COST ACCOUNTING- SEMESTER 4

VAISHNAV’S PERSONAL NOTES

1. Cost Accounting- Objectives, Scope, Limitation and Advantages.

A. Cost Accounting is a business practice in which we record, examine, summarize, and study the
company’s cost spent on any process, service, product or anything else in the organization. This helps
the organization in cost controlling and making strategic planning and decision on improving cost
efficiency. Such financial statements and ledgers give the management visibility on their cost
information. Management gets the idea where they have to control the cost and where they have to
increase more, which helps in creating a vision and future plan. There are different types of cost
accounting such as marginal costing, activity-based costing, standard cost accounting, lean
accounting. In this article, we will discuss more objectives, advantages, costing and meaning of costs.

Scope of Cost Accounting

Cost Ascertainment: This is one of the main criteria for cost accounting. Cost ascertainment is the process
of collection of expenses and by analysis of these expenses. It links up the production of various products at
their different stages of production with such expenses.

Cost Accounting: This is the process of accounting for the costs of a firm. Classifying and recording of
costs is the first step in the process. The end result is the preparation and presentation of this statistical data in
an acceptable format.

Cost Control: Cost control is the process by which action is taken to reduce the costs and expenses to boost
profitability and efficiency.

Objectives of Cost Accounting

. Thus, the following are the main objectives of cost accounting:

1. Ascertainment of the cost per unit of the different products that a business concern manufacturers.
2. To correctly analyze the cost of both the process and operations.

3. Disclosure of sources for wastage of material, time, expenses or in the use of the equipment and the
preparation of reports which may be necessary to control such wastage.

4. Provide requisite data and help in fixing the price of products manufactured or services rendered.

5. Determination of the profitability of each of the products and help management in the maximization of
these profits.

6. Exercise effective control of stocks of raw material, work-in-progress, consumable stores, and finished
goods so as to minimize the capital invested in them.

7. Present and interpret data for management planning, decision-making, and control.
8. Help in the preparation of budgets and implementation of budgetary control.

9. Aid management in the formulation and implementation of incentive bonus plans on the basis of
productivity and cost savings.

10. Organization of cost reduction programmes with the help of different departmental managers.

11. To provide specialized services for cost audit in order to prevent errors and frauds.

12. To facilitate prompt and reliable information to management.

13. Determination of costing profit or loss by linking the revenues to costs of those products or services
by selling which the revenues have arisen.

Advantages of Cost Accounting

1] Measuring and Improving Efficiency: Cost accounting allows for data that enables the firm to measure
efficiency. This could be efficiencies with

2)Unprofitable Activities: Just because a firm is making overall profits, it does not mean all activities are
profitable. Cost accounting will help us identify the profitable and unprofitable activities of the firm.

3] Fixing Prices : This is one of the important advantages of cost accounting. Many businesses price their
products based on the cost of production of these products.

4] Price Reduction: Sometimes during tough economic conditions, like depression, the prices have to be
reduced. In some cases, these prices are reduced to below the total cost of the product.

5] Control over Stock: Another important advantage of cost accounting is that it helps with restocking and
control over materials. Cost accounting will help us calculate the most ideal and economic re-order level and
quantities.

6] Evaluates the Reasons for Losses: Every firm has to deal with periods of profits and losses. But now
they must always evaluate or investigate the reasons for the losses suffered.

7] Aids Future Planning: One of the biggest advantages of cost accounting is that it will help the
management with future plans they may have. For any production or selling plans, it is important to have
detailed data about the machines, the labour capacity, output levels, levels of efficiency of each process etc.

Limitations of Cost Accounting

1. Lack of uniformity:
Cost accounting lacks a uniform procedure. It is possible that two equally competent cost accountants
may arrive at different results from the same information. Keeping this limitation in view, all cost
accounting results can be as mere estimates.

2. Conceptual diversity:
There are a large number of conventions and flexible factors such as classification of cost into its
elements, issue materials on average or standards price, apportionment of overhead expenses, arbitrary
allocation of joint costs, division of overhead into fixed and various and variable costs, division of cost
into normal and abnormal and controllable and non-controllable and adoption of marginal and standard
costs due to which it becomes difficult to have exact costs. In which a contacts, the reliable of cost
accounting might be low.

3. Costly:
There are many formalities which are to be observed by a small and medium size concerned due to which
the establishment and running costs are so much that it becomes difficult for their concerned to afford us
cost. Thus it can be used only by big concerned.

4. Ignorance of futuristic situation:

The contribution of cost accounting for heading futures situation has not been much for example, it is has
not evolved so far any tool for heading inflation situation.

5. Lack of double entry systems:

Under cost accounting. A double entry system is not adopted that does not enable to checks the
arithmetic's accuracy of the transaction and locate the errors.

6. Developing stage:
Cost accounting is to development stage since its principle concepts and conversions are not fully
developed.

2. Financial Accounting vs Cost Accounting

Let us now look at some key differences in Financial Accounting vs Cost Accounting.

Sr No Financial Accounting Cost Accounting

Records and summarizes cost

Records financial data of the information and data. This includes
1 organization. So it records all information about labour, materials
relevant monetary data and various overheads of the
manufacturing process.

2 Financial accounting only deals in Cost accounting uses both historical

historical costs (only actual costs and pre-determined costs (standard
 and figures) costs, estimates etc.)

The users of the information Information provided by cost

provided by financial accounting accounting is only meant for people
3
are both internal and external within the firm like management,
users employees etc.

