eee Tr Povamant Seventh Edition Bo pee Simplified Approach to COSTING THEORY (For CA IPCC & CWA Inter) CA K Hariharan BCom, FCA Foreword by CAR Nagarajan Past Chairman of SIRC of ICAI €ccH aWolters Kluwer business Wolters Kluwer (India) Pvt Ltd 10" Floor, Tower C Building No. 10 Phase ~ IT DLF Cyber City Gurgaon Haryana (India) Phone: +91-124-4960999 Website: www,cchindia.co.inAbout CCH India WOLTERS KLUWER (INDIA) PVT LTD WOLTERS KLUWER Ce CCH India (a Wolters Kluwer business) is part of the Wolters Kluwer Group, a leading global information service provider for professionals, CCH publications cover a wide range of topics such as tax, accounting, legal, financial planning, human resources and training. CCH has a comprehensive portfolio of product types ranging from annual books, !oose-leaf subscription products, online products, solution finders, workflow solutions software, newsletters and journals, For more information on our products and services, log on to CCH India website at www.cchindia.co.in Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that: (1) the authors, Consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents in this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor. © 2014 CA K HARIHARAN ‘All rights reserved. No part ofthis work covered by the copyright owners may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher and copyright owners. First Print, 2014 Seventh Edition, July 2014 Sixth Edition, January 2014 Fifth Edition, June 2013 Fourth Edition, June 2012 Third Edition, August 2011 Second Edition, January 2011 Reprint Edition, June 2010 First Edition, January 2010 ISBN-15; 978-93-5129-291-3, Published by Wolters Kluwer (India) Pvt Ltd Printed and bound at Akash Press aman e@eoeaeanOGM@Gaanheaheaseeaenaeaeoeoseoeoeeoenea d @@@8ee6 @ 6 @ @eeeegneoaeoedeeavead ee eueeesn ee os wv FOREWORD Simplified Approach to Costing Theory adapts a fresh and novel approach to the study of the subject COSTING for the CA-IPCC/PCC keeping in view the specific requirements of candidates appearing for the CA Exams. While the “CA course” by itself is termed to be a challenging course, even to the brilliant students, the subject Costing, certainly daunting with aggressive teeth to create allergy before any student desirous of taking up CA exams both at IPCC and Final level Itis true in the case of any subject, the concepts and theory are the fulcrum of the subject and the rest all is only a superstructure based on the pedestal of such strong conceptual framework. No wonder the examiners at the professional Institutes focus their questions more on such theoretical areas to be tested with the students’ community especially at a threshold level. Costing subject practically a living subject for any walk of economic activity with commercial sense, more importantly with reference to manufacturing and production areas of involvement. At this juncture a need was felt to have a book in a simple language which an average student can understand and a brilliant can brush up his knowledge faster. I hope this is the objective and conviction behind the birth of this tiny baby SIMPLIFIED APPROACH TO COSTING THEORY!! The book covers right from the definition of “costing,” travels through the most significant issues on Material, Labour, Overheads, passing through Integrated & Non-Integrated Accounting System, operating and Process Costing and reaching the destination of most challenging areas of Standard Costing, Marginal Costing and Budgetary control in a comfort of ease creating lot of confidence in the minds of students. To top up, the uniqueness of the book is FAQ and for your Revision! Having been a professional myself and teaching the students of CA course over three decades, I never felt that the demanding subject Costing, can be reduced to mere charts, tables, diagram and pictures. It only makes me regret that I have not been a student of this great teacher CA K Hariharan on the subject! Having born and brought up relatively from a small town, having realised Direction, Dedication, Determination, Discipline and Deadlines are the keys to success, having felt Devotion to the duty is not a sacrifice, having convinced that we cannot prosper without bringing prosperity to others, having struggled himself for becoming a successful professional, Mr K Hariharan has demonstrated that no person was ever honoured for what he received; honour has been the reward for what he gave. Tam quite sure every student on using this book would feel that this would be the bible on the subject to begin with; on developing on this with the true intention of the author, anybody canmaster the subject with ease. While I am sure this would be a great source of inspiration for everybody to score amazing reward in the examinations, they would also refer and recommend this EASY TOOL to every junior who seeks their advice. Incidentally I feel it is not only from examination point of view, but one would consider to be his/her proud possession of collection in their library as a quick referring material on need! Knowledge, had it not been passed along would have died. Our greatest responsibility is to pass ona legacy that the coming generations can be proud of. I wish the author should bring more and more SUCH USEFUL PUBLICATIONS TO THE BENEFIT OF STUDENTS COMMUNITY which would facilitate in removing the fear complex on professional examinations!! CAR Nagarajan Past Chairman of SIRC of ICAI anan-@e@ne2aH BHOA2A2BHLHKBARBCCOSCHABSCABCHBESPREFACE TO THE SEVENTH EDITION "This edition has been drafted considering questions that have been asked in the past 29 CA- IPCC/PCC examinations. The above said value additions would facilitate the students to revise important concepts in a better way. Last few pages have been provided with important formula and formats which would help in carrying out preparation one day before the examination. Special thanks to my ever-loving student cum my partner CA. K, SWAPNA ACA, for her endless help and support. Special thanks to my beloved students, M. Tharakanadha, N Raghuveer, G Krithika and K Madhavi who spared their valuable me for proof reading and Jaya Chitra for typing this course material. Best Regards CAK HARIHARAN Author July, 2014eeeaeennoepeeveenee2eo200909R9F9 COT HRS VVTFVTVWVYPREFACE TO THE FIRST EDITION The book has been thoroughly designed keeping in view the examination requirements of CA PCC/IPCC, where the emphasis is given on thorough knowledge in all theoretical concepts to facilitate a better score. The book has been presented in a simpler version in the form of charts and tables to facilitate the students to have a better grasp over the concepts. The author is obliged to have any suggestions on any value additions required to be done in this material. The author is thankful to professionals and students fraternity who have contributed their valuable suggestion and had helped to bring this book in its current form and to the family members and well wishers for their moral support in bringing the book in its current form, Special thanks to my beloved students V MN Pramodh, V Sai Charanya and N Radhakrishnan who spared their valuable time for proof reading, Systematic study of this book would enable students to experience a considerable saving in preparation time for costing theory part. Best Regards CA K HARIHARAN January 2010. 3 d a 5 3 8 » , D » d » dvv ¥ v voy v v Emerald Professional Academy - Tirupati Sharddha Academy ~ Bangalore Master Minds ~ Guntur, Nellore & Kurnool. Logic - Kochi . SFM Praveen’s Academy - Hyderabad “SIMPLIFIED APPROACH TO COSTING THEORY” (For CA IPCC & CWA inter) “SIMPLIFIED APPROACH TO FINANCIAL MANAGEMENT THEORY” : (For CA IPCC & CWA inter) “SIMPLIFIED APPROACH TO COSTING THEORY” (For CA Final & CWA. Fianl) “ FOR YOUR REVISION - ADVANCED MANAGEMENT ACCOUNTING PROBLEMS & SOLUTIONS" (For CA Final) “QUESTION BANK FOR YOUR REVISION COST ACCOUNTING & FINANCIAL MANAGEMENT.” - (with Answer hints - For CA IPCC / PCC) “QUESTION BANK FOR YOUR REVISION COST & MANAGEMENT ACCOUNTING” - (with Answer hints - For CWA-INTER) . “QUESTION BANK FOR YOUR REVISION ADVANCED MANAGEMENT ACCOUNTING.” - (with Answer hints - For CA Final) “ SIMPLIFIED APPROACH TO COST ACCOUNTING” (For SAS Examination of Indian Audit & Accounts Department) “SIMPLIFIED APPROACH TO COST ACCOUNTING& FINANCIAL MANAGEMENT PROBLEMS & SOLUTIONS” (For CA IPCC, CWA Inter & CS inter) Handled 38 hours continuous class ( 2 full days é& one full night) for CA - Final costing crash course @ ICAI Trivandrum Branch Presented articles in SICASA Newsletters of CA Institute Presented articles in SIRC Newsletters of CA Institute Past committee member of Southern India Chartered Accountant Students’ Associations (GICASA - ICAI) © Held the post of Chairman for various conference committees of the CA Institute Conference Organized various seminars for CA/CWA/CS & other professionals Organized various Conference for CA Students Paper Presenter in various seminars and conferences. Resource person cum trainer for “Finance for Non-finance people” for various corporate._ ® Participated in various live public interaction programmes on © Doordharshan Podhigai TV, = Jaya TV and * Kalaingar news Television - to create awareness about professional courses « IFRS compliance Audit, Due Diligence Audits. Representation on behalf of the client for Income Tax Assessment & Appeals. Liaison with Reserve Bank of India with respect to FEMA & Other statutory compliance. Liaison with Labour Enforcement office, DGFT, Ministry of Corporate Affairs (MCA), Software Technology Parks of India (STPI), Commercial Tax, Central Excise and Customs department with respect to statutory compliance and registrations. Author is taking CA Final & IPCC Costing class at : Premier Academy - chennai. “a PREMIER ACADEMY CA/CWA/CS NEVER. dim CA join PA Regular class: 4 month class (weekly 3 days; Shrs/day) & 1 month full day class (Mon to Fri. day) Crash course: 12 days To attend his class contact 044-24622694, 09841661405 Visit www.premieracademy.in www.cahariharan blogspot.com wvywvevvvv=gep Des“CA TEST SERIES” TestTiming __.| Any day, any time (students choice) No. of test 5 test per subject Method of test ‘Test No % of coverage Marks | Time T__| First 25% of syllabus | 50__| 1% hrs 2 [Next 25% of syllabus | 50_| 1% hrs 3__[ Next 25% of syllabus | 50 | 1% hrs fi Next 25% of syllabus _| 50 | 1% hrs [FULL syllabus 100 | Shrs Valuation by & ica Faculties+ ICAI Evaluators + Personal counseling Other Benefits session (On one to one basis) For Details 09841413755, Contact: Visit : www.premieracademy.inii ee ee ee ee ee ee ee oe eo oe ee oO EXAMINATION TIPS Is costing paper a complicated one in the entire CA curriculum? Yes, because most of the CA IPCC & Final students are facing problem either by way of conceptual understanding of the problem or by way of time management (completing all the questions within 3 hours) What is there in a costing paper, after all some additions, subtractions, multiplications é& divisions. Yes of course some time square roots too. Isit really that much difficult paper? Students may say ‘hmm’... come & write a CA exam then u will know costing is better or bitter paper!!!" Ok no violence between us..... let us see how to prepare for costing paper for the forthcoming CA exams to score more marks. Fither IPCC or Final, the weightage given for the costing theory is 30 marks, Failure in costing is mainly because students don’t concentrate much on theory. Without studying costing theory possibility of clearing costing paper is very very remote. Though I am starting in a pessimistic manner it isa fact. If you are strong in costing theory, minimum you can score 60 marks. All theory questions are direct questions and all the questions are available in our Institute's study material itself and unlike Income Tax or Law paper there are no amendment in costing theory. Studying theory alone is not enough you have to understand the concept properly. On top of it, mere understanding alone is not sufficient; you should remember the text also. Unless otherwise you remember, recollect & write few points in the examination you won't get marks. Systematic and planned study is important to remember all the points, “Failure to plan is equal to planning to fail”. Planning is important, but execution is even more importantlf you spend absolute one and half hours per day with full concentration for three months you can finish the IPCC/Final costing paper very easily. Refer one book; reading more than one book is not advisable. How many books you read is not important; how many times you revise one particular book is more important. Practical problems should be worked out at least once as if you are taking up your final examination, instead of auditing the questions with solutions by way of ticks. Improve your analytical skills. Practice makes perfection and unless otherwise there is adequate practice nothing will come. While working out the problems avoid writing “K” for thousands and “L” for lakhs because you don’t have the privilege to write like that in examinations. To put a zero takes one second and each and ever second counts in an ‘examination. If you put K or L in exam then examiner will award a big “O”. Attempt all the questions; don't skip any question in the exam. The attempt may be a failure, but you should not fail in attempting any of the questions. WINNERS NEVER QUIT & QUITTERS NEVER WIN WISH YOU ALL THE VERY BEST & DO WELL......@eeeeooaeeeoeeooaeooveosrvorees| & ‘ 8 ‘ 8 DB 5 5 5 D D @ ICAI - IPCC - Syllabus Paper 3A: Cost Accounting Level of Knowledge: Working knowledge Objective: (2) To understand the basic concepts and procedure used to determine product costs; (b) To be able to interpret cost accounting statements; (0) Tobe able to analyse and evaluate information for cost ascertainment, planning, control and decision making; and (@) Tobe able to solve simple cases. Contents: 1. Introduction to Cost Accounting (a) Objectives and scope of cost accounting (©) Cost centres and cost units () Cost classification for stock valuation, profit measurement, decision making and control (d)_ Coding systems (€) Elements of cost (Cost behaviour pattern, separating the components of semi-variable costs (g)_ Installation of a costing system (h) Relationship of cost accounting, financial accounting, management accounting and financial management, 2. Cost Ascertainment (a) Material Cost () Procurement procedures - storage procedures and documentation in respect of receipts and issue of stock and stock verification (i) Inventory control - techniques of fixing of minimum, maximum and reorder levels, economic order quantity, ABC analysis; stocktaking and perpetual inventory (ii) Inventory accounting (v) Consumption - identification with products of cost centres, basis for consumption entties in financial accounts, monitoring consumption. - (b) Labour Cost (i) Attendance and payroll procedures, overview of statutory requirements, overtime wages, idle time wages and incentives (ii) Labour turnover (il) Utilisation of labour, direct and indirect labour, charging of labour cost, identifying labour hours with work orders or batches or capital jobs (iv) Efficiency rating procedures (v) Remuneration systems and incentive schemes.(0 Direct Expenses ub-contracting, Control on material movements, Identification with the main product or service. (a) Overheads (i) Functional analysis ~ factory, administration, selling, distribution, research and development Behavioural analysis - fixed, variable, ssemi-variable and step cost (ii) Factory overheads ~ primary distribution and secondary distribution, criteria for choosing suitable pasis for allotment, capacity cost adjustments, fixed absorption rates for absorbing overheads to products or services (ii) ‘Administration ‘overheads - method of allocation to cost centres OF products (iv) Selling and distribution ‘overheads - analysis and absorption of the expenses in products/customers, impact of marketing strategies, cost cffectiveness of various methods of sales ‘promotion. 3, Cost Book-keeping Cost ledgers ~ non-integrated accounts, integrated accounts, reconciliation of cost and financial accounts. 4, Costing Systems {) Job Costing Job cost cards and databases, applications of job costing: (0) Batch Costing (c) Contract Costing callecting, direct costs of each job, attributing overhead costs to jobs, on =e ee sooeeoeedeoe retention money, escalation clause, contract accounts, accounting for material, © Progress payments, Prong fr plant used ina contrac, contract profit and balance sheet entries. (4) Process Costing valent units, inter-process Profit, Double entry book keeping, process loss, abnormal gains and losses, equi joint products and by products (e) Operating Costing System 5, Introduction to Marginal Costing Marginal costing is compared with absorption costing, volume graph. 6.Introduetion to Standard Costing setting of standards, contsibation, breakeven analysis and. prof Various types of standards, basic concepts of material and labour standards a variance analysis. 7, Budgets and Budgetary Control ‘The budget manual, preparation and monitoring procedures, budget variance’ flexible bud preparation of funetional budget for operating and non-operating functions, cash budget, master buds principal budget factors.2oeoesooee G@@Ceo eee egeue ®@ eve wveevVE CONTENTS Preface to the Seventh Editi Preface tothe First Edition About the Author Examination Tips ICAI- IPCC - Syllabus CHAPTERS Basic Concepts Material Costing Labour Costing. Overheads. Integrated and Non-integrated Accounting System. Job, Batch and Contract Costing... Operating Costing. Process Costing... Joint Products and By-Products 10. Standard Costing, 11. Marginal Costing, 12. Budgetary Control. ee XN ane wpe Frequently Asked Questions... For Your Revision .eesovueeneeooec ©OvueovevnveovseuvyTTvT Tes@9@e@ @ ve.esee@ evusvee08 oo wv _ COST BASIC CONCEPTS Cer A user BASIC CONCEPTS ¥ Itis the expenditure incurred for producing the product or rendering the services. (ie. Actual or notional amount of expenditure attributable to a specified product or activity) ¥ It-should be expressed from Manufacturers’ point of view (and not from customer's point of view). ¥ Cost ascertainment is based on uniform principles and techniques. COSTING CIMA, London defines costing as “techniques and processes of ascertaining cost.” ¥ The process of accounting for cost ¥ Begins with the recording of income and expenditure ¥ Ends with the preparation of periodical statements and reports ¥ Aids ascertainment and control of costs COST ACCOUNTING + CIMA defines cost accounting as “the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.” ‘© Shilling law has defined cost accounting as “the body of concepts, methods and procedures used to measure, analyse or estimate costs, profitability and the performance of individual products. Departments and other segments of company’s operations, for either internal or external use or both, and to report on these questions to the interested parties.” COST ACCOUNTANCY CIMA has defined cost accountancy as “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision-making,” © Itis the application of costing and cost accounting principles, methods and techniques ¥ It includes the presentation of information ¥ Itis for the purpose of managerial decision making.So TES, Cost Accountancy = Costing + Application of cost control ‘methods + Ascertainment of Profitabil “(Way 2008) | (i) Ascertainment of cost a. Post Costing b. Continuous Costing (ii) Determination of selling price (iii) Ascertaining the profit of each activity (iv) Cost control (v) Cost reduction (vi) Assist management in decision-making. ‘There are two methods of ascertaining costs, viz., Post Costing and Continuous Costing. = POST COSTING 7 TRONTINUOUS COSTING _ Tr means analysis of actual information | It aims at collecting information about cost as recorded in financial books. as and when the activity takes place so that | ‘as soon as a job is completed the cost of completion would be known. It is accurate and is useful in the case of | This involves careful estimates being, "Cost plus Contracts” where price is to | prepared of overheads. In order to be of be determined finally on the basis of | any use, costing must be a continuous actual cost. process. Cost ascertained by the above two methods may be compared with the standard costs which are the target figures already compiled on the basis of experience and experiments. yICOST REDUCTION. an ¥ Itis the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered. V Without impairing their suitability for the use intended or diminution in the quality of the product, ‘Three-fold assumptions in cost reduction (i) There is a saving in unit cost. (ii), Such saving is of permanent nature. (ii) The utility and quality of the goods and services remain unaffected, if not improved. SCOPE OF COST REDUCTION: (May 2007) Y Itisattainable in almost all areas of business activities. & 2 @-a-8-@-@-@ 8 © @-6® @€ 0820608666686¥ Ik covers a wide range like new layout, product design, production methods, materials and machines in factories as well as in offices, innovation in marketing ete. ¥ It also covers activities like purchasing, handling, packaging, shipping, warehousing, use of administrative facilities and even utilisation of financial resources. ¥ If two or more products are produced and managed together, the result of combined efforts are higher than sum of the results of individual products, Analysis of synergetic effect is helpful in cost reduction. ‘Two or more products are produced and managed together. The results of combined efforts are higher than sum of the results of individual products. Analysis of synergetic effect is helpful in cost control. Eg. Let cost of product A = 71000 Cost of product B = 500 If you produce both products A and B then the total cost should be less than 1500. This is because of; * Optimum utilization of fixed cost and * Due bulk purchase, reduction in unit cost of material. ‘This impact is known as synergetic gain. Temporary savings cost _ | = Saving in cost per unit = Saving either in total cost or cost per unit : * Quality of the product remains| = Quality of the product is not unaffected guaranteed * Dynamic approach * Lack of dynamism * Value engineering, Market | * Standard costing and Budgetary tesearch, Job evaluation and Merit control are tools for cost control rating are tools for cost reduction * It can be achieved by way of| * Itisachieved through continuous process of critical compliance with the standards examination ; = Corrective Function + Preventive FunctionDetermine the clear cut objective, (i.2., pre-determine the desired results) . ‘¢ Evaluate the actual performance . | performance with planned one and ‘ Investigate Variation in actual ecoaeeeeceo (@) Control of material cost Gi) Control of labour cost (iii) Control of overheads (iv) Measuring efficiency (v) Budgeting (vi) Price determination (vil) Curtailment of loss during the off-season (viii) Expansion (ix) Arriving at decisions @ es a e @ a) To identify unprofitable activities. s b) Toapply e ‘¢ Cost reduction techniques, i + Operations research techniques and 4 + Value analysis technique. é ©) Toachieve the objective of economy in business operations. d) Aid to Continuous efforts for finding new and improved methods for reducing costs. a ¢) To identify the reason for decrease in the profit of the business. {) To identify unprofitable products or product lines so that these may be eliminated. g) To provide information and data to the management to serve as guides in makit@ decisions. h)_ To provide necessary guidance on ¢ Make or Buy decision. a + Whether to accept orders at below their cost? ‘ Which machine to purchase if more than one choice are available? i) Aids price fixation. 