Cost & Mgmt Accounting

7/28/2019 Cost & Mgmt Accounting

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Cost & ManagementAccounting

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

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Cost Accounting


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FORM OF BUSINESS

Trading

Service

Manufacturing

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TRADING BUSINESS TransactionsMr. Afaq commenced business with cash investment of Rs75,000.

Paid Shop Rent for three months at Rs 5.000 per month.

Bought Furniture for Rs 12,000 cash.

Purchased goods for Rs 2,000 cash.

Purchased goods from AAA Store Rs 5,000 & paid cash.

Sold goods for Rs 7,000 cash.

Sold merchandise to HHH Traders for Rs 13,000.

Paid advertising expenses Rs 500.

Paid Cash Rs 8,000 to J.J. Store on account.

Purchased Equipment from Modern Equipment HouseRs 15,000. The payment of Rs 3,000 was made & Afaqhas promised to pay the remaining amount in a week.

Received Cash from Noble Store Rs 22,000.

Withdrew cash for personal use Rs 2,000.

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SERVICE BUSINESS TransactionsJamil opened a Training Center with cash investment of Rs 95,000

Paid Office Rent for six months at Rs 5.000 per month. Purchased Furniture Rs 12,000 on account from J.J. Store.

Purchased Office Supplies (Stationery) for Rs 2,000 oncredit from P Stationers.

Rendered services and collected cash Rs 24,000.

Paid Electricity Bill for the month Rs 1,500 Rendered services and sent bill to Noble Traders Rs 47,000

Paid Cash Rs 8,000 to J.J. Store on account. Purchased Equipment from Modern Equipment House Rs

15,000. The payment of Rs 3,000 was made and Mr. Afaqhas promised to pay the remaining amount in a week.

Received Cash from Noble Traders Rs 22,000.

Withdrew cash for personal use Rs 2,000.

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MANUFACTURING TransactionsDuring the month, the following transactions took place in City Sugar Mill.

Purchased Materials on a/c from Arshad Co. Rs 35,000. Materials issued to production Rs 29,000 & Supplies 5,000

Freight paid in cash for material received Rs 1,000.

Materials returned to the vendor during the month Rs 600.

Payroll for the period was distributed as: direct labour

Rs 38,000, indirect labour balance of payroll. Employee payroll deductions: Income tax 10% & EOBI 1%

Employers contribution: Social security 6% and EOBI 5%.

Depreciation: building Rs 4,000, machinery Rs 6,000

Factory overhead charged at Rs 30 per direct labour hour. Insurance expired Rs 2,000.

Factory overhead charged to production at 2.40 per directlabour hour. 20,000 direct labour hours were used.

Cost of goods manufactured was Rs 89,000.

Goods costing Rs 70,000 were sold on a/c for Rs 120,000.6


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What is Cost Accounting?A systematic, disciplined study to

analyze and ascertain cost ofproduct, service or idea.

Control of cost resulting reductionof cost by identifying theabnormal losses and leakage of

material usage, wastage oflabour time and overhead cost.

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Cost DefinitionCommonly used as an amount

require to buy something or topay for service.

According to cost accounting,cost is defined with reference toclassification, such as by

function, Behavior, Time, attribute& Control etc.

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Cost Classifications

By Nature orFunction

Production

Selling & Distribution

Administration

FinanceByBehaviour

Variable

Fixed

Semi Variable Stepped

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Cost ClassificationsBy Time Period Cost

Product Cost

ByManagement

Controllable Cost

Non-ControllableCost

By AttributeDirect Cost

Indirect Cost

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Cost of Production: Elements

Direct Material = Variable

Direct Labour = Variable

Factory Overhead = Variable

& Fixed

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Direct Material - VariableThe material that forms an integral part of the finished goods and that can

be included directly in calculating the cost of the product .

Raw Material

Raw Cotton

Gypsum Clay

Iron Ore

Wheat

Oil Seed

Bamboo Pulp

Crude Oil

Finished Product

Cotton Bales

Cement

Iron & Steel

Flour

Oil & Ghee

Paper

Petrol, Diesel &

Gasoline

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Direct Material Direct Material Purchased from supplier and

placed to Store (Material Debit & A/Payable Credit)

Defective Material Returns to Supplier

(A/Payable Debit & Material Credit)

Direct Material issued to production( W. I. Process Debit & Material Credit)

Excess Material Returns back to Store from

Production (Material Debit & W.I. Process Credit)

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Direct Material Cost - ComputationRs.