Financial accounting is mandatory

Cost accounting is only done by
for all firms. Every organization
4 manufacturing firms. And in most
has to keep some record of its
cases, it is not mandatory.
financial transactions

The emphasis here is on recording Other than recording data it also

5 the transactions/data and provides a system of cost control of
presenting it in the given format. labour, material, overhead costs

Financial accounts deal with the

Costing will enable us to get the
business in its entirety. So it
6 profit or loss for individual
provides us with profit or loss for
products, process, job etc.
the whole concern

In financial accounting, there is no

In Cost accounting, forecasting is
aspect of forecasting. It is simply
7 possible using some of the
a record of the financial position
budgeting techniques
of the firm

Financial accounting is strictly a

positive science. There is rigidity Cost accounting is both a positive
8
in the process due to legal and normative science.
requirements
Financial Management
Accounting Accounting
Objectives The main objectives of financial
accounting are to disclose the end
results of the business, and the
financial condition of the business
on a particular date.
Audience Financial accounting produces
information that is used by external
parties, such as shareholders and
lenders.
Optional? It is legally required to prepare
financial accounting reports and
share them with investors.
Segment reporting Pertains to the entire organization.
Certain figures may be broken out
for materially significant business
units.
Focus Financial accounting focuses on
history; reports on the prior quarter
or year.
Format Financial accounts are reported in a
specific format, so that different
organizations can be easily
compared.
Rules Rules in financial accounting are
prescribed by standards such
as GAAP or IFRS. There are legal
requirements for companies to
follow financial accounting
standards.
Reporting frequency Defined - annually, semi-annually,
and duration quarterly, yearly.
Information Monetary, verifiable information.
3. Cost Techniques and Menthods
The main objective of managerial
accounting is to help management by
providing information that is used to
plan, set goals and evaluate these goals.
Managerial accounting produces
information that is used within an
organization, by managers and
employees.
Managerial accounting reports are not
legally required.
Pertains to individual departments in
addition to the entire organization.
Managerial accounting focuses on the
present and forecasts for the future.
Format is informal and is on a per
department/company basis as needed.
Managerial accounting reports are only
used internally within the organization;
so they are not subject to the legal
requirements that financial accounts are.
As needed - daily, weekly, monthly.
Monetary and company goal driven
information.
Methods of Costing
Every business and organization has different nature and characteristics. So it also needs to employ different
costing systems to ascertain the cost of their products. So let us look at some of the most common and
popular methods of costing.

1] Job Costing

Many firms and businesses work on a job work basis. In such cases, we use the job costing method. Here the
cost is assigned to a specific job, assignment etc.

There is no pre-production here, each order is made to the specifications needed. If the system is
implemented accurately we can find the profitability of each job. Some important features of job costing are,

• It concerns itself with specific order costing, i.e the cost of each order or job regardless of the time
taken to finish the job. But usually, the duration of each job is relatively short.

• The costs are collected at the completion of the job

• Prime costs are traced and overheads are assigned to each job on some appropriate proportionate basis.

2] Batch Coting

Batch costing is used when the goods are not produced to demand but are pre-produced. Here the production
process is continuous and occurs in batches.

These batches may be for a specific order or some pre-determined quantity. In this system, the goods are
more or less uniform.

The total cost incurred during the production of one such batch of goods is divided by the number of units
produced to give us the cost per unit.

This method is very useful for consumer electronic goods such as televisions, washing machines etc.

3] Process Costing

This is one of the most popular methods of costing. There are many goods that are produced continuously.

These goods are homogeneous and are usually produced in huge quantities. So the method of process costing
is used to find the cost of production of each unit.

In continuous processing, the output of one process becomes the input of the next process and so on until we
achieve our finished product.
So for the purposes, we find out the costs of each process and divided it by the number of units produced in
this process. Some examples of products that use process costing are sugar, edible oil, chemicals, salt etc.

4] Operating Costing

Among all the methods of costing, the one best suited to the service sector is operating costing. We use
operating costs to calculate the cost of the services provided to the customers.

The service must be uniform service provided to all customers, not specialized services. And to ascertain the
cost we average the total cost over the total services rendered.

5] Contract Costing

To work out the cost of a contract undertaken we employ contract costing. So it will help us track the costs of
a specific contract with a specific customer.

These methods of costing are mainly used for construction contracts, like the construction of complexes,
highways, bridges, dams etc.

As you can see there are a lot of similarities between job costing and contract costing. But job costing is
usually for a shorter period.

Techniques of Costing

1] Marginal Costing

Marginal costing is based on the principle of dividing all costs into fixed cost and variable cost.

Fixed costs are unrelated to the levels of production. As the name suggests these costs remain the same
irrespective of the production quantities.

Variable costs change in relation to production levels. They are directly proportionate. The variable cost per
unit, however, remains the same.

And in marginal costing, we only consider these variable costs while calculating the production costs.
Of all the available techniques of costing, marginal costing is most suitable for making decisions like how
much material to buy, the correct product mix, fixing the selling price etc.

Understand the Meaning of Cost, Costing, and Cost Accounting here in detail.

2] Standard Costing

Standard costing is a technique where the firm compares the costs that were incurred for the production of the
goods and the costs that should have been incurred for the same.

Essentially it is the comparison between actual costs and standard costs. The differences between the two are
variances.

The standards costs we use for this comparison are pre-determined. Such standard costs of materials, labor,
overheads are calculated with scientific and technical analysis. They help set the benchmark for the whole
industry.

If the actual costs are greater than these standard costs, the variance is adverse. So we analyze the reason for
this adverse variance and try and solve the root causes.

And if the standard costs are higher than the actual costs, the variance is favorable. Even favorable variances
must be analyzed.

