Cost Accounting Final Report

Embed Size (px)

Citation preview

  • 7/29/2019 Cost Accounting Final Report

    1/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    i

    AAAAcccckkkknnnnoooowwwwlllleeeeddddggggmmmmeeeennnntttt

    This report has proved to be a great experience and knowledgeable for our group

    members about practical approach towards Job Order and Batch Costing functions.

    For this, we would like to thank our course instructor SIR FAISAL MAJID from the

    core of our hearts for giving and providing us an opportunity and guidance to write

    this report in the light of his vast experience, and having his unconditional support all

    the time.

  • 7/29/2019 Cost Accounting Final Report

    2/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    ii

    AAAAbbbbssssttttrrrraaaacccctttt

    This report basically emphasizes on defining cost accounting, than Job-order and

    batch costing, it gives as several advantages to managers/management,

    labours/workers, employees, to government, consumers etc,

    Apar t fr om that, cos ting has several di sadvantages li ke dup li ca tion, not 100%

    practically applicable, do not help in decision making in long-run, and last but not the

    least, its often referred to as an expensive routine.

    Whereas when it comes to Job Order, Each order or job should be continuously

    identifiable from the raw material stage to the stage of completion. Apart from that,

    the system is very expensive because it requires a lot of clerical work in estimating

    costs, designing and scheduling of production. It should, therefore, be adopted when

    absolutely warranted.

    When it comes to batch costing, the term batch refers to the lot in which the articles

    are to be manufactured, one unit of such product is not produced but a lot is

    produced thats why also known as Lot Costing and it is used in case of

    pharmaceutical or drug industries, ready-made garment factories, industries

    manufacturing component parts of radio sets, television sets, watches, etc.

  • 7/29/2019 Cost Accounting Final Report

    3/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    iii

    Table of ContentsTable of ContentsTable of ContentsTable of Contents

    Acknowledgment ...... ............................... .......... ..................................... .... ... i

    Abst ract .................... ....................... ................... ................................ ........ ii

    Objectives of cost accounting: ...................................................................... 1

    Importance and advantages of Cost Accounting: .............................................. 3

    Criticisms of Cost accounting: ....................................................................... 4

    Functions of Cost Accountant: ....................................................................... 5

    Job Costing: ................................................................................................. 6

    Objectives of job costing: .......................................................................... 7

    Procedure: .............................................................................................. 7

    Advantages of job cost ing: . .............. .......... ................................... .......... 10

    Limitations of job costing: ....................................................................... 10

    Batch Costing: ............................................................................................ 11

    Where Batch is used? ................................................................................ 11

    The Term Batch Refers to: ....................................................................... 11

    It is used at: ......................................................................................... 11

    Where difference lies? ............................................................................ 11

    Determination of Economical Batch Quantity .................................................. 12

  • 7/29/2019 Cost Accounting Final Report

    4/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    1

    CCOOSSTT AACCCCOOUUNNTTIINNGG,, JJOOBB CCOOSSTTIINNGGAANNDD BBAATTCCHH CCOOSSTTIINNGG

    COST: Cost means the amount of expenditure incurred on a particular thing. CAS-

    1 (Cost Accounting Standard 1, issued by the ICWA, India)defines Cost as: Cost is

    a measurement, in monetary terms, of the amount of resources used for the

    purpose of production of goods or rendering services.

    COSTING: Costing means the process of ascertainment of costs. Costing involves

    the following steps

    (i) As cert ai ni ng or co ll ecting costs(i i)Anal yzi ng or cl as sif ying cost s in to basi c elements su ch as Ma teri al, Labour,

    Expenses etc. and

    (iii) All ocat ing to tal co st s to a part icula r thi ng i. e. a product , a cont ract or aprocess. Thus cost can now be defined as the total expenditure, duly

    classified into materials, labour, expenses etc. allocated to a particular

    product or contract or process.

    COST ACCOUNTING: The Institute of Cost and Management Accountant, England

    (ICMA) has defined Cost Accounting as the process of accounting for the costs

    from the point at which expenditure incurred, to the establishment of its ultimaterelationship with cost centers and cost units. In its widest sense, it embraces the

    preparation of statistical data, the application of cost control methods and the

    ascertainment of the profitability of activities carried out or planned.

    Cost accounting is a term broader than costing. It covers costing plus the

    reporting and control of costs. Thus Cost Accounting = Costing + Cost Reporting +

    Cost Control. Cost accounting can be defined as the technique of recording,

    classification, allocation, reporting and control of costs.

