Co sti ng Co ncept

Notes

Compiled under guidance of

CA Manoj Dubey Sir
 COST & MANAGEMENT ACCOUNTING

NOTES INDEX
SERIAL NO. CHAPTERS PAGE NO.
1 INTRODUCTION TO COST AND 2-16
MANAGEMENT ACCOUNTING
2 MATERIAL COSTING 17-28
3 EMPLOYEE COST AND DIRECT EXPENSES 29-34
4 OVERHEADS – ABSORPTION COSTING 35-40
METHOD
5 ACTIVITY BASED ACCOUNT 41-42
6 COST SHEET 43-44
7 COST ACCOUNTING SYSTEM 45-46
8 UNIT AND BATCH COSTING 47-48
9 JOB COSTING 49
10 PROCESS & OPERATION COSTING 50-51
11 JOINT PRODUCT AND BUY PRODUCT 52-53
12 SERVICE COSTING 54-55
13 STANDARD COASTING 56-59
14 MARGINAL COSTING 60-62
15 BUDGETS AND BUDGETARY CONTROL 63-64

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 1

 CHAPTER 1
INTRODUCTION TO COST AND MANAGEMENT
ACCOUNTING
1. BASIS STRUCTURE/MEANING AND DEFINTIONS

2. OBJECTIVES OF COST ACCOUNTING

The main objectives of Cost and Management Accounting are explained as below:

(i) Ascertainment of Cost: Accumulation and ascertainment of cost. Costs are accumulated, assigned and
ascertained for each cost object.
(ii) Determination of Selling Price and Profitability: The Cost Accounting System helps in determination of
selling price and thus profitability of a cost object. It provides a basis for Price Fixation & Rate
Negotiation.
(iii) Cost Control: It ensures that expenditures are in consonance with predetermined set standard and
any variation from these set standards is noted and reported on continuous
basis.
To exercise control over cost, following steps are followed:
 Determination of Pre-determined standard or results.
 Measurement of Actual Performance.
 Comparison of Actual Performance with Set Standard or Target
 Analysis of variance and Action.
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 2
(iv) Cost Reduction: It is an approach of management where cost of an object is believed to have a scope of
further reduction. No cost is termed as lowest and every possibili ty of cost Reduction is explored.
To do Cost Reduction, the following action is taken:
 Each activity within an entity is segmented to analyses and identify value added and non-value added
activities. All non-value added activities are eliminated. Value Chain Analysis, a strategic tool,
developed by Michael porter, is one of the method to do value analysis
 Conducting continuous research and study to know the most optimal way to manufacture a product
or render a service.
(v) Assisting Management in Decision Making: Cost and Management Accounting by providing relevant
information, assist management in planning, implementing, measuring, controlling and evaluating of
various activities.
3. DIFFERENCE BETWEEN COST CONTROL AND COST REDUCTION

4. SCOPE OF COST ACCOUNTING

Cost
Comparison
Cost s Cost
Analysis Control

Cost Cost
Accounting Reports

Scope of
Costing Statutory
Cost
Compliances
Accounting

Scope of Cost Accounting consists of the following functions:

(i) Costing: Costing is the technique and process of ascertaining costs. The cost ascertainment procedure is
governed by some cost accounting principles and rules. Generally, cost is ascertained using historical
costs, standard costs, process cost, and operation cost etc.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 3

(ii) Cost Accounting: This is a process of accounting for cost which begins with the recording of expenditure
and ends with the preparation of periodical statement and reports for ascertaining and controlling cost.

(iii) Cost Analysis: It involves the process of finding out the factors responsible for variance in actual costs
from the budgeted costs and accordingly fixation of responsibility for cost differences.

(iv) Cost Comparisons: It includes comparisons of cost involved in alternative courses of action such as use of
different technology for production, cost of making different products and activities, and cost of same
product/ service over a period of time.

(v) Cost Control: It involves a detailed examination of each cost in the light of advantage received from the
incurrence of the cost. Thus, we can state that cost is analyzed to know whether cost is not exceeding its
budgeted cost and whether further cost reduction is possible or not.

(vi) Cost Reports: Cost Reports helps in planning and control, performance appraisal and managerial decision
making.

(vii) Statutory Compliances: Maintaining cost accounting records as per the rules prescribed by the statute to
maintain cost records relating to utilization of materials, labour and other items of cost as applicable to the
production of goods or provision of services as provided in the Act and these rules.

5. RELATIONSHIP OF COST AND MANAGEMENT ACCOUNTING WITH OTHER RELATED DISCIPLINES

Cost and Management Accounting as a discipline is interrelated and dependent on other disciplines of accounting.

6. COST ACCOUNTING AND MANAGEMENT ACCOUNTING

Cost Accounting and Management Accounting is used synonymously but there are a few differences.
Management Accounting is an open-ended discipline which enables managers to take informed decisions.
Management Accounting takes inputs from cost accounts, financial accounts, statistical and operation
management tools etc.

Basis Cost Accounting Management Accounting

Nature Quantitative aspect Both qualitative and quantitative aspect
Objective Records the cost of producing a product Provides information to management for
and providing a service. planning and co-ordination.

Area Deals with cost Ascertainment. Wider in scope as it includes financial

accounting, budgeting, taxation, planning
etc.
Recording of Uses both past and present figures Focused with the projection of figures for
data future.
Development Development is related to industrial Development is related to the need of
revolution modern business world.
Rules and Follows certain principles and Does not follow any specific rules and
Regulation procedures for recording costs of regulations.
different products.
7. COST AND MANAGEMENT ACCOUNTING WITH FINANCIAL MANAGEMENT
Cost and Management Accounting is an application of Financial Management for decision making purposes.
The relationship among Cost Accounting, Management Accounting, Financial Accounting and Financial
Management can be understood with the help of the following diagram.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 4

8. COST ACCOUNTING WITH FINANCIAL ACCOUNTING
Cost accounting accumulates and ascertains costs for goods sold and inventories. It provides inputs to record
costs in financial accounting system.
Difference between Financial Accounting and Cost Accounting

Basis Financial Accounting Cost Accounting

Objective Provides information about the financial Ascertainment of cost for the purpose of cost
performance of an entity control and decision making.
Nature Classifies records, present and interprets Classifies, costs records, present, and
transactions in monetary terms. interprets it in a significant manner.

Recording of data It records Historical data. It makes use of both historical and
determined costs.
Users of shareholders, creditors, financial Internal management and regulatory
information analysts and government and its authorities
agencies, etc.
Analysis of cost It shows profit or loss of the organization
It provides the cost details for each cost
and profit either segment wise or as a whole.
object i.e. product, process, job, operation,
contracts etc.
Time period Financial Statements are prepared Reports and statements are prepared as and
usually for a year. when required.
9. ROLE & FUNCTIONS OF COST AND MANAGEMENT ACCOUNTING

The functions of cost and management accounting include:

Provision of Performance of
Collection and relevant Responsibility
Assigning Costs to Sets Budget and centre is
Accumulation of information to the
Cost Objects Standa measured and
Cost management for
decision Making evaluated against
set standards

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 5

10. USERS OF COST AND MANAGEMENT ACCOUNTING

11. INTERNAL USERS

Internal users, who use the Cost and Management Accounting information may include the followings:
(a) Policy Makers- The policy makers are those who formulate strategies
(i) To achieve the goals (short & long term both)
(ii) To position into the competitive market environment.
(iii) To design the organizational structure
(b) Managers- The managers use the information
(i) To know the cost of a cost object and cost centre
(ii) To know the price for the product or service
(iii) To evaluate performance of responsibility centres
(iv) To know the profitability-product-wise, department-wise, customer-wise etc.
(v) To evaluate the strategic options and to make decisions.
(c) Operational level staff- The operational level staff like supervisors, foreman, and team leaders require
information
(i) To know the objectives and performance goals for them.
(ii) To know product and service specifications.
(iii) To know the performance parameters against which their performance is measured and evaluated.
(iv) To know divisional (responsibility centre) profitability etc.
(d) Employees- Employees are concerned with the information related with time and attendance, incentives
for work, performance standards etc.
12. EXTERNAL USERS
External users, who use the Cost and Management Accounting information may include the followings:
(a) Regulatory Authorities-Regulatory Authorities used the data for tariff determination, providing
subsidies, rate fixation etc. To do this the regulatory bodies require information on the basis of some
standards and format in this regard.
(b) Auditors- The auditors while conducting audit of financial accounts or for some other special purpose
audit like cost audit etc. require information related with costing and reports reviewed by management etc.
(c) Shareholders- Shareholders are concerned with information that effect their investment in the entity.
(d) Creditors and Lenders- Creditors and lenders are concerned with data and information which affects an
entity's ability to serve lenders or creditors.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 6

 13. ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM
The essential features, which a good Cost Accounting System should possess, are as follows:'

14. INSTALLATION OF COSTING SYSTEM

Management of an organization needs complete and accurate information to make decisions. A well-established
costing system should provide all relevant information as and when required by management as well as various
stakeholders. Before setting up a system of cost accounting the factors mentioned below should be studied:
Objective
Nature of Business or Industry
Organisational Hierarchy
Knowing the product
Knowing the production process
Information synchronization
Method of maintenance of cost records
Statutory compliances and audit
Information Attributes:

15. COST ACCOUNTING WITH THE USE OF INFORMATION TECHNOLOGY (IT)

Information technology has changed the Cost and Management Accounting functions
dramatically with the introduction of Enterprise Resource Planning (ERP) system.
The new industrial revolution in the form of digital innovation which is popularly known as
Industry 4.0 has more emphasis on digitization and automation of business process to have a
better control over cost to maintain market competitiveness.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 7

16. DIGITAL COSTING SYSTEM
Digital costing system too collects data, classify the data, account the data to get and
process information to make decisions, but the difference is the method of collection,
medium of storage, forms of analysis and reporting. Digital costing system links
different business functions such as production, procurement, inventory
management with the digital costing system of its suppliers, customers and the market
through data sharing and network interaction.
Digital Costing System provides data to get the following information:
(i) Cost incurred on a cost object.
(ii) Data on time spent.
(iii) Data on resource consumption.
(iv) Data on current market price of final product and raw materials.
(v) Data on lead time and availability of materials.
(vi) Data on product demand and trend.
17. COST OBJECTS
Cost object is anything for which a separate measurement of cost is required. Cost object may be a product, a
service, a project, a customer, a brand category, an activity, a department or a programme etc.

PRODUCT - Smart Phone, Tablet , Book etc.

SERVICE - Airline flight, Concurrent Audit etc.

PROJECT - Metro Rail Project, Road Projects etc.

ACTIVITY - Quality inspection of materials, Placing of orders etc.

DEPARTMENT - Production Department, Finance & Account etc.

18. COST UNITS

It is a unit of product, service or time 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 vale.
Industry Sector Cost Unit
Brewing Barrel
Brick Making 1,000 bricks
Coal Mining Tonne/Ton
Electricity Kilowatt-hour (kWh)
Engineering Contract, Job
Oil Barrel, tonne, litre
Hotel/Catering Room/Meal
Professional Services Chargeable hour, job, Contract
Education Course, enrolled Student
Hospitals Patient day

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 8

SOME EXAMPLES FROM THE CIMA TERMINOLOGY ARE AS FOLLOWS:

19. COST DRIVER

It is an activity which is responsible for cost incurrence. Level of activity or volume of

Production is the example of a cost driver. An activity may be an event, task, or unit of
work etc. Examples of cost drivers are number of machine set ups, number of purchase
orders, hours spent on product inspection, number of tests performed etc.