Material Inventory Jan.1 4,000

Material Purchase 86,000

90,000 Material Inventory Jan. 31 6,000

Cost of Material Consumed 84,000

Material Requisition (Evidence)

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Direct Labour - VariableThe Labour is applied directly to the materials comprising the

finished product.

Direct Labour

Machine Operator

Car Driver

Faculty

Telephone Operator

Cashier

Pilot

Advocate

Chemist

Industry

Factory Plant

Rent a Car

University

P.T.C.L.

Bank

Airline

Solicitors firm

Pharmaceutical

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Direct Labour Cost

Labour wage

= No. of Hours worked (x) wage per hour

4,000 Hours (x) 50 =Rs 200,000

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Factory OverheadVariable & Fixed Indirect Labour

Depreciation

Insurance Factory

Repair & Maintenance

Indirect Material - Supplies Fuel

Electric & Power

Telephone

Fixed

Fixed

Fixed

Variable

Variable Variable

Semi Variable

Semi Variable

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Statement of Cost of Goods Manufactured

Cost of Direct Material Consumed

Direct Labour Cost incurred (4000 Hr) Factory Overhead Applied (@ 30)

Total Manufacturing Cost

Work in Process Jan.1

Work in Process Jan.31

Cost of goods manufactured

84,000

200,000120,000

404,000

24,000

428,000

32,000

396,000

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Statement of Cost of Goods Sold Finished Goods Jan. 1

Cost of goods manufactured(As per statement)

Finished Goods Jan. 31

Cost of goods sold

Adjust. of under /over applied FOH

Cost of goods sold (Adjusted)

Rs 60,000

396,000

456,000

50,000

406,000

- Nil -

406,000

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Statement of Comprehensive Income Sales Revenue

Cost of goods sold(As per statement)

Gross Profit

Selling & Distribution Exp.Administrative Exp

Net Income

Rs 650,000

(406,000)

144,000

40,000 50,000

90,000

54,000

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Costing

Documents


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Material Control - (Store Department)

Functions: To Raise Material Requirements

Issue Material Purchase Requisition TO Purchase Deptt

To Receive Goods from Suppliers To prepare Goods Received Note

To Place Goods for quick Retrieval Proper management for issuance to production depttr.

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Functions: To Issue Material to Production Deptt

Honor the Material Requisition

Duly Signed by the Authority

To Maintain Record of Material Receipt,

Issue and Balance ( Perpetual InventorySystem) FIFO, LIFO or AVERAGE Method

(BIN CARD)

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ORDERING COST

Costs relates to Placing order till receipt

of Physical Material,

Salary & allowances etc. of Purchase Deptt. Depreciation - fixed assets Pur. Deptt.

Tel. fax. Telex charges

Advertisement

Stationery AND

FREIGHT24



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CARRYING/ HOLDING COST

Costs relates to Store Department

Salary & allowances etc. of Store Deptt.

Depreciation - fixed assets Store Utilities Charges

Stationery AND

INTEREST ON BANK FINANCE

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Scrap Material Material Issued to Production

Work in Process (Debit) & Material (Credit)

Material Return back to Store Same Condition

Material (Debit) & Work in Process (Credit)

Material Return back to Store Scrap (Less Value)

Scrap Material (Debit) , F.O.H Loss in value (Debit)

& Work in Process (Credit)

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Spoiled Work Material issued to Production, Labour cost of

production and F.O.Head applied to Production W.I.P. Material (Debit) and Material (Credit)

W.I.P. Labour (Debit) and Payroll (Credit)

W.I.P. FOH (Debit) and FOH Appiied (Credit)

Defective Goods / Work returned back to Store

General Work Loss charged to Production (FOH)

Specific Order Loss charged to Order

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Documents - Materials Material Requision

Prepared by: Production Department

Issued to: Store Department

Purpose: Request for issuance of Mterial

Nature: Internal Document Simple format

Purchase Requisition

Prepared by: Store Department

Issued to: Purchase Department Purpose: Request for Purchase of Material

Nature: Internal Document Simple format

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Documents - Materials Purchase Order

Prepared by: Purchase Department

Issued to: Vendor (Supplier of Goods etc.)

