Rs. 30) = Rs. 133.32 (approx)


Labour Turnover• Labour turnover is the speed of change in the

composition of workforce.• Labour turnover should be lower in the

organisation. High labour turnover will cause increase in production cost.

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Calculation of labour turnover ratios:

(1) Replacement method = No. of workers replaced during the year 100

Avg. no. of workers p.a.

(2) Separation Method = No. of workers separated (left) during the year 100


(3) Flux Method= No. of workers joined + No. of workers left 100



OVERHEADS• The most common classification of

overheads is :1. Manufacturing Overheads2. Administration Overheads and3. Selling & Distribution Overheads


OVERHEADS• When we prepare cost sheet, we charge all the

3 overheads, to find out the total cost of a product.

• Generally, no difficulty arises for charging direct costs to the product. However, as indirect cost (i.e. overheads) bear no direct relationship with the individual product, there arises a considerable difficulty in charging overheads to individual product.

• Overheads are charged using a step by step approach to the product, to ascertain it’s cost.


FACTORY OVERHEADS• There are primarily 3 methods of

charging factory overheads :1. Single Rate or Blanket Rate Method2. Departmental Rate Method and3. Activity Based Costing Method. Also

known as ABC. This method is in C.A. Final for studies.


Single Rate Method• In this method, a single overhead recovery rate is

calculated for the entire factory and using this rate, factory overheads are charged to all the products.

• For example, total factory overheads for the company is say Rs. 5,00,000 and total labour hours worked is 50,000.

• Then, the factory overhead recovery rate is Rs. 10 per labour hour.

• If a product requires 15 labour hours of work, then we will charge Rs. 150 (i.e. 15 hrs. x Rs. 10 ) to that product as it’s share of factory overheads.


Single Rate Method• This method is very simple to

understand and use. Hence, small organisations prefer this method of charging factory overheads.

• However, this method leads to more approximation in charging overheads.

• Pricing decision taken on the basis of this method may go wrong and hence it is not a very popular method.

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Departmental Rate Method• This is one of the most popular and widely

used method of charging factory overheads.• The steps involved in this method are :1. Allocation of overheads2. Apportionment of overheads3. Re-apportionment of overheads4. Calculation of overhead recovery rates and5. Charging the overheads i.e. absorption of

overheads.


Overheads Summary

Admn. OH Factory OH S & D OH

Single Rate Departmental Rate ABC[ C.A. Final ]

Allocation

Apportionment

Re-Apportionment

Recovery Rate

Absorption of OH

Charging the OH ofrespective Dept. to

the same Dept. Charging CommonOH to all the Dept.on suitable basis.Charging Service

Dept. OH to Production Dept. Calculation of OH

Rate for charging OHOH charged to the

respective Job, Batch,Process, Contract etc.


Administration Overheads

• There are 3 possible treatments :1. Apportion it between Production and

Sales Department2. Charge to Costing Profit & Loss A/c3. Charge it using a separate recovery rate.


Administration Overheads• The most commonly used method is to charge

admn. overheads using a separate rate of recovery.

• If a basis is given in the question itself, then use that basis, else use Works Cost (i.e. Factory Cost) as basis for charging.


Selling & Distribution Overheads• If a basis is given in the question itself, then

use that basis, else use Works Cost (i.e. Factory Cost) as basis for charging.


Under and over absorption of overheads

• Overhead Recovery Rate may be calculated in the following two manners :

1. Actual Basis and2. Estimated Basis (i.e. budgeted data)

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Actual Basis• In this case the accountant will wait till the

close of financial year to know the actual amount of overheads incurred.

• Once the amount of actual OH is ascertained, then he calculates the overhead recovery rates for charging the overheads to cost object.

• This method involves delay in cost calculation and consequently it also delays the decision regarding fixation of sales price of the product. Hence, this method is not popular.


Estimated Basis• In this case the accountant estimates (i.e.

budgets) the amount of overheads to be incurred for the year.

• On the basis of estimated OH, he calculates the overhead recovery rates for charging the overheads to cost object.

• This method is very popular because it does not cause delay in cost calculation and consequently decisions regarding fixation of sales price can be taken immediately.


Estimated Basis• However, one disadvantage of this method is

that the OH absorbed on estimated basis may not tally with actual overheads incurred.

• This leads to either under absorption of OH or over absorption of overheads.

• When OH absorbed are less than OH incurred, then we call it a situation of under absorption of OH.

• When OH absorbed are more than OH incurred, then we call it a situation of over absorption of OH.


Under AbsorptionOverheads A/c

To actual OH incurredSay 1,00,000

By WIP A/ci.e. OH absorbedSay 80,000

WIP A/cTo OHAbsorbed

80,000

Overheads A/cTo actual OH incurredSay 1,00,000

By WIP A/ci.e. OH absorbedSay 1,20,000

WIP A/cTo OHabsorbed

1,20,000

Over Absorption


Accounting Treatment• These under or over absorption of OH are

required to be adjusted in the books of accounts, otherwise OH account will not tally.