4 j) _ Itserves as a guide to test the adequacy of selling prices. ‘ iQ) The use of cost accounting technique viz., variance analysis. hs }) _ Ithelps in cost control. 4 m) It provides figures for the use of Government, Wage Tribunals and other bodies. ‘ 1) _Ithelps to work out the cost of dle capacity. 4 q6@e@@ @ee @ 9 © @ @ @ 9 9 @@ @ @ @Ve@g @. COST ACCOUNTING TREATMENT OF UNSUCCESSFUL RESEARCH Oa ci AND DEVELOPMENT COST... (Now 2007) © Cost of unsuccessful research is treated as factory overheads, provided the expenditure is normal and is provided in the budget. © Ifitis not budgeted, it is written off to the profit and loss account. ©. If the research is extended for long period of time, some cost of failure is spread over to successful researches. FACTORS > The objective of the system. » — Scope and extent of coverage. > The general organisational set up of the business. > The technical aspects of the concern. > The attitude and behavior of the people in the organisation (Psycho Social Aspects). > The manner in which different variable expenses would be affected with the expansion or cessation of different operations. > The manner in which Cost and Financial Accounts could be inter-locked into a single integral accounting system. > The maximum amount of information that would be sufficient (Information Requirements). i) Lack of support from top management. ii) Resistance from accounting staff. iif) Lack of co-operation at the operating levels. iv) Shortage of trained staffs. v) Costs of the operating systems. “ (Nov. 2006; tay. 2008) * Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements of a business concern. * The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the output of the system. .te ESS = Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting. + The Cost of installing and operating the system should justify the results. +The system of costing should not sacrifice the utility (of data collected) by introducing unnecessary details. + A carefully phased programme should be prepared by using network analysis for the introduction of the system. + Management should have faith in the Costing System and should also provide a helping hand for its development and success, Features: i. Itshould be tailor-made ii, Collected Data should be accurate Cooperation from all other departments Cost and Benefit should match vy. Itshould not sacrifice the utility by including unnecessary details vi. Usage of network analysis vii, Faith and Confident Cost Sheets Statements of material consumption Statements of labour utilisation Overheads incurred compared with budgets Sales effected compared with budgets Reconciliation of actual profit with estimated profit The total cost of inventory carried ‘The total cost of abnormally spoiled work in factory and abnormal losses in stores Labour turnover statements Expenses incurred on research and development compared with budgeted amounts — 0m It is defined asa © location, ©. person or o anitem of equipment or ©. group of these for which cost may be ascertained and used for the purpose of Cost Control. ~e oe ena@naGnahenmanwane heaanuaeaesageaaaaeaeanaeaeaaenae@@2@ee2e0 »>e@ @ e@ @ @ ©2866 86 Cy ® @e8@e @@e@ee8 e @ 2 @ e s COST CENTRE [ In manufacturing entities | Inother entities EF eS Production Cost, Service Cost Personal Cost, Impersonal Cost Centre Centre Centre Centre Personal Cost Centre or Impersonal Cost Centre Production Cost Centre or Service Cost Centre Personal Cost Centre consists of a person or group of persons. Impersonal cost centre consists of a location or an item of equipment ( E i rtf | Location Person Personal Cost Centre Item of equipment Impersonal Cost Centre Ina manufacturing concern there are two main types of Cost Centres: (i) Production Cost Centre: It is a cost centre where raw materials are converted into finished product. Here both direct and indirect expenses are incurred. E.g.: Machine shops, welding shops, assembly shops, etc. (ii) Service Cost Centre: It serves as an ancillary unit to a production cost centre. Eg: Power house, gas production shop, material service centres, plant maintenance centres, te Tt is a unit of o Product, © Service or © Time or © Combination of these in relation to which costs may be ascertained or expressed. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.Automobile Number Cement Tonne or per bag Chemicals Litre or Gallon or Kilogram or Tonne Power Kilo-watt hour [Steel Tonne 7 [Transport === Passenger kilometer or Tonne kilometer | Nursing home Per bed per day or Per patient per day | Bridge construction Each contract Interior decoration Each job | Bicycles Each unit Advertising Each job [Sugar Quintal orTonne ‘Hotel providing lodging | Room per day facilities Airlines Per Passenger miles or per tonne miles Itis defined as a tis a unit of | © location Product ©. person or ©. Service or ©. anitem of equipment or o. Time or group of these for which cost may be | Combination of these in relation to ascertained. which costs may be expressed. It may be Personal Cost Centre or Impersonal Cost Centre / Production Cost Centre or Service Cost Centre, Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value. Eg, Each and every production units in a company is called cost centre. Eg, outputs of the production units are called cost units. @eaaeoenoeavnaneaeasn eoocea © 6 2 neaaaeoeoeaeG 68 @®eaaaeae @@ 8@e8@e@ oe e@ vee o e9 © — fin process costing each and ‘every | Outputs of the process are called cost racess is called cost centre, units, In contract costing each and every | The contract Heeiscaled acount | contract are called cost centre. It is an activity centre of a business organisation entrusted with a special task. CATEGORIES: Y Cost Centres; ¥ Profit Centres; and ¥ Investment Centres; Centres which have the responsi generating and maximising profits. earning an adequate return on (May 2006, Nov. 2008) INVESTMENT GENTRES | tres which are concerned with investment, je ibefinition Meaning DIFFERENTIAL It represents the change in total cost (variable as well as | COsT fixed) due to change in activity level, technology, process | (May 2008) or method of production, etc. Itmay be - o Incremental or o Decremental costs It represents an increase or decrease in total cost resulting out (a) Producing or distributing a few more or few less of the products; (©) A change in the method of production or of | distribution; (6) Anaddition or deletion of a product or a territory; and | __| (@) Selection of an additional sales channel. | |IMPUTED COSTS | These costs are notional costs which do not involve any | cash outlay. These costs are similar to opportunity costs. | Eg, Interest on capital, the payment for which is not actually made.TERMS wet hg ee a OPPORTUNITY This cost refers to cost = the value of sacrifice made or | (May 2003, 2008) "| « benefit of opportunity foregone * in accepting an alternative course of action ie. The next best alternative f firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. + itarises only if the alternatives are available + Itwill not form part of books of accounts + Itis purely for the purpose of managerial decision * Costs which are useful for the purpose of decision making are called relevant cost. Hence opportunity cost is a relevant cost i} OUT-OF-POCKET |= It is that portion of total cost, which involves cash cost outflow. * Qut-of-pocket costs can be avoided or saved if a particular proposal under consideration is not accepted. This is a short-run concept It is used in decisions relating to fixation of selling price in recession, make or buy, etc. * Costs which are useful for the purpose of decision making are called relevant cost. Hence out of pocket |__cost isa relevant cost SHUT DOWN = Those costs, which continue to be, incurred even COSTS | when a plant is temporarily shutdown. E.g. rent, rates, depreciation, etc. = These costs cannot be eliminated with the closure of the plant. * In other words, all fixed costs, which cannot be avoided during the temporary closure of a plant, will be known as shut down costs. Here we can classify the fixed cost into two types: a, Avoidable Fixed Cost and b._Unavoidable Fixed Cost. ameea Aa eaOaGe2eaeaeaeEeaGeaeoeaeveooaegceoeanoeeeddel e@eesd e 2 we SUNK COSTS (Nov. 2000, May 2003, 2005) * Historical costs incurred in the past are known as sunk costs. * They play no role in decision making in the current period. | * Itisa Irrelevant cost. For eg, in the case of a decision relating to the replacement of a machine, the written down value ofthe existing machine is a sunk cost and therefore, not considered. DISCRETIONARY COSTS (Nov. 2008) * Such costs are not tied to a clear cause and effect relationship between inputs and outputs. * They usually arise from periodic decisions regarding the maximum outlay to be incurred. Eg, advertising, public relations, executive training, etc. COST OBJECT (May 2000) DIRECT COSTS Ttem for which a separate cost measurement is required is called cost object. E.g.; product, service, project, customer, brand category, an activity, department, programme, etc. | = Costs which are directly attributable to production of product or rendering of a service are called direct cost. + These are related to the cost object. | * These can be traced in an economically feasible way. * All the direct costs are collectively called PRIME | Cost E.g. Raw material cost, wages paid, etc. INDIRECT COSTS * Costs which are not directly attributable to production of a product or rendering of service are called indirect cost. * These are related to the cost object. * These cannot be traced to in an economically feasible way. * All the direct costs are collectively called OVERHEAD PRE-DETERMINED cosT MARGINAL COST E.g, Supervisor's salary. : * It is a cost which is computed in advance before production or starting an operation. + Computation can be done on the basis of specification of all the factors affecting cost. - + The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. * Here a unit may bea single article, an order, a stage of _production, a process of a department. |F Se Hits | PRE-PRODUCTION cosT (Nov. 2000) It relates to change in output in the particular circumstances under consideration within the capacity of the concerned organisation. = The part of development costs incurred in making trial production run prior to formal production. = This term is sometimes used to cover all activities prior to production including research and development, but in such cases the usage should be made clear in the context. CONVERSION COST (May 2003) * The sum of direct wages, direct expenses and overhead cost of converting raw materials to the ished stage or converting a material from one stage of production to the next. Conversion cost = Direct wages + Direct expenses + Production overheads. In some circumstances this phrase is used to include any excess material cost or loss of material incurred at the particular stage of production. | FIXED COSTS (Nov. 2004) Total cost will remain the same irrespective of level of output, where as per unit cost will vary. These are the costs which are incurred for a period changes in output. Within certain output and turnover limits they tend to be unaffected by fluctuations in the levels of activity (output or turnover). Fixed costs tend to change beyond the relevant range. E.g. Rent VARIABLE COSTS (Nov, 2004) = Total cost will vary depending upon the level of output, where as per unit cost will remains the same i.e, costs tend to vary with the volume of activity is called variable cost. «Any increase in the activity results in an increase in the variable cost and vice-versa. E.g, Direct labour cost 7 [pn Fixedleget in] l= Variable cost’) | ‘Total cost ‘Remains the SAME | VARY with output Per unit cost | VARY with output | Remains the SAME. ‘They do not tend to increase or decrease with the | @e@eaeannesenvnavea2eeaeaeoneaeaeeend @ a @e eae @e@ eoe®e@ @eeoeeeoeeesee @eeoee8 e@ e ee Batch Costing Joint & By Product Job Contract Single Process Costing Costing Costing Costing Costing 1 ‘BATCH COSTING: This costing is based on the concept of contract costing, ‘This method is used to determine the cost of a group of identical or similar products, The batch costing of similar products is the unit and not single item within the batch, This method can be applied for the production of nuts and bolts, medicines and other items which are manufactured in distinct batches. 2. JOB COSTING: This method is used in those concems where production is carried out as per specific orders and specifications. Each job is separate and distinct from other jobs and products. This method is popular in enterprises engaged in house building, ship building, machinery production and repairs, etc. 3. CONTRACT COSTING: This method of costing, based on the principle of job costing, is used by house builders and civil contractors. The contract ‘becomes the cost unit for which relevant cost are accumulated. 4, SINGLE OR UNIT COSTING: This method is used where a single item is produced and the final product is composed of homogeneous units. The per unit cost is obtained by dividing the total cost by the total number of units manufactured. : 5, PROCESS COSTING: Under this method of costing, the cost of completing each stage of work is ascertained, like cost of making pulp and cost of making paper from pulp. This method is used in those industries where manufacturing is done continuously like chemicals, oil, gas paper, ett. 6. MULTIPLE COSTING: This method is used in those industries where the nature of product is complex such as motor cars, airplanes étc. In such casesoe costs are accumulated for different components which make the final product and then summed up to ascertain total cost of product, 7. OPERATING COSTING: Ascertainment of cost of rendering or operating a service is called “service or operating costing”. It is used in case of concerns tendering services like transport, cinema, hotels, etc. where there is rio identifiable tangible cost limit. | Toy making Batch Per batch Cement Unit * | Per tonne or per bag Radio Multiple Per radio or per batch | Bicycle Multiple Per bicycle [Ship building Contract Per ship Hospital Operating patient | Per bed per day / per day Road Transport [Operating Per Tonne Kilometer Steel, “__ [Process Per Tonne | Coal 5 Singie Per unit Bridge Construction Contract. Each contract Tnterior Decoration Job Each Job Advertising ~ [Job Each Job Furniture. ‘Multiple Each unit Sugar company having its own sugarcane fields Process | Per Quintal Soap Process Units Pharmaceuticals Batch Units Advantages to | | | j Management Employee Society Creditor Government 1. Tomanagement |” a. Fixation of responsibility : Measurement of economic performance Helps in minimising wastage and losses Facilitates comparison and its analysis Fixation of price” Guidance for future production policy Aid in decision making a poppe op anepnoehmeaOeaGeaAaaah Beaosaeeoeeeeaeoeeoeese @ee @@eeaeonoaeesee @ Ce ee a | eer vve Lae 1a Ey Ue 2. Toemployee | a, Facilitates good wage policy by merit rating technique which is conducted by scientific process. 3, To society ._ Minimisation of cost of production 4, To creditor ‘a. Increase the confidence of creditor in the capital employed b. Knowing every aspect of production easily by using cost accounting, 5. Togovernment | a. Help in formulating policies regarding taxation, price control measure, wage fixation etc. b. Help in assessing in preparing national plans. c. Help in assessing excise duty, income tax, sales tax/VAT, etc. Areas of activity for which cost accounting record rules are to be maintained are: @ Raw materials, components, store ete. (ii) Salaries and wages (ii) Service department expenses (iv) ties (v) Repair and maintenance } (vi) Depreciation (vii) Royalty (viii) Other overheads (ix) Conversion cost (x) R& Dexpenses (xi) Interest (xii) Expenses/Incentive on exports (xiii) By-products (xiv) Joint products (xv) Captive consumption (xvi) Packing (xvii) Expenses of capital nature (xviii) WIP & FG Stock (xix) Cost statement (xx) Production records (xxi) Reconciliation of Cost and Financial A/é (xxii) Adjustment of cost variances (cxifi) Record of Physical verification (xxiv) Statistical statement & records.‘The break-up and build-up of cost is called cost sheet. Cost Direct Indirect Cost Cost Direct Direct Ditect Production Selling & Material || Latour | | Expenses Overheads Distribution OHs PRIME COST FACTORY COST/ WORKS COST COST OF FRODUCTION COST OF SALES amnueahmeaeaG ahh ahOoBeOebooeeoeaee seoesedCHAPTER 2 MATERIAL COSTING Material cost is the cost of tangible physical input used in production. Material cost can be classified into - 1. Direct Material cost 2. Indirect Material cost ‘An item of ial is considered as | If material cost which does not satisfy direct if it ame the following | the criteria specified fot treating a cost conditions: as direct material is treated as Indirect i, Direct relationship with finished | material. product; ii, Such relationship is capable of being quantified. (e.g. Each unit of output requires 2 kgs of raw material X & 4 kgs of raw material Y). iii, Such quantification achieves control purpose. @eeseeoeeea ang @eee@ @ fae 1. Purchase procedures 2. Material accounting procedures 3, Setting of various stock levels 4, Economic Ordering Quantity (EOQ) 5. ABCanalysis 6. 7. 8. eee Two bin system Stores location and layout Use of perpetual inventory records and continuous stock verification 9. Physical stock verification 10. Review of slow moving and non-moving stock 11. Accounting for landed cost 12. Wastage and scrap control 13. Budgetary Control 14, Ratio analysis FESS Itis the voucher of the authority regarding issue of materials for use in the factory. e ve wvee vLT oe aT TT TS The Requisition Notes are made out in triplicate. The copies are distributed in the fallowing manner: © One for the Store-keeper. © One for Cost department. © One for the Department requiring it, Who has to prepare MRN? Generally ‘Materials List’ is prepared in a manner that either the whole of the materials would be withdrawn on its basis or separate materials requisitions would be prepared by the person ot department and the material drawn upto the limit specified in the list, {Eno ‘material lis’ has been prepared, then MRN can be prepared by Planning Department. If there is no Planning Department, or they are unable to undertake this task, then MRN should be prepared by the persoh or department that requires the materials. Usually, a foreman’s authority is enough for this but, in case of costly materials; it would be desirable tohave such requisitiors duly approved by some higher authority lke the Superintendent. MRN- specimen: [ Material Requisition Note | Work Order No. Department Item No, Particulars Qty. Rate(3) Amount (3) Store-keeper Workman receiving Foreman SL. Clerk the material BIDE OF MATENTAT OMY DMN Nay: Itis also known as Material Specification List or simply Material List Ttisa schedule of standard quantities of materials required for production, Itis prepared by the engineering department or planning department, It should be in a standard form, v v a v The copies are distributed to each ofthe following department: © Stores department. © Cost Accounts Department. © Production Control department. © Engineering or Planning department, rs 3 e MiozennaneaGeaeeaaeneseeoeveseoee 06.0090@®eeeeeeeea og e ee e A comprehensive Materials List should rigidly lay down the exact description and specifications of all materials required for a job or other unit of production and also required quantities so that any deviation from the standard list can easily be detected. ADVANTAGES OF BILL OF MATERIAL: Copan, TD ie Stores department ¥ It serves as an important basis of preparing material purchase requisitions by stores department. It acts as an authorisation for issuing total material requirement. Time savings. Cost savings. The clerical activity is reduced as the stores clerk issues the entire/part of the material requirement to the users if the details of material required are presented in the bill of materials. Cost Accounts Department /¥ Useful for preparing an estimate/budget of | matérial cost for the job/ process operation. Aids in control of excess kost of material used. Y This is done after determining material | variances and ascertaining the reasons for their < SAN s occurrence. Production Control Y It is used to control the usage of materials. department | ¥ Saves time which otherwise would have been wasted for preparing separate requisitions of material. Engineering or Planning Y Used to prepare a material list in a standard department form. Y Acopy of list is sent to stores, cost accounts and production control department.