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Cost accounting and financial management for CA
Professional Competence Examination 3rd Edition M. Y.
Khan Digital Instant Download
Author(s): M. Y. Khan; P. K. Jain
ISBN(s): 9780070221079, 0070221073
Edition: 3
File Details: PDF, 10.53 MB
Year: 2008
Language: english
 COST ACCOUNTING AND
FINANCIAL MANAGEMENT
For CA Professional Competence Examination
Third Edition
 COST ACCOUNTING AND
FINANCIAL MANAGEMENT
For CA Professional Competence Examination
Third Edition

M Y KHAN
Formerly Professor of Finance
Department of Financial Studies
University of Delhi

P K JAIN
Modi Foundation Chair Professor
Professor of Finance, Department of Management Studies
Indian Institute of Technology, Delhi

Tata McGraw-Hill Publishing Company Limited

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 Contents vii

Preface to the Third Edition

The third edition of Cost Accounting and Financial Management, like the earlier editions, caters exclusively
to the requirements of CA Professional Competence Examination (PCE) of the Institute of Chartered
Accountants of India. It covers the entire revised syllabus and is, accordingly, divided into two sections
titled Cost Accounting and Financial Management.
In the light of the revised syllabus of the CA PCE, the following new features have been added in the
third edition.
l New chapters:
1. Reconciliation and Integration
2. Marginal Costing and Full Costing
3. Break-even Analysis
4. Standard Costs
5. Cost Variances Analysis
l Latest examination questions, updated till year 2007, with their solutions.
l Inclusion of Project Finance, Negotiation of Term Loans and Project Appraisal by Financial
Institutions.
l Extension of Du-Pont Analysis.
The authors would like to place on record a word of appreciation for the excellent support from Mr Biju
Kumar, Mr Tapas K Maji, Mr B L Dogra, Ms Anubha Srivastava, Mr Hemant Jha and Mr Manohar Lal of
TMH for the speedy and excellent publication of the book.
M Y KHAN
P K JAIN
 Preface to the First Edition

This book is designed exclusively for the requirements of the C.A. Professional Examination-II of the
Institute of Chartered Accountants of India (ICAI). It covers the entire revised syllabus and is, accordingly,
divided into two volumes titled Cost Accounting and Financial Management respectively. To cater to the
special needs of the students, numerous problems and exercises have been solved in the text. They include
most of the questions set at the various examinations conducted by the ICAI.
AUTHORS
 Contents

Preface to the Third Edition v

Preface to the First Edition vii

SECTION ONE
COST ACCOUNTING
PART ONE
INTRODUCTION
1. Cost Accounting—An Overview 1.5–1.28
Introduction 1.5
Nature of Cost Accounting 1.5
Cost Concept/Definition, and Classifications 1.9
Cost Ascertainment/Product Costing 1.13
Installation of a Cost Accounting System 1.18
Cost Reduction 1.20
Summary 1.26
References 1.27
Review Questions 1.27
Examination Questions 1.28
2. Cost Concepts 2.1–2.19
Introduction 2.1
Cost Concepts Relating to Income Measurement 2.1
Cost Concepts Relating to Profit Planning 2.4
Cost Concepts for Control 2.14
Cost Concepts for Decision-Making 2.15
Summary 2.17
References 2.18
Review Questions 2.19
Examination Questions 2.19
x Contents

PART TWO
PRODUCT COSTING COST ACCUMULATION/ASCERTAINMENT
3. Costing and Control of Materials 3.3–3.64
Introduction 3.3
Control of Materials 3.3
Cost of Inventory and Costing Methods 3.20
Summary 3.29
References 3.31
Solved Problems 3.31
Review Questions 3.49
Examination Questions 3.60
4. Costing and Control of Labour 4.1–4.41
Introduction 4.1
Accounting for Labour 4.2
Special Problems Relating to Accounting for Labour 4.3
Labour Turnover 4.10
Efficiency Rating Procedures 4.15
Summary 4.19
References 4.21
Solved Problems 4.21
Review Questions 4.31
Examination Questions 4.37
5. Costing and Control of Factory (Manufacturing) Overheads 5.1–5.73
Introduction 5.1
Factory Overhead Costs 5.1
Cost Allocation 5.5
Absorption of Factory Overheads 5.11
Underabsorption And Overabsorption of Factory Overheads 5.16
Activity-Based Costing 5.18
Summary 5.25
References 5.28
Solved Problems 5.28
Review Questions 5.43
Examination Questions 5.56
6. Costing and Control of Administrative, Selling and Distribution Overheads 6.1–6.20
Introduction 6.1
Administrative Overheads/Costs 6.1
Selling and Distribution Overheads 6.4
Treatment of Special Items of Cost 6.9
Summary 6.13
Solved Problems 6.13
Review Questions 6.17
Examination Questions 6.20
 Contents xi

7. Job-order, Batch and Contract Costing 7.1–7.54

Introduction 7.1
Job/Order Costing 7.1
Batch Costing 7.12
Contract Costing 7.14
Summary 7.18
References 7.19
Solved Problems 7.19
Review Questions 7.37
Examination Questions 7.47
8. Process, Joint and By-product Costing 8.1–8.95
Introduction 8.1
Nature and Suitability 8.1
Cost Accumulation in Process Costing 8.2
Joint Products 8.21
By-Products 8.25
Sell Now (at Split-Off Point) or Process Further 8.27
Summary 8.30
Solved Problems 8.32
Review Questions 8.59
Examination Questions 8.77
9. Unit/Single/Output and Operating Costing 9.1–9.45
Introduction 9.1
Unit/Single/Output Costing 9.1
Operating Costing 9.11
Summary 9.14
Solved Problems 9.15
Review Questions 9.28
Examination Questions 9.40
10. Reconciliation and Integration 10.1–10.50
Introduction 10.1
Reconciliation of Financial and Cost Accounts 10.1
Integrated Accounts 10.7
Summary 10.14
Solved Problems 10.15
Review Questions 10.30
Examination Questions 10.48
PART THREE
MARGINAL COSTING, BREAK-EVEN ANALYSIS, COST VARIANCE ANALYSIS
11. Variable (Marginal) Costing and Absorption (Full) Costing 11.3–11.37
Introduction 11.3
Variable and Absorption Costing: a Comparison 11.4
Variable and Absorption Costing: Reconciliation 11.11
xii Contents

