SARANSH

Last Mile Referencer for

COST AND
MANAGEMENT
ACCOUNTING

The Institute of Chartered

Accountants of India
(Setup by an Act of Parliament)

Board of Studies (Academic)

www.icai.org | www.boslive.icai.org
Saransh - Last Mile Referencer for Cost and Management
Accounting
While due care has been taken in preparing this booklet, if any errors or omissions are noticed, the
same may be brought to the notice of the Director, BoS. The Council of the Institute is not
responsible in any way for the correctness or otherwise of the matter published herein.

© 2023. The Institute of Chartered Accountants of India (Also referred to as ICAI)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
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Published in January 2023 by:

Board of Studies (Academic)
The Institute of Chartered Accountants of India
‘ICAI Bhawan” A-29, Sector-62,
Noida 201 309
 Board of Studies (Academic), the student wing of the Institute, does not leave any
stone unturned in providing best-in-class services to its students. It imparts quality
academic education through its value-added study materials, wherein concepts are
explained in lucid language. Illustrations and Test Your Knowledge Questions
contained therein facilitate enhanced understanding and application of concepts
learnt. Booklet on MCQs & Case Scenarios contain a rich bank of MCQs and Case
Scenarios to hone the analytical skills of students, by applying the concepts learnt in
problem solving. Revision Test Papers contain updates and Q & A to help students
update themselves with the latest developments before each examination and revise
the concepts and provisions by solving questions contained therein. Suggested
PREFACE

Answers containing the ideal manner of answering questions set at examination also
helps students revise for the forthcoming examination. Mock Test Papers help
students assess their level of preparedness before each examination. BoS (Academic)
also conducts live virtual classes through eminent faculty for its students across the
length and breadth of the country.

To reach out to its students, the BoS (Academic) has also been publishing
subject-specific capsules in its monthly Students’ Journal “The Chartered
Accountant Student” since the year 2017 for facilitating effective revision of concepts
dealt with in different topics of each subject at the Foundation, Intermediate and
Final levels of the chartered accountancy course. Each issue of the journal includes a
capsule relating to specific topic(s) in one subject at each of the three levels. In these
capsules, the concepts and provisions are presented in attractive colours in the form
of tables, diagrams and flow charts for facilitating easy retention and quick revision
of topics.

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. The
capsule on ‘Cost and Management Accounting’ covers diagrams, flow charts tables
and formulas. In addition, it encompasses case studies and skill assessment-based
questions so that students can critically analyse business problems and strengthen
their analytical skills through interpreting and evaluating.” This capsule, though,
facilitates the students in undergoing quick revision, under no circumstances, such
revisions can substitute the detailed study of the materials provided by BoS such as
Study Material and Practice Manual.

Happy Reading!

© ICAI BOS(A)
SARANSH Cost and Management Accounting

Message of Key ICAI Office Bearers

CA. (Dr.) Debashis Mitra

President, ICAI

The Board of Studies (Academic) of ICAI has always been at the forefront of providing
quality education to aspiring CA students and handholding them in preparing for their
exams. Saransh — Last Mile Referencer is a step in that direction. This pack of 3 booklets
on Accounting, Auditing & Cost Management and Strategic Decision Making covers
˦˜˚ˡ˜Ѓ˖˔ˡ˧˖ˢˡ˖˘ˣ˧˦ˢ˙˘˔˖˛˖˛˔ˣ˧˘˥˜ˡˣ˥˘˖˜˦˘˙ˢ˥ˠʡˇ˛˜˦˪˜˟˟ˡˢ˧ˢˡ˟ˬ˛˘˟ˣ˦˧˨˗˘ˡ˧˦˙ˢ˥
their reference for examinations but also Members can use it for their practice reference.

CA. Aniket S. Talati

Vice-President, ICAI

It has always been the endeavour of ICAI to provide updated information to its student to
˞˘˘ˣ˧˛˘ˠ˔˕˥˘˔˦˧˔˕ˢ˨˧˧˛˘˟˔˧˘˦˧˛˔ˣˣ˘ˡ˜ˡ˚˦˜ˡ˧˛˘˔˖˖ˢ˨ˡ˧˜ˡ˚˔ˡ˗˥˘˟˔˧˘˗Ѓ˘˟˗˦ʡˇ˛˘
Board of Studies (Academic), the academic wing of ICAI, has come up with a series of
booklets ‘Saransh – Last Mile Referencer’ with key points of different subjects. This will help
facilitate effective revision of concepts in each subject.

CA. Dayaniwas Sharma

Chairman, Board of Studies (Academic)

Saransh — Last Mile Referencer is a compilation of capsules on different subjects of

Foundation, Intermediate and Final levels of the chartered accountancy course. This
˦˘˥˜˘˦ˢ˙˕ˢˢ˞˟˘˧˦˖ˢˡ˦ˢ˟˜˗˔˧˘˦˔˟˟˦˜˚ˡ˜Ѓ˖˔ˡ˧˧ˢˣ˜˖˦ˢ˙ʴ˖˖ˢ˨ˡ˧˜ˡ˚˜ˡ˖˟˨˗˜ˡ˚ʴ˖˖ˢ˨ˡ˧˜ˡ˚
Standards & Ind AS, Auditing with Auditing Standards and Cost Management and
Strategic Decision Making at one place by capturing the key points. The concepts and
ˣ˥ˢ˩˜˦˜ˢˡ˦ˣ˥˘˦˘ˡ˧˘˗˜ˡ˔˧˧˥˔˖˧˜˩˘˖ˢ˟ˢ˨˥˦˜ˡ˧˛˘˙ˢ˥ˠˢ˙˧˔˕˟˘˦ʟ˗˜˔˚˥˔ˠ˦˔ˡ˗Єˢ˪˖˛˔˥˧˦
will facilitate quick revision of topics and easy retention.

CA. Vishal Doshi

Vice-Chairman, Board of Studies (Academic)

Among the many best-in-class services that the Board of Studies (Academic) provides to
its students, Saransh — Last Mile Referencer is another initiative in that direction. These
booklets on different subjects have been provided in a concise and precise form. It will
facilitate understanding of the concepts better to students and grasp the essence of the
subject. These capsules will enhance of level of preparedness before the examinations.

© ICAI BOS(A)
SARANSH

The Institute of Chartered

Accountants of India
(Setup by an Act of Parliament)
Board of Studies (Academic)

INDEX
Topic Pg No.

COST AND MANAGEMENT ACCOUNTING

Introduction To Cost and Management Accounting 1

Material Cost 6

Overheads 9

Process And Operation Costing 11

Standard Costing 13

Marginal Costing 16

Budget & Budgetary Control 18

Employee (Labour) Cost 21

Cost Sheet 25

Unit & Batch Costing 29

Job & Contract Costing 31

Activity Based Costing (ABC) 35

Joint Products & By-products 38

Service Costing 42

© ICAI BOS(A)
SARANSH

© ICAI BOS(A)
SARANSH Cost and Management Accounting

Cost and Management Accounting

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.

Introduction to Cost and Management Accounting

Chapter Overview

Objectives of Cost Scope of Cost Role & Functions of Users of Cost

and Management and Management Cost and Management and Management
Accounting Accounting Accounting Accounting

Cost Relationship of Cost and

Cost Responsibility Cost
Accounting Management Accounting with
Classification Centres Object
using IT other accounting disciplines

Meaning of Terms used in Cost and Management Accounting

First of all, let us discuss the meaning of various terminologies used in Cost and Management Accounting to have
a clear understanding about the subject.

Cost Cost Management Cost

Cost Costing Accounting Accountancy Accounting Management

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.

© ICAI BOS(A) 1
SARANSH Cost and Management Accounting

Objectives of Cost Accounting

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.”

Assisting management in decision making: Cost and Management accounting by providing

relevant information, assist management in planning, implementing, measuring, controlling and
evaluation of various activities.

Scope of Cost Accounting Role and Functions of Cost and

We also need to know various scopes of cost accounting. Management Accounting
Cost ascertainment and the process of cost accounting
are the major scopes. The other scopes are presented. Role of a Cost and
Management Accounting
system
Functions of Cost and
Management Accounting
System

Provide relevant Collection and

information to management accumulation of cost for
for decision making each element of cost
Cost Analysis
Assigning costs to cost
Assist management for objects to ascertain cost.
planning, measurement,
Sets budget and standards
evaluation and controlling of
for a particular period
business activities or activity beforehand
Statutory and these are compared
Cost
Compliances Scope with the assigned and
Comparisons
of Cost Help in allocation of cost ascertained cost.
Accounting
to products and inventories
for both external and Provision of relevant
internal users. information to the
management for decision
making.

Cost Cost
Control To gather data like time
Reports taken, wastages, process
idleness etc., analyse the
data, prepare reports and
take necessary actions

© ICAI BOS(A) 2
SARANSH 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

Creditors and Financial Management

Lenders

Essentials of a good Cost Accounting System

The essential features which a cost accounting system should possess are depicted as below:

Informative and Accurate and Uniformity and Integrated and Flexible and Trust on the
simple authentic consistency inclusive adaptive system

Cost Accounting using Information Cost Objects

Technology It is very important to understand the meaning of
With the use of information technology, the cost cost object, cost unit and cost driver. Their meaning
accounting system gets integrated and automated. The alongwith examples are illustrated below.
basic features are depicted as below:
Cost Object: Cost object is anything for which
a separate measurement of cost is required. Cost
object may be a product (book), a service (airline),
a project, a customer, a brand category etc.
Enterprise Resource Internet (including intranet
Planning (ERP) and extranet)

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).

© ICAI BOS(A) 3
SARANSH Cost and Management Accounting

Responsibility Centres
To have a better control over the organisation, management delegates its responsibilities and authorities to various
departments or persons, which are known as responsibility centres. There are four types of responsibility centres
as discussed below:

Responsibility Centres

Cost Centres: Revenue Centres: Profit Centres: Investment Centres:

The responsibility centre
which is held accountable
for incurrence of costs
which are under its control.
Which are accountable for
generation of revenue for
the entity. Example- Sales
Department.
Which have both
responsibility of generation
of revenue and incurrence
of expenditures. Example-
Decentralised branches of
an organisation.
Which are not only
responsible for profitability
but also has the authority
to make capital investment
decisions. Example-
Maharatna, Navratna and
Miniratna.

Standard Cost Centre: Discretionary Cost

Cost Centre where output Centre:
is measurable and input The cost centre whose
required for the output can output cannot be measured
be specified. in financial terms.