20. RESPONSIBILITY CENTRES

To have a better control over the organization, management delegates its responsibility and authority to various
departments or persons. These departments or persons are known as responsibility centres and are held
responsible for performance in terms of expenditure, revenue, profitability and return on investment.

(i) Cost Centres- The responsibility centre which is held accountable for incurrence of costs which are under
its control. The performance of this responsibility centre is measured against pre-determined standards or
budgets. The cost centres are of two types:
(a) Standard Cost Centre and
(b) Discretionary Cost Centre
Standard Cost Centre: Cost Centre where output is measurable and input required for the output can be
specified.
Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined.
(ii) Revenue Centres- The responsibility centres which are accountable for generation of revenue for the
entity. Sales Department for example, is responsible for achievement of sales target and revenue
generation.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 9

(iii) Profit Centres: These are the responsibility centres which have both responsibility of generation of
revenue and incurrence of expenditures. Since, managers of profit centres are accountable for both costs
as well as revenue.
(iv) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also have the authority to make capital investment decisions.

21. LIMITATIONS OF COST ACCOUNTING

(i) Expensive: It is expensive because analysis, allocation and absorption of overheads requires
considerable amount of additional work, and hence additional money.
(ii) Requirement of reconciliation: The results shown by cost accounts differ from those shown by
financial accounts. Thus preparation of reconciliation statements is necessary to verify their
accuracy.
(iii) Duplication of work: It involves duplication of work as organization has to maintain two sets of
accounts i.e. Financial Accounts and Cost Accounts

22. CLASSIFICATION OF COSTS

It means the grouping of costs according to their common characteristics. The important ways of classification of
costs are:

BY NATURE OR ELEMENT
Under this type of classification of cost, total cost of a cost object is classified on the basis of element of cost
i.e., material, labour, other expenses and overheads.

A diagram as given below shows the elements of cost described as under:

(i) Material: Material cost means cost of raw material required to make a product into finished goods. The
materials can be directly attributable to a cost object or allocable on some reasonable basis where direct

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 10

 attribution is not possible. Materials which are present in the finished product (cost object)
or can be economically identified in the product are termed as direct materials. For
example, materials purchased for a specific job etc.
(ii) Labour: Wages paid to workers for converting the raw materials into finished goods, is called labour cost/
labour which can be economically identified or attributed wholly to a cost object is termed as direct labour.
For example, employee engaged on the actual production of the product or in carrying out the necessary
operations for converting the raw materials into finished product
(iii) Other Expenses: All expenses other than material or labour which are incurred for a particular cost object
are termed as other Expenses. For example, hire charges for some special machinery, cost of defective work
etc.
(iv) Overheads: The aggregate of indirect material costs, indirect labour costs and indirect expenses is termed
as Overheads. The main groups into which overheads may be subdivided are as follows:
 Production or Works Overheads: Indirect expenses which are incurred in
the factory and for the running of the factory. E.g.: rent, power etc.
 Administration Overheads: Indirect expenses related to management and
administration of business. E.g.: office rent, lighting, telephone etc.
 Selling Overheads: Indirect expenses incurred for marketing of a
commodity. E.g.: Advertisement expenses, commission to sales persons etc.
 Distribution Overheads: Indirect expenses incurred for dispatch of the
goods E.g.: warehouse charges, packing (secondary) and loading charges.
BY FUNCTIONS
Under this classification, costs are divided according to the function for which they have been incurred. It includes
the following:

Production / Research and

Administration Distribution
Manufacturing Selling Cost Development
Cost Cost
Cost etc.

The below chart shows the flow of costs in a cost sheet under functional classification:

BY VARIABILITY OR BEHAVIOUR
Based on this classification, costs are classified into three group's viz., fixed, variable and semi-variable.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 11

 FIXED COSTS
VARIABLE COSTS
SEMI-VARIABLE COSTS

(a) Fixed costs- These are the costs which are incurred for a period, and which, within certain output and
turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They do
not tend to increase or decrease with the changes in output. For example, rent, insurance of factory building
etc., remain the same for different levels of production.

(b) Variable Costs- These costs tend to vary with the volume of activity. Any increase in the activity results in
an increase in the variable cost and vice- versa. For example, cost of direct material, cost of direct labour,
etc.

(c) Semi-variable costs- These costs contain both fixed and variable components and are thus partly affected
by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas and electricity
etc. Such costs are depicted graphically as follows:

23. METHODS OF SEGREGATING SEMI-VARIABLE COSTS INTO FIXED AND VARIABLE COSTS
The segregation of semi-variable costs into fixed and variable costs can be carried out by using the following
methods:

High Low Analytical Comparison Least Square

Graphical Method
Method Method by Period Method

(a) Graphical Method:- Under this method the following steps are followed:

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 12

 (i) A large number of observations regarding the total costs at different levels of output are plotted
on a graph.
(ii) The output is plotted on the X-axis and the total cost is plotted on the Y-axis.
(iii) Then, by judgement, a line of “best-fit”, which passes through all or most of the points, is drawn.
(iv) The point at which this line cuts the Y-axis indicates the total fixed cost component in the total cost.
(v) If a line is drawn at this point parallel to the X-axis, this indicated the fixed cost.
(vi) The variable cost, at any level of output, is derived by deducting this fixed cost element from the total
cost.

(b) High- Low Method: - Under this method, difference between the total cost at highest and lowest
volume is divided by the difference between the sales value at the highest and lowest volume. The
quotient thus obtained gives us the rate of variable cost in relation to sales value.
(c) Analytical Method: - Under this method an experienced cost accountant tries to judge empirically what
proportion of the semi-variable cost would be variable and what would be fixed. The degree of variability
is ascertained for each item of semi-variable expenses. For example, some semi – variable expenses may
vary to the extent of 20% while others may vary to the extent of 80%.Although it is very difficult to estimate
the extent of variability of an expenses, the method is easy to apply. (Go through the following illustration
for clarity).
(d) Comparison by period or level of activity method: Under this method, the variable overhead may be
determined by comparing two levels of output with the amount of expenses at those levels, since the fixed
element does not change, the variable element may be ascertained with the help of the following formula.
Suppose the following information is available.
Production Units Semi – variable expenses
January 100 260
February 140 300
Difference 40 40

The variable costs:

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑒𝑚𝑖−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
=
40
= ₹1/Unit
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 40 𝑈𝑛𝑖𝑡𝑠
Thus, in January, the variable cost will be 100 × 1 = 100
The fixed cost element will be (260 – 100) or 160.
In February, the variable cost will be 140 × 1 = 140
Whereas the fixed cost element will remain the same, i.e., 160.

(e) Least square method: This is the best method to segregate semi-variable costs into its fixed and variable
components. This is a statistical method and is based on finding out a line of best fit for a number of
observations.
The method uses the linear equation y = mx + c, where
‘M’ represents the variable elements of cost per unit,
‘C’ represents the total fixed cost,
‘Y’ represents the total cost,
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 13
 ‘X’ represents the volume of output.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 14

 The total cost is thus split into its fixed and variable elements by solving this equations.

BY CONTROLLABILITY
Costs here may be classified into controllable and uncontrollable costs.
(a) Controllable Costs: Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. It incurred in a particular
responsibility centre can be influenced by the action of the manager Controllable
heading that responsibility centre. Costs Uncontrollable
For example, direct costs comprising direct labour, direct material, Costs

direct expenses and some of the overheads are generally controllable by the
shop floor supervisor or the factory manager.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs.
For example, expenditure incurred by say, the tool room is controllable by the foreman in-charge of that
section but the share of the tool-room expenditure which is apportioned to a
machine shop is not controlled by the machine shop foreman.
Distinction between Controllable Cost and Uncontrollable Cost:
The distinction between controllable and uncontrollable costs is not very
prominent and is sometimes left to individual judgement. In fact, no cost is
uncontrollable; it is only in relation to a particular individual that we may specify a
particular cost to be either controllable or uncontrollable.
BY NORMALITY
According to this basis, cost may be categorised as follows:
(a) Normal Cost It is the cost which is normally incurred at a given level of output under the conditions in
which that level of output is normally attained.
(b) Abnormal Cost It is the cost which is not normally incurred at a given level of output in the conditions
in which that level of output is normally attained. It is charged to Costing Profit and loss Account.

BY COSTS USED IN MANAGERIAL DECISION MAKING

(a) Pre-determined Cost- Computed in advance before production or operations start, on the basis of
specification of all the factors affecting cost.
(b) Standard Cost- A pre-determined cost, which is calculated from managements expected standard of
efficient operation' and the relevant necessary expenditure.
(c) Marginal Cost - Aggregate costs increases if the volume of output is increased or decreased by one unit.
(d) Estimated Cost- Estimated costs are prospective costs since they refer to prediction of costs.
(e) Differential Cost- It represents the change (increase or decrease) in total cost (variable as well as fixed)
due to change in activity level, technology, process or method of production, etc.
(f) Imputed Costs- These costs are notional costs which do not involve any cash outlay. Interest on capital,
the payment for which is not actually made, is an example of imputed cost.
(g) Capitalized Costs -These are costs which are initially recorded as assets and subsequently treated as
expenses. Example, installation expenses on the erection of a machine are added to the cost of a machine.
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 15
(h) Product Costs- These are the costs which are associated with the purchase and sale of goods In the
production scenario, such costs are associated with the acquisition and conversion of materials and all
other manufacturing inputs into finished product for sale.
(i) Opportunity Cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone in
accepting an alternative course of action.
(j) Out-of-pocket Cost -It is that portion of total cost, which involves cash outflow. This cost concept is a short-
run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc.
(k) Shut down Costs - Those costs, which continue to be, incurred even when a plant is temporarily shut-down
e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant.
(l) Sunk Costs- Historical costs incurred in the past are known as sunk costs. They play no role in decision
making in the current period.
(m) Absolute Cost - These costs refer to the cost of any product, process or unit in its totality. Here the costs
depicted in absolute amount may be called absolute costs and are base costs on which further analysis and
decisions are made.
(n) Discretionary Costs - 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.
(o) Period Costs -These are the costs, which are not assigned to the products but are charged as expenses
against the revenue of the period in which they are incurred.
(p) Engineered Costs- These are costs that result specifically from a clear cause and effect relationship between
inputs and outputs. The relationship is usually personally observable.
(q) Explicit Costs- These costs are also known as out-of-pocket costs and refer to costs involving immediate
payment of cash, salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are
some examples of explicit costs involving immediate cash payment.
(r) Implicit Costs - These costs do not involve any immediate cash payment. They are not recorded in the books
of account. They are also known as economic costs.
24. METHODS OF COSTING

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 16

25. The following table summarizes the various methods of costing applied in different industries:

Name of A Series of Construction Similar Rendering Customer Consisting of

output Processes of building units of a of Services Specifications: multiple
Single single Unit varieties of
Product, activities and
produced processes
by Single
Process
Method Process Contract Unit or Operating Job Costing Multiple
costing or Costing output or Costing Costing
Operation Single
Costing Costing
Cost For each For each For the For all For each order/ Combination
process contract entire services assignment/job of any method
activity,
but
averaged
for the
output

Example Sugar Real estate Cold Hospitals Advertising Car Assembly

Drinks

26. TECHNIQUES OF
COSTING

For ascertaining cost, following types of costing are usually used.

