Cost Account Projckt

8/18/2019 Cost Account Projckt

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TABLE OF CONTENTS

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SR NO;

PARTICULARS PG NO

1. Introduction 06

2. M!nin" 0#

$. %i&&rnc 0'

(. Co)*!ri+on

,. St!nd!rd Co+tin"-

Ad!nt!"+- Li)it!tion+

11

6. /!rinc An!+i+ 1

#. Concu+ion 2

. Bi3o"r!*4 2'


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Introduction

The success of a business enterprise depends to a greater extent upon howefficiently and effectively it has controlled its cost. In a broader sense the costfigure may be ascertained and recorded in the form of Historical costing and Predetermined costing. The term Historical costingrefers to ascertainment and recording of actual costs incurred after completionof production ..One of the important objectives of cost accounting is effectivecost ascertainment and cost control.Historical Costing is not an effective method of exercising cost control

because it is not applied according to a planned course of action. nd also itdoes not provide any yardstic! that can be used for evaluatingactual performance. "ased on the limitations of historical costing it is essentialto !now before production begins what the cost should be so that exactreasons for failure to achieve the target can be identified and

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the responsibility be fixed. #or such an approach to the identification ofreasons to evaluate theperformance$ suitable measures may be suggested andta!en to correct the deficiencies.Standard costing is theestablishment of cost standards for activities and their

periodic analysis to determine the reasons for any variances.Standard costing is a tool that helps management account incontrolling costs.#or example$ at the beginning of a year a company estimates that labor costs

should be %& per unit. 'uch standards are established either by historical trend

analysis of the cost or by an estimation by any engineer or management

scientist. fter a period$ say one month$ the company compares the actual cost

incurred per unit$ say %&.() to the standard cost and determines whether it has

succeeded in controlling cost or not.This comparison of actual costs with

standard costs is called variance analysis and it is vital for controlling costs

and identifying ways for improving efficiency and profitability. If actual cost

exceeds the standard costs$ it is an unfavorable variance. On the other hand$ if

actual cost is less than the standard cost$ it is a favorable variance.

MEANING OF STAN%AR% COST AN%

STAN%AR% COSTING

St!nd!rd Co+t

The word *'tandard* means a *+ardstic!* or *"ench ,ar!.* The term*'tandard Costs* refers to Pre-determined costs. "rown and Howard define'tandard Cost as a Pre-determined Cost which determines what each productor service should cost under given circumstances. This definition states that

standard costs represent planned cost of a product.'tandard Cost as defined bythe Institute of Cost and ,anagement ccountant$ ondon *is thePredeterminedCost based on technical estimate for materials$ labour and overhead for aselected period of time and for , a prescribed set of wor!ing conditions.*

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St!nd!rd Co+tin"

'tandard Costing is a concept of accounting for determination of standard foreach element of costs. These predetermined costs are compared with actual

costs to find out the deviations !nown as */ariances.*Identification andanalysis of causes for such variances and remedial measures should be ta!enin order toovercome the reasons for /ariances.

Chartered Institute of ,anagement ccountants 0ngland defines 'tandardCosting as *the Preparation and use of standard costs$ their comparison withactual costs and the analysis of variances to their causes and points of

incidence.*

#rom the above definition$ the techni1ue of 'tandard Costing may be

summari2ed as follows 3456 7etermination of appropriate standards for each element of cost.4&68 scertainment of information about actuals and use of 'tandard Costs.496 Comparison of actual costs with 'tandard Costs$ the differences !nown as/ariances.4:6 nalysis of /ariances to find out the causes of /ariances.4)6 ;eporting to the responsible authority for ta!ing remedial measures.

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%i&&rnc 3t5n E+ti)!td Co+t+ !nd St!nd!rd Co+t+

lthough$ Pre-determination is the essence of both 'tandard Costing and0stimated Costing$ the two differ from each other in the following respects3

St!nd!rd Co+tin"

456 It is used on the basis of scientific.4&6 It emphasises *what the cost should be.*496 It is used to evaluate actual performance and it serves as an effective tool

of cost.4:6 It is applied to any industry engaged in mass production.4)6 It is a part of accounting system and standard costing variances arerecorded in the boo!s of accounts.

