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Accounting may be broadly classified into two categories – accounting which is
meant to serve all parties external to the operating responsibility of the firms and the
accounting which is designed to serve internal parties who take care of the operational needs
of the firm. The first category which is conventionally referred to as financial accounting,
looks to the interest of those who have primarily a financial stake in the organization’s affairs
– creditors, investors, employees etc. n the other hand the second category of accounting is
primarily concerned with providing information relating to the conduct of the various aspects
of a business like cost or profit associated with some portions of business operations to the
internal parties viz., management. This category of accounting is called as !anagement
"n order to perform the primary task of decision making managers of business
enterprises need information about the past, present and future in the functional areas of
management such as personnel, finance, marketing and production. #ight decision making
has to be based on $uantitative and $ualitative information. The management thus constantly
needs accounting information to base its decisions upon. Thus management accounting
provides the information needed by management personnel.
The "nstitute of %hartered Accountants of &ngland has defined management
accounting as' (Any form of accounting which enables a business to be conducted more
efficiently can be regarded as !anagement Accounting).
As per American Accounting Association, (!anagement Accounting includes the
methods and concepts necessary for effective planning, for choosing among alternative
business actions and for control through the evaluation and interpretation of performances.
As per "nstitute of %hartered Accountants of "ndia, (*uch of its techni$ues and
procedures by which accounting mainly seeks to aid the management collectively have come
to be known as management accounting).
The %hartered "nstitute of !anagement Accounts +,-. defines management
accounting as under'
(!anagement accounting is an integral part of management concerned with identifying,
presenting and interpreting information used for'
/. 0ormulating strategy
1. 2lanning and controlling activities
3. 4ecision making
5. ptimizing the use of resources
6. 4isclosures to shareholders and others external to the entity
7. 4isclosure to employees
8. *afeguarding assets.)
Nat"e o% management acco"nt#ng:
!anagerial personnel are entrusted with authority and responsibility of operating business
activities. !anagement accounting provides information to the personnel are entrusted with
authority and responsibility of operating business activities. !anagement accounting
provides information to the managerial personnel at three levels of management viz., top,
middle and lower levels of management. "t provides the management with the tools for an
analysis of its administrative action that can lay suitable emphasis on the possible alternatives
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in terms of costs, prices and profits. The decisions made by management are based on
$uantitative information and common sense, foresight, knowledge and experience.
!anagement accounting includes financial accounting information and raw material from
several other disciplines such as costing, statistics, mathematics, political science, sociology,
psychology, management economics, law etc. 9ith all these data he can ensure optimum
utilization of all the resources including employees by maintaining sound morale of the
employees, maximization of output and minimization of inputs, analyze the managerial
$uestions in terms of costs, revenues, profits and growth. "t is thus a highly personalized
service with the help of which management can explore and exploit business opportunities
and take sound and correct decisions. "t is not a precise science as it uses its own conventions
rather than standardized principles. Therefore the inferences drawn from the facts provided,
depends on the skill, :udgment and common sense of different management accountants.
Thus it is said that management accounting serves as a management information system
which enables the effective management of an enterprise.
4cope o% management acco"nt#ng:
!anagement accounting is a wide and diverse sub:ect. As stated earlier it includes various
branches of knowledge such as psychology, sociology, economics, laws, political science,
mathematics, statistics, finanacial accounting, cost accounting etc. "t is thus very difficult to
define its scope, as it is a dynamic and ever growing discipline of knowledge. The important
techni$ues and systems used by management accounting are briefly stated below.
a. ;istorical cost accounting' !aintenance of books of cost accounting enables to
know the actual costs incurred by the firm.
b. *tandard costing' The standard costs laid down by experts are compared with the
natural costs in order to know the deviations
c. !arginal costing' The costs are divided into fixed and variable costs which help is
making vital decisions.
d. 4ecision accounting' 4ecisions are made after studying the impact of decisions in
terms of costs, resource, profits, growth etc.
e. <udgetary control' "t is a system of controlling the cost with the help of budgets.
f. %ontrol accounting' "t includes the techni$ues such as standard costing, budgetary
control, control reports, internal check, internal audit and reports.
g. #evaluation accounting' "t is based on current costs to ensure that the investment
is intact and profits from investment are kept in mind.
h. 0inancial planning = policies' "t consists of raising the long term and short term
finance and invest it on optimum basis and enhance the profitability of the firm.
i. %apital expenditure' The large amounts of future capital expenditure and future
profits are analysed to take important decisions.
:. <reak even analysis' This is an important techni$ue which is used to analyse the
behavior of costs viz., fixed and marginal costs, indicating the level of activity at
which the total costs would e$ual the total revenue and also the margin of safety.
k. "nter>period comparison' "t is a techni$ue of comparing the present performance
with the past performance.
l. Techni$ues of forecasting' *ome techni$ues like decision tree, probability and
sensitivity analysis are used by management accountants for forecasting which
forms a base for planning.
m. perations research' "t consists of statistical and mathematical techni$ues that are
increasingly used in decision making process.
n. *tatistics' The statistical techni$ues used by management accountant are
correlation, regression, probability, time series, standard deviation, linear
programming, control charts etc.
o. ther techni$ues' ther techni$ues employed are' 0inancial reporting, data
processing, pro:ect management and appraisal, management audit, efficiency
audit, cost audit, performance budgeting, tax planning, social accounting = audit,
human resource accounting, responsibility accounting and divisional performance.
5"nct#ons o% management acco"nt#ng:
/. !odification of data' The management accounting system modifies the data furnished
by financial accounting to serve the managerial needs in such a way that the process
of classification and combination which enables to retain similarities without
eliminating dissimilarities.
1. ?alidating the data' To make reliable decisions valid data should be made available to
managers. The effectiveness of managerial function depends too much upon the
accuracy and ade$uacy of the data. "t is the function of management accounting to
present before the management the re$uired data with some sort of reasonable
accuracy and it need not be with perfect accuracy.
3. Analysis and interpretation of data' Though management accounting is concerned
with recording of business transactions, the analysis and interpretation of such data, in
analyzing and interpreting the data lies the essence of management accounting. To
discharge this function management accounting uses a number of tools like !arginal
costing, budgeting, standard costing etc.
