accounts

• Financial accounts : recording financial

transaction, preparing P&L A/C, balance sheet,
cash flow statement.
• Cost accounts: providing detailed cost information
to various levels of management for efficient
performance of their functions: “ The technique &
process of ascertaining costs”
• Management accounts: using accounts (both
financial and cost) as a tool for management ie
for decision making
 Costing and cost accounting
• Costing means finding the cost of products
or services
• Cost accounting means the technique
used to find the cost & includes cost
control and cost audit
 Limitation of financial accounting
• Shows only overall performance
• Historical in nature
• No performance appraisal
• No material control system
• No labour cost control
• Costs are not classified as variable, fixed, controllable
and uncontrollable
• No analysis of losses
• No information of product prices
• No data for decision ( make or buy, rent or own etc).
 Objective and function of cost
accounts
• Ascertainment of cost
• Cost control and cost reduction : standard
costing, budgetary control, inventory
control etc
• Guide to business policy
• Determination of selling price ( very
important during depression)
 cost
• “price paid for something”
• “ the amount of expenditure (actual or notional)
incurred or attributable to a given thing” CIMA
London
• “ cost is a measurement in monetary terms of
the amount of resources used for the purpose of
production of goods or rendering of services”
ICWA of India
• To make it clearer cost has to be defined ie fixed
cost, variable cost, marginal cost, controllable
cost, material cost etc.
 Cost vrs expenses vrs losses
• Expenses is an expired cost resulting from
a productive usage of an asset.
• Used productively is expired cost ie dep.
• Unexpired cost: benefit yet to be received
ie lubricants purchased but not yet used
• Loss an expired cost that generates no
benefit.
 Cost centre
• “ a location person, or item of equipment
for which costs may be ascertained and
used for the purpose of cost control”
 Cost unit
• “ unit of product or services in relation to
which costs are ascertained” CIMA
London
 Classification of cost
• Direct and indirect cost
• Fixed and variable cost
• Committed and discretionary cost
• Product cost and period cost
• Controllable and non controllable cost
• Historical cost and pre-determined cost
• Normal cost and abnormal cost
 Other cost
• Relevant cost & irrelevant cost
• Sunk cost
• Differential cost
• Opportunity cost
• Replacement cost
• Future cost
 Components of cost

cost

Direct cost Indirect cost

material labour expenses material labour expenses

 Components of cost
• Direct material : material, components and
primary packing material
• Indirect material : grease, oil, soap,
sandpaper, jute for cleaning etc.
• Direct labour : wages
• Indirect labour : supervisor, cleaner
• Direct expenses: commission, royalty etc
• Indirect expenses : insurance, repair
advertisement.
Material control (inventory control)
• “ systematic control & regulation of
purchase, storage and usage of material
in such a way so as to maintain an even
flow of production at the same time
avoiding excessive investment in
inventories”
 Objective of inventory control
• No under stocking
• No over stocking
• Economy in purchasing
• Proper quality
• Minimum wastage
• Information about material
 Technique of inventory control
• ABC technique
• Maintain stock level : maximum, minimum
& reorder level
• Economic order qty (EOQ)
• Proper purchase of material
• Proper store keeping
• Proper identification of slow moving, non
moving and obsolete material : inventory
turnover, average stocking period
• Inventory turnover= cost of mat.
Consumed/average stock
• Average stock = O/S + C/s / 2
• Cost of material consumed = O/S +
purchase – closing stock
• Average stocking period = 365/ inventory
turnover
 Records to be maintained
• BIN card
• Store ledger A/c
• Goods received note (GRN)
• Material requisition note
• Material return note
• Material transfer note
 Methods of pricing material issue
• FIFO
• LIFO
• Simple average price
• Weighted average price
• Standard price
 Prepare a store ledger using FIFO
method
• 1/4/07 Opening stock 50 kg @ Rs 20/- per kg
• 2/4/07 purchase 40 kg @ RS 21/- per kg
• 3/4/07 issued 60 kg
• 8/4/07 purchase 80 kg @ RS 24/-
• 10/4/07 issued 50 kg
• 13/4/07 issued 20 kg
• 14/4/07 issued 10 kg
• 15/4/07 purchase 50 kg @ Rs 25/- per kg
• 16/4/07 issued 40 kg
 LABOUR COST
• Direct Labour
• Indirect Labour :(supervisor ,clerks ,peon ,
watchman)

• Labour Turnover : No. of workers left /

Average no. of workers

Average no. of workersA :

no. of workers in the beginning + no.of workers at
the end / 2
 WORK & MOTION STUDY
• For repetitive work :
• Work study
• Motion study
 OVERHEAD COST

CLASSIFICATION OF OVERHEADS

Function : Element : Behavior :

Production overhead Indirect material Fixed
Administrative overhead Indirect labour Variable
Selling & dist overhead Indirect exp Semi variable
 Problem on semi variable cost
• From the given information find the fixed
and variable cost incurred by the co.