Advantages and Limitations of Variable Costing 11.12

Summary 11.14
References 11.15
Solved Problems 11.15
Review Questions 11.25
12. Volume-Cost-Profit Analysis/Break-Even Analysis 12.1–12.54
Introduction 12.1
Break-Even Analysis 12.2
Summary 12.22
References 12.24
Solved Problems 12.24
Review Questions 12.36
13. Standard Costs 13.1–13.8
Introduction 13.1
Meaning of Standards 13.1
Establishing Cost Standards 13.2
Components of Standard Cost 13.3
Summary 13.7
References 13.8
Review Questions 13.8
14. Cost Variances Analysis 14.1–14.36
Introduction 14.1
Material Variances 14.2
Labour Variances 14.10
Standard Cost Accounting 14.15
Summary 14.17
References 14.18
Solved Problems 14.18
Review Questions 14.30
Index (Cost Accounting) I.1–I.6
SECTION TWO
FINANCIAL MANAGEMENT
PART ONE
BACKGROUND
1. Financial Management—An Overview 1.5–1.21
Introduction 1.5
Finance and Related Disciplines 1.5
Scope of Financial Management 1.8
Objectives of Financial Management 1.12
Organisation of Finance Function 1.17
Emerging Role of Finance Managers in India 1.18
Summary 1.19
References 1.20
Review Questions 1.20
Examination Questions 1.21
 Contents xiii

2. Time Value of Money 2.1–2.19

Introduction 2.1
Summary 2.16
References 2.17
Solved Problems 2.17
Review Questions 2.18
Examination Question 2.19
PART TWO
TOOLS OF FINANCIAL ANALYSIS AND PLANNING
3. Cash Flow Statement 3.3–3.45
Introduction 3.3
Meaning, Sources and Uses of Cash and its Usefulness 3.3
Preparation of Cash Flow Statement 3.5
AS-3 - Cash Flow Statement 3.13
Summary 3.22
References 3.22
Solved Problems 3.22
Review Questions 3.41
Examination Questions 3.42
4. Financial Statements Analysis 4.1–4.84
Introduction 4.1
Ratio Analysis 4.2
Common Size Statements 4.32
Importance and Limitations of Ratio Analysis 4.34
Summary 4.36
References 4.39
Solved Problems 4.40
Review Questions 4.63
Examination Questions 4.77
PART THREE
5. Capital Budgeting: Principles and Techniques 5.3–5.98
Introduction 5.3
Nature of Capital Budgeting 5.3
Data Requirement: Identifying Relevant Cash Flows 5.6
Evaluation Techniques 5.22
Summary 5.50
References 5.53
Solved Problems 5.54
Review Questions 5.78
Examination Questions 5.89
6. Concept and Measurement of Cost of Capital 6.1–6.54
Introduction 6.1
Importance and Concept 6.1
Measurement of Specific Costs 6.5
xiv Contents

Computation of Overall Cost of Capital 6.19

Summary 6.24
References 6.27
Solved Problems 6.27
Review Questions 6.42
Examination Questions 6.50
7. Sources of Long and Medium-term Finance 7.1–7.74
Introduction 7.1
Retained Earnings 7.1
Equity/Ordinary Share Capital 7.2
Project Financing (Term Loans), Term Loans Negotiation and Appraisal 7.5
Debentures/Bonds/Notes 7.23
Hybrid Financing/Instruments 7.26
Loan Securitisation 7.35
Venture Capital Financing 7.41
Lease Financing 7.45
Euro—Issues 7.53
Summary 7.57
Solved Problems 7.61
Review Questions 7.72
Examination Questions 7.73
PART FOUR
8. Operating, Financial and Combined Leverage 8.3–8.54
Introduction 8.3
Operating Leverage 8.4
Financial Leverage 8.7
Combined Leverage: Total Risk 8.21
Summary 8.22
References 8.24
Solved Problems 8.24
Review Questions 8.38
Examination Questions 8.49
9. Capital Structure, Cost of Capital and Valuation 9.1–9.40
Introduction 9.1
Capital Structure Theories 9.2
Net Income Approach 9.4
Net Operating Income (NOI) Approach 9.7
Modigliani-Miller (MM) Approach 9.11
Traditional Approach 9.19
Summary 9.25
References 9.26
Solved Problems 9.27
Review Questions 9.34
Examination Questions 9.40
 Contents xv

10. Designing Capital Structure 10.1–10.24

Introduction 10.1
Profitability Aspect 10.2
Liquidity Aspect 10.3
Control 10.9
Leverage Ratios for Other Firms in the Industry 10.9
Nature of Industry 10.10
Consultation with Investment Bankers and Lenders 10.10
Maintaining Manoeuverability for Commercial Strategy 10.11
Timing of Issue 10.11
Characteristics of the Company 10.12
Tax Planning 10.12
Summary 10.14
References 10.15
Solved Problems 10.15
Review Questions 10.18
Examination Questions 10.24
PART FIVE
11. Working Capital Management—An Overview 11.3–11.54
Introduction 11.3
Nature of Working Capital 11.3
Planning of Working Capital 11.8
Working Capital Financing 11.18
Summary 11.29
References 11.32
Solved Problems 11.32
Review Questions 11.44
Examination Questions 11.50
12. Management of Cash and Marketable Securities 12.1–12.40
Introduction 12.1
Motives for Holding Cash 12.1
Objectives of Cash Management 12.3
Factors Determining Cash Needs 12.4
Determining Cash Need 12.5
Cash Management: Basic Strategies 12.15
Cash Management Techniques/Processes 12.18
Marketable Securities 12.22
Summary 12.26
References 12.27
Solved Problems 12.28
Review Questions 12.37
Examination Questions 12.40
13. Receivables Management 13.1–13.30
Introduction 13.1
xvi Contents