• There are 3 methods to deal with this situation:1. Carry forward to next year2. Transfer to Costing P & L Account and3. Use of Supplementary Rate Method


1. Carry forward of OH

• Under this method, any amount of under or over absorption of overheads is carried forward to next year with the hope that it will get adjusted with under or over absorption of overheads of the next year.

• However, this method is not recommended because it disturbs the profitability of current year as well as the profitability of next year.

• Inspite of this, small organisations prefer this method because it is very simple and does not involve any adjustment in the books.

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2. Transfer to Costing P&L A/c• Under this method, any amount of under or

over absorption of overheads is transferred to Costing P & L Account.

• This method is used when the amount of under or over absorption is very small and immaterial.

• As the amount is negligible, it does not have any sizable impact on ascertainment of cost.


3. Use of Supplementary Rate• This method is used when the amount of under

or over absorption is large and material.• Hence, this amount is again adjusted in the

books of accounts by charging the overheads using supplementary rate.

• However, like rectification of error, the overheads are adjusted directly in the accounts where the final effect goes.

• Hence, the adjustment is made only in Closing WIP, Closing FG and COGS.


Use of Supplementary Rate

• Supplementary Rate can be calculated either on the basis of Quantity or Value of Closing WIP, Closing FG and COGS.

• You have to choose an appropriate method, depending upon the information available in the question.


Job Costing, Batch Costing & Output Costing


Job Costing• It is a method of costing where goods are

produced or services are given to the customer as per his requirement. Each order of a customer is known as Job.

• Every customer’s requirement might be different from each other. Hence, we need to calculate the cost of each job separately and quote the selling price of each job separately.


Batch Costing• This method of costing is used in an industry

where the goods are produced in lots or batches.

• In this case, we need to maintain the accounting record batch wise, so that we can ascertain the cost of each batch separately.

• Once we calculate the cost of a batch, then we can easily calculate cost per unit also.

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Batch Costing• We have to charge the prime cost and

overheads to each batch, to ascertain the cost of a batch.

• Thus, it is similar to job costing only.


Economic Batch Quantity (EBQ)• It is the most economical quantity

which we should produce in one batch. Simply speaking, it is the economic batch size.

• The optimum batch size can be calculated using a formula, which is similar to the formula of EOQ.


Economic Batch Quantity (EBQ)2 x Annual Demand x Set up cost per batch

Carrying cost per unit per annum

• Please note the following changes in EOQ :1. EOQ was for raw material, EBQ is for finished

goods.2. Annual consumption is replaced by annual

sales demand and3. Ordering cost is replaced by set up cost.


Economic Batch Quantity (EBQ)

2 x Annual Demand x Set up cost per batchCarrying cost per unit per annum

• The objective here is to minimise the total of [annual set up cost + annual carrying cost]

• Carrying cost per unit p.a. can be calculated as [production cost per unit x c.c. % p.a.]


Total Set up Cost p.a.= No. of batches x set up cost per batch

= Annual Demand x set up cost per batchBatch Size


Total Carrying Cost p.a.= Average Inventory x Carrying cost per unit p.a.

= Batch Size x c.c. p.u. p.a.2

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Single Unit or Output Costing• This method of costing is used in an

industry, where only one type of product is manufactured. Hence, calculation of cost is very simple.

• Cost per unit = Total CostNo. of units produced


Contract Costing• Difference between job costing and

contract costing• Contractor and Contractee• Cost plus contract and Fixed price contract• Completed contract method and

Proportionate completion method• Note : from exam point of view, the stress

is on fixed price contract and proportionate completion method.


Important terms• Contract price• Work certified• Progress payment• Retention money• Cost of work certified • Cost of work uncertified• Notional profit = [ work certified – cost of

work certified ]


Contract Account for 31.03.15 ending

7,00,000Total7,00,000Total

6,00,000

1,00,000

By work certified[ up to 31.01.15 ]By cost of workUncertified[ Feb + Mar ]

3,00,0001,50,000

50,000

2,00,000

To Material CostTo Labour costTo Overheads[ upto 31.03.15 ]To Notional Profit

Rs.ParticularsRs.Particulars


Formulae for Transfer to P&L A/c• This is the main area of discussion in contract

costing.• The basic principle used is the ‘Concept of

Prudence’.• Prudence simply means, one may account for

anticipated losses but not the anticipated gain.• When contract is incomplete, there is an

uncertainty about its future. Hence, we need to make a provision for future contingency, out of the notional profit earned.


Formulae for Transfer to P&L A/c

• If there is a notional loss on the contract :• Transfer entire loss to profit and loss

account.• If future further loss is anticipated and can

be measured, then one should also make a provision for such future losses also.

