Cost Accounting Fullprocess 130704003351 Phpapp02

8/12/2019 Cost Accounting Fullprocess 130704003351 Phpapp02

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Cost Accounting


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Definition

Chartered Institute Of Management

Accountants ( CIMA London )

Costing is the technique and process of

ascertaining cost


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Cost Accounting

Cost accounting measures and reports informationrelating to the cost of acquiring and utilizing

resources

Cost accounting provides information for

management and financial accounting

Cost management describes the approaches and

activities of managers in short-run and long-run

planning and control decisions

These decisions increase value of customers andlower costs of products and services

Cost management is an integral part of a companys

strategy


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Financial Accounting

Financial accounting measures and records businesstransactions and provides financial statements that

are based on generally accepted accounting

principles (GAAP)

Managers are responsible for the financial statementsissued to investors, government regulators, and other

parties outside the organization

Financial accounting focuses on external parties

Financial accounting reports on what happened in the

past


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An Introduction to Cost Terms


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Costs and Cost Objects

Cost a resource sacrificed or foregone to achieve a specific

objective

Cost Object

any product, machine, service or process for which

cost information is accumulated

cost objects can vary in size from an entire company,

to a division or program within the company, or down

to a single product or service


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Cost Drivers and Cost Management

Cost driver (cost generator or cost determinant) a factor which causes the amount of cost incurred to

change

production costs are driven by the number of

products produced, labour costs, number of setupsrequired, and the number of change orders

Cost Reduction Programs focus on two things:

1. Doing only value-added activities2. Efficiently manage the use of cost drivers in those

value-added activities


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Variable and Fixed Costs

Variable Cost a cost which is constant per unitbut changes in total in proportionto changes in the output

materials (parts), fuel costs for a

trucking company

R

s

Volume

R

s

Volume

Fixed Cost

a cost which does not change in

total as volume changes butchanges on a per-unit basis as the

cost driver increases and decreases

amortization, insurance


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Total Costs and Unit Costs

Unit Cost (or Average Cost) Total cost / some number of units

Average cost

= Total manufacturing costs / Number of units produced

= Rs980,000 / 10,000

= Rs98 per unit

Unit or average costs must be interpreted with caution

As volume increases, the unit or average cost falls as

the fixed costs are spread over a larger number of

units


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Types of Inventory

Direct material inventory (stock awaiting use in the

manufacturing process)

Work-in process inventory (partially completed goods

on the shop floor)

Finished goods inventory (goods completed but not

yet sold)


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Period and Product Costs

Period Costs are expensed on the income statement as they are

incurred

also called operating costs (excluding cost of goods

sold) examples: selling, general and administrative costs

Product Costs

are inventoried on the balance sheet and expensedonly when the product or service is sold

also called inventoriable costs

Examples: materials and labour (manufacturing)


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Costing System Terminology

Cost Object

anything for which a separate measurement of costsis desired

Cost Pool

a grouping of individual cost items

Cost Allocation Base

a factor that is the common denominator forsystematically linking an indirect cost or group of

indirect costs to a cost object


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Alternative Classifications of Costs

1. Business functiona. R&D

b. Design

c. Production

d. Marketinge. Distribution

f. Customer service

2. Assignment to a cost

object

a. Direct costs

b. Indirect costs

3. Behaviour patterna. Variable costs

b. Fixed costs

4. Aggregate or averagea. Total costs

b. Unit costs

5. Assets or expenses

a. Inventoriable costs

b. Period costs


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Costs in a Manufacturing Company

Inventoriable

(Product)

Costs

Direct

Material

Purchases

Work in

ProcessInventory

Cost of Goods Sold

Revenue

Gross Margin

Marketing andAdministrative Costs

Operating Income

Period

Costs

IncomeStatement

Balance Sheet

Materials

Inventory

Direct

Labour

Indirect

Manufacturing

Costs

Finished

Goods

Inventory


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Costing Systems

Job-Costing

System

Costs are assigned to a

distinct unit or batch Resources are

expended to bring a

distinct product or

service to market for aspecific customer

advertising campaign,

audit, aircraft assembly

Process-Costing

System

Costs are assigned to

a mass of similar units

Resources are used to

mass-produce a

product or service and

not for any specificcustomer

Postal delivery, oil

refining


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Job Costing Approach

1. Identify the cost object(s)

2. Identify the direct costs for the cost object(s)

3. Select cost-allocation bases to use in allocating the

indirect costs to the cost object(s)

4. Identify the indirect costs associated with eachcost-allocation base

5. Compute the rate per unit of each cost-allocation

base to allocate indirect costs to the cost object(s)