5. %ommunicating the data' The collected and interpreted data must be communicated to
those who are interested in it or to whom it has some meaning. therwise these data
may not yield any meaningful result and the whole process of collecting, validating
and interpreting would amount to be a futile exercise. The communication of the data
should be done within a reasonable time. 4ata delayed is decision delayed and a
delayed decision may delay the prosperity of its concern. To accomplish this function
of management accounting several reports and statements are being used.
5"nct#ons o% a management acco"ntant: Although it is understood that all the functions of
management accounting are to be performed by the management accountant, the following
may be said to be the important role of the management accountant in the management of a
/. %ollection of data' The management accountant has to collect data about the
problems faced by the management through primary and secondary sources.
1. Analysis of data' After the collection of data, the management accountant has to
analyse it for the purpose of interpretation using various tools and techni$ues.
3. 2resentation of data' The management accountant is re$uired to present the data to
the management in columns and rows to facilitate proper understanding.
5. 2lanning' The management accountant assists the management in long range
planning as well as in formulation of policies of the organisation.
6. %ontrolling' The management accountant follows different techni$ues like
standard costing, budgetary control etc to ensure ade$uate control for
implementation of plans and achievement of ob:ectives.
7. #eporting' #eporting being a very important function of a management
accountant, he has to prepare different types of reports periodically and
communicated to the concerned departments to meet the re$uirements at different
levels of management for necessary action.
8. %o>ordinating' The management accountant has to co>ordinate the various
activities of the organization for the preparation of master budget and other such
@. 4ecision making' The management accountant has to assist the management in
taking realistic decisions through analysis and interpretation of data that suggests
a particular course of action with the help of various tools of management
Management acco"nt#ng &s. %#nanc#al acco"nt#ng
0inancial accounting and management accounting are two interrelated facets of the
accounting system. They are not independent of each other but they are interdependent.
0inancial accounting provides the basic data which are analysed and interpreted suitably and
in the re$uired manner by management accounting. Although there exists close relationships
between financial accounting and management accounting, distinction is always drawn
between financial accounting and management accounting since they differ in their emphasis
and approaches.
$#mens#on Management Acco"nt#ng 5#nanc#al Acco"nt#ng
/. b:ective To provide information for internal
To make periodical reports
to shareholders, creditors,
debenture holders and the
1. *tructure ?aries according to use of the
,nified structure
3. *ources of
9hatever is useful to management Aenerally accepted
accounting principles
5. Beed ptional *tatutory obligation
6. Time>orientation ;istorical and estimates of the
7. #eport entity #esponsibility centers verall organization
8. 2urpose A means to the end of assisting
&xternal reporting C
statements for outside users
@. ,sers #elatively small group' known
#elatively large group'
mostly unknown
D. "nformation
!onetary and non>monetary 2rimarily monetary
/E. "nformation
!any approximations 0ew approximations
//. #eport fre$uency ?aries with purpose, monthly and
Fuarterly and annual
/1. #eport timeliness #eports issued promptly after end
of period covered
4elay of weeks or even
/3. 2eriod of
#eports are for shorter durations.
The data is also collected for
preparing long term plans for five
or more years.
Aenerally adopts twelve
months period for reporting
financial performance.
/5. Giability
?irtually none. 0ew lawsuits but threat is
always present.
/6. #ecord
maintenance =
%osts and revenues reported by
responsibility centres or cost
#ecords maintained in the
form of personal, property
and nominal accounts.
/7. #ole of
Transcends beyond book>keeping
into the managerial process of
planning, organizing, control and
evaluating and also to different
functional areas.
Gimits the role to a book>
Management acco"nt#ng &s. cost acco"nt#ng
%osting has been defined as classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services. %ost accounting will
tell the management as to how the business has fared at each stage of operation. <ut cost
accounting will not tell them anything about the future policy to be adopted. "t is here that
management accounting differs from cost accounting. The aim of management accounting is
not to collect information as such but to utilize the information collected in order to help the
management to formulate their future policy and to make important policy decisions.
Though there is a difference between management accounting and cost accounting in
their ob:ective yet their functions are complementary in nature. !anagement accounting
depends heavily on cost data and other information derived from cost records. "n one way,
management accounting is an expansion of cost accounting. Gike cost accounting,
management accounting involves reporting at fre$uent intervals rather than at the end of a
year or half>year.
%ost accounting deals primarily with cost data. <ut management accounting involves
the consideration of both costs and revenues. "t is a broader concept than cost accounting. "t
not only reports costs but also uses them to assist management in planning possible alternate
courses of action.
%onceptually speaking management accounting is a blending together of cost
accounting, financial accounting and all aspects of financial management. "t has a wider
scope as a tool of management. <ut it is not a substitute for other accounting functions. "t is a
continuous process of reporting cost and financial data as well as other relevant information
to management.
Cost: %ost means the amount of expenditure incurred on a particular thing. %A*>/ +%ost
Accounting *tandard /, issued by the "%9A, "ndia. defines %ost as' %ost is a measurement,
in monetary terms, of the amount of resources used for the purpose of production of goods or
rendering services.
Cost#ng: %osting means the process of ascertainment of costs. %osting involves the following
steps +i. Ascertaining or collecting costs +ii. Analysing or classifying costs into basic
elements such as !aterial, Gabour, &xpenses etc. and +iii. Allocating total costs to a
Hparticular thing’ i.e. a product, a contract or a process. 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 Acco"nt#ng: The "nstitute of %ost and !anagement Accountant, &ngland +"%!A. has
defined %ost Accounting as – (the process of accounting for the costs from the point at which
expenditure incurred, to the establishment of its ultimate relationship with cost centres and
cost units. "n 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
%ost accounting is a term broader than costing. "t covers costing plus the reporting and
control of costs. Thus %ost Accounting I %osting J %ost #eporting J %ost %ontrol. %ost
accounting can be defined as the techni$ue of recording, classification, allocation, reporting
and control of costs.