Purpose: Order for purchase of material

Nature: External DocumentFormal Letter Head

Invoice

Prepared by: Vendor

Issued to: Accounts Department Purpose: To demand payment of the material sold

Nature: Standard Format

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Documents - Materials Debit Note

Prepared by: Store Department

Issued to: Vendor

Purpose: To inform about quantity of goods being return

Nature: Formal

Credit Note

Prepared by: Vendor

Issued to: Accounts Department

Purpose: Proof of the goods received and

purchaser will not have to pay for them.

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Documents Labour Cost Payroll Salary sheet

Prepared by: Accounts & HR Department

Base Wage

Payment Period: Attendance (Time In Out)

Overtime: Premium % Downtime: Record from Production deptt.

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Documents Factory Overhead Budgeted Cost Variable & Fixed

Past Record, Forecast for future.

Activities: To be Attended

Cost Incurred Actual

Payment Vouchers Bills etc.

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Costing Systems


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Standard Costing

Flour Ghee

Cement

Automobiles

Computer

Toys

Office Furniture

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Cloth Crockery

Electronic Goods

Books etc

School & College Furniture

Readymade Clothing

Electric Fittings etc.


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Job Order Costing

Tailoring

Vehicle Repairing

Specific Furniture Tool Repairing

Special Purpose Vehicle Draper

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Batch Costing

Medicine - Limited LIfe

Paint - Various colours of one product

Newspaper News for Specific Areas

Confectionery - Flavor

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Service Costing Educational Institutions

Auditors

Airlines Shipping Companies

Insurance

Solicitors

Engineering

Consultants

Transportation Hotels

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Contract Costing

Roads

Motorways

Bridge

Plaza

Societies, Housing Schemes

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Managerial Accounting


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Managerial Accounting

It refers to the process of

Identifying, Measuring,Analyzing, Interpreting and

communicating information in

pursuit of an organizations goal.

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Management Functions

Planning

Controlling

Organizing

Decision Making

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PlanningA process of making Plan for

future course of action. Examples:

Budgets (Production, Procurement etc.)

Product Pricing

Other Plans

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Which product or services should be sold


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Which product or services should be sold

Where should they be sold

What are the responsibilities of each management

position Who should be hired to fill these positions

How much does it cost to manufactdure a product or

offer a service. What is the most profitable combination of products

or services

What will happen to profit if selling price are

increase or decrease.

How much operating capacity is needed in the form

of people, fund, inventory and fixed assets

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Product: Pricing Model


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Product: Pricing Model Material ( 3 Kg. @ Rs 100 per Kg.) = 300

Labour (4 Hours @ Rs 200 per hr) 800 Factory overhead ( 4 hrs x Rs150*) 600

Total Production Cost 1,700

Selling & Distribution Exp (20%) 340Administrative & General Exp (10%) 170

Finance Cost (15% of Rs 2,210) 332

Total Product Cost 2,542 Profit on Product (20%) 508

Price of the Product (Ex- Sales Tax) 3,050

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C t l


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C o n t r o l

Performance Evaluation is an essentialmanagerial step needed to identify slack

areas and reward for good results.

Controlling with managerial accounting is

defined as the comparison of actual

results with the planned performance(standards) and to take corrective

measures to Guard against recurrence in

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Develop a Product or Service

Prepare Cost Standard

Material, Labour and Overhead

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Organizing

Plans are only piece of papers until theyare implemented.

The Organizing function provides the

structure within which management willwork to implement the plans.

It identifies the work to be performed, the

Persons responsible for the variousactivities and the relationship exists

between the different parts of the entity.

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Directing

Deals with day to day management ofthe entity.

Actions, Decision Making,

Communication and leadership arecombined in the Directing

Functions.

Problems are solved, questions are

answered, disagreements are resolved.

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Decision Making

Management decision making

regardless of the level with in the

organization are the time

dimension involved is concerned

with the selection betweenalternatives.

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Which Product to Produce and to stop

How to Produce them Make or Buy How to Sale them Method feasible

What Prices to charge Refer Market

From where to buy Raw Material Cost

When to Replace Equipment CBA

How to allocate scare resources Max. Whether to expand production capacity

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Make or Buy Decision

Shut down Operation

Price for one off order Special Offer

Product need further Processing

or should be sold now

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Good Luck