Objectives 13.1
Credit Policies 13.3
Credit Terms 13.8
Collection Policies 13.11
Summary 13.14
References 13.15
Solved Problems 13.16
Review Questions 13.23
Examination Questions 13.27
14. Inventory Management 14.1–14.6
Introduction 14.1
Objectives 14.2
Summary 14.4
References 14.5
Review Questions 14.6
Appendices A.1–A.12
Index (Financial Management) I.1–I.7
 Section One
Cost Accounting
Cost Accounting is devoted installation of costing system. procedure of product costing in
to a discussion of concepts, The cost concepts related to various situations: Chapter 7
theories and techniques of managerial needs are examined (Job-order, Batch and Contract
cost ascertainment. It is in Chapter 2. Costing); Chapter 8 (Process,
divided into two parts: (i) The subject matter covered in Joint and By-product Costing);
Introduction and (ii) Product part two is the ascertainment of Chapter 9 (Unit/Single/Output
Costing/Cost Ascertainment. cost in different jobs, processes, Costing); and Chapter 10
Part one consists of two activities, and so on. The (Reconciliation and Integration).
chapters. Chapter 1, which is chapters 3 to 6 dwell on the Part three consists of four
devoted to an overview of elements of costs, namely, chapters. While chapters 11 and
cost accounting, discusses its Costing and Control of Materials 12 discuss Variable/Marginal
objectives, relationships (Chapter 3), Labour (Chapter 4), Costing and Break-even Analysis
between cost accounting and Factory Overheads and Activity respectively, Standard Costs and
financial accounting, and Based Costing (Chapter 5), and Costs Variances Analysis are
between cost accounting and Administrative, Selling and Distri- covered in Chapters 13 and 14
management accounting; and bution Overheads (Chapter 6). respectively.
also cost ascertainment, cost Chapters 7 to 12 of this part
audit, cost reduction and, examine the system and
 Part One
Introduction
This part provides an intro- discusses cost concepts and also discusses the cost account-
duction to cost accounting as classifications. The framework of ing records/rules and cost
a background for a detailed cost ascertainment and the reduction framework. Chapter 2
account of its main features in installation of a costing system is describes the various concepts
the subsequent parts of this also outlined. One of the of costs related to various
book. Chapter 1 describes the important inputs in managerial management needs.
nature of cost accounting and decision-making is cost data. It

1. Cost Accounting—An Overview

2. Cost Concepts
 Cost Accounting—An Overview 1
Introduction

The primary purpose of accounting is to provide financial information relating to an economic/

business activity. It is concerned with measuring, recording, and reporting financial information by the
management to plan and control the activities of a business as well as by others who provide funds or
who have various interests in the operations of an entity. The accounting system that provides the
information to measure product costs and performance, and control the operations of a firm is called
cost accounting. An overview of this system of accounting is the focus of this chapter, which is a
background to a detailed account of its features in the subsequent chapters of this book. Section 1 of
the chapter dwells on the nature of cost accounting in terms of its objectives, and the relationship
between financial, cost and management accounting. The cost concepts and their classifications are
briefly outlined in Section 2 to provide a conceptual foundation for the subject-matter covered
subsequently. The framework of cost ascertainment/product costing is presented in Section 3. Section
4 describes cost audit and the related aspects of cost accounting records rules as well as cost audit
report rules. While the considerations in the installation of a costing system in an organisation and
cost reduction are highlighted in Sections 5 and 6 respectively, the last section summarises the main
points.

NATURE OF COST ACCOUNTING

This section dwells on the nature of cost accounting. It is illustrated with reference to (i) Meaning and
objectives of cost accounting and (ii) The relationship between cost, financial and management accounting.

Meaning and Objectives

Meaning Financial accounting results in reports to external parties on the status of assets, liabilities
and equity; results of operations; changes in owner’s equity and changes in the sources and uses of funds for
1.6 Cost Accounting

an accounting period. Cost data are/must be accumulated both for external financial accounting and internal
management purposes. It accumulates, classifies and interprets information concerning the cost of materials,
labour and other costs of manufacturing and marketing. Thus, it communicates financial information to
management for planning, evaluating and controlling resources.
One of the primary concerns of financial accounting is the income determination. While calculating
income, cost data are also used. Cost accounting provides an important input to financial accounting to the
extent it provides cost data for determining income and financial position.
Thus, cost accounting is that part of accounting which identifies, defines, measures, reports and analyses
the various elements of direct and indirect costs associated with manufacturing and providing goods/
services. In the process of accumulating costs for inventory valuation and income determination, the needs
of external users and management are fulfilled. It also provides management with an accurate, timely
information for planning, controlling, and company operations.

Objectives The information needs of management and cost accounting objectives are closely related.
The main objectives of cost accounting are: (i) Product costing (Cost ascertainment); (ii) Planning, perfor-
mance evaluation and control and (iii) Decision making.

Product Costing Ascertainment of cost is one primary objective of cost accounting. The determination
of total product cost and cost per unit are important for inventory valuation, product pricing and managerial
decision making. Product costing covers the entire cycle of accumulating manufacturing and other costs and
subsequently assigning them to work-in-process, finished goods, and so on.

Planning and Control The creation of useful cost data and information for planning and control by
management is another important objective of cost accounting. The tools of managerial planning and
control are budgeting and standard costing. The different plans/budgets are evaluated in relation to associ-
ated costs and benefits. The control technique compares the actual and budgeted performances. The
variances between budgets and actuals are analysed by causes and, in that light, corrective actions are taken.

Decision Making Yet another objective of cost accounting is to provide information for both short- and
long-term decisions. Decision-making primarily involves choice out of available alternatives.

Relationship Between Cost, Financial, and Management Accounting

Accounting is a system of collecting, summarising, analysing and reporting information about a business
enterprise, in financial (monetary) terms. The business accounting system consists of three parts: (i) Finan-
cial accounting, (ii) Cost accounting, and (iii) Management accounting. The interrelationship between them
is discussed below.