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E+ti)!td Co+tin"

456 It is used on the basis of statistical facts and figures.4&6 It emphasises *what the cost will be.*

496 It is used to cost ascertainment for fixing sales price.4:6 It is applicable to concern engaged in constructionwor!.4)6 It is not a part of accounting system because it is

based on statistical facts and figures.

Co)*!r !nd Contr!+t 3t5n St!nd!rd Co+tin" !nd

Bud"t!r Contro

;elationship3 The following are certain basic principles common to both'tandard Costing and "udgetary Control3

(1) 7etermination of standards for each element of costs in advance.4&6 #or both of them measurement of actual performance is targeted.496 Comparison of actual costs with standard cost to .find out deviations.4:6 nalysis of variances to find out the causes.4)6


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Bud"tor Co+tin"

(1) "udgets are projections of financial accounts. ..4&6 s a statement of both income and expenses it forms part of budgetarycontrol. 496 "udgets are estimated costs. They are *what the cost will be.*4:6 "udget can be operated with standards.4)6 In budgetary control variances are not revealed through the accounts.4=6 "udgets are prepared on the basis of historical facts and figures.

St!nd!rd Co+tin"

456 'tandard Costing is a projection of cost accounts.

4&6 'tandard costing is not used for the purpose of forecasting.496 'tandard Cost are the *>orms* or *what cost should be.*4:6 'tandard Costing cannot be used without budgets4)6 ?nder standard costing variances are revealed through different accounts.4=6 'tandard cost are planned and prepared on the basis of technical estimates.

ADVANTAGES OF STANDARD COSTING

The following are the important advantages of standard costing 3456 It guides the management to evaluate the production performance.4&6 It helps the management in fixing standards.496 'tandard costing is useful in formulating production planning and price

policies.4:6 It guides as a measuring rod for determination of variances.

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%tr)in!tion o& St!nd!rd Co+t+

The following preliminary steps must be ta!en before determinatio.n ofstandard cost 3

456 0stablishment of Cost Centres. 4&6 Classification and Codification of ccounts.496 Types of 'tandards to be applied.4a6 Ideal 'tandard4b6 "asic 'tandard4c6 Current 'tandard4d6 0xpected 'tandard4e6 >ormal 'tandard4:6 Organi2ation for 'tandard Costing.4)6 'etting of 'tandards.

456 E+t!3i+4)nt o& Co+t Cntr+3It is the first step re1uired before setting of

'tandards. ccording to CI,. ondon Cost Centre is *a location. person oritem of e1uipment for which costs may be ascertained and used for the

purpose of cost control.* Cost centre is necessary for the determination of

standard costs for each product and comparison of actual cost with the predetermined standards to ascertain the deviations to ta!e correctivemeasures.

4& C!++i&ic!tion !nd Codi&ic!tion o& Account+3 Classification of ccounts andCodification of different items of expenses and incomes help 1uic!ascertainment and analysis of cost information.

496 T*+ o& St!nd!rd+ to 3 A**id3 7etermination of the type of standard to

be used is one ofthe important steps before setting up of standard cost. Thedifferent types of standards are given below 34a6 Ideal 'tandard


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4b6 "asic 'tandard4c6 Current 'tandard4d6 0xpected 'tandard4e6 >ormal 'tandard

(a) Ideal Standard: The term *Ideal 'tandard* refers to the standardwhich can I6e attained under the most favourable conditions possible.In other words$ ideal standard is based on high degree of efficiency. Itassumes that there is no wastage. no machine brea!down. >o powerfaih Te. no labour ideal time in the production process. In practice it isdifficult to attain this ideal standard.

(b) Basic Standard: This standard is otherwise !nown as "ogey'tandard. "asic 'tandard which is established for use is unalteredover a long period of time. In other words this

standard is fixed in relation to a base year and is not changed in response tochanges in material costs. labour costs and other expenses as the case may be.The application of this standard has no practical importance from cost control

and cost ascertainment point of view.