O+1ect#&es o% cost acco"nt#ng:
%ost accounting has the following basic aspects or ob:ectives'
/. %osting' "t involves the following basic aspects or 6 HA’s'
a. Ascertain costs relating to a particular period,
b. Analyse or classify costs under different heads of accounts such as material,
labour, expenses etc.,
c. Allocate costs fully to the direct expenses or the specific costs such as raw
materials, labour to the relevant products, contracts or processes,
d. Apportion or distribute common costs to each product, contract or process on a
suitable basis and
e. Absorb the total expenses of a department over its products so as to finalise the
cost of each product that is then reported to the management.
1. %ost reporting' %ost reporting has the following aspects'>
a. What to report or the nature of information to be presented should be relevant
and precise.
b. Whom to report will determine the scope of the report to be submitted to the
top management.
c. When to report – daily, weekly, monthly, $uarterly or yearly etc.
d. How to report or the format will depend on the factors mentioned above. nce
the cost report is received, management can take action to control the costs.
3. %ost %ontrol' %ost control has been defined by the "%!A as (the guidance and
regulation by executive action of the costs of operating an undertaking). Thus cost
control means the control of costs by management. 0ollowing are the aspects or stages
of cost control.
a. Set targets for cost, production, profits etc. for each period.
b. Measure Actual Performance relating to cost, production profits for the period
c. Compare targets with actuals to find out the variations
d. Analyse variations, the causes for variations whether favourable or adverse are
to be investigated. 9hile adverse variations denote wastages and loses,
favourable variations may indicate the targets fixed are very low. "n both cases
the exact reasons for the variations are to be known.
e. Take action once the causes are known to eliminate avoidable losses etc.
5. ther aspects' The other aspects or ob:ectives of cost accounting are as follows'
a. 2rovide re$uired data for fixing sales price for submitting tenders, $uotations
b. Assist the management in controlling inventory for raw materials, goods in
process, finished goods, spares and consumables etc.
c. Advice management on future policies regarding expansion, growth, capital
investment etc.
d. "nstall labour incentive system for getting maximum productivity from labour
at optimum cost.
e. Advice management in eciing optimum prouct!mix( merits and demerits of
alternative courses of actions +make or buy etc"#$ introduction of automation,
mechanization, rationalization of system of production etc.
Thus the ob:ectives can be summarized as follows'
/. Ascertainment of costs
1. &stimation of costs
3. %ost control
5. %ost reduction
6. 4etermining selling price
7. 0acilitating preparation of financial and other statements
8. 2roviding basis for operating policy
Impotance an! a!&antages o% Cost Acco"nt#ng:
%ost accounting is not only important to the management and owners but also to many others
like the workers, the Aovernment, the consumers, the public at large and so on. The
advantages are as follows.
/. To the management and the owners' %ost accounting helps the management of the
concern to ascertain the cost and profitability of each individual product C serviceC
contractC processC divisionC branch separately. This also helps in valuation of the
closing stock of goods at the end of the year. "t helps the management of the concern
in controlling costs in reducing the avoidable expenditure, and minimizing wastages
and losses. "t ensures the reconciliation of %uantity of input with the $uantities 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. "t is of great help to the 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 $uote. Thus cost accounting is an invaluable
decision aid to ecision making" "t also facilitates in preparation of budgets and
implementation of budgetary control in the organization. The end result of all the
above advantages of cost accounting is maximi&ation of profits of the concern thus
benefiting the owners by increasing their net worth or the share prices, higher
dividends etc.
1. To the workers' %ost accounting has an elaborate system of assessing the performance
of workers and rewarding them suitably through incentives and bonus. The increase in
profits due to a cost accounting system also leads to higher remuneration and bonus to
the workers.
3. To the Aovernment C %onsumers C 2ublic' "n case the products are under price control,
cost accounting furnishes the data re$uired by the government for fixing fair prices.
%onsumers benefit since the prices fixed on the basis of the cost data are :ust and
reasonable and cannot be too high. "t also leads to efficiency and productivity in the
industrial sector. "t ensure optimum utilization of the scarce economic resources of the
country. %ost accounting leads to maximum profits for an organization. Baturally the
Aovernment also gains by way of more taxes on production, income and sales etc.
The higher revenue is used by the Aovernment for public welfare and economic
C#t#c#sms o% Cost acco"nt#ng:
/. 4uplication' "t is argued that cost accounting is duplication when a good financial
accounting system is already in operation. %ost accounting takes its basic data from
books of accounts and :ust rearranges it in a different way.
1. "napplicable' "n a concern producing a single product involving no complex
processes, cost accounting is inapplicable. "t is also of no use in non>profitable
organizations or in agriculture etc.
3. Bot useful for decision making' "n 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 Aovernment and the
market forces of demand and supply.
5. &xpensive and routine' A cost accounting system is $uiet expensive to install and
operate. At times the cost accounting systems become mere routing of filling the
forms and submitting standard reports. Bon>cooperation from staff also may lead to
failure of the system in many concerns.
;owever, proper planning and implementation of the cost accounting system will overcome
these criticisms and would stand null and void in view of the ob:ectives, importance and
advantages of the cost accounting system.
5"nct#ons o% Cost Acco"ntant:
The main functions of a cost accountant can be summarized as follows'
/. 4etermining cost and analyzing income' A cost accountant determines the cost of a
:ob, product or process as the case may be. ;e analyses and classifies costs according
to different cost elements, viz., materials, labour and expenses. *uch analysis enables
him to tell the management the significance of the different cost elements and fixation
of the selling prices of the products manufactured by the business. ;e advises the
management about the profitability or otherwise of each :ob, product or process.
Thus, he helps the management in maximizing business profits.
1. 2roviding cost data for planning and control' A cost accountant collects, classifies and
presents in appropriate form suitable data to the management for planning and
controlling the operations of the business. ;e makes constant endeavour to control
and reduce the cost by the following techni$ues'
a. ;e submits regular reports to the management regarding wastage of material,
idle time, idle capacity, etc. ;e identifies the causes and suggests suitable
controlling measures to prevent or reduce losses on account of these causes.
b. ;e makes product>wise or process>wise comparisons to identify non>profitable
products or processes.
c. ;e develops cost consciousness in the organization by adoption of budgetary
control and standard costing techni$ues.
d. ;e maintains an even flow of materials and at the same time prevents
unnecessary investment of materials through different material control
techni$ues e.g. A<% analysis, perpetual inventory system, materials turnover
ratios, fixation of different levels of materials etc.
e. ;e organizes various cost reduction programmes with the co>operation and co>
ordination of different departmental heads.