Financial and Cost Accounting: Similarities Financial accounting and cost accounting repre-
sent the two parts of the accounting information system of a business enterprise. These are similar on two
counts. Firstly, operating information is used in the preparation of financial as well as cost accounts. If an
enterprise has two completely different systems for collecting information for two purposes, it would
involve, among other things, the incurrence of extra costs. The use of financial accounting information for
cost accounting is, therefore, economical. This implies that financial accounting has a significant influence
on cost accounting. Secondly, the considerations which make Generally Accepted Accounting Principles
(GAAP) useful in financial accounting, are equally relevant in cost accounting also. For example, manage-
ment cannot base its reporting system on non-verifiable, subjective estimates of profits because cost and
revenue concepts in financial accounting are based on the idea of objectivity.
 Cost Accounting — An Overview 1.7

Differences Nevertheless, the two systems of accounting differ from each other in several respects. One
basic difference between financial accounting and cost accounting relates to the structure or format of
presenting information. Financial accounting has a single unified structure in the sense that the information
relating to the operations of various enterprises is presented on a more or less uniform basis. It may be
recalled that the end-products of financial accounting are the three financial statements: (i) Balance sheet,
(ii) Profit and loss account/Income statement and (iii) Statement of changes in financial position. The
preparation of various financial statements on the basis of a specified model implies that, while preparing
accounts, all firms arrange the information in a uniform manner. In other words, financial accounting has a
unified structure.
Why is the structure of financial accounting uniform? The primary objective of financial accounting is to
provide information to outside parties, namely, shareholders, creditors, Government, the general public, and
so on. These outside-users of the financial statements are interested in information from many different
businesses. In order to enable an inter-firm comparison, there is a distinct need to present financial account-
ings on a uniform basis, and within a unified structure. The unified structure of financial accounts, therefore,
facilitates communication between a business and the outside parties interested in it.
In contrast, cost accounting concerns itself with the accounting information that is useful to the manage-
ment only. As this type of accounting is undertaken for internal use, its structure varies with the require-
ments and circumstances of each case. In other words, cost accounting is tailored to meet the needs of the
management of a specific business, and therefore, it lacks a single unified structure. A related aspect is the
impact of the GAAP on the preparation of the two types of accounting. Financial accounting is prepared in
accordance with the GAAP. Accounting is the ‘language of business’, as it is the principal means by which
information about a business is communicated to those interested in it. If, therefore, the information is to be
communicated effectively and understood properly, it should be prepared in accordance with a mutually
understood set of rules. These ground rules are referred to as GAAP. They represent laws or rules to be
used as guideline in the preparation of financial accounts. In other words, GAAP provides a specified
framework for the preparation of financial accounts which has evolved over the years and is based on
experience, reason, usage, convention, and necessity. Thus, they ensure that financial accounts are prepared
in accordance with certain norms and standards for better comprehension and reliability. On the other hand,
cost accounting is for the exclusive use of the management of a firm. Outsiders do not need such accounts
and have no access to them either. Therefore, there is a scope for flexibility in its preparation. It can be
tailored to the specific needs of the management. The criterion for inclusion of any information in manage-
ment accounting is the utility. In short, financial accounting, which essentially caters to the needs of
outsiders, is prepared according to the norms set by the GAAP, whereas cost accounting, as an aid to
managerial decision making, is dependent on, and largely influenced by, the internal requirements of the
management.
The third difference between financial accounting and cost accounting relates to the need for preparing
such accounts. The preparation of financial accounts is a statutory obligation. In fact, the corporate laws and
regulations that govern the functioning of a corporate enterprise not only make it mandatory to prepare such
accounts, but also lay down the model/format in which such accounts are to be prepared. The corporate laws
also prescribe independent audit by professional auditors to ensure that the accounts reflect a true and fair
view of the firms’ affairs. Apart from this, tax regulations also require the maintenance of records by
business establishments. In sharp contrast, cost accounting is entirely optional. It is prepared only if it is
deemed useful to the management. There are no external compulsions for its preparation. The format, as
also the items to be included, are exclusively dependent on the management’s discretion.
The end-products of financial accounting are the three financial statements, namely, balance sheet, profit
and loss account, and statement of changes in financial position. The balance sheet and the profit and loss
1.8 Cost Accounting

account report the financial position on a particular date, and the results of the operation of the firm during
an accounting period respectively. The statement of changes in financial position reports the inflow and
outflow of financial resources during a given period of time. These are essentially, records of what has
happened in the past. Therefore, these are aptly called historical accounts. On the other hand, cost account-
ing does not record the financial history of an enterprise. Though past data is included in cost accounting, a
major part of its contents is related to the future plans. It is, therefore, future-oriented. It aims at providing
data for budgeting, planning, and so on. Thus, cost accounting lays more emphasis on the future.
Moreover, financial accounting relates to the business as a whole. While some firms do prepare financial
accounts on a segmented basis for the main lines of business, the emphasis is on the entire business. Cost
accounting focuses on parts of the business. In cost accounting the business is divided into different
responsibility centres—cost, profit and investment. The term, responsibility centre, refers to the division of
an enterprise into sections, departments, products, individual activities, and so on. In brief, financial ac-
counting deals with the business as a whole, whereas cost accounting focuses on its different parts.
Finally, financial accounting and cost accounting also differ in relation to their ultimate objectives.
Financial accounting is prepared to serve the purpose of external reporting. Therefore, from the viewpoint
of the management, the purpose of financial accounting is accomplished when it is reflected in the three
financial statements, that is, the balance sheet, profit and loss account, and statement of changes in financial
position. In a way, it is an end in itself, whereas cost accounting is only a means to an end. In other words,
cost accounting is designed to serve as an aid to managerial decision making. With the help of cost
accounting, the management can discharge its planning, directing and controlling functions. In planning, the
manager decides what actions should be taken to help the organisation achieve its goals. In directing, the
manager oversees the conduct of day-to-day operations. And in controlling, steps are taken to ensure that
the responsibility centres are operating in the best possible manner.

