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Cost and Management Accounting

Answer 1: Cost is a term whereas ‘Costing’ is a process for determining the cost. It may be
called a technique for ascertaining the cost of production of any product or service in the
business organization. The real scope of this term can best be understood in the context of big
manufacturing concerns that produce hundreds of products and spend a lot of money on material,
labour and other overheads. The cost of each product in those organizations requires recording
expenses with to each product or process, classifying expenses like direct material, labour,
overheads etc, allocating direct expenses and suitable apportionment of overheads to each
product for most correct determination of per unit cost of production of each product.
Cost accounting has the following main objectives to serve:
1. Determining selling price,
2. Controlling cost
3. Providing information for decision-making
4. Ascertaining costing profit
5. Facilitating preparation of financial and other statements.

There are different methods of costing which are as follows

1. Job Costing
2. Batch Costing
3. Contract Costing
4. Composite Costing
5. Process Costing
6. Unit Costing
7. Operating Costing
8. Operation Costing

With the help of costing methods and techniques helps for collection and classification of
expenditure according to cost elements and allocation and apportionment of the expenditure to
the cost centres or cost units, or both.

As the company Recently has been losing bids in tenders it thought were low, while it has
won a few bids it thought were high. And it has lately diversified into new markets and
introduced new product lines. Goods have become complex, requiring many inputs and
processes. so, the company need to follow process costing to improved its productivity.

Process costing is an accounting methodology that traces and accumulates , and allocates of a
manufacturing process. Costs are assigned to products, usually in a large batch, which might
include an entire month's production. Eventually, costs have to be allocated to individual units of
product. It assigns average costs to each unit, and is the opposite extreme of which attempts to
measure individual costs of production of each unit. Process costing is usually a significant
Cost and Management Accounting

Features of process costing

1. Work In Progress One of the most unique features of process costing is its work-in-
progress nature. Unlike other types of costing, i.e. job order costing; there is no need for a sales
order. Due to its continuous nature, process costing is simply divided up among workplace
2. Cost Control Another important feature of process costing is its direct relation to cost
control. When a manager needs to zone in on a budget and control costs associated with
manufacturing, process costing provides relevant feedback on month-to-month comparisons of
similar products. It allows managers to monitor and assign value to a product at any given time.
3. Per Unit Costs Because process costing provides cost information for every step of a
company's manufacturing process, it is able to provide managers an account of all direct and
indirect costs. As costs are assigned to products and services, which sometimes include a whole
month's production, process costing breaks down information to determine average per-unit
4. Controlled
One major characteristic of process costing is the fact that the process is controlled. This
is why process costing is used--it is an industry where the process is clear-cut, which makes it
possible to assign a price to it. This means that there are a wide range of industries where process
costing will not work. For example, a law firm cannot use process costing to determine prices
because the process to produce their product (legal expertise and advice) is not the same for
every client. Indeed, its selling point is that it is different for every client. Therefore, the process
cannot be streamlined and the costs cannot be kept the same for all lawyers.
5. Cumulative
Process costing uses cumulative costs from every stage of production. So, if a factory
makes ketchup bottles, the people in charge of process costing would find the cost of the glass,
plus the cost of the labels, plus the cost of the workers in each department and maintenance of
the necessary machines.
Principles of Process Costing

1. The whole factory operation is divided into several operations or production centers, each
performing standard operations.
2. All the items of process costing i.e. materials, labour and overheads are collected in
process wise.
3. The records are maintained in process wise as the number of units produced, the total
costs incurred and the cost per unit.
4. The total cost of one process is transferred to next process along with the number of units
transferred to next process for further processing.
5. The cost per unit is calculated by dividing the number of units produced in a process into
the total costs incurred for processing the same number of units in a specified period.
Cost and Management Accounting