3] Budget and Budgetary Control

When we talk about the techniques of costing, budgetary control is an important technique. A budget is a
quantitative statement prepared prior to the defined period in order to help achieve certain objectives of the
firm.

This budget can be in the form of quantities or can be a monetary statement.

For example, a production budget will deal in quantities of goods to be produced. On the other hand, a
marketing budget will be a monetary statement.

Another important feature of a budget is that it is prepared ahead of time. So the budget can be for the
next quarter or the next year or any such predetermined period.

A budget will lay down the objectives of this period, and the firm’s methods to achieve them.

Budgetary control is the preparation of budgets and analysis of the actual performance of the firm in
comparison to the budgeted numbers.
 If there is a lot of variation from the budget the firm can take corrective action. This is how budgetary control
works.

4. What is process costing?

Definition of Process Costing

Process costing is a term used in cost accounting to describe one method for collecting and
assigning manufacturing costs to the units produced. A processing cost system is used when nearly
identical units are mass produced. (Job costing or job order costing is a system used to collect and assign
manufacturing costs to units that vary from one another.)
Example of Process Costing
Let's assume that a company manufactures large quantities of an identical product. The product requires
several processing operations, each of which occurs in a separate department. In the first department, the
following processing costs were incurred during the month of June:

• Direct materials of $150,000

• Conversion costs of $225,000
If the equivalent of 100,000 units were processed in June, the per unit costs will be $1.50 for direct
materials and $2.25 for conversion costs. These costs will then be transferred to second department where
its processing costs will be added.

Characterstics:

1. The production is carried on continuously and passing two or more processes.

2. Only homogeneous products are produced.

3. The production will be stopped if the plant and machinery is shut down for repairs.

4. The management has clearly defined process cost centers and the accumulation of costs such as cost of
material, cost of labour and overheads by the cost centre.
5. The accurate accounting records are maintained in process wise as the number of units produced
completely, the number of units partly produced and total costs incurred.

6. The finished product of one process becomes the raw material of the next process or operation and so
on until the final product is obtained.

7. Some losses may arise in all the processes due to avoidable and unavoidable reasons. Such losses may
be normal and/or abnormal.

8. Accounting treatment of normal losses and abnormal losses are studied in this method of costing.

9. Sometimes, abnormal gain is also available in certain processes.

10. Accounting treatment of such abnormal gain is also studied in this method of costing.
11. Sometimes, goods are transferred from the process to next process at transfer price instead of cost

price.
12. The transfer price is compared with market price to know the level of efficiency or losses occurring in
a particular process.

What is Accounting Treatment:

An asset that is completely depreciated and continues to be used in the business concern will be reported
on the balance sheet (B/S) at its cost along with its accrued depreciation. There will be no depreciation
expense maintained after the asset is completely depreciated. No entry is needed until the asset is
disposed of via sale, salvage, retirement, etc.,
Normal and Abnormal Loss

Goods sent on consignment does not become the property of consignee as he has not bought them. The
ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the
books of the consignor, not the consignee.

The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold
he will deduct his expenses, commission,etc., from the sale proceeds and remits the balance to the consignor.
If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are
two types of losses that can occur in consignment :

1] Normal Loss

The normal loss means a loss which is inherited and can not be avoided. It should also be considered while
valuing the closing stock.

To ascertain the cost per unit after the normal loss, we use the following formula:

Cost per unit=Total cost+Expenses incurredTotal quantity–Normal lossCost per unit=Total

cost+Expenses incurredTotal quantity–Normal loss
For example: If a certain amount of oranges are consigned, some of them will be destroyed in loading and
unloading whereas some of them will not be in a state to be sold. Suppose, 10,000 oranges were sent to the
consignee at ₹30 per kg and freight of ₹60,000. It is known that there would be a normal loss of 10%.

Cost per kg=300000+600009000i.e.10000−10=₹40Cost per kg=300000+600009000i.e.10000−10=₹40

If the unsold quantity is 500 its value will be(500×40=20000)

2] Abnormal Loss

Some losses are accidental or can be caused by carelessness. Example: by theft or loss by fire,
flood, earthquake, war, accidents in transit, etc. Such losses are more or less abnormal. Suppose a part of
goods is stolen, now this will reduce the value of stock and therefore profit on consignment. Now the best
thing is to find out the cost of goods that are lost. After finding out the value, consignment a/c is credited and
abnormal a/c is debited and then transferred to profit and loss a/c, so as to arrive at correct profit or loss of
consignment.

Some businessmen also take an insurance policy in respect of goods sent or received. Such a policy is
obtained only in respect of abnormal loss caused to goods.

5. Marginal Costing-Characteristics and its used in decision making in the organization.

Marginal Costing
Definition: Marginal Costing is a costing technique wherein the marginal cost, i.e. variable cost is
charged to units of cost, while the fixed cost for the period is completely written off against the
contribution.

The term marginal cost implies the additional cost involved in producing an extra unit of output,
which can be reckoned by total variable cost assigned to one unit. It can be calculated as:

Marginal Cost = Direct Material + Direct Labor + Direct Expenses + Variable Overheads

Characteristics of Marginal Costing

▪ Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of variability into
fixed cost and variable costs. In the same way, semi variable cost is separated.
▪ Valuation of Stock: While valuing the finished goods and work in progress, only variable cost are
taken into account. However, the variable selling and distribution overheads are not included in the
valuation of inventory.
▪ Determination of Price: The prices are determined on the basis of marginal cost and marginal
contribution.
▪ Profitability: The ascertainment of departmental and product’s profitability is based on the
contribution margin.
In addition to the above characteristics, marginal costing system brings together the techniques of cost
recording and reporting.

