Cost Accounting

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• Cost means total money, time and resources needed to produce a product or perform a service.

Costing

• The technique and process of ascertaining cost.

• Cost Accounting

• Process of determining and accumulating the cost data of product or service.

• It also cover classification, analysis and estimation of cost.

• Cost Accountancy

• Application of costing and cost accounting principles and methods for cost control and
maximum profitability as well as proper presentation for decision making.

Assist
managemen
t

Determine Objectives of Decision fo


introducing o
product cost cost discarding
& price accounting products

Formulatio
n of
budgets
Advantages of Cost Accounting

• Provides data about profitable & unprofitable product.

• Removing unnecessary cost to reduce wastage.

• Negotiations with labour unions & government.

• Check frauds and manipulations.

• Cost Classification

Fixed
Cost

Cost
Semi
variable or Variabl
semi fixed
e Cost
cost
• Cost Sheet

• when costing information are set out in the form of a statement, it is called cost sheet.

• It is usually adopted when there is only one product is produced and all costs are incurred for
that product only.

• Cost sheet may be prepared for a week, monthly, quarterly or yearly.

• Job Costing

Method applied to determine cost of specific job manufactured according to customers’ specifications

• Advantages of Job Costing

• Better Control Over Cost

• Apply Corrective Measures So Quickly

• Proactively Respond to Changes

•  Easy to Calculate Overheads for Specific Job

• Helps the Company in Avoiding Duplication of Work

• Process Costing

• Raw material moves from one process to another till it reaches to final stage.

• The cost of each process is recorded in a separate account called Process A/c.

• Procedure of Process Costing

• Each process account is debited with material, labour, overheads and other expenses.

• Output of one process is transferred to next process.

• Output of one process becomes input of another process.

• Process Losses & Wastages

• Normal Loss: When loss cant be avoided on account of nature of material or its process.

• Example: Goods taken as a sample, evaporation, defective units, metal turnings.

• Abnormal Loss: Actual loss exceeds normal loss.

• Normal Loss = Input x % of normal loss

• Normal output = Input – normal loss


• Unit cost = Cost of process – sales value of normal loss/ Input – normal loss

• Abnormal loss = Normal output – Actual output

• Abnormal gain = Actual output – Normal output


• Marginal Costing

• Marginal Cost : Var cost incurred for producing extra units of output.

• Only variable cost is considered.

• The cost which can be avoided if that unit may not produced.

• Fixed overheads are not considered & written off to costing P&L Account.

• It is also known as variable costing.

Mainly used in valuation of inventories & COGS

• Basic Formula

Sales

Less variable cost

Contribution

Less fixed cost

Profit
• Sales = variable cost + fixed cost + profit
• Sales – variable cost = contribution
• Sales – variable cost = fixed cost + profit
• Contribution = fixed cost + profit
Contribution – fixed cost = profit
• Advantages
• Profit planning
• Pricing decisions
• Cost control
• Make or buy decisions
• Profit Volume Ratio
• Effect on profit of changes in volume and type of output.
• Sales, variable cost & contribution directly vary with no. of units.
• Thus there is direct relationship between volume, variable cost and contribution which indicated
by PV Ratio.
• PV Ratio Indicates
• Contribution per rupee of sales.
• Rate at which profits are earned.
• High PV Ratio means high profits.
• Assist management in important decisions like changes in production or sales policies

• PV Ratio Will Be Higher If
• Sales value is high.
• Variable cost is low.
• Total contribution from all products is large
• Profit volume ratio = contribution/sales x 100
• OR
• Change in profit/change in sales x 100
• Break Even Point
• BEP = total cost = total revenue.
• i.e. no profit no loss situation.
• Below BEP organization make losses.
• Above BEP organization start its earnings
• BEP in units = Fixed Cost/Contribution Per Unit
• BEP in Rs. = Fixed Cost/Contribution Per Unit x Sales
• OR
• Fixed Cost/ PV Ratio
• Margin of Safety
• Difference between actual sales and break even sales.
• Indicates soundness of business.
• When MOS is large business can still make profits after a serious fall in sales.
• Margin of Safety (Rs.)= Actual Sales – Break Even Sales in Rs.
• Margin of Safety (units)= Actual Sales – Break Even Sales in units.
• Profit / PV Ratio.

