Difference b/w allocation & apportionment?

Allocation: direct exp are allocated

Allocation means the allotment of whole items of cost to cost centres or

cost units.

It deals with the whole items of cost.

Cost is directly allocated to any cost centre or cost units.

Cost is allocated when the cost centre uses whole of the benefits of the
expenses.

Apportionment : indirect expense are allocated

Apportionment means allotment of proportion of items of cost to cost

centres or cost units.

It deals with only proportion of items of cost.

It needs a suitable basis for subdivision of cost by cost centres or cost units.
Thus it is indirect process of allotment.

Cost is apportioned when cost centres use only a proportion of the benefits
of the whole expenses.
Theory of constraints
The Theory of Constraints is an organizational change method that is focussed on profit
improvement. The essential concept of TOC is that every organization must have at least one
constraint. A constraint is any factor that limits the organization from getting more of whatever it
strives for, which is usually profit. The Goal focuses on constraints as bottleneck processes in a
job-shop manufacturing organization. However, many non-manufacturing constraints exist, such
as market demand, or a sales departments ability to translate market demand into orders.
The Theory of Constraints defines a set of tools that change agents can use to manage
constraints, thereby increasing profits. Most businesses can be viewed as a linked set of
processes that transform inputs into saleable outputs. TOC conceptually models this system as
a chain, and advocates the familiar adage that a "chain is only as strong as its weakest link."
Goldratt defines a five-step process that a change agent can use to strengthen the weakest link,
or links. In The Goal, Goldratt proves that most organizations have very few true constraints.
Since the focus only needs to be on the constraints, implementing TOC can result in substantial
improvement without tying up a great deal of resources, with results after three months of effort.
The Five Steps of the Theory of Constraints
1.
Identify the System Constraint
The part of a system that constitutes its weakest link can be either physical or a policy.
2.
Decide How to Exploit the Constraint

Goldratt instructs the change agent to obtain as much capability as possible from a
constraining component, without undergoing expensive changes or upgrades.
An example is to reduce or eliminate the downtime of bottleneck operations.
3.
Subordinate Everything Else
The non-constraint components of the system must be adjusted to a "setting" that will
enable the constraint to operate at maximum effectiveness. Once this has been done, the
overall system is evaluated to determine if the constraint has shifted to another
component. If the constraint has been eliminated, the change agent jumps to step five.
4.
Elevate the Constraint
"Elevating" the constraint refers to taking whatever action is necessary to eliminate the
constraint. This step is only considered if steps two and three have not been successful.
Major changes to the existing system are considered at this step.
5.
Return to Step One, But Beware of "Inertia"

Plant types of theory of constraints

There are four primary types of plants in the TOC lexicon. Draw the flow of material from the
bottom of a page to the top, and you get the four types. They specify the general flow of
materials through a system, and they provide some hints about where to look for typical
problems. The four types can be combined in many ways in larger facilities.

I-plant: Material flows in a sequence, such as in an assembly line. The primary work is
done in a straight sequence of events (one-to-one). The constraint is the slowest operation.

A-plant: The general flow of material is many-to-one, such as in a plant where many subassemblies converge for a final assembly. The primary problem in A-plants is in
synchronizing the converging lines so that each supplies the final assembly point at the right
time.

V-plant: The general flow of material is one-to-many, such as a plant that takes one raw
material and can make many final products. Classic examples are meat rendering plants or
a steel manufacturer. The primary problem in V-plants is "robbing" where one operation (A)
immediately after a diverging point "steals" materials meant for the other operation (B).
Once the material has been processed by A, it cannot come back and be run through B
without significant rework.

T-plant: The general flow is that of an I-plant (or has multiple lines), which then splits into
many assemblies (many-to-many). Most manufactured parts are used in multiple
assemblies and nearly all assemblies use multiple parts. Customized devices, such as
computers, are good examples. T-plants suffer from both synchronization problems of Aplants (parts aren't all available for an assembly) and the robbing problems of V-plants (one
assembly steals parts that could have been used in another).

Opportunity cost
The cost of an alternative that must be forgone in order to pursue a certain action. Put another
way, the benefits you could have received by taking an alternative action.
2. The difference in return between a chosen investment and one that is necessarily passed up.
Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the
stock, you gave up the opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

Sunk cost
Money already spent and permanently lost. Sunk costs are past opportunity costs that are
partially (as salvage, if any) or totally irretrievable and, therefore, should be considered
irrelevant to future decision making. This term is from the oil industry where the decision to
abandon or operate an oil well is made on the basis of its expected cash flows and not on how
much money was spent in drilling it. Also called embedded cost, prior year cost, stranded cost, or
sunk capital.
for example: A company invests $2,000,000 over several years to develop a left-

handed smoke shifter. Once created, the market is indifferent, and buys no units.
The $2,000,000 development cost is a sunk cost, and so should not be considered
in any decision to continue or terminate the product.