    Objectives of cost accounting:Objectives of cost accounting:Objectives of cost accounting:Objectives of cost accounting:

    Cost accounting has the following basic aspects or objectives:

    1. Costing: It involves the following basic aspects or 5 As:i. As cert ai n cost s re la ting to a parti cu la r pe ri od ,

  • 7/29/2019 Cost Accounting Final Report

    5/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    2

    ii .Anal yse or class if y costs under dif fe rent heads of ac count s such as mater ial ,labour, expenses etc.,

    iii.Al lo ca te costs fu ll y to the di rect expenses or the spec if ic cost s such as rawmaterials, labour to the relevant products, contracts or processes,

    iv .Apporti on or dis tr ibute common costs to each product, cont ract or processon a suitable basis and

    v.Ab sorb the to tal expenses of a depar tment over it s product s so as to fi na li zethe cost of each product that is then reported to the management.

    2. Cost reporting: Cost reporting has the following aspects:-i. What to report or the nature of information to be presented should be

    relevant and precise.

    ii . To whom to report will determine the scope of the report to be submitted tothe top management.

    iii. When to report daily, weekly, monthly, quarterly or yearly etc.iv . How to report or the format will depend on the factors mentioned above.

    Once the cost report is received, management can take action to control the

    costs.

    3. Cost Control: Cost control has been defined by the ICMA as theguidance and regulation by executive action of the costs of operating

    an undertaking. Thus cost control means the control of costs by

    management. Following are the aspects or stages of cost control.

    i. Set targets for cost, production, profits etc. for each period.ii . Measure Actual Performance relating to cost, production profits for the

    period concerned.

    iii. Compare targets with actuals to find out the variationsiv .Anal yse vari at ions , the causes fo r vari at ions whether favourabl e or adverse

    are to be investigated. While adverse variations denote wastages and loses,

    favourable variations may indicate the targets fixed are very low. In both

    cases the exact reasons for the variations are to be known.v. Take action once the causes are known to eliminate avoidable losses etc.

    4. Other aspects: The other aspects or objectives of cost accounting areas follows:

    i. Provide required data for fixing sales price for submitting tenders,quotations etc.

  • 7/29/2019 Cost Accounting Final Report

    6/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    3

    ii .As si st the management in cont ro ll ing in vento ry fo r raw mate rials , goods inprocess, finished goods, spares and consumables etc.

    iii.Advi ce management on future po li cies regard ing expansion , growth, capi ta linvestment etc.

    iv . Install labour incentive system for getting maximum productivity fromlabour at optimum cost.

    v.Advi ce management in decidi ng optimum product-mix , meri ts and demer itsof alternative courses of actions (make or buy etc.,) introduction of

    automation, mechanization, rationalization of system of production etc.

    Thus the objectives can be summarized as follows:

    1. As cert ai nment of cost s2. Estimation of costs3. Cost control4. Cost reduction5. Determining selling price6. Facilitating preparation of financial and other statements7. Providing basis for operating policy

    Importance and advantages of Cost Accounting:Importance and advantages of Cost Accounting:Importance and advantages of Cost Accounting:Importance and advantages of Cost Accounting:

    Cost accounting is not only important to the management and owners but also to

    many others like the workers, the Government, the consumers, the public at large

    and so on. The advantages are as follows.

    1. To the management and the owners:o Cost accounting helps the management of the concern to ascertain

    the cost and profitability of each individual product / service/

    contract/ process/ division/ branch separately. This also helps in

    valuation of the closing sto ck of goods at the end of the year. It helpsthe management of the concern in controlling costs in reducing the

    avoidable expenditure, and minimizing wastages and losses. It

    ensures the reconciliation of quantity of input with the quantities of

    output, wastages and scrap. The management is thus able to regulate

    and monitor the movement of materials thus preventing theft and loss

    of materials during processing and handling. It is of great help to the

  • 7/29/2019 Cost Accounting Final Report

    7/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    4

    management in taking several decisions such as, which products to

    produce more, how much to produce, whether to make or buy a

    component, what price to charge or quote. Thus cost accounting is an

    invaluable decision aid to decision making. It also facilitates in

    preparation of budgets and implementation of budgetary control in

    the organization. The end result of all the above advantages of cost

    accounting is maximization of profits of the concern thus benefiting

    the owners by increasing their net worth or the share prices, higher

    dividends etc.

    2. To the workers:o Cost accounting has an elaborate system of assessing the

    performance of workers and rewarding them suitably through

    incentives and bonus. The increase in profits due to a cost accounting

    system also leads to higher remuneration and bonus to the workers.

    3. To the Government / Consumers / Public:o In case the products are under price control, cost accounting

    furnishes the data required by the government for fixing fair prices.