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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

By Nature By Variability By By Costs for

or Element By Functions By Normality Managerial
or Behaviour Controllability
Decision Making

(i) By Nature or Element

ELEMENTS OF COST

Material Cost Labour Cost Other Expenses

Direct Indirect Direct Indirect Direct Indirect

Material Cost Material Cost Labour Cost Labour Cost Expenses Expenses

Overheads

Production Administration Selling and Distribution

Overheads Overheads Overheads

© ICAI BOS(A) 4
SARANSH 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

(iii) By Variability or Behaviour

Abnormal Cost - It is the cost which is not normally incurred

Fixed Cost Variable Cost Semi-variable Cost

(vi) By Cost for Managerial Decision Making

(j) Out-of- It is that portion of total cost, which involves

(a) Pre A cost which is computed in advance before pocket Cost cash outflow
determined production or operations start
Cost

Those costs, which continue to be incurred

(k) Shut down even when a plant is temporarily shut-down
A pre-determined cost, which is calculated
(b) Standard Costs e.g. rent, rates, depreciation, etc
from managements ‘expected standard of
Cost efficient operation’ and the relevant necessary
expenditure
Historical costs incurred in the past are
(l) Sunk Costs known as sunk costs. They play no role in
The amount at any given volume of output decision making in the current period.
(c) Marginal by which aggregate costs are changed if the
Cost volume of output is increased or decreased by
one unit
(m) Absolute These costs refer to the cost of any product,
Cost process or unit in its totality.
The expected cost of manufacture, or
(d) Estimated acquisition, often in terms of a unit of product
Cost computed on the basis of information
available in advance of actual production or Such costs are not tied to a clear cause
purchase (n) Discretionary
and effect relationship between inputs and
Costs
outputs.
It represents the change (increase or decrease)
(e) Differential
in total cost (variable as well as fixed) due to
Cost
change in activity level, technology, process or
method of production, etc. These are the costs, which are not assigned
(o) Period Costs to the products but are charged as expenses
against the revenue of the period in which
they are incurred.
(f) Imputed These costs are notional costs which do not
Costs involve any cash outlay
These are costs that result specifically from
(p) Engineered a clear cause and effect relationship between
Costs inputs and outputs.
(g) Capitalised These are costs which are initially recorded as
Costs assets and subsequently treated as expenses.
These costs are also known as out of pocket
(q) Explicit costs and refer to costs involving immediate
These are the costs which are associated with payment of cash. Salaries, wages, postage and
(h) Product the purchase and sale of goods (in the case of Costs
Costs telegram, printing and stationery, interest on
merchandise inventory). loan etc.

This cost refers to the value of sacrifice (r) Implicit

(i) Opportunity made or benefit of opportunity foregone in These costs do not involve any immediate
Cost Costs cash payment.
accepting an alternative course of action

© ICAI BOS(A) 5
SARANSH
Material Cost
Chapter Overview
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Cost and Management Accounting
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6
SARANSH Cost and Management Accounting

(a) Inventory Control- By Setting Quantitative

Levels

Re-order Stock Level When to Order

Re-order Quantiy/ EOQ
(v) Average Inventory Level:
Average Stock Level = Minimum Stock Level
+ 1/2 Re-order Quantity
How Much to Order Or
Average Stock Level =

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

Danger Stock Level Kept for emergency requirement

Fast, Slow and Non On the basis of inventory
Moving (FSN) turnover
Buffer Stock To meet sudden demand

Vital, Essential and On the basis of importance of

Desirable (VED) inventory
(i) Re-order Stock Level (ROL): Maximum
Consumption × Maximum Re-order Period
Or, ROL = Minimum Stock Level + (Average Rate of High, Medium and Low On the basis of price of an item
Consumption × Average Re-order period) (HML) of inventory

(ii) Re-Order Quantity/ Economic Order Quantity

(EOQ): (c) Using Ratio Analysis
(i) Input Output Ratio: Input-output ratio is the ratio
of the quantity of input of material to production and
2x Annual Requirement (A) x Cost per order (O) the standard material content of the actual output.
EOQ =
Carrying Cost per unit per annum (C)
(ii) Inventory Turnover Ratio:
Inventory Turnover Ratio =
Just in Time (JIT) Inventory Management Cost of materials consumed during the period
JIT is a system of inventory management with
Cost of average stock held during the period
an approach to have a zero inventories in stores.
According to this approach material should only be (d) Physical Control
purchased when it is actually required for production. (i) Two Bin System: Two Bin System is supplemental
Production Material Order Supplier
to the record of respective quantities on the bin
Demand starts to Requirement for raw sent the card and the stores ledger card.
for final process the is sent to materials material
product for
demad for
product
Purchase
department
sent to
supplier production
(ii) Establishment of system of budgets: Based on this,
inventories requirement budget can be prepared.
Such a budget will discourage the unnecessary
investment in inventories.
(iii) Minimum Stock Level:
Minimum Stock Level = Re-order Stock Level - (iii) Perpetual inventory records and continuous
(Average Consumption Rate × Average Re-order stock verification :
Period) Perpetual inventory represents a system of records
maintained by the stores department in the form of
(iv) Maximum Stock Level: Bin cards and Stores ledger.
Maximum Stock Level = Re-order Level + Re-
order Quantity - (Minimum Consumption Rate × (iv) Continuous Stock Verification:
Minimum Re-order Period) The system of continuous stock-taking consists of
physical verification of items of inventory.

© ICAI BOS(A) 7
SARANSH Cost and Management Accounting

Valuation of Material Issue

Cost Price Methods Average Price Methods Market Price Methods Notional Price Methods
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© ICAI BOS(A) 8
SARANSH Cost and Management Accounting

Overheads
Chapter Overview Steps for Distribution of Overheads
OVERHEADS Estimation of Overheads

Selling and Allocation of Overheads: Apportionment of

Production Administrative Distribution Overheads: Allotment
Overheads Overheads Direct assignment of cost
Overheads to a cost object which can of proportions of items
be traced directly of cost to cost centres or
departments on some basis.

Accounting and Control of Overheads

Production Production Service Service
Department-I Department-II Department-I Department-II

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.

By Function By Nature By Element By Control

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or Production t

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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
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is called absorption of overheads.
Distribution
Overheads
Methods for Re-apportionment of
Overheads
)XQFWLRQDO&ODVVLÀFDWLRQRI2YHUKHDGV
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.

Expenditures incurred on all activities relating

to general management and administration Direct Step method or Reciprocal
of an organisation. It includes formulating re-distribution non-reciprocal Service
Office and the policy, directing the organisation and method method. method.
Administrative controlling the operations of an undertaking
Overheads which is not related directly to production,
selling, distribution, research or development
activity or function.

(i) Selling overhead: expenses related to sale of

Simultaneous Trial and Repeated
Selling and products and include all indirect expenses in
Equation error distribution
Distribution sales management for the organisation.
method method method
Overheads (ii) Distribution overhead: cost incurred on
making product available for sale in the market.

© ICAI BOS(A) 9
SARANSH Cost and Management Accounting

Methods of Absorbing Overheads to various Products or Jobs

Several methods are commonly employed either individually or jointly for computing the appropriate overhead
rate. The more common of these are:

Percentage of Percentage of Percentage of direct Labour hour Machine hour Rate per unit of
direct materials prime cost labour cost rate rate Output

Machine hour rate Treatment of Under-absorption and Over-

absorption of overheads in Cost Accounting
Machine hour rate implies, cost of running a machine
for an hour to produce goods.
Is there any under/
The steps involved in determining of Machine hour over absorption of
rate is as follows: overheads?

Step1: Calculate total of overheads apportioned to a production

department. Yes

Step 2: Apportion further these overheads to machines or group

of machines in the department. Amount of under/ Yes
over absorption is
small
Step 3: Allocate machine specific costs (directly identifiable with
the machine)
No
Costing
P&L A/c
Step 4: Estimate total productive hours for the machine
Due to wrong
estimation Yes
Step 5: Aggregate overheads as apportioned in step-2 and and abnormal
allocated in step-3 and divide it by Estimated total productive reasons
hours

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

Types of Overhead Rates Concepts related with Capacity

Installed/ The maximum capacity of producing goods
Normal Rate: This rate is calculated by dividing Rated or providing services. It is also known as
the actual overheads by actual base. It is also capacity theoretical capacity.
known as actual rate.

Practical It is defined as actually utilised capacity of a

Pre-determined Overhead Rate: This rate
is determined in advance by estimating the
amount of the overhead for the period in
which it is to be used.
Blanket Overhead Rate: Blanket overhead
rate refers to the computation of one single
overhead rate for the whole factory.
Departmental Overhead Rate: It refers to the
computation of one single overhead rate for a
particular production unit or department.
capacity plant. It is also known as operating capacity.
The volume of production or services
Normal achieved or achievable on an average over a
capacity period under normal circumstances taking
into account the reduction in capacity
resulting from planned maintenance.
Actual Capacity actually achieved during a given
capacity period.
Idle It is that part of the capacity of a plant,
capacity machine or equipment which cannot be
effectively utilised in production.

© ICAI BOS(A) 10
SARANSH Cost and Management Accounting

Treatment of Certain Items in Cost 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.

Process and Operation Costing

Chapter Overview Meaning of Process Costing
Process Costing is a method of costing used in
industries where the material has to pass through two
or more processes for being converted into a final
Meaning
product. It is defined as “a method of Cost Accounting
whereby costs are charged to processes or operations
and averaged over units produced”.
Costing
Procedure
Normal
This can be understood with the help of the following
diagram:
Process & Operation Costing

Treatment of
Process loss/ gain Raw Process Process Process Finished
Abnormal Material -I -II -III Goods

Costing Procedure in Process Costing

Process Costing
Methods Materials: Each process for which the materials are used, are
debited with the cost of materials consumed on the basis of the
information received from the Cost Accounting department.
Valuation of WIP
Equivalent Units
Employee Cost (Labour) - Each process account should
Inter-process be debited with the labour cost or wages paid to labour for
Profit carrying out the processing activities. Sometimes the wages
paid are apportioned over the different processes after selecting
appropriate basis.
Operation Costing
Direct expenses - Each process account should be debited with
direct expenses like depreciation, repairs, maintenance, insur-
ance etc. associated with it.

Production Overheads- These expenses cannot be allocated to a

process. The suitable way out to recover them is to apportion them
over different processes by using suitable basis.

© ICAI BOS(A) 11
SARANSH Cost and Management Accounting

Steps in Process Costing Treatment of Normal, Abnormal Loss and

Abnormal Gain
Step-1: Analyse the Physical Flow of Production Units Normal Process Abnormal Abnormal Process
Loss Process Loss Gain/ Yield

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Valuation of Work-in-process
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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
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Equivalent completed units = Actual number of units in Percentage of

X
the process of manufacture Work completed

Input Details Units Output Units Equivalent Units

Particulars
Material Labour Overhead

% Units % Units % Units

a b c= a×b d e=a×d f g=a×f

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**

Normal loss*** xxx - - - - - -

Abnormal loss/ xxx xxx xxx xxx xxx xxx xxx
Gain****

Total Closing W-I-P xxx xxx xxx xxx xxx xxx xxx

xxx Total 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.

© ICAI BOS(A) 12
SARANSH Cost and Management Accounting

(ii) Methods for valuation of work-in-process

First-in-first-out (FIFO) method
Under this method the units completed and transferred include
completed units of opening work-in-process and subsequently
introduced units. Proportionate cost to complete the opening
work-in-process and that to process the completely processed
units during the period are derived separately.
Weighted Average (Average) Method
Under this method, the cost of opening work-in-process and cost
of the current period are aggregated and the aggregate cost is
divided by output in terms of completed units.

,QWHU3URFHVV3URÀW Operation Costing

In some process industries the output of one process is
transferred to the next process not at cost but at market
value or cost plus a percentage of profit. The difference
between cost and the transfer price is known as inter-
process profits.
This product costing system is used when an entity produces
more than one variant of final product using different
materials but with similar conversion activities. Which
means conversion activities are similar for all the product
variants but materials differ significantly. Operation
Costing method is also known as Hybrid product costing
system as materials costs are accumulated by job order or
batch wise but conversion costs i.e. labour and overheads
costs are accumulated by department, and process costing
methods are used to assign these costs to products.