• Costing in Service Sector

• Technique to find out cost per service offered.

• Suitable only for service organisations.

• Utility is for both internal as well as external purposes.

• Service cost centers need to established.



• Transfer Pricing

• Transfer of goods & services from one division to another division.

• Divisions of take joint responsibility for

 Product development,

 Manufacturing & marketing

Revenue Sharing

• It is strategic decision because it is revenue to selling & cost to buying division.

• If selling division charge higher price its profit will rise but buying division will lose.

• Hence divisional profitability will affected not overall profit of organization because one is
loosing but one is earning also.

• Decision Making

• Make or buy decision: Company should decide to produce by itself or outsourced.

If it is produced by itself at what price it should transfer between profit centers

• Features of Transfer Pricing

• Optimal allocation of resources.

• Accurate measurement of divisional performance.

• Decision should be in the best interest of organization.

It should simple to calculate.

• Objectives of Transfer Pricing

• Trade-off between company cost & revenue.

• Increase divisional & company profits with performance.

• Induce goal congruence between divisional goals & organizational goals.

• Necessary Conditions for Transfer Pricing

• Competent people should deal.

• Focus on overall profitability.

• Transfer price = Market price of identical product.


• Transfer price would benefit of excise duty & sales tax

• Types of Transfer Pricing

• Market based transfer price

• Cost based transfer price

• Market Based Transfer Pricing

• Market price exist when heavy competition exist in external market.

• No distinction within purchases made inside or outside.

• Buying & selling divisions are indifferent to trade internally or externally.

• Divisional profits will be the same internally or externally.

• Cost Based Transfer Price

• Based on cost + profit

• Complex but satisfactory than market price.

• How to define cost & profit mark up is imp.


• Cost Audit

• Done under sec 233B.

• Companies maintain cost records as per sec 209(1)(d) of companies act, 1956.

• Member of Institute of Cost & Works Accountants of India (ICWAI) can become cost accountant.

Appointed by BODs

• Objectives of Cost Audit

• Detecting errors & prevent frauds

• Records are properly maintained as per industry principles

• Cost control mechanism

Policy formulation & decision making

• Areas Investigated

• Material

• Procedure involved in purchase and store

• Analysis of scrap, wastage or loss of materials

• Pricing methods followed

Physical stock available

• Inventory

• Size of inventory – excess or adequate

• Storage cost

• All material issues are authorized??

• Stocks lying in production dept

• Stores are physically checked or not

• Closing stock valued correctly or not

• System of scrap and waste treated in costing


• Treatment of surplus materials.

• Work in Progress

• WIP physically verified with job cards

• Valuation is done as per job cost sheet

• Duration of goods lying in semi finished form

• Under – valuation of opening or closing WIPs are checked

• Volume of WIP and finished goods are as per planned or not

• Labour

• Attendance records, time spent on jobs & wages paid.

• Calculation of overtime & payroll

• Reduction in labour cost

• Labour efficiency = improving productivity.

• Recruitment process and training

• Verification of overtime cost, its calculation & authorization

• Reduction in Idle Time

Checking payment system of wages

• Opening Stock

• Yearly volume

• Physical stock and stock reflected in books

• Production incharge is responsible for all stock records

• Closing Stock

• Volume of unsold stock compare with last years records

• Sales & production budgets are checked

• Schedule of goods moving from store to production shops

Transfer vouchers of goods and scrap records


• Overheads

• Proper classification in factory, admin & selling

• Amount of overheads is consistent with volume of production and sales

• Budgetary control mechanism

• Checking actual vs budgeted

Mechanism of WIP

• Capital Expenditure

• Treatment of expenses for fixed assets

• Physical verification of fixed assets

• Depreciation methods and rates

• Profitability of the project

• Procedure of Cost Audit

• Vouching

• Checking calculations & totalling

• Audit questions to concerned persons

• Audit report & certificate with suggestions submitted

• Types of Cost Audit

• Statutory cost audit

• Voluntary cost audit

• Statutory Cost Audit

Conducted under the order of the govt if:

 production is hampered due to dishonest management

 When industry requires protection

 When orders are placed cost + contract system

 Voluntary Cost Audit


Conducted under following conditions:

 On labour demand for bonus, fair wages etc.

 Review cost records

 Check departmental performance

 To maintain same costing system in different divisions of same organisation

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