Professional Documents
Culture Documents
Revision
Intermediate Course Paper-3:
Cost and Management
Accounting
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Page Edition of Students’
Topics
No. Journal
Introduction to Cost and Management
1-5 September 2017
Accounting
6-8 September 2017 Material Cost
9-13 April 2021 Employee (Labour) Cost
14-16 September 2017 Overheads
17-20 November 2021 Activity Based Costing
21-24 April 2021 Cost Sheet
25-26 February 2023 Cost Accounting System
27-29 November 2021 Unit and Batch Costing
29-33 November 2021 Job and Contract Costing
34-36 September 2017 Process and Operation Costing
37-40 November 2021 Joint Products and By Products
41-46 February 2023 Service Costing
47-49 September 2017 Standard Costing
50-52 September 2017 Marginal Costing
52-55 September 2017 Budget and Budgetary Control
COST AND MANAGEMENT ACCOUNTING
Cost and Management Accounting - A Capsule for Quick Revision
In contemporary business environment, existence of an entity depends on the way it tackles the challenges
posed by the competitive market conditions. Cost leadership being one of the competitive strategies, gives
an added advantage to the entity. Cost being an important aspect for survival and growth in business,
requires a mandatory awareness about the cost control and cost reduction. Fourth industrial revolution,
also known as Industry 4.0, puts more emphasis on the digitization of information for effective decision-
making, which enables an entity in keeping ahead in competition. Cost and Management accounting, a
discipline of accounting, capacitates an entity in taking timely decisions by provisions of cost, profitability
and other relevant information.
Chartered Accountants, as a global business solution provider, play an important role in business, have
an onus by helping an entity to achieve its long-term objectives. In this direction, Cost and Management
Accounting helps Chartered Accountants in taking timely and informed business decisions. In view of
nobility of the objective to provide quality academic inputs to the students of CA course, the Board of
Studies (BoS) of ICAI has decided to bring forth a capsule module of Cost and Management Accounting.
Although, the capsule has been prepared keeping in view the new and revised Scheme of Education and
Training of ICAI, the students of earlier Scheme may also be benefitted from it.
In the beginning, a chapter overview has been provided to present a holistic viewpoint on the topic’s coverage.
This capsule, though, facilitates the students in undergoing quick revision, under no circumstances; such
revisions can substitute the detailed study of the material provided by the BoS.
Remember, “The expert in anything was once a beginner”. Now, let us begin.
Cost It is an
The amount Costing is Accountancy has Management application of
of expenditure defined as the been defined as accounting is management
It is the the application accounting
incurred on or technique and the application
process of of costing and concepts,
attributable to a process of of the principles
accounting for cost accounting methods of
specified article, ascertaining of accounting
cost. principles, collections,
product or costs. and financial
activity. methods and management. analysis and
techniques. presentation of
data.
There are many objectives of cost accounting. The main objectives are explained as below. We also need to keep
our focus on understanding the difference between Cost Control and Cost Reduction.
Ascertainment of Cost: The main objective of cost and management accounting is accumulation
and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object.
Objectives of Cost Accounting
Determination of Selling Price and Profitability: The cost and management accounting system
helps in determination of selling price and thus profitability of a cost object.
Cost Control: Maintaining discipline in expenditure is one of the main objectives of a good cost and
management accounting system. It ensures that expenditures are in consonance with predetermined
set standard and any variation from these set standards is noted and reported on continuous basis.
Cost Reduction: It may be defined “as the achievement of real and permanent reduction in the
unit cost of goods manufactured or services rendered without impairing their suitability for the use
intended or diminution in the quality of the product.”
Cost Cost
Control To gather data like time
Reports taken, wastages, process
idleness etc., analyse the
data, prepare reports and
take necessary actions
2
COST AND MANAGEMENT ACCOUNTING
Users of Cost and Management Accounting Relationship of Cost Accounting,
Cost and Management Accounting information
Management Accounting, Financial
which are generated or collected are used by various
Accounting and Financial Management
stakeholders. The users of the information can be There is a close relationship between various disciplines
broadly categorized as below: like Cost Accounting, Management Accounting,
Financial Accounting and Financial Management.
Sometimes these disciplines are interrelated and
Internal External dependent on each other also.
Users Users
Managers Regulatory
Management Cost
Authorities
Accounting Accounting
Operational Auditors
level staffs
Financial
Accounting
Employees Shareholders
Informative and Accurate and Uniformity and Integrated and Flexible and Trust on the
simple authentic consistency inclusive adaptive system
Cost Accounting
using IT Cost Units: It is a unit of Cost Drivers: A Cost driver
product, service or time (or is a factor or variable which
combination of these) in effect level of cost. Example
relation to which costs may for a purchase department is
Paperless Environment Just-in-Time (JIT)
be ascertained or expressed. number of purchase orders.
Example for power industry is
kilo Watt hour (kWh).