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

Basic or Bogey Current Standards:

Standards: These
What is a Standard or Standard Cost? standards are used
Standard cost is defined in the CIMA Official Terminology only when they are
as “‘the planned unit cost of the product, component likely to remain
or service produced in a period. The standard cost may constant or unaltered
be determined on a number of bases. The main use of over a long period.
standard costs is in performance measurement, control,
stock valuation and in the establishment of selling prices.”
These standards reflect
the management’s
anticipation of what
actual costs will be for
the current period.

© ICAI BOS(A) 13
SARANSH Cost and Management Accounting

Process followed in Standard Costing

Setting of Ascertainment of Comparison of Investigate the Disposition of

Standards actual costs actual cost with reasons for variances
standard cost variances

Variances at a Glance
Total Cost Variance

Material Cost Variance Labour Cost Variance Overhead Cost Variance

Usage Idle Time Efficiency Variable Overheads Fixed Overhead

Price Variance Variance Rate Variance Variance Variance Variance 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)]

Material Price Variance Material Usage Variance

[Standard Cost of Actual Quantity – Actual Cost]
(The difference between the Standard Price and Actual Price for
the Actual Quantity Purchased)
[(SP – AP) × AQ]
Or
[(SP × AQ) – (AP × AQ)]
[Standard Cost of Standard Quantity for Actual Production –
Standard Cost of Actual Quantity]
(The difference between the Standard Quantity specified for actual
production and the Actual Quantity used, at Standard Price)
[(SQ – AQ) × SP]
Or
[(SQ × SP) – (AQ × SP)]

Material Mix Variance Material Yield Variance

[Standard Cost of Actual Quantity in Standard Proportion –
Standard Cost of Actual Quantity]
(The difference between the Actual Quantity in standard
proportion and Actual Quantity in actual proportion, at Standard
Price)
[(RSQ – AQ) × SP]
Or
[(RSQ × SP) – (AQ × SP)]
[Standard Cost of Standard Quantity for Actual Production –
Standard Cost of Actual Quantity in Standard Proportion]
(The difference between the Standard Quantity specified for
actual production and Actual Quantity in standard proportion, at
Standard Purchase Price)
[(SQ – RSQ) × SP]
Or
[(SQ × SP) – (RSQ × SP)]

© ICAI BOS(A) 14
SARANSH 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
[Standard Cost of Actual Time Worked in Standard
Proportion – Standard Cost of Actual Time Worked]
(The difference between the Actual Hours worked in
standard proportion and Actual Hours worked in actual
proportion, at Standard Rate)
[(RSH – AH#) × SR] Or
[(RSH × SR) – (AH# × SR)]
Labour Yield Variance Or Sub-Efficiency Variance
[Standard Cost of Standard Time for Actual Production
– Standard Cost of Actual Time Worked in Standard
Proportion]
(The difference between the Standard Hours specified
for actual production and Actual Hours worked in
standard proportion, at Standard Rate)
(SH – RSH) × SR Or
(SH × SR) – (RSH × SR)

(iii) Variable Overhead Variances

Variable Overhead Cost Variance
(Standard Variable Overheads for Production – Actual Variable Overheads)

Variable Overhead Expenditure Variable Overhead Efficiency Variance

(Spending) Variance
(Standard Variable Overheads for Actual Hours#) (Standard Variable Overheads for Production)
Less Less
(Actual Variable Overheads) (Standard Variable Overheads for Actual Hours#)
[(SR – AR) × AH#] [(SH – AH#) × SR]
Or Or
[(SR × AH#) – (AR × AH#)] [(SH × SR) – (AH# × SR)]

(iv) Fixed Overhead Variances

Fixed Overhead Cost Variance
(Absorbed Fixed Overheads) Less (Actual Fixed Overheads)

Fixed Overhead Expenditure Variance Fixed Overhead Volume Variance

(Budgeted Fixed Overheads) (Absorbed Fixed Overheads)
Less Less
(Actual Fixed Overheads) (Budgeted Fixed Overheads)
Or Or
(BH × SR) – (AH × AR) (SH × SR) – (BH × SR)

Fixed Overhead Capacity Variance
SR (AH – BH)
Or
(AH × SR) – (BH × SR)
AH* - Actual Hours paid
AH# - Actual Hours worked
Fixed Overhead Calendar Variance Fixed Overhead Efficiency Variance
Std. Fixed Overhead rate per day (Actual no. SR (AH – SH)
of Working days – Budgeted Working days) Or
(AH × SR) – (SH × SR)

© ICAI BOS(A) 15
SARANSH 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

The marginal or variable costs (as direct material, direct

Characteristics Break-even labour and variable factory overheads) are treated as the cost

Characteristics of Marginal Costing

of Marginal Analysis of product
Marginal Costing
Costing
Under marginal costing, the value of finished goods and
Cost-Volume- Margin of Safety work–in–progress is also comprised only of marginal costs.
Profit (CVP) Variable selling and distribution overheads are excluded for
Analysis valuing these inventories.
Angle
of Incidence Fixed costs are treated as period costs and are charged to profit
Short-term
and loss account for the period for which they are incurred
Decision making
Contribution
Prices are determined with reference to marginal costs and
Ratio
contribution margin

Profitability of departments and products is determined with

reference to their contribution margin
Meaning of Terms
In order to understand the concept of marginal costing,
let us first define various terminology associated with &RPSXWDWLRQRI&RQWULEXWLRQDQG3URÀW
marginal costing. under Marginal Costing
For the determination of cost of a product/ service under
marginal costing, costs are classified under variable and
Marginal Differential fixed. All the variable costs are part of product and fixed
Marginal Cost Direct Costing
Costing Cost costs are charged against contribution margin.

Cost and Profit Statement under Marginal Costing

Marginal It is a costing Direct costing Differential
cost as system where and Marginal cost is Amount Amount
understood products or Costing difference (Rs) (Rs)
in economics services and is used between the Revenue xxx
is the inventories synonymously costs of two Product Cost:
incremental are valued at at various different - Direct Materials xxx
cost of variable costs places and it production - Direct employee (labour) xxx
production only. is so also. levels. - Direct expenses xxx
which arises - Variable manufacturing overheads xxx
due to
Product (Inventoriable) Costs xxx (xxx)
one-unit
Product Contribution Margin xxx
increase
- Variable Administration overheads xxx
in the
- Variable Selling & Distribution overheads xxx (xxx)
production
Contribution Margin xxx
quantity.
Period Cost:
Fixed Manufacturing expenses xxx
Fixed non-manufacturing expenses xxx (xxx)
Profit/ (loss) xxx

© ICAI BOS(A) 16
SARANSH Cost and Management Accounting

Advantages of Marginal Costing %UHDN(YHQ$QDO\VLV

There are many advantages of marginal costing, some Break-even analysis is a generally used method to study
of them are discussed below. the CVP analysis. This technique can be explained in
two ways.
(i) In narrow sense it is concerned with computing the
Simplified break-even point.
Pricing
Policy
(ii) In broad sense this technique is used to determine
Short term
profit
Proper the possible profit/loss at any given level of
recovery of
planning production or sales.
Overheads
= Fixed Cost /
Break-even Point Contribution per unit
Advantages
Helps in of Marginal Shows
Decision Costing Realistic
Making Profit

Break even
Cash Break-even = Cash Fixed Cost /
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

&RVW9ROXPH3URÀW &93 $QDO\VLV Angle of Incidence

It is a managerial tool showing the relationship between
various ingredients of profit planning viz., cost, selling
price and volume of activity.
Marginal Cost Equation
Marginal Cost Equation = S -V = C = F ± P
This angle is formed by the intersection of sales line and
total cost line at the break-even point. This angle shows
the rate at which profit is earned once the break-even
point is reached. The wider the angle the greater is the rate
of earning profits. A large angle of incidence with a high
margin of safety indicates extremely favourable position

Marginal Cost Statement 0DUJLQRI6DIHW\

This is the difference between the expected level of sales
(r) and break even sales (no profit, no loss). The larger is
Sales (S) xxxx the margin of safety higher is the profit and vice versa.
Less: Variable Cost (V) xxxx
Variations of Basic Marginal Cost Equation and
Contribution (C) xxxx other formulae
Less: Fixed Cost (F) xxxx
Profit/ Loss (P) xxxx i. Sales – Variable cost = Fixed cost + Profit / Loss

By multiplying and dividing L.H.S. by S

3URÀW9ROXPH5DWLRRU39UDWLR ii. S (S – V)
=F+P
This ratio shows the proportion of sales required to S
cover fixed cost and profit. P/V ratio is calculated as S- V
below: iii. S x P/V Ratio = F + P or Contribution (P / V Ratio = X 100)
S
Contribution ( ... at BEP Profit is zero )
(a) P/V Ratio= ×100 iv. BES x P/V Ratio = F
Sales v.
Fixed cost
BES =
(b) When two years’ data is given, P/V Ratio P/V Ratio
vi.
Fixed cost
Change in contribution/ Profit P/V Ratio =
×100 BES
Change in sales vii S × P/V Ratio = Contribution (Refer to iii)

© ICAI BOS(A) 17
SARANSH Cost and Management Accounting

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

Budget & Budgetary Control

Chapter Overview 'HÀQLWLRQDQG7HUPLQRORJ\
Let us first define various important terminologies
Essentials of used in budget and budgetary control.
Budget

Budget Budgeting Budgetary control

Objectives of Capacity-wise
Budgeting
Budget & Budgetary Control

Quantitative Coordinating The establishment

expression of a the combined of budgets
Types of plan for a defined intelligence of an relating to the
Budgets Functions-wise period of time entire organisation responsibilities
into a plan of of executives
action based on of a policy and
past performance the continuous
Zero-based
Budgeting (ZBB) comparison of the
Period-wise
actual with the
budgeted results,
either to secure by
Performance individual action
Budgeting
Master Budget the objective of
the policy or to
provide a basis for
Budget Ratio its revision

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

© ICAI BOS(A) 18
SARANSH Cost and Management Accounting

Characteristics of Budget Objectives of Budgeting

Main characteristics of budget are as below: The objective of budgeting begins with planning and
ends with controlling. Once the planning is done, they
can be used for directing and controlling operations so
It is concerned that the stated targets in planning are achieved.
for a definite
future period

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 ord g a
activities of a ing ina nd
Budget is a business troll tin
g
means to achieve C on
business and it
is not an end in
itself

Advantages of Budgetary Control System

There are many advantages of budgetary control system, and some of the them are illustrated below:

Control on Finding Effective Revision of Implementation Cost

Efficiency utilisation of of Standard Credit Rating
expenditure deviations plans Consciousness
resources Costing system

&ODVVLÀFDWLRQRI%XGJHW

BUDGET

Capacity wise Functions wise Master Budget Period wise

Sales budget Long-term

Fixed Budget Production budget Budgets
Plant utilisation budget
Direct-material usage budget
Flexible Direct-material purchase budget Short-term
Budget Direct-labour (personnel) budget Budgets
Factory overhead budget
Production cost budget
Current
Ending-inventory budget Budgets
Cost of goods-sold budget
Selling and distribution cost budget
Administration expenses budget
Research and development cost budget
Capital expenditure budget
Cash budget

© ICAI BOS(A) 19
SARANSH Cost and Management Accounting

'HÀQLWLRQRIGLIIHUHQWW\SHVRI%XGJHW
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.”

'LIIHUHQFHVEHWZHHQ)L[HG%XGJHWDQG)OH[LEOH%XGJHW
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.