Application of Marginal Costing in Decision Making

1. Cost Control:

Marginal costing divides the total cost into fixed and variable cost. Fixed cost can be controlled by the top
management and that to a limited extent. Variable costs can be controlled by the lower level of
management. Marginal costing by concentrating all efforts on the variable costs can control and thus
provides a tool to the management for control of total cost.

There may be situations where the profits of the concern are decreasing in-spite of increase in sales. If the
data is presented on the basis of absorption costing basis, the management may not be able to comprehend
the results. Marginal costing analysis will correctly bring out the reasons as to why the profits are
decreasing in-spite of increase in sales.

Moreover, it should be noted that in marginal costing fixed costs are not eliminated at all. These are
shown separately as a deduction from the contribution instead of merging with cost of sales and
inventories. This helps the management to have control on fixed costs also in the long period as these
costs are programmed in advance.

2. Profit Planning:

Marginal costing helps the profit planning i.e., planning for future operations in such a way as to
maximise the profits or to maintain a specified level of profit. Absorption costing fails to bring out the
correct effect of change in sale price; variable cost or product mix on the profits of the concern but that is
possible with the help of marginal costing.

Profits are increased or decreased as a consequence of fluctuations in selling prices, variable costs and
sales quantities in case there is fixed capacity to produce and sell.

3. Evaluation of Performance:

The different products, departments, markets and sales divisions have different profit earning
potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector of a
concern.

Performance evaluation is better done if distinction is made between fixed and variable expenses. A
product, department, market or sales division giving higher contribution should be preferred if fixed
expenses remain same.

4. Decision Making:

The information provided by the total cost method is not sufficient in solving the management problems.
Marginal costing technique is used for providing assistance to the management in vital decision-making,
especially in dealing with the problems requiring short-term decisions where fixed costs are excluded.

6. BEP Analysis-Assumptions and its application

Break-even point represents that volume of production where total costs equal to total sales revenue
resulting into a no-profit no-loss situation.If output of any product falls below that point there is loss; and
if output exceeds that point there is profit. Thus, it is the minimum point of production where total costs
are recovered. Therefore, at break-even point.

Sales Revenue – Total Cost

or, Sales – Variable Cost = Contribution = Fixed Cost

It can be concluded that at break-even point the contribution earned just covers the fixed cost and, at
levels below the point, contribution earned is not sufficient to match the fixed cost and, at levels above the
point, contribution earned more than recovers the fixed cost.

P is the break-even point in the break-even chart where OS and CT—being the sales line and total cost
line—intersects. Loss results in the left side of P, i.e., before the break-even point is reached, and, beyond
P, profit starts to generate. Break-even point has a wide use in the field of marginal costing and helps to
decide the product mix, fixation of selling price, steps to be taken in long-term planning etc.

Break-even point can be ascertained by using the following formula:

Assumptions Underlying Break-Even Analysis:

The break-even analysis is based on certain assumptions.

They are:
(i) All costs can be separated into fixed and variable components,

(ii) Fixed costs will remain constant at all volumes of output,

(iii) Variable costs will fluctuate in direct proportion to volume of output,

(iv) Selling price will remain constant,

(v) Product-mix will remain unchanged,

(vi) The number of units of sales will coincide with the units produced so that there is no opening or
closing stock,

(vii) Productivity per worker will remain unchanged,

Limitations of Break-Even Analysis:

1. Break-even analysis is based on the assumption that all costs and expenses can be clearly separated into
fixed and variable components. In practice, however, it may not be possible to achieve a clear-cut division
of costs into fixed and variable types.

2. It assumes that fixed costs remain constant at all levels of activity. It should be noted that fixed costs
tend to vary beyond a certain level of activity.

3. It assumes that variable costs vary proportionately with the volume of output. In practice, they move,
no doubt, in sympathy with volume of output, but not necessarily in direct proportions..

4. The assumption that selling price remains unchanged gives a straight revenue line which may not be
true. Selling price of a product depends upon certain factors like market demand and supply, competition
etc., so it, too, hardly remains constant.

5. The assumption that only one product is produced or that product mix will remain unchanged is
difficult to find in practice.

6. Apportionment of fixed cost over a variety of products poses a problem.

7. It assumes that the business conditions may not change which is not true.

8. It assumes that production and sales quantities are equal and there will be no change in opening and
closing stock of finished product, these do not hold good in practice.
9. The break-even analysis does not take into consideration the amount of capital employed in the
business. In fact, capital employed is an important determinant of the profitability of a concern.

7. Standard Costing-Meaning,Advantages and Limitation.

It is a method of costing by which standard costs are employed. According to ICMA, London,
Standard Costing is “the preparation and use of standard costs, their comparison with actual
cost and the analysis of variances to their causes and points of incidence”.
According to Wheldon, it is a method of ascertaining the costs whereby statistics are prepared
to show:
(i) The standard cost;

(ii) The actual cost;

(iii) The difference between these costs which is termed the variance.

Advantages of Standard Costing:

The following advantages may be derived from Standard Costing:
(i) Standard Costing serves as a guide to the management in several management functions while
formulating prices and production policies etc.

(ii) More effective cost control is possible under standard costing if the same is reviewed and analysed at
regular intervals for improvements and immediate action can be taken if deviations from standards are
found out which, ultimately, leads to cost reduction.

(iii) Analysis of variance and its measurement helps to detect inefficiencies and mistakes which enable
the management to investigate the reasons.