(c) Current Standard: The term *Current 'tandard* refers to *a standardestablished for use over a short period of time related to current conditionswhich reflects the performance thatshould be attained during the period.* These standards are more suitable andrealistic for control purposes.

(d) Expected Standard: 0xpected 'tandard may be defined as *the standard

which may be anticipated to be attained during a future specified budget period.* These standards set targets which can be achieved in a normalsituation. s such it is more realistic than theIdeal 'tandard.

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(e ) Noral Standard: This standard resents an average standard in pastwhich$ it is anticipated$ can be attained over a future period of time$ preferablylong enough to cover one trade cycle. The usefulness of such standards is verylimited for the purpose of cost control.

4:6 Or"!ni7!tion &or St!nd!rd Co+tin"3 The success of the standard costingsystem depends upon the reliability of standards. Hence the responsibility forsetting standard is vested with the 'tandardCommittee. It consists of 4a6 Purchase ,anager 4b6 Production ,anager 4c6 Personnel ,anager

4d6 Time and ,otion 'tudy 0ngineers4e6 ,ar!eting ,anager and Cost ccountant

4)6 Sttin" o& St!nd!rd8 The 'tandard Committee is responsible for settingstandards for each element of costs as given below 3I. 7irect ,aterialII. 7irect abour

III. Overheads4a6 #ixed Overheads4b6 /ariable Overheads

I. St!nd!rd &or %irct M!tri! Co+t

The following are the standard involved in direct materials cost3(i) ,aterial Duantity or ?sage 'tandard.4ii6 ,aterial Price 'tandard.

4i6 ,aterial ?sage 'tandard3 ,aterial ?sage 'tandard is prepared onthe basis of material specifications and 1uality of materialsre1uired to manufacture a product. Ehile setting of standards

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proper allowance should be provided for normal losses due tounavoidableoccurrence of evaporation$ brea!age etc.

4ii6 ,aterial Price 'tandard3 ,aterial Price 'tandard is calculated by

the Cost ccountant and the Purchase ,anager for each type ofmaterials. Ehen this type of standard is used$ it is essential toconsider the important factors such as mar!et conditions$forecasting relating to the trends of prices$ discounb etc.

II. St!nd!rd &or %irct L!3our Co+t

The following standards are established34i6#ixation of 'tandard abour Time

4ii6 #ixation of 'tandard ;ate 4i6 #ixation of 'tandard abour Time3 abour 'tandard time is fixed

and it depends upon thenature of cost unit$ nature of operations performed$ Time and ,otion 'tudy etc. Ehile determining thestandard time normal ideal time is allowed for fatigue and othercontingencies.

4ii6 #ixation of 'tandard ;ates3 The standard rate fixed for each job

will be determined on the basisof methods of wage payment suchas Time Eage 'ystem$ Piece Eage 'ystem$ 7ifferential Piece ;ate'ystem and Premium Plan etc.

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III. Sttin" St!nd!rd+ &or Or4!d+

The following problems are involved while setting standards for overheads34567etermination of standard overhead cost4&6 0stimating the production level of activity to be measured in terms ofcommon base li!e machine hours$ units of production and labour hours.

'etting of overhead standards is divided into fixed overhead. variableoverhead and semi-variableoverhead. The determination of overhead rate may be calculated as follows 3

'tandard Overhead ;ate F 'tandard overhead for the budget period 'tandard production for the budget period

'tandard /ariable Overhead F 'tandard overhead for the budget period ;ate standard production for the budget period

St!nd!rd 9our3 ?sually production is expressed in terms of units$ do2en.!gs$ pound$ litres etc. Ehen productions are of different types$ all productscannot be expressed in one unit. ?nder such circumstances$ it is essential tohave a common unit for all the products. Time factor is common to all the

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operation. IC,$ ondon$ defines a 'tandard Time as a *hypothetical unit pre-established to represent the amount of wor! which should be performed inone hour at standard performance.*

St!nd!rd Co+t C!rd3 fter fixing the 'tandards for direct material$ directlabour and overhead cost$they are recorded in a 'tandard Cost Card. This'tandard cost is presented for each unit cost of a product. Thetotal 'tandard Cost of manufacturing a product can be obtained byaggregating the different 'tandard Cost Cards of different proceses. TheseCost Cards are useful to the firm in production planning and pricing policies.

