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Standard costs are determined for each element of costbe it direct material, direct labour, overheads (fixed and variable)- separately and then variations from actual costs are computed in respect of each element distinctly so as to detect which part of the costs needs control and to which department, process or operation, the responsibility may be placed
When the actual costs are compared with the standard costs, some deviations normally occur. The deviation of actual from the standard is known as variance. The variance may be favorable or unfavorable according to the circumstances. If the actual cost is more than the standard cost, the variance shall be adverse or unfavorable. In case the standard cost is more than the actual cost, a favorable variance would result.
Variable overheads are divided into three categories. Manufacturing variable overhead Administration variable overhead Selling & distribution variable overhead Such variance may therefore be calculated separately for each of these overheads . 1. 2. 3.
Standard variable overhead on actual production is the product of standard variable overhead rate per unit multiplied by the actual production for the period. . VOCV= Standard variable overheads production ± Actual variable overheads on actual Where.The difference between the standard variable overheads for actual output and the actual variable overheads is known as Variable overhead cost variance (VOCV).
Standard variable overhead rate per unit = Budgeted variable overheads Budgeted Output .
2.1. Certain variable overheads may vary according to time also and hence VOCV may be segregated into: Variable Overhead Expenditure Variance (VOEXPV) Variable Overhead Efficiency Variance (VOEFFV) .
The formulae for computation of the above variances are as under: VOEXPV= Actual time X ( Standard overhead rate ± Actual overhead rate) OR Standard variable overheads for actual time ± Actual variable overhead .
Standard Variable overheads for actual time = Standard Variable Overhead rate per hour X Actual hours .Where.
The formulae for computation of the above variance (VOEFFV) are as under: VOEFFV= Standard variable overheads on actual production ± standard variable overheads for actual time .
In other words. While the cost in the traditional accounting refers to the historical cost. Inflation Accounting is a system of accounting which shows the effect of changing costs and prices on affairs of a business unit during an accounting year. . in inflation accounting it represents the cost that prevails at the time of reporting.Inflation normally refers to the increasing trend in general price level. it is a state in which the purchasing power of money goes down.
historical cost based depreciation would be highly insufficient to replace the existing assets at current cost. assets are shown at historical cost. year after year. Moreover current revenues for the period are not properly matched with the current cost of operation. . the problems created by price changes in the historical cost based accounts necessitated some method to take care of inflation into the accounting system.In the traditional accounting. During the inflationary period. Thus.
(a) Current Purchasing Power Method (CPP Method) (b) Current Cost Accounting Method (CCA Method) .
.All items in the financial statements are restated in terms of units of equal purchasing power. CPP method distinguishes between monetary and non-monetary items. which arise due to change in the value of rupee. The CPP method basically attempts to remove the distortions in Financial statements.
Historical value of asset Price Index at the date of conversion Price at the date of transaction .
. The consumer price index on that date was 125 and it was 250 at the end of the year.000. A company purchased a plant on 1/1/2005 for a sum of Rs. Restate the value of the plant as per CPP method as on 31st December 2005. 45.
Conversion Factor = Price Index (31/12/2005)=250 / Price Index (1/1/2005) = 125 =2 Value of the plant on 31/12/05 = Historical Cost x Conversion Factor Rs 45.000 x 2 = Rs 90.000 .
During the period of inflation the holder of monetary assets lose general purchasing power since their claims against the firm remain fixed irrespective of any changes in the general price levels. Preference share capital etc. . the holder of monetary liabilities gains since he is to pay the same amount due in rupees of lower purchasing power. Conversely. creditors. debentures. Example debtors.Monetary Items (both assets and liabilities) are those items whose amounts are fixed by contractor otherwise they remain constant in terms of monetary units.