(iv) Since standard costs are predetermined costs they are very useful for planning and budgeting. It also
helps to estimate the effect of changes in Cost-Price-Volume relationship which also helps the
management for decision-making in future.
(v) As standard is fixed for each product, its components, materials, process operation etc. it improves the
overall production efficiency which also ultimately reduces cost and thereby increases profit.

(vi) Once the Standard Costing System is implemented it will lead to saving cost since most of the costing
work can be eliminated.

(vii) Delegation of authority and responsibility becomes effective by setting up standards for each cost
centre as the supervisors or executives of each cost centre will know the standard which they have to
maintain.

(viii) This system also helps to prepare Profit and Loss Account promptly for short period in order to
know the trend of the business which helps the management to take decisions promptly.

(ix) Standard costing also is used for inventory valuation purposes. Stock can be valued at standard cost
which can reduce the fluctuation of profit for different methods of valuation for the same.

(x) Efficiency of labour is promoted.

(xi) This system creates cost-consciousness among all employees, executives and top management which
increase efficiency and productivity as well.

Disadvantages of Standard Costing:

The alleged disadvantages of Standard Costing are:
(i) Since Standard Costing involves high degree of technical skill, it is, therefore, costly. As such, small
organisations cannot, introduce the system due to their limited financial resources. But, once introduced,
the benefits achieved will be far in excess to its initial high costs.

(ii) The executives are liable for those variances that are found from actions which are actually
controllable by them. Thus, in order to fix up the responsibilities, it becomes necessary to segregate
variances into non-controllable and controllable portions although that is not an easy task.
(iii) Standards are always changing since conditions of the business are equally changing. So, standards
are to be revised in order to make them comparable with actual results. But revision of standards creates
many problems, particularly in inventory adjustment.

(iv) Standards are either too liberal or rigid since the same are based on average past results, attainable
good performance or theoretical maximum efficiency. So, if the standards are very high, it will adversely
affect the morale and motivation of the employees.

8. Variances analysis-Reasons for variances in materials and labour

The function of standards in cost accounting is to reveal variances between standard costs which are
allowed and actual costs which have been recorded. The Chartered Institute of Management
Accountants (UK) defines variances as the difference between a standard cost and the comparable
actual cost incurred during a period. Variance analysis can be defined as the process of computing the
amount of, and isolating the cause of variances between actual costs and standard costs. Variance
analysis involves two phases:

(1) Computation of individual variances, and

(2) Determination of Cause (s) of each variance.

Material Cost Variance:

Material cost variance is the difference between the actual cost of direct material used and standard cost
of direct materials specified for the output achieved. This variance results from differences between
quantities consumed and quantities of materials allowed for production and from differences between
prices paid and prices predetermined.

This can be computed by using the following formula:

Material cost variance = (AQ X AP) – (SQ X SP)

Where AQ = Actual quantity

AP = Actual price
SQ = Standard quantity for the actual output

SP = Standard price

Material Usage Variance: The material quantity or usage variance results when actual quantities of raw
materials used in production differ from standard quantities that should have been used to produce the
output achieved. It is that portion of the direct materials cost variance which is due to the difference
between the actual quantity used and standard quantity specified.

As a formula, this variance is shown as:

Materials quantity variance = (Actual Quantity – Standard Quantity) x Standard Price

A material usage variance is favourable when the total actual quantity of direct materials used is less than
the total standard quantity allowed for the actual output.

II. Labour Variances:

Direct labour variances arise when actual labour costs are different from standard labour costs. In analysis
of labour costs, the emphasis is on labour rates and labour hours.

Labour cost variance denotes the difference between the actual direct wages paid and the standard direct
wages specified for the output achieved.

This variance is calculated by using the following formula:

Labour cost variance = (AH x AR) – (SH x SR)

Where:
AH = Actual hours

AR = Actual rate

SH = Standard hours

SR = Standard rate
1. Labour Efficiency Variance:
The calculation of labour efficiency or usage variance follows the same pattern as the computation of
materials usage variance. Labour efficiency variance occurs when labour operations are more efficient or
less efficient than standard performance. If actual direct labour hours required to complete a job differ
from the number of standard hours specified, a labour efficiency variance results; it is the difference
between actual hours expended and standard labour hours specified multiplied by the standard labour rate
per hour.

Labour efficiency variance is computed by applying the following formula:

Labour efficiency variance = (Actual hours – Standard hours for the actual output) x Std. rate per hour.

9. Problems on fixation of stock levels

https://youtu.be/0YLHjA_OePA
10. Problems on primary and secondary distribution
https://youtu.be/bQ_6MOYnkfc
https://youtu.be/NOQmvKPCzuA
11. Problems on cost-sheet/job costing/process costing
https://youtu.be/p-ZRp1G4sAM
https://youtu.be/Z_jygh-e0Ts
https://youtu.be/yGY_CKPaKNE

12. Problems on marginal coadting-P/V ratio, BEP analysis, income statement.

https://youtu.be/i_7dxah6h3w

13. Problems on fixation of stock levels

https://youtu.be/kuTBkXJAu90
 Short Answers

1. Cost control and Cost reduction

Cost Control: Cost Control is a process in which we focus on controlling the total cost through competitive
analysis. It is a practice which works to align the actual cost in agreement with the established norms. It
ensures that the cost incurred on production should not go beyond the pre-determined cost. Cost Control
involves a chain of various activities, which starts with the preparation of the budget in relation to production.

