Costing It is the techniques and process of ascertaining costs.

Cost Accounting It is a specialised branch of accounting which involves classification, accumulation,

assignment and control cost.

General principles of cost accounting

1. A cost should be related to its causes.

2. A cost should be charged only after it has been incurred.
3. The convention of prudence should be ignored.
4. Abnormal costs should be excluded from cost accounts.
5. Past costs not to be charged to future period.
6. Principles of double entry should be applied wherever necessary.

Objectives of cost accounting

1. To ascertain cost per unit of different products.

2. To provide correct analysis of costs.
3. To ascertain profitability of each product.
4. To advise management on future expansion policies.
5. To provide a perpetual inventory of stores and other materials.

Difference between financial accounting and cost accounting

Financial Accounting Cost Accounting

The purpose of financial accounting is to The purpose of financial accounting is
keep complete record of the financial reducing and controlling cost
transactions.
These are accounts of whole business. It is only a part of whole accounts
Valuation of stock at cost or market price. Valuation of stock at cost price
Financial accounting are concerned with Cost accounting are concerned with
external transactions internal transactions
Only historical costs are recorded. Both historical and predetermined costs
are recorded.
It discloses net profit and loss of the It discloses profit and loss of each
business. product, job or service.

Difference between cost accounting and management accounting

Cost Accounting Management Accounting

It is used for cost control and cost It is used for managerial decision making.
reduction.
The scope of cost accounting is narrow. The scope of management accounting is
broader.
It considers only quantitative data. It considers both quantitative and
qualitative data.
It is used for management, shareholders It is only for management.
and vendors
Statutory audit is mandatory for big No statutory audit requirement.
business.
Cost accounting is restricted to cost It uses financial as well as cost accounting
related data. data.
Importance of cost accounting

1. Cost accounting helps in making estimates.

2. It eliminates wastage.
3. It makes comparison possible.
4. It helps in inventory control.
5. It provides data for periodical profit and loss account.
6. It helps in determining efficiency.
7. It provides continuous employment and high remuneration to employees.

Cost unit The unit cost is the price incurred by a company to produce, store and sell one unit of a
particular product.

Cost Centre It is the smallest organisational sub unit for which separate cost collection is attempted.

Profit centre It is a business unit or segment that generates revenues and incurs cost.

Difference between profit centre and cost centre

Profit Centre Cost Centre

These are autonomous. These are not autonomous.
It is created because of decentralisation It is created for accounting convenience
of operations. of cost and their control.
Profit centres has a profit target. Cost centres does not have target cost.

Cost Classification

1. Direct Cost Direct costs are those costs which are incurred for a particular product which
can be identified with a particular cost centre to cost unit.
2. Indirect cost Indirect costs are those costs which are incurred for the benefit of a number
of cost centre and cannot be identified with a particular cost centre.
3. Fixed Cost Fixed costs are predetermined costs that remains same throughout a specific
period.
4. Variable cost It is a cost that changes the quantity of goods and services that business
produces changes.
5. Semi variable cost These are costs which are partly fixed and partly variable.
6. Product cost These are those costs which are traceable to the product.
7. Period cost These are those costs which are incurred for a period and treated as expense.

Types, Methods and Techniques of costing

1. Job Costing It refers to a system of costing in which cost are ascertained in terms of specific
jobs or orders which are not comparable with each other.
2. Process costing It is a method of costing used mainly in manufacturing where units are
continuously mass produced through one or more processes.
3. Unit costing The unit cost is the price incurred by a company to produce, store and sell one
unit of a particular product.
4. Operating costing It is the mix of job costing and process costing. This method is applicable
where services are rented rather than goods produced.
Elements of costing
1. Direct material It refers to the raw materials that are directly used in the production
process of goods and services of the company.
2. Indirect material Indirect material are those material that are used in the production
process but that are not directly traceable to the product. Eg: Glue, oil, tape,
cleaning supplies, etc.
3. Direct labour It is the amount of effort exerted by employees to convert raw
materials into finished goods.
4. Direct expenses It is the expense that is related to the purchase of product.
5. Overhead It is the aggregate of the cost of indirect material, indirect labour and such
other expenses.