Cost and Management Accounting Cost accounting is that branch of the accounting informa-
tion system which records, measures and reports information about costs. A cost is a sacrifice of resources.
The costs are reflected in the accounting system by outlays of cash, promises to pay cash at a future date,
and the expiration of the value of an asset. The primary purpose of cost accounting is cost ascertainment and
its use in decision making and performance evaluation. A cost accounting system provides data for both
financial accounting and management accounting. When costs are used by outsiders, such as shareholders or
creditors, to evaluate the performance of the management and make investment decisions, they are said to
be used for financial accounting purposes. On the other hand, when cost data are used inside the organisation
to evaluate the performance of operations, activities, personnel, and so on, as the basis of decision making,
they are said to be used for management accounting purposes. For instance, in a manufacturing business, the
costs of products sold, and stock on hand, include the total expenditure on materials, labour, and all the
other production costs. Each of these costs must first be measured, then accumulated and, finally, distrib-
uted to the work-in-process, finished goods and cost of goods sold. Consequently, the amount of profit
reported by a manufacturing company depends on the accuracy of its cost calculations. Thus, cost account-
ing is useful for performance appraisal.
Cost accounting also helps in planning. Planning is a process of setting goals and allocating resources to
achieve these goals. The expected financial outcome of planning is expressed in terms of budgets. A firms
can increase its profits in two ways: (i) By increasing unit sale price/sales volume, and (ii) By reducing
costs.
While the first cannot always be under the control of the management, the second falls well within the
managerial domain. A detailed cost accounting system is an important requirement for a systematic cost
control. For this reason, the management must understand the nature and behaviour of different elements of
 Cost Accounting — An Overview 1.9

cost, know when and where they are incurred, and who is responsible for them. The actual cost should be
compared with the planned estimates. The differences between these should be analysed to identify the
reasons for deviations, and corrective action should be taken to eliminate them. Thus, cost accounting is
very useful to management for profit planning.
Cost accounting is also useful for the purpose of control. Control comprises managerial action to correct
conditions that cause deviation between the actual and planned performance. Comparison between the
actual and budgeted cost will highlight a poor or good performance, as well as the operations that have gone
out of control and warrant corrective action. Thus, cost accounting provides the basis for cost/managerial
control.

COST CONCEPT/DEFINITION, AND CLASSIFICATIONS*

This section presents the basic cost concepts, their definitions and classifications to provide a conceptual
foundation for the subject matter to be covered in the remainder of this book.

Basic Cost Concept

Cost is defined as the ‘value’ of the sacrifice made to acquire goods/services, measured in monetary terms
by the acquisition of assets or incurrence of liabilities at the time the benefits are acquired. At the time of
acquisition, the cost incurred is for the present or future benefits. When these benefits are utilised, the costs
become expense. An expense is defined as a cost that has given a benefit and is now expired. Unexpired
costs that can give future benefits are classified as assets. Expenses are matched against revenues to
determine net income/loss for a period. Revenue is defined as the price of products sold/services rendered.

Cost Classifications
Cost data/cost accounting information is routinely accessed by management for the purpose of (a) product
costing, (b) performance evaluation and (c) managerial decision making. It consists of past revenues and
costs necessary for product costing and performance evaluation, as well as projected revenues and costs
necessary for managerial decision making. The cost data are classified into various categories according to:
Elements of a product (product cost);
Relationship to production;
Relationship to volume;
Ability to trace;
Department where incurred;
Functional areas/Activities performed;
Period charged to income; and
Relationship to planning, controlling and decision making.

Elements of a Product/Product Cost/Cost Elements This classification provides man-

agement with information necessary for product pricing and income measurement. The cost elements of a
product (its integral components) are (i) Materials, (ii) Direct labour, and (iii) Factory overheads.

Materials These are the principal substances used in production and are transformed into finished goods
by the addition of direct labour and factory overhead. The cost of materials may be divided into direct and
indirect materials.
Other documents randomly have
different content
I say these things now, not desiring to insult the fallen, but in order
to increase the security of those who have not fallen: not to tear
open the sores of the wounded, but to maintain in sound health
those who are not wounded: not to shipwreck the man tossed by
the waves, but to warn those who are sailing in calm seas so that
they may avoid sinking. How can this be done? By taking to heart
the vicissitudes of human things. For if this man had feared a
change of fortune, it would not have come upon him, but neither his
own lot nor that of others improved him: now do you who are
nursing your riches gather your lesson from this man’s 299
misfortune, for nothing is more insecure than human things.
Consequently, if a man were to call them neediness itself, he would
say less than the truth, whether he liken them to smoke or mire, or
a dream, or spring blossoms, or anything else, so perishable are
they, and so less than nothing. That nothingness has indeed much
that is insecure is evident from this: who was ever a mightier man
than he? Did he not surpass the whole world by his wealth? Did he
not rise to the height of honours? Did not all men hold him in fear
and awe? Yet see, he is more miserable than slaves, and more to be
pitied than menials, in greater want than the poor who are pinched
with hunger, having before his eyes day by day swords pointed at
him, and dungeons and executioners, and the road leading to death.
Nor does he enjoy the memory of his past pleasure, nor is he
conscious even of the light; but in the midst of day, as if in darkest
night, encompassed by anguish, he is deprived of his sight. Try as I
will, however, I cannot measure that suffering by words, which
delivers him up to an hourly expectation of death. But what need is
there of our words since he bears them distinctly written on himself
for us, as if engraven on a statue? For yesterday men came to him
from the imperial court, wishing to drag him away by force, and he
took refuge amongst the sacred vessels: he looked already nothing
better than a dead man, his teeth were chattering, his whole body
shivering and trembling, his voice was broken, his tongue 300
faltering, and he himself as if the life in him had turned to
stone.
I say these things, not in scorn nor in reproach at his misfortune, but
in the wish to soften your judgment, and to enkindle your pity, and
to persuade you to be satisfied with the chastisement already
inflicted. For there are amongst you many inhuman men who would
even reproach me for receiving him at the sanctuary. I should desire
to soften their cruelty by dwelling on the sufferings of this man. Why
do you reproach me, beloved brethren? Because, you say, he who
warred incessantly against the Church has found shelter in it. For
this very reason you should have praised God the more for allowing
him to fall into a need so great as to learn both the power and the
kindness of the Church: the power, on the one hand, to outlive so
overwhelming a reverse inflicted by his enemies, and the kindness
with which she who was persecuted extends her shield, and covers
him with her own wings, putting him in perfect security, and bearing
no memory of former things, but opening her heart to him with the
most tender love. This is more wonderful than any trophy, this is a
magnificent victory: by this the heathen is converted and even the
Jew put to shame: this it is which shows forth the brightness of her
countenance; that, taking her foe captive, she spares him; that
whereas all men forsake him, she alone, as a tender mother, hides
him in her own sanctuary curtains, and encounters imperial 301
wrath, an angry populace, a boundless hatred, on his
account. This is the altar’s adornment. What adornment is it, you
ask, that the man who is abominable, and avaricious, and cursed,
should touch the altar? Speak not thus, since the harlot too touched
the feet of Christ, and she was indeed full of sin and impurity, yet it
was no reproach to Jesus, but a great wonder and song of praise,
for she who was unclean did not defile the Holy One; on the
contrary, He, the Good and the Pure, made that abandoned harlot
clean through His touch. Do not bear malice, O man. We are
servants of Him Who was crucified, and Who said, Forgive them, for
they know not what they do. ‘But,’ you say, ‘it was he who, by
various laws and regulations, cut off flight to the altar.’ Consider,
then, that experience has taught him the value of his own action,
and he himself has been the first to break the law which he made.
He has become a spectacle to the world, and in his silence he raises
a voice of warning to all men, ‘Do not likewise, that you may not
suffer in like manner’. Through his misfortune he has become a
teacher, and through it the altar sends forth a great radiance. It is
now especially terrible, and evident to all men, because it holds the
lion in chains. The royal statue would be greatly adorned, not so
much by depicting the king as he sits on the throne, clothed in
purple, and wearing his crown, as by barbarians under the royal
feet, with their hands tied behind them and their faces to the 302
ground. You yourselves, in your eagerness to come here, can
testify that he has spoken no word, for indeed the spectacle before
us to-day is noteworthy, and I see here as many people collected
together as in the holy Easter festival. He in his silence has called
them; his deeds have spoken louder than the voice of a trumpet.
You have come here, virgins from your chambers, women from your
drawing-rooms, men leaving the marketplace deserted, that you
may contemplate human nature convicted, and see the
perishableness of earthly things laid bare, the shameful spectacle of
that which was yesterday, and but lately so brilliant. So much for the
success born of avarice, which is more shamefaced than any old
woman’s blotches: the change of fortune has passed over it like a
sponge, and wiped away both paint and titles.