3. ,ndertaking special cost studies for managerial decision>making' A cost 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'
a. "ntroduction of new products, replacement of manual labour by machines etc.
b. !ake or buy decisions, replacing or repairing old machines, accepting orders
below cost, etc.
c. &xpansion plans, installation of new capital pro:ect, etc.
d. ,tilisation of idle capacity and development of a proper information system to
provide prompt and correct cost information to the management.
e. "nstallation of a cost audit system.
All types of manufacturing concerns can broadly be classified into two categories – +i. !ass>
production concerns, +ii. *pecial order concerns. !ass production concerns such as chemical
plants, flour mills, paper manufacturing, tyre and rubber companies etc., produce uniform
standard products and involve generally a continuous production process. The finished
products are the result of successive operations. n the other hand, special>order concerns
manufacture products in clearly distinguishable lots in accordance with special orders and
individual specifications. 2rinting shops, construction companies, machine tool
manufacturing, repair shops, wood>working shops etc., come in this category. "n 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. "n 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.
6o+ Cost#ng:
"n case of special>order concerns products produced or :obs undertaken are of diverse nature.
They involve materials and labour in different $uantities and entail different amounts of
overhead costs. "n such concerns it is necessary to keep a separate record of each lot of
products or :obs from the time the work on the :ob or product begins till it is completed. A
separate :ob card or sheet is maintained for each :ob or product in which all expenses of
materials, labour, overheads are entered and cost of completing a :ob or manufacturing a
product is found out. *uch a cost system is known as :ob or terminal or specific costing.
b:ectives of :ob costing'
/. "t helps in finding out the cost of production of every order and thus helps in
ascertaining profit or loss made out on its execution. The management can :udge the
profitability of each :ob and decide its future courses of action.
1. "t helps management in making more accurate estimates about the costs of similar
:obs to be executed in future on the basis of past records. The management can
conveniently and accurately determine and $uote prices for orders of a similar nature
which are in prospect.
3. "t enables management to control operational inefficiency by comparing actual costs
with the estimated ones.
A system of :ob costing should be adopted after considering the following two factors.
a. &ach order or :ob should be continuously identifiable from the raw material stage to
the stage of completion.
b. The system is very expensive because it re$uires a lot of clerical work in estimating
costs, designing and scheduling of production. "t should, therefore, be adopted when
absolutely warranted.
The following is the procedure adopted for costing purposes in a concern using :ob costing'
/. Kob order number' &very order received is allotted a certain number from a running
list maintained for this purpose. &very order or :ob will be known by its number
throughout its production process in the factory.
1. 2roduction C :ob order' A production C :ob order is a written order issued to the
manufacturing department to proceed with a :ob. "t is issued by the production
planning department on receipt of a :ob order to the foreman of the relevant
department. "nstructions to the costing department to collect particulars of costs on
execution of the :ob are also issued simultaneously. The production order is prepared
with sufficient copies for all the departmental managers or foreman who will be
re$uired to take any part in the production.
3. <ills of materials' The production and planning department also prepares a list of
materials and stores re$uired for the completion of the :ob. 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. n the same
pattern a list of tools re$uired is also prepared.
5. Kob cost card' Kob cost card or :ob cost sheet is the most important document used in
the :ob costing system. A separate card or cost sheet is maintained for each :ob in
which all expenses regarding materials, labour and overheads are recorded directly
from costing records. The method of finding out the cost of these elements in respect
of a particular order is as follows.
a. Materials' The information regarding cost of materials or stores used for a
particular :ob order can be obtained from materials or stores re$uisition slips.
"n case of large :ob orders, materials abstracts can be prepared for finding out
the total value of materials issued to different :obs.
b. (abour' The cost of labour incurred on each :ob can be ascertained with the
help of time and :ob cards. "n case of a large number of :obs, preparation of
wages abstract may considerably help in computing the amount paid as wages
for completion of specific :obs. 9ages paid for indirect labour will constitute
an item of factory overheads.
c. )verheas' &very :ob will be charged with amount of overheads determined
on the basis of the method selected for allocation of overheads. Bormally on
the basis of past results an overhead rate is determined and each :ob is charged
for overheads at the pre>determined rate.
2rofit or loss on a :ob can also be found out by preparing a :ob account. The :ob
account is debited with all expenses incurred on the :ob and is credited with the
:ob price. The difference of the two sides will be the profit or loss made or
suffered on the :ob.
6. 9ork>in>process' The account is maintained in the cost ledger and it represents the
:obs under production. The account may be maintained in any of the following two
ways depending upon the re$uirements of the business'
a. A composite work>in>process account for the entire factory.
b. A composite work>in>process account for every department. 0or example, if
the factory has three departments A, < and %, a work>in>process for each of
these three departments will be opened.
The work>in>process account is periodically debited with all costs direct and
indirect incurred in execution of the :obs. At intervals of month or so a summary
of completed :obs is prepared and the work>in>process account is credited with the
cost of completed :obs. "n case work>in>progress account for each department of
the factory has been opened, it will be necessary to find out the cost of completed
:obs regarding each department. The balance in work>in>process account at any
time represents the cost of :obs not yet completed.
7. Kob ticket' "n order to provide information regarding the progress of each :ob at each
operation, generally a :ob ticket is issued by the production control department. The
ticket contains detachable portions for different operations. The :ob ticket is useful for
both production control and costing departments. n completion of an operation, the
relevant portion of ticket is detached and sent to production control department. This
enables production control department in keeping production schedule up>to>date. n
the basis of detached portion a departmental summary of production can be prepared
which is very useful for costing purposes. !oreover, the amount of work>in>process
as shown by the cost ledger can be checked by listing the ticket number of :obs in
process in any department and valuing this list.
8. 2rogress advice' The foreman of a department may be re$uired to send periodically a
statement regarding the stage of completion of each :ob to ensure completion of :obs
by scheduled dates. *uch a note is called (progress advice).
Advantages of :ob costing'
/. Kob costing enables the management to identify spoiled and defective work in respect
to particular production orders, departments or groups of workers and hence the
management can fix up responsibility for inefficiency.