Cost sheet
When costing information is set out in the form of a statement, it is called cost sheet or
statement of cost.
Inventory
It is the raw material used to produce goods as well as the goods that are available for sale.

Perpetual inventory system

A system of records maintained by the controlling departments which reflects the physical
movements of stock and their current balance.
Advantages of perpetual inventory system

1. Quick valuation of closing stock.

2. Lesser investment in materials.
3. Helpful in formulating proper purchase policies.
4. Adequacy of working capital.
5. Immediate detection of theft and leakages.
6. Beneficial in ascertaining efficiency of stores organisation.
Bill of materials A bill of material is centralised source of information used to manufacture
a product.

Material inspection note It is a report prepared by the inspection department after

inspecting the material received.
Continuous stock taking It means stock taking is conducted on regular basis.
Advantages of continuous stock taking
1. Improved stock management
2. Prevent unnecessary wastage and losses.
3. Improved stock management.
4. No need to shut down operations.
5. Eliminate delay in production and delivery.
Purchase order
It is a legal document by a buyer send to a supplier or vendor to authorise a purchase.
Prime cost

Prime cost is the total direct cost of production including raw materials and labour.
Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as economic order quantity.
Bin Card

It is the record maintained under the perpetual inventory system by the stores department
and shows the quantities of the materials received, issued and balance. It is also known as
stock card.
Stores Ledger

It is a ledger which provides information for the pricing of material issued and the money
value at any time of each items of stores.
ABC analysis
It is an inventory management technique that determine value of inventory items based on
their importance to business.

VED analysis
It is an inventory management technique that classifies inventory based on its functional
importance.
JIT (Just In Time)

It is an inventory management method whereby labour, material and goods are scheduled
to arrive exactly when needed in the manufacturing process.
Reordering level
It is that point of level of stock of a material where the storekeeper starts the process of
initiating purchase requisition for fresh supplies of that materials.
Safety lock level
It is also known as minimum level. It is the minimum quantity of material which must be
maintained in hand at all times.

Maximum level
It is the maximum of stock which should be held in stock at any period of year
Danger level
It is a level of stock at which normal issue of materials are stopped and issues are made only
under specific instructions.

FIFO (Fist In First Out)

Under this method, material received first are issued first.
Applicability of FIFO
1. Increased warehouse space.
2. Keeps stock handling to a minimum.
3. Enhanced quality control.
4. Warranty control.
5. Warehouse operations are more streamlined.

LIFO (Last In First Out)

Under this method, material received last are issued first.
Time keeping
It is the process of tracking and reporting work and leave time.
Time Booking

It is the recording of time spend by the workers on different jobs or work.

Object of time booking
1. To ensure the time spend by a worker in a factory.
2. To ascertain labour cost of each individual job.
3. To ascertain unproductive time or ideal time.
4. To know the efficiency of workers.
Ideal time
There is a difference between the time booked to different jobs or work orders and time
recorded at the factory gate. This difference is known as ideal time.
Over time
It is the work done beyond the normal working period in a day or week.
System of wage payment
1. Time wage system
Under this method of wage payment, the workers is paid at an hourly, daily, weekly
or monthly rate.
Disadvantages of Time wage system
a. Workers are not motivated.
b. Strict supervision negatively affect.
c. workers will get payment for idle time.
d. It encourages go slow of work.