Responsibility Centres
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Classification of cost basically means grouping of cost according to their common features. The important ways of
classification of cost are illustrated as below:
Classification of Cost
Overheads
4
COST AND MANAGEMENT ACCOUNTING
(ii) By Functions (iv) By Controllability
Direct Materials
Direct Employees Controllable Costs: Cost that can be controlled
Prime Cost
(Labours)
Direct Expenses Uncontrollable Costs: Costs which cannot be influenced
Indirect Factory Overheads or controlled
Material Factory Cost or Works Cost
Administration
Indirect Overheads Cost of Goods Sold
Labour (v) By Normality
Selling and Distribution
Indirect Overheads
Expenses Cost of Sales
Normal Cost - It is the cost which is normally incurred
Material Cost
Chapter Overview How Material is Procured?
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6
COST AND MANAGEMENT ACCOUNTING
(a) Inventory Control- By Setting Quantitative
Levels
Maximum Stock Level Upto How much to stock Maximum Stock Level + Minimum Stock Level
2
Minimum Stock Level Atleast How much to keep (b) On the basis of Relative Classification
Average Stock Level Stock normally kept ABC Analysis On the basis of value and
frequency of inventory
Cost Price Methods Average Price Methods Market Price Methods Notional Price Methods
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8
CMA
ca intermediate - PAPER 3 - COST AND MANAGEMENT ACCOUNTING
In today’s business world, Chartered Accountants are very much part of the decision-making team of any organisation.
They are rigorously involved in decision-making process with the help of Cost and Management Accounting tools.
While being associated with an industry, a Chartered Accountant may also be involved in monitoring, measuring,
compensating appropriately to the employees (labour) to achieve economy in cost as well as retain best talent,
efficiency in performance and effectiveness in desired output, side by side ascertaining cost for a cost object through
elementwise collection of cost, accumulation of the costs into a cost sheet. While this edition of Cost & Management
Accounting (CMA) Capsule discusses the topic ‘Employee (Labour) Cost’ covering Wages and Incentive Payment
system to employees, its absorption; efficiency rating procedures; treatment of overtime, idle time; Employee Turnover
along with topic ‘Cost Sheet’ covering its classification, format and advantages, students are advised to thoroughly go
through the same to meticulously understand the concepts before attempting questions.
Efficiency
Control of
Employee Cost
Overtime Rating Direct employee cost Indirect employee cost
Procedures
1. Cost of employees, directly 1. Cost of employees who are
engaged in the production not directly engaged in the
process. production process.
Attendance Employee
& Payroll Idle Time (Labour) 2. Easily identifiable and 2. Apportioned on some
Procedures Turnover allocable to cost unit. appropriate basis.
3. Varies with the volume 3. May not vary with the
of production and has volume of production.
Meaning of Employee (Labour) Cost positive relationship with
the volume.
9
CMA
Time-keeping: A record of total time spent by • Attendance and Time details:
the employees in a factory.
Detailed sheet of number of days or hours worked
Step-1 by each employee as reflected by the time keeping
methods are sent to the payroll department.
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining employee cost.
Objectives of
Time Keeping: (iv) For controlling employee cost. • List of employees and other details:
(v) For ascertaining idle time. List of employees on roll and the rate at which
(vi) For disciplinary purposes. Step-2 they will be paid is sent by the personnel/ HR
(vii) For overhead distribution. department.
Methods of Time-keeping
• Computation of wages and other incentives:
Methods of Time-keeping Payroll department prepares pay slip and forward
Step-3 the same to the cost/ accounting department.
Mechanical/ Automated
Manual Methods Methods
• Payment to the employees:
Attendance Punch Card After all deductions (like PF, ESI, TDS), wages/
Step-4 salary is paid to the employees.
Register method Attendance
For the collection of all such data, a separate record, Normal idle
generally known as Time (or Job) card, is kept. time Abnormal
idle time
2. Employee
Payroll work,
Details
Urgency of work. Charged to job directly. Wages = Time taken × Time rate + 50% of time saved × Time rate
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CMA
Factors for increasing Employee productivity:
• Standard time allowance is fixed for
performance of a job.
ROWAN Employing who possess right type of skill.
• Bonus is paid if time is saved.
PREMIUM • Bonus is that proportion of the time
PLAN wages as time saved bears to the Placing the right type of person to the right job.
standard time.
Absorption of Wages
Methods to calculate Employee Turnover
Elements of Wages
Or
No. of Separations+No.of Accessions (i.e. No.of Replacements+
No.of New Joinings)
Time allowed as per standard × 100
Efficiency in % = × 100 Average no.of employees during the period on roll
Time Taken
Need for Efficiency rating: Newly recruited employees are also responsible for changes
in the composition or work force, some management
accountants feel to take new recruitment for calculating
employee turnover. The total number of workers joining,
Payment including replacements, is called accessions.