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Formulae for Transfer to P&L A/c• If there is a notional profit on the contract,

then the amount of profit to be transferred to P&L depends upon the % completion of contract as follows :

• If the contract work has progressed below 25%, then nothing is transferred to P&L. Because it is considered too early to account for the profit. It also means, entire notional profit will remain as provision for future contingency.



• If the contract work has progressed 25% and above, then some profit is transferred to P&L as per the following formula :

1 x Notional Profit x Cash Received3 Work Certified



• If the contract work has progressed 50% and above, then the formula shall be :

2 x Notional Profit x Cash Received3 Work Certified


Formulae for Transfer to P&L A/c• If the contract is nearing completion, i.e. the

work has progressed 90% and above, then the formulae are based on total estimated profit. Total estimated profit can be calculated as :(a) Total contract price xxx(b) Total estimated cost :

cost incurred till date xxxfurther cost of completion xxx xxx

(c) Total estimated profit [ a – b ] xxx


Nearing Completion Contract• There are four formulae :(a) Total Estimated x Work Certified

Profit (TEP) Total contract price

(b) TEP x work certified x cash receivedtotal contract price work certified

(c) TEP x cost incurred till datetotal estimated cost

(d) TEP x cost till date x cash receivedtotal estimated cost work certified


Escalation Clause• It is one of the clauses in the agreement

between Contractor and Contractee.• In fixed price contract, contractor carries a risk of

increase in prices of raw material, labour cost etc. To safeguard himself against the rise in prices in future, he may request the contractee for inclusion of this clause in the agreement.

• By this clause, some of the burden of increase in price is transferred to contractee. It means, contractee will pay extra amount over and above the fixed contract price to cover such increase in cost.

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Escalation Clause• For example – It is agreed between contractor

and contractee that, in the event of increase in cement price beyond Rs. 200 per bag, the contractee will bear 40% burden of such increase in price.

• Let’s further assume that 1,000 bags of cement is consumed @ Rs. 250 per bag. In such case, the increase in cost is [ 1,000 bags x Rs. 50 ] = Rs. 50,000.

• The contractee will pay an extra Rs. 20,000 [i.e. 40% of 50,000] to the contractor, as per escalation clause.


Costing in Service Sector(Operating Costing)

This method of costing is used forcalculating cost and profitability inthe Service industry. E.g. Goodstransport, Passenger transport,Hotels, Hospitals, EducationalInstitutes etc.


Important points to note :1. Identification of Unit of Service

2. Quantification of effective services rendered

3. Uniformity of data

4. Cost Sheet format


Cost Sheet FormatParticulars Per Unit TotalA. Variable Cost :B. Semi Variable Cost :C. Fixed CostD. Total Cost (A+B+C)E. RevenueF. Profit


Process Costing & Operation Costing• This method of costing is used in an industry,

where the goods are produced continuously in various stages.

• These stages of production are known as Processes or Operations.

• Output of previous process becomes the input of next process.

• Cost records are maintained process wise. It means, cost of production is calculated at each stage of production.


Bird’s Eye View

Simple QuestionsInvolving

adjustment ofNormal Loss

Abnormal LossAbnormal Gain

Questions ofEquivalentProductionInvolving

Valuation byFIFO

LIFO andAverage method

Questions ofInter processtransfers at

profitInvolving

Adjustment ofunrealised profit

on stock i.e.Stock Reserve

MiscellaneousQuestions

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Important Formula• Normal Cost Per Unit of Output =

Total Process Cost – Realisable value of normal scrapInput Quantity – Normal Loss Qty.

• The cost per unit so obtained is used for valuation of :• Output transferred to next process• Abnormal loss and• Abnormal gain.


Let’s see how it is presented


Process – I A/cParticulars Qty . Rate Amt. Particulars Qty. Rate Amt.

To Input RM To Other material To direct wages To Prod OH (100% of wages)

Total

1,000

1,000

6 6,000

5,200

4,000

4,000

19,200

By Normal loss(1000 5%)By output trans. to process II a/c

Total

50

950

1000

4 200


Working Notes :1) Calculation of cost per unit of output :

Total process cost - Realizable value of (RM + labour +OH) normal loss

= Input (Qty) – normal loss (Qty)

Process I = 19,200 – 2001000 – 50

= Rs. 20 per unit


Process – I A/cParticulars Qty Rate Amt. Particulars Qty Rate Amt.

To Input RM To Other material To direct wages To Prod OH (100%)

Total

1,000

1,000

6 6,000

5,200

4,000

4,000

19,200

By Normal loss(1000 5%)By output trans. to process II a/c

Total

50

950

1000

4

20

200

19,000

19,200


Process II A/cParticulars Qty Rate Amt. Particulars Qty Rate Amt.

To Input recd. from process I

To Material To Wages To Prodn.