2. Piece rate wage system

Under this system of wage payment, a fixed rate is paid for each unit produced, job
completed or an operation performed
Advantages of piece rate wage system
1. Workers are paid according to their merits.
2. Workers are motivated to increase production.
3. Profit per unit increases.
4. Idle time is minimized.
5. The employer can make quotations confidently.
6. Less case of defective tools and machinery.
7. Less supervision is required.
8. Inefficient workers are motivated to become efficient.
Halsey Premium Plan:
Under this method, the worker is given wages for the actual time taken and a bonus equal
to half of wages for time saved.
Advantages of Halsey Premium Plan
a. It is simple to calculate.
b. It guarantees time wages to workers.
c. Helpful in reducing labour cost per unit.
d. It motivates efficient workers.
e. Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
a. Quality of work suffers.
b. Workers criticize this method on the ground that the employer gets a share of wages
of the time saved.
Rowan Plan:
Under this method bonus is that proportion of the wages of the time taken which the time
saved bears to the standard time allowed.

Advantages of Rowan Plan

1. It guarantees time wages to workers
2. The quality of work does not suffer
3. Labour cost per unit is reduced.
4. Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
1. Workers do not get the full benefit of the time saved by them.
2. Very efficient and not so efficient workers may get the same bonus.

Machine hours rate

It is the hourly cost in terms of factory overheads to operate a particular machine.
Tenders or Quotation
It is an offer made by a person to supply certain goods at a specified price.
Classification of overhead

1. Function wise classification

a. Manufacturing overhead
It is the total cost involved in operating all production facilities of a
manufacturing business. It is also called factory overhead or work overhead.
b. Administrative overhead
It is the general business expenses not related to production, marketing or
research costs.
c. Selling and distribution overhead
The expenses incurred by an organisation in carrying out its selling activities.
2. Behavioural wise classification
a. Fixed overhead
It is a set of cost that do not vary as a result of changes in activity.
b. Variable overhead
It is a cost of operating a firm that fluctuate with the level of business or
manufacturing activity.
c. Semi variable overhead
It is a cost composed of a mixture of both fixed and variable components.
Job Costing
It means ascertaining costs of an individual job, work order or projects separately.
Features of job costing

a. job is treated as unit.

b. A separate job cost sheet is made out for each job.
c. The duration of the job is usually a short period.
d. A separate working progress ledger is maintained for each job.
e. Profit or loss is determined for each job independently.
Advantages of job costing
a. It helps to control future cost.
b. It helps to distinguish profitable jobs from unprofitable jobs.
c. It helps to identify defective works.
d. Selling prices of special orders can easily be fixed.
Contract Costing
It is a form of specific order costing in which cost are attributed to individual contracts.
Work in progress

It is the unfinished contract at the end of the accounting period and it includes amount of
work certified and amount of work uncertified.
Work certified
The sales value of work completed as certified by the architect is known as work certified.

Work uncertified
It means work which has been carried out by the contractor but has not been certified by
the architect.
Retention money

The unpaid balance of work certified or the amount held back or retained by contractee is
known as retention money.
Normal process loss
This is the loss which is unavoidable on account of inherent nature of production process

Abnormal process loss

Any loss caused by unexpected or abnormal conditions such as plant break down,
substandard material, accident etc. Such loss are called abnormal process loss.
Abnormal gain
It is the excess of actual production over normal output. It is also called abnormal effective.
Operating costing
It is the method of costing designed to find out cost of operating or rendering a service. It is
also called service costing.

Process costing Process costing is the method of costing used to ascertain the cost of a
product at each process.
Features of process costing
1. Production is continuous.
2. Products are standardised.
3. Products are homogeneous.
4. Products passes through two or more process.
5. Products are not distinguishable in processing stage.
6. The finished products of one process becomes the raw materials of the
subsequent process.
Advantages of process costing
1. It is easy to compute average cost.
2. It is simple.
3. It is less expensive.
4. It is possible to ascertain the process cost at short intervals.
Disadvantages of process costing
1. Process cost are only historical.
2. Difficult to value losses, waste, scrap etc.
3. Difficult to value work in progress.
4. These are not accurate. It’s only an average cost.

Difference between process costing and job costing

Process costing Job costing

Production is continuous Production according to customers
order
Production is for stock. Production is not for stock
Work in progress always exist. Work in progress may or may not
exist
All units produced are Each job is different.
homogeneous
There is a regular transfer of cost of There is no such transfer
one process to another process
Budget

A financial plan expressed in terms of money is called budget.