Firm has a Helps
following management
system of direct
relationship for preparing
payment by manpower
results with the requirements
output
Premature retirement
Personal
Causes Domestic problems/ Family
responsibilities
Discontent over the jobs and
working environment
Disciplinary measures
Cost of recruitment
13
COST AND MANAGEMENT ACCOUNTING
Overheads
Chapter Overview Steps for Distribution of Overheads
OVERHEADS Estimation of Overheads
Concepts
Distribution of Overhead related with
Overheads Rates Capacity Re-apportionment of Overheads: The process of assigning
service department overheads to production departments
is called reassignment or re-apportionment. Methods of re-
apportionment are:
&ODVVLÀFDWLRQRI2YHUKHDGV (i) Direct re-distribution method
Overheads are the expenditure which can not be (ii) Step method of secondary distribution or non-reciprocal
identified with a particular cost unit. Overheads can be method
classified as under. (iii) Reciprocal Service method.
t'BDUPSZPS t'JYFE t*OEJSFDU t$POUSPMMBCMF Total Overheads: The sum of allocated, apportioned and re-
Manufacturing Overhead materials costs apportioned overhead is called total overheads for a cost object.
or Production t7BSJBCMF t*OEJSFDU t6ODPOUSPMMBCMF
Overhead Overhead employee cost costs
t0ĊDFBOE t4FNJ7BSJBCMF t*OEJSFDU Absorption of Overheads: Total overheads calculated as above
Administrative Overheads expenses is distributed over the actual quantity of goods produced. The
Overheads distribution of total estimated overheads to units of production
t4FMMJOHBOE is called absorption of overheads.
Distribution
Overheads
Methods for Re-apportionment of
Overheads
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One of the most important ways of classifying overheads The re-apportionment of service department expenses
is as per their function. As per this classification over the production departments may be carried out by
overheads are classified as under. using any one of the following methods:
Indirect cost incurred for manufacturing or Methods for
Factory or production activity in a factory. Manufacturing
Manufacturing Re-apportionment
overhead includes all expenditures incurred
or Production from the procurement of materials to the
Overhead completion of finished product.
Percentage of Percentage of Percentage of direct Labour hour Machine hour Rate per unit of
direct materials prime cost labour cost rate rate Output
No
The resultant figure is machine hour rate
Calculate Supplementary Rate and Charge to Cost of Sales
A/c, Finished Goods A/c and W-I-P A/c
15
COST AND MANAGEMENT ACCOUNTING
Interest and financing It includes any payment in nature of interest for use of non- equity funds and incidental cost that an entity
charges incurs in arranging those funds. Interest and financing charges shall be presented in the cost statement as a
separate item of cost of sales.
Cost of primary packing necessary for protecting the product or for convenient handling, should become a
Packing expenses part of cost of production. The cost of packing to facilitate the transportation of the product from the factory
to the customer should become a part of the distribution cost.
These indirect benefits stand to improve the morale, loyalty and stability of employees towards the
Fringe benefits organisation. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by
means of a supplementary wage or labour rate; otherwise these may be collected as part of production
overheads.
If research is conducted in the methods of production, the research expenses should be charged to the
production overhead; while the expenditure becomes a part of the administration overhead if research relates
Research and to administration. Similarly, market research expenses are charged to the selling and distribution overhead.
Development
Expenses Development costs incurred in connection with a particular product should be charged directly to that
product. Such expenses are usually treated as “deferred revenue expenses,” and recovered as a cost per unit of
the product when production is fully established.
Growing overhead
costs
Increasing market
competition
Increasing product
diversity
Decreasing costs
of information
processing
USEFULNESS/SUITABILITY OF ABC
ABC is particularly needed in the following situations:
High amount Wide range Presence of Stiff
of overhead of products non-volume competition
related
activities
ACTIVITY BASED COSTING
POINTS OF DISCUSSION ADVANTAGES AND DISADVANTAGES OF ABC
17
CMA
Examples of Cost Driver business function wise:
Design of
Research and products, Customer Marketing Distribution
Development services and Service
procedures
COST ALLOCATION
Process
Assigning Cost Specification
Activity Based Traditional Absorption
Costing Costing
Requirments
Overhead Costs
Product level activities Inspecting and testing Number of tests
costs
Activities which are performed - Designing the product
to support different products in - Producing parts
product line. specifications Painting costs Number of parts
19
CMA
Then, cost per product as per ABC
Activity Total Cost (R) Cost Driver Cost Driver Level Cost Driver Rate Product 1 (R) Product 2 (R)
(R)
(a) (b) (c) (d) (e) = (b)/(d) (f) (g)
Ordering 64,000 No. of Purchase 80 800 24,000 40,000
Orders (30+50) (800 x 30) (800 x 50)
Delivery 1,40,000 No. of Deliveries 200 700 77,000 63,000
(110 + 90) (700 x 110) (700 x 90)
Shelf stocking 80,000 Shelf Stocking 400 200 44,000 36,000
Hours (220 +180) (200 x 220) (200 x 180)
Helps in Decision
determining support
price based for human
on cost plus resources
markup basis
Cost Driver
Analysis
Value-Added
Activities (VA)
Activity Analysis
Non-Value-
Added Activities
(NVA)
Activity Based
Cost Management
(ABM): Using ABC
to manage costs at Cost Reduction
activity level.
Business Process
Re-engineering
Performance
Analysis
Benchmarking
Performance
Measurement
Head of
Functional
Costs in Cost
Classification
Sheet
Advantages
Format of
of
Cost Sheet
Cost Sheet
Direct Expenses
Administration Overheads
Selling Overheads
Distribution Overheads
Cost of Production
Cost of Sales
21
CMA
Prime Cost:
Depreciation and Salary and wages Packing material Salary and wages of
maintenance of, office related with sales that enables to employees engaged in
building, furniture etc. department store, transport, and distribution of goods
make the product
marketable.