(a) Uniform Costing:- When a number of firms in an industry agree among themselves to follow
the same system of costing
Advantages of such a system are:
(i) A comparison of the performance of each of the firms can be made with that of another,
or with the average performance in the industry.
(ii) It is also possible to determine the cost of production of goods which is true for the
industry as a whole.
(b) Marginal Costing: - It is defined as the ascertainment of marginal cost by differentiating
between fixed and variable costs. It is used to ascertain effect of changes in volume or type
of output on profit.
(c) Standard Costing and Variance Analysis: - standard costs are pre-determined and
subsequently compared with the recorded actual costs. It is thus a technique of cost
ascertainment and cost control.
(d) Historical Costing It is the ascertainment of costs after they have been incurred. This type
of costing has limited utility.
 Post Costing: It means ascertainment of cost after production is completed.
 Continuous costing: Cost is ascertained as soon as the job is completed or even when the
job is in progress.
(e) Absorption Costing: - It is the practice of charging all costs, both variable and fixed to
operations, processes or products. This differs from marginal costing where fixed costs are
excluded.

•••
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 17
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 18
 CHAPTER 2
MATERIAL COST

1. INTRODUCTION

Direct Materials constitute a significant part for manufacturing and production of goods. Being an input and a
significant cost element, it requires adequate management attention. The
principle for Cost Control are: - 3Es Economy
 Economy in procurement Efficiency
 Efficiency in handling & Processing the material
 Effectiveness in producing. Effectiveness

Importance of proper recording and control of material are as follows:

Quality of final product

Price of the final product

Production continutiy

Cost of stock holding and stock-out

Wastage and other losses

Regular information about resources

2. MATERIAL CONTROL
Cost Control, which means all activities and control mechanism which are necessary to keep the cost in adherence
to the set standards. Material, being one of the total cost elements, are also required to be controlled so that the
overall cost control objective can be fulfilled.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 19

3. OBJECTIVES OF SYSTEM OF MATERIAL CONTROL
The objectives of a system of material control are as following:

Minimising
interruption in Optimisation of Reduction in Adequate Completion of
production Material Cost Wastages Information Order in Time
process

(i) Minimising interruption in production process: No activity, particularly production,

suffers from interruption for want of materials and stores.
(ii) Optimisation of Material All the materials and stores are acquired at the lowest possible price considering
the required quality and other relevant factors like reliability in respect of delivery, etc., holding cost too
needs to be minimized.
(iii) Reduction in Wastages: An objective of avoidance of unnecessary losses and wastages that may arise from
deterioration in quality due to defective or long storage or from obsolescence.
(iv) Adequate Information: Maintain proper records to ensure that reliable information is available for all
items of materials and stores.
(v) Completion of order in time: Proper material management is very necessary for fulfilling orders of the
firm. This adds to the goodwill of the firm.

4. REQUIREMENTS OF MATERIAL CONTROL

Material Control requirements can be summarized as follows

Determining
Proper co-ordination
purchase proced ure Use of standard
of all departments
to see that purchases forms
involved
are made

Preparation of Storage of all

Operation of a
budgets concerni ng materials and
materials, supplies system of internal
supplies in a well
check
and equipment designated location

Development of
Operation of a Operation of a
system of controllin g
system of perpetual system of stores
accounts and
inventory control and issue
subsidiary records

5. ELEMENTS OF MATERIAL CONTROL

Material control is a systematic control over the procurement, storage and usage of material so as to maintain an
even flow of material.
Material control involves efficient functioning of the following operations:
 Purchasing of materials MATERIAL CONTROL
 Receiving of materials
 Inspection of materials Material Procurement
Control
 Storage of materials
 Issuing materials Material Storage Control
 Maintenance of inventory records
Material Usage Control
 Stock audit
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 20
6. MATERIAL PROCUREMENT CONTROL
It can be understood with the help of the following diagram.
 Bill of Materials
It is also known as Materials Specification List or Materials List. It is a detailed list specifying the standard
quantities and qualities of materials and components required for producing a product or carrying out of
any job.

Format and content of a Bill of Materials vary on the basis of industrial peculiarities,

Uses of Bill of Material

Marketing (Purchases)
Production Dept. Stores Dept. Cost/ Accounting Dept.
Dept.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 21

 Material Requisition Note
It is also known as material requisition slip. It is a voucher of authority used to get materials issued from
store.
Format and content of a Material Requisition Note vary on the basis of industrial peculiarities,

Difference between Bill of Materials and Material Requisition Note

Bill of Materials Material Requisition Note

Prepared by Engineering or Planning dept. Prepared by production or consuming dept.
Complete schedule of component parts and raw Document asking Store-keeper to issue materials.
materials.
Serves the purpose of material requisition. Cannot replace a bill of materials.
Used for purpose of quotations. Useful in arriving historical cost only.
Helps in keeping a quantitative control on materials Shows the material actually drawn from stores.
drawn.

 Purchase Requisition
A purchase requisition is a form used for making a formal request to the purchasing department to purchase
materials. This form is usually filled up by the store keeper for regular materials and by the departmental head
for special materials (not stocked as regular items).
 Inviting Quotation/ Request for proposal(RFP)/Notification Inviting Tender (NIT)
Materials purchase department has to answer the following question before initiating purchasing of materials:

 Selection of Quotation / Proposal

Then the tender notice send their price quotations/ proposals to the purchase department.
On the receipt of quotations, a comparative statement is prepared. For selecting
material suppliers, the factors which the purchase department keeps in its mind are-price, quantity, quality
offered, time of delivery, mode of transportation, terms of payment, reputation of supplier etc.

 Preparation and Execution of Purchase Orders

After selecting the Quotation, the purchase manager or concerned officer proceeds to issue the formal
purchase order. It is a written request to the supplier to supply specified materials at specified rates and
within a specified period.

 Receipt and Inspection of Materials

After execution of purchase order and advance payment necessary arrangement is made to receive the
delivery of materials after receipt of materials along with relevant documents or/ and invoice, receiving
department (store dept.) arrange to inspect the materials for its conformity with purchase order.
After satisfactory inspection, materials are received and Goods Received Note is issued.
If some materials are not found in good condition or are not in conformity with the purchase order are
returned back to the vendor along with a Material Returned Note.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 22

 Such returns may occur before

Goods Received
Note
or after the preparation of the
If everything is in order receiving report. If the return
and the supply is takes place before the
considered suitable for preparation of the receiving
acceptance, the Receiving

Material Returned Note

report, such material obviously
department prepares a would not be included in the
Receiving Report or report. But if the material is
Material Inward Note or returned after its entry in the
Goods Received Note receiving report, a suitable
document must be drawn up in
support of the issue so as to
exclude from the Stores of
Material Account the value of
the materials returned back.
This document usually takes
the form of a Material Returned
Note or Material outward
return note.

 Checking and Passing of Bills of Payment

The invoice received from the supplier is sent to the accounts section to check authenticity and mathematical
accuracy. The quantity and price are also checked with reference to goods received note and the purchase order
respectively. The accounts section after checking its accuracy finally certifies and passes the invoice for payment.

7. VALUATION OF MATERIAL RECEIPTS

Ascertainment of cost of material purchased is called valuation of materials receipts. Cost of material includes
cost of purchase net of trade discounts, rebates, duty draw-back, input credit availed, etc. and other costs incurred
in bringing the inventories to their present location and condition. Invoice of material purchased from the market
sometime contain items such as trade discount, quantity discount, freight, duty, insurance, cost of containers,
taxes, cash discount etc.
Treatment of items associated with purchase of materials is tabulated as below:
SI Items Treatment
No.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 23

 Discounts and Subsidy

(i) Trade Discount Trade discount is deducted from the purchase price if it is not shown
as deduction in the invoice.

(ii) Quantity Discount Like trade discount quantity discount is also shown as deduction from
the invoice. It is deducted from the purchase price if not shown as
deduction.

(iii) Cash Discount Cash discount is not deducted from the purchase price. It is treated as
interest and finance item. It is ignored.

(iv) Subsidy/Grant/Incentives Any subsidy/grant/incentive received from the Government or from

other sources deducted from the cost of purchase.

Duties and Taxes

(v) Road Tax/Toll Tax Road tax/ Toll tax, if paid by the buyer, is included with the cost of
purchase.

(vi) Goods and Service Tax Goods and Service Tax (GST) is paid on supply of goods and provision of
(GST) services and collected from the buyers. It is excluded from the cost of
purchase if credit for the same is available. Unless mentioned
specifically it should not form part of cost of purchase.

(vii) Custom Duty Custom duty is paid on import of goods from outside India. It is added
with the purchase cost.

Penalty and Charges

(viii) Demurrage Demurrage is a penalty imposed by the transporter for delay in

uploading or offloading of materials. It is an abnormal cost and not
included with cost of purchase

(ix) Detention charges/Fine Detention charges/ fines imposed for non-compliance of rule or law by
any statutory authority. It is an abnormal cost and not included with
cost of purchase

(x) Penalty Penalty of any type is not included with the cost of purchase

Other expenditures

(xi) Insurance charges Insurance charges are paid for protecting goods during transit. It is
added with the cost of purchase.

(xii) Commission or brokerage Commission or brokerage paid is added with the cost of purchase.
paid.

(xiii) Freight inwards It is added with the cost of purchase as it is directly attributable to
procurement of material.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 24

 (xiv) Cost of containers Treatment of cost of containers are as follows:

 Non-returnable containers: The cost of containers is added with

the cost of purchase of materials.

 Returnable Containers: If the containers are returned and their

costs are refunded, then cost of containers should not be
considered in the cost of purchase.

 If the amount of refund on returning the container is less than

the amount paid, then, only the short fall is added with the cost
of purchase.

(xv) Shortage Shortage in materials is treated as follows:

Shortage due to normal reasons: Good units absorb the cost of

shortage due to normal reasons. Losses due to breaking of bulk,
evaporation, or due to any unavoidable conditions etc. are the reasons
of normal loss.
Shortage due to abnormal reasons: Shortage arises due to abnormal
reasons such as material mishandling, pilferage, or due to any avoidable
reasons are not absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss account.

8. MATERIAL STORAGE & RECORDS

Proper storing of materials is of primary importance. It is not enough only to purchase material of the required
quality. If the purchased material subsequently deteriorates in quality because of bad storage, the loss is even
more than what might arise from purchase of bad quality of materials. Apart from preservation of quality, the
store-keeper also ensures safe custody of the material. It should be the function of store-keeper that the right
quantity of materials always should be available in stock.

 Duties of Store Keeper

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 25

 Store Records
The record of stores may be maintained in three forms:
 Bin Cards
 Stock Control Cards
 Store Ledger
Bin Cards: It is a quantitative record of inventory which shows the quantity of inventory available in a particular
bin. Bin refers to a box/ container/ space where materials are kept. Card is placed with each of the bin (space) to
record the details of material like receipt, issue and return. It is maintained by store department.
Stock Control Cards: It is also a quantitative record of inventory maintained by stores department for every item
of material. In other words, it is a record which shows the overall inventory position in store. Recording includes
receipt, issue, return, in hand and order given.
Stores Ledger: A Stores Ledger is maintained to record both quantity and cost of materials received, issued and
those in stock. It is a subsidiary ledger to the main cost ledger, it is maintained by the Cost/ Accounts Department.
The source documents for posting the ledger are Goods received notes, Materials requisition notes etc.
The first two forms are records of quantities received, issued and those in balance, but in the third record i.e.
store ledger, value of receipts, issues and closing balance is also maintained.