Such is the power of this catastrophe: it has made him who was
conspicuous and illustrious now appear more miserable than all. If
the rich man come in, he will be taught much, for, contemplating
him, who had the whole world at his command, thrown down from
so mighty a height, trodden under foot, fallen lower than a hare or a
frog, fastened without chains to this pillar, and done to death by fear
in his anguish though unfettered, he restrains his wrath, humbles his
pride, and draws that lesson of wisdom which it behoves him to
draw, from human things, and so goes away, learning by 303
facts what the Scripture speaks of in the words, All flesh is
grass, and all human glory as the flower of the field, that the grass
has been burnt up and the flower thrown away: that man shall be
burnt up as swiftly as grass, and trodden under foot as quickly as
the flower of the field: that our days are like smoke, and so on. In
his turn, the poor man comes in, and, gazing at this spectacle, he
does not despair of himself, nor is he afflicted at his own poverty,
but he is thankful to his neediness for providing him with a place of
refuge, and a calm harbour, and a wall of strength. And often,
seeing these things, he would prefer to remain where he is, rather
than to have all things for a short time, and then to be in danger of
his life. See you how this man’s flight hither is no small advantage to
the rich and poor alike, to small people and great people, to
bondsmen and freemen? See how each one has gone away with his
own lesson drawn from the sight alone? Now, have I succeeded in
softening your passion and putting an end to your anger? Have I
extinguished your inhumanity and enkindled sympathy within you?
Indeed, I think so, for your faces show it, and your tears. If, then,
your stony hearts have been softened and mellowed, put forth also
the fruit of alms-giving, and, showing the ear of sympathy, let us
solicit the emperor, or rather let us call upon our merciful God to
mitigate the emperor’s wrath, and to make him kind, so that he may
grant us a full pardon. Already, indeed, since the day of his flight,
there has been no small change; for when the emperor learnt 304
that he had taken refuge in this place, in the presence of the
soldiers who were incited against his crimes and preparing to put
him to death, he made a long speech. In it he quieted their anger,
alleging not only this man’s delinquencies, but giving him credit for
whatever good he had done, and calling upon them to show him
mercy in the one case, and in the other to pardon him as a man.
Upon their again urging him to avenge the insulter of the emperor,
crying out, stamping with their feet, threatening him with death, and
brandishing their spears, he drew floods of tears from the driest
eyes, and, reminding them of the sacred table to which he had fled,
he put an end to their anger.

Let us, then, do our part also, for what excuse would you have if the
emperor, when insulted, bears no malice, and you who are not
insulted should be thus angry? How, when this spectacle is removed,
would you approach the mysteries and recite that prayer in which
we are commanded to say, ‘Forgive us our trespasses as we forgive
those who have trespassed against us,’ whilst you are calling for
revenge against your trespassers? Did he commit great injustice and
look down upon all? I do not deny it, but this is no time for
judgment, this is the time for mercy; not for chastisement, but for
kindness; not for examination, but for concession; not for strict
justice, but for pity and kindness. Therefore, let no man be 305
wrathful nor discontented; rather let us supplicate our
merciful God to grant him a period of life, and to snatch him from
impending death, so that he may redeem his transgressions. Let us
go together to our merciful emperor, entreating him, by the Church
and by the altar, to release that one man who is seeking refuge at
the sacred table. If we do this, the emperor too will approve, and
God will ratify the emperor’s decision, and He will give us a great
reward for our mercy. For in proportion as He turns away from the
hard and inhuman man, and hates him, so does He protect and
cherish the kind and merciful man. If he be a just man also, God
holds brighter crowns in reserve for him: if he has sinned, He
overlooks his iniquities, and gives him this great reward for his
kindness to his fellow-man. I desire mercy and not sacrifice, He
says. And everywhere in the Scripture you find Him seeking for this
and saying that it is the remission of sins. So, then, we shall make
Him merciful to ourselves, and atone for our own sins. Thus we shall
adorn the Church, and win the applause of our merciful emperor, as
I was saying, and all the people will rejoice: the ends of the earth
will be in admiration at the kind and gentle spirit of our city, and
throughout the whole world those who hear what has taken place
will sing our praises. In order that we may enjoy these goods, let us
fall down on our knees in supplication, entreat, beseech; let us
shield the captive from danger, from flight, from death, so 306
that we ourselves may enjoy lasting goods by the grace and
mercy of our Lord Jesus Christ, to Whom be glory and might, now
and for ever and ever. Amen.
 FOOTNOTES

[1]
Card. Newman.