OH

Total

950

950

20 19,000

3,9606,000

6,000

34,960

By Normal loss (950 10%)

By Output trans. to process III

By Abnormal loss a/c

Total

95

840

15

950

8

40

40

760

33,600

600

34,960

Process Il = 34,960 – 760950 – 95

= Rs. 40 per unit

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Process III A/cParticulars Qty Rate Amt. Particulars Qty. Rate Amt. To Input recd. from process II To Direct

material To Direct wages To Prodn OH To Abnormal

gain a/c

Total

840

36

876

40

76

33,600

5,9248,0008,000

2,736

58,260

By normal loss (840 15%)By Out put trans. to finished goods

Total

126

750

876

10

76

1,260

57,000

58,260

Process Ill = 55,524 – 1,260840 – 126

= Rs. 76 per unit


Let’s see an example of equivalent units( just try to remember these figures )

• Opening WIP = 2,000 unitsMaterial cost (100%) = Rs. 7,500Labour cost (60%) = Rs. 3,000Overheads (60%) = Rs. 1,500

• Units introduced into the process = 8,000• Cost incurred during the period :

Material cost = Rs. 1,00,000Labour cost = Rs. 78,000Overheads = Rs. 39,000


• Units completed and transferred to next process is = 8,000 units

• Closing WIP = 2,000 unitsMaterial cost = 100% completeLabour cost = 50% completeOverheads = 50% complete

• We will solve it by all the 3 methods –


Particulars ( FIFO Basis )

Total units

Equivalent units Material Labour & OH

% Units % Units Input :Opening WIP Units introduced Total input Output :a) Units completed & trans. Out of opening WIP Out of fresh input

Sub-total (a)b) Closing WIP (out of fresh)

Total

2,0008,000

10,000

2,0006,0008,0002,000

10,000

-100%

100%

-6,000

2,000

8,000

40%100%

50%

8006,000

1,000

7,800

1) Statement of equivalent production :


Particulars Material Labour Overhead Total Cost incurred during

the period () Equivalent units

Cost per Eq. unit

1,00,0008,000

12.50

78,0007,800

10.00

39,0007,800

5.00

217,000-

27.50

2) Statement of cost :


Particulars Rs. Rs. A) Units completed & transferred

(i) Out of opening WIP - Cost already incurred Cost incurred now

Labour & OH (800 15)(ii) Out of introduced

(6,000 units Rs. 27.50) Subtotal (A) B) Closing WIP :

Material (2,000 units Rs. 12.50)Labour (1000 units Rs. 10)Overheads (1000 units x Rs. 5)

Total (A + B)

12,000

12,000

25,00010,0005,000

24,000

1,65,0001,89,000

40,0002,29,000

3) Allocation of cost :

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Particulars Qty Rate Amt Particulars Qty Rate Amt To Opening WIPTo Units introducedTo Labour To Overhead

Total

2,000

8,000

10,000

12,000

100,000

78,00039,000

229,000

By Units completed & transferred

By Closing WIP

Total

8,000

2,000

10,000

WN 3(A)

WN 3(B)

189,000

40,000

229,000

4) Process A/c (FIFO Method)


Particulars Total units

Equivalent units Materials Lab. & OH% Units % Units

Input:Opening WIP Units brought into process Total input Output :a) Units completed & trans.

Out of fresh input

b) Closing WIP :Out of opening WIP

Total

2,0008,000

10,000

8,000

2,000

10,000

100%

-

8,000

-

8,000

100%

(10%)

8,000

(200)

7,800

1) Statement of equivalent production : [ LIFO Method ]


Particulars Material Labour Overhead Total Cost incurred during

the period () Equivalent units

Cost per Eq. unit

1,00,0008,000

12.50

78,0007,800

10.00

39,0007,800

5.00

217,000-

27.50



Particulars Rs Rs A) Units completed & transferred

(8,000 units Rs. 27.50)

B) Closing WIP : [ Out of OP. WIP ] Cost already incurred

( 7,500 + 3,000 + 1,500) Cost incurred now

Labour ( 200 x 10)Overhead ( 200 x 5 )

Total

12,000

(2,000)(1,000)

2,20,000

9,000

2,29,000




Total

2,000

8,000

10,000

12,000

100,000

78,00039,000

229,000


By Closing WIP

Total

8,000

2,000

10,000

WN 3(A)

WN 3(B)

220,000

9,000

229,000

4) Process A/c (LIFO Method)


Particulars( Average cost method)

Total units

Equivalent units Materials Lab./OH

% Units % Units Input:Opening WIP Fresh Input

Total input

Outputa) Units completed & trans.

b) Closing WIP

Total

2,0008,000

10,000

8,000

2,000

10,000

100%

100%

8,000

2,000

10,000

100%

50%

8,000

1,000

9,000

1) Statement of equivalent production : [Average Method]

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Particulars Material Labour Overheads Total Cost of Opening WIPCost incurred during the year

Total Cost() Equivalent units

Cost per equivalent unit

7,500100,000

107,50010,000

10.75

3,00078,000

81,0009,000

9.00

1,50039,000

40,5009,000

4.50

12,0002,17,000

2,29,000-

24.25



Particulars Rs. Rs. A) Units completed & transferred

(8,000 units Rs. 24.25)B) Closing WIP :

Material (2,000 units Rs. 10.75)Labour (1,000 units x Rs. 9)Overheads (1,000 units Rs. 4.50)

Total cost

21,5009,0004,500

1,94,000

35,000

2,29,000




Total

2,000

8,000

10,000

12,000

100,000

78,00039,000

229,000


By Closing WIP

Total

8,000

2,000

10,000

WN 3(A)

WN 3(B)

194,000

35,000

229,000

4) Process A/c (Average Method)


Difference between FIFO/LIFO/Average

(a) Cost of opening WIP is kept separate & taken to the statement of allocation of cost.