=HUR%DVHG%XGJHWLQJ =%% 3HUIRUPDQFH%XGJHWLQJ

It is defined as ‘a method of budgeting which requires
each cost element to be specifically justified, although
the activities to which the budget relates are being
undertaken for the first time, without approval, the
budget allowance is zero’.
Stages in Zero-based budgeting
Identification and description of Decision packages
A performance budget is one which presents the
purposes and objectives for which funds are required,
the costs of the programmes proposed for achieving
those objectives, and quantitative data measuring the
accomplishments and work performed under each
programme.
Steps in Performance Budgeting

Establishing Evolving suitable

Bring the norms, yardsticks,
a meaningful system of
Evaluation of Decision packages functional work units of
accounting performance
programme and financial
and activity and units costs,
management wherever possible
classification in accord
Ranking (Prioritisation) of the Decision packages of under each
with this programme and
government classification
operations activity for their
reporting and
Allocation of resources evaluation

© ICAI BOS(A) 20
SARANSH Cost and Management Accounting

EMPLOYEE (LABOUR) COST

Points of Discussion Classification of Employee cost:

Meaning of Wage and

Absorption of Direct
Employee Incentives employee cost
Wages Indirect
(Labour) Cost Payment System employee cost

Efficiency
Control of
Employee Cost
Overtime Rating Direct employee cost Indirect employee cost
Procedures
1. Cost of employees, directly  $PTU PG FNQMPZFFT XIP BSF
engaged in the production not directly engaged JO UIF
process. QSPEVDUJPO QSPDFTT
Attendance Employee
& Payroll Idle Time (Labour) 2. Easily identifiable and  Apportioned on some
Procedures Turnover allocable to cost unit. appropriate basis
3. Varies with the volume  .BZ not vary with the
of production and has volume PG QSPEVDUJPO
Meaning of Employee (Labour) Cost positive relationship with
the volume.

t
#FOFmUT QBJE PS QBZBCMF UP UIF FNQMPZFFT

EMPLOYEE PG BO FOUJUZ XIFUIFS QFSNBOFOU Employee Cost Control
(LABOUR) PS UFNQPSBSZ GPS UIF TFSWJDFT SFOEFSFE
COST CZ UIFN
t
*ODMVEFT QBZNFOUT NBEF JO DBTI PS LJOE - To control over the cost incurred on
employees.
EMPLOYEE - To keep the wages per unit of output
(LABOUR) as low as possible.
COST
CONTROL - To give the employees an appropriate
compensation and encourage
Wages and
efficiency.
salary

Factors for the Control of Employee Cost:

0UIFS CFOFmUT
MFBWF XJUI QBZ Control over time-
Allowances and Assessment of
free or subsidised keeping and time-
incentives manpower requirements.
food, leave travel booking.
DPODFTTJPO FUD
Employee cost
includes Control over idle time
Time and Motion Study.
and overtime.

Control over employee Wage and Incentive

Employer’s turnover. systems.
contribution to PF Payment for
BOE PUIFS XFMGBSF overtimes
funds;
Job Evaluation and
Employee productivity.
Merit Rating.

© ICAI BOS(A) 21
SARANSH Cost and Management Accounting

Time-keeping: A record of total time spent by t
"UUFOEBODF
BOE
5JNF
EFUBJMT

UIF FNQMPZFFT JO B GBDUPSZ
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. t
-JTU
PG
FNQMPZFFT
BOE
PUIFS
EFUBJMT
(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
t
$PNQVUBUJPO
PG
XBHFT
BOE
PUIFS
JODFOUJWFT
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
t
1BZNFOU
UP
UIF
FNQMPZFFT
Attendance 1VODI $BSE After all deductions (like PF, ESI, TDS), wages/
Step-4 salary is paid to the employees.
3FHJTUFS NFUIPE Attendance

.FUBM %JTD 5PLFO #JPNFUSJD

NFUIPE Attendance system
t
%FQPTJU
PG
BMM
TUBUVUPSZ
MJBCJMJUJFT
All statutory deduction are paid to the respective
Time-Booking: " NFUIPE XIFSFJO FBDI BDUJWJUZ PG Step-5
BO FNQMPZFF JT SFDPSEFE statutory bodies & funds.

(i) To compute the cost of the job

or activity. Idle Time
Objectives of (ii) To measure efficiency.
5JNF #PPLJOH (iii) To analyse the variance in The time during which no production is carried-out because
time with respect to the the worker remains idle but are paid.
standard time.

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

Payroll Procedures of Employees

5JNF LFFQJOH Personnel/ HR Normal Idle Time: Time which cannot be avoided or
Department Department reduced in the normal course of business.

t
5JNF MPTU CFUXFFO GBDUPSZ HBUF BOE UIF QMBDF PG

 5JNF BOE
Attendance

 &NQMPZFF

Payroll work,
Details

Department t
*OUFSWBM CFUXFFO POF KPC BOE BOPUIFS

Causes:
t
4FUUJOH VQ UJNF GPS UIF NBDIJOF
 8BHF BOE t
/PSNBM SFTU UJNF CSFBL GPS MVODI FUD
4BMBSZ TIFFU

t
5SFBUFE BT B part of cost of production

 %FQPTJU PG EFEVDUJPOT
and contributions Treatment t
*O UIF DBTF PG direct workers an allowance for
Cost/ Accounting OPSNBM JEMF UJNF JT DPOTJEFSFE XIJMF setting of
of Normal
Department standard hours PS TUBOEBSE SBUF
Idle Time
t
In case of indirect workers, normal idle time is
 1BZNFOU BGUFS EFEVDUJPOT DPOTJEFSFE GPS UIF computation of overhead rate.
and contributions

Abnormal Idle Time: Apart from normal idle time, there

Employees 4UBUVUPSZ #PEJFT may be factors which give rise to abnormal idle time.

© ICAI BOS(A) 22
SARANSH Cost and Management Accounting

t
-BDL PG DPPSEJOBUJPO Systems of Wage Payment and Incentives

t
1PXFS GBJMVSF #SFBLEPXO PG NBDIJOFT
Causes: t
/POBWBJMBCJMJUZ PG SBX NBUFSJBMT System of Wages Payment
t
4USJLFT MPDLPVUT QPPS TVQFSWJTJPO mSF nPPE
etc.
Time Output Combination Premium Group Incentives
based based of time and Bonus bonus for indirect
output based method scheme workers
Causes further
analysed into

Time based (Time Rate System):

Workers are paid on time basis i.e. hour, day, week, or month.
Controllable Uncontrollable
abnormal idle time abnormal idle time
Wages = Time Worked (Hours/ Days/ Months) × Rate for the time

Time which could have Time lost which

been put to productive management does not Output Based (Piece Rate System):
use had the management have any control e.g.,
been more alert and breakdown of machines, Each operation, job or unit of production is termed a piece.
efficient. flood etc. A rate of payment, is fixed for each piece.
The wages of the worker depend upon his output and rate of
each unit of output.
t
Not included in production cost.
t
4IPXO BT B separate item JO UIF Costing Profit Wages = Number of units produced × Rate per unit
and Loss "DDPVOU
Treatment
of Abnormal t
'PS FBDI DBUFHPSZ JF controllable and
uncontrollable JEMF UJNF UIF break-up of cost due
Idle time
UP WBSJPVT GBDUPST TIPVME CF separately shown
t
Management TIPVME BJN BU eliminating
Premium Bonus Method:
controllable idle time
The worker is guaranteed his daily wages, if output is below
and up to standard.
In case the task is completed in less than the standard time,
Overtime the saved time is shared between the employees and the
employer.
Overtime: Work done beyond normal working hours.

Overtime Payment = Wages paid for overtime at normal rate +

1SFNJVN FYUSB QBZNFOU GPS

PWFSUJNF XPSL t "
TUBOEBSE
UJNF
JT
mYFE
GPS
FBDI
KPC
PS

process
t 8PSLFS
HFUT
IJT
UJNF
SBUF
FWFO
JG
IF

HALSEY exceeds the standard time limit, since
Overtime PREMIUM his day rate is guaranteed.
Extra amount so paid over the normal rate PLAN
premium: t *G
KPC
EPOF
JO
MFTT
UIBO
UIF
TUBOEBSE

time, bonus equal to 50 percent of the
wages of time saved is paid.
CAUSES TREATMENT

Urgency of work. Charged to job directly. Wages = Time taken × Time rate + 50% of time saved × Time rate

To make up shortfall in Treated as overhead cost of

production due to some
unexpected development.
To make up shortfall in
production due to some
fault of management.
To take advantage of an
expanding market or of
rising demand.
the particular cost centre
which works overtime.
If overtime is worked in a
department due to the fault
of another department, then
premium should be charged
to the latter department.
Overtime worked on account
of abnormal conditions
such as flood, etc., should
be charged to Costing P/L
Account.
ADVANTAGES of
HALSEY PREMIUM PLAN
t
Time rate is guaranteed
t
0QQPSUVOJUZ GPS increasing
earnings by increasing
QSPEVDUJPO
t
System is equitable in as
NVDI BT UIF FNQMPZFS HFUT B
direct return GPS IJT FĉPSUT
in improving production
NFUIPET
DISADVANTAGES of
HALSEY PREMIUM PLAN
t
Incentive is not so strong
BT XJUI QJFDF SBUF TZTUFN
t
Harder the worker works,
UIF lesser IF gets QFS QJFDF
t
4IBSJOH QSJODJQMF NBZ not
be liked by employees

© ICAI BOS(A) 23
SARANSH Cost and Management Accounting

Factors for increasing Employee productivity:

t 4UBOEBSE
UJNF
BMMPXBODF
JT
mYFE
GPS

performance of a job.
ROWAN Employing XIP QPTTFTT right type of skill.
t #POVT
JT
QBJE
JG
UJNF
JT
TBWFE
PREMIUM t #POVT
JT
UIBU
QSPQPSUJPO
PG
UIF
UJNF

PLAN wages as time saved bears to the 1MBDJOH UIF right type of person UP UIF right job
standard time.

Training ZPVOH BOE PME XPSLFST CZ QSPWJEJOH

Time Saved SJHIU UZQFT PG PQQPSUVOJUJFT
Time taken × Rate per hour + × Time taken × Rate per hour
Time Allowed

5BLJOH BQQSPQSJBUF NFBTVSFT UP avoid UIF TJUVBUJPO PG

ADVANTAGES of
ROWAN PREMIUM PLAN
t
" XPSLFS DBO never double
his earnings even if there
is bad rate setting
t
4VJUBCMF GPS encouraging
moderately efficient
workers
t
4IBSJOH QSJODJQMF appeals
to the employer as being
FRVJUBCMF
excess or shortage of employees.
DISADVANTAGES of
ROWAN PREMIUM PLAN
Carrying out work study for fixation of wages.
t
4ZTUFN JT B bit complicated
t
*ODFOUJWF JT weak at a high
production level where the
time saved is more than
50% of the time allowed
Employee (Labour) Turnover
t
4IBSJOH QSJODJQMF JT not
generally welcomed by
employees Rate of change in the composition of employee
EMPLOYEE
force during a specified period measured
TURNOVER
against a suitable index.