1. !anagement can determine the trends in costs and compare the operating efficiency
of men and machines in each cost centre. "t can also determine the completion cost of
each :ob.
3. "t enables the preparation of estimates of costs of :obs before production.
5. "t enables comparison of estimated costs with actual costs as the costs are analysed on
the basis of costs, services and production.
6. "t makes available to the management a complete file of production orders which
contains valuable statistics on cost.
7. "t enables ascertainment of profit or loss on each :ob immediately after their
8. "t enables the management to identify unprofitable :obs.
@. "n case of cost plus contracts, :ob costing enables to provide precise $uotations.
D. "t helps in production planning.
/E. "t facilitates fixation of selling price.
Gimitations of :ob costing'
/. Kob costing involves a lot of clerical work in identifying materials, labour and
overheads with specific :obs and departments.
1. !anagement cannot evaluate precisely the operating efficiency of men and machines.
3. *ince costs ascertained and compiled are historical costs, they are not of much utility
to the management.
5. "t does not apply budgetary control to important cost elements such as labour,
materials and overheads.
6. Kob costs over any period of time cannot be compared if ma:or economic changes take
place in between.
7. "t is expensive to operate and errors are possible due to increased clerical work.
7atch Cost#ng:
<atch costing is a modified form of :ob costing. 9hile :ob costing is concerned with costing
of :obs that are executed against specific orders of the customers, batch costing is used where
articles are manufactured in definite batches. The articles are usually kept in stock for selling
to customers on demand. The term batch refers to the lot in which the articles are to be
manufactured. 9henever a particular product is re$uired, one unit of such product is not
produced but a lot of say 6EE or /EEE units of such product are produced. "t is therefore also
known as (Got %osting). 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.
The costing procedure for batch costing is similar to that under :ob costing except with the
difference that a batch becomes the cost unit instead of a :ob. *eparate :ob cost sheets are
maintained for each batch of products. &ach batch is allotted a number. !aterial re$uisitions
are prepared batchwise, the direct labour is engaged batchwise and the overheads are also
recovered batchwise. %ost per unit is ascertained by dividing the total cost of a batch by
number of items produced in that batch. rdinary principles of inventory control are used.
2roduction orders are issued only when the stock of finished goods reaches the ordering
level. "n case the batches are repetitive, the costing work is much simplified.
*ince in batch costing production is done in batches and each batch consists of a number of
units, the determination of optimum $uantity to constitute an economical batch is all the more
important. *uch a $uantity can be fixed on the basis of same formulae and principles as are
applicable to economic order $uantity of materials.
&conomic <atch Fuantity I 1, x 2
, I Annual demand
2 I *etting up and order placing costs per batch
* I *torage or inventory carrying over cost per unit per annum
*tandard costing is defined as – (the preparation and use of *tandard %osts, their comparison
with actual costs and the analysis of variance as to their causes and point of incidence.
"%9A Gondon had defined *tandard %osting as – (the preparation of *tandard %osts and
applying them to measure the variations of actual costs from standard costs and analyzing the
causes of variations with a view to maintain maximum efficiency in production).
Mate#al 9a#ances:
/. !aterial %ost ?ariance L!%?M
"t is the difference between the standard cost of material specified for the output
achieved and the actual cost of direct material used. "t is said to be favourable when
standard cost is more than actual cost and adverse when actual cost exceeds standard
costs. "t is further divided into !aterial ,sage ?ariance and !aterial 2rice ?ariance.
!%? I *% – A%
I +*F x *2. – +AF x A2.
1. !aterial ,sage ?ariance L!,?M
"t is that portion of the !aterial %ost ?ariance which is due to the difference between
the *tandard Fuantity specified for the actual output and the Actual Fuantity used for
the actual output. "t is said to be favourable when standard $uantity is more than
actual $uantity and adverse when actual $uantity exceeds standard $uantity.
!,? I +*F – AF. x *2
3. !aterial 2rice ?ariance L!2?M
"t is that portion of the !aterial %ost ?ariance which is due to the difference between
the *tandard 2rice specified for the Actual utput and the Actual 2rice paid. !aterial
2rice ?ariance is said to be favourable when the actual price is less than the standard
price and adverse when the actual price is more than the standard price.
!2? I +*2 – A2. x AF
5. ?erification
!aterial %ost ?ariance I !aterial ,sage ?ariance J !aterial 2rice ?ariance
i.e. !%? I !,? J !2?
:a+o" 9a#ances:
/. Gabour %ost ?ariance LG%?M
"t is the difference between the standard cost of labour specified for the output
achieved and the actual cost of direct labour used. "t is said to be favourable when
standard cost is more than actual cost and adverse when actual cost exceeds standard
costs. "t is further divided into Gabour &fficiency ?ariance and Gabour #ate ?ariance.
G%? I *% – A%
I +*; x *#. – +A; x A#.
1. Gabour &fficiency ?ariance LG&?M
"t is that portion of the Gabour %ost ?ariance which is due to the difference between
the *tandard ;ours specified for the actual output and the Actual ;ours used for the
actual output. "t is said to be favourable when standard hour is more than actual hour
and adverse when actual hour exceeds standard hour.
G&? I +*; – A;. x *#
3. Gabour #ate ?ariance LG#?M
"t is that portion of the Gabour %ost ?ariance which is due to the difference between
the *tandard #ate specified for the Actual utput and the Actual #ate paid. Gabour
#ate ?ariance is said to be favourable when the actual rate is less than the standard
rate and adverse when the actual rate is more than the standard rate.
G#? I +*# – A#. x A;
5. ?erification
Gabour %ost ?ariance I Gabour &fficiency ?ariance J Gabour #ate ?ariance
i.e. G%? I G&? J G#?
4tan!a! Cost#ng
/. Aiven the cost standard for material consumption are 5E kg. N #s. /E per kg.
%ompute the material variances when actuals are'
a. 5@ kg N #s./E per kg.
b. 5E kg N #s./1 per kg.
c. 5@ kg N #s. /1 per kg.
d. 37 kg for a total cost of #s.37E.