[2]
Palladius, Life of St. Chrysostom, in his works, vol. xiii., pp. 39, 40.

[3]
In writing the above sketch, Nirschl’s Lehrbuch der Patrologie und
Patristik has been used, and Cardinal Newman’s notice of the
Saint quoted once or twice, and everywhere borne in mind.

[4]
Translated from the Greek Oxford and Cambridge Edition

[5]
Translated from the Greek Oxford Edition.

[6]
Compare ἀλλ’ ἤτοι μὲν ταῦτα Θεῶν ἐν γούνασι κεῖται (Ἰλιαδος P.
514).

[7]
St. Chrysostom here refers from memory to the Acts, where Peter
and John are spoken of as “illiterate and ignorant men” (c. iv., v.
13).

[8]
Translated from Greek Benedictine Edition in folio, tom. ii., p. 2.

[9]
I have ventured to change ἐννατήν into another. It is part of a
long argument.
[10]
δεκάτην αἰτίαν.

[11]
Compare with St. Augustine, Da amantem et sentit quod dico.

[12]
Translated from the Greek Benedictine Edition in folio.

[13]
Compare with St. Augustine: Unde temporibus eruditis, et omne
quod fieri non potest respuentibus, sine ullis miraculis nimium
mirabiliter incredibilia credidit mundus?—De Civitate Dei, l. xxii.,
c. viii.

[14]
Μὰλλον δὲ οὐκ αὐτοὶ μόνοι, ἀλλὰ καὶ ὁ πάντων κορυφαῖος
Πέτρος.

[15]
Ὅμιλια προ τῆς ἐξορίας. Benedictine Edition. There is a doubt
about the authenticity of the latter part of this Homily, which has
not been translated.

[16]
Ἐκκλησίας δὲ σάρκα ἀνέλαβε.

[17]
Translated from the Greek German Edition, Περὶ Ἱερωσυνῆς.
Leipzig, 1872.

[18]
See Ezekiel, c. xxxiii., v. 6.

[19]
Benedictine Edition, t. xii., p. 167.
[20]
Greek Oxford Edition.

[21]
Ἀλλ’ αὐτὸς ὁ σταυρωθεὶς ὑπὲρ ἡμῶν Χριστός.

[22]
... μεταῤῥυθμίζει τὰ προκείμενα.

[23]
The single word altar has to stand for the Greek βωμός and
θυσιαστήριον, the former meaning the altar on which a bloody
offering is made, the latter the altar on which the sacrifice after
the order of Melchisedec is offered.

[24]
P. 295 of the same Homily.

[25]
Blessed Thomas More’s words to his wife will here occur to many:
‘How long, thinkest thou, I might still live?’ and when she replied,
‘Full twenty years, if it so pleases God,’ answered, ‘Should I give
up eternity for twenty years?’

[26]
Benedictine Edition, tom. iii., p. 515. St. Chrysostom wrote this
letter, A.D. 404, before his second exile, from which he never
returned. Copies of it were sent to the Archbishops of Milan and
Aquileia.

[27]
The Curiosi were officers whose business it was to pursue crime
and treason of all kinds, and to summon and denounce the guilty
to the emperor.—Benedictine’s note.

[28]
Holy Saturday.
[29]
Uninitiated (ἀμύητοι ἦσαν), to speak the language of that day.

[30]
Eutropius, the eunuch, the unworthy minister of the emperor,
who had attempted to take away the right of asylum from the
Church, fell suddenly, and fled for refuge to the altar of the
cathedral. On this occasion Chrysostom defended him from the
angry people and the soldiers sent to apprehend him.

THE END.

307
 INDEX.

A B C D E F G H I J K L M
N O P Q R S T U V W X Y Z

A
Abraham, sacrifice of, 290.
Alexander, thirteenth god, 266;
his tomb obscure, 268.
Altar, radiance of, 301;
fruitfulness of, 233.
Almsgiving, by words, 65;
value of, 70;
interest of, 71.
Angels of the mysteries, 211.
Antioch, John of, 1;
surnamed Golden Mouth, 2.
Anthusa, St., mother of St. Chrysostom, 1.
Apostles, condition of, 102;
victory of, 103;
mines of, 109;
glory of, 96.
Arcadius, emperor, 6;
death of, 14.
Argument, an irrefutable, 98.
Arsacius, intruded into see of Constantinople, 12.

B
Basil, friend of Chrysostom, 3.
Bond of new Covenant, 219, 220.
Blood of Our Lord, 242;
drunk by Himself, 221.
Bread, one for all, 244.

C
Charity not consumed, 31.
Chastisement here, 123, 124.
Children, witness of, 50.
Christ, our High Priest, 214;
His Pasch, 229.
Christians, responsibility of, 62.
Chrysostom, government of, 8;
expulsion of, 11;
appeal to Pope, 12;
at Comana, 13;
death of, 14;
his body translated to Constantinople—to Rome, 15;
character of his works, 17;
summary of, 18, 19, 20;
his letter to Pope Innocent, 272;
unjustly summoned into court, 275;
thrust out of his see, 277;
in exile, 283. 308
Church, invincible, 90, 190;
brighter than sun, 190;
heaven made for it, 192;
soul’s remedies in, 194;
olives of, 240;
vengeance of, 298;
generosity of, 300.
Cities, strong walls of, 151.
Clothing Christ, 69.
Conquering by contraries, 141, 142.
Community life, 149.
Conscience, tribunal of, 122.
Constantine the Great, where buried, 269.
Crucified ever living, 267;
power of, 144.
 D
Departed at the mysteries, 250, 254.
Diodorus, bishop of Tarsus, 3.
Dispositions for the mysteries, 215, 216, 238, 247.