/ARIANCE ANAL:SIS

'tandard Costing guides as a measuring rod to the management fordetermination of */ariances* in order to evaluate the production performance.The term */ariances* may be defined as the difference

between 'tandard Cost and actual cost for each element of cost incurredduring a particular period. The term */ariance nalysis* may be defined asthe process of analy2ing variance by subdividing the total variance in such away that management can assign responsibility for off-'tandard Performance.The variance may be favourable variance or unfavourable variance. Ehen theactual performance is better than the 'tandard$ it resents *#avourable/ariance.* 'imilarly$ where actual performance is below the standard it iscalled as *?nfavourable /ariance.*

An!+i+ o& !ri!nc 4ANO/A6 is a collection of statistical models used toanaly2e the differences between group means and their associated procedures

4such as *variation* among and between groups6$ developed by ;.. #isher. Inthe >O/ setting$ the observed variance in a particular variable is

partitioned into components attributable to different sources of variation. In itssimplest form$ >O/ provides a statistical test of whether or not the means of several groups are e1ual$ and therefore generali2es the t -test to more thantwo groups. s doing multiple two-sample t-tests would result in an increased

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http://en.wikipedia.org/wiki/Statistical_modelhttp://en.wikipedia.org/wiki/Ronald_Fisherhttp://en.wikipedia.org/wiki/Variancehttp://en.wikipedia.org/wiki/Statistical_testhttp://en.wikipedia.org/wiki/Meanhttp://en.wikipedia.org/wiki/Student's_t-test#Independent_two-sample_t-testhttp://en.wikipedia.org/wiki/Student's_t-test#Independent_two-sample_t-testhttp://en.wikipedia.org/wiki/Multiple_comparisons_problemhttp://en.wikipedia.org/wiki/Ronald_Fisherhttp://en.wikipedia.org/wiki/Variancehttp://en.wikipedia.org/wiki/Statistical_testhttp://en.wikipedia.org/wiki/Meanhttp://en.wikipedia.org/wiki/Student's_t-test#Independent_two-sample_t-testhttp://en.wikipedia.org/wiki/Multiple_comparisons_problemhttp://en.wikipedia.org/wiki/Statistical_model


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chance of committing a statistical type I error $ >O/s are useful incomparing 4testing6 three or more means 4groups or variables6 for statisticalsignificance.

/ariance analysis helps to fix the responsibility so that management canascertain -4a6 The amount of the variance4b6 The reasons for the difference between the actual performance and

budgeted performance 4c6 The person responsible for poor performance4d6 ;emedial actions to be ta!enTypes of /ariances3 /ariances may be broadly classified into two categories

46 Cost /ariance and 4"6 'ales /ariance.

A Co+t /!ri!nc

Total Cost /ariance is the difference between 'tandards Cost for the ctualOutput and the ctual Total Cost incurred for manufacturing actual output.The Total Cost /ariance Comprises the following 3

I. 7irect ,aterial Cost /ariance 47,C/6II. 7irect abour Cost /ariance 47C/III. Overhead Cost /ariance 4OC/6

I. %irct M!tri! /!ri!nc+7irect ,aterial /ariances are also termed as ,aterial Cost /ariances. The,aterial Cost /ariance is the difference between the 'tandard cost ofmaterials for the ctual Output and the ctual Cost of materials used for

producing actual output. The ,aterial Cost /ariance is calculated as3

,aterial Cost /ariance F 'tandard Cost - ctual Cost,C/ F 'C-C4or6

,C/ F F G 'tandard 'tandard G ctual ctual } Duantity Price Duantity Price

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http://en.wikipedia.org/wiki/Type_I_errorhttp://en.wikipedia.org/wiki/Statistical_significancehttp://en.wikipedia.org/wiki/Statistical_significancehttp://en.wikipedia.org/wiki/Type_I_errorhttp://en.wikipedia.org/wiki/Statistical_significancehttp://en.wikipedia.org/wiki/Statistical_significance