(b) Equivalent units of FIFO & LIFO are always equal.

(c) We need the % completion break up of Op. WIP.

(d) We do not need the cost break up of opening WIP.

FIFO & LIFO Method(a) Cost of opening WIP is

added to current cost in the statement of cost.

(b) Equivalent units of Average method are always higher.

(c) We do not need the % completion of Op. WIP.

(d) We need the cost break up of opening WIP.

Average Method


Let’s see the presentation of Inter process profit questions


Process I A/c

10,00020,00015,00045,000(5,000)40,00014,00054,00018,000

72,000

--------

*18,000

18,000

10,00020,00015,00045,000(5,000)40,00014,00054,000

-

54,000

To Opening stockTo Direct MaterialsTo Direct WagesPrime cost of productionLess : Closing StockPrime cost of transferTo Production overheadsTotal cost of transferTo Costing P & L A/c*( 25 / 75 x 54,000 )By Transfer to Process II A/c

TotalProfitCostParticulars

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Process II A/c

12,00072,00021,00015,000

1,20,000(6,000)

1,14,0006,000

1,20,00030,000

1,50,000

2,00018,000

--

20,000*(1,000)

19,000-

19,00030,000

49,000

10,00054,00021,00015,000

1,00,000(5,000)

95,0006,000

1,01,000-

1,01,000

To Opening StockTo Input recd. from process ITo Direct MaterialsTo Direct WagesPrime cost of productionLess : Closing Stock*[ 20,000 / 1,20,000 x 6,000 ]Prime cost of transferTo Production OverheadsTotal cost of transferTo Costing P & L A/c*( 20 / 80 x 1,20,000 )By Transfer to Process III A/c



Process III A/c

8,0001,50,000

30,00016,000

2,04,000(4,000)

2,00,00040,000

2,40,00060,000

3,00,000

2,00049,000

--

51,000*(1,000)

50,000-

50,00060,000

1,10,000

6,0001,01,000

30,00016,000

1,53,000(3,000)

1,50,00040,000

1,90,000-

1,90,000

To Opening StockTo Input recd. From process IITo Direct MaterialsTo Direct WagesPrime cost of productionLess : Closing Stock*[ 51,000/ 2,04,000 x 4,000]Prime cost of transferTo Production OverheadTotal cost of transferTo Costing P & L A/c( 20/80 x 2,40,000 )By transfer to Fin. goods A/c



Finished goods A/c

30,0003,00,000

3,30,000(15,000)

3,15,0003,500

3,18,50031,500

3,50,000

11,0001,10,000

1,21,000*(5,500)

1,15,500-

1,15,50031,500

1,47,000

19,0001,90,000

2,09,000(9,500)

1,99,5003,500

2,03,000-

2,03,000

To Opening StockTo Finished goods recd. from process III A/cTotal goods available for saleLess : Closing Stock*[1,21,000 / 3,30,000 x 15,000]Cost of goods soldTo Selling overheadsCost of SalesTo Costing P & L A/c (Bal. fig.)By Sales A/c



Costing Profit & Loss A/c

2,0002,000

11,000

18,00030,00060,00031,500

1,54,500

By Op. St. reserve b/dProcess 2 A/cProcess 3 A/cFinished goods A/c

By Profit earned :Process 1 A/cProcess 2 A/cProcess 3 A/cFinished Goods A/c

Total

1,47,000

1,0001,0005,500

1,54,500

To Actual realised profit ( Bal. fig.)

To Closing Stock reserve c/d :

Process 2 A/cProcess 3 A/cFinished Goods A/c

Total

AmountParticularsAmountParticulars


Stock Valuation for Balance Sheet purposes :

5,000

5,000

3,000

9,500

22,500

5,000Nil

6,000(1,000)

4,000(1,000)15,000(5,500)

Stock of process 1Less : Stock ReserveStock of process 2Less : Stock ReserveStock of process 3Less : Stock ReserveStock of Finished goodsLess : Stock Reserve

Total Stock

Rs.Rs.Particulars


Joint Product, By-Product Costing

• This method of costing is used in an industry, where multiple products emerge out of a common process.

• These multiple products are either known as Joint Products or By Products.

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Joint Product, By-Product Costing• The products whose economic value is higher

are known as joint products and those products whose economic value is lower are known as by products.