1. Aemini chemical industries provide the following information from their records. 0or
making /E kgs of A&!% standard material re$uirement is '
!aterial Fuantity +kg. #ate per kg+#s..
A @ 7.EE
< 5 5.EE
4uring April /EEE kg of A&!% were produced. The actual consumption of
materials is as under'
!aterial Fuantity +kg. %ost +#s..
A 86E 616E
< 6EE 16EE
%alculate material variances
3. ,sing the following information of department O, calculate all possible labour
Actual wage rate per hour #s.3.5E
*tandard hours for production @75E hours
*tandard rate per hour #s.3.EE
Actual hours worked @1EE hours.
5. The standard cost card for one unit of a product shows the following costs for material
and labour'
!aterial 5 pieces N #s. 6.EE and Gabour /E hours N #s./.6E
68EE units of product were manufactured during the month of !arch 1EE1 with the
following material and labour costs'
!aterial 13EEE pieces N #s.5.D6 and Gabour 67,@EE hours N #s./.61
%alculate material and labour variances.
6. The standard cost card of a product shows the following
!aterial cost #s.6 for 1 kg. and 9ages #e. /.EE for 1 hours.
The actual which have emerged from business operations are as follows'
2roduction' @EEE units.
!aterial consumed worth #s.3D7EE for /76EE kg. and wages paid #s.81EE for /@EEE
hours of work.
%alculate appropriate material and labour variances.
!arginal cost is the amount at any given volume of output by which aggregate costs are
changed if the volume of output is increased or decreased by one unit. Thus it is clear that
increase C decrease in one unit of output increases or decreases the total cost from the existing
level to the new level. This increase or decrease in variable cost from existing level to the
new level is called as marginal cost. *uppose the cost of producing /EE units is #s.1EE, if /E/
units are produced the cost goes up by #s.1 and becomes #s.1E1, if DD units are
manufactured, the cost is reduced to #s. /D@, then the #s.1 increase or decrease in the cost of
production of one unit is the marginal cost. Thus the marginal cost of producing one unit is
The ascertainment of marginal costs and of the effect on profit of changes in volume or type
of output by differentiating between fixed and variable costs is said to be marginal costing.
/. *ales' This is the total amount of sales made by the firm or entity.
1. ?ariable cost' This is the cost of the product that keeps changing with the change in
the volume of production.
3. %ontribution' "t is e$ual to 4ales less &a#a+le cost. This is the profit before ad:usting
the 0ixed %osts. "t covers fixed cost and profit.
5. 0ixed cost' "t is the cost of the product that does not change over a period even with
the change in the volume of production.
6. 2rofit' "t is e$ual to cont#+"t#on less %#;e! costs. This is the profit after ad:usting the
fixed costs. Thus, it does not include fixed cost.
7. 2rofit ?olume #atio' The ascertainment of the impact of changes in volume of output
on profit is done by means of the 2rofit – ?olume #atio.
Po%#t < &ol"me at#o =P9 Rat#o> ? Cont#+"t#on
*ales, variable cost and contribution vary directly with the number of units. Thus,
when the number of units produced or sold increases, the sales, the variable cost and
the contribution also increase pro>rata. n the contrary, when the number of units
goes down, the sales, the variable cost and contribution are also lower. Thus there is a
direct relationship between volume, variable cost and contribution. This is known as
the volume>cost>profit relationship. The profit>volume ratio indicates this relationship.
8. <reak &ven 2oint' "t means the point of no profit and no loss. <&2 is the volume of
output or sales at which the total cost is exactly e$ual to the revenue. <elow <&2 the
concern makes losses, at the <&2, the concern makes neither profit nor loss, above
<&2, the concern earns profits. <&2 is calculated in terms of units or value. Thus
7EP .#n "n#ts/ ? 5#;e! Cost ? 5
Cont#+"t#on pe "n#t 4 < 9
7EP .#n Rs./ ? 5#;e! Cost ; 4ales ? 5#;e! Cost
Cont#+"t#on pe "n#t P9 Rat#o
@. !argin of *afety' "t is the difference between the Actual *ales and the *ales at the
<reak>even point. Garger !argin of safety indicates stronger business. *uch business
can continue to earn profits, even if sales decrease +i.e. in recession.. Thus,
Mag#n o% 4a%et* .#n Rs./ ? Act"al 4ales < 7EP 4ales .Rs./
Mag#n o% sa%et* .#n "n#ts/ ? Act"al 4ales."n#ts/ < 7EP 4ales .#n "n#ts/
/. *ales – ?ariable %ost I %ontribution
1. %ontribution – 0ixed %ost I 2rofit
3. *ales – ?ariable cost I 0ixed cost J 2rofit
5. 2rofit – volume ratio L2? #atioM I %ontribution
6. <&2 +in units. I 0ixed %ost
%ontribution per unit
7. <&2 +in #s.. I 0ixed %ost x *ales I 0ixed %ost .
%ontribution per unit 2? #atio
8. #e$uired *ales +#s.. I 0ixed %ost J 4esired 2rofit
2? #atio
@. #e$uired *ales +,nits. I 0ixed %ost J 4esired 2rofit
%ontribution per ,nit
D. Actual *ales I 0ixed %ost J 2rofit
2? #atio
/E. !argin of *afety +in #s.. I Actual *ales – <&2 *ales +#s..
//. !argin of *afety +in units. I Actual *ales+units. – <&2 *ales +in units.
/1. 2rofit I !argin of *afety x 2? #atio
2roblems for !arginal %osting
/. *. Gtd. furnishes you the following information relating to the half year ending 3E
*eptember 1EE8. 0ixed expenses #s.6E,EEE, sales value #s.1,EE,EEE and 2rofit
#s.6E,EEE. 4uring the second half of the same year the company, has pro:ected a loss of
#s./E,EEE. %alculate'
a. 2? ratio, break>even point and margin of safety for six months ending 3E
*eptember 1EE8.
b. &xpected sales volume for second half of the year assuming that selling price and
fixed expenses remain unchanged in the second half year also.
c. The break>even point and margin of safety of the whole year 1EE8>E@.
