What is Accounting

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least, of a financial character and interpreting the result thereof.

Different types of Accounting

FINANCIAL ACCOUNTING: In financial Accounting daily transactions are recorded through entries, ledgers are prepared, after a certain period trial balance is prepared and finally the final accounts.


MANAGEMENT ACCOUNTING :It is used by Management to control Expenses, to planning purpose and for the purpose of decision making so that it may maximize the profit of business.

1. TAX ACCOUNTING: Though, final accounts show the income or loss of the business even then due to the reason of different tax structures and Acts prevailing in every country, tax accounting is necessary. 2. COST ACCOUNTING: In it, all expenses whether related to production or sale are analyzed so that per unit cost in production may be known.

Definition of Cost Accounting

“Cost accounting is the process of accounting for cost which begins with the recording of income and expenditure and ends with the preparation of periodical statements and reports for ascertaining and controlling cost.” Walter W.Biggs

Cost Accounting is a part of financial accounting in which expenses are classified, recorded, allocated so that per unit cost of produced commodities and services may be ascertained.  The derived data is used to control the business activites for maximization of profit and to formulate policies.

Comparison of Final and Cost Accounts


Final accounts are prepared to know the total cost, total sale and total profit/loss while cost accounting purports separate product wise cost, product wise sales and product wise profit and loss.





Financial accounts show the profit loss and financial position at the end of the particular period while cost accounting shows profit/ loss and cost of each product at any time.

process of financial accounting the determination of selling price of any product is difficult but through the process of cost accounting the determination of selling price of any product is reliable.

4. REALITY OF EXPENSES – In financial
accounts all direct and indirect expenses are real while in cost accounting indirect expenses are estimated on some bases.
Eg. electricity expenses of each department are put to cost on the basis of unit consumes by each department

Financial accounts cannot be used as measure of cost control but cost accounting is so used.

In financial accounts stocks are valued at cost or market value whichever is less while in cost accounting stocks are valued mostly at cost.

Limitations of Final accounts

 

Lack of control over raw materials.
No proper accounting of wages or labour Difficulty in deciding prices and non availability of production cost separately Direct and indirect expenses are not defined separately

 Decision making for Production Standard is

 No day to day cost information available

 Non availability of cost data
 No complete analysis of Losses.

Aims and objectives of Cost Accounts
     

Ascertainment of cost Determination of selling price Cost control and cost reduction Ascertaining the profit of each activity

Assisting management in decision making
Determining and controlling efficiency.

Functions of Cost Accounts
Calculation, classification, determination and analysis of cost  Controlling cost  Matching cost with revenues  Other functions

Advantage and Importance of Cost Accounts

Advantages to producers and management
Advantages to labourers Advantages to investors and Creditors. Advantages to Customers. Advantages to Nation.

Different types of Cost Accounting

      

Uniform costing Method Contract Costing Process Costing Method Departmental Costing Operating Cost System Multiple Cost System Batch Costing Standard Costing System Marginal Costing System

Characteristics of Ideal System of Cost Accounting
Simplicity  Economical  Favorable to business  Elasticity  Accuracy and clean Presentation  Proper Classification and Analysis  Reconciliation

Methods of calculating unit cost

Unit Costing
“Single or output cost system is used in businesses where a standard product is turned out and it is desired to find out the cost of a basic unit of production”
– J.R.Batliboi

Objects of Unit Costing
To determine per unit cost and total cost of production.  To know detailed per unit cost  Calculating the variation in cost and determining the reasons for variation and comparing.  To decide the price of production

   

The Expenditure, which has been incurred upon production for a period is extracted from the financial books and store records, and set out in memorandum statement. If this period statement is confined to the disclosure of cost of units produced during the period, then it is termed as COST SHEET. Cost sheet Statement of cost and statement of profit Production Account Trading & profit & loss A/c & Working A/c


It presents an analytical statement of expenses of production by which per unit cost of production and different overheads are known.

