UNIT 1

 UNIT 1 

Synopsis:

1.cost accounting - introduction, objectives, functions, cost sheet, cost concepts, classification
2. Management accounting - Nature, scope, functions
3. distinguish between  financial accounting, cost accounting, and management accounting
4.methods of costing - job, batch costing

1Q) Define Cost  Accounting. Briefly explain the objectives and scope of cost accounting.(10M)

Introduction: 

Cost: Cost is the amount incurred for the production and distribution of the product. It does not include income tax, interest on capital, preliminary expenses, dividends, goodwill, bad debts etc.

 Cost Accounting: Recording of cost-related information.

Costing: Costing is the method or technique with the help of which cost can be ascertained.

Definition:

Cost accounting is defined as a system of recording in accounts the materials used and labour employed in the manufacture of a certain commodity/ on a particular job.

Objectives of Cost Accounting: The following are the main objectives of Cost Accounting :- 

(a) To ascertain the Costs under different situations using different techniques and systems of costing (b) To determine the selling prices under different circumstances

 (c) To determine and control efficiency by setting standards for Materials, Labour and Overheads 

(d) To determine the value of closing inventory for preparing financial statements of the concern

 (e) To provide a basis for operating policies which may be determination of Cost Volume relationship, whether to close or operate at a loss, whether to manufacture or buy from market, whether to continue the existing method of production or to replace it by a more improved method of production....etc. 

(f) To achieve real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product

Scope or functions of Cost Accounting The scope of Cost Accounting is very wide and includes the following:- 

(a) Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of product / services rendered with reasonable degree of accuracy.

 (b) Cost Accounting: It is the process of Accounting for Cost which begins with recording of expenditure and ends with preparation of statistical data. 

(c) Analysis of Cost: It is the process of locating the factors responsible for difference in actual cost from the budgeted costs and fixing up of responsibility for differences in cost. It provides better cost management and helps in taking strategic decisions. 

(d) Cost Control: It is the process of regulating the action so as to keep the element of cost within the set parameters. 

(e) Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily prepared for use by the management at different levels. Cost reports helps in planning and control, performance appraisal and managerial decision making. 

(f) Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the adherence to the Cost Accounting plan. Its purpose is not only to ensure the arithmetic accuracy of cost records but also to see the principles and rules have been applied correctly.

2Q) Elements of cost (5M)

                The various elements of cost can be illustrated by the following chart.

Material: The substance from which the product is made is called material. It can be direct as well as indirect.

Direct material: Direct materials are those materials which can be identified in the product and can be conveniently measured and directly charged to the product. Thus, these materials directly enter production and form a part of the finished products.

Examples: Clay in bricks, timber in furniture making, and bricks in building a house.

Indirect material: Indirect materials are those materials that cannot be traced as part of the product. Indirect materials include fuel, and oil required for operating and maintaining plant and machinery.

Examples: nuts and bolts, tools, etc.

Labour: In order to convert materials into finished products, human effort, is required, such an effort is known as labor. Labour can be direct, as well as indirect·

(i) Direct labour: Labour that is directly involved in the production of goods & services and which can be conveniently allocated to a Job, process/commodity unit.

Example: wages paid to the driver, conductor, etc, of a bus in the transport office.

(ii) indirect labour: Indirect labour is labour that is not directly engaged in the production of goods & services but which indirectly helps the direct labour engaged in production.

Example: Mechanics, supervisors, cleaners

(iii) Other Expenses: These may be classified as direct and indirect

(i) Direct Expenses: These are expenses that can be directly, conveniently & wholly identified with a Job, process / productive expenses.

Example: Hire of special machinery required for a particular expense.

(ii) Indirect expenses: These Expenses cannot be directly, conveniently & wholly allocated to cost centers.

Example: Rent, lighting, Insurance charges, etc.

Overheads:  Any expenditure over& above prime cost is known as overhead. In general terms, overheads comprise all expenditure incurred for/in connection with the general org. of the whole/ part of the undertaking that is the cost of operating supplies & services used by the undertaking including the maintenance of capital assets.

           Overhead may be defined as " The cost of indirect material, indirect Labour & such other expenses including services as cannot conveniently be charged to a specific unit. The major business functions are as follows:

 1. Production overhead

 2. administration overheads

 3. selling overheads

 4. distribution overheads

1. Production overheads: These costs are also known as manufacturing overhead, factory overheads/works overheads. They are aggregate of the indirect expenses of operating the production

division of concern and include all indirect expenses incurred

to convert the raw material into the finished product.

Examples: factory power, cotton waste, consumable stores, depreciation and insurance of plant and machinery and factory building and maintenance, indirect wages,etc

(2) Administration overheads: The other term used is general/ office overheads. These include all such Expenses connected with the direction, control, and administration functions of the business excluding those connected with the selling distribution functions.

Examples: office rent and rates, office lighting & heating, office salaries, audit fees, postage & telephone, printing and stationery, legal charges, depreciation of office building & machinery, etc.