> Stores location should be near to the material receiving department > _ Intention behind the same is to minimize the transportation charges. > Tt should be easily accessible to all other departments of the factory, railway siding, roads etc. > BOM - Specimen: Job No. . Department authorised. Sl. Code Description Qty. Date of issue & Rate No. No. Authorised by. Store Keeper's signature, Bill of Materials Amount Qty. issued z z Date Qy. aa eh gees BOM Te ar eR eee {) It isa list of material required either for a particular job or work order. ii) It contains the description code and quantity of materials and other store items required for the particular job or work order, i) Itis a formal request for the supply of specified materials, stores etc to the production department, ii) Tt contains information about the description, code arti quantity of materials needed for a specific job or work order. iii) Acts as an authorisation for the issue of all the materials and stores items mentioned in BOM. iii) Tt authorises the issuing department to draw from stores the requisitioned materials, Ithelps to avoid delay in the movement of materials to the departments which are in need The efficient working of the stores department depends upon the location of stores departments also, The location of stores department inside the factory should be planned judiciously. ee @eaeoauenceces @2O@@oa eae aan eee Gh Gh BHR DGee e @eee ee e Stores location should be determined with following objectives in mind: a. Reduction in transportation charges by locating stores near the department which is receiving the materials. b. Easy accessibility and reach from production departments. c. Reduction in time involved in material movement from stores to production centres. d. Avoidance or reductions of wastage in material movement and handling. rae : 5 aoe 3 ] a > Adequate facility should be there in stores, ie., necessary racks, drawers and other suitable receptacles for storing material should be there. : a > Each place (for example, a drawer or a corner) where materials are Kept is called a bin. > Each bin should be serially numbered and for every item a bin should be allowed. > All receipts of the item of the same type should be kept in the birvallotted, for convenience of access. > — The number of the bin should be entered in the Store Ledger control accounts. CENTRALISED AND DECENTRALISED STORES: Another major decision that the company has to take is about whether to have a centralised store or a decentralised store. ‘SYSTEMS OF STORAGE CENTRALISED STORAGE DECENTRALISED STORAGE In case df a centralised store, the responsibility of receiving, storing and issuing all materials is entrusted to only store departments this system has the advantages of efficient supervision of { materials, encourages the personnel, maximum economy in storage expenses-etc, However, this system suffers from a few limitations such as high transportation cost, delay in the issue of materials, high incidence of loss in the case of fire etc. With a view to overcome these limitations of centralised storage system, decentralised stores are suggested, Under this system, a number of stores departments are maintained and they will be entrusted with the responsibility of receiving, storing and issuing materials, DIFFERENT CLASSES OF STORES There are three classes of stores viz,, * Central or main stores, * Sub-stores and + Departmental stores. pee cee ‘The record of stores may be maintained in: o Bin Cards,oe © Stock Control Cards, © Stores Ledger. * The first two form of accounts are records of quantities received, issued and those in balance, but the third contains cost information in addition to it. + ‘Usually, the account is kept in the forms ie. quantitative in the store and quantitative-cum- financial in the Cost:Department. (ew eapal ana sie CONTROL CARDS |] * Its the quantitative records of| ¢ It's the quantitative records of |___ stores. stores and stock on order, * It is kept attached to the bins or] + These are kept in cabinets or trays teceptacles or quite near thereto or loose binders. anid they also assist in identification of stock, ADVANTAGES ADVANTAGES }) Entries are made assoonasthe | i) Records are kept in a more transaction taken place; compact manner so that reference ii) Instant entries will reduce the to them is facilitated. possibility of committing ii) Records can be kept in a neat and mistakes; clean way by men solely engaged iii) High control over stocks; : in clerical work so that a division iv) Rectification of mistake if any is of labour between record keeping possible at earlier stage itself; and actual material handling is v) Verification and reconciliation of possible. . actual stock quantity with the iii) As the records are at one place, it book balance is possible at any is possible to get an overall idea point of time; of the stock position without the vi) It facilitates easy identification of necessity of going round the different items of materials. stores. DISADVANTAGES DISADVANTAGES i) Records are dispersed over a wide | i) On the spot comparison of the area; physical stock of an item with its it) Dirt and grease spoils the bin book balance is not facilitated. cards; ii) Physical "identification —_of fii) Persons handling the bin cards are materials in stock may not be as not clerical workers, they may not easy as in the case of bin cards, as knowledge enough to handle the the Stock Control Cards are | records. _|___housed in cabinets or trays, es 2S&G2@OOGQAn GQ4ORGBHBGBABBACAEBESA -2aa&@GQQ084 aAoaneae@eeeee eee @ » 8 @ @ ve eee SP USTORS ERS It is a collection of cards or loose pages specially ruled for maintaining a record of both quantity and cost of material in stores, received, issued and those in stock. Itis subsidiary of main cost ledger. Itis maintained by the Cost Accounts Department. Itis posted from Goods Received Notes and Materials requisition. Advantages: It enables distribution of work among a number of clerks Receipts and issues are posted quickly and regularly. It enables centralisation of stock records. ‘The gives the assurance for accuracy of posting, ‘The records are clearer and neater. Recurring cost of maintaining them is much less than those kept manually. If up-to-date records are available, the management will be able to exercise greater control over quantities held in stock from time to time, Ithelps to a great deal of saving in both the amount of investment in stock and their cost. Distinguish between Bin Cards and Stores Ledger (May 2002, Nov. 2003, 2004) a Cadi: Glo )e 1 iBtores Led i) It contains records of quantities | i) It contains both quantitative and ie. their receipts, issue and value information in respect of balance. their receipts, issue and balance. ii) Bin cards are maintained by the| ii) _ Stores ledger is maintained by cost | stores-keeper. accounting department. iii) Itis the store recording document. _| iii) _Itis accounting record iv) Balance, in Bin Cards represents | iv) Balance in Stores Ledger has to closing stock material on hand. reconciled with a. Bin Card - for Quantity Verification b. General Ledger - for Value verification | v) Bin card entries are made at the | v) _ In stores ledger entries are made only time when transaction takes place. after the transaction has taken place. vi) Bin cards record each transaction. | vi) It records the same information in a summarised form. vii) Inter-departmental transfers of Inter departmental transfer of materials do not appear. materials appears here. viii) Records are spread over wide vii) Records are available in one place area. i.e, in cost accounting department.‘BinCards “) 7 TE _ StoresiLedger |] ix) Physical identification of material | ix) Physical identification of material is is very easy. not easy on the basis of Stores Ledgers. CSE a DUES ORSTO i 1. To control over all the activities in Stores Department. 2. To ensure safety both as to quality and quantity of materials. 3. To maintain proper records. 4, To initiate purchase requisitions. 5. To initiate action for stoppage of further purchasing, when the stock level approaches the maximum limit. ‘To check and receive purchased materials and to arrange for the storage in appropriate places. To reserve a particular material for a specific job when it is required, To issue materials only in required quantities against authorised requisition notes. To check the book balances, with the actual physical stock at frequent intervals by way of internal control over wrong issues, pilferage, etc. . ) TREATMENTOF SHORTAGES IN STOCK-TAKING"” 7 At the time of stock-taking generally discrepancies are found between physical stock shown in the bin card and stores ledger. These discrepancies are in the form of shortages or losses. The causes for these discrepancies may be classified as: a. Unavoidable or b. Avoidable. UNAVOIDABLE C/ ‘AVOIDABLE CAUSES, ¥ Losses arising from unavoidable causes | ¥ Avoidable losses are generally should be taken care of by setting up a| _ treated as abnormal losses. standard percentage of loss based on the | ~ These losses should be debited to study of the,past data. The issue prices| the Costing Profit and Loss may be inflated to cover the standard| Account, loss percentage. Alternatively, issues] ¥ Loss or surplus arising from may be made at the purchase price but| errors in documentation, posting the cost of loss or shortage may be| — etc., should be corrected through treated as overheads. adjustment entries. ¥ Actual losses should be compared with the standard and excess losses should be analysed to see whether they are due to normial or abnorinal reasons. ¥ If they are attributable to normal causes, an_additional charge to overheads Sense =m tena @aehakc aah eOeOOhaGBeasGeaeeaeeesedPePeeVPeoees ee ee Should be made on the basis of the value of materials consumed ¥ If they arise from abnormal causes, they should be charged to the Costing Profit and Loss account. = TWORINSYSTEM (1 0 It is a system of storage where in each bin is divided into two parts 1. Base part and 2, Issue part © Base part or smaller partis where quantity is equal to the minimum stock or reordering level is kept. co Issue part is where the remaining quantity is stored. Issues are made out of the larger part ie,, the issue part but as soon as it betomes necessary to use quantity for the base part, fresh order is made. This system is supplement to the record of respective quantities on the bin card and stores ledger. ° ° (ob SHR US TENNESSE ay me philosophy is dedicated to eliminate the waste of time. If we make our raw material suppliers agree that they deliver their goods in time and in quantity we need, then we almost eliminate raw material inventories. We shall then have virtually zero inventories or near zero. This is called Just-in-time system. Ohno (VP of Toyota Japan) and-was first successfully lant in Japan and now being tried at various industries all Just This System was found by Taichi implemented at the Toyota motor car pl over the world. Advantages of JIT purchasing: a. _ It results in considerable savings in material handling expenses. b. _Itregults in savings in factory space. cc. Investment in raw materials and WIP is substantially reduced. 4d. Last quantity discounts can be obtained and paperwork is reduced because of using of blanket long-term orders to fewer suppliers instead of purchase orders. e. JIT purchasing are now being attempted to extend daily deliveries to as many areas a5 possible so that goods spend less time in warehouse or on store shelf before they are exhausted. Peraiss TMP Le‘SETTING OF VARIOUS STOCK LEVELS Various stock levels, ———> Maximum Level [+ Average Level Re-order Level Minimum Level Danger Level Zero Level eer Minimum (Nov. 2003) evel | Re-order level - (Average Usage x Average Lead time) { By It indicates the lowest figure of inventory balance, which must be maintained in hand at all times, so that there is no stoppage of production due to non-availability of inventory. Maximum (Nov. 2003) Re-order level Tevel | Re-orderlevel + Re-order quantity ~ (Minimum Usage x Minimum Lead time) Maximum Usage x _| time. It indicates the maximum inventory held in stock at any This level ies between minimum | (Noo. 2003) | Maximum Lead Time and the maximum levels in such a | way that before the material | ordered is received by the stores, there is sufficient quantity in hand to cover both normal and abnormal consumption situations In other words, it is the level at which fresh order should be 1 | placed for replenishment of stock. Average Level | Minimumlevel+1/2Re- [Is a simple average of order quantity maximum stock level and or minimum stock level Max level +Min level |” 2 aAoan-GA2 eh AMOK OKAHKAfOHRARBDBDHARGAOGCGHHOHCBECECEEESSPRVOORP SSBC ORS RSCHOHSOSC ECS weege e es @ VARIOUS _ FORMULA MEANING STOCKLEVELS | i ; Danger level Minimum usage x | It is the level at which normal Minimum Lead Time | issues, of the raw material Or inventory are stopped and only Minimum usage x _| emergency issues are made. Minimum Time for emergency purchase { (92 © OP) DISTINGUISH BETWEENIRE-ORDER EEVEL’ : i “AND RE-ORDER QUANTITY (May 2008) Re-order level (ROL) is defined as that level of an inventory item where a fresh order for its replenishment is placed. Re-order level = Maximum Usage x Maximum Lead Time. Re-order quantity (ROQ) is defined as that quantity of an inventory item for which order is placed again and again. Economic Order Quantity (EOQ) is a Re-order quantity but not vice-a-versa. 0S 1 4) 242 AECONOMIC ORDERING OUANATTY (E0Q) » i@vay.2007)38) “The size of the order for which both ordering and carrying costs are minimum is known as economic ordering quantity.” It refers to quantity to be purchased every time so as to minimize the total of two types of costs associated with purchase. If purchases of material are made in bulk then inventory carrying cost will be high. On the other hand if order size is small each time, then the ordering cost will be high. In order to minimise ordering and carrying costs it is necessary to determine the order quantity which minimises these two costs, which is known as economic order quantity. Total cost = Purchase value of Raw material + Associated cost Associated cost = Ordering cost + carrying cost Ordering cost * Itis also known as Buying Cost } + Itincurred every time a purchase order is made Eg. - Preparation of purchase order - Cost of receiving goods - Transport cost - Documentation processing cost - Setup cost Carrying cost + Itis also known as stock holding cost + These are costs associated with carrying one unit of the raw material stock.Eg. Storage cost - Handling cost + Insurance cost Obsolescence cost ~ Opportunity cost (required rate of retum on investment) Carrying cost Buying cost Quantity Formula (Wilson's formula) J(2AB)/C Where, A= Annual requirement of raw material in units B= Buying cost or Ordering cost per order C= Annual carrying cost of one unit (ie, carrying cost percentage * cost of one unit) Assumptions : The calculation of economic order of material to be purchased is subject to the following assumptions: . Annual requirement of raw material in units are known in advance . Ordering cost per order is fixed & known in advance Carrying cost per vinit per annum is fixed & known in advance Cost per unit of raw material is constant Uniform availability of raw material throughout the year (ie. the lead time is zero) 9. Uniform production schedule throughout the year . There is no discount NOAPeENne COMPUTATION OF EOQ, WHEN QUANTITY DISCOUNTS ARE OFFERED The computation of EOQ with discounts involves the following steps by Tabular Method or Trial and Error method. ~a naa Mena AG GM oGOahOOGsOeoteeHeeeoeeos 0S@Geoaedvoaseeose @ Ss eeeeoeo eee @ Determine various order size Determine the number of orders at the order size chosen above Number of orders = Annual Requirement } order size ‘Compute Ordering cost p.a = No. of order * cost per order ‘Compute Carrying cost p.a = % of the Order size x Carrying cost per unit pa ‘Compute Associated cost p.a = Ordering cost + Carrying cost Determine cost of purchase p.a ‘Compute Total cost p.a = Associated cost + Cost of purchase Points to be remember: Method to be selected for EOQ computation ‘Computation of EOQ Formula based method Tabular method If you want to find the OQ under ‘Applicability: formula based approach, then all the 1. If any one of the assumptions under assumptions of the EOQ has to be FOQis not satisfied (or) satisfied. 2, In situations where options are available > It isa system of inventory control. > It exercises discriminating control over different items of stores classified on the basis of the investment involved. > ABC analysis is also known as “PARETO ANALYSIS” or 70 : 20 : 10 Analysis or Selective Stock Control Analysis. > Usually the items are divided into three categories according to their importance, namely, their value and frequency of replenishment during a period.> In this system the inventories are categorised into three parts, * Acategory item © Beategory item * Ccategory item (i) ‘A’ Category of items consists of only a small percentage i.e,, about 10% of the total items handled by the stores but require heavy investment about 70% of inventory value, because of their high prices or heavy requirement or both. “B’ Category of items are relatively less important; they may be 20% of the total items of material handled by stores. The percentage of investment required is about 20% of the total investment in inventories. i) { (iil) ‘C’ Category of items does not require much investment; it may be about 10% of total inventory value but they are nearly 70% of the total items handled by store. tegOry, 70% 10% “20% Value involved 70% 20% 10% Level of importance High Moderate Teast Level of control | Strict Selective Little Review of stock Regular basis _| Periodical review Rarely Lead Time Maximum efforts | Moderate effortto [Minimum to to reduce the lead | reduce the lead reduce the lead time is undertaken | time is undertaken | time is undertaken Level of management | Taken careby | Supervised by | Supervised by the senior officers | middle clerical staff management Follow-up Maximum follow | Periodic follow- | Follow-up is upisrequired up is required —_ required only in exceptional cases ADVANTAGES OF ABC ANALYSIS: a) Cost savings: The cost of placing orders, receiving goods and maintaining stocks is minimised. b) Control by exception: Management's time is saved since attention needs to be paid only to ‘some of the items rather than all the items. ©) Smooth flow: It ensures that, without there being any danger of interruption of production for want of materials or stores, minimum investment is made in inventories of stocks of materials or stocks to be carried, d) Standardisation of Work: With the introduction of the ABC system, much of the work connected with purchases can be systematised on a routine basis to be handled by subordinate staff. an eazeeeaeOenGaGGeO2ne2O2Oneoae Gone oeeeoe 0@6e@ e aeee eee es e @ vee weve v @ ( |) PERFETUADINVESTORMREC PERPETUAL INVENTORY: Perpetual inventory represents a system of records maintained by the'stores department. It comprises: (i) Bin Cards, and (fi) Stores Ledger. {A perpetual inventory is usually checked by a programme of continuous stock-taking, Perpetual inventory is essential for material control. It incidentally helps continuous stock-taking. CONTINUOUS STOCK VERIFICATION: (May 2013) > Continuous stock-taking means the physical verification of those records (which are maintained under perpetual inventory) with actual stock. > The verification of physical inventory is an essential feature of every sound system of material control. > — The system of continuous stock-taking consists of counting and verifying the number of items daily throughout the year so that during the year all items of stores are covered three or four times. > The stock verifiers are independent of the store's, and the stores staff has'no foreknowledge of the particular items that would be checked on any particular day. > Butit must be seen that each item is checked a number of times ina year. > Annual stock-taking, however, has certain inherent shortcomings which tend to detract from the usefulness of such physical verification. > For instance, since all the items have to be covered in a given number of days, either the production department have to be shut down during those days to enable thorough checking of stock or else the verification must be of limited character. > Moreover, in the case of periodical checking there is the problem of finding an adequately trained contingent. vvvvv ! (EF Peepetual inventory!) Definition Refers to inventory records, that are bin cards and stores | intervals during the year. Since ledger that are maintained on stock-taking, takes __place up to date basis at all points of regularly, it is called as time. Stock verification takes | Continuous Stock-taking, Place at the end of a financial period say a year. Time covered | All items of stock are covered [In each verification, 2-3 items in a single stretch of | are covered. In an entire period, verification, say over 2-3 days. | all itgms are covered on rotation basi| [- Basis: Perpetualliiventary + Continuo stock-idin Stoppage Regular stores procedures like | There is no interference with | material receipts, issues etc. | regular workflow. may have to be stopped to facilitate stock-taking, Discrepancies | Discrepancies can be known | Discrepancies are ascertained only at the end of the year. | immediately in order to take | Responsibility cannot be easily | corrective actions and avoid re- | . fixed. | occurrence, Updation The inventory records are also |Due to surprise _ element updated periodically, say | involved, inventory records | weekly or monthly, in fact, at | must be maintained up to date any time before physical | at all times. verification. Effects on These do not facilitate or help [It provides stock figures on Interim the quick computation of | real-time basis. Hence, final Financial interim or final financial | accounts can be completed Result | result. quickly; interim results can be prepared conveniently, Not due to damage Due to damage aay i ee Waste Serap Spoilage Defective RM lost in Incidental residue Materials which are Portions of production processing having | | from manufacture | | badly damaged in | | which ean be reciied no recoverable | | having small amount | | manutcturng and tuned outa good ie recoverable without | | operations, and sits further processing. camot be ecified ‘economically. and (Rectifiable) te ras Seman residual hence taken out of vet) proces, (Wot rectifiable) a@nmnO2eaGOn,Oatdeseeaanenaenaneaeae @ awe ona anne aeaeS9@eeaeeee 89 @™ & ¢oe e es r wvvuvuvewwvvuvevveveeosce WASTE: It represents that portion of basic raw materials lost in processing, having no recoverable value. Waste may be : a) visible (remnants of basic raw materials) or ») invisible (disappearance of basic raw materials through evaporation, smoke etc) + Shrinkage of material due to natural causes may also be a form of a material wastage. | TYPES OF WASTAGE, | EAGEOUNTING TREATMENT Normal waste Form part of cost of production | ‘Abnormal wastage Transferred to the Costing Profit and Loss _ | Account CONTROL OF WASTE: Normal allowances for yield and waste should be made from past experience, Actual yield and waste should be compared with anticipated figures and appropriate actions should be taken where necessary. Responsibility should be fixed on purchasing, storage, maintenance, production and inspection staff to maintain standards, A systematic procedure for feedback of achievement against laid down standards should be established. SCRAP: (Nov. 2008) It is the incidental residue from manufacture having small amount recoverable without further eo ° ° processing. Scrap may be treated in cost accounts, in the following ways: ‘TYPES OF SCRAP _ E \C@OUNTING TREATMENT ‘Normal scrap a. if the value of scrap is negligible a. Excluded from cost b._ otherwise b,_Itis treated as other income _- ‘Abnormal scrap ‘After adjustment of normal. loss scrap valise balance should be transferred to the Costing Profit and Loss Account CONTROL OF SCRAP: Tt means the maximum effective utilisation of raw material Scrap control starts from the stage of product designing Selection of most suitable type of material Selection of most suitable type of equipment Selection of trained labour Fixing of standard allowance for scrap Actual scrap should be collected, recorded and reported properly to achieve timely control © 000000 EiSPOILAGE: Materials which are badly damaged in manufacturing operations, and which cannot be rectified economically and hence takey out of process are to be disposed of in some manner without farther processing (Nov. 2003, May 2005, 2007, Nov. 2007) { TYPES OF SPOILAGE {5 | ACCOUNTING TREATMENT. | Normal spoilage Form part of cost of production ‘Abnormal spoilage Transferred to the Costing Profit and Loss Account CONTROL OF SPOILAGE: © Actual spoilage should be compared with standard set © If there is abnormal variation, report should be made to achieve proper action. DEFECTIVES: (Nov. 2008) It signifies those units or portions of production which can be rectified and turned out as. good units by the application of additional material, labour or other services, E.g, Duplication of pages or omission of some pages in a book. It arises due to: - sub-standard materials, - bad-supervision, - bad-planning, - poor workmanship, - inadequate-equipment and + careless inspection. To some extent, defectives may be unavoidable but usually, with proper care it should be possible to avoid defect in the goods produced. a 2000, Nov. 2003, May 2005, 2007, Nov. 2007 ) i] Accounmye i bgt a. In general a. Form part of cost of production b. If deflating department is not! —b. Charged to general overheads identified c. Charged to departmental ©. If deflating department is overheads. identified d. Charged to specific job d._ Due to specific job Abnormal defective Transferred to the Costing Profit and Loss Account J CONTROL OF DEFECTIVE i ©. by proper training of the employees ©. by adequate supervision aeeseeenanmenmOnOn aan GOhanascegeanoanacscec @»>e@es Oe ee © by purchase of quality material by installation of proper material handling system © by usage of proper tools & equipments Control of defectives may cover the following two areas: a) Control over defectives produced b) Control over reworking costs. + TT MOSBESDUE TO OBSONETE STORES, | > Obsolescence is defined as “the loss in the intrinsic value of an asset dite to its supersession’, It may arise due to change in design, nature of product, need of customer, taste of customer or government restriction. Itis no more required for production. The value of the obsolete material held in stock is a total loss and immediate steps