• Joint Products can also be called as Major Products or Main Products and

• By Products are called as Minor Products or Subsidiary Products.

• It is judgement of management to treat some of the products as joint products and some of them as by products.


Some Important Concepts

• Joint cost = cost up to split off point = cost up to separation point = common cost

• Further processing cost = cost incurred after split off point = cost incurred after separation point = separate cost

• Net realisable value (NRV) = Final sale value – further processing cost.


Accounting of By-Products

Joint Cost :Material 50,000Labour 30,000Overheads 20,000Total 1,00,000

Product ‘A’ – Joint Product

Product ‘B’ – Joint Product

Product ‘C’ – By Product







Other Income Method – i.e. cr. to P&L account







Credit of sale value to joint cost







Credit of net sale value to joint cost i.e. NRV

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Reverse Cost Method i.e. Gross sale value – estimated profit –further processing cost = estimated cost at split off point







Opportunity cost method







Standard cost method i.e. pre determined cost







Any other suitable method.


Accounting of Joint Products• Physical Output i.e. Quantity Method : Let’s

assume that there are only 2 joint products A & B, and we have to distribute joint cost Rs. 98,000.

• If output of A & B is 2,000 units and 3,000 units respectively, then the joint cost shall be distributed in the ratio of 2 : 3.


Accounting of Joint Products• Relative Sale Value Method : It is the most

popular and logical method of apportionment of joint cost.

• Sale value is calculated as [selling price x output quantity].

• Let’s see the logic, why sale value method is the most preferred method.

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An Example

30,0001,00,000Sale value1050Sales price per unit

3,0002,000Output QuantityProduct ‘B’Product ‘A’Particulars


Accounting of Joint Products• Relative Sale Value Method :• It has 4 different variations -1. Final sale value method2. Net realisable value method (NRV)3. Actual sale value at separation point4. Reverse cost method


Accounting of Joint Products

• Technical Evaluation or Survey Method

• Marginal cost and contribution method


Cost Ledger Accounting• This topic can be divided in to 3 parts :1. Pure Cost Ledger Accounting i.e. Non-

Integrated Accounts. Only Nominal Accounts are maintained i.e. Revenue and Cost accounts are kept.

2. Integrated Accounting System. Personal, Real and Nominal, all accounts are maintained.

3. Reconciliation of Profit as per Cost Records and Financial Records.


Cost Ledger Accounts


Stores Ledger Control Account

TotalTotal

By closing stock c/d

To GLA –Purchase Exp.

By Factory OH –indirect material

To GLA -Purchases

By WIP – direct material

To opening stock b/d

Rs.Particulars Rs.Particulars

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Wages Control Account

TotalTotal

By Factory OH –indirect wages

By WIP – direct wages

To GLA – wages incurred



Factory Overheads Control Account

TotalTotal

To GLA – indirect expenses

To Wages A/c –indirect wages

By WIP – Factory OH absorbed

To Stores Ledger - indirect material



Work in Progress Control Account

By Closing WIPFOHTo Factory OHDETo GLA

TotalTotal

(Factory cost of FG)DLTo Wages A/c

By Finished Goods A/c

DMTo Stores ledger To Opening WIP



Administration OH Control Account

TotalTotal

By Finished Goods A/c – Ad. OH absorbed

To GLA – Admn. overheads incurred



Finished Goods Control Account

TotalTotalBy closing stockTo Admn. OH

By Cost of Sales A/c – COGS

To WIP A/c –factory cost of FG

To opening stockRs.Particulars Rs.Particulars


Selling & Dist. OH Control Account

TotalTotal

By Cost of Sales A/c – S&D OH absorbed

To GLA – S & D overheads incurred


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Cost of Sales Account

To S & D OH A/cTotalTotal

By Costing P&L A/c – transfer of cost of sales

To Finished Goods A/c –COGS



Sales Account

TotalTotal

By GLA A/c –actual sales

To Costing P&L A/c – transfer



Costing Profit & Loss Account

TotalTotal

To GLA A/c –transfer of profit

By Sales A/cTo Cost of Sales A/c



General Ledger Adj. A/c (GLA)

Particulars Rs. Particulars Rs.

To Sales By bal. b/dBy Stores Ledger

By Wages A/c

By Factory OHBy Admn. OHBy S & D OH

To balance c/d By Costing P&LTotal Total


Integrated Ledger Accounts• Under Integrated accounting system, we

merge the cost accounts with financial accounts.

• We maintain all the types of accounts i.e. Personal, Real and Nominal accounts.

• GLA A/c is replaced by respective accounts like Cash, Bank, Debtors, Creditors, Fixed Assets etc.


Standard Costing & Variance Analysis• It is a technique, which is popularly used

for cost control.

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Types of VariancesVariances are

of 3 types

Sales Variances Cost Variances Profit Variances[ C.A. Final ]

Labour Cost Variable OH Fixed OHMaterial Cost

Note : Profit Variances are in C.A. Final Syllabus.