Absorption of Wages
Methods to calculate Employee Turnover
ELEMENTS OF WAGES

Monetary payment Non-monetary benefits Replacement Method Separation Flux Method

t #BTJD
XBHFT
t .FEJDBM
GBDJMJUJFT This considers actual Method This considers
t %FBSOFTT
BMMPXBODF
t &EVDBUJPOBM
BOE
USBJOJOH
replacement of This considers CPUI UIF OVNCFS
facilities; employees irrespective total number of replacements
t 0WFSUJNF
XBHFT
of number of of employees BT XFMM BT UIF
t 1SPEVDUJPO
CPOVT t 3FDSFBUJPOBM
BOE
TQPSUT
QFSTPOT MFBWJOH UIF separated number of
t &NQMPZFST
DPOUSJCVUJPO
UP
facilities; organisation separations
PF, ESI and other funds, t )PVTJOH
BOE
TPDJBM

t -FBWF
QBZ
FUD welfare; and Number of employees Replaced
t $PTU
PG
TVCTJEJTFE
DBOUFFO
Replacement method =
EVSJOH UIF QFSJPE
× 100
and co-operative societies, "WFSBHF OVNCFS PG FNQMPZFFT EVSJOH UIF
period on roll
etc.

/VNCFS PG FNQMPZFFT 4FQFSBUFE EVSJOH UIF QFSJPE

Separation method = "WFSBHF OVNCFS PG FNQMPZFFT EVSJOH UIF QFSJPE on roll
× 100
(IÀFLHQF\5DWLQJ3URFHGXUHV

Number of employees Seperated +

If the time taken by a worker on a job ≤ the standard time, /VNCFS PG FNQMPZFFT 3FQMBDFE EVSJOH UIF QFSJPE
then he is rated efficient. Flux method = "WFSBHF OVNCFS 0G FNQMPZFFT EVSJOH UIF QFSJPE PO SPMM
× 100

Or
/P PG 4FQBSBUJPOT /PPG "DDFTTJPOT JF

/PPG 3FQMBDFNFOUT
/PPG /FX +PJOJOHT
Time allowed as per standard × 100
Efficiency in % = × 100 "WFSBHF OPPG FNQMPZFFT EVSJOH UIF QFSJPE PO SPMM
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 IBT B Helps
following management
system of direct
relationship for preparing
payment by manpower
results XJUI UIF requirements
output

© ICAI BOS(A) 24
SARANSH Cost and Management Accounting

Causes of Employee Turnover: COST SHEET

$IBOHF PG KPCT GPS CFUUFSNFOU
Points of Discussion
Premature retirement
Personal
Causes Domestic problems/ Family
responsibilities Head of
Functional
%JTDPOUFOU PWFS UIF KPCT BOE Costs in Cost
Classification
XPSLJOH FOWJSPONFOU Sheet

4FBTPOBM OBUVSF PG UIF CVTJOFTT

Causes of Employee Turnover

4IPSUBHF PG SBX NBUFSJBM QPXFS Advantages

Format of
TMBDL NBSLFU GPS UIF QSPEVDU FUD of
Cost Sheet
Unavoidable Cost Sheet
$IBOHF JO QMBOU MPDBUJPO
Causes
Disability

Disciplinary measures
)XQFWLRQDO&ODVVLÀFDWLRQRI(OHPHQWVRI&RVW
%JTTBUJTGBDUJPO XJUI KPC
SFNVOFSBUJPO IPVST PG XPSL
Direct Material Cost
XPSLJOH DPOEJUJPOT FUD
4USBJOFE SFMBUJPOTIJQ XJUI
management
Direct Employee (labour) Cost
Avoidable -BDL PG USBJOJOH GBDJMJUJFT BOE
Causes promotional avenues
-BDL PG SFDSFBUJPOBM BOE Direct Expenses
medical facilities

Low wages and allowances

Production/ Manufacturing Overheads

Effects of Employee Turnover:

Even flow of production is disturbed Administration Overheads

Efficiency of new workers is low

Increased cost of training Selling Overheads

New workers cause increased breakage of tools

Cost of recruitment Distribution Overheads

Cost of Employees Turnover:

Research and Development costs etc.
Cost of Employees Turnover

Preventive Costs
Costs incurred to prevent Replacement Costs Cost Heads in a Cost Sheet
$PTUT XIJDI BSJTF EVF UP
FNQMPZFF UVSOPWFS PS LFFQ employee turnover
it as lowest as possible Prime Cost

Cost of medical Cost of

CFOFmU recruitment
Cost of Production
Cost on employees’ Training and
XFMGBSF MJLF induction
QFOTJPO FUD
Abnormal Cost of Goods Sold
$PTU PO PUIFS CSFBLBHF BOE TDSBQ
CFOFmUT XJUI BO
objective to retain Extra wages and
employees PWFSIFBET EVF UP
UIF JOFĊDJFODZ PG Cost of Sales
OFX XPSLFST

© ICAI BOS(A) 25
SARANSH Cost and Management Accounting

Prime Cost:

Direct Direct Direct Prime

material costs employee costs expenses Cost

Prime Cost xxxx

Add: Factory Overheads# xxx
Gross Works Costs xxxx
Cost of material
Direct Material Cost

Add: Opening stock of Work-in-process xxx

'SFJHIU JOXBSET Less: Closing stock of Work-in-process (xxx)
Cost of direct
material Insurance
Factory or Works Costs xxxx
consumed* FH Add: Quality Control Cost xxx
Trade discounts or rebates
Add: Research & Development cost (Process related) xxx
(to be deducted)
Add: Administrative Overheads related with xxx
Duties & Taxes (if ITC is not production
BWBJMBCMF BWBJMFE 
Less: Credit for recoveries (miscellaneous income) (xxx)
Wages and salary Add: Packing Cost (Primary packing) xxx
Direct Employee Cost

Cost of Production xxxx

Payments to Allowances and incentives
the employees
engaged in the Payment for overtime
#
Factory Overheads (Works / production / manufacturing
overheads) includes-
production
of goods and #POVT FYHSBUJB
provision of
services FH Employer’s contribution to
Consumable Lease rent of
PF, ESI & funds Depreciation
stores and spares production assets
0UIFS CFOFmUT NFEJDBM MFBWF
XJUI QBZ -5$ 

Power & fuel Repair and Indirect

maintenance employees cost Drawing and
Expenses other Royalty paid of plant and related with Designing
Direct Expenses

than direct machinery, production department cost

material cost )JSF DIBSHFT factory building activities
and direct
employee cost 'FF GPS UFDIOJDBM BTTJTUBODF
FH Insurance of plant Service
Amortised cost of moulds, and machinery, Amortised cost department cost
patterns, patents factory building, of jigs, fixtures, such as Tool Room,
stock of raw tooling Engineering &
0UIFS FYQFOTFT EJSFDUMZ SFMBUFE material & WIP Maintenance,
XJUI UIF QSPEVDUJPO PG HPPET Pollution Control
*
Cost of Goods Sold:

Opening Closing Direct Cost of Cost of

Addition/ Opening Closing
Stock of stock of materials Cost of Cost of
Purchases stock of stock of
Material Material consumed Production Goods Sold
finished finished
goods goods

Cost of Production: Cost of Sales:

Cost of Goods Sold xxxx
Factory Add: Administrative Overheads (General) xxx
Prime related Cost of Add: Selling Overheads xxx
cost costs and Production
overheads Add: Packing Cost (secondary) xxx
Add: Distribution Overheads xxx
Cost of Sales xxxx

© ICAI BOS(A) 26
SARANSH Cost and Management Accounting

Examples:
Administrative Selling Packing Cost Distribution
Overheads (General) Overheads (secondary) Overheads

Depreciation and
maintenance of, office
CVJMEJOH GVSOJUVSF FUD
Salary of administrative
employees,
BDDPVOUBOUT FUD
Salary and wages 1BDLJOH NBUFSJBM Salary and wages of
SFMBUFE XJUI TBMFT UIBU FOBCMFT UP employees engaged in
department store, transport, and distribution of goods
NBLF UIF QSPEVDU
NBSLFUBCMF
Rent, depreciation, Transportation and
maintenance related insurance costs related
XJUI TBMFT EFQBSUNFOU XJUI EJTUSJCVUJPO

Rent, rates & taxes Advertisement, %FQSFDJBUJPO IJSF

maintenance of website DIBSHFT NBJOUFOBODF
GPS POMJOF TBMFT NBSLFU BOE PUIFS PQFSBUJOH DPTUT
SFTFBSDI FUD SFMBUFE XJUI EJTUSJCVUJPO
*OTVSBODF MJHIUJOH
office expenses

Indirect materials-
printing and stationery,
PĊDF TVQQMJFT FUD

-FHBM DIBSHFT BVEJU GFFT

NFFUJOH FYQFOTFT FUD

Cost Sheet- Specimen Format

Particulars Total Cost (R) Cost per unit (R)
1. %JSFDU NBUFSJBMT DPOTVNFE
0QFOJOH 4UPDL PG 3BX .BUFSJBM xxx
Add: "EEJUJPOT 1VSDIBTFT xxx
Less: $MPTJOH TUPDL PG 3BX .BUFSJBM (xxx)
xxx xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx xxx
5. Add: 8PSLT 'BDUPSZ 0WFSIFBET xxx
6. (SPTT 8PSLT $PTU   xxx
7. Add: 0QFOJOH 8PSL JO 1SPDFTT xxx
8. Less: $MPTJOH 8PSL JO 1SPDFTT (xxx)
9. Works/ Factory Cost (6+7-8) xxx xxx
10. Add: Quality Control Cost xxx
11. Add: 3FTFBSDI BOE %FWFMPQNFOU $PTU xxx
12. Add: "ENJOJTUSBUJWF 0WFSIFBET SFMBUJOH UP QSPEVDUJPO BDUJWJUZ xxx
13. Less: $SFEJU GPS 3FDPWFSJFT4DSBQ#Z1SPEVDUT NJTD JODPNF (xxx)
14. Add: 1BDLJOH DPTU QSJNBSZ xxx
15. Cost of Production (9+10+11+12-13+14) xxx xxx
16. Add: 0QFOJOH TUPDL PG mOJTIFE HPPET xxx
17. Less: $MPTJOH TUPDL PG mOJTIFE HPPET (xxx)
18. Cost of Goods Sold (15+16-17) xxx xxx
19. Add: "ENJOJTUSBUJWF 0WFSIFBET (FOFSBM xxx
20. Add: .BSLFUJOH 0WFSIFBET 
4FMMJOH 0WFSIFBET xxx
%JTUSJCVUJPO 0WFSIFBET xxx
21. Cost of Sales (18+19+20) xxx xxx

© ICAI BOS(A) 27
SARANSH Cost and Management Accounting

Treatment of various items of cost in Cost Sheet:

Advantages of Cost Sheet
t
"OZ BCOPSNBM DPTU XIFSF JU JT NBUFSJBM BOE
Abnormal RVBOUJmBCMF TIBMM OPU GPSN QBSU PG DPTU PG Provides the total cost figure as well as cost per
costs production or acquisition or supply of goods unit of production.
PS QSPWJTJPO PG TFSWJDF

Subsidy/ Helps in cost comparison.

t
3FEVDFE GSPN UIF DPTU PCKFDUT UP XIJDI TVDI
Grant/
Incentives BNPVOU QFSUBJOT
Facilitates preparation of cost estimates
Penalty, fine, required for submitting tenders.
damages, and t
%PFT OPU GPSN QBSU PG DPTU
demurrage
Provides sufficient help in arriving at the
figure of selling price.
Interest and t
/PU JODMVEFE JO DPTU PG QSPEVDUJPO
other finance t
4IBMM CF QSFTFOUFE JO UIF DPTU TUBUFNFOU BT B
costs TFQBSBUF JUFN PG DPTU PG TBMFT Facilitates cost control by disclosing
operational efficiency.