1. A company had incurred fixed expenses of #s.1,16,EEE with sales of #s.8,6E,EEE and
earned a profit of #s./,6E,EEE during the first half>year. "n the second half>year, it
suffered a loss of #s.86,EEE. %alculate'
a. The 2? ratio, <&2, margin of safety of the first half>year
b. &xpected sales>volume for the second half year assuming that selling price and
fixed expenses remained unchanged during the second half>year.
3. A retail dealer in garments is currently selling 15,EEE shirts annually. ;e supplies the
following details for the year ended 3/
4ecember 1EE8.
*elling price per shirt #s.5E
?ariable cost per shirt #s.16
0ixed cost'
*taff salaries for the year #s./,1E,EEE
Aeneral office costs for the year #s.@E,EEE
Advertising costs for the year #s.5E,EEE.
As a management accountant of the firm, you are re$uired to answer each of the
following independently.
a. %alculate the <&2 and margin of safety in sales revenue and number of shirts
b. Assume that 1E,EEE shirts were sold in a year. 0ind out the net profit of the
c. "f it is decided to introduce selling commission of #s.3 per shirt, how many
would re$uire to be sold in a year to earn a net income of #s./6,EEE.
d. Assuming that for the year 1EE@ an additional staff salary of #s.33,EEE is
anticipated and price of a shirt is likely to be increased by /6P what should be
the <&2 in number of shirts and sales revenueQ
5. 2resent the following information to show to the management
a. The marginal product cost and the contribution per unit.
b. The total contribution and profits resulting from each of the following sales
2roduct #s. 2er
4irect materials A /E
< D
4irect wages A 3
< 1
0ixed expenses #s.@EE
?ariable expenses are allocated to products as /EEP of direct wages.
*ales price A 1E
< /6
*ales mixtures'
i. /EEE units of product A and 1EEE units of <
ii. /6EE units of product A and /6EE units of <
iii. 1EEE units of product A and /EEE units of <
9hich product mix is most profitableQ
6. The following particulars are extracted from the records of a company'
2articulars 2er ,nit
2roduct A 2roduct <
*ales #s./EE #s./1E
%onsumption of raw materials 1 -g. 3 -g.
!aterial %ost #s./E #s./6
4irect 9ages %ost #s./6 #s./E
4irect &xpenses #s.6 #s.7
!achine hours used 3hrs. 1hrs.
verhead expenses'
0ixed #s./6 #s./E
?ariable #s./6 #s.1E
4irect 9ages per hour is #s.6. %omment on the profitability of each product +both
products need the same raw materials. when'
i. Total sales potentials in units is limited.
ii. Total sales potential in value is limited.
iii. #aw materials are in short supply.
iv. 2roduction capacity +in terms of machine hours. is the limiting factor.
Assuming raw materials as the key factor, availability of which is /E,EEE kg. and
maximum sales potential of each product being 3,6EE units, find the product mix
which will yield the maximum profit.
7. A company produces a single product which is sold by it presently in the domestic market
at #s.86 per unit. The present production and sales is 5E,EEE units per month representing
6EP of the capacity available. The cost data of the product are as under'
?ariable costs per unit #s.6E 0ixed costs per month #s./E lakhs.
To improve the profitability, the management has 3 proposals on hand as under'
a. To accept an export supply order for 3E,EEE units per month at a reduced price of
#s.7E per unit, incurring additional variable costs of #s.6 per unit towards export
packing, duties etc.
b. To increase the domestic market sales by selling to a domestic chain stores 3E,EEE
units at #s.66 per unit, retaining the existing sales at the existing price
c. To reduce the selling price for the increased domestic sales as advised by the sales
department as under'
#educe selling price per unit by #s. "ncrease in sales expected
+in units.
6 /E,EEE
@ 3E,EEE
// 36,EEE
2repare a table to present the results of the above proposals and give your comments and
advice on the proposals.
8. A company manufactures three products by processing materials through machine shop
and finishing departments. *tandard product costs are based on the following figures.
2articulars A < %
!aterial %ost #s.1.3E #s.3.6E #s.6.EE
Gabour ;ours'
!achine shop N6Epaise per hour
0inishing department N7Epaise per hour
1 hrs
1 hrs
1 R hrs
/ R hrs
3 hrs
/ hr
*elling price #s.@.6E #s./E.1E #s./1.EE
verhead rates based on normal production are !achine shop N#e./ per hour and
0inishing department N7E paise per hour. At the budgeted level of production half of the
total overheads charged to each department is variable and the other half is fixed. 2resent
the information to the management to assess the profitability of the products when there is
a shortage of any of the three factors viz., time, labour and raw materials.
A 2rocess means a distinct manufacturing operation or stage. "n process industries, the raw
material goes through a number of processes in a se$uence before the finished product is
finally produced. 0or example, production of coconut oil involves the following distinct
processes' /. %opra crushing 1. #efining and 3. 0inishing.
2rocess costing is defined as (a method of costing used to ascertain the cost of the product at
each stage or operation of manufacture..)
"mportant calculations
/. Bormal loss I "nput x P of normal loss
1. Bormal output I "nput – Bormal loss
3. ,nit %ost I %ost of process – *ale value of Bormal loss
"nput – Bormal loss
5. Abnormal loss I Bormal utput – Actual output
6. Abnormal gain I Actual output – Bormal output
7. %ost of actual output I ,nit cost x ,nits of Actual utput
8. %ost of Abnormal Goss I ,nit cost x ,nits of Abnormal Goss
@. %ost of Abnormal Aains I ,nit cost x ,nits of Abnormal Aains
/. Assemblers Gtd. have three Assembly shops viz., Aeneral Assembly, Gower
Assembly. The %ompany furnished the following information.
Geneal :owe H#ghe
#aw !aterial + in Gitres. 6,EEE /,D1E 3,687
!aterial %ost per litre #s. 7E 5E @E
Gabour cost #s. 5,1@,EEE /,E7,EEE 1,/E,EEE
4irect &xpenses #s. @@,EEE 1,@6,EEE /,E5,@EE
9astage as percentage of total input 5P 6P /EP
a. utput transferred '
To Gower Assembly
To ;igher Assembly
b. utput sold in market '
*ale price per litre #s.
Administration overhead #s.37,EEE and !arketing overhead #s.5@,EEE.
2repare various Assembly Accounts and %osting 2rofit and Goss Account.