Salary of administrative Rent, depreciation, Transportation and
employees, maintenance related insurance costs related
accountants, etc. with sales department with distribution
Indirect materials-
printing and stationery,
office supplies etc.
23
CMA
Treatment of various items of cost in Cost Sheet:
Advantages of Cost Sheet
• Any abnormal cost, where it is material and
Provides the total cost figure as well as cost per
Abnormal quantifiable, shall not form part of cost of
costs unit of production.
production or acquisition or supply of goods
or provision of service.
Helps in cost comparison.
Subsidy/ • Reduced from the cost objects to which such
Grant/
Incentives amount pertains.
Facilitates preparation of cost estimates
required for submitting tenders.
Penalty, fine,
damages, and • Does not form part of cost.
demurrage Provides sufficient help in arriving at the
figure of selling price.
Costing Overhead
Profit & Loss Adjustment
Account Account
FLOWCHART
Materials
Control A/c Production
Wages
Overhead
Control A/c
Control A/c
Work in Progress
Control A/c
Reconciliation of Cost and Financial Accounts Cost of Sales Selling & Distribution
Control A/c Overhead Control A/c
Non-integrated Accounting System
SEPARATE LEDGERS are maintained for both cost and
financial accounts.
INTEGRATED ACCOUNTING SYSTEM
ADVANTAGES
This system is also known as COST LEDGER
ACCOUNTING SYSTEM.
• No need for reconciliation
• Less efforts
This system contain limited ACCOUNTS due to the • Less time consuming
exclusion of purchases, expenses and also Balance Sheet
items like fixed assets, debtors and creditors. • Economical process
25
COST AND MANAGEMENT ACCOUNTING
RECONCILIATION OF COST AND FINANCIAL
Receivables Payables
Bank
(Debtors) (Creditors)
ACCOUNTS
account
account account Reconciliation is done when cost and financial accounts are
kept separately
Procedure for Reconciliation Now, reconciliation between Financial and Cost Accounts can be
done by preparing RECONCILIATION STATEMENT as follows:
(Rs.) (Rs.)
3. Reconciliation of
both the profits Profit as per Cost Accounts 3,00,000
2. Ascertainment
of profit as per Add: Factory overheads over-absorbed
(`5,00,000 – `4,50,000) 50,000
1. Ascertainment cost accounts
of profit as per
financial accounts Selling & Dist. Overhead over-absorbed 20,000
(`2,00,000 – `1,80,000)
Example:
Difference in the valuation of closing stock
Profit as per Cost Accounts after following adjustment `3,00,000 of finished goods (`1,50,000 – `1,23,000) 27,000 97,000
Factory overheads absorbed `5,00,000
Selling & Distribution Overhead absorbed `2,00,000 3,97,000
Valuation of closing stock of finished goods `1,23,000
Administrative Overhead absorbed `1,93,000 Less: Admn. overhead under-absorbed 67,000
Profit as per financial accounts after following adjustment `1,10,000 (`2,60,000 – `1,93,000)
Factory overheads charged `4,50,000
Selling & Distribution Overhead charged `1,80,000 Interest on loan 2,20,000 2,87,000
Valuation of closing stock of finished goods `1,50,000
Administrative Overhead charged `2,60,000
Interest on loan `2,20,000
Profit as per financial accounts 1,10,000
Meaning
It is collected Direct employee These are
Process of Cost Accumulation from Material cost: It is collected collected under
and Calculation Requisition notes. from job time suitable standing
Batch cards or sheets. orders numbers,
Costing Determination of Economic and selling and
Batch Quantity (EBQ) distribution
Accumulated overheads against
material cost is The time booked/ cost accounts
Difference between Job and then posted in cost recorded is valued
Batch Costing numbers.
accounting system. at appropriate rates
and entered in the
cost accounting
UNIT COSTING system. Total expenses
so collected are
Meaning of Unit Costing apportioned
to service and
Indirect employee production depart
costs: These are ments on some
- where the output produced is identical collected from
and each unit of output requires identical suitable basis.
the payrolls books
cost. and posted against
UNIT - also known as single or output costing.
COSTING standing order
- applied in industries like paper, or expenses code The expenses
cement, steel works, mining, numbers in the of service
breweries etc. overhead expenses departments are
ledger. finally transferred
to production
departments.
Here, costs are collected and analysed element wise and
then total cost per unit is ascertained as follows:
27
CMA
TREATMENT OF SPOILED AND DEFECTIVE ECONOMIC BATCH QUANTITY (EBQ)
WORK
Primarily, the total production cost under batch production
comprises of two main costs, namely,
Loss due to Loss due to
normal reasons abnormal reasons
Inventory
Machine
holding
Set Up Costs
costs
Actual number Number of Cost of
of defectives defective units rectification and
is within the substantially loss is treated
exceeds the as abnormal Balancing Machine set up cost and Inventory holding cost
normal limit
normal limits cost and is
written off as
loss in Costing
Profit and Loss - Set up cost may - Lower inventory
BATCH COSTING
ECONOMIC
Meaning of Batch Costing BATCH
It is the size of a batch where total
cost of set-up and holding costs are at
QUANTITY
(EBQ) minimum.
is a type of specific order costing
where articles are manufactured in
predetermined lots, known as batch.