© ICAI BOS(A) 28
SARANSH Cost and Management Accounting

UNIT & BATCH COSTING

Points of Discussion COST COLLECTION PROCEDURE IN UNIT
COSTING
Meaning
Unit Collection of
Costing Process of Cost Accumulation Collection of Employees Collection of
and Calculation Materials Cost (labour) Cost Overheads
Methods of Costing

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:

The total overhead

of production
Total cost of production departments is
Cost per unit =
No. of units produced then applied to
products on some
realistic basis, e.g.
machine hour;
labour hour etc.

Image source: https://metry.io/en/cost-collection-from-invoices/

© ICAI BOS(A) 29
SARANSH Cost and Management Accounting

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

Lower lot size

Account. decline due to lesser holding costs.

Higher lot size

Cost of Cost of rectification
rectification or loss beyond normal number of set ups.
- But higher set up
or loss will be limits are written off - But units in costs due to high
charged to the in Costing Profit and inventory will go up number of set ups.
entire output Loss Account leading to higher
holding costs

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

A batch consists of certain number of units which are

PROCESSED SIMULTANEOUSLY. Under this method of
manufacturing, the inputs are accumulated in the assembly
line till it reaches minimum batch size. Soon after a batch
size is reached, all inputs in a batch is processed for further Set-up cost
operations.

Batch Size
COSTING PROCEDURE IN BATCH COSTING

Material On the basis of material Determination of EBQ

cost requisitions for the batch.
By calculating the total cost for a series of possible batch
Multiplying the time spent on sizes and checking which batch size gives the minimum cost.
the batch by direct workers as
Labour cost ascertained from time cards or
job tickets.
Mathematical formula:
Absorbed on some suitable
Overheads basis like machine hours, direct
labour hours etc.

Where, D = Annual demand for the product

S = Setting up cost per batch
C = Carrying cost per unit of production

© ICAI BOS(A) 30
SARANSH Cost and Management Accounting

DIFFERENCE BETWEEN JOB AND BATCH PROCESS OF JOB COSTING

COSTING
Prepare a separate cost sheet for each job
Sr. Job Costing Batch Costing
No
Disclose cost of materials issued for the job
1 Used for non- standard and Homogeneous products
non- repetitive products produced in a continuous
produced as per customer production flow in lots. Employee costs incurred (on the basis of bill of
specifications and against material and time cards respectively)
specific orders.
2 Cost determined for each Cost determined in When job is completed, overhead charges are
Job. aggregate for the entire added for ascertaining total expenditure
Batch and then arrived at on
per unit basis.
3 Jobs are different from each Products produced in a
SUITABILITY OF JOB COSTING
other and independent of batch are homogeneous and
each other. Each Job is lack of individuality. When jobs are executed for different customers
unique. according to their specifications.

When no two orders are alike and each order/

job needs special treatment.
JOB AND CONTRACT COSTING
POINTS OF DISCUSSION Where the work-in-progress differs from period to
period on the basis of the number of jobs in hand.

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:

JOB COST SHEET

‰ It is applicable where the work consists
of separate contracts, jobs or batches, Description: ______________ Job No.: _____________________
each of which is authorised by specific Blue Print No.: ____________ Quantity: ____________________
JOB
COSTING order or contract. Material No.: ______________ Date of delivery: _______________
‰ Industry example: PRINTING; Reference No.: ____________ Date commenced: _____________
FURNITURE; HARDWARE; SHIP- Date finished: _________________
BUILDING; HEAVY MACHINERY;
INTERIOR DECORATION. Date Reference Details Material Labour Overhead

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

© ICAI BOS(A) 31
SARANSH Cost and Management Accounting

COLLECTION OF COSTS FOR A JOB

Materials cost Labour cost Overheads

Traced to and Booked against Manufacturing overheads are

identified with specific specific jobs in the job collected under suitable standing
job or work order time cards or sheets order numbers

Selling and distribution overheads

Posted to individual Posted to the are collected against cost
job cost sheets or appropriate job cost accounts numbers
cards in the work-in- card or sheet in work-
progress ledger in-progress ledger
Total overhead expenses are
apportioned to service and production
departments on some suitable basis.
If the surplus material
is utilised on some
other job, instead of
being returned to the The expenses of service
stores first, a material departments are finally transferred
transfer note is to production departments.
prepared.

Image source: https://www.dreamstime.com/ The total production overhead is

job-costing-text-paper-sheet-chart-dice-spectacles-
pen-laptop-blue-yellow-push-pin-wooden-table- then applied to products on
business-banking-image197323655 some realistic basis.

SPOILED AND DEFECTIVE WORK ACCOUNTING OF COSTS FOR A JOB

Meaning 1. For purchase of materials
It is the quantity of production that has been Stores Ledger Control A/c Dr.
Spoiled work
totally rejected and cannot be rectified.
To Cost Ledger Control A/c
It refers to production that is not as perfect 2. For the value of direct materials issued to jobs
Defective work as the saleable product but is capable of
being rectified Work-in-Process Control A/c Dr.
To Stores Ledger Control A/c
Treatment 3. For return of direct materials from jobs

Where a percentage Stores Ledger Control A/c Dr.

of defective work The cost of rectification will be
is ALLOWED in a charged to the whole job and To Work-in-Process Control A/c
particular batch spread over the entire output of 4. For return of materials to suppliers
AS IT CANNOT BE the batch
AVOIDED. Cost Ledger Control A/c Dr.
To Stores Ledger Control A/c
Where defect is The cost of rectification shall
DUE TO BAD be written off as a loss being an 5. For indirect materials
WORKMANSHIP. abnormal cost
Factory Overhead Control A/c Dr.
To Stores Ledger Control A/c
Where defect is due
to the inspection 6. For wages paid
department Cost of rectification will be
WRONGLY charged to the department and Wages Control A/c Dr.
ACCEPTING will not be considered as cost of
INCOMING MATERIAL manufacture of the batch To Cost Ledger Control A/c
OF POOR QUALITY.

© ICAI BOS(A) 32
SARANSH Cost and Management Accounting

7. For direct wages incurred on jobs DIFFERENCE BETWEEN JOB COSTING AND
PROCESS COSTING
Work-in-Process Control A/c Dr.
To Wages Control A/c Job Costing Process Costing
8. For indirect wages
A Job is carried out by Process of producing the product
Factory Overhead Control A/c Dr. specific orders. has a continuous flow and the
product produced is homogeneous.
To Wages Control A/c Costs determined for each job.
Costs are compiled on time
9. For any indirect expense paid basis i.e., for each process or
Each job is separate and department.
Factory Overhead Control A/c Dr. independent.
To Cost Ledger Control A/c Products lose their individual
Each job has a number and identity.
10. For charging overhead to jobs costs are collected against the
same job number. The unit cost of process is an
Work-in-Process Control A/c Dr. average cost for the period.

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.

TERMS USED IN CONTRACT COSTING

It is costly and laborious method.
(i) Work-in-Progress
Chances of error is more as lot of
clerical process is involved. Work-in-Progress
Dis-
advantages
This method not suitable in inflationary The contract which is not complete at the reporting date.
condition. It includes:
Previous records of costs will be
meaningless if there is any change in
market condition. Cost of work Amount of
completed
Cost of work not estimated/
(certified and
yet completed notional profit
uncertified)

© ICAI BOS(A) 33
SARANSH Cost and Management Accounting

(ii) Cost of Work Certified or Value of Work Certified (viii) Estimated Profit

Expert, based on his assessment, certifies the work completion

in terms of percentage of total work. Estimated Contract Estimated
Cost or value of certified portion is calculated and is known as Profit price total cost
Cost of work certified or Value of work certified respectively.

(a) Value of Work Certified = Value of Contract × Work

certified (%)
SPECIMEN OF CONTRACT ACCOUNT (with few items)
(b) Cost of Work Certified = Cost of work to date – (Cost of
work uncertified + Material in hand + Plant at site) The cost of Work Uncertified may be ascertained as follows:

Particulars (R) Particulars (R)

(iii) Cost of Work Uncertified
To Materials xxx By Plant at site c/d xxx

Cost of the work ” Wages xxx ” Work-in-progress xxx

carried out but Always shown c/d:
not certified by at cost price.
the expert. ” Direct expenses xxx - Work certified xxx
” Indirect expenses xxx - Work xxx
The cost of Work Uncertified may be ascertained as follows: uncertified
(R) (R) ” Plant and xxx ” Costing P&L A/c xxx
Machinery (b/f ) (If Loss)
Total cost to date xxx
Less: Cost of work certified xxx ” Cost of Sub- xxx
Contract
Material in hand xxx
Plant at site xxx xxx ” Costing P&L A/c xxx
(b/f ) (If Profit)
Cost of work uncertified xxx
XXX XXX

(iv) Progress Payment

Progress Value Retention Payment COST PLUS CONTRACT

payment of work to date
certified money

Cost- Plus When the value of the contract is

Contract determined by adding an agreed
(v) Retention Money percentage of profit to the total cost.

Value Payment
Retention
of work actually
Money
certified made
ADVANTAGES AND DISADVANTAGES OF
COST PLUS CONTRACT

(vi) Cash Received ADVANTAGES DISADVANTAGES

t
$POUSBDUPS JT BTTVSFE t
$POUSBDUPS NBZ OPU
of a fixed percentage of have any inducement to
Value profit. avoid wastages and effect
Cash Retention
of work t
6TFGVM XIFO XPSL UP CF economy in production
received money
certified done is not definitely to reduce cost.
fixed at the time of
making the estimate.
t
$POUSBDUFF DBO FOTVSF
(vii) Notional Profit himself about ‘the cost
of the contract’, as he is
empowered to examine
Cost of the books and docu-
Value work to date ments of the contractor.
Notional of work –
profit certified Cost of
work not yet
certified

© ICAI BOS(A) 34
SARANSH Cost and Management Accounting

ESCALATION CLAUSE FACTORS PROMPTING DEVELOPMENT OF ABC

Growing overhead
Empowers costs
the contractor
to recover the Increasing market
increased competition
prices.
Increasing product
diversity
Protect the
contractor from
Contractor may Decreasing costs
adverse financial
increase the of information
impacts. processing
contract price if the
cost of materials,
employees and other
expenses increases
beyond a certain USEFULNESS/SUITABILITY OF ABC
limit.
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

Usefullness ADVANTAGES DISADVANTAGES

Concept of ABC
t
.PSF BDDVSBUF DPTUJOH t
&YQFOTJWF
t
0WFSIFBE BMMPDBUJPO JT EPOF t
/PU IFMQGVM UP UIF TNBMM
on logical basis. organizations.
t
&OBCMFT CFUUFS QSJDJOH t
.BZ OPU CF BQQMJFE UP
policies. organizations with limited
Cost t
6UJMJ[FT VOJU DPTU SBUIFS products.
Hierarchy Steps
than just total cost. t
4FMFDUJPO PG UIF NPTU
t
)FMQ UP JEFOUJGZ OPOWBMVF suitable cost driver may be
added activities. difficult or complicated.
t
)FMQGVM UP UIF PSHBOJ[BUJPOT
with multiple products.
t
)JHIMJHIUT QSPCMFN BSFBT
MEANING OF ACTIVITY BASED COSTING which require attention of
the management.

t
"DDPVOUJOH NFUIPEPMPHZ UIBU BTTJHOT

costs to activities rather than products TERMS USED
or services.
ACTIVITY t
$PTUT BSF BTTJHOFE CBTFE PO UIFJS VTF PG (i) Activity t
&WFOU UIBU JODVST DPTU
BASED resources.
COSTING t
$SFBUFT B LINK BETWEEN THE
(ABC) ACTIVITY (resource consumption) and
the COST OBJECT. t
"O JUFN GPS XIJDI DPTU NFBTVSFNFOU JT
(ii) Cost Object
required
t
6TFGVM UP UIF ORGANIZATION WITH
MULTIPLE PRODUCTS.
t
'BDUPS UIBU DBVTFT B DIBOHF JO UIF DPTU PG BO
activity-
t
Resource cost driver: Measure of the
(iii) Cost Driver
quantity of resources.
t
Activity cost driver: Measure of the
frequency and intensity of demand.