    Consumers benefit since the prices fixed on the basis of the cost data

    are just and reasonable and cannot be too high. It also leads to

    efficiency and productivity in the industrial sector. It ensure optimum

    utilization of the scarce economic resources of the country. Cost

    accounting leads to maximum profits for an organization. Naturally

    the Government also gains by way of more taxes on production,

    income and sales etc. The higher revenue is used by the Government

    for public welfare and economic development.

    Criticisms of Cost accounting:Criticisms of Cost accounting:Criticisms of Cost accounting:Criticisms of Cost accounting:

    1. Duplication:o It is argued that cost a ccounting is duplication when a good financial

    accounting system is already in operation. Cost accounting takes its

    basic data from books of a ccounts and just rearranges it in a different

    way.

  • 7/29/2019 Cost Accounting Final Report

    8/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    5

    2. Inapplicable:o In a concern producing a single product involving no complex

    processes, cost accounting is inapplicable. It is also of no use in non-

    profitable organizations or in agriculture etc.

    3. Not useful for decision making:o In many cases, the decisions of the management are not based on

    cost accounting data. Thus the decision regarding which item to

    produce and how much to produce depends on the license given by

    the Government and the market forces of demand and supply.

    4. Expensive and routine:o A cost accounti ng syst em is qu ie t expensive to ins ta ll and operat e. At

    times the cost accounting systems become mere routing of filling the

    forms and submitting standard reports. Non-cooperation from staff

    also may lead to failure of the system in many concerns.

    However, proper planning and implementation of the cost accounting system will

    overcome these criticisms and would stand null and void in view of the objectives,

    importance and advantages of the cost accounting system.

    Functions of Cost Accountant:Functions of Cost Accountant:Functions of Cost Accountant:Functions of Cost Accountant:

    The main functions of a cost accountant can be summarized as follows:

    1. Determining cost and analyzing income:o A cost account ant determines the cost of a job , produc t or process as

    the case may be. He analyses and classifies costs according to

    different cost elements, viz., materials, labour and expenses. Such

    analysis enables him to tell the management the significance of the

    different cost elements and fixation of the selling prices of the

    products manufactured by the business. He advises the managementabout the profitability or otherwise of each job, product or process.

    Thus, he helps the management in maximizing business profits.

    2. Providing cost data for planning and control:o A cost account ant co llec ts , cl as sif ies and presents in app ropr ia te fo rm

    suitable data to the management for planning and controlling the

  • 7/29/2019 Cost Accounting Final Report

    9/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    6

    operations of the business. He makes constant endeavour to control

    and reduce the cost by the following techniques:

    3. Undertaking special cost studies for managerial decision-making: Acost accountant undertakes special cost studies and carries out

    investigation for collecting and presenting suitably the data to the

    management for decision-making regarding the following areas:

    o Introduction of new products, replacement of manual labour bymachines etc.

    o Make or buy decisions, replacing or repairing old machines, acceptingorders below cost, etc.

    o Expansion plans, installation of new capital project, etc.o Utilisation of idle capacity and development of a proper information

    system to provide prompt and correct cost information to the

    management.

    o Installation of a cost audit system.All types of manufacturi ng concerns can broadl y be cl assif ied into two categori es

    (i) MASS-PRODUCTION CONCERNS,a. In case of mass production concerns the products when produced are

    of the same type, and involve the same material and labour and pass

    through the same set of process. In such industries each process is

    designated as a separate cost-centre and the cost per unit is

    calculated by dividing total cost of the process with the total number

    of units produced by the process. The cost of production of the

    product is obtained by adding the unit costs of various processes

    through which the product has passed. This method of costing is

    known as process costing.

    (i i)SPECIAL ORDER CONCERNS.

    Job Costing:Job Costing:Job Costing:Job Costing:

    In case of special-order concerns products produced or jobs undertaken are of

    diverse nature. They involve materials and labour in different quantities and entail

    different amounts of overhead costs. In such concerns it is necessary to keep a

    separate record of each lot of products or jobs from the time the work on the job

    or product begins till it is completed. A separate job card or sheet is maintained

  • 7/29/2019 Cost Accounting Final Report

    10/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    7

    for each job or product in which all expenses of materials, labour, overheads are

    entered and cost of completing a job or manufacturing a product is found out.

    Such a cost syst em is known as job or terminal or specific costing.

    Objectives of job costing:Objectives of job costing:Objectives of job costing:Objectives of job costing:

    1. It helps in finding out the cost of production of every order and thus helps inascertaining profit or loss made out on its execution. The management can

    judge the profi tabi l it y of each job and decide it s fu ture courses of act ion.