6. Compute the indirect costs allocated to the cost

object(s)

7. Determine the cost of the cost object(s) by adding

the direct and indirect costs


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Job Costing Overview

IndirectCost Pool

Manufacturing Overhead

Rs1,215,000

Rs45 per direct

Manufacturing Labour Hours

Cost Object:

Direct + Indirect CostsDirect Material

Direct Labour

Cost

Allocation Base

27,000 Direct Manufacturing

Labour-Hours


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Job Costing System in Manufacturing

Cost of

Goods SoldFinished Goods

Inventory

Work-In-Process

Inventory

Materials

Inventory

Buy

Materials

Use

Materials

Incu r Labour

Costs

Inc ur Overhead

Costs

Complete

Product ion

Sell

Goods


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Cost Sheet


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Cost SheetIt is a statement designed to show the output of a

particular accounting period along withbreakup of cost.

It is a memorandum statement

It does not form part of double entry costaccounting records.

It discloses the total cost and cost per unit.

It helps

To fix Selling Price.

To submit quotation price.

To Control cost.

COST SHEET


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COST SHEET

Total Cost Cost Per unit

Direct Materials

Direct Labour

Prime Cost

Add: Works Overheads

Works Cost

Add: Administration overheadsCost of Production

Add: Selling & Distribution Overheads

Total Cost or Cost of Sales


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Elements of Cost

Direct Material :-Identify in the product

Easily measure & directly charge to the product

e.g. Timber in furniture making

Categories raw material

Specifically purchased for specific job or process

Parts or components purchased.

e.g. tyres for cycles

Primary Packing material

to protect finished product

for easy handling inside the factory.


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Direct Labour :-

Labour engaged in

converting raw material into finished goods Altering the construction

Actual Production

Composition of Product

i.e labour which can be attributed to a particular job,productor process

Exception :- Where the cost is not significant like

wages of trainees- their labour though directly

spent on product is not treated as direct Labour

Test:-

Easily Identify

Feasible to Identify


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Overheads:- It may be defined as the aggregate of the cost ofindirect materials, indirect labour and such other expenses

including services as cant conveniently be charged direct

to specific cost unit.

Categories:- Manufacturing Overheads

Administration of machines

Selling & distribution of machines


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Standard Costing


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Why is Standard Costing Used?

A standard is a preestablished

benchmark for desirable performance.

A standard cost systemis one in which a

company sets cost standards and then

uses them to evaluate actual performance.

A variance is the difference between

actual performance and the standard.


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Favorable versus Unfavorable

An unfavorablevariance occurs when actual

performance falls below the standard.

A standard is a preestablished

benchmark for desirable performance.


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. Standard cost is the Predetermined cost

based on a technical estimate for material, labor and

overhead for a selected period of time

and for a specified set of working conditions.

Standard costing is the preparation of standard cost and

applying them to measure the variations from actual

costs and analyzing the causes of variations with a view

to maintain maximum efficiency in production


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Quantity and Price Standards

Quantity used

Price paid


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Ideal versus Practical Standards

A standard that allows for the normal

inefficiencies of production iscalled a practical standard.

A standard that allows for no inefficiencies

of any kind is an ideal standard.


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The Standard Costing Process

Gather information

and set standards.

Compare actualperformance to

standard and prepare

performance reports.

Determine which

variances to investigate.

Investigate the

cause of variances.

Take corrective action.

Determine if

corrective action

is needed.


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Problems With Standard Costing

Employees may try to set low standards

to make them easier to achieve.

Using historical data to set standards

may build in past inefficiencies.

Managers might focus on thenumbers to the exclusion

of other important factors.


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Problems With Standard Costing

Focus on unfavorable variances

may result in ignoring the

favorable variances.

Managers may lose

sight of the big picture.


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Comparison of Cost Systems

Cost

Classification

Actual

Cost

System

Normal

Cost

System

Standard

Cost

System

DirectMaterial

Direct

LaborManufacturing

Overhead

Actual

Actual

Actual

Actual

Actual

Estimated

Estimated

Estimated

Estimated


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Analysis of variance


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Analysis of Variance may be done inrespect of each element of cost and sales:

1.Direct Material Variance

2.Direct Labor Variance

3.Overhead Variance

4.Sales Variance

Analysis of Variance


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Material Variances

(Standard Price x Standard Rate)

- ( Actual quantity x Actual Rate )


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Direct Materials Variances

There are two variances calculated

for material cost variance.

The material quantity variance(also called the usage variance) is a

measure of the amount of materials used.

The material price variance

is a measure of the cost to buy the

various materials that were purchased.


