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7/29/2019 Cost Accounting Final Report
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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.
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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.
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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
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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 ,
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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.
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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
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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.
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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
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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
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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.
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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.
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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.
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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.
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Batch Costing:Batch Costing:Batch Costing:Batch Costing:
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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.
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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.
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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.
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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
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basis of same formulae and principles as are applicable to economic order quantity
of materials.
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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