    2. It helps management in making more accurate estimates about the costs ofsimilar jobs to be executed in future on the basis of past records. The

    management can conveniently and accurately determine and quote prices for

    orders of a similar nature which are in prospect.

    3. It enables management to control operational inefficiency by comparing actualcosts with the estimated ones.

    A sy stem of job cost ing should be adopt ed aft er cons id er ing the fo ll ow ing two

    factors.

    1. Each order or job should be continuously identifiable from the raw materialstage to the stage of completion.

    2. The system is very expensive because it requires a lot of clerical work inestimating costs, designing and scheduling of production. It should, therefore,

    be adopted when absolutely warranted.

    Procedure:Procedure:Procedure:Procedure:

    The following is the procedure adopted for costing purposes in a concern using job

    costing:

    1. Job order number: Every order received is allotted a certain number from arunning list maintained for this purpose. Every order or job will be known byits number throughout its production process in the factory.

    2. Production / job order: A production / job order is a written order issued tothe manufacturing department to proceed with a job. It is issued by the

    production planning department on receipt of a job order to the foreman of

    the relevant department. Instructions to the costing department to collect

    particulars of costs on execution of the job are also issued simultaneously.

  • 7/29/2019 Cost Accounting Final Report

    11/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    8

    The production order is prepared with sufficient copies for all the

    departmental managers or foreman who will be required to take any part in

    the production.

    3. Bills of materials: The production and planning department also prepares a listof materials and stores required for the completion of the job. A copy is also

    sent to the concerned foreman with the production order which serves as an

    authority to him for collecting the materials and stores mentioned from the

    storekeeper. On the same pattern a list of tools required is also prepared.

    4. Job cost card: Job cost card or job cost sheet is the most important documentused in the job costing system. A separate card or cost sheet is maintained for

    each job in which all expenses regarding materials, labour and overheads are

    recorded directly from costing records. The method of finding out the cost of

    these elements in respect of a particular order is a s follows.

    MATERIALS: The information regarding cost of materials or stores used

    for a particular job order can be obtained from materials or stores

    requisition slips. In case of large job orders, materials abstracts can be

    prepared for finding out the total value of materials issued to different

    jobs .

    LABOUR: The cost of labour incurred on each job can be ascertained with

    the help of time and job cards. In case of a large number of jobs,

    preparation of wages abstract may considerably help in computing the

    amount paid as wages for completion of specific jobs. Wages paid for

    indirect labour will constitute an item of fact ory overheads.

    OVERHEADS: Every job will be charged with amount of overheads

    determined on the basis of the method selected for allocation of

    overheads. Normally on the basis of past results an overhead rate is

    determined and each job is charged for overheads at the pre-determined

    rate.

    Profit or loss on a job can also be found out by preparing a job account. The job

    account is debited with all expenses incurred on the job and is credited with the

    job pr ice . The di ff erence of the two sides wi ll be the pro fi t or lo ss made or

    suffered on the job.

  • 7/29/2019 Cost Accounting Final Report

    12/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    9

    1. Work-in-process: The account is maintained in the cost ledger and itrepresents the jobs under production. The account may be maintained in any

    of the following two ways depending upon the requirements of the bus iness:

    A compos it e work-i n-process account fo r the enti re fa ctory.

    A compos ite wo rk-i n-process account for every depar tment. Fo r

    example, if the factory has three departments A, B and C, a work-in-

    process for each of these three departments will be opened.

    The work-in-process account is periodically debited with all costs direct and

    indirect incurred in execution of the jobs. At intervals of month or so a summary

    of completed jobs is prepared and the work-in-process account is credited with the

    cost of completed jobs. In case work-in-progress account for each department of

    the factory has been opened, it will be necessary to find out the cost of completed

    jobs regarding each department . The ba lance in work -i n-process account at any

    time represents the cost of jobs not yet completed.

    1. JOB TICKET:In order to provide information regarding the progress of each job at

    each operation, generally a job ticket is issued by the production

    control department. The ticket contains detachable portions for

    different operations. The job ticket is useful for both production

    control and costing departments. On completion of an operation, the

    relevant portion of ticket is detached and sent to production control

    department. This enables production control department in keeping

    production schedule up-to-date. On the basis of detached portion a

    departmental summary of production can be prepared which is very

    useful for costing purposes. Moreover, the amount of work-in-process

    as shown by the cost ledger can be checked by listing the ticket

    number of jobs in process in any department and valuing this list.