should be taken to dispose it off at the best available price. > Eg: Mobile phones , computer etc, v vv | SEYPES OF OBSOLESCENCE! | ||’ “SACCOUNTING TREATMENT ‘Normal obsolescence Form part of cost of production ‘Abnormal obsolescence Transferred to Costing Profit and Loss | Account CONTROL OF OBSOLESCENCE: © By avoid excessive production © Provision should be made for obsolete material © By Proper inventory controlET TT CHAPTER 3 LABOUR COSTING Meaning: Cost incurred for the Kuman resources to produce the product is called labour cost. It may be Direct labour cost or Indirect labour cost. (Nov. 2001) = Diteetibabour 5, pT) i Indirect Labour |) he doi Itis directly attributable to product Itis not directly attributable to product It varies directly with the volume of It may or may not vary directly with the output volume of output It forms part of prime cost It forms part of overheads _| E'g, Wages paid to factory workers Eg Salary paid administration dept. z ‘TLABOURGOSTICONIROLLING TECHNIOUE > Be To exercise an effective control over the labour costs, the essential requisite is efficient utilisation of labour and allied factors. The main points which need consideration for controlling labour costs are the following: Assessment of manpower requirements. Control over time-keeping and time-booking. Time & Motion Study. Control over idle time. Control over overtime. Control over labour turnover, ‘ ‘Wage and incentive systems, Control over casual, contract and other workers, Job Evaluation and Merit Rating. |. Labour productivity, PNA REV E F TIME:KEEPING (Atfendarice Procediije) g It refers to total time spend employees’ attendance time. OBJECTIVES OF TIME-KEEPING: (May 1994) (i) For the preparation of payrolls. (ii) For calculating overtime. ii) For ascertaining and controlling labour cost. (iv) For ascertaining idle time. (¥) For disciplinary purposes. (vi) For overhead distribution, a by the workers inside the factory ie. correct recording of the m~asnae2neaeaenanaGnanaeea hea OQeoeeeeaeeoeeeee OCe eee ® @ STING aus METHODS OF TIME-KEEPING: Time-keeping methods Manual Attendance Metal Disc Dial Time Time Recording Register Method Method Clocks The sel compar lection of a particular method by a company depends upon a number of factors such a ny's policy, size, number of employees etc, However, any method selected and adopted by them must be appropriate so that time keeping can be made with minimum cost. MANUAL METHOD: ‘The manual methods of time-keeping are as follows: (@) Al ttendance Register Method, and (b) Metal Disc Method. } @ 4 A v ttendance Register Method: Itis the oldest method of recording time. Under this method, an attendance register is kept in the time office adjacent to the factory gate or in each department for workers employed therein. The attendance register contains such columns as the name of the worker, the worker's number, the department in which he is working, the time of arrival and departure, normal time and the overtime. The time of arrival and departure, is noted down by an employee know as time- keeper. This method is simple and inexpensive and can be used in small firms where the number of workers is not large. This method may lead to dishonest practice of recording wrong time because there is possibility of collusion between some of the workers and the time-keeper. However, for recording the time of workers who work at customers’ premises and places which are situated at a distance from the factory, this may be the only suitable method.ISTING THEOR Cora (b) Metal Disc Method: v Under this method, each worker is allotted a metal disc or a token with a hole bearing his identification number. ¥ Aboard is kept at the gate with pegs on it and all token are hung on this board. Y These boards can be maintained separately for each department so that the workers could remove their tokens from the board without undue delay. Y As the workers enter the factory gate, they remove their respective discs or tokens and place them in a box or tray kept near the board. ¥ Immediately after the scheduled time for entering the factory, the box is removed and the late comers will have to give their tokens to the time-keeper personally so that the exact time of their arrival could be recorded. ¥ The discs or tokens still left on the board represent the absentee workers. Y Later the time-keeper records the attendance in a register known as Daily Muster Roll which is subsequently passed on to the Pay roll Department. Advantages: => This method is simple because illiterate workers can very easily recognize their tokens and put them in the box. => This method is better than attendance register method and is useful when the number of employees is not large. Disadvantages: : => There are chances that a worker may try to remove his companion’ token from the board in order to get his presence marked when he is absent. => There are chances of disputes regarding the exact time of arrival of a worker because the time-keeper marking the attendance can commit mistakes deliberately or through carelessness. There is no authentic proof of the presence or absence of the workers. => There are chances of inclusion of dummy or ghost workers by the time-keeper in the attendance register or Daily Muster Roll. MECHANICAL METHODS: The mechanical methods that are generally used for the recording of time of workers may be as follows: (a) Time Recording Clocks; and (0) Dial Time Records. (A) Time Recording Clocks: v v v ¥ The time recording clock is mechanical device which automatically records the time of the workers, This method has been developed to obviate some of the difficulties experienced in case of manual methods. This method is useful when the number of workers is fairly large. Under this method, each worker is given a Time Card usually of one week duration, a. MR oct am OO aOaanheaG2eaeO2oeoeeoeesceaoaneaoanoea 08@®e@eeee @ @eo@e@ 06 eeoee ee @ wewveeeeveek @ e ¥ Time cards are serially arranged in a tray near the factory gate and as the worker enters the gate, he picks up his card from the tray, puts it in the time recording clock which prints the exact time of arrival in the proper space against the particular day. Y This process is repeated for recording time of departure for lunch, return from lunch and time of leaving the factory in the evening. Late arrivals, early leavings and overtime are printed in red to attract the attention of the management. COMBINED TIME AND PAYROLL CARD A time card may also give such particulars as hourly rate, total gross wages, net-off deductions and net wages payable. If these particulars are included in the time card, it would be known as combined time and pay-roll card. : Ithas been divided into two parts o Upper part and o Lower part ‘The upper part being the record of time and the lower one serving as the wage ticket. Wages are calculated on the basis of time recorded in the upper portion and are entered in the lower portion by the pay-roll department. : {B) Dial Time Records: : ¥ The dial time recorder is a machine which has a dial around the clock. Y This dial has a number of holes (usually about 150) and each hole bears a number corresponding to the identification number of the worker concerned. Y There is one radial arm at the centre of the dial. As a worker enters the factory gate, he is to press the radial arm after placing it at the hole of his number and his time will automatically be recorded on roll of a paper inside the dial time recorder against the number. ¥ — Thesheet on which the time is recorded provides a running account of the worker's time. This machine allows greater accuracy and can itself transcribe the number of hours to the wages sheets. ¥ “This machine can also calculate the wages of the workers and thus avoids much loss of time. |) REQUISITES O8A\COOD INEEKEEPING SYSTEM'S a) Itshould not allow proxy for another worker under any circumstances. b) There should also be a provision of recording of time of piece workers so that regular attendance and discipline may be maintained. This is necessary to maintain uniformity of flow of production. c) Time of arrival as well as time of departure of workers should be recorded so that total times of workers are recorded and wages may be calculated accordingly. d) As far as possible, method of recording of time should be mechanical so that chances of disputes regarding time may not arise between workers and the time-keeper.(b) Metal Disc Meth ¥ Under this method, each worker is allotted a metal disc or a token with a hole bearing his identification number. ¥ A board is kept at the gate with pegs on it and all token are hung on this board. ¥ These boards can be maintained separately for each department so that the workers could remove their tokens from the board without undue delay. Y As the workers enter the factory gate, they remove their respective discs or tokens and place them in a box or tray kept near the board. Y Immediately after the scheduled time for entering the factory, exact time of their arrival could be recorded. ¥ — The discs or tokens still left on the board tepresent the absentee workers. v which is subsequently passed on to the Pay roll Department. Advantages: = This method is simple because illiterate workers can vi and put them in the box. = This method is better than attendance register method and is useful when the number of employees is not large. Disadvantages: = There are chances thit a worker may try to remove his companion's token from the board in order to get his presence marked when he is absent. = There are chances of disputes regarding the exact time of arrival of a worker because the time-keeper marking the attendance can commit mistakes deliberately or through carelessness. There is no authentic proof of the presence or absence of the workers, > There are chances of inclusion of dummy or ghost workers by the time-keeper in the attendance register or Daily Muster Roll, MECHANICAL METHODS: ‘The mechanical methods that are follows: (a) Time Recording Clocks; and (b) Dial Time Records. (A) Time Recording Clocks: v ‘The time recording clock is mechanical device which automaticaly records the time of the workers. ¥ — This method has been developed to obviate some of the difficulties experienced in case of manual methods, This method is useful when the number of workérs is fairly large. Under this method, each worker is given a Time Card usually of one week duration, es generally used for the recording of time of workers may be as ¥ the box is removed and the late comers will have to give their tokens to the time-keeper personally so that the Later the time-keeper records the attendance in a register known as Daily Muster Roll ety easily recognize their tokens. eo 4a @ are oc8 @O OGCABBABOBRBBOBHHOCHBKBSESEEEeee 0 eee ee ee ee ees @ ve 2. Y Time cards are serially arranged in a tray near the factory gate and as the worker enters the gate, he picks up his card from the tray, puts it in the time recording clock which prints the exact time of arrival in the proper space against the particular day. ¥ This process is repeated for recording time of departure for lunch, return from lunch and time of leaving the factory in the evening, v Late arrivals, early leavings and overtime are printed in red to attract the attention of the management. COMBINED TIME AND PAYROLL CARD A time card may also give such particulars as hourly rate, total gross wages, net-off deductions and net wages payable. If these particulars are included in the time card, it would be known as combined time and pay-roll card. It has been divided into two parts ©. Upper part and o Lower part ‘The upper part being the record of time and the lower one serving as the wage ticket. Wages are calculated on the basis of time recorded in the upper portion and are entered in the lower portion by the pay-roll department. (8) iat Time Recon The dial time recorder is a machine which has a dial around the clock. : This dial has a number of holes (usually about 150) and each hole bears a number corresponding to the identification number of the worker concerned. ¥ There is one radial arm at the centre of the dial. As a worker enters the factory gate, he is to press the radial arm after placing it at the hole of his number and his time will automatically be recorded on roll of a paper inside the dial time recorder against the number. ¥ The sheet on which the time is recorded provides a running account of the worker's time. This machine allows greater accuracy and can itself transcribe the number of hours to the wages sheets ¥ This machine can also calculate the wages of the workeys and thus avoids much loss of time. 1. |) | REQUISTTES OF A\GOOD/TIMEFKEEFING SYSTEM a) It should not allow proxy for another worker under any circumstances. b) There should also be a provision of recording of time of piece workers so that regular attendance and discipline may be maintained. This is necessary to maintain uniformity of flow of production. ©) Time of arrival as well as time of departure of workers should be recorded so that total times of workers are recorded and wages may be calculated accordingly. d) As far as possible, method of recording of time should be mechanical so that chances of disputes regarding time may not arise between workers and the time-keeper.‘OSTING THEORY IPCC/ PCC e) _Late-comers should record late arrivals. Any relaxation by the time-keeper in this regard will encourage indiscipline. f)_Thesystem should be simple, smooth and quick. g) Unnecessary queuing at the factory gate should be avoided. h) Sufficient clocks should be installed keeping in view the number of workers so that workers may not have to wait for a long period for recording their time of arrivals and departures. i) A responsible officer should pay frequent visits at the factory gate to see that proper method of recording of time is being followed. It is a system of recording the time spent by each works on various jobs. Methods of Time booking: . Daily Time Sheet Weekly Time sheet Job card ‘Combined Time and Job card Labour cost card or circulating job card vi. Piece-work card OBJECTIVES OF TIME-BOOKING: 1. To ensure that time paid for, according to time keeping, has been properly utilised on different jobs or work orders, 2. - Toascertain-the cast of each job or work order. 3. To provide a basis for the apportionment of overheads. 4 To have control oyer Idle time. Distinction between Tinie Keeping and Time Booking ‘Time Keeping |= | {7 “) Mime Booking ©) 7” It is a system of recording the arrival | It is a system of recording the time spent and departure tinie of each worker. _| by each workers on various job. T's basic objectives is to maintain [Its basic objective is to ascertain the attendance record as per statutory | labour cost of a job. requirements and to provide data for | the payroll preparation. ga | Methods: Methods: 1, Manual Methods 1. Daily Time Sheet a. Attendance register 2. Weekly Time sheet b. Metal Disc Method 3. Job card 2. Mechanical methods 4. Combined Time and Job card a. Time Recording Clocks 5. Labour cost card or circulating job b. Dial Time Records. card [6 Piece-work card 2ee@eeoaeaeoseeooeteoea aMeoseone @ 4 amm @ 4 2 4 GG ®e @eee2eee08@ f®eee @e@eeeea s LABOUR COSTING [e (nD PEs Da Soe eee It is the time during which no production is carried out even though wages are paid for such unproductive time. . Idle Time = Total time ~ Productive time Since we calculate total time from Time keeping Records and Productive time from Time booking records: Idle Time = Time as per Time Keeping Records - Time as per Time Booking Records. Idle time can be - © normal idle time or o abnormal idle time. Tris inherent in any work situation | Over and above the normal idle ime, there and cannot be eliminated. may be factors which give rise to abnormal idle time. Eg. i. The time lost between factory |Eg.i. Lack of coordination, gate and the place of work, Power failure, ji, Interval between one job and | iti, Breakdown of machines, another, iv. Non-availability of raw materials, iii, Setting up time for the machine, iv. Normal fatigue ete. Itis uncontrollable in nature. It may be controllable and uncontrollable. 1.Controllable abriormal idle time: It refers to that time which could have been put to productive use had the management been more alert and efficient: All such time which could have been avoided is controllable idle time. 2. Uncontrollable idle time: | Time lost due to abnormal causes, over which | management does not have any control ¢g., breakdown of machines, flood etc. may be characterised as uncontrollable idle time. ‘Accounting Treatment: ~ [Accounting Treatment: Normal idle time is treated as a part | It should be shown as a separate item in the of-the cast of production. Costing Profit and Loss Account.Sea ERT > Work done beyond normal working hours is known as ‘overtime work’, > Overtime has to be paid at double the rate of wages ( such amount is known as ‘Overtime Premium’). According to the Factories Act, 1948, worker is entitled to overtime when he works for more than 9 hours on any day or more than 48 hours in a week. CIRCUMSTANCE UNDER WHICH OVERTIME MAY ARISE i, Due to shortage of labour ' Due to urgency of customer To make up any shortfall in production target or due to achieve the production target To meet the seasonal demand iv. Due toabnormal reason [ OVERTIME PREMIUM (May 2000) Overtime payment is the amount of wages paid for working beyond normal working hours, The rate for overtime work is higher than the normal time rate; usually it is at double the normal rates, The extra amount so paid over the normal rate is called overtime premium, ACCOUNTING TREATMENT OF OVERTIME PREMIUM IN COST ACCOUNTING (May 2000, Nov. 2004, May 2008) Charged to cost of production Due to customer's desire Charged to the particular job Due to fault of particular department __| Charged to the department in default Due to abnormal conditions Charged to Costing P&L a/c Steps for controlling overtime: = Watch on the output during the normal hours should be maintained to ensure that overtime is not granted when normal output is not obtained during the normal hours, special reasons, Statement concerning overtime work is prepared along with justifications, places for putting up before the competent authority. Prior sanction about overtime should be obtained from competent authority. Actual rate of output produced during the overtime period shouild be compared with normal rate of output. = Periodical reports on overtime wa corrective action. without any at appropriate uu ges should be sent to top management for taking 'E possible an upper limit may be fixed for each category of workers in respect of overtime. a 4 —naeaoanaheaAmaaaheaGseaGBeaeoaeesevoeaeeeoeeonese a@@ee0eee2820 @oeee eo eeee eaveoe 2 vee LABOUR COSTING APTER 3 pipieer sone Wess o Labour turnover in an organisation is “the rate of change in the composition of labour force during a specified period measured against a suitable index” Terms associated with Labour Tumover . Separation . Replacement New Recruitment |. Accession & . Average Labour Force (eee epoge Left & Discharged ‘Additional labour force | Old worker Goes Out Goes Out - | New worker : Comes in Comes in Accession: It represents the number of new workers joining the organisation, whether by way of replacement or otherwise. Computation; No. of workers at the end of the period xxx ‘Add: No. of separations xx Less: No. of workers at the beginning (xxx) | Accession ome Average Labour Force = No. of workers at the beginning + No. of workers at the end Ra cts a he Pepin * No ol woken atten METHODS OF COMPUTATION OF LABOUR TURNOVER (May 2003, Nov. 2007) Methods — Without Expansion With Expansion 1 Separation Drepacement | [3 Mined 1 Sepaaton 7 aceon Method =S/L Method = R/L ‘Method Method =S/L. ‘Method = = GHRVL AfLor (RNV/L Where: S= Number of Separations R= Number of Replacements Az Accession N=New Recruitments / L= Average Labour force (Note: Labour Turnover is expressed in percentage)CAUSES OF LABOUR TURNOVER (May 2011) (a) Personal Causes; (b) Unavoidable Causes; and (©) Avoidable Causes. (@) Personal Causes: Personal causes are those which Induce or compel workers to leave their jobs; such causes include the following: (i) Change of jobs for betterment. (ji) Premature retirement due to ill health or old age. (iii) Domestic problems and family responsibilities. (iv) Discontent over the jobs and working environment. Inall the given cases the employee leaves the organisation at his will and, therefore, it is difficult to suggest any possible remedy in the first three cases. But the last one can be to overcome by creating conditions leading to a healthy working environment. For this, officers should play a positive role and make stire that their subordinates work under healthy working conditions. (b) Unavoidable Causes: Unmvoidable causes are those under which it becomes obligatory on the part of management to ask one or more of their employees to leave the organisation; such causes are summed up as listed below: : (i) Seasonal nature of the business; (i) Shortage of raw material, power, slack market for the product etc; (iii) ‘Change in the plant location; (v) ity, making a worker unfit for work; (¥) Disciplinary measures; (vi) Marriage (generally in the case of women). (0) Avoidable Causes: Avoidable causes are those which require the attention of management on a continuous basis so as to keep the labour turnover ratio as low as possible. The main causes under this case are indicated below: ()) Dissatisfaction with job, remuneration, hours of work, working conditions, etc,, (i) Strained relationship with management, supervisors or fellow workers; (iii) Lack of training facilities and promotional avenues; (iv) Lack of recreational and medical facilities; (v) Low wages and allowances. : Proper and timely management action can reduce the labour turnover appreciably so far as avoidable causes are concerned. as-menaeanaKGoKG OGM aoeeGeaGBOOoeeeeoseeeoeveg devv@ we PVFTBPeoeeSeSCeeRQoeeeseeeeoeaee FES EFFECTS OF LABOUR TURNOVER (Nov. 1998) High labour turnover increases the cost of production in the following ways: (i) Even flow of production is disturbed; (ii) Efficiency of new workers is low; prod in the beginning; (iii) There is increased cost of training and induction; (iv) New workers cause increased breakage of tools, luctivity of new but experienced workers is low wastage of materials, etc. COSTS WHICH ARE ASSOCIATED WITH. LABOUR TURNOVER (Nov. 1999, 2003) ‘Cost OF LABOUR TURNOVER : Replacement costs Increase in labour turnover leads to increase in replacement cost Preventive costs Increase in preventive cost leads to decrease in labour turnover Replacement cost Cost Preventive cost Labour Turnover (a) Preventive costs: These include costs incurred to keep the’labour turnéver at a low level, i.e. cost of medical services, welfare schemes and pension schemes. If.a company incurs high preventive costs, the rate of labour turnover is usually low. : ment costs: These are the costs which arise due to high labour tw training and experience of good work, additional costs will ie, cost of employment, training and induction, abnormal nd overheads due to the inefficiency of new workers. (b) Replacen over. If men leave soon after they acquire the necessary have to be incurred on new workers, breakage and scrap and extra wages at PeSTING TH! c. Points system ny IPCC/ PC i, Beadaux System and ii, Haynes System d, Accelerated Premium System ) Premium Bonus method a. Halsey system b. Rowan system and . Barth system d) Group system and ) System of incentive schemes for indirect workers system) |) SUA MeaNING FE Tien Time rate Payment made on the basis of number of hours worked. | system Formula: Time Taken x Rate Per Hour High wage | ¥ Under this plan @ worker is paid a wage rate which is | plan substantially higher than the rate prevailing in the area or in | the industry. Y In return, he is expected to maintain a very high level of _performance, both quantitative and qualitative. Measured day | v In this method the hourly rate of the time worker consists of work two parts viz, fixed and variable. ¥ The fixed element is based on the nature of the job i, the rate for this partis fixed on the basis of job requirements. | v The variable portion varies for each worker depending upon i his merit rating and the cost of living index. Differential Tn this method, different hourly rates are fixed for different levels time rate of efficiency. Up to a certain level of efficiency the normal time or day rate is paid. Based on efficiency level the hourly rate | increases gradually. : "Under this system the payment made has a direct relationship Payment by result | with the output given by a worker. y Under this system of wage payment, each operation, job or anit | ‘Differential | piece work of production is termed a piece. The wages of the worker depend | upon his output. | Wages = Number of units produced x Piece rate per unit. Under this several piece rates on a slab scale are fixed for a job or | | operation which is put on piece-work. For different levels of output below and above the standard, different piece rates are applicable umeana een Reh MOH aGGOBKhSCESCHBCOCCHOHEOHSECSCHSO®@QGeoeoGGOBGOCGC OHO e@ @e eevee eees @ wwe a z It aims at rewarding efficient workers by providing increased Bonus of 20% of time rate plus 1% for each 1% increase in {) efficiency is admissible Taylor's differential _| piece rate beyand certain level of outpit: piece work | Formula: system, "TE ORWAGES Less than 100% 83% of normal piece rate | 100% or more 125% of normal piece rate Merrick Under this system three piece rates for a job are fixed. None of differential _| the fixed rates is below the normal piece rate ‘LEVEL OR EFFICIENCY) 11) RANE OF WAGES — system. Up to 83% Normal piece rate Above 83% & up to 100% 110% of normal piece rate Above 100% 120% of normal piece rate Gantttaskand | This system is a combination of time and piece work system. bonus system | According to this system a high standard or task is set and (Nov. 2004, payment is made at time rate to a worker for production below Nov. 2008) the set standard, If the standards are achieved or exceeded, the | payment to the concerned worker is made at a higher piece rate. | LEVEL OF OUTPUT #3. JE RATE OF WAGES © Below standard Guaranteed time rate + || AtStandard Time rate plus bonus of 20% of time rate ‘Above Standard High piece rate on worker's | | whole output. | It is so fixed, so as to include a bonus of 20% of the time rate. Emerson's Under this system minimum time wages are guaranteed. But | efficiency beyond a certain efficiency level, bonus in addition to minimum | system day wages | (Nov. 2008) _ i i eae ORWAGES So Below 66.67% Time rate wages ‘Above 66.77 & upto 100% | Time rate plus Bonus of 20% of time rate Above 100% Time rate plusING THEORY SYSTEM Points scheme or Bedeaux system .