Advantages of process
1. Easy to Use
Process costing is an easier system to use when costing homogenous products compared
to other cost allocation methods. Business owners allocate business costs according to the
number of processes each good travels through in the production system.
2. Flexible
Business owners use process costing because it creates a flexible production process.
Companies needing to refine their process can simply add or remove a process as necessary.
This also allows companies to lower their production cost for each good.
3. Cost Errors
Process costing can create cost errors in the production system. Production cost errors
often represent a significant disadvantage for cost accounting systems. Process costing does not
use direct allocation to apply business costs to individual goods.
4. Equivalent Units
Management accountants must calculate equivalent units in the process costing system.
Equivalent units represent the amount of unfinished goods left in a process at the end of an
accounting period. This calculation may only be a best guess or an estimate by management

Answer 2:
Statement showing contribution margin of 15000 units (foreign client)

Particulars Calculation Amount(Rs)

Sales 15000 units * Rs. 40 6,00,000
Less: Variable cost
Direct material 15000 units * Rs.20 (3,00,000)
Direct wages 15000 units * Rs.12 (1,80,000)
Variable factory overhead 15000 units * Rs.2 (30,000)
Variable selling and
distribution overhead 15000 units * Rs.2 (30,000)
Contribution 60,000

From the above calculation its shows that the company can accept the special order as it would
increase the company’s operating profit by Rs. 60,000
Cost and Management Accounting

Statement showing contribution margin of 15000 units (domestic client)

Particulars Calculation Amount(Rs)
Sales 15000 units * Rs. 0 7,50,000
Less: Variable cost
Direct material 15000 units * Rs.20 (3,00,000)
Direct wages 15000 units * Rs.12 (1,80,000)
Variable factory overhead 15000 units * Rs.2 (30,000)
Variable selling and
distribution overhead 15000 units * Rs.2 (30,000)
Contribution 2,10,000

From the above calculation it shows that the company should accept the special order
from domestic market and reject the order from foreign client as acceptance of domestic market
would increase the operating profit of the company by Rs. 2, 10,000.

Answer:3 a)
 Department I, the overhead rate has to be calculated on the basis of Direct wages:

𝐅𝐚𝐜𝐭𝐨𝐫𝐲 𝐨𝐯𝐞𝐫𝐡𝐞𝐚𝐝 𝐞𝐬𝐭𝐢𝐦𝐚𝐭𝐞

Department I overhead rate = × 𝟏𝟎𝟎
𝐃𝐢𝐫𝐞𝐜𝐭 𝐥𝐚𝐛𝐨𝐮𝐫 𝐞𝐬𝐭𝐢𝐦𝐚𝐭𝐞

= × 100

= 150%
 Department II, the overhead rate has to be calculated on the basis of machine hours:

𝐅𝐚𝐜𝐭𝐨𝐫𝐲 𝐨𝐯𝐞𝐫𝐡𝐞𝐚𝐝 𝐞𝐬𝐭𝐢𝐦𝐚𝐭𝐞

Department II overhead rate = × 𝟏𝟎𝟎
𝐌𝐚𝐜𝐡𝐢𝐧𝐞 𝐡𝐨𝐮𝐫𝐬 𝐞𝐬𝐭𝐢𝐦𝐚𝐭𝐞

= × 100

= 2.50 per hour

Cost sheet for job no.XYZ

(RS.) (Rs.) (Rs)
Material 2 10 12
Direct labour 5 7 12
Prime cost 7 17 24
Factory overheads: 7.50 32.5 40
(Dept I: Rs. 5*150%
Cost and Management Accounting

Dept II: Rs. 2.5 *13hrs

Total cost of the job 14.5 49.5 64

Total cost of the job

Cost of the job p.u of finished product =
Total number of finished product


= Rs. 4 per unit

Therefore cost of finish product job is Rs.4 per unit

Answer 3.b) Calculation of over absorbed or under absorbed overheads


Actual overheads 8,000 12,200
Absorbed overheads 7,500 12,500
Under-absorbed 500
Over-absorbed overhead 300
Department I has 500 under absorbed overheads and Department II has 300 over absorbed