Normal process loss:

The loss expected or anticipated prior to production is a normal process loss. It is
thus called a standard loss. A provision for such a loss is made

before starting production. Weight losses, shrinkage, evaporation, rusting etc. are
the examples of normal loss. Normal loss increases the cost of production of the
usable goods realized.
Abnormal process loss
The loss realized over the normal loss is called an abnormal loss. Abnormal loss
arises because of abnormal working conditions, bad working condition,
carelessness, rough handling, lack of proper knowledge, low quality raw material,
machine breakdown, accident etc. Therefore an abnormal loss is an
unanticipated loss. Abnormal loss is a controllable loss and thus can be avoided
if corrective measures are taken. Therefore, abnormal loss is also called an
avoidable loss.
The value of an abnormal loss is assessed on the basis of the production cost
with which theprofit and loss account is charged.

Marginal costing distinguishes between fixed costs and variable costs as convention
ally classified.
The marginal cost of a product is its variable cost. This is normally taken to be;
direct labour, direct material, direct expenses and the variable part of overheads.
Marginal costing is formally defined as:
the accounting system in which variable costs are charged to cost units and the fixed
costs of the period are written-off in full against the aggregate contribution. Its special
value is in decision making. (Terminology.)
The term contribution mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus
MARGINAL COST =

VARIABLE COST DIRECT LABOUR

+
DIRECT MATERIAL
+
DIRECT EXPENSE
+
VARIABLE OVERHEADS

Diference b/w absorption n marginal costing

In absorption costing, items of stock are costed to include a fair share of fixed
production overhead, whereas in marginal costing, stocks are valued at variable
production cost only. The value of closing stock will be higher in absorption costing
than in marginal costing.
b. As a consequence of carrying forward an element of fixed production overheads in
closing stock values, the cost of sales used to determine profit in absorption costing
will:
i.
include some fixed production overhead costs incurred in a previous period but
carried forward into opening stock values of the current period;
ii.
exclude some fixed production overhead costs incurred in the current period by
including them in closing stock values.
In contrast marginal costing charges the actual fixed costs of a period in full into the
profit and loss account of the period. (Marginal costing is therefore sometimes known
as period costing.)
c. In absorption costing, actual fully absorbed unit costs are reduced by producing in
greater quantities, whereas in marginal costing, unit variable costs are unaffected by
the volume of production (that is, provided that variable costs per unit remain
unaltered at the changed level of production activity). Profit per unit in any period can
be affected by the actual volume of production in absorption costing; this is not the
case in marginal costing.
d. In marginal costing, the identification of variable costs and of contribution enables
management to use cost information more easily for decision-making purposes (such
as in budget decision making). It is easy to decide by how much contribution (and
therefore profit) will be affected by changes in sales volume. (Profit would be
unaffected by changes in production volume).In absorption costing, however, the
effect on profit in a period of changes in both:
i.
production volume; and
ii.
sales
volume;
is not easily seen, because behaviour is not analysed and incremental costs are not
used in the calculation of actual profit.

 Though, marginal costing and absorption costing are two traditional

costing techniques, they have their own unique principles that draw a
fine line that separates one from another.
In marginal costing, contribution is calculated, whereas this is not
calculated under absorption costing.
When valuing the stocks under marginal costing, only the variable
costs are considered, whereas valuation of stock under absorption
costing includes costs incurred for the production function also.
Generally, the value of inventory is higher under absorption costing
than marginal costing.
Marginal costing is often used for internal reporting purposes
(facilitate the decision making of managers), while absorption costing
is required for external reporting purposes, such as income tax
reporting.
Contribution must be calculated under marginal costing system,
whereas gross profit will be calculated under absorption costing
method.

Cost Volume Profit Analysis

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is

concerned with the effect of sales volume and product costs on operating profit of a
business. It deals with how operating profit is affected by changes in variable costs,
fixed costs, selling price per unit and the sales mix of two or more different
products.
CVP analysis has following assumptions:
1.

All cost can be categorized as variable or fixed.

2.

Sales price per unit, variable cost per unit and total fixed cost are constant.

3.

All units produced are sold.

Where the problem involves mixed costs, they must be split into their fixed and
variable component by High-Low Method, Scatter Plot Method or Regression
Method.

CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:
px = vx + FC + Profit

In the above formula,

p is price per unit;
v is variable cost per unit;
x are total number of units produced and sold; and
FC is total fixed cost

Responsibility accounting

Responsibility accounting involves a company's internal accounting and budgeting. The

objective is to assist in the planning and control of a company's responsibility centerssuch
as decentralized departments and divisions.
Responsibility accounting usually involves the preparation of annual and monthly budgets for
each responsibility center. Then the company's actual transactions are classified by
responsibility center and a monthly report is prepared. The reports will present the actual
amounts for each budget line item and the variancebetween the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility center to
receive monthly feedback on the manager's performance. Responsibility accounting is a
reporting system that compiles revenue, cost, andprofit information at the level of
those individual managers most directly responsible for them. The intent is to
provide this information to those people most able to act upon it, as well as to
judge their performance with it.