9. INVENTORY CONTROL
The Chartered Institute of Management Accountants (CIMA) defines Inventory Control as "The function of
ensuring that sufficient goods are retained in stock to meet all requirements without carrying
unnecessarily large stocks."
The objective of inventory control is to make a balance between sufficient stock and over-stock. The stock
maintained should be sufficient to meet the production requirements so that uninterrupted production flow can
be maintained. The management may employ various methods of inventory control to have a balance.
Management may adopt the following basis for inventory control:

 Inventory Control – By Setting Quantitative Levels

S.NO. Re-order Stock Level • When to Order
1 Re-order Quantity/ EOQ • How Much to Order
2 Maximum Stock Level • Upto How much to stock
3 Minimum Stock Level • At least How much to stock
4 Average Stock Level • Stock normally kept
5 Danger Stock Level • Kept for emergency requirement
6 Buffer Stock • To meet sudden demand

1. Re-order Stock Level (ROL):- This level lies between minimum and the maximum levels in such a way
that before the material ordered is received into the stores, there is sufficient quantity in hand to cover
both normal and abnormal consumption situations.
It is calculated as:

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 26

2. Re – order Quantity: Re-order quantity is the quantity of materials for which purchase requisition is made
by the store department. The quantity should be ordered where, the total of carrying cost and ordering cost
is at minimum. For this purpose, an economic order quantity should be calculated.
Economic Order Quantity (EOQ): The size of an order for which total of ordering and carrying cost are
minimum.
Ordering Cost: Ordering costs are the costs which are associated with the purchase or order of materials such
as cost to invite quotations, documentation works like preparation of purchase orders, employee cost directly
attributable to the procurement of material, transportation and inspection cost etc.
Carrying Cost: Carrying costs are the costs for holding/ carrying of inventories in store such as the cost of fund
invested in inventories, cost of storage, insurance cost, obsolescence etc.
The Economic Order Quantity (EOQ) is calculated as below:

EOQ = √

Annual Requirement (A) - It represents demand for raw material or Input for a year.
Cost per Order (O) - It represents cost of placing an order for purchase.
Carrying Cost (C) - It represents cost of carrying average inventory on annual basis.

Assumptions underlying E.O.Q. The calculation of economic order of material to be purchased is subject
to the following assumptions:
(i) Ordering cost per order and carrying cost per unit per annum are known and they are fixed.
(ii) Anticipated usage of material in units is known.
(iii) Cost per unit of the material is constant and is known as well.
(iv) The quantity of material ordered is received immediately ie. The lead time is zero.
3. Minimum Stock Level: It is lowest level of material stock, which must be maintained in hand at all times,
so that there is no stoppage of production due to non-availability of inventory.
It is calculated as below:
Minimum Stock Level
= Re-order Stock Level – (Average Consumption Rate x Average Re-order Period)

4. Maximum Stock Level: It is the highest level of quantity for any material which can be held in stock at any
time. Any quantity beyond this level cause extra amount of expenditure due to engagement of fund, cost of
storage, obsolescence etc.
It can be calculated as below:
Maximum Stock Level
= Re-order Level + Re-order Quantity –
(Minimum Consumption Rate x Minimum Re-order Period)

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 27

 5. Average Inventory Level: This is the quantity of material that is normally held in
stock over a period. It is also known as normal stock level.
It can be calculated as below:

6. Danger level: It is the level at which normal issues of the raw material inventory are stopped and
emergency issues are only made.
It can be calculated as below:
Danger Level = Average Consumption* x Lead time for emergency purchase
*Some time minimum consumption is also used.
7. Buffer Stock: Some quantity of stock may be kept for contingency to be used in case of sudden order, such
stock is known as buffer stock.

 Inventory Stock Out

Stock out is said to be occurred when an inventory item could not be supplied due to insufficient stock
in the store. Due to stock out an entity not only loses overheads costs and profit but reputation (goodwill)
also due to non-fulfilment of commitment. Though it may not be a monetary loss in short term but in long
term it could be a reason for financial loss.
While deciding on the level of inventory, a trade-off between the stock out cost and carrying cost is made
so that overall inventory cost can be minimized.
 Just In Time (JIT) Inventory Management
JIT is a system of inventory management with an approach to have zero inventories in stores.
According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) The products should be delivered to customers at the time only when they want.
It is also known as 'Demand pull' or 'pull through' system of production. In this system, production
process actually starts after the order for the products is received. Based on the demand, production
process starts and the requirement for raw materials is sent to the purchase department for purchase.
This can be understood with the help of the following diagram:

Production Material
starts to requirement is Order for raw Supplier sends
Demand for
process the sent to the materials sent the material
final product
demand for Purchase to supplier for production
product department

 Inventory Control – On the basis of relative Classification

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 28

1. ABC Analysis:-
This system exercises discriminating control over different items of inventory on the basis of the
investment involved. Usually the items are classified into three categories according to their relative
importance, namely, their value and frequency of replenishment during a period.

'A' Category:- This category of items consists of only a small percentage ie.,
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:- This category of items is 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

'C' Category:- This 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.

2. Fast Moving, Slow Moving and Non Moving (FSN) INVENTORY:-

It is also known as FNS (Fast, Normal and slow moving) classification of inventory analysis. Under this
system, inventories are controlled by classifying them on the basis of frequency of usage.

Slow Moving- This category of

Fast Moving- This category of items
items is stored little far and stock is
is placed nearer to store issue point
reviewed periodically for any
and the stock is reviewed frequently
obsolescence, and may be shifted to
for making of fresh orders.
Non-moving category.

Non-Moving- This category of items

is kept for disposal. This category of
items is reported to the management
and an appropriate provision for loss
may be created.

Some of the reasons for slow moving and non-moving inventories are stated below:
(i) Failure of production management to communicate the updated requirement to the stores management

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 29

 (ii) Technological upgradation in terms of new machine requiring new kind of material or
existing material becoming obsolete.

(iii) Lack of periodic review of inventories.

3. Vital, Essential and Desirable (VED): Under this system of inventory analysis, inventories are classified on
the basis of its criticality for the production function and final product. Generally, this classification is done
for spare parts which are used for production.

Vital- Items are classified as vital when its unavailability can interrupt the
production process and cause a production loss.

Essential- Items under this category are essential but not vital. The unavailability
may cause sub standardisation and loss of efficiency in production process.

Desirable- Items under this category are optional in nature, unavailability does
not cause any production or efficiency loss.

4. High Cost, Medium Cost, and Low Cost (HML) Inventory: Under this system, inventory is classified on
the basis of the cost of an individual item, unlike ABC analysis where inventories are classified on the basis
of overall value of inventory. A range of cost is used to classify the inventory items into the three categories.
High-Cost inventories are given more priority for control, whereas Medium-cost and Low-cost items are
comparatively given lesser priority.
 Inventory Control – Using Ratio Analysis
(i) Input-Output Ratio: Input-output ratio is the ratio of the quantity of input of material to production
and the standard material content of the actual output.
This type of ratio analysis enables comparison of actual consumption and standard consumption,
thus indicating whether the usage of material is favorable or adverse.
(ii) Inventory Turnover Ratio: Computation of inventory turnover ratios for different items of material
and comparison of the turnover rates provides a useful guidance for measuring inventory
performance. High inventory turnover ratio indicates that the material in the question is a fast
moving one. A low turnover ratio indicates over-investment and locking up of the working capital in
inventories. Inventory turnover ratio may be calculated by using the following formulae: -

𝑪𝒐𝒔𝒕 𝒐𝒇 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔 𝒄𝒐𝒏𝒔𝒖𝒎𝒆𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒑𝒆𝒓𝒊𝒐𝒅

Inventory Turnover Ratio =
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒔𝒕𝒐𝒄𝒌 𝒉𝒆𝒍𝒅 𝒅𝒖𝒊𝒓𝒏𝒈 𝒕𝒉𝒆 𝒑𝒆𝒓𝒊𝒐𝒅

Average Stock = 1/2 (opening stock + closing stock)

𝟑𝟔𝟓 𝒅𝒂𝒚𝒔/𝟏𝟐𝒎𝒐𝒏𝒕𝒉𝒔
Average no. of days of Inventory holding = 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓
𝑹𝒂𝒕𝒊𝒐
 Inventory Control – By Physical Control
Perpetual
Establishment of inventory records
system of budgets and continuous
stock verification

Two Bin continuous

stock
System
verification
Physical
Control

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 30

 CHAPTER 3
EMPLOYEE COST

1. MEANING OF EMPLOYEE (LABOUR COST)

 Benefits paid or payable to the employees of an entity, whether permanent or temporary for the services
render by them.
 Includes payments made in cash or kind.

Employee Cost includes the following:-

 Classification of Employee cost :-

Direct Indirect
 Related to production  Not related to production
 Can be easily identified and allocated to  Apportioned on some apportioned basis.
cost unit.  May not vary
 Varies with volume of production

2. EMPLOYEE COST CONTROL

 Control over cost incurred.
 Keep wage per unit {low as possible}.
 Give appropriate compensation.
 Functions of different department:
 Personnel department:
 Searches required skills & qualifications
 Recruitment/proper training
 Maintain all personal records of employees
 Evaluation of performance.
 Engineering & work study department :
 Prepare plans & Specifications for job.
 Training, guidance/supervise.
 Conduct time & motion study.
 Job evaluation.
 Time Keeping Department :
 Attendance Records.
 Time spent by employees on various job i.e. time booking.
 Payroll Department :
 Preparation of payroll.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 31

  Calculation of payment
 Distribution of salary, wages.

 Cost Accounting Department :

 Accumulation & classification of employee costs.
 It records payments.
 Analysis & allocation of cost to various centers or cost objects (procedure)

 Collection of employee cost :

 To ascertain the effective wages paid per hour in each department and to analyses the total
payment of wages of each department into:
(i) the amount included in the direct cost of goods produced
(ii) The amount treated as indirect employee cost
(iii) The amount treated as the cost of idle time and hence loss.
(iv) The amount treated as abnormal loss/ gain and to be transferred to profit and loss account.

3. ATTENDANCE & PAYROLL PROCEDURE

 Attendance procedure/time keeping :
It is a record of total time spent by employee for:
 Overhead distribution
 Preparation of payroll
 Calculating overtime
 Identifying idle time
 For disciplinary reason
 Method of time keeping:

 Requisites of good time keeping system:-

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 32

 • Shouldn’t allow for proxy attendance
• Should be mechanical than manual to avoid conflicts
• Queuing for attendance to be avoided
• Both time of arrival & departure to be recorded
• Late comers to be recorded
• System to be received regularly

 Time Booking:
 It refers to a method where in each & every activity of employer is recorded.
 This is used to measure the time spent on each particular job & charge labour cost accordingly.
 Time booking used:
 For costing For collection of all such data, a separate
 To measure efficiency record known as job card or time card.
 For fixation of responsibility.

 Payroll Procedure

4. IDLE TIME:
The time during which no production is carried out because the worker remains idle but are paid.
Idle time = Time paid – Time booked
IDLE TIME IS OF TWO TYPE
 Normal
 Can’t avoided in normal course of business
 Treated as a part of cost of production
 Abnormal
 Apart from normal ideal time (can be avoided)
 Charged to costing P & L
5. OVERTIME
Work done beyond normal working hours is known as ‘overtime work’
Overtime Payment = wages paid for overtime at normal rate + premium (extra) payment for overtime work
 Overtime premium: Extra amount paid over normal rate is called overtime premium.
6. LABOUR UTILISATION
 For this purpose, a statement is prepared for each department/cost centre.
 Wage Analysis sheet is prepared.
 Analyses the labour time into direct & indirect labour by cost centers, jobs, work orders.
 Provides detail of direct labour cost to be charged as production cost.
 Provides information for treatment of indirect labour cost.
7. SYSTEMS OF WAGE PAYMENT AND INCENTIVES

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 33

 Time Based or Time rate system :-
 Wages are paid on time basis i.e. hour, day etc.
Wages = time worked × Rate for the

 Output based : {piece rate system}

 Each operation, job or unit of production is termed as piece.
 A rate of payment, known as piece rate.
Wages = No. of units produced × Rate per unit

 Premium bonus Method:-

 Halsey Premium plan
 Along with basic payment
 Additional he gets bonus if he does the job in less than the standard time

Advantages Disadvantages
1. Time wages are guaranteed even if the output 1. Incentive is not as strong as with piece rate.
of worker is below the standard.
2. Opportunity for increasing earnings by 2. Workers gets less per piece even if works harder.
increasing production.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 34

 3. Employer also gain since direct labour cost & 3. The sharing principle may not be liked by
overhead cost per unit declines. employer.

