Accounts Assignment

Name: Priyanka M. Salunkhe

Batch: PT-MIM 2019-2022
Roll no – 24
Lead Faculty: Thakoor sir

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 INDEX

Sr. No Topic Page No

1 Acknowledgement 3

2 Declaration 4

3 Cost Classification 5

4 Product Analysis 16

5 Process Of Capital Budgeting 18

6 Machine Installation Problem 20

ACKNOWLEDGEMENT
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This report cannot be possible without the valuable contribution of the faculty Prof.
Thakoor sir who guided us in doing the project and give us right direction for the
completion of the report in a right way.

During preparation of this report we learn a lot, we actually get a practical knowledge
about the subject and us to get to know how the actual research work is done. During the
research we face a lot of problem while collecting and analyzing the primary data, and
then we take some guidance of a marketing research faculty which guided us in doing the
assignment.

DECLARATION

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We declare that the assignment is purely our work which was conducted under the
supervision of Prof. Thakoor sir. We also declare that this report is the only copy that is
being submitted to you and no other copy has been retained or submitted to any other
Organization

Priyanka Salunkhe

Cost and Management Accounting

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 Q. 1). Explain Classification of Cost

Definition: Cost classification is the logical process of categorizing the different costs
involved in a business process according to their type, nature, frequency and other
features to fulfill accounting objectives and facilitate economic analysis. Cost refers to
the value sacrificed with the aim of gaining something in return.
Every business process involves some cost. It is the basis of profit determination for an
organization.

Knowing about the different expenses facilitate the procedure of cost accounting in an
organization.

A particular cost can be allocated under multiple categories. For instance; salary paid to
an employee is a labor cost as well as a fixed cost. Moreover, the different elements of
cost classification are linked to each other in one or the other way.

Content: Cost Classification

1. Basis of Classification

o Cost Classification by Nature

o Cost Classification by Relation to Cost Centre
o Cost Classification by Functions
o Cost Classification by Behavior
o Cost Classification by Management Decision Making
o Cost Classification by Production Process
o Cost Classification by Time

Basis of Classification

There are various kinds of cost incurred in the production of goods or services, and these
costs are categorized systematically.

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 Some of the principal bases on which different costs can be allocated are as follows:

Cost Classification by Nature

The cost can be differentiated by its nature or the purpose for which it has occurred.

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 It can be treated as an expense under this category and the expenses so incurred are

divided as follows:

 Material: Material cost is the cost of the raw material and its related cost such as
procurement cost, taxes, insurance, freight inwards, etc.
 Labor: Labor cost is the salary and wages paid to the employees, i.e. permanent,
temporary or contractual employees working in an organization. It also
includes PF contribution, bonus, commission, incentives, allowances, overtime pay,
etc.
 Other Expenses: All the other overheads excluding material and labor come
under this head. Some of these are packaging, promotion, job processing charges,
etc.

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Cost Classification by Relation to Cost Centre
Another basis of differentiating the costs is categorizing them by their allocation in the
production process of goods or services.

The points as mentioned earlier under the cost classification by nature are used under this
category to further sub-categories the elements of this category. To get a better
understanding of it, let us read below

 Direct Cost: Direct cost is the significant cost immediately associated with a
production process. It can be seen as a prime cost for any business. It is sub-divided
into direct material cost, direct labor cost and other direct expenses.
 Indirect Cost: Indirect cost is the cost which cannot be directly allocated to a
particular process of production. It is a secondary cost and is majorly seen as of
three types – indirect material cost, indirect labor cost and other indirect expenses.

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Cost Classification by Functions
The cost can also be classified by the business functions for which the resources have
been used.

There are five significant functions of a business which involves some expense and are
essential to the organization in their way. The cost involved in such business operations
are explained below:

 Production: Production cost comprises of all the direct and indirect costs incurred
in the production of goods and services.
 Administration: The costs involved in the management activities of an
organization like electricity, stationery, telephone expenses, rent etc. These are also
known as administrative overheads.
 Selling: The indirect costs incurred on the sales function of the goods and services
like an advertisement, promotion, research, customer service, etc. are clubbed under
selling cost.
 Distribution: Distribution cost refers to the cost incurred for making the goods or
services available to the customers. These are warehousing, delivery service,
transportation, etc.
 Research and Development: Research is essential to develop a new product or
modify an existing one. The cost incurred on the research team, research
implementation, findings, etc. comes under this category.

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Cost Classification by Behavior
The cost involved in any business process can be differentiated on the grounds of its
volatility concerning the fluctuation in business activity in the short run.

The following classification of cost by its behavior will give a clear illustration of the
above statement:

 Fixed Cost: The cost which is hardly affected by the temporary change taking
place in business activity is known as a fixed cost. It includes rent, depreciation,
lease, salary, etc.
 Variable Cost: The cost which changes proportionately with the change in
production quantity or other business activity is termed under variable cost. Raw
material, packaging, sales commissions, wages, etc. are variable costs.
 Semi-Variable Cost: The cost which is moderately influenced by the change in
business activity is called semi-variable cost. It includes power consumption,
maintenance cost, management cost, supervision cost, etc.