} Bis earned ‘standard minutes for work done) over actual time. Under this scheme, firstly the quantum of work that a wSrESt can perform is expressed in Bedeaux points or B's. The points represent the standard time in terms of minutes required to perform the job. The standard number of points in terms of | minutes is ascertained after a careful and detailed analysis of each operation or job. Each such minute consists of the time zequired to complete a fraction of the operation or the job, and also an allowance for rest due to fatigue. Workers who are not able to complete tasks allotted to them “within the standard time are paid at the normal daily rate. Those }who are able to improve upon the efficiency rate are paid a | bonus equal tothe wages for time saved as indicated by excess of Workers are paid 75% of the time saved. Hayne’s system Under this system also the standard is set in minutes. The standard time for the job is expressed in terms of the standard man-minutes called as “MANIT”. Manit stands for man-minute, In the case of | repetitive work the time saved is shared between the worker and the foreman in the ratio 5 : 1. Ifthe work is of non-repetitive nature, the worker, the employer and the foreman share the value of time saved in the ratio of 5 : 4: 1. Each worker is paid according to hourly rate for the time spent by him on the job. Accelerated premium system | Premium bonus methods production beyond standard. Under this system earnings increase with output; the rate of increase of earnings itself increases progressively with output; in fact the earnings increase in greater proportion tharvthe increase in production. This system acts as a strong incentive for skilled workers to earn high wages by increasing output and for Under | these methods, standard time is established for performing a job. The worker is guaranteed his daily wages (except in Barth System), if his output is below and upto standard. In case the task is completed in less than the standard time, the saved time is shared between the employee and the employer. There are two types of time-sharing plans in use viz, constant sharing plans and variable sharing plans. Halsey systems Under this workers will get the bonus equal to 50% of the wages of time saved. Formula = (Time taken * Time rate) + (50% of time saved * Time rate). anamaRaohSRHKKSKBLAOABARBSBEHECHECHOHCHHESCHEHHOdn ee ee ee oe Oe 2 oe ea 7 e@ vveve we SYSTEM | MEANING \ Halsey Weir | The Halsey Weir System is the same as the Halsey System except | ‘System that the bonus paid to workers is 30% of the time saved. | Formula: (Time taken * Time rate) + (30% of time saved * Time rate). | Rowan system [Under Rowan System the bonus is that proportion of the time ‘wages as time saved bears to the standard time. | Formula; (Time taken * Rate per hour) + (Time Taken/Standard Time) x Time Saved Rate per hour Barth system | The system is particularly suitable for trainees and beginners and Nov. 2008) also for unskilled workers, Formula: Rate per hour x ¥ Gtandard Time x Actual Time) Group system | Certain jobs or operations are required to be performed collectively by a number of workers. Under such case each man’s work depends on the work performed by one or more of his culleagues and as such it is not possible to measure separately the output of each worker. The workers constituting a group or a team here are considered as a composite unit and the combined output of such a unit is measured for the purpose of wage calculation. System of Since the setting of work standards and measurement of output incentive in the case of indirect workers is not an easy task in respect of schemes for | maintenance, internal transport, inspection, packing and indirect cleaning, therefore the introduction of a system for payment by workers results for indirect workers is difficult. In spite of that it has been felt necessary to provide for incentives to indirect workers, due 2 | to Payment of incentive bonus to direct workers and time rate to indirect workers leads to dissatisfaction and labour unrest. Meaning JOB EVALUATION is the assessment of the relative worth of jobs within a company. MERIT RATING is the assessment of the relative worth of the man behind the job Factors influencing merit rating: Quantum of work done Quality of work done required Sense of responsibility Initiativeness Reliability Level of knowledge and experience Skill Discipline Sense of judgment ~CaENaueene10. Ability to follow instructions 11. Adaptability of instructions 12. Cooperation 13. Extraordinary talent Under this method every factor is assigned with some points, Evaluator assigns points to each worker for every factor on the basis of points acquired by the employees, incentives, increment, promotion may be granted. Difference between Job Evaluation & Merit Rating (ev 1991, May 1994, Noo 1986, 19,2001) (os EvanuaTT | Job evaluation is the assessment of the iB iS the assessment of the Telative worth of jobs within a company. | relative worth of the man behind the job, Job evaluation and its accomplishment | Merits rating provide a scientific basis for are means to set up a rational wage and | determining fair wages of each worker salary structure, based on his ability and performance. Job evaluation ~ simplifies wage | Merit rating is used to determine Tair administration by bringing _an | rate of pay for different workers, uniformity in wage rates. Difference between Casual Worker and 1 Outworker ate _(May 1997; May 2002) fe eo i. Casual worker is appointed for a short duration to carry on normal business activities in place of a A worker who « does not work in: the factory premises but either | works from his home or at a site regular but temporarily absent outside the factory is known as an worker. ; outworker, | ii, He is engaged for the regular] ii, He is supplied with raw materials work inside the factory. and tools necessary for carrying out the job. He is usually engaged _on specialised job. iil, “He is paid on daily time basis. Iti, An outworker who works from is also known as daily wage. his home is usually compensated i cn the basis of his output. anna Roni BG 24 2.22O CO SO G.0_8 OO O8.C OOM 6@OCROHOCSCOECBOS eee vea v@ve FovetesS i CHAPTER 4 OVERHEADS ‘MRE Costs which are not directly attributable to produce the product or render the service are v called indirect cost. ¥_ Alllthe indirect expenses are collectively called overheads. These are related to the cost object. ¥ These cannot be traced to it in an economically feasible way. Ey ig. Supervisor salary. Production overheads Administrative overheads Selling and distribution overheads Research and Development overheads 5) Qe pe STEPS FORTHE DISTRIBU HONOROVERHEADS) Estimation and Collection of Manufacturing Overheads Classification Allocation Apportionment overheads Re-apportionment and Recovery / Absorption The estimation is usually done with reference to past data aa een Estimation / Collection adjusted for known future changes. The overhead expenses : are usually collected through a system of standing orders. The term “Standing Order” denotes sanction for indirect expenses under various heads of expenditure. Classification * | It is classification of overheads on the basis of behavior / (May'98) Nature / Variability Allocation The term allocation’ implies relating overheads directly to the (May’98, Nov'01)_| various departments. ‘Apportionment — | Expenses ‘which cannot be directly allocated to the various (May'98) departments and cost centres are apportioned. Apportionment implies “the allotment of proportions of items of cost to cost centres or departments”. It implies that the unallocatable ‘expenses are to be spread over the various departments or cost centres on an equitable basis. a)Re- "| Expenses of service departments transferred to production [apportionment * _| departments are called Re-apportionment, Recovery / | Charging of overhead cost with every unit of output is called Absorption recovery. (May’98, .” Crean absorption is based on: Nov ‘01) - Percentage of Direct Material Percentage of Direct Labour |. Percentage of Prime cost iv. Labour hour rate v._Machine hour rate Tt means identifying a cost centre and charging its expense in full Tt means allotment of proportions of common cost to various cost centres Specific costs are directly allocated to cost centre Common expenses which cannot be directly allocated are apportioned on some suitable basis Nature of expenses is specific and identifiable Nature of expense is General and common * Allocation allots whole amount of cost to cost centre or cost unit + Apportionment allots part of cost to cost centre or cost unit * No basis required for allocation + Apportionment is made on the basis of area, assets value, number of workers etc _ * Charging of expenses to only one| * Charging of expenses to more than |__ cost centre ‘one cost centre [s Expenses are charged in full . Eapel cha iarged i in proportions Rent ‘Area in sy. meter Depreciation Value of asset ‘Supervisor salary ‘Number of hours spend a Electricity charges Number of light points Power i Horse Power rate Tnsurance Value of asset Fire insurance of building Floor area occupied Canteen expenses Number of employees ~-asaeoneahbeaGMheoGOOaGHGOOtCeoeeeoeoeeee SERCO OCLCOeE 6 @ | ) seveeeve 8 e weve ia | UGOMMON EXPENSES)” Car riage outwards room Volume of unitsjsold | Material handling expenses Value of materials consumed Delivery charges Weight Indirect expenses Direct wages Sundries / mise. exp. Direct wages METHODS OF RE-APPORTIONMENT (Nov. 1999, 2004) Expenses of service departments transferred to prod ¢. Following are the method of re-apportionment of service department expenses apportionment to production department Let A & B = Production Departments departments and another service dept., whereas the another service dept, rendered services only to production dept, rendered X & Y = Service Departments iW i eat sae SAL sigue Re-Apportionment | Service Dept, rendered | X rendered services to A &3 | Direct Distribution services only to production | Y Rendered services fo A & B_ | Method dept, : One service dept, rendered | X rendered sic oA, B&Y | Stepladder Method / | services to all production | Y Rendered services to A &B | Non-Reciprocal Method Both the service dept, are | X rendered services to A, B & Y services to | Y Rendered services to A, B & X Reciprocal Method 1, Simultaneous production dept, & other Equation service dept, | ) | Technique 2, Repeated Redistribution Technique Points to be remembered: topic. > Direct material, Direct Labs > Direct material, Direct Labour our & Direct expenses of the Production department ‘should not be considered for primary and secondary distribution. & Direct expenses of the Service department be considered for primary and secondary distribution. luction departments are called Re- > Cost which are indirectly helps you to produce a products alone will form part of this should> All the expenses of the service department are indirect expenses (i.e overhead) > Allocation + Apportionment = Primary Distribution > Reapportionment = Secondary Distribution > In general, Indirect Expenses and miscellaneous expenses are to be apportioned based on direct wages. However, if the industry is machine dependent, then, we have to apportion based on the machine hours, © tis also called Multiple overhead | computation of one single overhead | rate. rate for the whole factory. + It refers to a separate rate for each * The use of blanket rate may be| _ individual ostcentre or department, proper ifthe factory produces only | * Hf the product lines are varied or tne major product in a continuous, ™achinery is used to a varying process (eg,, chemical factories) or| degree inthe _ different i departments, that is, where where the work performed in every partments, 4 department is fairly uniform or) Conditions throughout the factory standardised. are not uniform, the use of | © Blanket rate should be applied. oe rates is to be (1) Where only one major product is | Preferred. being produced. | (2) where several.‘ products are | Formula = OH allocated to each Dept. produced, but Corresponding base (a) all products pass through all ‘tments; and (&) alt products are processed for the same length of time in| each department. Where these conditions do not exist, departmental rates should be used. Formula = OH for the entire factory No. of hours -~ananeaaoneaG@eaheahe oG@aGeaOaseaeoe ©@eoaHneeeaeeevee®@aQoeeeQgeaane , e eve eevee vs vve > Overhead expenses are usually applied to production on thi > The actual overhead rate will rarely coincide with the pre~ > Such a variation may ari 1 LINGOST ACGOUNTING. e es of pre-determined rates. fetermined overhead rate, due mined overhead rate and actual overhead rate. se due to any one of the following situations: period is either more or less in comparison to variation in pre-detey j) ‘The numbér of units produced during the with budgeted figure. ii) The actual overheads incurred are more or less than the estimated overheads for the period. both in the actual overheads and in the iif) If changes occur in different proportion number of units produced during the period. jjunpawansonrrion (ij) 2 [OVERABSORETION Te means absorbed overheads are less than Tt means absorbed overheads are more | the actual overheads. than the actual overheads. It may be due to Tt may be due to i. Normal reasons or i. Error inestimation Seasonal fluctuations, ii, abnormal reasons Unanticipated changes in methods of production ‘Accounting treatment Accounting treatment Th ceprraal caoeioky, i reabon Write off to Use | The amount of | Transferred to costing P&L supplementary | normal increase in | Costing P&L account. recovery rate. cost is apportioned | account. to a. Units sold b. Closing Stock of | Finished Goods | c. Closing Stock of WIP (Ee Genuine error|Eg. Strike in planning; change | period wages; in planning | write off of | premises ete. obsolete stocks etc. | ee)When the amount of under-absorbed and over-absorbed overheads is significant or large, because of differences due to wrong estimation, then the cost of product needs to be adjusted by using supplementary rates (under and over-absorption actual overheads) to avoid misleading impression. SSD CAPAY TF aytis9) It is the part of capacity of plant or machinery which cannot be effectively utilised. Idle capacity = Practical capacity — Actual capacity + Idle capacity may arise due to: Lack of demand Shortage of raw material Shortage of labour Lack of power Seasonal nature etc. Idle capacity may be classified into: 1) Normal Idle Capacity and ' 2) Abnormal Idle capacity ‘TREATMENT OF IDLE CAPACITY COST Tale capacity cost = (Total Overheads / Normal capacity) * Idle Capacity (eg. repairs & maintenance, change over of job etc) | Due to avoidable reasons Charged to P&L A7e (c.g; faulty planning, ower failure etc) Dae to Seasonal Factors. Charged to cost of production ERE AES 23 It is a technique of intelligently describing in numbers or letters or a combination of both, the lengthy description of numerous cost accounting heads for ease of recording and controlling of the cost data generated. It facilitates the task of allocation and apportionment of overheads over different departments or cost centres and it reduce the task of maintaining a huge number of accounts. Methods (May ’91) () Straight numbering system (i) Number blocks system (ii) Combination of symbdls and numbers a-2e2e-2nen Meee KhenGeoG Aah Geese @eonvneeaneaeeed2®eeee oe eeeEoeasaeeoeseegoae eueeeesg ei @ (iv) Numerical code method (v) Mnemonic method ACNE RASS: cost aCeOUNTING TREATMENT i ESE FS lay mm, wer 1909 TIATORE Bee eR © TREATMENT 1. Primary Packing Ttis necessary to protect | Prime Cost the product. 7 2. Secondary Packing. a. If It facilitates for a. Distribution Overheads | transportation of product \. b.Ifitisa fancy packing _| b. Selling Overheads to attract customer _ : ' 3. Special Packing Trmay be at the request of | Directly charged to a customer specific Job. llaepelir TS Ts es provided to the workers in | Production Overheads addition to their salary and allowances are known as fringe benefits.(Ct a a RTE | CHAPTER 5 INTEGRATED AND NON-INTEGRATED ACCOUNTING SYSTEM UNTING SYSTEM, © It's a system of accounting under which separate ledgers are maintained for cost and financial accounts by Accountants. © Under such a system the cost accounts restricts itself to recording only those transactions which relate to the product or service being provided. ° accounts. ©” This leads fo the exclusion of certain exper from ‘other than the sale of product or service’. © A special feature-of the non-integrated system of accounts is its ability to deal with notional expenses like rent or interest on capital tied up in the stock. © The accounting of notional rent facilitates comparisons amongst factories (some owned and some rented). IMPORTANT LEDGERS - UNDER NON-INTEGRATED ACCOUNTING SYSTEM ¥ Cost Ledger . Y Stores Ledger. ¥ — Work-in-Progress Ledger Y Finished Goods Ledger MAIN ACCOUNTS - WHEN A SEPARATE COST LEDGER IS MAINTAINED ¥ Cost Ledger Control Account/ General Ledger Adjustment Account Stores Ledger Control Account Work-in-Progress Control Account Finished Goods Control Accounts Wage Control Account Production Overheads Account Administrative Overheads Account Selling and Distribution Overheads Account Cost of Sales Account Costing Profit & Loss Account Overheads Adjustment Account { hi aT | RNAS AK Hence items of expenses which have a bearing with sales or, production or for that matter any other items which are under the factory management are the ones dealt with in such nses like interest, bad debts and Tevenue/income e a ® @ @ 6 e a 6 6 e @ @ a @ @ @ q 4 a 4 a « a a q 1 q q d 4 4 qee ®@eeeea @COORBEOCRBORDOBOES eee wvv@ew Dd D a Tt is one of the accounts prepared under the non-integrated system of accounting. As the system does not permit the operation of personal accounts or real accounts, the General Ledger Adjustment Account is used to compléte double entry. For posting of contra entries involving a personal or real account, the General Ledger Adjustment Account is used. RE SOU RR AES PURCHASE Stores Ledger Control A/c od To Cost Ledger Control A/c xxx MATERIAL RETURNED TO VENDOR ; Cost Ledger Control A/c Dr ad To Stores Ledger Control A/c xxx MATERIAL (DIRECT) ISSUED TO PRODUCTION Work-in-Progress Control A/c Dr Xxx To Stores Ledger Control A/e rox MATERIAL ‘INDIRECT ISSUED TO PRODUCTION Manufacturing Overheads A/c Dr xxx To Stores Ledger Control A/c xx MATERIAL RETURNED FROM JOB TO STORES Stores Ledger Control A/c Dr. XX To Work-in-Progress Control A/c x0 MATERIAL TRANSFERRED FROM JOB 1 TO JOB 2 Job 2 A/c Dr. XxX ToJob1 A/c roxx DIRECT WAGES PAID TO WORKERS Wage Control A/c Dr xxx To Cost Ledger Control A/c 20x WIP A/c Dr xxx To Wage Control A/c xxx INDIRECT WAGES PAID TO WORKERS IN THE PRODUCTION, ADMINISTRATION, SELLING AND DISTRIBUTION DEPARTMENTS Wage Control A/c Dr xxK To Cost Ledger Control A/c XXX Production Overheads A/c Dr XXXistrative Overheads A/c Dr xxx 5 Selling & Dist. Overheads A/c Dr Xxx To Wage Control A/c xox ADMINISTRATIVE OVERHEAD EXPENSES INCURRED Administrative Overheads A/c Dr xox To Cost Ledger Control A/c 2x CARRIAGE INWARD Manufacturing Overheads A/c Dr vox To Cost Ledger Control A/c xxx ADMINISTRATIVE OVERHEADS RECOVERED FROM FINISHED GOODS Finished Goods Ledger Control A/c Dr 2K To Administrative Overheads A/c xxx SELLING AND DISTRIBUTION OVERHEADS RECOVERED FROM SALES Cost of Sales A/c Dr XXX To Selling & Distribution Overheads A/c XXX UNDER/OVER ABSORBED OVERHEADS ARE TRANSFERRED TO COSTING PROFIT & LOSS ACCOUNT a. For over recovery Production Overheads A/c Dr rox To Costing Profit & Loss A/c 20x | b. For under recovery Costing Profit & Loss Account Dr xxx To Administrative Overheads A/c Pepe 2002, 207, 2012) © Inthis system cost and financial accounts are kept in the same set of books. © _Itprovides full information required for Costing as well as for Financiel Accounts, © Under this system there is no need for a separate cost ledger. ADVANTAGES (May 2002, 2007, 2012) v The question of reconciling costing profit and financial profit does not arise, as there is one figure of profit only. Due to use of one set of books, there isa significant extent of saving in efforts made, No delay is caused in obtaining information as its provided from books of original entry. It is economical also as it is based on the concept of “Centralisation of Accounting function”. S88 @ a Mk 2 om 2-@ 2 G-e @-4 G8 2266826 8.0.08 9 09026080@6¢0200880800800000 ®©e®2020008 ee vVveee@ oe ve PRE-REQUISITES FOR INTEGRATED ACCOUNTS. 