Note: If hours saved is more than 50% of time allowed then Halsey premium is greater than Rowan plan.
 Rowan Premium Plan :
 Bonus is that proportion of time wages as time saved bears to the standard time.

Advantages Disadvantages
1. Provides minimum wages to workers. 1. Bit Complicated (system)
2. It provides better return for moderate 2. The incentive is weak at a high production level where
efficiency than under Halsey plan. time saved is more than 50% of time allowed.
3. Sharing principle appeals to the employer as 3. Sharing principle is not generally welcomed by
being equitable. employees.

Note: If time saved is upto 50% of time allowed then bonus under Rowan is greater than halsey.
 At 50% bonus under both the schemes are same.

8. ABSORPTION OF WAGES:
• Wages – Monetary Payment & Non-monetary benefits.
• The monetary part includes the following:-

9. EFFICIENCY RATING PROCEDURE

It is the time taken by workers on a job equals or less than the standard time then their is rated efficiency.
𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 (𝑠𝑡𝑑)
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 (%) = × 100

 Procedure :-
Determining std. time

Measure Actual performance

Computation of efficiency rating

 Employee productivity :
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑡𝑖𝑚𝑒 𝑓𝑜𝑟 𝑑𝑜𝑖𝑛𝑔 𝐴𝑐𝑡𝑢𝑎𝑙 𝑤𝑜𝑟𝑘
 Determine by input/output ratio.=
𝐴𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛

10. EMPLOYEE (LABOUR) TURNOVER

 It is an organization is the rate of change in the composition of labour force during a specific period.
 Employee/labour Turnover Ratios:
 WITHOUT EXPANSION

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 35

 𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑
1. Separation method : = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟
{It means left or discharge.}

𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑

2. Replacement method :- = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
{New appointed on vacant places

[𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑]+[𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑]

3. Flux Method : = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
 WITH EXPANSION
1. Separation Method : Same
2. Replacement method : Same
3. Flux method :
[𝑁𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑] + [𝑁𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑] + [𝑛𝑒𝑤𝑙𝑦 𝑎𝑝𝑝𝑜𝑖𝑛𝑡𝑒𝑑 𝑎𝑡 𝑛𝑒𝑤 𝑝𝑜𝑠𝑡
= × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟
{𝑊𝑜𝑟𝑘𝑒𝑟𝑠 𝑖𝑛 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔}+{𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑒𝑛𝑑}

 Average No. of workers = =

2

 Equivalent Employee (labour) Turnover Ratio :

𝐸𝐿𝑅 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑
The rate are converted into equivalent annual employee turnover. = × 365
𝑁𝑜.𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

 Causes & effects of ELR :

 CAUSES
(a) Personal Causes
(i) Change of jobs
(ii) Premature Retirement
(b) Unavoidable Causes
(i) Seasonal nature of business
(ii) Shortage of Raw Material
(c) Avoidable Causes
(i) Dissatisfaction with job
(ii) Lack of Training
 EFFECTS
(a) Even flow of production is disturbed.
(b) Efficiency of New Workers is low.
(c) Increased Cost of recruitment & training

11. DIRECT EXPENSES:

Expenses paid for other than direct material and direct labour cost, which are incurred to manufacture a product
or for provision of service & can be directly traced in an economically feasible manner to a cost object.
 Royalty paid / payable for production or provision of services
 Hire charges paid for hiring specific equipment.
 Cost for product / service specific design or drawing.
 Cost of product / Service specific software.
 Other expenses directly related to production.
 Treatment of Direct Expense:
 It forms a part of prime cost.
 In case of lump sum payment or onetime payment.

Cost is amortized over the estimated production volume or benefit derived.

•••
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 36
 CHAPTER 4
OVERHEADS – ABSORPTION COSTING METHOD

1. INTRODUCTION
 Overheads are the expenditure which cannot be conveniently traced to or identified with any particular
cost unit.
 Overheads are also very important cost element along with direct materials and direct employees.

2. CLASSIFICATION OF OVERHEADS

Examples
By Function
Factory or Manufacturing or Production Stock keeping expenses, Depreciation of factory building,
Overhead
Office and Administrative Overheads Salary paid to office staffs, postage and stationery,
Selling and Distribution Overheads Salesmen commission, Advertisement cost,

By Nature
Fixed Overhead Salary paid to permanent employees, Interest on capital
Variable Overhead Indirect materials, Power and fuel,
Semi-Variable Overheads Electricity cost, water cost,
By Element
Indirect materials Stores used for maintaining machines, Stores used by service
departments
Indirect employee cost Salary paid to foreman and supervisor & administration staff
Indirect expenses Rates & taxes, advertisement expenses
By Control
Controllable costs Materials cost, wages and salary
Uncontrollable costs Rates and taxes, Depreciation,

3. ADVANTAGES OF CLASSIFICATION OF OVERHEADS INTO FIXED AND VARIABLE

The primary objective of segregating semi-variable expenses into fixed and variable is to ascertain marginal
costs. Besides this, it has the following advantages also
• Controlling Expenses
• Preparation of Budget Estimates
• Decision Making
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 37
 4. STEPS FOR THE DISRIBUTION OF OVERHEADS

 Estimation and Collection of Overheads: - By standing Orders Through budgeting process.

 Allocation of Overheads: - Directly attributable to department/ cost centres.
 Apportionment of Overheads: - Overheads which are related to more than one department are required
to be distributed between/ among the departments. This distribution of overheads between/ among the
departments is called apportionment.
Overhead Cost Bases of Apportionment
1. (i) Rent and other building expenses Floor area, or volume of department
(ii) Lighting and heating (conditioning)
(iii) Fire precaution service
(iv) Air- conditioning
2. (i) Perquisites Number of workers
(ii) Labour welfare expenses
(iii) Time keeping
(iv) Personnel office
(v) Supervision
3. (i) Compensation to workers Direct wages
(ii) Holiday pay
(iii) ESI and PF contribution
(iv) Perquisites
4. General overhead Direct labour hour, or Direct wages, or
Machine hours.
5. (i) Depreciation of plant and machinery Capital values
(ii) Repairs and maintenance of P&M
(iii) Insurance of stock
6. (i) Power/steam consumption Technical estimates
(ii) Internal transport
(iii) Managerial salaries
7. Lighting expenses (light) No. of light points, or Area or Metered units
8. Electric power (machine operation) Horse power of machines, or Number of
machine hour, or value of machines or units
consumed.
9. (i) Material handling Weight of materials, or volume of materials,
(ii) Stores overhead or value of materials or unit of materials.

 Re-Apportionment of Overheads: - The re-apportionment of the service department cost to the

production department is known as secondary distribution
Cost of the Service Departments Basis
1. Maintenance and Repair shop Direct labour hours, Machine hours, Direct
2. Planning and progress labour wages, Asset value x Hours worked
3. Tool room
4. Canteen and Welfare No of direct workers
5. Hospital and Dispensary No. of employees etc.
6. Personnel Department
7. Time-keeping No. of card punched, No. of employees

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 38

 8. Computer Section Computer hours, Specific allocation to
departments
9. Power House (electric lighting cost) Floor area, Cubic content, No. of electric
Points, Wattage.
10. Power House (electric power cost) Horse power, Kwh, Horse power × Machine
hours, Kwh × Machine hours
11. Stores Department No. of requisitions, Weight or value of
Materials issued.
12. Transport Department Crane hours, Truck hours, Truck mileage,
Truck tonnage, Truck ton-hours, Tonnage
handled. No. of packages of Standard size
13. Fire Protection Capital values

14. Inspection Inspection hours

Methods for Re-apportionment: The re-apportionment of service department expenses over the production
departments may be carried out by using any one of the following methods:
(i) Direct re-distribution method.
(ii) Step method of secondary distribution or non-reciprocal method.
(iii) Reciprocal Service method

 Absorption: - To ascertain how much of the overheads is to be debited to the cost of the various jobs,
products etc. This process is called absorbing the overhead to cost units.

5. METHODS OF ABSORBING OVERHEADS TO VARIOUS PRODUCTS OR JOBS

• Percentage of Direct Materials
• Percentage of Prime Cost
• Percentage of Direct Labour Cost
• Labour Hour Rate
• Machine hour rate and
• Rate per unit of Output

Percentage of Direct Materials

The cost of direct material consumed is the base for calculating the amount of overhead absorbed. This
overhead rate is computed by the following formula:
Total Production Overheads of a Department
Overhead rate = x 100
Budgeted Direct Material cost of all products

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 39

 Percentage of Prime Cost Methods

This method is based on the fact that both materials as well as labour contribute in raising
factory overheads. Hence, the total of the two i.e. Prime cost should be taken as base for
absorbing the factory overhead. The overhead rate in this method is computed by the following formals:
Total Production Overheads of a Department
Overhead rate = x 100
Prime Cost

Percentage of Direct Labour Cost

Total Production Overheads of a Department
Overhead rate = x 100
Direct Labour Cost

Labour Hour Rate Method

This method is admirably suited to operations which do not involve any large use of machinery. To calculate
labour hour rate, the amount of factory overheads is divided by the total number of direct labour hours.
Total Production Overheads of a Department
Direct Labour Hour Rate = x 100
Direct Labour Hour

Machine Hour Rate Method

Machine hour rate implies, cost of running a machine for an hour to produce goods. There are two methods of
computing machine hour rates:
 Direct Machine hour rate: Only the expenses directly or immediately connected with the operation of the
machine are taken into account.
 Comprehensive Machine hour rate: The overheads not directly related to machines may be absorbed on
the basis of Productive Labour Hour Rate Method
The steps involved in determining of Machine hour rate are as follows:

Rate per Unit of Output Method

This is the simplest of all the methods. In this method overhead rate is determined by the following formula:

6. TYPES OF OVERHEADS RATES

The overhead rates may be of the following types
Amount of Overheads
Overheads Rate =
Number of Units
 Normal Rate
 Pre-determined Rate
 Blanket Rate
 Departmental Rate

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 40

 Normal Rate

This rate is calculated by dividing the actual overheads by actual base. It is also known as
actual rate. It is calculated by the following formula:
Actual Amount of Overheads
Normal Overhead Rate =
Actual Base

Pre- determined Overhead Rate

This rate is determined in advance by estimating the amount of the overhead for the period in which it is to be
used. It is computed by the following formula:
Budgeted Amount of Overheads
Pre- determined Rate =
Budgeted Base

Blanket Overhead Rate

Blanket overhead rate refers to the computation of one single overhead rate for the whole factory. It is to be
distinguished from the departmental overhead rate which refers to a separate rate for each individual cost centre
or department.
Total overheads for the factory
Blanket Rate =
Total number of units of base for the factory
A blanket rate should be applied in the following cases:
1. Where only one major product is being produced.
2. Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.