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F 4'D x 'P6 - 4D x P6

>ote3 If the actual costs is more than standard cost the variance will be

unfavourable or adverse variance and.on tile other hand. if the actual cost isless than standard cost the variance will be favourabie variance. Thematerialcost variance is further classified into34I6 ,aterial Price /ariance4&6 ,aterial ?sage /ariance496 ,aterial ,ix /ariance4:6 ,aterial +ield /ariance1 M!tri! Pric /!ri!nc MP/ 3 ,aterial Price /ariance is that portion

of the ,aterial Cost /ariance which is due to the difference between the'tandard Price specified and the ctual Price paid for

purchase of materials. ,aterial Price /ariance may be calculated by

,aterial Price/ariance F ctual Duantity x G'tandard Price - ctual Price

,P/ FD x 4'P-P6

>ote 3 If actual cost of materials used is more than the standard cost thevariance is adverse. it represents negative 4-6 symbol. nd on the other hand.if the variance is favourable it is to be represented by positive 46 symbol.

2 M!tri! U+!" /!ri!nc MU/8 ,aterial ?sage /ariance is that part of ,aterial Cost /ariance which refers to the difference between the standard

cost of standard 1uantity of material for actual output and the 'tandard cost ofthe actual material used. ,aterial ?sage /ariance is calculated as follows3

,aterial ?sage/ariance F 'tandard Price x G 'tandard Duantity -ctual Duantity

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,?/ F 'P x 4'D - D6

>ote3 This /ariance will be favourable when standard cost of actual materialis more than the 'tandard material cost for actual output$ and /ice /ersa.

$ M!tri! Mi< /!ri!nc MM/ 8 It is the portion of the material usagevariance which is due to the difference between the 'tandard and the actual

composition of mix. ,aterial ,ix /ariance is calculated under two situationsas follows 3

4a6 Ehen actual weight of mix is e1ual to standard weight to mix4b6 Ehen actual weight of mix is different from the standard mix

4a6 Ehen ctual Eeight and 'tandard Eeight of ,ix are e1ual

4i6The formula is used to calculate the /ariance3

,aterial ,ix/ariance F 'tandard price x G'tandard Duantity-ctual Duantity

,,/ F 'P x 4'D-C6

4ii6In case standard 1uantity is revised due to shortage of a particular categoryof materials$ the formula will be changed as follows 3

,aterial ,ix/arience F'tandard priceG;evised 'tandard Duantity-ctual Duantity

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,,/ F 'P x 4;'D-D6

4b6Ehen ctual Eeight and 'tandard Eeight of ,ix are different3

The formula used to calculate the /ariance is

,aterial ,ix /arience

F G Total Eeight Of ctual ,ix x 'tandard Cost J 'tandard Cost Of

G Total Eeight Of 'tandard ,ix ctual ,ix G 'tandard ,ix

4iii6 In case the standard is revised due to the shortage of a particularcategory of materials$ the alternative formula will be as follows3

,aterial ,ix /arience

F G Total Eeight Of ctual ,ix x 'tandard Cost J 'tandard Cost Of

G Total Eeight Of ;evised 'td ,ix ctual ,ix G 'tandard ,ix

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( M!tri!+ :id /!ri!nc M:/8 It is the portion of ,aterial ?sage/ariance. This variance arises due to spoilage$ low 1uality of materials and

defective production planning etc. ,aterials +ield /ariance may be defined as*the difference between the 'tandard +ield 'pecified and the ctual +ieldObtained.* This variance may be calculated as under3

,aterial +eild/arience F 'tandard ;ate x 4 ctual +eild K 'tandard yeild 6

Ehere 'tandard ;ate Is calculated s3

'tandard ;ate F 'tandard Cost O# 'tandard ,ix >et 'tandard Output

/ri&ic!tion 3

The following e1uations may be used for verification of ,aterial Cost/ariances 3

(1) ,aterial Cost /ariance F ,aterial Price /ariance + ,aterial ?sage/ariance

4&6 ,aterial ?sage /ariance F ,aterial ,ix /ariance - ,aterial +ield/ariance

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496 ,aterial Cost /ariance F ,aterial ,ix /ariance + ,aterial +ield /ariance