1, EXTENT OF INTEGRATION: (acrvass (Nov 1996,2001, 2006, 2007) Decide the extent of integration of the two sets of books, whether to integrate up to the stage of prime cost or factory cost or preferably full integration of the entire accounting records. 2. CODING SYSTEM A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts. 3. STANDARDISATION ‘An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustment necessary for preparation of interim accounts. 4, COORDINATION Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured. Journal Entries RAW MATERIALS PURCHASED Stores Ledger Control A/c Dr xxx To Creditors A/c DIRECT MATERIALS ISSUED TO PRODUCTION Work-in-Progress Control A/c Dr. XxX To Stores Ledger Control A/c WAGES PAID (30% INDIRECT) Wages Control A/c Dr. 23x To Bank A/c Work-in-Progress Control A/c Dr (Direct Wages). xxx Factory Overheads Control A/c Dr. (Indirect Wages) xxx To Wages Control A/c MANUFA |G EXPENSES INCURRED Factory Overheads Control A/c Dr. xxx To Bank A/c MANUE, JRING OVE! .DS CHARGED TO PRODUCTIO! Work-in-Progress Control A/cDr. xXx To Factory overheads charged A/c SELLING & DISTRIBUTION OVERHEADS INCURRED Selling & Distribution Overheads Control A/eDr. xxx To Bank A/c XXX XOX XXXa. Finished Goods Ledger Control A/c Dr. To Work-in-Progress Control A/c b. Cost of Sales A/c Dr. To Finished Stock Ledger Control A/c To Selling and Distribution Control A/c SALES Sundry Debtors A/c Dr. To Sales A/c 00x AMOUNT RECEIVED FROM DEBTORS Bank A/e Dr. To Sundry Debtors A/c PAYMENTS TO CREDITORS Sundry Creditors A/c Dr. - ToBank A/c” - xx xx Xxx TATION OF COSPAND FINANCIADAGCOUNTS) Tt will arise if the cost and financial accounts are kept separately. The objective of cost accounting. is to provide information to management for decision making and contro! purposes while financial accounting conforms to ex ternal reporting requirements, CAUSES WHICH GIVE RISE TO DIFFERENCES IN THE COST AND FINANCIAL ACCOUNTS (Nov. 1999, 2007, May 2004, 2006, 2013) 1. Items included in the financial accounts but notin cost accounts. 2. Item included in the cost accounts only 3. Difference in method of depreciation 4. Difference in basis of inventory valuation 1. ITEMS INCLUDED IN THE FINANCIAL ACCOUNTS BUT NOT IN COST ACCOUNTS (Nov. 2008) and deposit, Gratuity, Pension, ses, Discount on issue of Share, (Matters of pure finance (like Interest on debentures Bonus of Employee, Income Tax, Preliminary Expen: Underwriting Commissions) (ii) Interest received on bank deposits, (tii) Interest, dividends, etc. received on investments. (iv) Rents receivable. (¥) Loss on the sale of investments, building etc, (vi) Profits made on the sale of fixed assets, (vii) Transfer fee received, (viii) Remuneration paid to the (>) Damages payable at law. es Proprietor in excess of fair reward for services rendered, = ea -@ a. > e @ ecceod aaa a @ 2-8 @-@-@20808008 0080 © e e ~ a a©ee0ee e@°0@ oO (x) Penalties payable at law. (xi) Losses due to serapping of machinery. 2. ITEM INCLUDED IN THE COST ACCOUNTS ONLY (Notional expenses): (i) Charges in liew of rent where premises are owned. {ii) Interest on capital employed in production, but upon which no interest is actually paid if the firm decided to treat interest as part of cost. (ii) Salary for the proprietor where he works but does not charge a salary. 3, DIFFERENCE IN METHOD OF DEPRECIATION ‘The amount of depreciation charged may be different in the two sets of books either because of the different methods of calculating depreciation or the rates adopted. In cost accounts, for instance, the straight line method may be adopted whereas in financial accounts it may be the diminishing balance method. DIFFERENCE IN BASIS OF STOCK VALUATION In financial accounts stock are valued either at cost or market price, in Cost Accounts, stocks are only valued at cost. CIRCUMSTANCES WHERE RECONCILIATION” wunts are integrated-there is no need to have a separate tegrdtion means that the same set of = whichever is lower. But When the Cost and Financial Acco reconciliation statement between the two sets of accounts. Int accounts fulfill the requirement of both ie., Cost and Financial Accounts. ) REASON FOR JONALRENT OP | |S AFACTORYBUID! PAGOOUNS (0 cosh Soul ‘The factory building may be rented or owned by the entrepreneur. When it is rented the rent is paid to the owner and the amount is included in cost. When the factory building is owned no rent is payable and for comparison of cost of items made in rented factory building and in ‘owned factory building, a notional rent is raised in books for comparison of cost in both the crces, However it should be remembered that when the building is owned the cost is charged as depreciation of the building.Ts TER 6 JOB, BATCH AND CONTRACT COSTING Hie RES customer's specifications. Itinvolves preparation of a separate cost sheet for each job. In this method costs are collected and accumulated according to jobs. Each job is treated as a separate entity for the purpose of costing. It is carried out for the Purpose of ascertaining cost of each job and takes into account the } cost of materials, labour and overheads etc. Job costing systems is suitable for: © Automobile service industries Interior decoration, Printing; Hardware; Ship-building; Heavy machinery; © Repairs and other similar work. Job Costing may be employed in the following cases: ~ When jobs are executed for different customers according to their specifications, 7 When no two orders are alike and each order/job needs special treatment. ~ Where the work-in-progress differs from period to period on the bacts of the number ofjobs in hand, ) WBATGHICOSTING: | ESRI) S0000 ¥ This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas under batch costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. ¥ Inthe case of batch Casting separate cost sheets are maintained for each batch of products by assigning a batch mimber, Cost per unit in a batch = Total cost of a batch / number of items produced in that batch. Y Batch costing systems: is suitable for following industries;- Pharmaceutical industries, industries manufacturing electronic parts of T.V,, radio sets etc. - ready-made garments, eeeed ane@neaG2naanaeeaceeeoeaooee o - ™. 2. 2 2 @e e @ ° Economic Batch Quantity (May 2001) The size of the batch for which both set up and carrying costs are minimum is known as ® Economic Batch Quantity (EBQ). It is also called Optimum Batch Quantity. > Formula : . If the unit cost of production (C) alone ] If the rate of interest (1) & unit cost of 6 given, production (C) are given, ® V@As)/C ((2as) 71C e Where, ‘A= Annual demand for the product @ = Setting up cost per batch * C= Carrying cost per unit of production = Rate of Interest @ @ e ‘work is done as per the customers | where production is of repetitive - requirement nature ee = It's a specific order costing It’s a special type of job costing | e Cost is determined on job basis Cost is determined on batch basis . ‘Each job is unique in nature The articles produced ina batch are alike | “ Job costing systems is suitable for: Batch costing systems is suitable for: ® ‘© Automobile service industries; © Pharmaceutical industries, ~ © Interior decoration; © ready-made garments, = Printing; © industries manufacturing electronic Hardware; parts of T.V,, radio sets; etc. Ship-building; | Heavy machinery; Repairs and other similar work. CONTRACTGOSTING (7 = D Contract is a bigger type of job. Contract costing is usually adopted by building contractors engaged in the task of executing Civil Contracts. FEATURES: , ‘©. The major part of the work carried out at the site of the contract. ‘The bulk expenses incurred by the contractor are considered as direct. The indirect expenses mostly consist of office expenses of the yards, stores and works. ° ° ©. A separate account is usually maintained for each contract. © The number of contracts undertaken by a contractor at a time is not usually very large. ° ‘The cost unit in contract costing is the contract itself.COST OF WORK CERTIFIEI Alll building contractors receive basis of the architect's or survey: work certified, a small percenta work which may be discovered I Payments periodically known as “running payment” on the ‘or's certificates. But payments are not equal to the value of the ge of-the amount due is retained as security for any defective later within the guarantee period, Cost of work certified = Total cost to date - (Cost of work uncertified + Material in hand + Plant at site) WORK UNCERTIFIED: It represents the cost ofthe work which has been carried out by the contractor but has not been certified by the contractee’ S architect. It is always shown at cost price, Cost of work uncertifie d = Total cost to date - (Cost of work certified + Material in hand + Plantat site) RETENTION MONEY: (May 2007) A contractor does not receive full payment for the work certified retains some amount (say 10% to 20%) to be paid, after sometime, no fault in the work carried out by contractor, fany deficiency or defect is noticed in the work, it 's to be rectified by the contractor before the release of the retention money. Retention money Provides a safeguard against the risk of loss due to faulty workmanship. NOTIONAL PROFIT: (May 2007) Ttrepresents the difference between the value of work certified and cost of work certified. Notional profit = by the surveyor. Contractee when it is ensured that there is Value of work certified - (Cost of work to date - Cost of work not yet certified) ESTIMATED PROFIT: Ttis the excess of the contract price over the estimated total cost of the contract. ij PROFIT/LOSS ON INCOMPLETE CONTRACTS (May 2011) t and Loss Account, in the case of incomplete contracts, the following four situations may arise _Wiof Completion of contact Less than 25 per cent NIL Equal to or more than 25% but less than 1/3 of Notional Profit = (Cash received 50% work certified) Equal to or more Wan 50% but Tess than | 273 of Notional Profit ¥ (Cash received 90% / work certified) Equal io or more than 90% but less | Ref. Estimated Total Profit method | than100% (Substantial completion) i @oe ~asaenahema@aohOOhOeoGeeeaeaeoaoeeee @eeeee e®ea 7 @ eeeee oe Formula for computation of % of completion % of completion = (Value of work certified / Contract Price) * 100 Estimated Total Profit Method Formula . T. ETP x (Work Certified / Contract Price) 2. ETP x (Work Certified / Contract Price) x (Cash Received / Work Certified) 3. ETP x (Cost Till Date / Estimated Total Cost) 4, ETP x (Cost Till Date / Estimated Total Cost) x (Cash Received / Work Certified) Note: Least of the above resultant profit will be taken to contract profit & loss account. Format of Contract Account Contract Account of .. For the accounting perio “To Material By Material at site To Wages xox | By Work Certified xxx To Direct Expenses vox | By Work Uncertified 7K To Depreciation 300% To Office & Admin expenses | xxx To Notional Profit ¢/d 7 Total 100 Total xx i To Profit & Loss a/c sax | By Notional Profit b/d 300 To Reserve a/c xxx {Total XXX Total XXX, L i aaFormat of Balance Sheet | SS abanesy 1 Capital xxx___ [Land & Building 20KK Profit & Loss a/e xxx | Plant & Equipments | ~ at Stores Xxx | ~atsite Xxx Outstanding Expenses xox | Material ~ at Stores xxx L ~atsite XXX + ' Work in progress: XxX | Value of work certified Add: Value of work uncertified Less: Cash received Less: Transfer to Reserve a/c t Cash & Bank [00 Prepaid expenses 2K xx | Total [00x total cost of the work. Such types o! the Contract Cost with feasonabl services, etc, ADVANTAGES () The Contractor is assured loss on the contract. .. (i) tis useful especially when the work to be done is not definitely fixed at the time of making the estimate, . (ii) Contractee can ensure himself about examine the books and documents of the contract, DISADVANTAGES The contractor may not have any inducement to avoid wastages and effect economy in production to reduce cost. es le accuracy due to w of a fixed percentage of profit. There is no risk of incurring any “the cost of the contract’ , as he is empowered to the contractor to ascertain the veracity of the cost of @eee SBaatzeananmnah G@eaeee eee eece Mw ww ee oe@eeenvece0n ee @ e¢ eoe ve If during the period of execution of a contract, the prices of materials, or labour etc., rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a clause in a contract deed is called an “Escalation Clause”. Calculation of Escalation claim For Material: Escalation claim = Standard Quantity x (Actual price ~ Standard price) For Labour: Escalation claim = Standard Hours x (Actual Rate ~ Standard Rate) Points to be remembered: > Escalation Clause is applicable only for changes in market price of the material and changes in rate of wages. > In other words, escalation clause not applicable for change in quantum of material consumption and number of hour’s utilisation. (0) WDURFRRENCR MET WEEN JOBIRICONTRACT COSTING! ©) (way 2005) c ) a icoNTRACT GOSTING = = is carried out in the + Contract work is carried out on the premises. site * Anorder, a unit, lot or batch of «Each contract is a cost unit. product may be taken as cost unit. Cost is first allocated to the cost Most of the expenses are of direct centres and then changed to and are directly charged to individual jobs. respective contract A/Cs. It is a system of costing in which | * Only general overheads and head the elements of cost are| _office expenses are apportioned to accumulated separately for each job | _ individual contracts. or work undertaken by an organisation. | * The prices of the jobs are fixed * The pricing is yenerally through based on the nature of costs and hiding and external force has major policy of the firm. influence in fixing the offer price. _|| CHAPTER 7 v v v eee PPPS BiG ER OPERATING COSTING Efesteui8008) © It is a method of ascertaining costs of providing or operating a service, This method of costing is applied by those undertakings which provide services rather than produce commodities Operating costing systems is suitable for: © Transport companies © Hospitals o Theatres © Schools ete Cost Unit of service sector “NATURE i | Bus operator Goods Transport service Tonne km Hospital Patient per day or Bed per day Hotel Room per day Canteen II Per item Cinema Per ticket Airlines Per Passenger miles or per tonne miles @ (a) COMPUTATION OF COMPOSITE UNITS: (Nov. 2006, 2009) ABSOLUTE (WEIGHTED AVERAGE) TONNES-KMS. Absolute tonnes-kms,, are the sum total of tonnes-kms,, arrived at by multiplying various distances by respective load quantities carried. COMMERCIAL (SIMPLE AVERAGE) TONNES-KMS, Commercial tonnes-kms, are arrived at by multiplying total distance kms, by average load quantity. Operation refers to a stage in * Operating cost refers to the total manufacturing activity where output cost of providing’a utility or is converted from one form into service or intangible product. another. Cost of each operation is P called operation cost. | eee a~ane@ohnmannande2eaeheoeeoeseeeseeoee @eaeoeeeaeseeoev see ee @ 4 ® a @ e ea é a aus i : . Output of each operation i istangible | = There 1s no tangible output _ _ Only services are provided S Cosis are classified inio direct material, "Costs are classified into fixed or | direct labour, direct expenses and| standing charges, variable or production overheads. running charges and semi- variable or maintenance charges. | * Operation costing system is suitable} = Operating costing system is for manufacturing industries, such as: | suitable for service industries, © Soap such as: +o Paint ©. Transport companies o Chemical © Hospitals © Theatres 7 ©. Schools etc. sa aa pula cay in | Operation costing is concerned with the determination of the cost of each operation rather than the process: + Inthe industries where process consist of distinct operations, the operation costing method is applied. + It offers better control and facilitates, the computation of unit operation cost at the end of each operation.CHAPTER 8 PROCESS COSTING ~ i Stages of production wherein raw materials are converted into one identifiable stage to another. It's a form of operation costing which applies where standardised goods are produced. Industries which use process costing system are soap, paints, steel industries etc. Features 1. The output of one process becomes the input of another process. 2, The end products usually are like units which are not distinguishable from one another. 3. Process may be carried out either sequentially or parallely (in case of single product sequential processing is possible and in case of joint product parallel processing is possible ._ after the spilt off point). 4.” Separate accounts has to be maintained for each and every process. 5. One to one input-output reconciliation of quantity is not possible. 6. Cost unit of the process account is output of the process and cost centre is the process itself 7. Output of the last process is'transferred to finished stock account. & a PROCESS LOSS: It is defined as the loss of material arising during the course of a processing operation and is equal to the difference between the input quantity of the material and its output. Process loss can be classified in to (i) Normal loss and (ii) Abnormal loss. (i) NORMAL LOSS: Y It is the loss of material which is inherent in the nature of work. ¥ Itcan be antictpated from ©. the nature of the material; ©. nature of operation; ©. the past experience and o Technical data. ¥ The cost of normal process loss in practice is absorbed by good units produced under the process. The amount realised by the sale of normal process loss units should be credited to the process account. ‘ (ii) ABNORMAL Loss; ¥ Its the loss in excess of the pre-determined loss. ¥ It cannot obviously be estimated in advance. v Tt may occur due to: othe carelessness of workers ant eed mB a DOHOKOHHHOHEE REE HOHESrt) e ©¢080G06 86.0.6 e e@o@ >9PSe eeeeonve @ ‘ ©. Improper training © Poor quality of raw material © abad plant design or operation etc, ¥ Itcan be kept under control by taking suitable measures. ¥ The cost of an abnormal process {oss unit is equal to the cost of a good unit. ¥ The total cost of abnormal process loss is credited to the process account from which it arises. ¥ The total cost of abnormal process loss is debited to costing profit and loss account. ABNORMAL GAIN: ¥ Itis an unexpected gain in production under normal conditions. ¥ Itwill arise, when loss under a process is less than the anticipated normal figure. ¥ Wherein the actual production exceeds the expected figures. ¥ The difference between actual and expected loss or actyal and expected production is known as abnormal gain. ¥ It should be debited in the process account. ¥ The cost of abnormal gain is computed on the basis of normal production. ¥ Abnormal Gain = Actual Output - Expected Output. Format of Process account 1 Eoe ee | By Normal Loss To Material To Labour By Abnormal Loss To By Output t/f to Overheads Next process (Total nox xox | Total 700K xx] W.N. 1 Computation of process loss Process Loss = Input Qty - Output Qty (Process loss we can classify into normal loss & Abnormal loss /' Abnorinal gain if any) W.N. 2 Computation of Cost Per Unit : CPU = (Gross Cost - Normal Loss Value) / (Input Qty - Normal Loss Qty) TE EQGIVATENT FRNA May 2005) It means converting the incomplete production units into their equivalent completed units. Equivalent completed units = {Number of units in the process (WIP)] x [Pereenlage of work completed) | Te Eg, : : If the No. of physical unit in process is 500 units; percentage of completion of work is 50% then Equivalent Production Unit = 500 units x 50% = 250 units, Steps: 1. Prepare statement of Equivalent Production a. Compute Input-output Qty reconciliationb. Compute percentage of completion and their equivalent production 2. Compute Cost Per Equivalent Unit 4. CPU = (Total Cost / Equivalent Units) 7 }. Prepare statement of evaluation (ie. Compute the value of Closing Work in Progress, Output transferred to next process & Abnormal loss or Abormal gain if any) Prepare process accoun! Format of statement of Equivalent Production [WRT On any Pylori i Soverheads = SS al Py : __ieompletion | | eompletic ae Op. Y XXX | Output “TXXX] 9K] MAK | KKK |KO OK wir Tt next process Current [9X [Normal] XXX) OX [ROR period Loss | Input I [| Abnormal XX] XX XXX XOX XXX Xx XXX loss Giwip D000] 90x 0 9K Total [Or XXX XXX, 70K [0 Points to remember; > If the problem is to be solved using FIFO method, % of completion for opening WIP should be there in the question. > In case % of completion of opening WIP is not given, we can solve only by using Weighted Average Method. > Incase % of completion of opening WIP is given in the question and the problem does not Specifically mention which method to use, even then we have to solve the problem by Way of FIFO because the intention behind providing the degree of completion of opening WIP is to make use of it, > Two materials will come if the question requires preparation of any-process account other than the first process. (provided opening WIP should not be NIL) > In general degree of completion of abnormal loss is 100% > However, if the degree of completion of the unit scraped is given then, we have'to make use of that percentage for abnormal loss. > Degree of completion of Abnormal Gain is always 100% > Degree of completion of normal loss is always NOT APPLICABLE > Degree of completion of Closing WIP will always be given in the question Three Adjustment to be remembered for FIFO Method: (1) Output transferred to next process has to be classified into how much is out-of opening WIP and balance is out of current period input. ananeanncmanaGaBoheoaSehHeonaeeeeoovoevseoeeoese@®eoe S FeV7ee0e eee S9eeeeooeeoeone Q) Cost of Opening WIP should not be considered for the purpose of computation of cost per equivalent unit and Do. (Q) The same cost of opening WIP should’ be added at the time of valuation of output transferred to next process. PP DANGER? Generally in process costing output of the one process becomes the input of the next process at cost. However, if the output of one process is transferred to the next process at market value or cost plus a percentage of profit, then the difference between cost and the transfer price is known as inter-process profit. TREES Advantages: 0 Comparison between the cost of output and its market price at the stage of completion is facilitated. ©. Each process is made to stand by itself as to the profitability. Disadvantages: © The use of inter-process profits involves complication. ©. The system shows profits which are not realised because Of stock not sold out. i) SOISTINCTION/BETWEEN JOB ING |EEROCESS COSTING) (Nev! 19% TL) psOBCOSTING: =U] PahROeEss CosTING + Jobis performed against specific order | _*__Process is continuous * Fach job is unique in nature ie.