Non monetary items are those items that can not be stated in fixed monetary amounts. plant &machinery. This may be due to change in the general price level. For example a machinery costing Rs25. They include tangible assets such as building.000 in 1996 may sell for Rs 35.000 today though it has been used. Note : Equity capital is a non monetary item since the equity shareholders have a residual claim on the company s net assets. . stock etc. Under CPP method all such items are to be restated to represent the current purchasing power.
Such monetary gain or loss should be computed separately and shown as a separate item in there stated income statement in order to find out the overall profit or loss under CPP method. In case of monetary assets and monetary liabilities. .The changes in purchasing power affects both monetary and non monetary items of the financial statements. the firm receives or pays the amounts fixed as per the terms of the contract. but it gains or losses in terms of real purchasing power.
. the cost of sales normally includes the entire opening stock and current purchases less closing stock. depends upon the method used for accounting for inventories (FIFO or LIFO). Under FIFO method. Closing stock comprises latest purchases.The restatement of the Cost of Sales and inventories under the CPP method. Under LIFO method. the cost of sales normally includes the latest purchases and the closing comprises the earliest purchases.
the profits are computed on the basis of current values of the various items to the business. This requires carrying out the following adjustments Revaluation adjustment Depreciation adjustment Cost of Sales adjustment Monetary Working Capital adjustment .Under the CCA method money remains to be the unit of measurement. Similarly. The items of the financial statements are restated in terms of current value of that item and in terms of general purchasing power of the money. Assets and liabilities are stated at their current value to the business.
The replacement cost could be taken as gross or net. .Fixed Assets Are shown in the balance Sheet at their values to the business. Net replacement cost of an asset is the gross replacement costless depreciation. To the business of an asset refers to the opportunity loss to the business of were deprived of such assets. Gross replacement cost of an asset is the cost tube incurred at the time of valuation to obtain a similar asset for replacement.
000 on31/12/2005 .000 now costs Rs 80. Assuming that the useful life the asset is 5years. An asset purchased on 1/1/2005 for Rs50.000 . then the net replacement cost =80.000 80000 x 3 / 5 = 32.000. then the gross replacement cost of the asset is Rs 80.
e. Current cost at beg. Depreciation charge may be computed either on the basis of total replacement cost of the assertor on average net current cost of assets. + Current cost at the end /2 . i. The profit and loss account should be charged for depreciation with an amount equal to the value of fixed assets consumed during the period.
Calculate the depreciation charge for the year2005 as per CCA method assuming that there is no change in the useful life of the asset.000 and on31/12/2005 Rs 40.000 and its expected life was 10 years without any scrap value. On 1/1/2005 the same new machine would cost Rs 30.000. . X ltd purchased a machine on 1/1/2002 for Rs80.
000) / 2 10 = 3500 Alternatively40.000 / 10 = 4000 .Depreciation under CCA method = Average replacement cost / useful life = (30.000 + 40.
COSA represents the difference between value to the business and the historical cost of stock consumed in the period COSA Adjustment = CS OS Ia ( CS/Ic OS/Io) Where: CS means Closing Stock OS means Opening Stock Ia means Average Index for the year Ic means Closing Index for the year Io means Opening Index for the year .
3050 . COSA = CS OS Ia ( CS/Ic OS/Io) = (16000 12000) 190 ( 16000/200 12000/160) = 4000 -190 (180 75) = Rs.
CCA ensures that the impact of changing prices on working capital is taken care of through MWCA.MWCA refers to the excess of accounts receivable and unexpired expenses over accounts payable and accruals. MWCA = C O Ia ( C/Ic O/Io) Where: C means Closing Monetary WC O means Opening Monetary WC Ia means Average Index for the year Ic means Closing Index for the year Io means Opening Index for the year . This adjustment is required only for price level changes and not for any increase in volume of the business.
MWCA = C O Ia ( C/Ic O/Io) Opening MWC = 18000 10000 = 8000 Closing MWC = 21000 12000 = 9000 MWCA = (9000 .70) = 1342 .8000) 190(9000/205 8000/175) = 1000 190 ( 43.90 45.
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