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Material Variances

( Standard material price

Actual material price)

Actual material quantity

( Standard material quantity

Actual material quantity)

Standard unit price


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Direct Materials Variances

Again Material Qt variances can be

divided into two varainces

The material mix variance

.

The material Yield variance


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Material Mix Variances

Standard Cost of Standard MixStandard Cost of Actual Mix

Std. Unit cost (SQAQ)

Actual weight do not differ


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Material Mix Variances

Actual weight differ

Total wt. Of actual mix X Std. Cost - Std. CostTotal wt. Of standard of Std. Mix of actual mixmix


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Material Variances

Standard Rate (Actual Yield

Standard Yield )

{If std. & actual mix are same}

Standard Rate = Std. Cost of Std. MixNet Std. Output

(Gross outputStandard loss)


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Material yield Variances

{Standard Rate (Actual YieldRevised Standard Yield )

If std. & actual mix are not same}

Standard Rate = Std. Cost of Revised Std. Mix

Net Std. Output(Gross outputStandard loss)


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Labor Variances

The labor cost variance is the

difference between actual cost of hour

worked and the standard cost allowed.

The labor rate variance is the

difference between the actual directlabor cost incurred and the standard

cost for the actual hours worked.


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St. Cost of laborActual cost of labor

Rate variance =Actual Time

Taken (Standard Rate

Actual Rate)

Labor Cost Variance

Labor Rate Variance

Total Labor Efficiency Variance


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Standard Rate (Standard time for actual

Output - Actual time Paid for)

Total Labor Efficiency Variance

L b V i


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Labor Variances

Total Labor efficiency variance are of two types

Labor Efficiency Variance

Labor Idle Time variance

L b V i


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Labor Variances

Labor Efficiency Variance

Labor Efficiency Variance = Standard rate(Standard time

for actual output - Actual time worked)

L b V i


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Labor Variances

Labor Idle Time variance = Abnormal Idle Time x

Standard Rate

Labor Idle Time variance

L b V i


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St. Cost of St Composition

(Actual time taken)Standard cost of actual

Composition ( Actual time worked)

Labor Mix Variance

Labor Variances

L b V i


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Standard Rate

(Actual YieldRevised

Standard Yield)

Labor Yield Variance

Labor Variances


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Overhead cost variance can bedefined as the difference between

the Standard cost allowed for theactual output achieved and the

actual overhead cost incurred.


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Overhead Costs


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Overhead Costs

Overhead costs are significant for most

organizations

Variable Overhead

Recall that variable overhead is allocated to

products and services using a budgeted variableoverhead rate

Fixed Overhead

Recall that fixed overhead is allocated to products

and services using a budgeted fixed overhead rate

Overhead Cost Variances


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Variable Overhead Fixed Overhead

How the

Cost is

Planned

andControl led

How Costs

areAl located

to

Products

Rs

Volume

Rs

Volume

Rs

Volume

Rs

Volume

Overhead cost Variance:-


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Overhead Cost Variance

Variable overhead variance Fixed overheadvariance

Expenditure Efficiency Expenditure Volume

variance variance variance variance

Capacity Calendar Efficiency

variance variance variance

O h d C t V i


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Overhead Cost Variance :-

Overhead Cost Variance

( Actual output x Standard overhead Rate per unit )

Actual overhead cost



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Overhead Cost variancescan bedivided into two varainces

1. Variable Overhead variance

.

2. Fixed Overhead variance


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Variable Overhead Variance

1. Variable Overhead variance

(Actual output x Standard variable overhead rate)

(Actual variable overheads)

Variable Overhead Variances


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Variable Overhead Variances

Variable Overhead variancescan bedivided into two variances

1. Variable Overhead Expenditure variance

.

2. Variable Overhead Efficiency variance


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(A) Variable overhead (spending) expenditure

variance

= (Actual hours worked x standard variable

overhead rate)Actual variable overheads

(B) Variable overhead efficiency variance

= Standard variable overhead rate(standard

Hours for Actual outputActual Hours)

2. Fixed overhead variance


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Fixed overhead variance

(Actual output x standard fixed overhead rate)

Actual fixed overheads

Fixed overhead variance can be categorized into:-

a) Expenditure variance = Budgeted Fixed overheads

Actual fixed overheads

b) Volume variance = actual output x Standard rate

Budgeted fixed overheads


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b) Capacity variance= standard rate( Revised

Budgeted unitsBudgeted units)

c) Calendar variance

= (Decrease or increase in number of units

produced due to the difference of budgeted andactual days x standard rate per unit)

e) Efficiency Variance = Standard Rate (Actual

ProductionStandard Production)


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Marginal Costing


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Features of Marginal Costing:


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Cost is classified into :

Fixed CostVariable Cost

Variable cost is only charged to production

Fixed cost is recovered from contribution

Valuation of stock of WIP and F.G. is done on the basisof marginal cost.