| * All the end products are L heterogeneous homogeneous in nature * Cost of job is calculated only when | + Cost of process is calculated at a job is completed the end of the each period = Cost centre is job _ = Cost centre is a process | + There may or may not be work in] * Since. process is a continuous process one some work will always be in process. Always output of one process will be transferred to next process as input The unit cost here is the average cost of the process for @ Generally no transfers from one job’ to another The cost of each job is complied separately by adding material, |____labour and overheads given period + Detailed supervision and control is| © Supervision and control is needed as each job is distinct and comparatively easier as the different from others. process operations. are standardised.CHAPTER 9 JOINT PRODUCTS AND BY-PRODUCTS ¥ Two or more products of equal importance, produced, simultaneously ‘from the same process, are known as joint products. "Two or more products separated in the course of the same processing operation usually requiring further processing, each product being in such proportion that no single product can be designated as a ‘major product”. . ¥ Basic Characteristics: , © All the products are equal importance in terms of sales value / profit © All the products are treated as main product ©. Until the split off point all the joint products are not distinguishable Eee a re: DAL TobebPrilduots i. 80-1 Petroleum i, lubricants, coal tar & kerosene Coal Gas Benzol, sulphate of ammonia |OilRefining | Petrol, diesel, LPG, kerosene etc. CO-PRODUCTS ¥ Two or more products which are contemporary but do not emerge necessarily from the same material in the same process. Eg. (i) Wheat and gram produced in two sepa cultivation are the co-products. (ii) Timber boards made from different trees are co-products. ' BY-PRODUCTS ¥ Itemerges as a result of processing operation of another product or they are produced from the scrap or waste of materials of a process i.e,, by-product is a secondary or subsidiary product which emanates as a résult of manufacture of the main product. “Products recovered from material discarded in a main proces, or from the production of some major Products, where the material value isto be considered at the time of severance from the main product,” Eg. rate farms with separate processing of | Mais ae Sugar Molasses Soap ‘Glycerin e@ © @ e ® @ ® e e e @ e e e e e @ 4 a q q a a a q q 4 ( a ( dee eeces0 se e ve eve veee eve fa “a The sales value of the b either credited to the Profit and Loss Account as miscellaneous income or It may be treated as deductions from the total costs When the by-products are of Tt may be regarded as joint products rather considerable total value than as by-products, 3. Where they require further Net realizable value of the by-product at the | processing splitoff point may be arrived at by subtracting the further processing cost from the realizable value of by-products. a. Ifsuch NRV is small, it may be treated as credited to P&L accounts. b. Ifsuch NRV is considerable, it should be treated as a joint product. ROUT 3 Two or more products, separated in the course of the same processing operation, considered as relatively important. Products recovered from ‘material discarded in a main process. Joint products are of equal importance By-products are of small economic value. Joint products are produced Intentionally By-products are —_—produced incidentally in addition to the main products. Eg. Eg Tiilstry iets Petroleum | gasoline, fuel oil, f lubricants, coal tar & Molasses kerosene Glycerin Coal Gas_| Coke, Tar, Benzol, sulphate of ammonia Oil Petrol, diesel, LPG, Refining _| kerosene ete.¥ The split-off point is that point or stage of products become separately identifiable. “The significance of split-off point lies on the fact that it’s the point where costs can be classified as joint cost and specific cost. ¥ Joint costs - Costs prior to splitoff point which are common to all the products Specific costs- Costs after the split-off point which can be allocated/ charged directly to a particular product, Joint product A Raw material X Joint product B Joint product © + Joint cost Specific costs () Physical unit method (ii) Average unit cost method (iil) _ Technical Point method or survey method (iv) Contribution margin method (v) Market value method, (0) Market value at Split off point method (6) Market value after further processing method (2) Net realizable value method (NRV). NRV: : Sales Value after further processing Less: Profit margin XXXX Selling & Distribution overheads xxx Further processing cost XXxx Net realisable value XXX ~DeeeAmnaeaneGeOGOaGee ee eeoee 6 GOeee @ e@ @-@ eee @ eevee vee e ENA CHAPTER 10 STANDARD COSTING LD NTE ET Standard costing is defined by the ICMA, London, “as the preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence.” Standard cost is defined “as a pre-determined cost which is calculated from management's standards of efficient operation and the relevant necessary expenditure. li may be used as a basis for price fixing and for cost control through variance analysis.” TYPES OF STANDARDS i (i) Ideal standards (i) Normal standards (ii) Basic or Bogey standards (iv) Current standards USES OF STANDARD COSTS © Effective way for planning and controlling costs © Pricing decisions ©. Decisions involving submission of quotations and tenders © Measurement of variances if any, from standards ©. Facilitates management by exception (MBE) THE PROCESS OF STANDARD COSTING STEP 1: The setting of standards, STEP 2:,Ascertainment of actual costs, STEP 3: Comparison of actual and standard costs to determine the variance and STEP 4: Investigation of variances and taking appropriate action. TED | 7 TSTANDARD COST? : + I’sa pre-determined cost Kohler defines estimated cost as + It is calculated from managements “the expected cost of manufacture, or ‘expected standard of efficient acquisition, often in terms of a unit of operation’ and the relevant product computed on the basis of necessary expenditure. information available in advance of actual = Itmay be used as a basis for price | production or purchase”. fixing and for cost control through variance analysis,G | Estimated costs are prospective costs since [. they refer to prediction of costs. Itis computed ori scientific basis tis computed with the help of historic data It is suitable for the organisations | It is suitable for the organisations which which deal with — standardised | deal with non standardised products. | products. * za It is used for the purpose of variance | It is applied for the purpose of decision analysis, cost control and cost | making and price determination teduction ERE EO EARN Ch AP ie ERTS Y Difference between standard and actual is called variance ¥ Variance analysis is the analysis of the cost variance into its component parts and the explanation of variances, * Itisa relevant cost Variance = Expectation - Actual ‘TYPES OF VARIANCES (May 2000) VARIANCES [Inpacton Controtbiy ] (reas [causa Element] ¥ ¥ ¥ ¥ ¥. Controtable | [ Uncontroibie Material ‘Latour Overhead variances variances. cost cost variances Favourable ‘Adverse variances [-— an v + Efficiency Price Volume variances | | variances | | variances There are three methods for recording standard cost operation in the book of accounts my ' PARTIAL PLAN: Variances are analysed and accounted at the end of the accounting period a~an-a2e2G4eeMeHOeOSGAaBe2O2aeeaesve & 0@eoee @eeoe @ @ e wve iw 2, SINGLE PLAN: Variances are analysed and accounted at the time of transaction 3, DUAL PLAN: Variances are analysed in the form of efficiency () Write off all the’variances to profit and loss account (i) Distribute the variance pro-rata to a, Cost of sales, b. Work-in-progress and c. Finished good st. (iii) Write off quantity variance to profit and loss spread over cost of sales, work-in-progress and finished goods stocks. 8-2 Material Price Variance rocks. @)-@) Material Usage Variance ‘OF VARIANCESIN/SPANDARD COSTING (Novii998), account but the price variances may be | @-@) Material Yield Variance Material Mix Variance ®)-@ 0-8 Material 1 2 3 4 SQ x SP. AQ* AP ‘AG x SP RAQ * SP X Y Total + Where, SQ = Standard Quantity (Standard Quantity or actual output) AQ = Actual Quantity RAQ = Revised Actual Quantity (Actual Quantity rewritten in stan SP = Standard Price per unit AP = Actual Price per unit Pee dard proportion)) Labour Cost Variance -@ —*—_, Labour Rate Variance Labour Efficiency Variance @-@ @-®) Labour Mix Variance | renee @-@) Q-@) Grade of Labour 1 2 3 4 SH x SR. AH x AR AH*xSR_| RAH= SR Skilled y Semi-skilled Total Where, SH = Standard Hours (Standard hours required for actual output) AH = Actual Hours RAH = Revised Actual Hours (Actual hours rewritten in SR = Standard Rate per hour AR = Actual Rate per hour IDLE TIME VARIANCE Labour Efficiency Variance may also be classified into 1. Idle Time Vatiance (i.e. Actual Idle hours x Standard Rate per hour) 2. Revised Efficiency: Variance (Balancing figure) “VARIABLE OVERHEAD: Variable Overhead Cost Variance @)-() standard proportion) Variable Overhead Expenditure Variance @-2 Variable Overhead Idle | “| Variable Overhead Revised Time Variance efficiency Variance (Actual Kdle Hours XS) (Galancing figure) eS -_smaoeaSA oe eeaG OGG OAGOOGQeeoeed @eeeee0e @ ee eee e Cm) eo eevee ees weve Variable Overheads 1 2 SH SR AH AR AH* SR Where, SH = Standard Hours (Standard hours required for actual output) AH = Actual Hours * SR = Standard Rate per hour AR = Actual Rate per hour BM. ‘I 1. FIXED OVERHEADS - WITHOUT CALENDAR VARIANCE Fixed Overhead Cost Variance @)-@ Fixed Overhead Expenditure Variance 8-2 Fixed Overhead Fixed Overhead Capacity Variance Efficiency Variance -@) O-@ ” oH Fixed Overhead Idle || Fixed Overhedd Revised Time Variance Efficiency Variance (Actual Idle Hours X SR) (Balancing figure) Fixed 1 2 3 4 Overheads AQ x SR AFOH BFOH AH x SR Where, AO = Actual Output SR = Standard Rate {per unit for (1); Per hour for (4)] AFOH = Actual Fixed Overheads BFOH = Budgeted Fixed Overheads AH = Actual Hours Se) |costixerHeORy cece | 2, FIXED OVERHEADS - WITH CALENDAR VARIANCE Fixed Overhead Cost Variance @)- 2) Fixed Overhead Expenditure Fixed Overhead Variance ‘Volume Variance @)-@) )-@) Se Fixed Overhead Fixed Overhead Fixed Overhead Capacity Variance Efficiency Calendar { @-6) Variance Variance ()-@) L -8) SSS Fixed Overhead Idle Fixed Overhead Time Variance Revised Efficiency (Actual Idle Hours X $2) Variance (@alancing figure) Fixed 1 2 3 4 5 Overheads AO xSR AFOH: BFOH AH * SR PFOH Where, AO = Actual Output SR = Standard Rate (per unit for (1); Per hour for (4)) AFOH = Actual Fixed Overheads BFOH = Budgeted Fixed Overheads AH = Actual Hours PFOH = Possible Fixed Overheads i.e. = (BFOH, (/ Budgeted Days) x Actual Days @ e ® 6 e a a e @ @ e e e a 4 i a a 4 q 4 d 4 4 q a 4 4 E 4eee @eoaoeeeoe@ e @ vFewvreeone@ vewewvugs v Sales Price Variance @)-@) Sales Volume Variance @)-@) ols Vana) Sales Mix Variance @)-@) Sales Quantity Variance ()-@) Product BQx BP AQ* AP 3 AQ* BP RAQ* BP x Y Total Where, BQ = Budgeted Quantity AQ= Actual Quantity BP = Budgeted AP = Actual Price per unit ice per unit RAQ = Revised Actual Quantity (Actual Quantity rewritten in Budgeted proportion)MARGINAL COST > The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit. > In general it is measured as to total variable cost attributable to one unit. > Marginal Cost = Variable Cost = Direct Labour + Direct Material + Direct Expenses + Variable Overheads > — Marginal Cost = Prime cost + Variable Overheads > Itisa relevant cost useful for decision making. MARGINAL COSTING % Marginal costing isnot a distinct method of costing like job costing, process costing etc > Iuses a special technique for managerial decision making, > Its used to provide a basis for interpretation of cost data to measure the profitability. >» Here cost has been‘ classified on the basis of behaviour or Nature (ie, Fixed cost, Variable cost & Semi-variable cost). THEORY OF MARGINAL COSTING > In telation to a given volume of output, additional output can normally be obtained at less than proportionate cost. > This is because of within lithits the aggr fixed, DECISION MAKING INDICATORS IN MARGINAL COSTING 1. Profit Volume Ratio (PV Ratio) 2. Break-even point (BEP) 3. Margin of Safety (MOS) 4. 5. egate of certain items of cost will tend to remain Indifference Point and Shut down Point Note: The last to decision making indicators (Indifference Point & Shut down Point) does not form part of IPCC/PCC syllabus) @amepeaeaeaa CBee eaaneaneaee @ an 6 amen nnd da A eBeoSeeeeoe ede ee @ @ weeeo vue wow FORMAT OF MARGINAL COST SHEET Particulars Amount Sales Value Xxx Less: Variable Cost 20% Contribution XXX Less: Fixed Cost ox Profit 20% Y Itisa procedure of cost recognition wherein costs ¥ CIMA, London defines the absorption costing as are classified on the basis of functions. variable and fixed, to operations, processes or products”. ¥ Allcost of production, both fixed and variable are included in inventory valuation. Ae RETIONCOSTING T. Only variable costs are inclu for product costing and inventory valuation. 1. Both fixed and variable costs are considered for product costing and inventory valuation. 7, Expenses are classified based on nature (ie, Variable and Fixed). 3. All fixed costs are treated as period cost. (4 Only variable manufacturing costs are treated as product cost. 5. Managerial Decisions are based on contribution. Z Expenses are classified based on Functions. fie Production, administrative, selling and distribution). 3. Only administration, selling and distribution overheads. are treated. as period cost. - 7 All variable manufacturing costs and fixed production overheads are treated |__as product cost. 5, Managerial Decisions are based on Net profit. 5 production. 7. In variance volume overheads are not absorbed. 6. The difference in the magnitude of opening and closing stock does not affect the unit cost of reporting, . fixed overhead expenditure variance only can be computed. There is no variance since fixed 6. The difference in the magnitude of opening and closing stock affect the unit cost of production due to the impact of the related fixed cost. 7, In variance reporting, fixed overhead expenditure and volume variances can be computed. Volume variance can also be sub classified into Capacity, Efficiency and Calendar variances. "the practice of charging all costs, both(eosin yy 8._Itaids decision making. 8. It distorts decision making. 9. Fixed costs are regarded as period | 9. Fixed costs are charged to the cost of costs. The profitability of different | production. Each product bears products is judged by their P/V| reasonable share of fixed costs and ratio. thus the profitability of a product are influenced by .an apportionment to t fixed asset. 10. Format for presentation of | 10. Format for presentation of information information to management: a y aa Sales Value 1K Less: Variable ‘cost Less: a poo ua a, Direct Material Xxx z 3 | Profit b. Direct Labour XXX, ee c. Factory OH 20K Gross Profit | xxx + Itis the difference between sales value and marginal cost + Teexcess of sale revenue over the variable cost Formula 1. Contribution = Sales Revenue - Variable cost (Direct Labour + Direct expenses + Variable Overheads) 2. Contribution = Fixed cost + Profit 3. Contribution = Sales X PV Ratio ih Ae WEL * tis the ratio of contribution to sales * This ratio is usually expressed in percentage ‘* Higher the PV Ratio is better + Itindicates the effect on profit for a given change in the sales. ‘+ Itmeasures the profitability of each product, process, operation etc. + It facilitates managerial decision making aa e2eaen nan d ea Se Onan OasFGO2Beohea eee ea ®@ @ e Formula ee 1. PV Ratio = Contribution 199 les Changes in Prt, gp Changes in Sales 3. PV Ratio = 100- Variable Cost Ratio Based on the same we can drive the following formulas; Total Sales = Contribution / PV Ratio Desired sales (in units) = Fixed Cost + Desired Profit Contribution per unit Desired sales ( in Rs.) = Fixed Cost + Desired Profit PV Ratio WAYS TO IMPROVE PV RATIO a. By way of reducing variable cost or b. By way of increasing the selling price or c. By way of improving Sales Mix 2. PV Ratio = eee ee @ 6 @ © e @ Y — Itisthe point at which there is neither a profit nor a loss to the firm Le. No profit No loss situation Y It is the volume of operation at which total sales revenue is just equal to total cost ee s e ii. iii, Total income = Total cost iv. Total income = Fixed Cost + Variable Cost v. Contribution = Fixed Cost vi. Fixed Cost = Sales x PV Ratio e eee Formula @ Fixed Cost Contribution per unit Fixed Cost PV Ratio BEP (in Value/Units) = Total sales - MOS sales . BEP (in %) = _100-MOS (in %) > | TS BEP (in units) e BEP (in Value)Significance of BEP (EVETORSATEST [MPAGROF BEF Tama Less than BEP Guaranteed Loss Equal to BEP [ No Profit / No | More than BEP Guaranteed Profit Break-even analysis is based on a number of assumptions which are as follows: (Nov. 1998) * Total costs can be easily classified in to fixed and variable. Variable cost per unit remains constant. However total variable costs vary in proportion to output. Total fixed costs remain constant irrespective of level of out. Selling price per unit remairis constant irrespective of quantity sold. Costs and revenues are linear over the range of activity under consideration. Costs and revenues are influenced only by volume. The state of technology, methods of production and efficiency remain unchanged. Produictivity of.the factors of production will remain the same. There will be no significant change in the levels of inventory. |. The company manufactures a single product. | . In the case of a multi product company, the sales mix will remain unchanged. BREAK-EVEN CHART A breakeven chart records costs and revenues on the vertical axis and the level of activity on the horizontal axis. The different types of Break-even charts are as follows: (i) Contribution Break-even Chart (i) Cash Break-even Chart (ii) Control Break-even Chart (iv) Analytical Break-even Chart () Product wise Break-even Chart ' (vi) Profit graph Hee eNawe ene (May 2001) 2anmonanan een Gea Rn agmganaheeaeaeneaneaeanaseaeaenanaeeo ae ea@eeeeedo eee eo @ e @e ee >See eee ee © BREAK-EVEN CHART Y Total Sales ; Profit Angle of Total cost Incidence, Sales Value ve Fixed Cost x FC Sales Quantity : mCASE 1) In cash break-even chagt, only cash fixed costs are considered. Non-cash items like depreciation for computation of break-even point. It depicts the level of etc, are excluded from the fixed cost ill equal to total cash outflow. ‘output or sales at which the sales revenue Wi It is computed as uhder: Cash BEP (Units) = Cash Fixed Cost /Contribution per Units [ERR om ¥ — Margin of safety is the excess of sales over the break-even sales ie, it is the difference between the Actual sales and the Break Even sales. ¥ — Itmay be expressed as a percentage of total sales or in value or in terms of quantity. Y In MOS firm will earn guaranteed profit. In MOS i Contribution = Profit ii. Fixed cost = Nil Formula MOS (in units) = ofit Contribution per unit MOS (in Value) E Profit ° PV Ratio MOS (in Value/Units) = Total Sales - BEP Sales 100 - BEP(in%) MOS (in %)CVP analysis is based on the following assumptions: - Same as ‘assumption under BEP’ listed above. Cost-Volume-Profit (CVP) analysis is the analysis of three variables © Cost; © Volume and © Profit. Such an analysis explores the relationship between costs, revenue, activity levels and the resulting profit. It aims at measuring variations in cost and volume. (May 2012) ‘The angle formed at the point of intersection of total cost and the sales line is called the angle of incidence. This is the angle at which the total sales line ‘The vertex of angle of incidence is the BEP. The angle represents the rate at which profits are being earned after reaching BEP. cuts the total cost line. If the angle is large, the firm is said to make profits at a high rate and vice versa. The CIMA defines a key factor “factor which at a the activities of an undertaking”. It represents a resource whose availability is less than its requirement (Resource constraint). Itis the most important factor for taking decisions about the profitability of a product. Itis also called Limiting Factor or Critical Factor or Budget Factor. Examples of Key Factors © Shortage of raw material © Shortage of labour © Demand 0 Availability of Plant capacity © Availability of Cash Steps for solving Key factor problems Identification of keg factor Compute contribittion per key factor Rank the produets based on the contribution Allocate the key resources based on the rank Prepare the profitability statement gee per key factor as computed above Shp ree eee ee Be particular time, or over a period, will limit a eae e *meOeanacsceaanaea h2aeanasceanmea e2eaenevaeaoeaeseegeeaeaen eeee e e ee Where stocks have been accumulated in large quantities and their market prices have fallen To popularise a new product Where such reduction enables a firm to boost the sale of other products having larger profit margin To capture foreign market To obviate shut-down cost To capture prospective marketNG THEORY CHAPTER 12 ° BUDGETARY CONTROL : SUBUDGET |! EE 2 CIMA of England and Wales has defines the terms budget as “A financial / quantitative statement, prepared and approved prior to a definéd period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital”. r SE BUDGETARY CONTROL TOPS Now 13), CIMA London defines budgetary control as ” the establishment of the budgets relating to the responsibilities of executives to the requirement of the policy and the continuous comparison of actual with the budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision”, Steps: 1. Establishment of budgets 2. Continuous comparison of actuals with budgets 3. Revision of budgets after considering changed circumstances 4, Placing the responsibility for failure come S| OF BUDGETARY CONTROL SYSTEN® ”) ih Qviay/2009) "7 The policy of a business for a defined period is represented by the master budget the details of which are given in a number of individual budgets called functional budgets. The functional budgets are broadly grouped under the following heads: Functional budget Physical budget Profit Budget Cost Budget Financial budget (2) Physical Budgets - Sales Qty, Product Qty., Inventory, Manpower budget. (b) Cost Budgets - Manufacturing Cost, Administration Cost, sales and distribution cost, R&D Cost. (©) Profit Budget - A budget which enables in the ascertainment of profit, for example, sales budget, profit and loss budget, etc. ; (@) Financial budgets - A budget which facilitates in ascertaining the financial position of a concern, for example, cash budgets, capital expenditure budget, budgeted balance sheet etc. ma@#e@eanuaanaGae M@2HaOOahOGBARBABBHHBABARLCE CBOe@ ‘The various commonly used Functional budgets are: eeee @ @eeoeesee¢ees e ee @ @ ees we e Sales Budget Production Budget Plant Utilisation Budget Direct Material Usage Budget Direct Material Purchase Budget Direct Labour (Personnel) Budget Factory Overhead Budget Production Cost Budget ‘THESALIENT FEATURES OF BUDGETARY CONTROL SYSTEM (Nov. 1997)" Determining the objectives to be achieved, over the budget period. Determining the variety of activities that should be undertaken for the achievement of the objectives. Drawing up a plan or a scheme of operation in respect of each class of activity. Laying out a system of comparison of actual performance by each person, section or department with the relevant budget. Determination of causes for discrepancies, if any. Ensuring that corrective action will be taken. in -py POBJECTIVES OF BUDERFARMCONTROL 7 5 de PLANNING: Planning is deciding in advance the future course of action budgeting is also performed same task. It will force management at all levels to plan the activities and policies for future period. DEFINING RESPONSIBILITIES: The main purpose of budgeting is defining the responsibilities of each functional executive so that there may be no conflict among the executives. COORDINATION: Budgetary control helps in coordinating various activities of the firm like planning policies directing scheduling, processing etc so that the common objective of firm may be achieved successfully. PERFORMANCE EVALUATION: Budget can provide the basis for comparison between actual performances and budgeted. It is helpful in controlling the deviation and take corrective action. COST CONTROL: Budget is a powerful tool for controlling the expenditures. PER TAD WANT AGES OF BUDCETARYGONTROL © ES It establishes the objective of an organisation and enables management to conduct business in the most efficient manner. (ii) Budget is helpful in allocating scarce resources in most optimal way. a)(iii) Budget identifies the areas of