Departmental Overhead Rate

It refers to the computation of one single overhead rate for a particular production unit or department
Overheads of department pr Cost Centre
Departmental Overhead Rate =
Corresponding base

7. TREATMENT OF UNDER-ABSORBED AND OVER–ABSORBED OVERHEADS

Overhead expenses are usually applied to production on the basis of pre-determined rates. Production overheads
are to be determined in advance for fixing selling price, quote tender price and to formulate budgets etc. Pre-
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
determined Overhead Rate =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
Overheads recovery rate is also known as overheads charging rate, overheads application rate and overheads
absorption rate’
Under or Over Recovery: Difference between recovered overheads and actual overheads
Situations:
1. Recovered OH > Actual OH Over Recovery
2. Recovered OH < Actual OH under Recovery
3. Recovered OH = Actual OH Equal Recovery

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 41

 Treatment of under/ over absorption of overheads in cost accounting

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 42

 CHAPTER 5
ACTIVITY BASED COSTING

1. MEANING AND DEFINITION

 ABC is an accounting methodology that assigns costs to activities rather than products
or services.
 ABC is a technique which involves identification of cost with each cost driving activity
and making it as the basis for apportionment of costs over different cost objects/ jobs/
products/customers or services.

2. MEANING OF TERMS USED IN ABC

(a) Activity: Activity, here, refers to an event that incurs cost.

(b) Cost Object: It is an item for which cost measurement is required e.g. a
product or a customer.
(c) Cost Driver: It is a factor that causes a change in the cost of an activity.
There are two categories of cost driver.
 Resource Cost Driver: used to assign the cost of a resource to an activity
or cost pool.
 Activity Cost Driver: used to assign activity costs to cost objects.
Examples of Cost Drives

Business Functions Cost Driver

Research and Development • Number of research projects
• Personnel hours on a project
Design of products, services and procedures • Number of products in design
• Number of parts per product
• Number of engineering hours
Customer Service • Number of service calls
• Number of products serviced
• Hours spent on servicing products
Marketing • Number of advertisements
• Number of sales personnel
• Sales revenue
Distribution • Number of units distributed
• Number of customers
(d) Cost Pool: It consists of costs that have same cause and effect relationship. Example machine set-
up.

3. TRADITIONAL ABSORPTION COSTING VS ABC

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 43

 Difference between ABC & Traditional Absorption Costing

ABC Traditional
Overheads are related to activities and grouped Overheads are related to cost
into Activity Cost Pools. centers/departments.

Costs are related to activities. Costs are related to cost centers.

More realistic. Not realistic

Activity–wise cost drivers are determined. Time (Hours) are assumed to be the only cost
driver
Cost are assigned to cost objects, e.g. customers, Costs are assigned to Cost Units i.e. to
products. products, or jobs.

4. LEVEL OF ACTIVITIES UNDER ABC

(a) Unit Level Activities: consumption of resources can be identified with the number of units produced.
(b) Batch Level Activities: The activities such as setting up of a machine or processing a purchase order are
performed each time a batch of goods is produced.
(c) Product Level Activities: the activities which are performed to support different products in product line
(d) Facilities Level Activities: the activities which cannot be directly attributed to individual products
5. ADVANTAGES OF ABC
 More accurate costing of products/services.
 Overhead allocation is done on logical basis.
 It enables better pricing policies
 Utilizes unit cost rather than just total cost
 Help to identify non-value added activities
 Helpful to the organizations with multiple products.
 Highlights problem areas which require attention of the management.
6. LIMITATIONS OF ABC
 more expensive,
 Not helpful to the small organizations.
 not be applied to organizations with limited products
 Selection of the most suitable cost driver may not be easy
7. REQUIREMENTS IN ABC IMPLEMENTATION

PROCESS ACTIVITY ACTIVITY DRIVE

STAFF TRAINING ASSIGNING COST
SPECIFICATION DEFINITION SELECTION

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 44

 CHAPTER 6
COST SHEET

1. INTRODUCTION
Ascertainment of cost includes elementwise collection of costs, accumulation of the costs so
collected for a certain volume or period and then arrange all these accumulated costs into a
sheet to calculate total cost for the cost object.
A Cost Sheet or Cost Statement is “a document which provides a detailed cost information”
2. FUNCTIONAL CLASSIFICATION OF ELEMENTS OF COST
Costs are divided according to the function for which they have been incurred. The following are the classification
of costs based on functions:
(i) Production/ Manufacturing Cost
(ii) Administration Cost
(iii) Selling Cost
(iv) Distribution Cost
(v) Research and Development costs etc.

3. COST HEADS IN A COST SHEET

The costs as classified on the basis of functions are grouped into the following cost heads in a cost sheet:
(i) Prime Cost
(ii) Cost of Production
(iii) Cost of Goods Sold
(iv) Cost of Sales

4. COST SHEET / STATEMENT

The cost items in the cost statement shall be presented on ‘basis of relevant classification’.
Particulars Total Cost Cost per unit
(₹) (₹)
1. Direct materials consumed:
Opening Stock of Raw Material xxx
Add : Additions / Purchases xxx
Less: Closing stock of Raw Material xxx
xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx
5. Add: Works/ Factory Overheads xxx
6. Gross Works Cost (4+5) xxx
7. Add: Opening Work in Process xxx
8. Less: Closing Work in Process (xxx)
9. Works/ Factory Cost (6+7-8) xxx
10. Add: Quality Control Cost xxx
11. Add: Research and Development Cost xxx
12. Add: Administrative Overheads (relating to production activity) xxx
13. Less: Credit for Recoveries/Scrap/By-Products/ misc. income (xxx)
14. Add: Packing cost (primary) xxx
15. Cost of Production (9+10+11+12-13+14) xxx
16. Add: Opening stock of finished goods xxx
17. Less: Closing stock of finished goods (xxx)
18. Cost of Goods Sold (15+16-17) xxx
19. Add: Administrative Overheads (General) xxx

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 45

 20. Add: Marketing Overheads:
Selling Overheads xxx
Distribution Overheads xxx
21. Cost of Sales (18+19+20) xxx

5. TREATMENT OF VARIOUS ITEMS OF COST IN COST SHEET

(a) Abnormal costs: Shall not form part of cost of production or acquisition or supply of goods or provision
of service.
Examples of abnormal costs are:
(i) Cost arising out of a pandemic e.g. COVID-19
(ii) Cost associated with employees due to sudden lockdown.
(b) Subsidy/Grant/Incentives: Any such type of payment received/ receivable are reduced from the cost
objects to which such amount pertains.
(c) Penalty, fine, damages, and demurrage: These types of expenses are not form part of cost.
(d) Interest and other finance costs: They are not included in cost of production. They shall be presented in
the cost statement as a separate item of cost of sales.

6. ADVANTAGES OF COST SHEET OR COST STATEMENTS

 Provides the total cost figure as well as cost per unit of production.
 Helps in cost comparison.
 Facilitates the preparation of cost estimates required for submitting tenders.
 Provides sufficient help in arriving at the figure of selling price.
 Facilitates cost control by disclosing operational efficiency

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 46

 CHAPTER 7
COST ACCOUNTING SYSTEMS

1. INTEGRATED ACCOUNTING SYSTEM

 Only One set of books of accounts is maintained to records transactions related to Cost Account &
Financial Account.
 It provides relevant information which is necessary for preparing Profit & Loss account and the
Balance Sheet.
2. NON – INTEGRATED ACCOUNTING SYSTEM
 Two set of books of accounts is maintained to records transactions related to Cost Account & Financial
Account.
 Cost Records only recognize Nominal Account (Material, Labour, Overheads etc.)
 For all transactions related to Real Account (Bank, Cash, & Assets etc.) and Personal Account (Debtors,
Creditors, Capital etc.)Cost Records use a Representative Account:
 Cost Ledger Control a/c. (CLC)
 Nominal Leger Control a/c. (NLC)
 General Ledger Adjustment a/c. (GLA)

3. DIFFERENCE
Integrated Non-Integrated
 When financial records & cost records are  When financial & cost record are maintained
maintained in same set of books. in separate set of books.
 Usually followed by Small organisation.
 Less Systematic  Usually followed by Larger organisation
 Less Costly  More Systematic & Detail
 Less time & effort  More costly
 Doesn't Require preparation of Reconciliation  More time & effort
for  Reconciliation needs to be prepare

4. RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

In case of Non- Integrated Accounting Systems, We have to RECONCILE profit between two sets of Books of
Accounts.

5. PRECEDURE FOR RECONCILIATION

There are 3 steps involved in the procedure for Reconciliation:

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 47

 Ascertainment of profit as per Financial Accounts

Ascertainment of profit as per Cost Accounts

Reconciliation of both the Profits

6. REASONS OF DIFFERENCE BETWEEN COST AND FINANCIAL ACCOUNTS

1. Items included in the financial accounts but not in Cost Accounts (Purely Financial Items)
 Interest on loans or bank mortgages.
 Expenses and discounts on issue of shares, debentures etc.
 Other capital losses i.e., loss by fire not covered by insurance etc.
 Losses on the sales of fixed assets and investments
 Goodwill written off
 Preliminary expenses written off
 Income tax, donations, subscriptions
 Expenses of the company's share transfer office, if any
 Interest received on bank deposits, loans and investments
 Dividends received
 Profits on the sale of fixed assets and investments
 Transfer fee received
 Rent receivables
2. Items included in cost accounts only (Notional Expenses)
 Charges in lieu of rent where premises are owned
 Interest on capital at notional figure though not incurred
 Salary for the proprietor at notional figure though not incurred
 Notional depreciation on the assets fully depreciated for which book value is nil
3. Other reason of difference.
 Difference in method on value of Depreciation
 Difference in value of opening stock.
 Difference in value of closing stock.

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 48

 CHAPTER 8
UNIT & BATCH COSTING

1. UNIT COSTING
 It is that method of costing where the output produced is identical &
each unit of output requires identical cost.
 Also known as single or output costing.
 Cost p.u. is same.
 The work is usually executed from factory.
 Time involved in production is usually less may be a few minute or
hours.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
 Formula: Cost per unit = 
𝑁𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

2. COST COLLECTION PROCEDURE IN UNIT COSTING

It is collected element wise:

Collection of material cost Collection of employee cost Collection of overhead
Cost of material issued for All direct employee (labour) It is collected under suitable
production are collected from cost is collected from job time standing orders numbers &
material Requisition note card or sheet selling and distribtution
overheads.

 Treatment of Spoiled & Defective work:

Loss due to normal Loss due to abnormal

reason reason

Cost of rectification or Cost of rectification or

loss will be charged to the loss is written off as loss
entire output. in costing profit & Loss
A/c

3. BATCH COSTING:
 It is a type of specific order costing where articles are manufactured in pre-determined lots known
as batch.
 Cost incurred batch wise.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑏𝑎𝑡𝑐ℎ
 Cost p.u. = 
𝑁𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡 𝑖𝑛 𝑏𝑎𝑡𝑐ℎ

4. COSTING PROCEDURE IN BATCH COSTING:

 To facilitate convenient cost determination, one number is allotted for each batch.
 Material cost for the batch is arrived at on the basis of material requisitions for the batch.
 Labour cost is arrived at by multiplying the time spent on the batch by direct workers as ascertained
from time cards or job tickets.
 Overheads are absorbed on some suitable basis like machine hours, direct labor hours etc.
5. ECONOMIC BATCH QUANTITY:
 EBQ is the size of a batch where total cost of set up & Holding costs are at minimum.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 49

 Setting up
 Two major cost: cost
2 ×0 ×𝑆
ECONOMIC
BATCH
 Formula: √ QUANTITY
𝐶
Where,
D = Annual demand for the product Carrying cost
S = Setting up cost per batch
C = Carrying cost per unit of production
 Total set up cost = {No. of Set ups} × {Set up cost per set up}
 Total Carrying cost = 𝐸𝐵𝑄 × CC p.u. p.a
2

 If Batch quantity is less then:

No. of set up ↑
Set up cost ↑
Carrying cost ↓
 If Batch quantity is more then:
No. of set up ↓
Set up cost ↓
Carrying cost ↑
Note: If carrying cost p.u p.a → if in %
= 𝑅𝑎𝑡𝑒 × cost of product
100

6. DIFFERENCE BETWEEN JOB COSTING & BATCH COSTING:

S.no Basis Job Costing Batch Costing.
1. Uses For costing of non-standard & non For homogeneous product produced in
repetitive products as per customer continuous production flow in lot.
specification.
2. Determination Cost determined for each job. Cost determined for entire batch.
3. Nature Jobs are different from each other Products produced in a batch are
and independent. each job is unique homogeneous & Lack of individuality.