Selling price is based on marginal cost and contribution

It is technique used to ascertain the marginal cost & to

know the impact of V.C. on volume of output

Profit is calculated by deducting marginal cost and

fixed cost from sales

C-V-P analysis is one of integral part of marginal costing


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Costs


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Costs

Total Costs (TC) = Fixed Costs (FC)+ Variable

Costs (VC)

Average Costs = TC/Output (Q)

AC (unit costs) show the amount it costs to produceone unit of output on average

Marginal Costs (MC)the cost of producing one

extra or one fewer units of productionMC = TCnTCn-1

Revenue


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Total Revenuealso known as turnover,sales revenue or sales = Price x

Quantity Sold

TR = P x Q

Pricemay be a variety of different

prices for different products in the

portfolio QuantityUnits sold

Profit


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Profit

Profit = TRTC Normal Profitthe minimum amount

required to keep a business in a

particular line of production Abnormal/Supernormal Profitthe amount

over and above the amount needed to

keep a business in its current line ofproduction

Marginal Cost Equation


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Marginal Cost Equation

Sales = Variable Cost + Fixed Cost + Profit/Loss

Sales - Variable Cost = Fixed Cost + Profit/Loss

Sales - Variable Cost = Contribution

Therefore,

Contribution = S.P.V.C. or

Contribution = Fixed Cost + Profit


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Cost-Volume-Profit(CVP) Analysis

Cost volume Profit Analysis


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Cost volume Profit Analysis is a logicalextension of marginal costing

C.V.P. analysis examines the relationship

of cost & profit to the volume of businessto maximize profits

Indicates direct relationship between

volume & profit

Indicates Indirect relationship between

volume & cost per unit (Inverse) Cost-Volume-Profit Assumptions

d T i l


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and Terminology

1. Changes in the level of revenues and costs arise

only because of changes in the number of product(or service) units produced and sold.

2. Total costs can be divided into a fixed component

and a component that is variable with respect to

the level of output.

Cost-Volume-Profit Assumptionsd T i l


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and Terminology

3. When graphed, the behavior of total revenuesand total costs is linear (straight-line) in relation

to output units within the relevant range

(and time period).

4. The unit selling price, unit variable costs, andfixed costs are known and constant.

Abbreviations


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Abbreviations

SP = Selling price

VCU = Variable cost per unitCMU = Contribution margin per unit

CM% = Contribution margin percentage

FC = Fixed costs

Abbreviations


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bb e at o s

Q = Quantity of output units sold

(and manufactured)OI = Operating income

TOI = Target operating income

TNI = Target net income

Breakeven Point


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Sales

Variable

expenses

Fixed

expenses

=

Total revenues = Total costs


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Cost-Volume-Profit Assumptionsd T i l


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Break even point ( Rs ) =Fixed Cost / P/V ratio

Break Even point (Units) = Fixed Cost (Total)

-----------------------------

(S.P per unitM.C per unit)

or( Contribution per Unit)

and Terminology

P/V Ratio = Profit / Sales

P/V Ratio = Contribution / Sales

Cost-Volume-Profit Assumptionsand Terminolog


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Value of sales to earn desired amount ofprofit:-

(Fixed Cost + Desired Profit)------------------------------------------

P/ V ratio

and Terminology

Cost-Volume-Profit Assumptionsand Terminology


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Variable Cost = Sales(sales x P/V ratio)

Profit= (sales x P/V ratio)Fixed Cost

Fixed Cost= (sales x P/v ratio)Profit

Margin of safety =

(Rs) = Profit/ P/V ratio or= Actual salesBreak Even Sales

(Units) = Profit / Contribution per unit

and Terminology

Essentials of Cost-Volume-Profit(CVP) Analysis Example


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(CVP) Analysis Example

Assume that the Furniture Shop can purchase

Chairs for Rs32 from a local factory; other

variable costs amount to Rs10 per unit.The local factory allows the Furniture Shop to

return all unsold Chairs and receive a full Rs32

refund per pair of Chairs within one year.The average selling price per pair of Chairs is Rs70

and total fixed costs amount to Rs84,000.



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How much revenue will the business receive if

2,500 units are sold?2,500 Rs70 = Rs175,000

How much variable costs will the business incur?

2,500 Rs42 = Rs105,000

Rs175,000105,00084,000 = (Rs14,000)



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What is the contribution margin per unit?