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Cost Classification by Management Decision
Making
Cost is not just a price paid to generate some value, but it is also used as a tool by the
management for decision making.

Managerial decisions are framed depending upon the following types of cost involved in
carrying out of business:

Marginal Cost: Marginal cost is the cost of producing an additional unit and its impact
on the total cost of production.

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Differential Cost: When there is an increment or decrement in the cost of bulk
production, the change in the cost of a single unit is also determined which is known as
differential cost.

Opportunity Cost: The value of one or more products given up to acquire the desired
product or service is known as opportunity cost. For instance; while choosing green tea, a
person has to give up the value he must have derived from coffee or regular tea.

Replacement Cost: When machinery or any other asset becomes obsolete or involve
high maintenance cost, and simultaneously a better asset is available in the market which
can replace it, then the cost involved in such substitution is known as replacement cost.
For example; a transportation company needs to replace its trucks from time to time to
avoid excessive repairing expenses.

Sunk Cost: The cost which has been born by the organization in the past and cannot be
recovered at any stage of the business process is termed as a sunk cost. Freight inwards
paid at the time of buying machinery has to be written off at the time of selling it.

Normal Cost: The routine cost associated with the manufacturing of goods or services
under usual circumstances is called a normal cost. It includes all direct expenses such as
salary, material, rent, etc.

Abnormal Cost: The cost that arises suddenly and unknowingly under unfavorable
situations is known as abnormal cost. For instance; workers go on strike, theft or robbery,
fire in the premises, etc.

Avoidable Cost: Such costs are under the control of management and can be prevented
as per the organizational need. For example; an enterprise upgrades its technology by
installing self-operative machines to avoid the labor charges it pays

Unavoidable Cost: The cost which is pre-determined and inevitable is called an

unavoidable cost.

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Cost Classification by Production Process
This basis of cost classification is significantly applicable in the manufacturing industries
or factories where goods are produced.

All production or manufacturing activities involve different types of costs. According to

the nature of the production process, these costs can be classified as below:

 Batch Cost: The cost incurred while producing a whole lot comprising of identical
products (batch) is known as batch cost. Each batch differs from the other, and the
units lying under a batch are identified by their batch number. Pharmaceuticals,
automobiles, electronic products are some of the examples.
 Process Cost: The cost incurred on performing different operations in a
streamlined production process is termed as a process cost. By dividing the total
cost of a process with the number of units produced, we can derive the process cost
of a single unit or product.

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  Batch Cost: The cost incurred while producing a whole lot comprising of identical
products (batch) is known as batch cost. Each batch differs from the other, and the
units lying under a batch are identified by their batch number. Pharmaceuticals,
automobiles, electronic products are some of the examples.
 Process Cost: The cost incurred on performing different operations in a
streamlined production process is termed as a process cost. By dividing the total
cost of a process with the number of units produced, we can derive the process cost
of a single unit or product.
 Operation Cost: The cost involved in a particular business function contributing
to the production process is known as operation cost. It helps in regulating the
mechanism of business activities by monitoring the cost incurred on each business
operation.
 Operating Cost: Operating cost refers to the day to day expenses incurred by an
organization to ensure uninterrupted functioning of the business is known as an
operating cost.
 Contract Cost: The cost of entering into a contract with a buyer or seller by
mutually agreeing to the terms and conditions so mentioned is called a contract
cost. It includes a bidding contract, price escalation contract, tenders, etc.
 Joint Cost: The combined cost involved in the production of two or more useful
products simultaneously is known as the joint cost. For example; the cost of
processing milk to get cottage cheese and buttermilk

Cost Classification by Time

The nature, importance and liability of a cost vary as per the time it takes place or has
been assessed.

A cost which is a priority today may not be that important tomorrow or a cost which has
been overlooked today may be considered as a relevant cost tomorrow.

Thus, depending upon the period a cost has occurred or assessed, it can be categorized
under the following heads:

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Cost Classification by Time
The nature, importance and liability of a cost vary as per the time it takes place or has
been assessed.

A cost which is a priority today may not be that important tomorrow or a cost which has
been overlooked today may be considered as a relevant cost tomorrow.

Thus, depending upon the period a cost has occurred or assessed, it can be categorized

under the following heads:

 Historical Cost: Any actual cost ascertained and evaluated after it has been
incurred, is termed a historical cost. It can be committed either on the production of
goods and services or asset acquisition.
 Pre-determined Cost: The cost which can be identified and calculated before the
production of goods and services based on the cost factors and data is called a pre-
determined cost. It can be either a standard cost or an estimated cost.
 Standard Cost: An actual cost which is pre-determined as per certain norms and
guidelines to provide as a base for cost control is termed as a standard cost.
 Estimated Cost: The cost of business operation presumed on the grounds of
experience is known as an estimated cost. It is merely based on assumptions and
therefore considered to be less accurate to determine the actual cost.