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 50

 CHAPTER 9
JOB COSTING
1. MEANING OF JOB COSTING
 In this method costs are collected and accumulated for specific jobs/work order.
 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, employees and overhead etc.
2. PRINCIPLES OF JOB COSTING
 Analysis and ascertainment of cost of each unit of production
 Control and regulate cost
 Determine the profitability
3. PROCESS OF JOB COSTING
 Prepare a separate cost sheet for each job
 Disclose cost of materials issued for the job
 Employee costs incurred
 When job is completed, overhead charges are added for ascertaining total expenditure

4. COLLECTION OF COSTS FOR A JOB

 Collection of Materials Cost
 Collection of Labour Cost
 Collection of Overheads

5. TREATMENT OF SPOILED AND DEFECTIVE WORK

 Spoiled work is the quantity of production that has been totally rejected and cannot be rectified.
 Defective work refers to production that is not as perfect as the saleable product but is capable of being
rectified

Where a percentage of defective work is allowed in The cost of rectification will be charged to the
a particular batch as it cannot be avoided. whole job and spread over the entire output of
the batch.
Where defect is due to bad workmanship The cost of rectification shall be written off as a
loss.
Where defect is due to the Inspection Department Cost of rectification will be charged to the
wrongly accepting incoming material of poor department and will not be considered as cost of
quality manufacture of the batch. It will be written off to
the Costing Profit and Loss Account.

6. ADVANTAGES AND DISADVANTAGES OF JOB COSTING

ADVANTAGES DISADVANTAGES
Details of Cost of material, labour and overhead for all job is Job Costing is costly and laborious method.
available to control.
Profitability of each job can be derived. Clerical process is involved the chances of
error is more.
Facilitates production planning. Not suitable in inflationary condition.
7. DIFFERENCE BETWEEN JOB AND PROCESS COSTING
JOB COSTING PROCESS COSTING
Produced by specific orders Product produced is homogeneous
Costs are determined for each job Costs are compiled on time basis
Each job is separate and independent Products lose their individual identity

•••
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 51
 CHAPTER 10
PROCESS COSTING
1. MEANING OF PROCESS COSTING
Process Costing is a method of costing used in industries where the material has to pass through two or
more processes for being converted into a final product.
This can be understood with the help of the following diagram:

RAW
PROCESS-I PROCESS-II PROCESS-III FINISHED GOODS
MATERIAL

2. COSTING PROCEDURE IN PROCESS COSTING

The Cost of each process comprises the cost of:
(i) Materials - Each process for which the materials are used, are debited with the cost of materials consumed
on the basis of the information received from the Cost Accounting department.
(ii) Employee Cost (Labour) - Each process account should be debited with the labour cost or wages paid to
labour for carrying out the processing activities.
(iii) Direct expenses - Each process account should be debited with direct expenses like depreciation, repairs,
maintenance, insurance etc. associated with it.
(iv) Overheads of production - Expenses like rent, power expenses, lighting bills, gas and water bills etc. are
known as production overheads.

3. TREATMENT OF NORMAL, ABNORMAL LOSS AND ABNORMAL GAIN

 Normal Process Loss = unavoidable loss which occurs due to inherent
nature of materials & production process (can be estimated in advance on
basis of past experience). It may be normal waste, normal scrap, normal
spoilage, and normal defectives.
Treatment in Costing: Cost of normal loss is absorbed by goods units by
inflating cost per unit.
 Abnormal Process Loss = Loss in excess of Normal loss (due to
carelessness of workers, machine breakdown) (cannot obviously be
estimated in advance.
Treatment in Costing: The cost of an abnormal loss units is equal to the cost of a good units. Treated as
loss.
 Abnormal Process Gain = when actual output is more than expected output or when actual losses are less
than normal loss.
Treatment in Costing: cost of abnormal gain is equal to cost of good units. Cost of abnormal gains is not
treated as recovery of cost of production

4. VALUATION OF WORK-IN-PROCESS
 When manufacture is continuous activity & at end of accounting period, there is some production units
which is semi-finished.
 Semi-finished means their percentage of completion with
regard to material, labour, overheads is not 100%.
 Such incomplete production units known as work-in-progress.
 Such WIP is valued in terms of equivalent production units.
 Equivalent units = Units of WIP X Percentage of work completed.

5. STEPS IN PROCESS COSTING

Step-1: Analysis of physical flow of production units
Step-2: Calculation of equivalent units for each cost elements
Step-3: Determination of total cost for each cost element

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 52

Step-4: Computation of cost per equivalent unit for each cost element

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 53

 Step-5: Assignment of total costs to units completed and ending WIP.

6. PROCESS COSTING METHODS

Mainly two methods for valuation of work-in-process are followed:
(i) First-in-First out (FIFO) method.
(ii) Weighted Average(Average) method
Opening WIP with FIFO method:
 Only current period work is considered in statement of equivalent production.
 Cost of opening WIP is directly added to value of units completed.
 Normal loss, abnormal loss and abnormal loss units always from current units.
Opening WIP with Average method:
 Total work is considered in statement of equivalent production.
 Cost of opening WIP is added to current period cost element wise.
 No need to add cost of opening WIP to finished goods.

7. INTER – PROCESS PROFITS

Sometimes output of one process is transferred to the next
process not at cost but at market value or cost plus a percentage
of profit.
The difference between cost & the transfer price is known as
inter-process profits. In such case, transferor process makes
profit.
Advantages:
 To check whether cost of production under a process
competes with its market price.
 Each process becomes profit-centre.
Disadvantages:
 The use of inter-process profits involves complication.
 The system shows profits which are not realized because of stock not sold out.

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 54

 CHAPTER 11
JOINT PRODUCT AND BY PRODUCTS

1. INTRODUCTION

2. WHAT IS JOINT PRODUCT?

Two or more products of equal importance, produced, simultaneously from the same process, with each having
a significant relative sale value are known as joint products.
3. WHAT IS BY PRODUCT?
Products recovered from material discarded in a main process, or from the production of some major products
4. DISTINCTION BETWEEN JOINT PRODUCT AND BY PRODUCT

 Joint products are of equal importance whereas by-products are of small economic value.

 Joint products are produced simultaneously but the by-products are produced incidentally in addition to
the main products.
5. METHODS OF APPORTIONMENT OF JOINT COST:

 Market value at separation point method: Apportionment of joint cost on the basis of market value at
separation point net of selling expenses at split off point (if any) of total output of products.

 Market value after further processing method: Apportionment of joint cost on the basis of market value
after further processing of total output of products.

 Net realizable value (NRV) method/ NRV at split off point method: Apportionment of joint cost on the
basis of net realisable value at split off point of total output of products.

Sale value after further Further processing cost-selling

NRV = –
processing expenses etc.
 Physical unit method: Apportionment of joint cost on the basis of physical units at split off point.
 Average unit cost method:
Apportionment of joint cost on the basis of average cost per unit.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 55

 Total Joint Cost
Average unit cost = Total Units at Separation Point

 Contribution margin method:

STEP – 1: Apportionment of variable joint cost on the basis of physical units.

STEP – 2: Apportionment of fixed joint cost on the basis of contribution.

 Reverse cost method:

Statement Showing Apportionment of Joint Cost
(Reverse Cost Method)
Particulars Product – A Product – B
Sale value after further processing XXX XXX
Less: Profit XXX XXX
Less: Selling expenses XXX XXX
Less: Further cost XXX XXX
Joint Cost XXX XXX

 Constant gross margin method:

First calculate constant percentage of profit
STEP – 1:
(Profit = Total sales - Total cost)

STEP – 2: Use reverse cost method

6. FURTHER PROCESSING DECISION:

 Incremental Revenue (IR) = Sale value after further processing – Sale value at separation Point.
 Incremental cost (IC) = Further processing cost + Selling expenses in case of further processing – Selling
expenses at split off point
Situation Further Processing Decision
1. IR > IC Yes
2. IR = IC Indifferent
3. IR < IC No

7. TREATMENT OF BY PRODUCT

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 56

 CHAPTER - 12
SERVICE COSTING
1. INTRODUCTION
 Service Industry is one of the major contributor to Indian GDP.
 Its Costing becomes very important since it needs to provide competitive pricing to its customers.
 Service costing is also known as operating costing.

2. APPLICATION OF SERVICE COSTING

a) Internally
 Service costing is required for in-house service providers
 E.g. Canteen, boiler house, Captive power generation etc.
b) Externally
 When services are offered to outside customers as a part of normal business of the organization as a
profit Centre.

3. SERVICE COST UNITS

 Composite service units is one of the difficulties in service costing
 The cost unit to be applied must be defined carefully and frequently
Service Industry Unit of Cost (Examples)
Transport Passenger Km / Quintal Km or Ton km
Electricity supply Kilowat hours
Hospital Patient day
Canteen Per meal
Cinema Per ticket
Hotels Room days
Banks Per transactions or per services
Educational Institutes Per student, per course
IT and ITES Per project etc.
Insurance Per policy / claim

4. METHODS OF ASCERTAINING SERVICE COST UNITS

 Composite cost Unit Sometimes two measurement units are combined together in service costing to know
the cost of service
 Examples are Ton kilometer, patient days etc.
 Composite units may be computed in two ways:-

(a) Weighted Average Method or Absolute Unit Method

 It is Summation of Product of qualitative and quantitative factors
 Absolute Ton kilometers of goods transport = Sum of ((weight carried 1 X Distance 1) + (weight
carried 2 X Distance 2) + (weight carried 3 X Distance 3))
(b) Simple Average or Commercial Basis Method
 It is the product of average qualitative and total quantitative factors
 Commercial Ton Kilometer for goods transport =
 (Sum of All distances) X (W1 + W2 + ….+ Wn) / n

Equivalent Cost Unit/ Equivalent Service Unit

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 57

  When two or more grades of services from same resources are provided.
 Each grade is assigned a weight
 Converted into equivalent units to make different grades of services equivalent and
comparable
 Example – A Hotel has three suits Standard, deluxe and luxurious
Deluxe cost is 2.5 times of standard
Luxurious cost is 2 times of standard
 All these can be converted into equivalent standard suits or equivalent Luxurious suits
5. STATEMENT OF COSTS FOR SERVICE SECTORS
 Costs are usually collected for a particular service and particular period of time.
 Costs can be collected on the basis of :-
Functional classification (Material, labour and Overheads) or
Variability (Fixed, Variable and semi-variable).
 Treatment of Depreciation – Treated as fixed is charged on the basis of time, treated as variable if charged
on the basis of activity level usage.
 Treatment of Interest – Presented as a separate item of cost of sales, generally interest is fixed charge