Cost Sheet reveals….
Units produced during particular period  Direct material,direct labor & other direct expenses incurred during particular period  Estimation & allocation of different overheads  Relation between different components of cost  Comparison of old records

Advantages of Cost Sheet
Per unit and total cost of production can be known  Determination of SELLING PRICE  Cost control

Cost Sheet & Apparel Industry
Production of fabric  Production of trims  Production of Finished garments  Helps in calculating Price  Price negotiation with buyers  Controlling costs

Basis Form Rules

Cost Sheet Statement Memorandum of particulars Work unfinished Comparison with Financial account  Analytical Controlling cost 

Cost A/c Account Double entry statement Work completed Comparison with Financial accounts Precise Controlling cost 


Nature Use

Elements of Cost and their Classifications
The total cost is divided into  Material cost  Labour cost  Other expenses










Material which is primarily used for manufacturing of the product and thus becomes as the organ of that product, as wood is to furniture. DIRECT LABOUR: Those workers who take active part in the process of production and who are utilised for changing the shape of material into production, wages paid to them is direct labour, as carpenter is to furniture.

Direct Expenses: They are those which can without difficulty be identified as being incurred wholly for a particular unit of cost. The important direct expenses are:

Direct Expenses

3. 4.

5. 6.


Excise Duty Royalty Architect’s and Surveyor’s fees Expenses of designing and drawings of patterns Experimental Expenses Hire Charges Repair and maintenance of the equipment Travelling expenses to the site

Indirect Expenses
Material that is auxiliary to production but is spent for the whole enterprise and not for a special unit. For eg. Lubricating oil for machines.  INDIRECT LABOUR: The labour that is not directly utilised in the process of production. Eg. Watchman’s salary.

Indirect Charges/ Expenses/ Overheads
They are not directly related to production units but these are supplementary expenses done for the whole unit.

Works/ Factory/ Mill/ Shop/ Foundry/ Manufacturing expenses
These expenses are concerned with production or factory. They are also known as works on cost or works overhead.

Works on Cost
Indirect materials – nuts, bolts, rags  Indirect Labour – store keeper’s salary  Gas, steam, power, fuel, coal, water, haulage, lighting and heating.  Rent, rate, taxes and insurance.  Works manager’s salary  Depreciation and repairs  Loose tools  Stores overheads

Buying expenses  Labour welfare expenses – P.F.  Contribution to technical journals  Research expenses  Training Expenses  Supervision and testing expenses  Cost of rectifying defective work

Office/ administration/ Establishment Expenses/ Overheads
1. 2. 3.

4. 5. 6. 7. 8.

Officer’s Salary Director’s fees Office rent, rate, taxes, insurance, lighting and cleaning Office stationery, telephone, postage Depreciation on office equipment Auditors’ fees Bank Charges Subscription to trade journals

Selling and Distribution Expenses/ Overheads
2. 3.

4. 5.


Travelling Expenses Salesman’s Salary and commission Discount, trade discount, cash discount allowed Sample expenses Branch expenses Expenses on catalogue and price lists Insurance and taxes on finished goods

8. 9. 10. 11.

13. 14. 15.

Showroom Expenses Packing expenses Carriage outward and loading charges Warehouse expenses Delivery van expenses Bad debts Advertisements Collection charges

Items to be excluded from cost books



Abnormal wastage of time and material Abnormal Expenses Interest on Capital Interest on loans, Cash Credit, O/D Capital Expenditures

6. 7. 8. 9.


Income tax Dividends Discounts on shares and debentures Appropriation of profits Writing off expenses Cash Discount

Specimen of a Cost Sheet

Cost Sheet for XYZ Co. For The month of ………..2008
Output……..Units Last Period Current Period
Total Cost Per Unit Cost Total Cost Per Unit Cost


Cost Sheet for XYZ Co. For The month of ………..2008 Output……..Units Last Period Current Period Particulars
Total Cost Per Unit Cost Total Cost Per Unit Cost

Direct Material consumed Direct Wages Other direct expenses Add: Factory overheads Factory Cost (Gross) Add: Op. WIP Less: Clg. WIP Factory Cost(Net) Add: Admn. Overheads Cost of Production Add: Op. Finished Goods Less: Clg. Finished Goods

Cost Sheet for XYZ Co. For The month of ………..2008
Output……..Units Last Period Current Period
Total Cost Per Unit Cost Total Cost Per Unit Cost

Particulars Cost of goods sold Add: Selling overheads Cost of Sales Add: Profit as % of Cost or Selling price Sales Revenue (Total)

A Case Of Cost Sheet Preparation

Orient Craft Ltd.
Expenditure incurred in manufacturing 10000 units of Basic polo T-shirts for the month ending on 31 Jan 2008: Raw Material 28000 Fuel 6900 Rent Rates and insurance 2000 300