Rs 70Rs 42 = Rs 28 contribution margin per unit

What is the total contribution margin when

2,500 pairs of Chairs are sold?

2,500 Rs 28 = Rs70,000


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If the business sells 3,000 pairs of Chairs,

revenues will be Rs 210,000 and contribution

margin would equal 40% Rs 210,000

= Rs 84,000.

Equation Method


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Rs70QRs42QRs84,000 = 0

Rs28Q = Rs 84,000Q = Rs84,000 Rs28 = 3,000 units

Let Q = number of units to be sold to break even

(Selling price Quantity sold)(Variable unit cost

Quantity sold)Fixed costs = Operating income

Contribution Margin Method


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Rs84,000 Rs28 = 3,000 units

Rs84,000 40% = Rs210,000

Graph Method


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0

4284

126168210252

294336378

0 1000 2000 3000 4000 5000

Units

$(000)

Breakeven

Fixed costs

Target Operating Income


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(Fixed costs + Target operating income)divided either by Contribution margin

percentage or Contribution margin per unit

Target Operating Income


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Assume that management wants to have an

operating income of Rs 14,000.

How many pairs of Chairs must be sold?

(Rs84,000 + Rs14,000) Rs 28 = 3,500

What sales are needed to achieve this income?

(Rs84,000 + Rs14,000) 40% = Rs245,000


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Alternative Fixed/Variable CostStructures Example


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Structures Example

What is the new contribution margin?

Decrease the price they charge from Rs32 to Rs25 and

charge an annual administrative fee of Rs30,000.

Suppose that the factory the Chairs Shop is using to

obtain the merchandise offers the following:

Alternative Fixed/Variable Cost StructuresExample


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Example

Rs70(Rs25 + Rs10) = Rs35

Contribution margin increases from Rs28 to Rs35.

What is the contribution margin percentage?

Rs35 Rs70 = 50%

What are the new fixed costs?

Rs84,000 + Rs30,000 = Rs114,000



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Example

Management questions what sales volume

would yield an identical operating income

regardless of the arrangement.28x84,000 = 35x114,000

114,00084,000 = 35x28x

7x = 30,000

x = 4,286 pairs of Chairs



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Example

Cost with existing arrangement

= Cost with new arrangement

.60x + 84,000 = .50x + 114,000

.10x = Rs30,000x = Rs300,000

(Rs300,000 .40)Rs 84,000 = Rs36,000

(Rs300,000 .50)Rs114,000 = Rs36,000


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Application Of Marginal Costing


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1. Cost Control

2. Profit planning

3. Evaluation of performance

4. Decision Making Fixation of selling Price

Key or limiting factors

Make or Buy Decision

Application Of Marginal Costing


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Selection of suitable product mixEffect of change in price

Maintained a desired level of Profit

Alternative methods of ProductionDiversification of Products

Closing down of activities

Alternative course of actionLevel of activity planning

pp g g

Typical Relevant Costing Decisions


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One-Time-Only Special Order (Pricing)

Make or Buy Decisions (Outsourcing)

Opportunity Costs

Product Mix Decisions under Capacity Constraints

Add or Drop a Product Line or Customer

Equipment Replacement Decisions

One-Time-Only Special Order


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Without With

Order Order Difference

Volume 30,000 35,000 5,000

Relevant revenues Rs600,000 Rs655,000 Rs55,000

Relevant costs:

Variable

manufacturing (225,000) (262,500) (37,500)

Incremental income Rs17,500

Outsourcing and Make/Buy Decisions


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Make Buy Difference

Relevant costs:

Outside cost of parts Rs160,000 Rs160,000

Direct materials Rs80,000 (80,000)

Direct labour 10,000 (10,000)Variable overhead 40,000 (40,000)

Fixed purchasing,

receiving and

setup overhead 20,000 (20,000)

Incremental difference

In favour of making Rs10,000

Outsourcing and Opportunity Costs


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Make Buy

Relevant cost to make Rs150,000

Relevant cost to buy Rs 160,000

Opportunity cost:

Profit forgone because

Capacity cannot be used

to make another product 25,000

Total relevant costs Rs175,000 Rs160,000

Opportunity cost considers the profits lost by not

following the next best alternative course of action

Product Mix Decisions Under Constraint


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Snowmobile Boat

Engine Engine

Contribution margin per unit Rs240 Rs375

Machine hours required per unit 2 5

Contribution margin permachine hour Rs120 Rs75

If machine hours are constrained, maximize income

by first producing as many snowmobile engines ascan be sold and then shift production to boat engines


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Documents

Cost Accounting Fullprocess 130704003351 Phpapp02