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 Q. 2). Cost analysis of a Product

What are Product Costs?

Product costs are the costs that are incurred to create a product that is intended
to sale for the customer.

Product costs are the Direct Materials, Direct Labor, Manufacturing overheads.

Company A is a manufacturer of tables. Its product costs may include:

 Direct material: The cost of wood used to create the tables.

 Direct labor: The cost of wages and benefits for the carpenters to
create the tables.
 Manufacturing overhead (indirect material): The cost of nails used to
hold the tables together.
 Manufacturing overhead (indirect labor): The cost of wages and
benefits for the security guards to overlook the manufacturing facility
 Manufacturing overhead (other): The cost of factory utilities.

Company A produced 1,000 tables. To produce 1,000 tables, the company

incurred costs of:

 10 lacs on wood
 1.5 lacs on wages for carpenters and 35000 on wages for security guards
to overlook the manufacturing facility
 10000 for a bag of nails to hold the tables together
 35000 for factory rent and utilities

Total product costs: 10 lacs (direct material) + 1.5 lacs (direct labor) + 10000
(indirect material) + 35000 (indirect labor) + 35000 (other costs) = 12.30 lacs

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Costs on Financial Statements
Product costs are treated as inventory (an asset) on the balance sheet and do not
appear on the income statement as costs of goods sold until the product is sold.

A company manufactures 50 units of widgets at a unit product cost of 350. On the

balance sheet, there would be a 350 x 50 = 17500 increase in inventory. If the
company sells 20 units of widgets, 350 x 20 = 7000 in inventory would be transferred
to the cost of goods sold on the income statement while the remaining 10500 would
remain in inventory on the balance sheet.

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 Financial Management

Q. 1). Explain the Process of Capital Budgeting

WHAT IS CAPITAL BUDGETING?

Capital budgeting is a company’s formal process used for evaluating potential
expenditures or investments that are significant in amount. It involves the decision
to invest the current funds for addition, disposition, modification or replacement of
fixed assets. The large expenditures include the purchase of fixed assets like land
and building, new equipment’s, rebuilding or replacing existing equipment’s,
research and development, etc. The large amounts spent for these types of projects
are known as capital expenditures. Capital Budgeting is a tool for maximizing a
company’s future profits since most companies are able to manage only a limited
number of large projects at any one time.
Capital budgeting usually involves calculation of each project’s future accounting
profit by period, the cash flow by period, the present value of cash flows after
considering time value of money, the number of years it takes for a project’s cash
flow to pay back the initial cash investment, an assessment of risk, and various
other factors.
Capital is the total investment of the company and budgeting is the art of
building budgets.

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CAPITAL BUDGETING PROCESS:

A) Project identification and generation:

The first step towards capital budgeting is to generate a proposal for investments.
There could be various reasons for taking up investments in a business. It could be
addition of a new product line or expanding the existing one. It could be a proposal
to either increase the production or reduce the costs of outputs.

B) Project Screening and Evaluation:

This step mainly involves selecting all correct criteria’s to judge the desirability of
a proposal. This has to match the objective of the firm to maximize its market
value. The tool of time value of money comes handy in this step.
Also the estimation of the benefits and the costs needs to be done. The total cash
inflow and outflow along with the uncertainties and risks associated with the
proposal has to be analyzed thoroughly and appropriate provisioning has to be
done for the same. 

C) Project Selection:
There is no such defined method for the selection of a proposal for investments as
different businesses have different requirements. That is why, the approval of an
investment proposal is done based on the selection criteria and screening process
which is defined for every firm keeping in mind the objectives of the investment
being undertaken.
Once the proposal has been finalized, the different alternatives for raising or
acquiring funds have to be explored by the finance team. This is called preparing
the capital budget. The average cost of funds has to be reduced. A detailed
procedure for periodical reports and tracking the project for the lifetime needs to be
streamlined in the initial phase itself. The final approvals are based on profitability,
Economic constituents, viability and market conditions.

D) Implementation:
Money is spent and thus proposal is implemented. The different responsibilities
like implementing the proposals, completion of the project within the requisite
time period and reduction of cost are allotted. The management then takes up the
task of monitoring and containing the implementation of the proposals.
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E) Performance review:
The final stage of capital budgeting involves comparison of actual results with the
standard ones. The unfavorable results are identified and removing the various
difficulties of the projects helps for future selection and execution of the proposals.

Q. 2). A project Manager needs to install a Machine

Calculate Payback Period, Payback Profitability, ARR on Initial Investment, ARR on Average rate of
return, Net Present Value, Profitability index. Assume cost of capital 10%

For solution refer the working done in note book

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