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Theoritical Concepts in Cost Accounting

Theoritical Concepts in Cost Accounting

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Published by: aman_arora on Jun 06, 2009
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05/11/2014

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PGP/SS/07-09 Saurabh Jain
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENTMANAGEMENT ACCOUNTING – TRIMESTER 1THEORITICAL CONCEPTS IN COST ACCOUNTINGCHAPTER 1: INVENTORY COSTING1. Introduction
It is the systematic control over the procurement, storage and usage of materials.Operations:a. Purchasing of materialsb. Receiving of materialsc. Inspection of materialsd. Storage of materialse. Issuance of materialsf. Maintenance of inventory recordsg. Stock audit
2. Inventory systems
a. Periodic Inventory SystemA method of recording stores balances after every receipt and issue of materials or inventory found at the end of the accounting period. The cost of material = total value ofinventory purchased during the period + value of inventory in the beginning of theperiod – value of inventory in the end of the period. No accounting is done for shortages,losses, theft & wastages.b. Perpetual Inventory System or Automatic Inventory SystemA system of recording stores balances which reflects the physical movement of stocks &their current balances. The objective is to make available details about the quantity andvalue of stock of each item at all times.
CHAPTER 2: BUDGETARY CONTROL1. Introduction
A budget is a plan of operations. The various uses of budgetary control are:a. Economical use of capital resourcesb. Co-ordinationc. Reduction of variationsd. Uniformity
 
PGP/SS/07-09 Saurabh Jain
2. Methods of Budgeting/Budgets
a. Fixed BudgetA budget which is prepared on the basis of a standard or fixed level of activity is a fixedbudget i.e. it does not change with a change in the level of activity and is therefore notwidely practiced because it does not give a true assessment of the performance &position of the company.b. Flexible BudgetA budget which is prepared for any level of activity. It considers fixed, variable and semi-variable elements of cost. It is desirable when:(1) Sales are unpredictable(2) Venture is a new one(3) Shortage of labour etc.
3. Performance Budgeting
It is the evaluation of the performance of organization in context of objectives. It is doneby fixing responsibility of the each executive in organization and reviewing it.Features:a. Prepared at each managerial level.b. It is continousc. It involves regular reporting
4. Zero Base Budgeting (ZBB)
a. It examines a programme or function from scratch.Assumption
Nothing is to be allowed simply because it was being done earlier.b. Steps of ZBB:(1) Determination of objectives(2) Determination of scope (to which ZBB is to be introduced)(3) Development of decision units.(4) Decision package must be made (with questions on how decision will be taken andreviewed)(5) Rank the decisions and calculate costsc. Advantages of ZBB:(1) Systematic way to evaluate(2) Identify areas of wasteful expenditures(3) Links budget with corporate objectives
CHAPTER 3: MARGINAL COSTING1. Introduction
Overheads:a. Fixed (remain fixed per unit of time)b. Variable (remain constant per unit of output)
 
PGP/SS/07-09 Saurabh JainWith an increase or decrease in production/output, fixed overheads remain constantwhile variable overheads changes.Thus, Fixed overheads should not be allocated to each individual department (i.e.apportion to production), rather they should be charged against the total funds arisingout of excess of selling price over total variable cost. This concept is known as MarginalCosting.It is the amount at any given volume of output – by which aggregate costs change if thevolume of output increases or decreases by one unit.Marginal Cost = (Total Cost – Fixed Cost) OR (Direct material + direct labour + other variable costs)
2. Concepts
a. Marginal Costing and Direct CostingSome accountants say direct costs = variable costs but Electricity, Rent etc. are directcosts but not variable for one product.b. Marginal Costing and Differential Costing(1) Differential Cost – Net increase of decrease in total cost resulting from a variation inproduction. Here, fixed costs may also get affected besides the variable costs. (Whencost increases, it is known as Incremental Costs whereas when cost decreases, it is knownas Decremental cost). Under this, costs of various alternatives are compared with thedifferent revenues and decisions are taken on the basis of the maximum net gain. It helpswhile checking the viability of different projects.(2) Marginal Costing – Under this, fixed cost are also considered at some stage, itassumes the form of differential costing.c. Marginal Costing and Absorption CostingUnder AC
Full costs i.e. Fixed Cost + Variable Cost are charged to productionUnder MC
Only Variable costs are charged to production, fixed costs are ignored.d. Differences
BASIS ABSORPTION COSTING MARGINAL COSTING
Valuation of stocks Stocks of work-in-progress offinished goods are valuedat works cost (includingfixed work overheads) andtotal cost of production(including fixed work overheads and officeoverheads respectively)Result: - Undervaluation ofstocks.The two stocks are valuedat Marginal Costing.Absorption of Overheads All variable and fixedoverheads are absorbed toproduction.Actual fixed overheads arewholly transferred to costingprofit and loss account.

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