© ICAI BOS(A) 35
SARANSH Cost and Management Accounting

Examples of Cost Driver business function wise:

Design of
Research and products, Customer Marketing Distribution
Development services and Service
procedures

Number of Number of Number of Number of Number

research products in service calls advertisements of units
projects design distributed

Personnel Number of Number of Number Number of

hours on a parts per products of sales customers
project product serviced personnel

Number of Hours spent Sales

engineering on servicing revenue
hours products

t
(SPVQ PG WBSJPVT JOEJWJEVBM DPTU JUFNT

(iv) Cost Pool
t
&YBNQMF NBDIJOF TFUVQ

COST ALLOCATION

Linked through Linked through

Overhead Cost
Activities
Costs Objects
Resource Cost Activity Cost
Drivers Drivers

REQUIREMENTS IN ABC IMPLEMENTATION TRADITIONAL ABSORPTION COSTING VS

ABC

Traditional Based on Machine

Costing hours, labour
Hours, Volume etc.
Staff Training Cost
Allocation
Activity based Based on Cost
Costing Driver

Process
Assigning Cost Specification
Activity Based Traditional Absorption
Costing Costing
Requirments

Related to activities Related to cost centers

More realistic Not realistic

Activity Driver Activity

Selection Definition Activity–wise cost drivers Time (hours) - only cost
driver

Cost are assigned to

cost objects Costs are assigned to cost units

Aids cost control Not suitable for cost control.

© ICAI BOS(A) 36
SARANSH Cost and Management Accounting

LEVEL OF ACTIVITIES UNDER ABC METHOD- EXAMPLES OF COST DRIVERS

OLOGY/COST HIERARCHY
ACTIVITY COST
Unit level activities COST POOL DRIVERS
Activities which can be - Indirect materials/
identified with the number of consumables
units produced. - Inspection or testing of Ordering and Receiving Number of purchase
every item produced Materials cost orders

Setting up machines Number of set-ups

costs
Batch level activities
Activities which are performed - Material ordering Machining costs Machine hours
each time a batch of goods is - Machine set-up costs
produced.
Assembling costs Number of parts

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

Supervising Costs Direct labour hours

Facilities level activities
Activities which are common - Maintenance of buildings
and joint to all products - Plant security Delivery cost Number of deliveries
manufactured.

Shelf-stocking cost Shelf-stocking hours

STAGES IN ACTIVITY BASED COSTING (ABC)

Customer Support Number of items sold
Identify different activities within the organisation

Break the Relate the overheads to the activities

organisation
down This Support activities are then spread HOW TO CALCULATE COST PER PRODUCT
creates across the primary activities USING ABC?
into many
very small ‘cost pools’
Where Determine the activity If it is given that,
activities. or ‘cost cost drivers
buckets’. base is the
cost driver Activity Cost (R) Particulars Product Product
To relate Calculate
measuring, activity cost Ordering 64,000 1 2
the
how the
overheads driver rates Delivery 1,40,000 No. of Purchase 30 50
support Orders
collected Calculate Shelf stocking
activities activity 80,000
in cost No. of Deliveries 110 90
are used. cost driver
pools to Shelf Stocking 220 180
the cost rates
for each Hours
objects.
activity

Total cost of activity

Activity cost driver rate =
Activity driver

Image source: https://www.dreamstime.com/photos-images/activity-based-

costing.html

© ICAI BOS(A) 37
SARANSH Cost and Management Accounting

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)

PRACTICAL APPLICATIONS OF ACTIVITY Key Elements Benefits

BASED COSTING
t
5ZQF PG XPSL UP CF t
&OIBODF BDDVSBDZ PG îOBODJBM
As a Decision-Making Tool done forecasts
t
2VBOUJUZ PG XPSL UP t
*ODSFBTJOH NBOBHFNFOU
be done understanding
Decisision Decisions t
$PTU PG XPSL UP CF t
3BQJEMZ BOE BDDVSBUFMZ QSPEVDF
Improve w.r.t. related to
performance done financial plans
introduction facility and
and of new product resource t
&MJNJOBUFT NVDI PG UIF OFFEMFTT
profitability or vendor expansion rework

Helps in Decision
JOINT PRODUCTS AND BY PRODUCTS
determining support
price based POINTS OF DISCUSSION
for human
on cost plus resources
markup basis
Joint Products &
By-Products
As Activity Based Management

Cost Driver
Analysis Meaning of Joint Treatment of By-
Value-Added Apportionment of Product Cost in
Products and By-
Activities (VA) Joint Costs Cost Accounting
Products
Activity Analysis
Non-Value-
Added Activities
(NVA)
Activity Based
Cost Management MEANING OF JOINT PRODUCTS AND BY-
(ABM): Using ABC PRODUCTS
to manage costs at Cost Reduction
activity level. Two or more products separated in the
Joint Products*
course of same processing operation.
Business Process
Re-engineering
Performance Products recovered from-
Analysis By-Products# t
NBUFSJBM EJTDBSEFE JO NBJO QSPDFTT
t
QSPEVDUJPO PG TPNF NBKPS QSPEVDUT
Benchmarking
*OIL INDUSTRY PRODUCING JOINT PRODUCTS using crude
Performance petroleum like gasoline, fuel oil, lubricants, paraffin, asphalt,
Measurement kerosene etc.

Facilitate Activity Based Budgeting (ABB)

It analyses the resource input or cost for each activity.

It is the reversing of the ABC process to produce financial
plans and budgets.

© ICAI BOS(A) 38
SARANSH Cost and Management Accounting

CO-PRODUCTS
CO-PRODUCTS

Joint products and co-products are used synonymously, but a

distinction is there.

Co-products are the two or more products which are

contemporary but do not emerge necessarily from the same
material in the same process.

For instance,

wheat and gram produced

Timber boards made from
in two separate farms with
different trees are
separate processing of
co-products.
cultivation are co-products.

METHODS OF APPORTIONMENT OF JOINT

Petroleum Refining Processes1
COST TO JOINT PRODUCTS

# MOLASSES IS PRODUCED AS A BY-PRODUCT in the Methods for

process of sugar manufacturing apportioning joint cost

Physical Net Realisable Using Other

Units Value at Technical methods
Method split-off point Estimates

Market Market Average Contribution

value at the value after unit cost margin
point of further method method
Sugar Manufacturing Process2 separation processing

Physical Units Method:

Point at which products are separated from the main product is
known as SPLIT-OFF POINT.
Joint costs here are apportioned on the basis of some
physical base, such as weight, numbers etc.

DISTINCTION BETWEEN JOINT PRODUCTS

AND BY-PRODUCTS Net Realisable Value at Split-off Point Method:
Joint costs here are apportioned on the basis of
JOINT PRODUCTS BY-PRODUCTS Net Realisable Value at Split-off Point.
t
&RVBM JNQPSUBODF t
4NBMM FDPOPNJD WBMVF
t
1SPEVDFE t
*ODJEFOUBM UP UIF NBJO NET REALISABLE VALUE AT SPLIT-OFF POINT
simultaneously. product.
sales value of joint products after processing

Estimated profit margins

Selling and distribution expenses

1
Image source: https://www.cmegroup.com/education/courses/introduction-to-refined-
products/a-look-into-the-refining-process.html
2
Image source: http://www.sustainablesugar.eu/molasses Post split- off costs

© ICAI BOS(A) 39
SARANSH Cost and Management Accounting

Using Technical Estimates: Variable costs

Apportioned on the In case products are further

This method is used WHEN- basis of units produced processed after point of separation,
(average method or then all variable cost incurred
physical quantities) be added to the variable costs
determined earlier.
Result obtained by above methods does not match
with the resources consumed by joint products, or;

Total variable cost is arrived which is deducted from their

Realisable value of the joint products are respective sales values to ascertain their contribution.
not readily available.

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

Useful method where further processing costs are

incurred disproportionately.
METHODS OF APPORTIONMENT OF JOINT
To determine the apportionment of joint costs over joint COST TO BY-PRODUCTS
products, a multiplying factor is determined as follows:

Methods for
apportioning joint cost

Alternatively, joint cost may be apportioned in the ratio of sales

values of different joint products. Net Standard Comparative Re-use
Realisable cost in price basis
Value Technical
(ii) Market value after further processing method Estimates

Basis of apportionment of joint cost is the total

sales value of finished products.
Net Realisable Value method:
Use of this METHOD IS UNFAIR WHERE-

No further Further processing

processing required required
Further processing costs after the point of
separation are disproportionate, or;

Realisation on the Additional expenses so

disposal of the by-product
All the joint products are not subjected
deducted from the total
to further processing.
cost of production.
incurred be deducted from
the total value realised from
the sale of the by-product.

(iii) Average Unit Cost Method Only the net realisations be

deducted from the total cost of
production to arrive at the cost of
production of the main product.
Physical unit method also follows the same steps of calculation
as followed under Average unit cost method, ultimately giving the Standard cost in Technical Estimates:
same outcome.
This method may be adopted where by-product is not saleable.
(iv) Contribution Margin Method
It may be valued at standard costs.
Variable
Joint costs segregated Standard cost may be determined by averaging costs recorded
into two parts in the past and making technical estimates of the number of
Fixed units of original raw material going into the main product
and the number forming the by-product; or by adopting some
other consistent basis.

© ICAI BOS(A) 40
SARANSH Cost and Management Accounting

Comparative price: TREATMENT OF BY-PRODUCT COST IN

COST-ACCOUNTING
Value of by-product is ascertained with reference to the price of -

Similar material, or; Alternative material Treatment of by-product

cost in cost-accounting

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 on However, if the by-product Deducted May be
Sales value Net realisable
by-product should be same can be put into an earlier credited to from total regarded as value of the
as that of the materials process only, the value Costing costs joint products by-product at
introduced into the process. should be the same as for the P&L rather than as the split-off
materials introduced into Account by-products point may be
the process. arrived

© ICAI BOS(A) 41
SARANSH Cost and Management Accounting

SERVICE COSTING
POINTS OF DISCUSSION SERVICE COSTING VS. PRODUCT COSTING

Unlike products, Composite cost

Application of units are used,
Service Costing
sevices are intangible. for cost measurement.
sevices cannot be stored. to express the volume of
there are no inventory for outputs.
Service Costing vs
the services.
Product Costing
employee (labour) cost
constitutes a major cost
Composite element than material cost.
Unit Indirect costs like
Methods of Ascertaining administration overheads
Service Costing

Service cost unit Equivalent have significant proportion

in total cost.
Unit
service sector heavily depends
on support services.