Labour turnover

Labor turnover measures the hiring and and termination of

employment in a given firm. While it is inevitable that some
employees leave a company, high turnover rates lead to high
expenses and low productivity. Therefore, a company should
aim to provide a good work environment for its employees to
achieve a low labor turnover rate.
Labour turnover may be measured with the help of the following methods:
1. Accession Method
2. Separation Method
3. Replacement Method (Net Labour Turnover Method)

4. Flux Method
1. Accession Method: Accessing means the additions to the pay roll. Under this
method, labour turnover is calculated by dividing total number of accessions
during a period by the average number of workers during that period and
multiplying the result by 100. Putting it in educational form:
Number of accessions in a period
Average number of workers in the period
2. Separation Method: Separations are due to quits, discharges, retirements
and deaths. Under this method, labour turnover for any given period is calculated
by dividing the total number of separations by the average number of workers
during that period and multiplying by 100. Putting it in educational form:
Number of separations in a period
Average number of workers in the period
3. Replacement Method: This method takes into account only the actual
replace of workers during a given period irrespective of the number of workers
leaving. Lab turnover is found out by dividing the number of replacements during
a given period the average number of workers during the period and multiplying
it by 100. Putting in educational form:
Number of replacements in a period
Labour Turnover =Average number of workers in the period
4. Flux Method: As the name suggests, it is the combination of the two methods
separation and replacement. Labour turnover is found out by adding all
separations a replacements and dividing by the average number of workers
during a given period a; multiplying the result by 100. Putting it in educational
form:

Number of separations in a period + Number of replacements in a period

Average number of workers in the period
Illustration-1
The personnel department of a company has supplied the following information
relating to its labour force. Calculate labour turnover rate using the different
methods.
Number of workers at the beginning of the year - 1,800 Number of workers at the
end of the year - 2,200
During the year 30 workers were discharged and 10 left the company. During the
year 440 workers were engaged out of which only 20 workers were appointed
against vacancies caused by the number of workers separated and the rest were
engaged n accordance with an expansion scheme.
Number of Separations in the year + No. of Replacements in the year Average
number of workers in the year
tqm.
1.

Total Quality Management (TQM) is a management approach that originated in the

1950s and has steadily become more popular since the early 1980s. Total quality is a
description of the culture, attitude and organization of a company that strives to provide
customers with products and services that satisfy their needs. The culture requires quality in all
aspects of the companys operations, with processes being done right the first time and defects

Total Quality Management (TQM) is a

comprehensive and structured approach to
organizational management that seeks to improve thequality of
products and services through ongoing refinements in response to
continuous feedback.
and waste eradicated from operations.

To be successful implementing TQM, an organization must concentrate on the eight key

elements:

1.

Ethics

2.

Integrity

3.

Trust

4.

Training

5.

Teamwork

6.

Leadership

7.

Recognition

8.

Communication
The continuous process of reducing or eliminating errors in manufacturing, streamlining supply
chain management, improving the customer experience and ensuring that employees are up-tospeed with their training. Total quality management aims to hold all parties involved in the
production process as accountable for the overall quality of the final product or service.
Process -reenginering
A comprehensive reengineering project could result in the complete replacement of an
existing process. It is common for a reengineering project to fully integrate the use of the
latest information technology, so that automation can take the place of manual labor.
A key underlying concept of business process reengineering (BPR) is that an existing
process may have to be completely torn out and replaced. By doing so, an organization can
dispense with antiquated notions of how transactions should be dealt with that have more of
a basis in tradition than the realities of how a business should compete.
The main problem with BPR is that the type of radical change that is a normal outcome of
the process is difficult to impose on an organization. The issue is particularly difficult when a
series of BPR changes are required, since they can result in significant downsizing that leads
to an employee revolt. A typical outcome is an initial group of BPR changes, after which the
effort bogs down and is eventually abandoned. Due to the radical nature of BPR, it works
best in an environment where employees understand that a company faces bankruptcy if it
cannot overhaul its systems to meet or exceed the performance of competitors.
Examples of successful BPR transformations are:

Cost accounting. A company painfully compiles the cost of finished goods based on
each item included in a production run. A reengineering effort implements the use
ofbackflushing, where costing is automatic, based on the number of units produced and the
bill of materials for the items produced.

Accounts payable. A company only pays suppliers after a difficult three-way

matchingprocess, where supplier invoices are compared to receiving documents and
purchase orders. A reengineering effort pays suppliers automatically, based on the number
of goods produced in which their parts are used. Prices paid are based on the authorizing
purchase order. No supplier invoice is needed, or will even be accepted.

Payroll. A company pays its employees with checks, which requires that checks be
sent by overnight mail to outlying employees, and that employees be contacted later if they
have not cashed their checks. A reengineering project eliminates checks in favor of payroll
cards and ACH electronic payments, thereby eliminating all of the costs associated with
checks.

Performance budget

Decisions made on these types of budgets focus more on outputs

or outcomes of services than on decisions made based on inputs.
In other words, allocation of funds and resources are based on
their potential results. Performance budgets place priority on
employees' commitment to produce positive results, particularly in
the public sector. A budget that reflects the input of resources and
the output of services for each unit of an organization. This type
of budget is commonly used by the government to show the link
between the funds provided to the public and the outcome of
these services.

Classification of cost:is given in ppt given by batra sir