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 58

 CHAPTER - 13
STANDARD COSTING

1. INTRODUCTION
 Standard Costing is a method of Cost and Management Accounting which starts with setting of standards
and ends with reporting of variances to management for taking corrective
actions.
 Standard Costs are also used to value inventory where actual figures are
not reliably available and to determine selling prices.
 The standard costing is preferred for the following reasons:
a) Prediction of future cost for decision Making
b) Provide target to be achieved
c) Used in budgeting and performance evaluation
d) Interim profit measurement and inventory valuation

2. SETTING UP OF STANDARD COST

Standard cost is set for each element of cost i.e. material, labour, variable overheads and fixed overheads.
Standard are also set for the sales quantity and sales value; this is generally known as budgeted Sales.
Standard Costs are divided into three main cost components, such as:-
a) Direct Material Costs
b) Direct Employee (Labour) Cost and
c) Overheads

3. TYPES OF VARIANCES
Controllable and un-controllable Variances:
 Controllable variances are those which can be controlled under the normal operating conditions if a
responsibility centre takes preventive measures and acts prudently.
 Uncontrollable variances are those which occurs due to conditions which are beyond the control of a
responsibility centre and cannot be controlled even though all preventive measures.
Favourable and Adverse variance:
 Favourable variances are those which are profitable for the company and
 Adverse variances are those which causes loss to the company.
 Computing cost variances
 Favourable variance means actual cost is less than standard cost.
 Adverse variance means actual cost is exceeding standard cost.
 The situation will be reversed for sales variance.
 Favourable variances mean actual is more than budgeted and
 Adverse when actual is less than budgeted.
 Favourable variance in short denoted by capital ‘F’ and
 Adverse variances by capital ‘A

4. CLASSIFICATION OF VARIANCES
Variances are broadly classified into two parts namely Revenue variance and Cost variance.
 Revenue variances - comparing actual sales from budgeted (standard) sales.
 Cost side reflects variances in cost components.
Cost variance classification is shown below with the help of a structured diagram.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 59

5. COMPUTATION OF VARIANCES
 Material Cost Variances
 Standard cost of materials - Actual cost of materials.
 Difference arises because of either difference in material price from the standard price or
difference in material consumption from standard consumption or both the reasons

 SQ (Standard Quantity): Standard quantity of raw material consumption to produce actual output.
 AQP (Actual Quantity Purchased): Actual quantity of raw materials purchased.
 AQC (Actual Quantity Consumed): Actual quantity of raw materials consumed to produce actual output.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 60

  RQ (Revised Quantity): Actual quantity of raw materials consumed in standard
proportion.
 SP (Standard Price): Standard purchase price of raw materials.
 AP (Actual Price): Actual purchase price of raw materials.

 Labour Cost Variances

 Standard cost of Labour - Actual cost of Labour.
 Difference arises because of either due to difference in the actual labour rate from the standard
rate or difference in numbers of hours worked from standard hours.

 SH (Standard Hours): Standard hours to produce actual output.

 AHP (Actual Hour Paid): Actual labour hours paid.
 AHW (Actual Hours Worked): Actual labour hours worked to produce actual output.
 AHW = AHP (actual hours paid) - Abnormal idle time hours
 RH (Revised Hours): Actual labour hours worked in standard proportion.
 SR (Standard Rate): Standard wage rate.
 AR (Actual Rate): Actual wage rate.

 Variable Overhead Variances

 Variable overheads consist of expenses other than direct material and direct labour which vary with the
level of production.
 Variable overhead cost variance calculation is similar to labour cost variance.
 Variable overhead cost variance is divided into two parts
(i) Variable Overhead Expenditure Variance and
(ii) Variable Overhead Efficiency Variance.

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 61

  Fixed Overhead Variances
 Fixed Overhead Cost Variance: Fixed overhead cost variance is the difference
between actual fixed overhead and absorbed fixed overhead.
 Fixed overhead variance is divided into two parts
(i) Fixed Overhead Expenditure Variance and
(ii) Fixed Overhead Volume Variance.
(A) Fixed Overhead Expenditure Variance: This is the difference between the actual fixed overhead
incurred and budgeted fixed overhead.
(B) Fixed Overhead Volume Variance: Variance in fixed overhead which arise due to the volume of
production is called fixed overhead volume variance.
 Fixed overhead volume variance is further divided into the three variances:
(a) Efficiency Variance
(b) Capacity Variance and
(c) Calendar Variance

6. ADVANTAGES OF STANDARD COSTING

 It serves as a basis for measuring operating performance and cost control.
 It aids price fixing.
 Introduction of standard costing facilitates evaluation of jobs and introduction of incentives.
 It facilitates the estimation of the cost of new product.
 It serves as a basis for inventory valuation.
 It is also used for the measurement of profit.
 It is used in planning, budgeting and decision making.
 It is used in standardization of products, operations and processes
 It serves as an incentive to the departmental head to achieve the targets set by the company.

7. CRITICISM OF STANDARD COSTING

 Variation in price
 Varying levels of output
 Changing standard of technology
 Attitude of technical people
 Mix of products
 Level of Performance
 Standard costs cannot possibly reflect the true value in exchange.

•••
APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 62
 CHAPTER - 14
MARGINAL COSTING

1. INTRODUCTION
 Marginal Costing is used to analyses relationship between cost, volume and profit.
 MARGINAL COST: the incremental cost of production for producing one additional unit of product.
 Marginal cost can precisely be the sum of prime cost and variable overhead.

2. CHARACTERISTICS OF MARGINAL COSTING

 All elements of cost are classified into fixed and variable components.
 Variable costs are treated as the cost of product.
 The value of finished goods and work–in–progress is also comprised only of marginal costs
 Fixed costs are treated as period costs and are charged to profit and loss

3. ABSORPTION COSTING
 Absorption Costing is the practice of charging all costs, both variable and fixed to operations, processes or
product.
 The classification of expenses is based on functional basis.

4. MARGINAL COST EQUATION

 Marginal Cost Equation = S -V = C = F ± P
Where,
S = Sales value, V = Variable cost , C = Contribution, F = Fixed Cost,

5. CONTRIBUTION
It is the balance amount of sales after deduction of variable cost which is used to recover fixed cost and
provide profit.

Contribution Sales Variable cost

6. CONTRIBUTION RATIO OR PROFIT VOLUME RATIO (PVR)

7. BREAK EVEN POINT (BEP)

• Level of sales at which company is in situation of no profit and no loss.
• Level of sales at which contribution and fixed cost are same.
BEP Sales = Variable cost + Fixed cost + Profit
BEP in units = Fixed Cost
Contribution Per Unit
BEP in units = BEP in amount + Sale price per unit

BEP (in amount) = Fixed Cost

PV Ratio
BEP (in amount) = BEP in units × Sale price per unit

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 63

 8. MARGIN OF SAFETY (MOS)
 Level of sales over and above BEP sales
 Level of sales at which contribution and profit are same
MOS Sales = Variable cost + Fixed cost + Profit
Profit
MOS in units = Contribution Per Unit

MOS in units = MOS in amount + Sale price per unit

Profit
MOS (in amount) = PV Ratio

MOS (in amount) = MOS in units × Sale price per unit

9. PV RATIO AND VARIABLE COST RATIO UNDER TWO PERIODS DATA:

Variable Cost Ratio = 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐓𝐨𝐭𝐚𝐥 𝐂𝐨𝐬𝐭
× 𝟏𝟎𝟎
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐒𝐚𝐥𝐞𝐬
Profit Volume Ratio = Change in Profit
× 100
Change in Sales

Variable cost per unit = Change in Total Cost

Change in Sales Units
Contribution per unit = Change in Profit
Change in Sales Units

10. SHUT DOWN POINT

Shut down point <

11. INDIFFERENCE POINT OR COST INDIFERENCE POINT

Indifference point =

Situation Suggestion
Expected activity < Indifference point Select option having lower fixed cost
Expected activity = Indifference point Select any option
Expected activity > Indifference point Select option having lower variable cost per unit

12. INCOME STATEMENT UNDER MARGINAL COSTING

Particulars ₹
Sales XXX
Production costs:
Variable (Actual) XXX

Variable Cost of Production XXX

Add: Opening Stock (Opening Units @ standard rate of variable XXX

COP)
Less: Closing Stock (Closing Units @ current rate of variable cost (XXX)
of Production)
Variable Cost of Goods Sold XXX

Add: Variable administrative and selling costs XXX

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 64

Variable Cost of Sales XXX

Contribution (Sales – Variable Cost of Sales) XXX

Less: Fixed Cost (All) (XXX)

Profit (Contribution – Fixed Cost) XXX

13. INCOME STATEMENT UNDER ABSORPTION COSTING

Particulars ₹
Sales XXX
Production costs:
Variable (Actual) XXX
Fixed (Recovered) XXX

Cost of Production XXX

Add: Opening stock (Opening Units @ standard rate of cost of production) XXX
Less: Closing stock (Closing Units @ current rate of cost of production) (XXX)

Cost of Goods Sold XXX

Add: Under absorbed fixed production overhead (If any) XXX

Less: Over absorbed fixed production overhead (If any) (XXX)
Add: Variable administrative and selling costs XXX
Add: Fixed administrative and selling costs XXX

Total Cost XXX

Profit (Sales - Total Cost) XXX

14. BEP AND ANGLE OF INCIDENCE GRAPH

15. DISTINCTION BETWEEN MARGINAL AND ABSORPTION COSTING

MARGINAL COSTING ABSORPTION COSTING
1. Only variable costs are considered. Both fixed and variable costs are considered.

2. Fixed costs are regarded as period costs. Fixed costs are charged to the cost of production.

3. Cost data presented highlight the total Cost data are presented in conventional pattern.
contribution of each product.
4. The cost per unit remains the same. the cost per unit reduces

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 65

 CHAPTER - 15
BUDGETS AND BUDGETARY CONTROL

1. BUDGET
Quantitative expression of a plan for a defined period of time.

2. BUDGETARY CONTROL

3. TYPES OF BUDGET

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 66

 4. FIXED AND FLEXIBLE BUDGET

S. N. Fixed Budget Flexible Budget

1. Does not change with actual volume of activity Can be re-casted on the basis of activity level
achieved. to be achieved.
2. Rigid. Not rigid.
3. Operates on one level of activity Consists of various budgets
4. If the budgeted and actual activity levels differ It facilitates the cost ascertainment and price
significantly, then cost ascertainment and price fixation at different levels of activity.
fixation do not give a correct picture.

5. Comparisons of actual and budgeted targets are It provided meaningful basis of comparison of
meaningless particularly when there is difference actual and budgeted targets.
between two levels.

5. ZERO BASED BUDGETING (ZBB)

 ZBB is a method of budgeting in which all expenses must be justified for each new period.
 The process of zero based budgeting starts from a "zero base".
 Every function within an organization is analyzed for its needs and costs.

6. VARIOUS RATIOS
Efficiency Ratio = Standard Hours
× 100
Actual Hours

Activity Ratio = Standard Hours

× 100
Budgeted Hours

Calendar Ratio = Available Working Days

Budgeted Working Days

Standard Capacity = Budgeted Hours

× 100
Max. Possible Hours in Budget Period
Usage Ratio
Actual Capacity = Actual Hours Worked
× 100
Max. Possible Working Hours in a Period
Usage Ratio
Actual Usage of Budgeted = Actual Working Hours
× 100
Budgeted Hours
Capacity Ratio

•••

APT COSTING FACULTY: CA MANOJ DUBEY, CA RAHUL JAIN 67