Cost Reduction: Cost Reduction is a process, which aims to lower the unit cost of a product manufactured
or service rendered without affecting its quality. It can be done by using new and improved methods and
techniques. It ascertains substitute ways to reduce the production cost of a unit. Thus, cost reduction ensures
savings in per unit cost and maximization of profits of the enterprise. Cost Reduction aims at cutting off the
unnecessary expenses which occur during the production Process, storage, selling and distribution of the
product. To identify cost reduction we should focus on the following major elements:

2.Installation and cost reduction: A costing system is an established set of procedures, rules, cost
records, etc., for the purpose of achieving specified objective at minimum cost. It forms the basis for
future operations.All types of concerns can adopt no one single system. Each concern may design and
install a system of its own depending upon its requirements.

It may establish the practice and procedure of making cost records. The need for installing a costing
system should be justified by a cost-benefit analysis. The benefits expected from the costing system
should more than compensate the expenses of installing and operating the system.When a decision to
install a system is taken, it should be so designed as to serve the purpose of the particular concern. It
should be useful in accordance with the objectives of costing and be flexible enough to adapt itself to
changing conditions.

3. Elements of Cost : The key elements included in the production costs are as follows:

• Purchase of raw machinery.

• Installation of plant and machinery.
• Wages of labor.
• Building rent.
• Interest on capital.
• Wear and tear of building and machinery.
• Advertisement expenses.
• Payment of taxes.

4. Cost Classification: Classification of Costs essentially means the grouping of costs according to their
similar characteristics. Now, in costing there are a dozen ways to classify costs as per their nature, functions,
traceability etc.
5. Hasley and Rowan Plans: Read this article to learn about the four reasons for which Rowan Plan is
better than the Halsey plan with formula and calculation of wages under the two methods.

Both Halsey and Rowan plans are criticised by workers on the ground that they do not get the full benefit
of time saved by them as they are paid bonus for a proportion of the time saved. The Rowan Plan has
another drawback that two workers, one very efficient and the other not so efficient, may get the same
bonus. Suppose, standard time fixed for a job is 20 hours. A finishes the job in 8 hours and worker B in
12 hours and labour rate per hour is Rs 1.50.

The Rowan Plan is better than the Halsey Plan because of the following reasons:
1. Under the Halsey Plan, premium rate varies between 33⅓ % and 66 ½ % of the wages of the time
saved whereas in the Rowan Plan, it is fixed and is calculated by applying the following formula:

Thus, the Rowan Plan protects employer and workers against loose premium rate setting

2. In the Halsey Plan, bonus is usually set at 50% of the time saved. It does not serve as a strong
incentive. On the other hand under the Rowan Plan, bonus is that proportion of the wages of the time
taken which the time saved bears to the standard time. It serves as a strong incentive for increasing the
efficiency.

3. In the Rowan Plan, the quality of work does not suffer much. The worker is not induced to rush
through the work because bonus increases at a decreasing rate at higher levels of efficiency. In the Halsey
Plan, a worker is induced to rush through the work because he gets extra wages for every 50% of the time
saved.

4. The effective labour rate per hour in the Rowan Plan is higher upto 50% of the time saved and falls
thereafter whereas in the Halsey Plan, the effective labour rate per hour is lower upto 50% of the time
saved and can be doubled thereafter. Usually, workers are not able to save more than 50% of the time
allowed, so workers prefer the Rowan Plan for earning more wages.

6.Labour Turnover:
Labour turnover refers to the rate at which employees leave employment. Labour turnover can be
evaluated by relating the number of employees leaving their employment during a period of time to the
total or average numbers employed in that period.

It may also be defined as engagements and losses in the working force as related to the total number of
employees who were on the pay roll at the beginning of the period in question.

Example:
Let us assume that in a factory there were 2,000 employees on an average during the year 1990 and 100
persons left the company during this period. So, the labour turnover will be 100*100/2000 = 5%

Generally, it is measured by the following formula:

7.Time Keeping and Time Booking: Time-keeping department is concerned with the recording
of time of each worker engaged in the factory. The recording of time is for two purposes, i.e., for
Time-keeping and Time Booking. Time-keeping is concerned with the recording of time of
workers for the purpose of attendance and wage calculations whereas time booking is the
reporting of each worker’s time for each department, operation and job for the purposes of cost
analysis and apportionment of labour costs between various jobs and departments.

Time booking is recording the time actually spent by a worker on various jobs done by him in
the factory for cost analysis and dividing labour cost into various jobs and departments. It also
helps in control over wastage of time- idle time.

Different methods used for time booking are:

1) Daily Time Sheets

2) Weekly Time Sheets

3) Job Cards
8. Machine Hour Rate: Machine hour rate is the cost of running a machine per hour. It is one of the
methods of absorbing factory expenses to production. It is used in those industries or departments where
machinery is predominant and there is little or practically no manual labour. In such industries or
departments, overhead consists of indirect expenses in running and operating the machine.

Therefore, it is desirable to allocate overhead to production on the basis of working hours of the
machines. It is not desirable to calculate the machine hour rate for the entire factory but different rates
may be calculated according to their make, type, size, capacity, wattage, horse power and other factors
relating to each machine or group of machines as a cost centre.

9.job costing and output costing:

Output costing is an analysis of the different elements of expenditure so as to find out the factory cost,
office cost and total cost per unit. The per-unit cost is arrived at by dividing the total expenditure by the
quantity produced.
This costing system is employed in industries wherein (i) the production is uniform and a continued
affair, (ii) the units of production are identical; and (iii) the cost units are physical and natural..

Job costing, generally, means a specific accounting methodology used to track the expense of creating a
unique product. Due to the fact that certain projects, such as construction, require different
operations, accountants use this methodology to trace the expenses of each job in order to use this
information for analysis and tax needs. Job costing forms have spaces to include direct labor, direct
materials, and overhead.