(3) Selling overheads: This type of expenditure is incurred in promoting sales & retaining customers. It is that portion of the marketing cost, is incurred in serving orders.

Example: Advertisement, salesmen salaries, brokerage and commission, bad debts, showroom expenses, traveling expenses:

(4) Distribution overheads: The expenditure incurred from the time Product is completed in the factory until it reaches The market or customer is classified as distribution overheads.

Examples: Packing & shipping expenses, carriage outwards, warehousing costs, delivery van costs, etc.

3Q)Cost sheet  (5m)

    A cost sheet is a document that provides for the assembly of the estimated detailed cost in respect of a cost center or a cost unit. It is a detailed statement of the elements of cost arranged in a logical order under different heads. It is prepared to show the detailed cost of the output for a certain period. It is only a memorandum statement and does not form part of the double-entry system. Additional columns can be provided to indicate the cost per unit at different stages of production or to enable a comparison to be made of the current costs with that of historical costs.

The main advantages of a cost sheet are:

1. it indicates the break-up of the total cost by elements, i.e. material, labour, overheads, etc.
2. it discloses the total cost and cost per unit of the units produced
3. it facilitates comparison
4. it helps the management in fixing  selling prices
5. it acts as a guide to the management and helps in formulating production policy
6. it enables keeping control over the cost of production
7. it helps the management in submitting quotations or preparing estimates for tenders
8. it is a simple and useful medium of communication of costs to various levels of management.

4Q) JOB COSTING & BATCH COSTING: (10M)

JOB COSTING: Job costing is a system of costing in which costs are ascertained in terms of a specific job that is not necessarily similar to another job. The unit of cost in this method is a job / a specific work order. A job is a specific order for work that is usually carried out within the factory.

         

        Job costing involves a considerable amount of recording & analysis. It requires reliable production control records which must show material issued to various jobs, labor time spent on different jobs & appropriate allocation of overheads. Each job passes through production cost centers. A separate job cost sheet is maintained for each job/product in which all expenses of material, labor, & overhead are recorded. The cost of completing a job /manufacturing a product is found out.

Nature & suitability of job costing :
       
            Many organizations manufacture products / provide services on receipt of a specific order from a customer as per his requirements. In such a case, no two jobs are necessarily alike & they don't pass through the same manufacturing process. Different jobs require a different amount of material, labor, and skills. Thus, job costing is used when products/ services are dissimilar.
       

          The distinguishing features of a situation where the job costing method is applied are as follows:

1. The job is undertaken for a specific customer & not for mass production.
2. Each job is unique. It has its own characteristics & needs special treatment. No two jobs are necessarily alike.
3. Each job doesn't pass through the same manufacturing process. The nature of the job determines the departments through which the job has been produced.
4. Cost can be identified with a specific job/order.
5. The job can be identified at each stage of production, from start to completion of the job.
6. The work-in-progress differs from time to time depending upon the no.of jobs on hand.
7. The time required to complete a job is comparatively short compared to a contract.
      

          Thus, job costing is generally used in the following types of industries :
(a) printing, where each print requires a specific type of paper, ink, design
(b)Furniture, where it is manufactured as per the specific requirements of a customer.
(c)Repair works
(d)shipbuilders,
(e)Interior decoration, advertising, and other professional services, where each job needs special treatment.

Objectives : 

The following are the main objectives of job costing.
1. To ascertain the cost of each individual job/order.
2. To determine the profit /loss of each job.
3. To help the management in the valuation of work-in-progress.
4. To help in the estimation of the cost of an order / a job so as to quote a price to the prospective customer.
5. To serve as a tool of cost control by comparing the actual cost with the estimated cost.

Advantages:  The advantages of job costing are as follows:

1. It helps in ascertaining the cost of each job separately.

2. It provides a detailed analysis of various elements of cost which enables management to identify inefficiencies in operations.

3. It helps to distinguish profitable jobs from unprofitable jobs.

4. It helps in the valuation of uncompleted jobs.

5. Wastage, spoilage & defective work can be reported for specific jobs enabling the management to take corrective action.

BATCH COSTING:

 Batch costing is a method of costing that is used in industries where production is carried out in batches. It is generally applied in pharmaceutical industries, snack food industries, toys manufacturing industries, and spare parts manufacturing industries. 

Meaning:

Batch costing is a type of specific order costing where articles are manufactured in predetermined lots, known as a batch. This method is used to ascertain the cost & profit of specific batches/ units in a specific batch. 

Features:

• Each batch is treated as a cost unit
• All costs are accumulated & ascertained for each batch
• A separate batch cost sheet is used for each batch & is assigned a certain number by which the batch is identified 
• The cost per unit is ascertained by dividing the total cost of a batch by the number of items produced in that batch. 

Economic batch quantity:

 Economic batch quantity (EBQ)refers to the optimum quantity batch which should be produced at a point in time so that the setup & processing costs & carrying costs are together optimized. 