MONTH OUTPUT SEMI

VARIABLE
COST
Jan 80 units Rs.2200
Feb 40 units Rs.1600
Mar 120 units Rs.2800
 STEPS IN OVERHEAD
DISTRIBUTION
• Classification & collection of overhead
• Allocation & apportionment of overhead to
production & service dept.
• Apportionment of service dept. cost to
production dept.
• Absorption of overhead of each production
dept. in cost units
ABSORBTION OF OVERHEAD
METHODS OF ABSORBTION

1) Direct material cost % rate

Prod Overheads / Direct Material X 100
2) Direct labour cost % rate
Prod Overheads / Direct Labour X 100
3) Direct labour hour rate
Prod Overheads / Direct Labour Hour
4) Machine hour rate
Prod Overheads / No. of Machine Hours
5) Rate per unit of output
Prod Overheads / No. of Units Produced
 TYPE OF OVERHEAD RATE
1) Actual Rate
Actual Overhead /Actual Base

2) Predetermined Rate
Budgeted overhead / Budgeted Base

3) Blanket Rate
Total Overhead Of The Factory / Total Prod Of The Factory
TREATMENT OF SPECIAL ITEMS
& OVERHEADS
> INTEREST ON CAPITAL
> DEPRECIATION : Methods of calculating
-Straight line method
cost of assets – scrap value / life of
assets
-Diminishing balance method
-Production unit method
cost of assets – residual value / expected
prod during the life of the asset
-Machine hour method
cost of assets – residual value /expected machine
hours during the life of the asset
> RENT
 problem
• Usha martin has 3 prod deptt. Wire deptt, rope
deptt,and annealing deptt. And 2 service deptt.
Canteen & security. From the following
information apportion the costs to various deptt.
And prepare overhead distribution summary.
• Rent 5000, indirect wages 1500, dep. 10000,
general lighting 600, power 15000, misc. exp
5000.
• Other information .
 wire rope anneali cantee securit
ng n y
Floor 4000 5000 6000 4000 1000
space
Light 20 30 40 20 10
point
No.of 30 20 30 15 5
worker

HP of 60 30 50 10 nil
m/c
Value 60000 80000 10000 5000 5000
of m/c 0
 Basic accountancy
Mohan started his business with Rs 500000 which he received from his
brother shyam in cash on 1 st april 2007. his other transactions
during the year was
1 sold goods to hari on credit for Rs 1500000 and received Rs
1300000 cash during the year.
2 purchased goods from lucky enterprises for Rs 1400000 on credit but
paid 1200000 cash during the year.
3 purchased a machine for Rs 20 lakh ( basic rate) on 1 st Oct. which
was financed by SBI to the extend of 90 % of the basic rate. VAT @
12.5 %, Excise @ 14 % , education cess 3 % and transporting Rs
10000 paid extra
4 other expenses carriage inwards 5000, salary 60000, rent 72000,
carriage out 84000, wages 24000, telephone 12000.
5 charge depreciation @ 20 % PA , Intrest to SBI @ 12 % PA
6 stock as on 31/3/2008 was Rs 150000
Prepare journal entry, ledger, trial balance, P& L a/c and balance sheet
 METHODS OF COSTING
• Output or unit/operation costing
• Contract Costing
• Batch Costing
• Process Costing
• Job order Costing
• Service/operating Costing
• Composite Costing
 TECHNIQUE OF COSTING
• Standard Costing
• Budgetary Control
• Marginal Costing
• Total Absorption Costing
• Uniform Costing
 OUTPUT OR UNIT COSTING
• When production is uniform and on a
continuous basis.
• Only one product is produced.
• Sugar, cement are some examples
• Cost sheet is prepared with total cost and
per unit cost.
 Job costing
• Cost sheet of each job is prepared ie
making of a machine, ship
• Cost and profit of each job is determined
• Cost sheet is prepared but stock is not
considered.
 Batch costing
• Suitable in industry where production is in
batches ie tyre : truck, car, cycle etc.
• Cost of each batch is found
• Cost sheet for each batch is prepared
• Determine the economic batch qty.
• Set up cost: the cost to set the machine
• Carrying cost : the cost of keeping the stock
• Economic batch quantity: the batch qty that
gives the max. profit.
 Economic batch quantity
• EBQ =

• U=no. of units to be produced in a year

• S=setup cost per batch
• C=carrying cost per unit of production
 problem
• The following is the data of bata India for
its NO. 8 Hush Puppy Shoe.
• Monthly demand 750 units
• Setting-up cost per batch Rs 2000/-
• Cost of Mfg. per unit Rs 1000/
• Rate of interest 10%
• Calculate Economic Batch Qty ( EBQ)
 Contract costing
• Dam, bridge, road etc.
• Generally take more than a year
• Jobs are done in the factory but contracts
at site.
• Essentially a contract is a bigger job.
• Fixed price contract/ cost plus contract
• Material at site at the end is credited
• P&M is debited & at the end the value of
machine is credited.
• If M/c is hired hire charges is debited
• Work in progress is work certified/ work un
certified
• If work is not completed profit is estimated
 Notional profit
• Value of work certified ------
• Value of work un certified -------
• xxxx
• Less cost of work to date -----
• notional profit zzzz
 Transfer to P&L a/c
• If less than 25 % completed then ignored
• 25 % to 50 % completed: 1/3 of notional
profit.
• More than 50 % less than 90% completed
: 2/3 of notional profit.
• 90% and more : estimated profit * work
certified/contract price
 problem
• From the following data of L&T prepare a
contract a/c.
• Materials14,00,000, labour 10,00,000, plant
10,00,000, overhead 5,00,000
• Total value of contract 1,20,00,000
• Cash received 28,80,000 being 80 % of work
certified
• Cost of work uncertified 1,00,000
• Value of material in hand 5,00,000
• Depreciation on plant 20 %