Costs stay in the work-in-process account throughout the job. When the job is finally completed, they are
transferred to the finished goods account. By using this method, accountants can make

10. Contract costing : it is the tracking of costs associated with a specific contract with a customer. For
example, a company bids for a large construction project with a prospective customer, and the two parties
agree in a contract for a certain type of reimbursement to the company. This reimbursement is based, at least in
part, on the costs incurred by the company in order to fulfill the terms of the contract. The company must then
track the costs associated with that contract so that it can justify its billings to the customer. The most typical
types of cost reimbursement are:
• Fixed price. The company is paid a fixed total amount for completing the project, possibly including progress
payments. Under this arrangement, the company will want to engage in contract costing to compile all of the
costs relevant to the construction project, just to see if the company earned a profit on the deal.

• Cost plus. The company is reimbursed for the costs it incurred, plus a percentage profit or fixed profit. Under
this arrangement, the company will be forced under the terms of the contract to track the costs related to the
project, so that it can apply to the customer for reimbursement. Depending on t he size of the project, the
customer may send an auditor to examine the company's contract costs, and may disallow some of them.

• Time and materials. This approach is similar to the cost plus arrangement, except that the company builds a
profit into its billings, rather than being awarded a specific profit. Again, the company must track all co ntract
costs carefully, since the customer may review them in some detail.

11. CVP Analysis : Cost-volume-profit (CVP) analysis is used to determine how changes in costs and
volume affect a company's operating income and net income. In performing this analysis, there are
several assumptions made, including:

• Sales price per unit is constant.

• Variable costs per unit are constant.
• Total fixed costs are constant.
• Everything produced is sold.
• Costs are only affected because activity changes.
• If a company sells more than one product, they are sold in the same mix

CVP analysis requires that all the company's costs, including manufacturing, selling, and
administrative costs, be identified as variable or fixed. Contribution margin and contribution margin ratio

Key calculations when using CVP analysis are the contribution margin and the contribution
margin ratio. The contribution margin represents the amount of income or profit the company
made before deducting its fixed costs. Said another way, it is the amount of sales dollars
available to cover (or contribute to) fixed costs. When calculated as a ratio, it is the percent of
sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of sales
results in the company having income.

12. Profit Planning and product mix decision:

Profit planning is the set of actions taken to achieve a targeted profit level. These actions involve the
development of an interlocking set of budgets that roll up into a master budget. The management team adjusts
the information in this set of budgets to arrive at the combination of actions needed to arrive at the targeted
profit level. The planning process may involve a significant amount of what-if analysis, to see what happens to
projected profits in different scenarios.
 When handled correctly and with an emphasis on making realistic estimates, profit planning can pinpoint those
specific actions that must be taken to arrive at a profit goal. For example:

• Increase the investment in new product development in order to increase new product sales

• Expand the regions within which existing products are sold

• Target areas of declining sales where it can make the most sense to eliminate products or cut costs

• Take steps to mitigate risks that may otherwise result in unusually large losses

• Target bottleneck operations to increase the productive capacity of the business

Product and mix decision: Before turning to the product mix decisions, we first have to know what the product
mix actually is. The product mix, also called product portfolio, is the set of all product lines and items that a company
offers for sale. For instance, the product mix of Colgate consists of three product lines: oral care, personal care and pet
nutrition. Each of these product lines, in turn, consists of several sub-lines. A vehicle manufacturer may have two product
lines: motorbikes and cars. Product mix decisions need to be taken for the whole product mix and affect each line.

Export sales: What is a sales order?

A sales order is a document generated by the seller upon receiving a purchase order from a
buyer specifying the details about the product or service along with price, quantity, buyer
details like the shipping address, billing address, mode of payment and terms and conditions.

In general practice, businesses follow the steps below.

1.

1. The seller sends a quote to the customer.

2. If accepted, the customer sends the seller a purchase order.

3. The seller creates a sales order based on the purchase order.

4. The customer may request a sales order to view the exact details of the products,
price, terms and delivery dates. Most businesses usually skip this test.

5. After the seller ships the products, they create an invoice from the sales order.
 HUMAN RESOURCE MANAGEMENT SEMESTER-4

VAISHNAV’s PERSONAL NOTES

1.What do you mean by human resource management and enumerate functions of human
resource management?

Ans) Human Resource Department is an integral part of any organization. Also,

the Human Resource Manager (HRM) is a member of the management. Four
basic functions of Human Resource Management are Planning, Directing,
Controlling and Organizing
• Human resource planning (HRP) is a strategy used by a company to maintain a
steady stream of skilled employees while avoiding employee shortages or
surpluses.
• Having a good HRP strategy in place can mean productivity and profitability for a
company.
• There are four general steps in the HRP process: identifying the current supply of
employees, determining the future of the workforce, balancing between labor
supply and demand, and developing plans that support the company's goals.

Functions of Human Resource Management

Planning: A manager must plan ahead in order to get things done by his
subordinates. It is also important to plan in order to give the organization its
goals.Also, planning helps establish the best procedures to reach the goals.
Further, some effective managers devote a substantial part of their time to
planning.

With respect to the human resource department, planning involves determining

the personnel programs that can contribute to achieving the organization’s
goals.These programs include anticipating the hiring needs of the organization,
planning job requirements, descriptions, and determining the sources of
recruitment.