Summary of Material Cost Variances

Total Cost Variance= (SQ x SP) – (AQ x AP)

Price Variance= AQ x (SP – AP)

Usage Variance= SP x (SQ – AQ)

Mix Variance= SP x (SM – AM)

Sub-Usage= SP x (SQ – SM)

AM = Actual Qty. Consumed and

SM = Actual Total Qty. consumed revised in standard proportion.


Circular Tally™

SQ x SP AQ x AP

AQ x SP

Cost Variance

Price VarianceUsage Variance


Circular Tally©

SQ AQ i.e. AM

AQ revised i.e. SM

Usage Variance

Mix VarianceSub-usage Variance

SP


Key Points1. In case of Mix Variance, if actual mix (i.e. actual

quantity consumed) is more than standard mix, then the variance is adverse else it is favourable.

2. In case of Sub-usage variance, if standard mix (calculated from actual quantity) is more than standard quantity, then it is adverse else it is favourable.

3. In case of mix variance, total quantity consumed is same, but difference is due to mixing proportion.

4. In case of sub-usage variance, mixing proportion is same, but the difference is only due to quantity.


Labour Cost Variances

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Summary of Labour Cost VariancesTotal Cost Variance

= (SH x SR) – (AH x AR)

Rate Variance= AH x (SR – AR)

Efficiency Variance= SR x (SH – AH)

Mix Variance= SR x (SM – AM)

Sub-Efficiency= SR x (SH – SM)


Circular Tally™

SH x SR AH x AR

AH x SR

Cost Variance

Rate VarianceEfficiency Variance


Circular Tally©

SH AH i.e. AM

AH revised i.e. SM

Efficiency Variance

Mix VarianceSub-efficiency Variance

SR


Variable OH Cost Variances


Calculation of Standard Recovery Rates :

• SRR/Unit = Budgeted OverheadsBudgeted Output

• SRR/Hour = Budgeted OverheadsBudgeted Hours


Analysis of V. OH Cost Variance

Cost Variance(SRR/unit x actual output) – Actual OH

Expenditure Variance= (SRR/hr. x actual hrs.) – Actual OH

Efficiency Variance= SRR/hr. (Std. hrs. – Actual hrs.)

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Fixed OH Cost Variances

OH Cost Variance

OH Expenditure VarianceOH Volume Variance

( Output based )

OH Capacity Variance( Hours based )

OH Efficiency Variance


Trick to remember formulae

• First and last variance is same as Variable OH variance i.e. Cost variance and Efficiency variance.

• Rest all the variances are Budget minus Actual.


Fixed OH Cost Variances

OH Cost Variance= (SRR/unit x Actual Output) – Actual Overheads

OH Expenditure Variance= Budgeted OH – Actual OH

OH Volume (output) Variance =SRR/unit x (Budgeted Output –

Actual Output)

OH Capacity (hours) Variance =SRR/hour x ( Budgeted Hours –

Actual Hours )

OH Efficiency Variance =SRR/hour x ( Standard Hours –

Actual Hours )


Sales Variances


Summary

Sales Value Variance(Bud. Qty. x SSP) – (Actual Qty. x ASP)

Sales Price VarianceActual Qty. x (SSP – ASP)

Sales Volume Variance SSP x (Bud. Qty. – Actual Qty.)


Circular Tally™

BQ x SSP AQ x ASP

AQ x SSP

Sales Value Variance

Sales Price Variance

Sales Volume Variance

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Marginal Costing• It is a technique used for managerial

decision making.• This technique recognises only two types

of costs i.e. (1) Variable cost and (2) Fixed cost.

• If there is a semi-variable cost, then it needs to be sub-divided into variable and fixed cost separately.


Division of CostTotal Cost

Prime Cost Overheads

Variable OH Fixed OHVariable cost

Fixed cost


Behaviour of Cost

TotalPer unitTotalPer unit

constantincreasesdecreasesconstantDecrease

constantdecreasesincreasesconstantIncrease

Fixed CostVariable CostProduction


Golden FormulaSales – Variable Cost = ContributionContribution – Fixed Cost = Profit/Loss

We can say that excess contribution over fixed cost is profit and excess of fixed cost over contribution is loss.


One, Two ka Four• Sales – Variable Cost = Contribution

• Sales – Contribution = Variable Cost

• Sales = Variable cost + Contribution


One, Two ka Four• Contribution – Fixed Cost = Profit/(Loss)Assuming there is a profit :• Contribution = Fixed Cost + Profit• Contribution – Profit = Fixed CostAssuming there is a loss :• Contribution = Fixed Cost - Loss• Contribution + Loss = Fixed Cost

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Profit Volume Ratio

• P/V Ratio = Contribution

SalesX 100

Sales

Variable Cost Contribution

Variable Cost Ratio P/V Ratio


Profit Volume RatioThe P/V Ratio formula can be reshuffled to get 2 more

important formulae as follows :

Contribution

P / V RatioSales =

Sales x P/V Ratio = Contribution


Break Even Point (BEP)• It is the point at which there is no profit or no

loss.• It means, at BEP, Total Contribution = Total

Fixed Cost• Management is interested in knowing BEP,

because the first objective of management is to cross BEP.