BATCH the cost object for cost determination is Cost/unit
COSTING
a batch for production. Total cost
example PEN MANUFACTURING Inventory
INDUSTRY carrying
cost
Batch Size
COSTING PROCEDURE IN BATCH COSTING
Methods of Costing
JOB COST CARD/ SHEET
Specific Order Costing
A cost sheet where,
quantity of materials issued,
Job Costing Contract Costing JOB COST hours spent by different class of
CARD/ employees,
SHEET amount of other expenses and share of
overheads
are recorded.
JOB COSTING
MEANING OF JOB COSTING Format of Job Cost Sheet:
Total
PRINCIPLES OF JOB COSTING Summary of costs Estimated Actual
(R) (R) For the job __________
Analysis and ascertainment of cost of each unit of Direct material cost Units produced______
production Direct wages Cost/unit __________
Production overhead Remarks ___________
PRODUCTION COST Prepared by:________
Administration and Checked by: ________
Control and regulate cost Selling & Distribution
Overheads
TOTAL COST
Determine the profitability PROFIT/LOSS
SELLING PRICE
29
CMA
COLLECTION OF COSTS FOR A JOB
To Factory Overhead Control A/c Costs are computed when a Costs are calculated at the end
job is completed. of the cost period.
11. For the total cost of jobs completed
More managerial attention is Control here is comparatively
Cost of Sales A/c Dr. required for effective control. easier.
To Work-in-Progress Control A/c
12. The balance of Cost of Sales A/c is transferred to
Costing Profit and Loss A/c; For such transfer
CONTRACT COSTING
Costing Profit and Loss A/c Dr. MEANING OF CONTRACT COSTING
To Cost of Sales A/c
13. For the sales value of jobs completed It is a form of specific order costing
where job undertaken is relatively large
Cost Ledger Control A/c Dr. and normally takes period longer than a
CONTRACT year to complete.
To Costing Profit and Loss A/c COSTING Adopted by the contractors engaged
in contracts like construction
of building, road, bridge,
erection of tower etc.
ADVANTAGES AND DISADVANTAGES OF JOB
COSTING FEATURES OF CONTRACT COSTING
Details of Cost of material, labour and Work in contract
Separate account Bulk of the
overhead for all job is available to control. is ordinarily
is usually expenses incurred
carried out at
maintained for are considered as
Profitability of each job can be derived. the site of the
each contract. direct.
contract.
Facilitates production planning.
Advantages
Budgetary control and Standard Costing Number of
Indirect expenses
can be applied in job costing. contracts Cost unit in
mostly consist of
undertaken by a contract costing is
Spoilage and detective can be identified office expenses,
contractor at a the contract itself.
and responsibilities can be fixed stores and works.
time is usually few.
accordingly.
31
CMA
(ii) Cost of Work Certified or Value of Work Certified (viii) Estimated Profit
Value Payment
Retention
of work actually
Money
certified made
ADVANTAGES AND DISADVANTAGES OF
COST PLUS CONTRACT
Empowers
the contractor
to recover the
increased
prices.
Protect the
contractor from
adverse financial Contractor may
impacts. increase the
contract price if the
cost of materials,
employees and other
expenses increases
beyond a certain
limit.
33
COST AND MANAGEMENT ACCOUNTING
Treatment of
Process loss/ gain Raw Process Process Process Finished
Abnormal Material -I -II -III Goods
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normal process an abnormal under which
loss in practice process loss unit
is equal to the abnormal gain
is absorbed
cost of a good arises is debited
Step-3: Determine Total Cost for each Cost Element by good units VOJU ͳF UPUBM
produced under with the abnormal
cost of abnormal
UIFQSPDFTTͳF process loss is gain and credited
amount realised credited to the to abnormal gain
Step-4: Compute Cost Per Equivalent Unit for each Cost Element by the sale of process account
from which it account which
normal process
loss units should arises. will be closed by
be credited to t5PUBM DPTU transferring to the
of abnormal
Step-5: Assign Total Costs to Units Completed and Ending WIP the process Costing Profit and
process loss
account. is debited to Loss account.
costing profit
and loss account.
Valuation of Work-in-process
ͳFWBMVBUJPOPGXPSLJOQSPDFTTQSFTFOUTBHPPEEFBMPGEJĊDVMUZCFDBVTFJUIBTVOJUTVOEFSEJĉFSFOUTUBHFTPG
completion from those in which work has just begun to those which are only a step short of completion.
(i) Equivalent Units
Equivalent units or equivalent production units, means converting the incomplete production units into
their equivalent completed units. Under each process, an estimate is made of the percentage completion of
XPSLJOQSPDFTTXJUISFHBSEUPEJĉFSFOUFMFNFOUTPGDPTUT
WJ[
NBUFSJBM
MBCPVSBOEPWFSIFBET
ͳFGPSNVMBGPSDPNQVUJOHFRVJWBMFOUDPNQMFUFEVOJUTJT
Opening xxx Opening W-I-P* xxx xxx xxx xxx xxx xxx xxx
W-I-P
Unit xxx Finished xxx xxx xxx xxx xxx xxx xxx
Introduced output**
Total Closing W-I-P xxx xxx xxx xxx xxx xxx xxx
* Equivalent units for Opening W-I-P is calculated only under FIFO method. Under the Average method, it is not shown separately.