1. A product passes through three processes A, < and %. /E,EEE units at a cost of #s.
/./E per
,nit were issued to 2rocess A. The other direct expenses were as follows.
Pocess A
Pocess 7
Pocess C
*undry !aterials
4irect Gabour
4irect &xpenses
The wastage of 2rocess A was 6P and in 2rocess < 5P of inputs. The 9astage of
2rocess A was sold at #s. E.16 per unit and that of 2rocess < at #s. E.6E per unit
and that of 2rocess % at #s. /.EE per unit. The overhead charges were /7EP of direct
labour. The final product was sold at #s. /E per unit fetching a profit of 1EP on sales.
2repare all process accounts.
3. A product of a company passes through 3 processes viz., 2rocess A, 2rocess < and
2rocess %, to obtain three consecutive grades of the product. 4etails relating to its
production for the year 1EE/ are as follows.
Pat#c"las Pocess < A Pocess A 7 Pocess < C
#aw materials used
%ost per tonne
!anufacturing 9ages and &xpenses
9eight Gost
*crap *old at #s. 6EC> per tonne
*ale price per tonne
/,EEE tonnes
#s. 1EE
#s. 86,EEE
6E tonnes
#s. 5/,EEE
3E tonnes
#s. //,EEE
6/ tonnes
!anagement expenses were #s. /6,EEE, selling expenses were #s. /E,EEE. Two>third
output of 2rocess A and one>half output of 2rocess < are passed on the next process
and the balance was sold.
Tou are re$uired to prepare process cost accounts and costing 2rofit and Goss
Account for the year 1EE/.
%ontrolling costs by making use of budgets is known as budgetary control. <udgetary control
and standard costing together help in achieving the two important functions of management
vizU planning and control.
<udget is a plan $uantified in monetary terms, prepared and approved prior to a definite
period of time, usually showing planned income to be generated and C or expenditure to be
incurred during that period and the capital to be employed to attain a given ob:ective. <udget
may also be prepared in $uantitative terms. 0or example 2roduction <udget, 2lant utilization
budget etc. <udget is a plan showing expected achievement based on most efficient operating
standards. Against this actual accomplishment is regularly compared.
• <udgets may be time based
o *hort>term and
o Gong>term
• <ased on functions also known as functional budgets
o *ales budget
o 2roduction budget
o 2roduction cost budget
o 2urchase budget
o 2ersonnel budget
o 2lant ,tilisation budget
o Administrative cost budget
o *elling and 4istribution costC overhead budget
o %apital expenditure budget
o %ash budget
o #esearch and 4evelopment cost budget.
• <udgets may be based on behavior
o fixed budget and
o flexible budget.
<udgetary control is a system of planning and controlling costs which involves the following
/. &stablishment of budgets' 0unctional budgets are prepared based on responsibilities
of individuals. These budgets are then co>ordinated to prepare budgeted 2=G ACc and
budgeted balance sheet.
1. !easurement of actual performance.
3. %omparison of actual performance with budgeted performance to develop variances.
5. Analysis of causes of variance and reporting for immediate action.
/. A company manufactures product A and 2roduct <. 4uring the year ending 4ecember
1EE@, it is expected to sell /6,EEE kgs of product A and 86,EEE kgs of product < at
#s./6 and #s.@ per kg respectively. The direct materials 2, F, and # are mixed in the
proportion of 3'6'1 in the manufacture of product A. !aterial F and # are mixed in
the proportion of /'1 in the manufacture of product <. the actual and budgeted
inventories for the year are given below'
!aterial C 2roduct pening *tock
in kgs.
&xpected closing
stock in kgs.
Anticipated %ost
per -g. in #s.
!aterial 2 5,6EE 3,EEE 7C>
F 3,EEE 7,EEE 6C>
# 3E,EEE D,EEE 5C>
2roduct A 3,EEE /,6EE >
< 5,EEE 6,6EE >
2repare production budget and material purchase budget, showing the expenditure for
the materials for the year ending 3/>/1>1EE@.
1. !aya Gimited has made the following sales estimates for April, !ay and Kune of the
year 1EED from which you are re$uired to prepare sales budget by units and rupees for
each of the three months for each sales area and in total
*ales Area April !ay Kune
< 56P 36P 1EP
% 5EP 36P 16P
4 3EP 5EP 3EP
The area>wise unit sales expected is as follows'
*ales Area *ales +,nits.
A 1,6EE
< 1,EEE
% 3,EEE
4 7,EEE
Total /3,6EE
The selling price has been fixed at #s.7 per unit in Area A, #s.@ per unit in Area <,
#s./1 per unit in Area 4 and #s./E per unit in Area %.
3. %alculate the budgeted overhead cost per tonne at production level of 36 tonnes based
on the following details at @EP capacity +5E tonnes.
2articulars #s. in HEEE
4epreciation 11
"ndirect labour 15
"nsurance 7
2ower +@EP variable. 5E
#epairs and maintenance +6EP fixed. 5E
*alaries 1E
*tores consumable @
Also prepare budget for overhead cost at /EEP capacity utilization.
5. 2repare %ash budget of *andeep Gtd. for the months of April, !ay and Kune, 1EE8
!onth *ales 2urchases 9ages &xpenses
Kanuary /,7E,EEE DE,EEE 5E,EEE /E,EEE
0ebruary /,7E,EEE @E,EEE 37,EEE /1,EEE
!arch /,6E,EEE @5,EEE 55,EEE /1,EEE
April /,@E,EEE /,EE,EEE 5@,EEE /5,EEE
!ay /,8E,EEE DE,EEE 5E,EEE /1,EEE
Kune /,7E,EEE 8E,EEE 37,EEE /E,EEE
Tou are informed that'
a. 6EP of the purchases and sales are on cash.
b. The average collection period of the company is R month and credit purchases
are paid off regularly after / month.
c. Time lag in payment of wages is / month.
d. #ent of #s./EEE is payable every month.
e. %ash and bank balance as on 3/
march, 1EE8 was #s.3,EE,EEE.
f. 4ividend received in !ay #s.37,EEE.
g. 2rofessional fees to be paid in Kune #s./,6EE.
h. &xpenses are paid in the same month.