• A firm starts earning profit only after crossing BEP.

• BEP can be expressed in 3 ways – (a) No. of units, (b) Sale Value Or (c) % capacity.


BEP in No. of Units

Total Fixed Cost=

Contribution per unit


BEP in Sales Value

Total Fixed Cost=

Profit Volume Ratio


BEP in % Capacity

Total Fixed Cost=

Contribution at 1% capacity

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BEP – All in one formula

Total Fixed Cost=

Cont. p.u./PV ratio/cont. at 1% cap.


Volume of Sales required to earn desired profit

Desired profit + total fixed cost=

cont. p.u./PV ratio/cont. at 1% cap.


Profitability at desired level of output

= Total Contribution – Total Fixed Cost= (no. of units x contribution per unit) - Total

Fixed Cost OR= (Sales x P/V Ratio) – Fixed Cost OR= (% capacity x cont. at 1% capacity) – fixed

cost


Margin of Safety (MOS)• It is the sales in excess of BEP sales.• MOS = Total Actual Sales – BEP Sales

• MOS Ratio = MOS Sales x 100Total Actual Sales


Margin of Safety Ratio

Actual Sales

MOS Sales

BEP Sales BEP Ratio

MOS Ratio


Net Profit = MOS Sales x P/V Ratio

Total Sales X P/V ratio

MOS SalesX P/V Ratio

BEP SalesX P/V Ratio

Contribution= Fixed Cost

Contribution= Net Profit

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SalesQty.

Sales @ Rs. 10

Variable Cost @ Rs. 6

Contribution @ Rs. 4

Fixed Cost

Profit TotalCost

10,000 1,00,000 60,000 40,000 25,000 15,000 85,000

15,000 1,50,000 90,000 60,000 25,000 35,000 1,15,000

Diff.5,000

50,000 30,000 20,000 NIL 20,000 30,000

Variable Cost p.u. = Change in Total CostChange in Output


SalesQty.

Sales @ Rs. 10



Fixed Cost

Profit TotalCost

10,000 1,00,000 60,000 40,000 25,000 15,000 85,000

15,000 1,50,000 90,000 60,000 25,000 35,000 1,15,000

Diff.5,000

50,000 30,000 20,000 NIL 20,000 30,000

Contribution p.u. = Change in ProfitChange in Output


SalesQty.

Sales @ Rs. 10



Fixed Cost

Profit TotalCost

10,000 1,00,000 60,000 40,000 25,000 15,000 85,000

15,000 1,50,000 90,000 60,000 25,000 35,000 1,15,000

Diff.5,000

50,000 30,000 20,000 NIL 20,000 30,000

P / V Ratio = Change in Profit x 100Change in Sales


SalesQty.

Sales @ Rs. 10



Fixed Cost

Profit TotalCost

10,000 1,00,000 60,000 40,000 25,000 15,000 85,000

15,000 1,50,000 90,000 60,000 25,000 35,000 1,15,000

Diff.5,000

50,000 30,000 20,000 NIL 20,000 30,000

Variable Cost Ratio. = Change in Cost x 100Change in Sales


Budgets and Budgetary Control• Budget is a quantitative plan of action for

future period.• Budgetary control is a technique of

exercising overall managerial control with the help of budgets.


Types of Budgets• From examination point of view, you are

generally asked to prepare :1. Functional Budgets : i.e. Sales budget,

Production budget, Purchase budget, Manpower budget, Cash budget etc. and

2. Flexible Cost Budgets : i.e. Calculation of cost at various levels of activities. These are based on marginal costing principles.

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Functional Budgets• These are very popular questions.• To solve these questions, first you have to

identify the key factor or budget factor. In majority cases, it is sales.

• Then you have form a linkage between key factor and other dependent budgets like production, material consumption, material purchase, manpower etc.


Important Formulae1. For Finished Goods :

Op. stock + Production – Sales = Clo. Stock Production = Sales + Clo. stock – Op. stock2. For Raw Material :

Op. stock + Purchase – Consumption = Clo. Stock Purchase = Consumption + Clo. Stock – Op. stock


Common Link used in Budget

Sales Budget

Production Budget

Consumption Budget Purchase Budget

Manpower Budget

Master Budget


THANK YOU AND

WISH YOU BEST LUCK FOR

YOUR EXAMS !

IPCC COST ACCOUNTING · CA IPCC CA VINOD KUMAR AGARWAL Save transportation time. Can revise any...

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Transcript of IPCC COST ACCOUNTING · CA IPCC CA VINOD KUMAR AGARWAL Save transportation time. Can revise any...