**Under the FIFO method, Finished Output = Units completed and transferred to next process less Opening WIP. Under Average
method, Finished Output = Units completed and transferred.
***For normal loss, no equivalent unit is calculated.
****Abnormal Gain/ Yield is treated as 100% complete in respect of all cost elements irrespective of percentage of completion.
35
COST AND MANAGEMENT ACCOUNTING
(ii) Methods for valuation of work-in-process
Under this method the units completed and transferred include Under this method, the cost of opening work-in-process and cost
completed units of opening work-in-process and subsequently of the current period are aggregated and the aggregate cost is
introduced units. Proportionate cost to complete the opening divided by output in terms of completed units.
work-in-process and that to process the completely processed
units during the period are derived separately.
For instance,
38
CMA
Using Technical Estimates: Variable costs
Fixed costs
Other Methods: Thereafter, fixed costs are apportioned over the joint
products on the basis of the contribution ratios.
(i) Market value at the point of separation
Methods for
apportioning joint cost
Re-use basis:
Small total Considerable Require
value total value further
Sometimes, by-product may be of such a nature that it can processing
be reprocessed in the same process as part of the input of
the process.
In that case, value put However, if the by-product can Sales value Deducted May be Net realisable
on by-product should be put into an earlier process credited to from total regarded as value of the by-
be same as that of the only, the value should be the Costing costs joint products product at the
materials introduced same as for the materials P&L rather than as split-off point
into the process. introduced into the process. Account by-products may be arrived
40
COST AND MANAGEMENT ACCOUNTING
CA INTERMEDIATE - PAPER 3 - COST AND MANAGEMENT ACCOUNTING
Service sector, being one of the fastest growing areas and making a significant contribution towards the GDP of India,
is a very important sector where the role of the cost and management accounting is inevitable. The competitiveness of a
service organisation is majorly dependent on a robust cost and management accounting system for competitive pricing
and identification of value-added activities. Providers of services like transportation, hotels, financial services & banking,
insurance, electricity generation, transmission and distribution etc., are cost conscious and thrive to provide services in a
cost-effective manner. Chartered Accountants being global business providers guide the service organisation to continue
its operations cost effectively. Students are advised to meticulously go through the concept of service sectors and practice
practical questions for better understanding.
SERVICE COSTING
POINTS OF DISCUSSION SERVICE COSTING VS. PRODUCT COSTING
Hotels Guest Days or Room Days Equivalent Cost Unit/ Equivalent Service Unit
Information Technology Cost per project, per module, etc. Example: A hotel may decide tariff to their different
Enabled Services type of suites as follows-
Insurance Per policy, per claim, per TPA,
etc.
Composite unit may be computed in TWO WAYS Since, all three types of suites use same amount of overheads
but to attach qualitative weight, these rooms are required to be
converted into equivalent units.
Absolute Commercial (i) If Standard suite is taken as base:
(Weighted Average) basis (Simple Average) basis
Nature of suite Occupancy Equivalent single
(Room-days) room suites
Summation of the products Product of average qualitative (Room-days)
of qualitative and quantitative and total quantitative factors
factors Standard 36,000 36,000
(100 rooms x 360 (36,000 x 1)
days)
∑{Weight Carried (W) × ∑{Distance (D1 + D2 +
Distance (D)}1 + (W × D)2 …………...…+ Dn)} × Deluxe 18,000 45,000
+…. [(Weight1 + W2 + .... + Wn)/n] (50 rooms x 360 days) (18,000 x 2.5)
+(W × D)n
Luxurious 10,800 54,000
(30 rooms x 360 days) (10,800 x 5)
Example: A Lorry starts with a load of 20 Metric Ton (MT) of
Goods from Station ‘A’. It unloads 8 MT in Station ‘B’ and balance 1,35,000
goods in Station ‘C’. On return trip, it reaches Station ‘A’ with a
load of 16 MT, loaded at Station ‘C’. The distance between A to B, Or
B to C and C to A are 80 Kms, 120 Kms and 160 Kms, respectively.
(ii) If Luxurious suite is taken as base:
B 20 Mt – 8 MT = 12 MT Nature of suite Occupancy Equivalent
20 MT (120 KM) (Room-days) luxurious suites
(80 KM) (Room-days)
16 MT
A C
(160 KM) Standard 36,000 7,200
(100 rooms x 360 (36,000 x 1/5)
Weighted Average or Absolute basis – MT – Kilometer would days)
be calculated as follows:
= (20 MT × 80 Kms) + (12 MT × 120 Kms) + (16 MT × 160 Deluxe 18,000 9,000
Kms) (50 rooms x 360 days) (18,000 x ½)
= 1,600 + 1,440 + 2,560 = 5,600 MT – Kilometer
Luxurious 10,800 10,800
Simple Average or Commercial basis – MT – Kilometer would
(30 rooms x 360 days) (10,800 x 1)
be calculated as follows:
= [{(20+12+16) / 3} MT × (80 +120 +160) Kms]
= 16 MT × 360 Kms = 5,760 MT – Kilometer 27,000
42
COST AND MANAGEMENT ACCOUNTING
Goods Passenger
transport transport
Variable costs
or Running • Petrol and Diesel
costs • Lubricant oils,
(costs • Wages to Driver, Conductor, Cleaners,
associated etc. if it is related to operations
with distance • Depreciation (if related to activity)
travelled) • Any other variable costs identified.