Electric power 1340
Wages Repairs 63500 2400

Office salaries and
general expenses 7000

Administration of office 5000 Depreciation on machinery 2500

Light & water


Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Output 1000 Units
Particulars Current Period
Total Cost Per Unit Cost

Raw materials


28.00 91,500

Wages PRIME COST Add: Works Expenses Fuel Electric power Repairs Sampling expenses


63.50 91.50 6.90 1.34 2.40 1.06

6,900 1,340 2,400 1,060

Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Output 1000 Units Particulars Current Period
Total Cost Per Unit Cost

Light & water



Rent Rates & insurance Depreciation WORKS COST Add: Office On cost Office salary Admn. expenses

2,000 2.00 300 0.30 2,500 16,900 2.50 16.90 1,08,400 108.40
7,000 5,000 12,000 7.00 5.00 12

Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Out put 1000 Units
Particulars Current Period
Total Cost Per Unit Cost



120.40 138.46

Add:Profit(15% on cost) SALES PRICE

18,060 1,38,460

Statement of Cost, Profit & Loss

Statement of Cost, Profit & Loss is prepared as the cost sheet is prepared. The only difference is that in it, like cost sheet, per unit cost is not calculated only total cost is prepared.

Defective & rejected work
Sale of such units is deducted from total cost  But, cost of repairing such units is added to cost of production under the name of Additional Works overheads

Production A/c

Production A/c
The term production account is used to denote a particular form of manufacturing A/c prepared in conjunction with the financial accounts in order to show the actual cost of producing the goods manufactured during the period under review.These accounts may be drawn up at short interval Eg Monthly. -G R Glower & R G Williams

Application of production A/c
Production A/c for Coke and coal Companies  Production A/c for yarn and fabric production Companies

Case on Production A/c

Swadeshi Cotton Mills Ltd.
Prepare Production A/c for the half year ended on 30 June 2008. OS yarn at cost(60,000 kg) Rs 30,000 OS fabric at cost(1,20,000 kg) Rs 90,000 Spinning wages Rs 30,000, Stores Rs 20,000 Fuel Rs 10,000, Yarn sales(2,00,000 kg) Rs 40,000 CS of yarn at cost(2,00,000 kg) Rs 41,000 CS of fabric at cost(2,05,000 kg) Rs 1,50,000 Cotton purchased(10,40,000kg) 2,60,000 Weaving wages 60,000

Stores- weaving Rs 40,000 Fuel weaving-Rs 10,000 Sales of wastage (2,11,000 kg) Rs 29,000 Fabric sales (4,20,000 kg) Rs 3,00,000

Stores consumed increased the weight of production by 4,000 kg for spinning and 1,20,000 kg for weaving

Yarn Production A/c
Particulars To cotton To stores To fuel To wages Wt(kg) 4000 Amt 20000 10000 30000 1044000 320000 To op stock To cost of prod 60000 833000 30000 By sales 291000 By cloth prod* By Clg stock By profit & loss (loss) 893000 321000 104400 320000 200000 40000 493000 177215 200000 41000 62785 893000 321000 Particulars By cost of prod Wt(kg) Amt 1040000 260000 By sales waste 211000 29000 833000 291000

Fabric Production A/c
Particulars To yarn prod To stores To wages To fuel 613000 To op stock To gross profit 120000 To cost of prod 505000 Wt(kg) 120000 Amt 40000 60000 10000 287215 90000 By sales 287215 By clg stock 613000 287215 420000 300000 205000 150000 Particulars Wt(kg) 108000 Amt

4930000 177215 By loss in wt

By cost of prod 505000 287215



625000 450000

* Working notes:
Op stock + Production 60000 833000



200000 = 4,93,000 kg transferred to

- Closing stock cloth prod A/c.

cost of 893000 kg is Rs 3,21,000 => cost of 493000 kg is Rs 1,77,215

Trading & Profit & Loss A/c Or Working A/c

Working A/c
It is prepared just like production account. But the production A/c shows only the production cost but not the other items. Working A/c is distributed into 6 parts: Prime cost Work cost Production cost Cost of goods sold Cost of sales Net profit

1. 2. 3. 4. 5. 6.