II. L!3our /!ri!nc+

abour /ariances can be classified into3

4a6 abour Cost /ariance 4C/64b6 abour ;ate /ariance or Eage ;ate /ariance4c6 abour 0fficiency /ariance4d6 abour Idle Time /ariance4e6 abour ,ix /ariance(f) abour ;evised 0fficiency /ariance4g6 abour +ield /ariance

4a L!3our Co+t /!ri!nc LC/3 abour Cost /ariance is the difference between the 'tandard Cost of labour allowed for the actual output achievedand the actual wages paid. It is also termed as 7irectEage /ariance or Eage /ariance. abour Cost /ariance is calculated asfollows3

abour Cost /ariance F 'tandard Cost of abour - ctual Cost of abour

>ote3 If actual labour cost is more than the standard labour cost$ the variancerepresents negative and vice versa.

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3 L!3our R!t /!ri!nc3 It is that part of labour cost variance which is dueto the difference between the standard rate specified and the actual rate paid.This variances arise from the following reasons3

4a6 Change in wage rate.4b6 #aulty recruitment.4c6 Payment of overtime.4d6 0mployment of casual wor!ers etc.

It is expressed as follows 3

abour ;ate

/ariance F ctual Time G 'tandard ;ate K ctual ;ate

>ote3 If the 'tandard rate is higher than the actual rate$ the variance will befavourable and vice versa.

4cL!3our E&&icinc /!ri!nc3 abour 0fficiency /ariance otherwise!nown as abour Time /ariance. It is that portion of the abour Cost /ariancewhich arises due to the difference between standard labour hours specified andthe actual labour hours spent. The usual reasons for this variance are 4a6 poorsupervision 4b6 poor wor!ing condition 4c6 increase in labour turnover 4d6defective materials. It may be calculated as following3

Idle Time /ariance F Idle Hours x 'tandard ;ate

>ote3 If actual time ta!en is more than the specified standard time$ thevariance represents unfavourable andvice versa.

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4d6L!3our Id Ti) /!ri!nc3 abour Idle Time /ariance arises due toabnormal situations li!e stri!es$ loc!out$ brea!down of machinery etc. Inother words$ idle time occurs due to the difference between the time for which

wor!ers are paid and that which they actually expend upon production. It iscalculated as follows 3

Idle Time /ariance F Idle Hours x 'tandard ;ate4e6 L!3our Mi< /!ri!nc3 It is otherwise !nown as


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SUMMAR:

Standard costing underlies most business activities. "hecost of a product must be ascertained prior to productionfor pricing and control purposes. Standard costing may alsolead to cost reductions. #erhaps the most important bene$t%hich results from a standard costing system is theatmosphere of cost consciousness %hich is fostered amongmanagers.

Standard cost data are compared %ith actual cost data forthe purpose of ascertaining variances. Such variances arenormally bro&en do%n into t%o basic components'(uantityvariances and price variances. "he control of overheadcosts as distinct from direct costs re(uires a method %hichta&es into account the possibility of changes in the level ofproduction during the planning period. )le*ible budgetinga+ords such a method, and provides for each department aseries of budget allo%ance schedules for various volumelevels %ithin the normal range of operations.

"he ascertainment of variances is only the $rst stage inassessing results. -ariances should be analysed in depth inorder to establish %hether they are signi$cant, %hether

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they are controllable and if so %here responsibility lies.tthe same time, the analysis of variances enablesestablished standards to be validated and methods forestablishing standards in the future to be improved.

Standard costing not only provides a means of controllingcosts but also monitoring revenue through the analysis ofsales variances. /inear programming may allo% the controlprocess to be improved, providing that future developmentsin accounting information systems allo% opportunity coststo be recorded.

BIBLOGRAPHY

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Cost Account Projckt