inefficiencies within the organisatiori: (iv) Budget is the most important tool for controlling because it provides a yardstick against which the performance of organisation can be evaluated. (v) _Itis a basis for management by exception (MBE) by comparing actual and budgeted results. (vi) It ensures effective utilisation of men, machine, material and money. "LIMITATIONS OF BUDGETARY CONTROL SYSTEM if [/NSvE1I58)" () Budgets may or may not be true, as they are based on estimates. (ji) Budgets are considered as rigid document. (iii) Budgets cannot be executed automatically. (iv) Staff co-operation is usually not available during budgetary control exercise. (v) Its implementation is quite expensive, SPP) LNEESORBUDCETT Budgets may be classified on the following basis: 1. Time period 2. Condition 3. Capacity 4, Coverage Budget ‘Time Period | Condition Capacity Coverage | y t 4 q £ 4 { 4+ fy 4 ene Ser Basic || Current |} Fixed | rei [me [reo j BUD 72a) It is defined as “a budget which by to CIMA of Engl - fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained”. recognising the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained”. fi, Ttis also known as Rigid Budget or Tt tan be recasted on the basis of inflexible budget. activity level to be achieved, Thus itis not rigid. &aaG2@eooeaecneaeeaesoeoeeasvcoaeneoenoneaneaoeceacea2e a aaa@eoe@e eeegeoge e sveeoe e CHOCHHOH OHO OECCE THXED! errand eed operates for one level of activity and under one set of conditions. _| ~ Variance analysis does not give useful infermation. different levels of activity. ‘Variance analysis provides useful | information. If the budgeted and actual activity levels differ significantly, then the aspects like cost ascertainment and price fixation do not give a correct Te facilitates the ascertainment of cost, fixation of selling price and submission of quotations. vi. _picture. ‘Comparison of actual performance with budgeted targets will be meaningless specially when there isa difference between two activity levels. Tt provides a meaningful basis of comparison of the: actual performance with the budgeted targets. cs individual functions in an various functional budgets. organisation are known as|_* It serves as the basis upon which Functional Budgets. budgeted P&L A/c and forecasted + For example, purchase budget; sales Balance Sheet are built up. budget; production budget; plant- utilisation budget and cash budget. BUNGEE BUDGET Budgets which relate to the ‘a consolidated summary of the [/BHORT-TERMIBUDGEL The budgets which are prepared for periods longer than a year are called long-term budgets. Such budgets are helpful in business forecasting and forward planning. E.g. Capital expenditure budget and Research and Development budget. » * Budgets which are prepared for periods less than a year are known as short-term budgets. * Such types of budgets are prepared lin cases where a specific action has to be immediately taken to bring any variation under control. = Cash budget is an “example of short-term budget. }& Pee * A budget which remains unaltered over a long period of time is called basic budget. ‘A budget which is established for use over a short period of time and is related to the current conditions is called current budget. [)°DIFFERENCE: STANDARD COSTING) * Standard costing is the preparation of standard cost and applying them to measure the variations from actual cost and analysing the causes of variation with a view to maintain maximufn efficiency in ___ production. Budgets are financial statements prepared and approved prior to defined period of time to attain a | given objective. * Standard costing is based on technical assessment. Tt is based on past performance adjusted with future trend. | | « Standards are set production expenses. only for Budgets are prepared for all items of income and expenditure. = Standard costs are projection of cost accounts and deals with individual products and ascertaining and controlling their costs, Budgets are projection of financial accounts and it deals with the overall efficiency of the business * Standard costing represents what the cost should be under the specific condition of production. Budgets aré anticipated costs used for forecasting of material, labour overheads, cash etc. * Standard costing sets the target which should be maintained in actual performance. Budget setup maximum limit of expenses above which the actual expenditure should not normally exceed, = Range of standard costing is narrow as it is mainly confined to the control of products on costs. _expenses as well. Range of budgeting is wider than that of standard costing, It covers sales, capital and financial anmaeaG@h aOR aGeaea OahHoase2eeeoeeenovneoanoaeoeeena 2dCeo oacge S®@eeeeceeaedvee ese e eee eee LLL { BUDGETMANUAL (10 b. (May 2014)" Wises Sine Ab tae A budget manual is a collection of documents that contains key information for those involved in the planning process. It is a schedule, document or ‘booklet which shows in written form, the budget organisation and procedures. A copy of the manual is given to each departmental head for guidance. BUDGET MANUAL INDICATES THE FOLLOWING MATTERS: 1. Brief explanation of the principles of Budgetary Control System, its objectives and benefits. 2. Procedure to be adopted in operating the system - in the form of instructions and steps. 3. A form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated. 4, Definition of duties and responsibilities of Operational Executives, Budget Committee and Budget Controller. . A timetable for the preparation of each budget. . Nature, type and specimen forms of various reports, persons responsible for preparation of the reports and the program of distribution of these reports to the various officers, ‘Account Code and Chart of Accounts used by the Company | Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion. Budget Calendar showing the dates of completion of each of the budget and submission of Reports. 10, Budget Periods and Control Periods. 11. Information concerning key assumptions to be made by managers in their budgets, example the rate of inflation, key exchange rates, ete. Follow-up procedures. aw =x 2 for1. Cost unit and Cost centre 2 Cost centre and Profit centre Bill of material and Material requisition note (MRN) Controllable costs and uncontrollable costs Marginal costing and Differential costing Perpetual Inventory System and Continuous stocktaking Bin cards and Stores Ledger 3. 4 5. Explicit costs and Implicit cost 6, 7. 8. 8. Job evaluation and Merit Rating 0. Allocation and Apportionment 11. Job Costing and Batch Costing 12. Job Costing and Process Costing 13. Operating Costing and Operation Costing 14. Joint Productand By Product 15. Cost reduction and Cost control 16. Financial Accounting and Cost Accounting 17. Profit Centres and Investment Centres 18. Product Cost and Period Cost: 19. Centralised and decentralised stores Bin Cards and Stock Control Cards * Job Costing and Contract costing Standard cost and estimated cost Standard Costing and Budgetary Control Absorption Costing and Marginal Costing Marginal Cost and Differential Cost Mla Ses Aka 2 7 e ee @ eeeo eo Bar G OR G2 @O@ @2.Ge@ @.6.6.0.0 0 @ @ a la oa) ° Seece @ e SBeeo @ Pressey kedOvesons 9, Discuss the concept of Economic Batch Quantity (EBQ). th. To be able to calculate a basic EOQ certain assumptions are necessary. List down those assumptions. 11. Distinguish between Ide time and Idle facilites. How are they treated in Cost Accounts? 1. What go you understand by Labour Turnover? How is it messured? What are its causes? What are the remedial steps you would suggest to minimise its occurrence? 13, What do you understand by overtime premium? What isthe effect of overtime payment on productivity and cost? 14. Discuss the treatment of overtime premium in cost accounts and suggest a procedure for control of overtime work. } 15, Explain the methods and objectives of job evaluation. 16. List down the factors to be considered before introducing a sc 17. Discuss the three methods of calculating labour turnover. 18 Discuss two types of costs, which are associated with labour turnover. 19. Discuss the accounting treatment of Idle time and overtime wages. 20. What is an idle capacity? What are the costs ‘associated with it? How are these treated in product costs? 21. Discuss the objectives of time keeping and time booking, 2. Explain what is meant by Cost Apportionment and Cost Absorption. 23, What do you understand by the term ‘pre- determined rate of recovery of overheads’? 24, What do you mean by the term under/over absorption of production overheads? How does it arise? How is it treated in cost account? 25, What is blanket overhead rate? In which situations, 2%. Explain Single and Multiple Overhead Rates. 27. What are the advantages of integrated accounting? 28. Why is it necessary to reconcile the profits betweer Accounts? 29. What is the relevance of escalation clause provided in the contracts? 30. Discuss briefly the principles to be followed while taking credit for profit on incomplete ‘heme of incentive to workers. blanket rate is to be used and why? nthe Cost Accoimts.and Financial contracts. 31. Explain briefly the distinguishing features of contract costing. 32, How are costs classified? 33. How do you accounts for by-product in cost accounting: ‘a. when they are of small total value b. when they are of considerable total value cc. when they require further processing 34, What are the methods of Costing? 35. Explain Stores Location and Stores Layout. 36. , Explain Classification and Codification of Material 37. What are the advantages of ABC analysis. 38. Write a note on Two Bin System. 39, What is Just in Time (JIT) system? WI 11s and Methods of Codification. nat are the advantages of JIT purchasing?L ameacha tn oa@G2AH BBA AHAHRRLBBAAABAHOLZLCBHRESASKES What do you understand by the term obsolete materials? What are the various methods used for time keeping? Whaat are the factors influencing merit rating? What are the methods used for segregating Semi-Variable cost into Fixed Cost and Variable Cost? What is Non-Integrated Accounting System? What are essential Pre-requisites for Integrated System? What are the features of job costing? What are the features of Contract Costing? ‘What are the Absolute and Commercial tonne kilometers? What are the methods of apportionment of Joint Costs? What are the types of standards? How are the various variances classified? 52, What is the Accounting Treatment for standard cost? 53, What is the meaning of disposition of variance? 54, List out the Assumptions of Break-Even Analysis? 55. Explain how volume profit (CVP) cost-based sensitivity analysis can help manager's cope with uncertainty? 36. State the assumption of cost-volume profit analysis. 57. Whatare the objectives of budgetary control? 58. What are the advantages of budgetary control? es What are the types of budget? Limitations of budgetary control system. SSSSsSRGR SSS Conversion cost ‘Sunk cost Opportunity cost Cost centre Profit Centre . Pre-production Costs ‘Write notes on Bill of Material Cost-plus contracts Escalation Clause. Relevant costs Il. Retention Money 12. Split off point 13. Dual plan 14, Absorption Costing 15. Contribution 16. Margin of Safety Re eNaeReNe17. Angle of Incidence 18. Key Factor 19. Budgetary Control 20. Differential costTN IPcc rc ¥ Time | Bement Nature | Retna ][Consot-][ Normaity ][ Farioay |[ on : abilty z ¥, ¥ z ¥ ¥ z Historical ‘Mater’ Fixed, Production cost ‘ateur Vrs iest | | conratabie | | Normai | | Adminsres | | Reto Conenteat | | expenditure |] Sem indie ‘Aono on Inlrent Pre vaiabie Non al sip determines Conte Red cot Conversion cost Direct Indirect Cost Cost Direct Direct Direct Production Selling & Material Labour | | Expense Overhead Distribution OH PRIME COST FACTORY COST/ WORKS COST OF PRODUCTION + COST OF SALES PROFIT SALES aen2@h o@A@eaGeGHhaGaoheaGBaaeaeeeeeeaa eeeadeeee0e @eeee >Ve € e vegee vve @eaeeoeoseoee ee VARIOUS STOCK Formula LEVELS : ‘Minimum level Re-order level - (Average Usage x Average Lead time) Maximum level Re-order-level + Re-order quantity - (Minimum Usage * Minimum Lead time) Re-order level Maximum Usage x Maximum Lead Time ‘Average Level Minimum level + 1/2 Re-order quantity or Maximum level + Minimum level 2 Danger level Minimum usage * Minimum Lead Time is : Minimum usage x Minimum Time for emergency purchase Y t Cargying cost ae Buying cost EO ° 2 x Where, Quantity ‘A= Annual requirement of raw material in units B= Buying cost or Ordering C= Annual carrying cost of one unit (i, cost per order ie, carrying cost percentage * cost of one tunit) a a)Mechanical Time Register Method Method Recording ‘Attendance | Metal Dise | Dial Time Idle Time = Total time ~ Productive time Since we calculate total time from Time Time booking records Time as per Time Keeping Records - Time as per Time Booking Records. ‘LABOUR TURNOVER keeping Records and Productive time from Idle Time = cost oF LABOUR TURNOVER Preventive costs Replacement costs Increase in preventive cost Increase in labour turnover leads to decrease in labour leads to increase in turnover replacement cost Replacement cost Cost Preventive cost @ Maanaeaeah@ GB@GHaHAmeoaGnaVG@eoeeeeeeoneoee aaa @&ee @ @eeee800 > ee @eee8G00 @ @ 4 @ Seee e @ ee oS FOR YOUR R Ni METHODS OF COMPUTATION OF LABOUR TURNOVER ‘Methods =>? ‘Without Expansion With Expansion 3.Mixed 2. Accession. || 3:Flux Method 1. Separation 2. Replacement cena 1. Separation “Method =/A/L_ || + G+A)/Lor Method =S/L || Metbod=R/L | | Zeerye | | Mettod=S/L 1) or imenyyt (GREN/L Where: S =Number of Separations R =Number of Replacements A = Accession N =New Recruitments L_=Average Labour force (Note: Labour Turnover is expressed in percentage) Time rate system Straight piece work system Taylor's as | differential |/'Less than 100% 83% of normal piece rate piece work |'790% or more 125% of normal piece rate [system |] ge EEE Merrick : differential rate | UP-£089% ‘Normal piece rate aan Above 83% & upto 100% _| 110% of normal piece rate | | {Above 100% 120% of normal piece rate Gantt task and bonus system fi LoUmROT = WAGES | Below standard Guaranteed time rate ‘At Standard Time rate plus bonus of 20% of time rate ‘Above Standard High piece rate on worker's whole output It is 50 fixed, so as to include a bonus of 20% of the time ratePena Teer] Emerson’s EVEL OF EFFICIENCY | RATE OF ‘WAGES efficiency | [Below 66.67% Time rate wages | system Above 66,77 & up to 100% | Time rate plus } | Bonus of 20% of time rate - | | ‘Above 100% Time rate plus “| : Bonus of 20% of time rate plus 1% for each 1% increase in | Te. Hig 5 is admissible zl Halsey systems | (Time taken Time rate) + 60% of time saved > Time Tale) Halsey Weir (Time taken x Time rate) + (30% of time saved * Time rate) i System Rowan system | (Time taken x Rate per hour) + (Time Taken/Standard Time) «Time | Saved * Rate per hour Barth system Rate per hour x V (Standard Time * Actual Time) ERRORS UE I SS METHODS OF RE-APPORTIONMENT Expenses of service departments transferred to production departments are called Re- apportionment. Following are the method of reapportionment of service department expenses to production department Let A & B = Production Departments X & Y= Service Bepertrest “Brobal Service Dept, rendered | X rendered services fo A & B; | Direct Distribution services only to production | y Rendered services to A & B| Method dept. One service dept., rendered | X rendered services to A, B Stepladder Method / Services to all production | & Y; Non-Reciprocal Method departments and another service dept., whereas the another service dept, tendered services only to production dept. Y Rendered services to A & B Ie es @\eneenahaeaeG @OHheaeeae eee Ooeoeeeseeoeonooevesee@e2e0e0080 @ SBeeeoe ee ve eve Probability t Service Service rendered by, ‘Method of RE ___ Apportionment, Both the service dept., are rendered services. to production dept,, & other service dept. &Y; &X X rendered servic ‘Y Rendered services to A, B Reciprocal Method 1, Simultaneous Equation Technique 2. Repeated Redistribution Technique ices to. A, B SS! Economic Batch Quantity (EBQ) If the unit cost of production (C) alone given, V@as) /C If the rate of interest (I) & unit cost of production (C) are given, YAS) IC Where, A= Annual demand for the product $= Setting up cost per batch C= Carrying cost per unit of production I= Rate of Interest 2 TEE IGON PROFIT/LOSS O1 contracts, the following four situations may arise ‘OMPLETE CONTRACTS To determine the profit to be taken to Profit and Loss Account, in the case ] Tia of incomplete i ")FhatiChnipletion bf contract Less than 25 per cent [iy aL Be ecopaieedin et We | NIL Equal to or more than 25% but less than 50% 7/3 of Notional Profit * (Cash received / work certified) Equal to or more than 50% but’ less than 90% | / work certified) 2/3 of Notional Profit x (Cash received Equal to or more than 90% but less thant00% (Substantial completion) Ref, Estimated Total Profit method Formula for computation of % of completion = (Value of work ‘ % of compl ied / Contract Price) * 100 PnESTIMATED TOTAL PROFIT METHOD (ETP) Formula 1, ETP x (Work Certified / Contract Price) 2. ETP x (Work Certified / Contract Price) x (Cash Received / Work Certified) 3. ETP x (Cost till Date / Estimated Total Cost) 4. ETP x (Cost till Date / Estimated Total Cost) x (Cash Received / Work Certified) Note: Least of the above resultant profit will be taken to contract profit & loss account, Format of Contract Account Contract Account of For the accounting perio. Dr. To Material xxx | By Material at site Xxx ToWages x __| By Work Certified To Direct Exp. xx _| By Work Uncertified To Depreciation 2K To Office & Admin exp. xxx To Notional Profit c/d XXX Total _ XXX, Total XXX To Profit & Loss a/c xx_| By Notional Profit b/d 200K To Reserve a/c Xxx Total [0x Total xxx. Format of Balance Sheet » Capital is Profit &Lossa/c | xxx Plant & eae ~ at Stores -atsite $e eaenee2eaee@e2G GB@Oeeeoaxeneeeae O0o9CCHOSeEE SES9COSRSKCCCHCAESESCH OEE 2@2eeeeo 82008868 wvwevee e ‘Outstanding Expenses xxx _| Material 7 - at Stores -atsite Work in progress: Value of work certified Add: Value of work uncertified Less: Cash received Less: T/f to Reserve a/¢ Cash & Bank 30K Prepaid expenses Total 20x Total XXX Calculation of Escalation claim For Material: ; ; Escalation claim = Standard Quantity x (Actual price - Standard.price) For Labour: : Escalation claim = Standard Hours * (Actual Rate - Standard Rate) Format of Process account _ PROCESS -I oi Deas ot ee : L To Material | xxx |x | xxx__|ByNormal Loss | xxx | _x XXX To Labour xxx | By Abnormal Loss | xxx [x | xxx To xox | ByOutputt/Fto xx |x | xx Overheads | Next process | Total XXX, xxx_| Total, XXX Xxx, W.N.1 Computation of process loss Process Loss = Input Qty - Output Qty / abnormal gain if any) (Process loss we can classify into normal & abnormal loss W.N.2 Computation of Cost Per Unit CPU = (Gross Cast - Normal Loss Value) / (Input Qty - Normal Loss Qty) Tpualont completed units = [Number of units in the process (IP)} x [Percentage of work |” completed) Pn7 Format of statement of Equivalent Production ot TH © ext rocess = EIS ‘Current | XXX | Normal XXX XX XXX" XXX XXX XXX XXX" period Loss Input ‘Abnormal | KXX XXX XXX XXX XXX XXX XXX, toss CWI [OX | OK TX THX XK | _ TOK Total [OX XX 2x_| XXX 7X] Points to remember: g > If the problem is to be sol ved using FIFO method, % of completion for opening WIP should be there in the question. » In case % of completion of opening WIP is not given, we can solve only by using Weighted Average Method. > _ Incase % of completion df opening WIP is given in the question and the problem does not and specifically mention which method to use, even then we have to solve the problem by Way of FIFO because the intention behind providing the degree of completion of opening WIP is to make use of it, 2) Two materials will come if the question than the first process. (provided opening shoulp not be NIL) requites preparation of any process account other joINmEROD Joint product A ‘Raw material X Joint product B Joint product C + Joint cost } Specific costs s NRV: Sales Value after further processing 000K Less: Profit margin 2x0 Selling & Distribution overheads xxx Po 1 ) e aeaee2eanaH2eae B@HGe2Ceaeaeoeeeoeseeosee © 68 0 Oa 6@@e00 @ee@ = @ee@ ©ee@ eee ee > veo v7,vwveuve Further processing cost Net realizable value Variance = Expectation - Actual TYPES OF VARIANCES VARIANCES Element Controllable | | Uncontotable Material Labour Overhead variances variances cost cost variances Favourable {[Aawerse variances T + + Efficiency Price Volume variances variances variances eae Material Price Variance Variance @-@ )-@) Material Usage Material Mix Variance @-@ ‘Material Yield Variance @-@ 1 SQx SP AQ* AP AQ*SP RAQ< SPLabour Cost Variance 0-2 Labour Rate Variance Labour Efficiency Variance 8-2 0-6) Labour Mix Variance 1 2 3 4 SH*SR AH x AR AH x SR RAH x SR Variable Overhead Cost Variance @-@) Variable Overhead Variable Overhead Expenditure Variance Efficiency Variance @)-@) Q)-@) Variable Overhead Idle Variable Overhead Revised Time Variance efficiency Variance (Actual Idle Hours X SR) (Balancing figure) ee 1 2 3 SHxSR AHx AR AH x SR m~azaneaeaena2OG2GhOOGAOOAABHRABCBABRLOECHEOSHOCHE@ ©0800 0Oo e weve weeervreervveege FIXED OVERHEADS ~ WITH! Fixed Overhead Expenditure Variance @)-@ @)-@ Fixed Overhead Capacity Variance IOUT CALENDAR VARIANCE ixed Overhead Cost Variance Fixed Overhead Volume Variance a-@ @-8) Fred Overhead Idle || Fixed Overhead Revised Time Variance Efficiency Variance (Actual Idle Hours XR) {Balancing figure) Fixed Overhead Efficiency Variance a ® FIXED OVERHEADS - ‘WITH C) Variance @-@ Fixed Overhead Expenditure 1 2 3 4 AOx SR AFOH BFOH AH*SR ‘ALENDAR VARIANCE Fixed Overhead 0-0 ‘Volume Variance Fixed Overhead Fixed Overhead Capacity Variance | | Efficiency -0 Variance . a-@ 6-8 Fixed Overhead Idle Time Variance (Actual Idle Hours X$R) Fixed Overhead Revised Efficiency Variance: (Balancing figure)SU (ES 2 fad [aS q Soil] AOxSR | AFOH BFOH | AH*SR | PFOH a aE ELE: |, Sales Price Variance Leecer ll Sales Mix Sales Quantity Variance Variance @)-() -@) 1 FORMAT OF MARGINAL COST SHEET Particulars ‘Amount Sales Value XXX Less: Variable Cost 2x Contribution 200 Less: Fixed Cost 2x Profit xx Formula Variable Overheads) 2. Contribution = Fixed cost 1. Contribution = Sales Revenue - + Profit 3.__ Contribution = Sales X PV Ratio Variable cost (Direct Labour + Direct expenses + 1. PV Ratio = Somtibution . 99 Sales 2. PV Ratio = Changes in Profit 69 Changes in Sales 3. PV Ratio =___ 100- Variable Cost Ratio . es @ @ ® @ e @ @ e | @ @ e @ é@ ge @ @ aq q € | 4d a a 4 a 4 q q q 4 ‘ q qweer eveuee »>S2SOO8 ORO OHSEHO Based on the same we can drive the following formulas; Total Sales = Contribution / PV Ratio Desired sales ( in units) = Fixed Cost + Desired Profit Contribution pet unit Desired sales (in Rs.) = Fixed Cost + Desired Profit PV Ratio | BEP (in units) == — _Fixed Cost__ Contribution per unit BEP (in Value) = Fixed Cost PV Ratio BEP (in Value/Units) = Total sales ~ MOS sales | pep (in%) = _100-MOS (in%) SIGNIFICANCE OF BEP EVEL OF OF BER gs eye £ eae Less than BEP Guaranteed Loss a oa [Equal to BEP No Profit / No Loss 1 NtoBEP [Move than BEP Guaranteed Profit More than + — | BREAK-EVEN CHART E Total Sales Angle of Total cost Profit Incidence, Sales Value ve Sales QuantityMOS (inunits) = Profit i Contribution per unit MOS(in Value) = __Profit__. : PV Ratio MOS (in Value/Units) = Total Sales - BEP Sales MOS(in%) = 100- BEP(in%) araaee2eoeooooe ce Time Period Condition [ Capacity Coverage 4 ty ¥ q ¥ ¥ } ¥ f t 4 Long Short 4 Term Term Basic Current Fixed Flexible Master, Functional Functional budget Sn ey y v Physical budget’ Profit Budget Cost Budget Financial budget sea aananaAithe @H2424 4 6 &