Tender Pricing

Tender Pricing
If any organization wants to purchase goods in bulk, then it wants information from the suppliers for rates and terms of supply and quality of product. The suppliers send their tenders and the buyer selects the most beneficial supplier in terms of cost and quality. It is also known as Bid pricing.

Case in tender pricing

Bhagwan Das & sons, Carpet manufacturers
The firm wants to send a tender for sale of 3000 carpets. It is estimated that materials will cost Rs 10000, wages Rs 6000.The works on cost and office and general on cost would bear the same percentage which works on cost bears to the productive wages and general on cost to the works cost in the manufacture of carpets in the last 6 months. The firm wants a net profit of 20% on selling price.

The cost of materials and expenses incurred in the last 6 months ending on 30 June 2008 on the manufacture of carpets is: Op stock of finished goods 28000

Op stock of Raw material
Purchase of raw material Wages Sales of finished goods Clg stock of finished goods Clg stock of Raw material Works overheads Office and general charges

292000 198800 592000 30000 13600 43736 35524

Cost sheet for the six months ended on 30th June 2008

Particulars Op stock of raw materials Add: Purchases Less: Closing stock Cost of material used Add: Wages PRIME COST Add: Works overheads

Rs. 12800 292000 13600

Rs .

304800 291200 198800 490000 43736

Particulars FACTORY COST Add: Office and general expenses

533736 35524 569260
28000 30000 597260

Add: Op stock Finished Goods Less Clg. stock Finished Goods COST OF GOODS SOLD PROFIT SALES

567260 24740 592000

Tender for 3000 carpets
Particulars Materials Wages PRIME COST Work on cost (22% on wages)* WORKS COST Rs 10000 6000 16000 1320 17320

Office & general on cost (6.656% on work cost) TOTAL COST Profit (20% on SP) TENDER PRICE

18473 4618 23091

* Working notes
% age of works on cost to wages = (43,736/198800)*100 = 22%  % age of office & general on cost to factory cost = (35524/533736)*100 = 6.656%



 

Costs Non – Cost Factors Nature of industry Product characteristics Competition Purchasing power of customers Supply elasticity Economic Conditions Availability of substitutes Government policies Management policies

Pricing in different markets

 

Perfect Competition Monopoly Oligopoly Imperfect Competition

Why to Study Pricing in Costing????

It helps the management in DECISION MAKING by providing various kinds of information such as……..

Detailed cost analysis  Future costs in form of tender pricing  Effect of demand, competition, price changes on profitability  Actual profits V/s Projected profits  Return on capital employed  Effect of price differential

Pricing decisions are required when…
New product is launched  Quotations / bids to be made  Product is yielding less profit  Resistance in the market for the product

Pricing methods based on costs

Full Cost / Total Cost Method
Selling price is determined as total costs plus mark up to cover profit.To arrive at the selling price, selling, distribution, and administration overhead and an estimated or desired percentage of profit is added to the total factory cost.

Cost Plus Contracts  New products with no established markets  Insignificant competition

Full cost Method
ADVANTAGES Long term pricing Safest method

DISADVANTAGES Ignores Elasticity of demand Ignores competition Fluctuating costs of inputs ignored Arbitrary nature of elements of cost

Conversion cost method
Total costs minus cost of material input cost method of pricing is based on the contention that because materials do not earn any profit, the profits should be related to the services performed, that is the value added in form of conversion cost.

Return on Investment Methods
This method takes into account the capital employed for financing the production and sales of production. The formula for fixing the SP which will yield desired return on capital P = [(C+xF)/U] / (1-xV) Where P= Selling Price C= Total cost x = Rate of Return on capital (desired) F = Fixed Assets V= Variable capital U = Annual sales (units)

Marginal Cost Method
A flexible approach and is particularly used in short term pricing.  Lowering of Prices may increase demand and revenue but the cost may increase if, for instance, overtime is worked to meet increased demand, so that this may result in overall reduction of profit.

Differential Costs Methods
Differential cost analysis reveals that a lower price is acceptable so long as the extra revenue is able to meet the additional cost and also earn some profit, provided this does not disturb the market.

Standard Cost Method
Price decisions are made on the basis of standard costs and they are revised before any pricing decisions. Standards provide a basis for various analysis.

Learning Curve Method

It is for the products that have large and costly non repeat orders of varying sizes. This method takes the efficiency factor of workers into account.

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