    2. PROGRESS ADVICE:The foreman of a department may be required to send periodically a

    statement regarding the stage of completion of each job to ensure

    completion of jobs by scheduled dates. Such a note is called

    p rogr ess adv ice.

  • 7/29/2019 Cost Accounting Final Report

    13/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    10

    AdvanAdvanAdvanAdvantages of job costing:tages of job costing:tages of job costing:tages of job costing:

    1. Job costing enables the management to identify spoiled and defective work inrespect to particular production orders, departments or groups of workers and

    hence the management can fix up responsibility for inefficiency.

    2. Management can determine the trends in costs and compare the operatingefficiency of men and machines in each cost centre. It can also determine the

    completion cost of each job.

    3. It enables the preparation of estimates of costs of jobs before production.4. It enables comparison of estimated costs with actual costs as the costs are

    analyzed on the basis of costs, services and production.

    5. It makes available to the management a complete file of production orderswhich contains valuable statistics on cost.

    6. It enables ascertainment of profit or loss on each job immediately after theircompletion.

    7. It enables the management to identify unprofitable jobs.8. In case of cost plus contracts, job costing enables to provide precise

    quotations.

    9. It helps in production planning.10. It facilitates fixation of selling pric e.Limitations of job costing:Limitations of job costing:Limitations of job costing:Limitations of job costing:

    1. Job costing involves a lot of clerical work in identifying materials, labour andoverheads with specific jobs and departments.

    2. Management cannot evaluate precisely the operating efficiency of men andmachines.

    3. Since costs ascertained and compiled are historical costs, they are not ofmuch utility to the management.

    4. It does not apply budgetary control to important cost elements such as labour,materials and overheads.

    5. Job costs over any period of time cannot be compared if major economicchanges take place in between.

    6. It is expensive to operate and errors are possible due to increased clericalwork.

  • 7/29/2019 Cost Accounting Final Report

    14/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    11

    Batch Costing:Batch Costing:Batch Costing:Batch Costing:

    WWWWhhhheeeerrrreeee BBBBaaaattttcccchhhh iiiissss uuuusssseeeedddd????

    Batch costing is a modified form of job costing. While job costing is concerned

    with costing of jobs that are executed against specific orders of the customers,

    batch costing is used where articles are manufactured in definite batches. The

    articles are usually kept in stock for selling to customers on demand.

    TTTThhhheeee TTTTeeeerrrrmmmm BBBBaaaattttcccchhhh RRRReeeeffffeeeerrrrssss ttttoooo::::

    The term batch refers to the lot in which the articles are to be manufactured.

    Whenever a particular product is required, one unit of such product is not

    produced but a lot of say 500 or 1000 units of such product are produced also

    known as Lot Costing.

    IIII tttt iiiissss uuuusssseeeedddd aaaatttt::::

    This method of costing is used in case of pharmaceutical or drug industries, ready-

    made garment factories, industries manufacturing component parts of radio sets,

    television sets, watches, etc.

    WWWWhhhheeeerrrreeee ddddiiiiffff ffffeeeerrrreeeennnncccceeee llll iiiieeeessss????

    1. The costing procedure for batch costing is similar to that under job costingexcept with the difference that a batch becomes the cost unit instead of ajob.

    2. Separate job cost sheets are maintained for each batch of products.3. Each batch is allotted a number. Material requisitions are prepared batch-

    wise, the direct labour is engaged batch-wise and the overheads are also

    recovered batch-wise.

    4. Cost per unit is ascertained by dividing the total cost of a batch by numberof items produced in that batch. Ordinary principles of inventory control are

    used.

    5. Production orders are issued only when the stock of finished goods reachesthe ordering level. In case the batches are repetitive, the costing work is

    much simplified.

    Since in batch costing production is done in batches and each batch consists of a

    number of units, the determination of optimum quantity to constitute an

    economical batch is all the more important. Such a quantity can be fixed on the

  • 7/29/2019 Cost Accounting Final Report

    15/15

    RREE PP OO RRTT OO NN JJ OO BB OO RRDD EE RR AANN DD BBAATT CC HH CC OO SS TT II NN GG

    12

    basis of same formulae and principles as are applicable to economic order quantity

    of materials.

    DDDDeeeetttteeeerrrrmmmmiiiinnnnaaaattttiiiioooonnnn ooooffff EEEEccccoooonnnnoooommmmiiiiccccaaaallll BBBBaaaattttcccchhhh QQQQuuuuaaaannnnttttiiiittttyyyy

    Economical batch quantity can be applied as follows.

    Where:

    U = Annual demand

    P = Setting up and order placing costs per batch

    S = Storage or inventory carrying over cost per unit on annual basis