Organizing: After the human resource manager establishes the objectives and
develops plans and programs to achieve them, he needs to design and develop
the organization’s structure to carry out the different operations. Developing the
organization’s structure includes:

• Grouping of personnel activity into functions or positions

• Assigning different groups of activities to different individuals
• Delegating authority according to the tasks assigned and responsibilities
involved
• Coordinating activities of different employees

Directing: The HR Manager can create plans, but implementing the plans
smoothly depends on how motivated the people are. The directing functions of
HRM involve encouraging people to work willingly and efficiently to achieve
the goals of the organization. In simpler words, the directing functions of HRM
entail guiding and motivating people to accomplish the personnel programs.

Controlling: Controlling is all about regulating activities in accordance with

the plans formulated based on the objectives of the organization. This is the
fourth function of the HRM and completes the cycle. In this, the manager
observes and subsequently compares the results with the set standards.
Professional Development: This is a very important function of Human
Resource Management. This function helps the employees with opportunity
for growth, education, and management training. The organization undertakes
to sponsor their employees for various seminars, trade shows, and corporal
responsibilities. This, in turn, makes the employees feel that they have been
taken care by their superiors and also the organization.

Performance Appraisal: The employees of any organization will be evaluated by the

HR department as per the performance. This function of Human Resource
Management is to help the organization in finding out if the employee they have
hired is moving towards the goals and objectives of the organization. On the other
hand, it also helps the company to evaluate whether the employees needs
improvement in other areas. It also helps the HR team in drawing certain
development plans for those employees who have not met the minimal requirements
of the job.

Ensuring Legal Compliance: To protect the organization this function plays a crucial
role. The HR department of every organization should be aware of all the laws and
policies that relate to employment, working conditions, working hours,
overtime,minimum wage, tax allowances etc. Compliance with such laws is very
much required for the existence of an organization.

2. What is strategic management

and how is it essential in
modern business?

Strategic human resource management is the connection between a

company’s human resources and its strategies, objectives, and
goals. The aim of strategic human resource management is to:

• Advance flexibility innovation, and competitive advantage.

• Develop a fit for purpose organizational culture.

• Improve business performance.

In order for strategic human resource management to be

effective, human resources (HR) must play a vital role as a strategic
partner when company policies are created and implemented. Strategic
HR can be demonstrated throughout different activities, such as hiring,
training and rewarding employees.

Strategic HR involves looking at ways that human resources can make a

direct impact on a company’s growth. HR personnel need to adopt a
strategic approach to developing and retaining employees to meet the
needs of the company’s long-term plans.

HR issues can be a difficult hurdle to cross for many companies, there are
all kinds of different components that can confuse business owners and
cause them to make ineffective decisions that slow down the operations
for their employees as well as their business. HR departments that
practice strategic human resource management do not work
independently within a silo; they interact with other departments within
an organization in order to understand their goals and then create
strategies that align with those objectives, as well as those of the
organization. As a result, the goals of a human resource department
reflect and support the goals of the rest of the organization. Strategic
HRM is seen as a partner in organizational success, as opposed to a
necessity for legal compliance or compensation. Strategic HRM utilizes
the talent and opportunity within the human resources department to
make other departments stronger and more effective.

Companies are more likely to be successful when all teams are working
towards the same objectives. Strategic HR carries out analysis of
employees and determines the actions required to increase their value to
the company. Strategic human resource management also uses the
results of this analysis to develop HR techniques to address employee
weaknesses.

The following are benefits of strategic human resource management:

• Increased job satisfaction.

• Better work culture.

• Improved rates of customer satisfaction.

• Efficient resource management.

• Proactive approach to managing employees.

• Boost productivity.

3.What is the role Human resource management in a global

economy?

Globalization has had profound effects on human resource management. International

assignments, outsourcing, coping with legal and cultural differences and managing talent from
foreign countries all pose challenges as globalization continues to shrink the world. Small
businesses are as affected by these developments as much as any multinational, since any
business is only as good as its employees.

Anticipating Future Needs

When you consider how labor markets have evolved, predicting future talent requirements is a
critical challenge companies face. Identifying and hiring talented employees who can learn
new skills as workplace requirements change is a daunting task. Your human resources
manager may not be best positioned to predict future needs, particularly if you or one of your
managers has a better sense of what your business needs to grow. Whether you expand your
business overseas or employ talent from abroad at your home office, globalization ha s
widened the pool of talent for you to choose from.

Nurturing Talent
In a never-ending quest to stay competitive, small businesses must embrace technology as
well as the employees who understand it. The small business must explore new ways to train
employees, looking at training as an investment rather than an expense. When integrating
international workers into your workplace, look for ways to engage employees on a continuing
basis. In addition to traditional seminars and continuing education, employees should be
encouraged to participate in real-time training with expert consultants – many from abroad –
to stay abreast of industry trends.

Overseas Assignments
On the surface it sounds exotic – an extended assignment in a foreign country with the
opportunity to work with an international division of your company. But all is not necessarily as
smooth as it would seem. Integrating knowledge and corporate practices with international
workers can be a difficult task. When your employees return from overseas assignments, they
may have a different perspective on business than the home office. This scenario raises
questions for human resource management who must integrate international assignments into
talent management and development programs. Weighing overseas assignments versus
hiring local talent is an issue that must be resolved.

Outsourcing in a Global Market

Outsourcing is an increasingly common way for a small or medium-size enterprise to leverage
its human resource requirements in a global market. The pool of contract workers is deep with
talent and includes freelancers in virtually every field, from virtual assistants to highly technical
professionals. If you choose to outsource your work, plan carefully. Some sites provide
safeguards to protect both parties, but there are no guarantees. The low bidder on your
project may lack the skills you need, and languages barriers and cultural differences can pose
problems. Nevertheless, globalization has created an opportunity for containing human
resource costs while still getting the job done.

3. Different techniques of recruitment