E
Eucharist, union of, 243;
makes earth heaven, 246.
Eternity, proved by suffering, 131.
Eudoxia, empress, 9;
statue to, 11;
death of, 14.
Eusebius, bishop of Nicomedia, 5.
Eutropius, fall of, 296;
anguish of, 299;
spectacle to all men, 302.

F
Feast of the martyrs, what, 259.
Flavian, bishop of Antioch, 4;
election of, 7.
Forgiveness as we forgive, 304.
Friendships, spiritual, 48;
worldly, 47.

G
Gallic Rufinus, 8.
Gifts of God through senses, 237.
Gladness in tribulation, 126, 127.
God, good by essence, 42;
His instruments, 146;
His kindness, 179;
His paradoxes, 32;
in visible things, 120;
not to be encompassed, 166.
Golden heart, 68.
Goodness, a beacon, 58, 60;
voice of, 56, 57;
peace of, 81.
Gospel, propagation of, 89;
announcement of, 101, 104.
Gregory Nazienzen, St., 6. 309

H
Heathen, argument with, 97.
Holiness everywhere possible, 78, 80.
Holy Spirit, gifts of, 34.
Holy tears, 249.
Human glory, vanity of, 296, 297.
Humble, abode of, 148.
Humility in labour, 150.

I
In chains for Christ, 153, 154.

J
Jews, dispersion of, 181.
Jewish sacrifice ceased, 231.
Jona, son of, 183.
Joy for faithful departed, 287.
Judas, communion of, 218.
Judgment, proved by suffering, 25.
Jurisdiction, each province its own, 274.

K
Kindness, reward of, 305.

L
Loss of a daughter, 288.
Love, true, 46, 140.

M
Magi, faith of, 245.
Man made for eternity, 168;
the man not the state, 79, 82.
Marriages of old, 106;
money marriages, 107.
Martyrs, voice of, 261, 263;
shrines of, 264, 265.
Martyrdom, the blessed death, 293.
Matthias, election of, 189.
Meletius, bishop of Antioch, 3;
death of, 7.
Ministering to Christ, 75.
Miracles, spiritual, 86, 88, 175.
Mites, spiritual, 100.
Money, tyranny of, 41, 43.
More, Blessed Thomas, 262.
Mortification, happiness of, 121.

310

N
Nature, good, 28.
Nova Roma, see of, 9.

O
Oak, Synod of the, 10.
Olympias, 293;
fortitude of, 294.

P
Paschal Lamb, a figure, 230.
Patience, more than alms-giving, 135;
a rock of strength, 285.
Paul and Plato, 95.
Paul, humility of, 115;
chains of, 155;
voice of, 223;
 heart of, 224, 225;
Peter’s companion, 227;
apostolate in prison, 286.
Persecution for justice, 282.
Peter’s prerogatives, 27, 184, 185;
Peter scandalised, 186;
before and after Resurrection, 176, 178, 187;
temptation of, 196;
sin of, 197;
at Jerusalem, 188.
Pilots, necessity of, in storm, 284.
Plato, achievements of, 143.
Pope Innocent, protest of, 12.
Poverty, 40;
voluntary, 44, 45.
Power of holy bodies, 270.
Priesthood, 202.
Priests, 195;
sinners not angels, 198;
spiritual generators, 201, 203;
responsibility of, 205;
purity required of, 206;
snares of, 207, 208;
rulers of the world, 209.
Priscilla and Persis, 105.
Privilege of servant, 156.
Probation, 133, 137.
Prosperity, vanity of, 303.

R
Resurrection, proved in nature, 159, 160;
by creation, 163;
by human things, 165;
confirmed by signs, 169, 170, 174;
by faith of world, 177;
same body in, 161, 162.
Riches and poverty, whence, 35, 39.
Rome, why blessed, 222.

S
Sacrifice of new law, 199, 200, 210;
for the dead, 251, 255.
Salt and light, 55. 311
Signs of Apostles, a testimony, 173;
greatest of, 52, 53.
Socrates, end of, 145.
Sojourners, 72.
Sorrow, false, 253.
Soul, worth of, 99.
Stilicho, 8.
Strength in weakness, 83.
Sufferings of just, 134, 137;
suffering its own reward, 292.

T
Table of peace, 235, 236.
Teacher’s example followed, 92.
Teaching by life, 77, 91, 93.
Temple, buyers and sellers in, 49.
Thanksgiving, 128, 129, 136, 138, 295.
The truth and the figure, 213.
Theodosius, death of, 4;
reign of, 6.
Theophilus, patriarch of Alexandria, 5, 273, 276;
enmity of, 9;
summoned to Constantinople, 10;
instigator of sacrilege, 278, 279.
Time and eternity, 33.
Timothy, 110;
infirmities of, 111;
advice to, 112, 113;
diligent in fasting, 114;
 his zeal, 116.
Tongue, a hand, 64.
Touch of faith, 66.

U
Unleavened bread, 256.

V
Vespasian and Titus, 180.
Virginity not commanded, 289.

W
Way, truth, and life, 23.
Wickedness, way to unbelief, 167.
Why Our Lord ate after Resurrection, 172.
Wine, gift of God, 258;
drinking, 117, 118.
Working for eternity, 139.

Z
Zebedee, sons of, 26.
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Life of St. Anastasia. Translated by Miss Margaret Howitt, and

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BELLECIO, FATHER ALOYSIUS, (S.J.).

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BRIDGETT, REV. T. E. (C.SS.R.).

Discipline of Drink
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A History of Religion, or the Evidences or the Divinity of the

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ENGLISH CATHOLIC NON-JURORS OF 1715.

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All for Jesus

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Bethlehem
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Creator and Creature
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