               Formula: √2AS÷C

Whereas,

    A= Annual demand

    S= Set up the cost per batch

    C= Carrying cost per unit per year 

Q) DIFFERENCES BETWEEN JOB & BATCH COSTING:

BASIS FOR COMPARISON	JOB COSTING	BATCH COSTING
Meaning	Job costing refers to a specific costing method, used when the production/work is carried out according to the requirements of customers	Batch costing is a form of job costing, that is applied when the articles are produced in batches, i.e. a group of like units are produced
Production	As per customer specification	Mass production
Product	Products have an independent identity, as each job is distinct from other jobs	Products do not lose their individual identity, as they are manufactured in a continuum
Cost unit	Executed Job	Batch
Cost ascertainment	On the completion of each job	Ascertained for the whole batch and then per unit cost is determined

 

5Q) COST CONCEPTS:

   cost: The amount of expenditure incurred on / attributable to a specified thing / activity.

    costs may be classified on the basis of decision making purposes for which they are put to use in the following ways:

1. fixed cost
2. variable cost
3. historical cost
4. replacement cost
5. opportunity cost
6. out of pocket cost
7. sunk cost
8. incremental cost
9. marginal cost

1. fixed cost: costs which remain fixed and not change in proportion to the volume of output are known as fixed cost.

Example: Rent , insurance of factory building etc. remain the same for different levels of production.

2. variable cost: cost which change in direct proportion to the volume of output are known as variable cost.

Example: cost of direct material, direct labour etc.

3. historical cost: historical cost is the original cost of an asset, as recorded in an entity's accounting records. Many of the transactions recorded in an organisation's accounting records are stated at their historical cost. According to the accounting standards, historical costs require some adjustment as time passes. Depreciation expense is recorded  for long term assets, there by reducing their recorded value over their estimated useful lives.

4. Replacement cost: It is the price that an entity would pay to replace an existing asset at current market prices with a similar asset. 

5. Opportunity cost: It is the value of the benefit sacrificed in favor of choosing a particular alternative . It is the cost of the best alternative foregone. If an owned building, for example , is proposed to be used for a new project, the likely revenue which the building could fetch, when rented out, is the opportunity cost. It should be considered while evaluating the profitability of the project.

6. Out-Of-Pocket Cost:  It is the cost which involves current / future expenditure / out lay , based on managerial decisions. For Example, a company has its own trucks of transporting goods from one place to another. It seeks to replace these by employing public carriers of goods. while making this decision management can ignore depreciation, but not the out of pocket cost in the present situation, i.e. fuel, salary to drivers and maintenance paid in cash.

7. sunk cost: A sunk cost refers to money that has already been spent and cannot be recovered. A manufacturing firm, for example, may have a number of sunk costs. Such as the cost of machinery, equipment  and the lease expense on the factory.

8. Incremental cost: The incremental costs are the additions to costs resulting from a change in the nature and level of business activity.

Example: Changing the product line/ changing the level of product output. buying additional / new materials, Hiring extra labour, adding new machines or replacing existing ones.

9. Marginal cost: The amount of any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit.

Example: the cost of production of  1000 units of radios is Rs. 2 lakhs and that of 1001 units is Rs. 200150 the marginal cost is Rs. 150(i.e. Rs.200150-200000)

6Q) Management accounting - Nature, scope, functions(10M)

Management accounting is comprised of two words' management and accounting'. It is the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such away that is helpful to the management in formation of policy, control of execution and appreciation of effectiveness. It is that system of accounting which helps management  in carrying out its functions more efficiently.

Definition:

According to Robert N. Anthony - management accounting is concerned with accounting information that is useful to management.

Nature or characteristics of management accounting:

 The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics  of management accounting.

1. providing accounting information
2. cause and effect analysis
3. use of special techniques and concepts
4. taking important decisions
5. achieving of objectives
6. no fixed norms followed
7. increase in efficiency
8. supplies information and not decisions
9. concerned with forecasting

Scope of management accounting:

Management accounting is a new approach to accounting. It provides techniques for the interpretation of accounting data. It also helps in developing realistic approach to future course of action. The main aim is to help management in its functions of planning, directing and controlling are of a great significance and form the scope of this subject.

1. financial accounting
2. cost accounting
3. financial management
4. budget and forecasting
5. inventory control
6. reporting to management
7. interpretation of data
8. control procedures and methods
9. internal audit
10. tax accounting

Functions of management accounting:

      

          Management accounting is a part of accounting. It has developed out of the need for making more and more use of accounting for taking managerial decisions. Management accounting is assigned the functions of classifying presenting and interpreting data in such away that it helps management in controlling and running the enterprise in an efficient and economical manner. Some of the functions of management accounting are as follows.

1. planning and forecasting
2. modification of data 
3. financial analysis and interpretation
4. facilitates managerial control
5. communication
6. use of qualitative information
7. co ordinating
8. helpful in taking strategic decisions
9. supplying information to various levels of management