Budgeting

A process of preparation, implementation and operation of budget is called budgeting.

Objectives of budgetary control

1. To control activities.
2. To evaluate performance of managers.
3. To motivate managers.
4. To eliminate wastes.
5. To aid the planning of annual operation.
6. To coordinate activities of the organisation.
7. To communicate plans with responsibility centre managers.

Steps involved in budgetary control

1. Setting up of organisational goals.

2. formulating plans for achieving goals.
3. Translating plans into budget.
4. Relating the responsibility of executives to the requirements of a policy.
5. Recording and reporting actual performance.
6. Continuous comparison of actual with budget.
7. Find out deviations.
8. Focusing attention on significant deviations.
9. Find out the reasons for deviations.
10. Presentation of information to the management.
11. Taking corrective action.
12. Revision of budgets.

Essentials of budgetary control system

1. Support by top management 4. Budget committee.

2. Formal organisation. 5. adequate accounting system
3. Clear cut objectives. 6. Periodic reporting

Zero based budgeting (ZBB)

It is a recent trend in budgeting and it starts from zero base. It is particular used of service
departments and government.

Advantages of ZBB

1. starts from zero.

2. It is useful for service department and government.
3. it ensure active participation of managers.
4. It helpful to management in making optimum allotment of scarce resources.
5. It promote high level of motivation at the level of unit managers.
Budget Manual

It is a written document which guides the executives in preparing various budgets.

Budget period

A period for which a budget is prepared and employed is called budget period.

Classification of budget

1. Classification according to time

a. Long term budget A budget for a period of five to ten years is called long term budget.
b. Short term budget A budget for a period of one to two years is called short term budget.
c. Current budget A budget covers a period of one month is called current budget.

2. Classification according to flexibility

a. Flexible budget It is a dynamic budget. It gives different budgeted cost for different level of
activity.
b. Fixed budget It is a budget does not change with changes in the level of activity.

3. Classification according to function

a. Functional budget Functional budgets are those which are prepared by heads of functional
departments for their respective departments. It is also called operating budgets or financial
budgets.
b. Master budget It is the summary of all budgets. It summarises sales, production, purchases,
fiancé, labour etc.

Types of functional budgets

1. Sales budgets It forecast the total sales expressed in quantities and money. It is
prepared by the sales manager.
2. Production budget It is the forecast of the quantity of production for the budget
period.
3. Material budget It shows the estimated quantity of raw material required for the
production for a budget period.
4. Purchase budget It shows the quantity of different types of materials to be
purchased during the budget period.
5. Cash budget IT is a statement showing cash inflows and cash outflows over the
budgeted period.

Standard Costing

It is defined as a benchmark measurement of resource usage, set in defined conditions.

Objectives of standard costing

1. Performance measurement. 4. Establishing selling prices

2. Cost control.. 5. Profit planning
3. stock valuation 6. Decision making.

Analysis of variance

It is the difference between standard cost and comparable actual cost incurred during a period.
Difference between traditional budgeting and ZBB

Traditional budgeting ZBB

Begins with previous year budget. Begins with zero, a base.
Focus on money. Focus on goals and objectives
Prepare annually Prepare once in every five years
Produces a singe level of expenditure Produces alternative level of
for an activity expenditure.
Resources are allotted not on the basis Resources are allotted on basis of cost
of cost benefit analysis benefit analysis

Difference between standard costing and budgetary control

Budgetary control Standard costing

It is based on past performance. It is based on technical estimate.
I fix minimum limits. It fix targets.
It does not required standardisation of It requires standardisation of product.
product.
Budget are expressed in total. Standard are expressed per unit of
production.
It is applicable to all types of It is applicable to manufacturing
organisations. organisation.
Budget consider both income and It considers only expenditure.
expenditure

Difference between forecast and budget

Budget Forecast
It is prepared by management for Estimate future trend based on
future period. historical data
Usually done for short term. Usually done for long term
It is a static statement. It is flexible.