Service Cost Statement

WHAT is service cost UNIT?
All the costs incurred during a period are-

Costing of Services: collected

(i) Transport
(ii) Hotels & Lodges
(iii) Hospitals analyzed
(iv) Information Technology
Enabled Services
expressed in terms of a cost per unit of service.
(v) Toll Roads
(vi) Educational Institutes
LIST of typical cost unit
(vii) Insurance
(viii) Financial Institutes Service industry Unit of cost (examples)
(ix) Others
Transport Passenger- km., (In public
Services transportation)
WHEN is service costing APPLIED? Quintal- km., or Ton- km. (In
goods carriage)
Internal application External application Electricity Kilowatt- hour (kWh)
Supply service
When service provided by When services are offered
service cost centre to other to outside customers as a Hospital Patient per day, room per day or
responsibility centre profit centre per bed, per operation, etc.

Example- Example- Canteen Per item, per meal, etc.

Use of canteen services by Hospitality services provided
hospital staff, operation of by a hotel,
fleet of trucks for transport provision of services by Cinema Per ticket
of raw material to factory financial institutions

© ICAI BOS(A) 42
SARANSH Cost and Management Accounting

Hotels Guest Days or Room Days Equivalent Cost Unit/ Equivalent Service Unit

Each grade of service is assigned a weight and converted

Bank or Financial Per transaction, per services
Institutions (e.g. per letter of credit, per
application, per project, etc.)
Educational Per course, per student, per
Institutes batch, per lecture, etc.
into equivalent units
Example- hotel having three types of suites for its
customers, viz., Standard, Deluxe and Luxurious and tariff
to be decided for one suite being double the rate of other
suite.

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.

What are the METHODS for ascertaining

Service Cost Unit?
Composite Cost Unit

Two measurement units combined together

Type of suite Number of rooms Room Tariff
Standard 100 Amount X
Example- transportation undertaking measuring
operating cost per passenger per kilometre. Deluxe 50 2.5 times of the
Other examples- Ton- km., Quintal- km., Passenger-km., Standard suites
Patient-day etc. Luxurious 30 Twice of the
Deluxe suites

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 (D)1 + 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

© ICAI BOS(A) 43
SARANSH Cost and Management Accounting

STATEMENT OF COSTS FOR SERVICE COSTING OF HOTELS AND LODGES

SECTORS
Cost sheet on the basis of variability is prepared classifying all
the costs into three different heads.

Fixed costs or Standing charges

HOTEL
Variable costs or Operating expenses

Semi-variable costs or Maintenance expenses

Guest-day
Cost unit or
COSTING OF TRANSPORT SERVICES Room-day

Types of transport COSTING OF HOSPITALS

services

Goods Passenger
transport transport

Cost unit: Cost unit:

Ton– Kilometer Passenger– Kilometer
A hospital may have different
departments such as Unit of Cost
t
0VU  1BUJFOU t
0VU 1BUJFOU o 1FS
Suggestive heads: t
*O 1BUJFOU Out-patient
t
.FEJDBM TFSWJDFT MJLF 93BZ t
*O 1BUJFOU o 1FS
Standing Scanning, etc. Room Day
charges or t
*OTVSBODF t
(FOFSBM TFSWJDFT MJLF t
4DBOOJOH o 1FS $BTF
fixed costs t
-JDFOTF GFFT Catering, Laundry, Power t
-BVOESZ o 1FS 
(costs that t
4BMBSZ UP %SJWFS $POEVDUPS $MFBOFST house, etc. items laundered
remain etc if paid on monthly basis t
.JTDFMMBOFPVT TFSWJDFT MJLF
constant t
(BSBHF DPTUT JODMVEJOH HBSBHF SFOU Transport, Dispensary, etc.
irrespective t
%FQSFDJBUJPO JG SFMBUFE UP FñVY PG UJNF
of distance t
5BYFT
travelled) t
"ENJOJTUSBUJPO FYQFOTFT FUD
COSTING OF INFORMATION TECHNOLOGY
ENABLED SERVICES

Variable costs
or Running t
1FUSPM BOE %JFTFM
costs t
-VCSJDBOU PJMT
(costs t
8BHFT UP %SJWFS $POEVDUPS $MFBOFST
associated etc. if it is related to operations
with distance t
%FQSFDJBUJPO JG SFMBUFE UP BDUJWJUZ
travelled) t
"OZ PUIFS WBSJBCMF DPTUT JEFOUJîFE

Semi-variable t
3FQBJST BOE NBJOUFOBODF EMPLOYEE COST constitutes SIGNIFICANT portion

costs or t 5ZSFT of total operating costs.
Maintenance t
4QBSFT FUD
costs
DIRECT EMPLOYEE COST is TRACEABLE to
SERVICES RENDERED.

© ICAI BOS(A) 44
SARANSH Cost and Management Accounting

Typical MANPOWER DIRECTLY ENGAGED on a project: SUPPORT MANPOWER ENGAGED on a project:

t

Software Engineers / Functional Consultants / Business t Quality Assurance Team,
Analysts, t Testing team,
t Project Leaders, t Version Control team,
t Project Manager, t Staffing Manager, etc.
t Program Manager, etc. If time is NOT TRACEABLE with a single project, then it may
The COSTS are TRACEABLE with a project and hence forming either be allocated or apportioned to various projects on some
part of DIRECT COSTS of the project. SUITABLE BASIS.

COSTING OF TOLL ROADS

Entry after
toll tax

t

Preliminary and pre-operative expenses,

t

Land Acquisition,
Capital Costs
t

Materials, Labour, Overheads incurred in the course of
(incurred during
actual construction,
construction period)

t

Contingency allowance,

Cost Involved t

Interest during construction period.

cost of operating tollbooths,

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.

Total Cost + Profit

To compute the toll rate, following formula may be used: =
Number of Vehicles

© ICAI BOS(A) 45
SARANSH Cost and Management Accounting

COSTING OF EDUCATIONAL INSTITUTIONS EXPENDITURE of Insurance companies

Direct costs like Indirect costs like

commission paid to agents, actuarial fees,
claim settlement, market and product
cost of valuation, development costs,
premium for re-insurance, administration cost,
legal and other costs, etc. asset management cost, etc.

Method
of Costing

INCOME of the Educational Institutions

Activity Based
Costing
One-time fees like Admission fee, Development fee, Annual fee etc

Pre-product development Post product development

Recurring fees like tuition fee, laboratory, computer and activities activities
internet fee, library fee, training fee, amenities fee, sports fee,
extracurricular activities fee, etc.

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
Operational Cost like teachers' salary, Building maintenance, for policy, settlement
Computer maintenance and internet charges. processing of and legal
applications, actions.
etc.

Research and Development Cost like academic research on

COSTING OF FINANCIAL INSTITUTIONS
various fields of specialisations.

COSTING OF INSURANCE COMPANIES

COSTS TO BE IDENTIFIED with appropriate activities that

have caused its occurrence.

Then costs must be REASSIGNED FROM ACTIVITIES TO

INCOME of Insurance companies COST OBJECTS based on identified cost drivers.

Premium on Fund administration

Commission on fee and return on The concepts on ACTIVITY BASED COSTING under Costing of
policy (periodic re-insurance investment of funds, etc. Insurance Companies is also applicable to financial institutions.
or onetime)

© ICAI BOS(A) 46
SARANSH Cost and Management Accounting

Integrated Accounting System

COSTING OF POWER HOUSES
COST AND FINANCIAL ACCOUNTS are kept in the
SAME SET of books.

PROVIDES RELEVANT INFORMATION necessary for

preparing profit and loss account and the balance sheet.

Cost unit Cost per kilowatt- NON-INTEGRATED ACCOUNTING SYSTEM

hour (kWh) MAIN ACCOUNTS usually prepared when a separate Cost
Ledger is maintained
Manufacturing/
Cost Ledger Stores Ledger Wages
Production/Works/
Suggestive heads: Control
Account
Control
Account
Control
Account
Factory Overhead
Control Account

Work-in- Administrative Finished Selling and

Goods Distribution Cost of
Standing Progress Overhead
Variable Control Overhead Sales
charges or Control Control Control
costs or Accounts Account
Fixed costs Account Account Account
Running costs Semi-variable
(costs that costs or
remain constant (costs associated Maintenance Costing Overhead
irrespective of with power costs Profit & Loss Adjustment
or stream Account Account
power or stream t

Meters
generated) generated)
t

Fuel Charges t

Furnaces
t

Rent, Rates & FLOWCHART
Taxes t

Water Charges t

Service
materials
t Insurance t

Wages /
Labour t

Tools, etc.
t Depreciation Materials
charges, if paid
t

Salaries, if on the basis of Control A/c Production
Wages
paid on time production Overhead
Control A/c
(Monthly Control A/c
basis) t

Any other
variable costs
t Administration identified. Work in Progress
expenses, etc. Control A/c

Administration Finished Goods

Overhead Control A/c
POINTS OF DISCUSSION Control A/c

Cost Accounting System Cost of Goods

Sold Control A/c
Non-Integral accounting system Integral accounting system

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.
t

No need for reconciliation
t

Less efforts
This system contain limited ACCOUNTS due to the t

Less time consuming
exclusion of purchases, expenses and also Balance Sheet
items like fixed assets, debtors and creditors. t

Economical process

In integrated system, all accounts necessary for showing classification

ITEMS OF ACCOUNTS excluded are REPRESENTED BY
COST LEDGER CONTROL ACCOUNT. of cost will be used but the cost ledger control account of non-
integrated accounting is replaced by use of following accounts:

© ICAI BOS(A) 47
SARANSH 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

Provision for Reconciliation of the balances of two sets of accounts is

Fixed assets Share capital possible by preparing a MEMORANDUM RECONCILIATION
depreciation
account account ACCOUNT
account

Causes of differences in Financial and Cost Accounts

Interest on loans

Expenses and discounts on issue of shares

Purely Financial Expenses Loss by fire not covered by insurance

Losses on the sales of fixed assets

Income tax, donations

Items included in
Financial Accounts only Interest received on bank deposits

Purely Financial Income Dividends received

Profits on the sale of fixed assets
Charges in lieu of rent where
premises are owned Rent receivables

Interest on capital at notional figure

Items included in Cost though not incurred
Accounts only (notional
expenses) Salary for the proprietor at notional figure

Notional Depreciation on the assets fully

depreciated

LIFO may be adopted for cost accounts

Items whose treatment is
different in the two sets Different method of depreciation may be
of accounts followed

Varying basis of valuation Valuation of stock (at cost in cost accounting)

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 Add: Factory overheads over-absorbed
of profit as per (`5,00,000 – `4,50,000) 50,000
1. Ascertainment cost accounts
of profit as per
financial accounts Selling & Dist. Overhead over-absorbed
(`2,00,000 – `1,80,000) 20,000

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
(`2,60,000 – `1,93,000) 67,000
Profit as per financial accounts after following adjustment `1,10,000
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 Profit as per financial accounts
Interest on loan `2,20,000
1,10,000

© ICAI BOS(A) 48
SARANSH

© ICAI BOS(A)
 4b Back Cover CMAx.pdf 1 26-06-2023 5.54.57 AM

SARANSH Last Mile Referencer for

COST AND
MANAGEMENT
ACCOUNTING
C

CM

MY

CY

CMY

The Institute of Chartered

Accountants of India
(Setup by an Act of Parliament)

Board of Studies (Academic)

The Institute of Chartered Accountants of India
ICAI Bhawan, A-29,
Sector-62, Noida 201 309
E-mail: bosnoida@icai.in June | 2023 | P3364 (New)
Phone: 0120 - 3045930

www.boslive.icai.org
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