Entry after
toll tax
• Land Acquisition,
Capital Costs
• Materials, Labour, Overheads incurred in the course of
(incurred during
actual construction,
construction period)
• Contingency allowance,
administrative expenses,
Annual
operating
cost emergency services,
Operating and
Maintenance Costs
communications and security services.
(incurred once the
road is operational)
Patching of potholes, sealing of cracks,
edge repair,
Routine
maintenance Surface renewal,
Periodic maintenance.
44
COST AND MANAGEMENT ACCOUNTING
Method
of Costing
Market research,
product Selling of Processing
Other incomes like transport, hostel, mess and canteen. development policy of claims
like specification
of coverage,
conditions, Appointment Claim
amount of of distribution inception,
EXPENDITURE of the Educational Institutions premium, etc. of sales claim
channel, estimation,
soliciting claim
for policy, settlement
Operational Cost like teachers' salary, Building maintenance, processing of and legal
Computer maintenance and internet charges. applications, actions.
etc.
Suggestive heads:
Standing
charges or Variable
Fixed costs costs or
Running costs Semi-variable
(costs that costs or
remain constant (costs associated Maintenance
irrespective of with power costs
power or stream or stream
generated) • Meters
generated)
• Fuel Charges • Furnaces
• Rent, Rates &
Taxes • Water Charges • Service
materials
• Insurance • Wages /
Labour • Tools, etc.
• Depreciation
charges, if paid
• Salaries, if on the basis of
paid on time production
(Monthly
basis) • Any other
variable costs
• Administration identified.
expenses, etc.
46
COST AND MANAGEMENT ACCOUNTING
Standard Costing
Chapter Overview Types of standards
There are various types of standard which are illustrated
Meaning of below:
Advantages Standard cost
and Standard
and Criticism
Costing Types of Ideal Standards: The
of Standard Standards level of performance
Costing
attainable when
prices for material
and labour are most
favourable, when Normal Standards:
Computation Standard
The Process the highest output These are standards
of Standard is achieved with the that may be achieved
of Variance Costing Costing
best equipment and under normal
layout and when the operating conditions.
maximum efficiency
in utilisation of
Setting-up of resources results in
Classification of
Standard Cost maximum output
Variances
Types of with minimum cost.
Standards
Variances at a Glance
Total Cost Variance
Expenditure
Mix Variance Mix Variance Expenditure Volume
Variance Variance Variance
Efficiency Efficiency
Yield Variance Yield Variance Variance Variance
Capacity
Variance
Calendar
Variance
Variance Analysis
(i) Material Cost Variance
Material Cost Variance
[Standard Cost – Actual Cost]
(The difference between the Standard Material Cost of the actual production volume and the Actual Cost of Material)
[(SQ × SP) – (AQ × AP)]
48
COST AND MANAGEMENT ACCOUNTING
(ii) Labour Cost Variances
Labour Cost Variance
[Standard Cost – Actual Cost]
(The difference between the Standard Labour Cost and the Actual Labour Cost incurred for the production achieved)
[(SH × SR) – (AH* × AR)]
Labour Rate Variance Labour Idle Time Variance Labour Efficiency Variance
[Standard Cost of Actual Time – Actual Cost] [Standard Rate per Hour x Actual Idle Hours] [Standard Cost of Standard Time for Actual
(The difference between the Standard Rate (The difference between the Actual Production – Standard Cost of Actual Time]
per hour and Actual Rate per hour for the Hours paid and Actual Hours worked at (The difference between the Standard Hours
Actual Hours paid) Standard Rate) specified for actual production and Actual
Hours worked at Standard Rate)
[(SR – AR) × AH*] Or [(AH* – AH#) × SR] Or [(SH – AH#) × SR] Or
[(SR × AH*) – (AR × AH*)] [(AH* × SR) – (AH# × SR)] [(SH × SR) – (AH# × SR)]
Labour Mix Variance Or Gang Variance Labour Yield Variance Or Sub-Efficiency Variance
[Standard Cost of Actual Time Worked in Standard [Standard Cost of Standard Time for Actual Production
Proportion – Standard Cost of Actual Time Worked] – Standard Cost of Actual Time Worked in Standard
(The difference between the Actual Hours worked in Proportion]
standard proportion and Actual Hours worked in actual (The difference between the Standard Hours specified
proportion, at Standard Rate) for actual production and Actual Hours worked in
standard proportion, at Standard Rate)
[(RSH – AH#) × SR] Or (SH – RSH) × SR Or
[(RSH × SR) – (AH# × SR)] (SH × SR) – (RSH × SR)
Fixed Overhead Capacity Variance Fixed Overhead Calendar Variance Fixed Overhead Efficiency Variance
SR (AH – BH) Std. Fixed Overhead rate per day (Actual no. SR (AH – SH)
Or of Working days – Budgeted Working days) Or
(AH × SR) – (BH × SR) (AH × SR) – (SH × SR)
AH* - Actual Hours paid
AH# - Actual Hours worked
The Chartered Accountant Student September 2017 21
49
COST AND MANAGEMENT ACCOUNTING
Marginal Costing
Chapter Overview Characteristics of Marginal Costing
Meaning of All elements of cost are classified into fixed and variable
Marginal Cost components. Semi-variable costs are also analyzed into fixed
and Marginal and variable elements.
Costing
50
COST AND MANAGEMENT ACCOUNTING
Break even
Profit = Cash Fixed Cost /
Cash Break-even
point Contribution per unit
More How
control over much to
expenditure produce
The contribution is
Multi-Product calculated by taking
Break-even Analysis weights (sales quantity/
value) for the products
viii. xiv.
Contribution Contribution
P/V Ratio = X 100
Sale Profitability =
Key factor
ix. (BES + MS) × P/V Ratio = Contribution (Total sales = BES + MS)
xv. Profit
Margin of Safety = Total Sales – BES or
x. (BES × P/V Ratio) + (MS × P/V Ratio) = F + P P/V Ratio
By deducting (BES × P/V Ratio) from L.H.S. and F from R.H.S. xvi. BES = Total Sales – MS
in (x) above, we get:
xvii.
xi. M.S. × P/V Ratio = P Margin of Safety Ratio = Total sales – BES
Total Sales
xii.
Change in profit
P/V Ratio = X 100
Change in sales
xiii.
Change in contribution
P/V Ratio = X 100
Change in sales
Essentials of Budget
Essential elements of budget are illustrated below:
Essential elements of a budget
Organisational Setting of clear Budgets are Budgets are Budgets should be Budgetary
structure must objectives and prepared for updated for the quantifiable and master performance
be clearly reasonable the future events that were budget should be broken needs to be linked
defined targets periods based on not kept into down into various effectively to the
expected course the mind while functional budgets. reward system
of actions establishing Budgets should be
budgets monitored periodically
52
COST AND MANAGEMENT ACCOUNTING
Budget is usually
prepared in the light It is a written Planning
of past experiences document
Characteristics
of Budget
Budget helps
in planning, It is a detailed
plan of all Dir
coordination and
the economic Co ectin
control g ord g a
activities of a llin ina nd
o tin
Budget is a business ntr g
means to achieve Co
business and it
is not an end in
itself
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BUDGET
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Functional Budgets Budgets which relate to the individual functions in an organisation are known as Functional Budgets. For
example, purchase budget; sales budget; production budget; plant-utilisation budget and cash budget.
Master Budget It is a consolidated summary of the various functional budgets. It serves as the basis upon which budgeted
P & L A/c and forecasted Balance Sheet are built up.
Long-term Budgets The budgets which are prepared for periods longer than a year are called long-term budgets. Such budgets
are helpful in business forecasting and forward planning. Capital expenditure budget and Research and
Development budget are examples of long-term budgets.
Short-term Budgets Budgets which are prepared for periods less than a year are known as short-term budgets. Cash budget is
an example of short-term budget. Such types of budgets are prepared in cases where a specific action has
to be immediately taken to bring any variation under control, as in cash budgets.
Basic Budgets A budget which remains unaltered over a long period of time is called basic budget.
Current Budgets A budget which is established for use over a short period of time and is related to the current conditions
is called current budget.
Fixed Budget According to CIMA official terminology, “a fixed budget, is a budget designed to remain unchanged
irrespective of the level of activity actually attained”.
Flexible Budget According to CIMA official terminology, “a flexible budget is defined as a budget which, by recognizing
the difference between fixed, semi-variable and variable costs is designed to change in relation to the level
of activity attained.”
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Sl. no. Fixed Budget Flexible Budget
1. It does not change with actual volume of activity achieved. Thus it is It can be re-casted on the basis of activity level to be
known as rigid or inflexible budget achieved. Thus it is not rigid.
2. It operates on one level of activity and under one set of conditions. It It consists of various budgets for different levels of
assumes that there will be no change in the prevailing conditions, which activity.
is unrealistic.
3. Here as all costs like - fixed, variable and semi-variable are related to only Here, analysis of variance provides useful information
one level of activity, so variance analysis does not give useful information. as each cost is analysed according to its behaviour.
4. If the budgeted and actual activity levels differ significantly, then the Flexible budgeting at different levels of activity
aspects like cost ascertainment and price fixation do not give a correct facilitates the ascertainment of cost, fixation of
picture. selling price and tendering of quotations.
5. Comparison of actual performance with budgeted targets will be It provides a meaningful basis of comparison of the
meaningless specially when there is a difference between the two actual performance with the budgeted targets.
activity levels.
54
COST AND MANAGEMENT ACCOUNTING
Budget Ratio
Budget ratios provide information about the performance level, i.e., the extent of deviation of actual performance
from the budgeted performance and whether the actual performance is favourable or unfavourable.
The following ratios are usually used by the management to measure development from budget
Efficiency Ratio Standard Capacity Employed Ratio
This ratio may be defined as standard hours equivalent of work
produced expressed as a percentage of the actual hours spent in This ratio indicates the extent to which facilities were actually
producing the work. utilized during the budget period.
Calendar Ratio
This ratio may be defined as the relationship between the number
of working days in a period and the number of working days as in
the relative budget period.
Budget Ratios: