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GUIDE TO COST ACCOUNTING
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FINANCIAL & MANAGEMENT ACCOUNTING
PROF. RANJAN DASGUPTA
UNIT 5:
COST ACCOUNTING
ACCOUNTING
FINANCIALACCOUNTING
COSTACCOUNTING
MANAGEMENTACCOUNTING
COST ACCOUNTANCY
COSTACCOUNTING
COSTING
COST ACCOUNTANCY?The Terminology published by the Institute of Cost & Management Accountants (ICMA), London:
“the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making.”
THE FOLLOWINGS FALL UNDER THE PURVIEW
OF COST ACCOUNTANCY:
COST ACCOUNTING COSTING COST CONTROL TECHNIQUESBUDGETING &COST AUDIT
COST ACCOUNTING?
Institute of Cost & Management Accountants
(ICMA), London:
“ process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres
and cost units.”
IN ANOTHER WAY:
KOHLER:
“ that branch of accounting dealing with the
classification, recording, allocation, summarisation and reporting of current and prospective costs.”
DEFINITION IMPLIES THE FOLLOWING ASPECTS OF COST ACCOUNTING:
COST CLASSIFICATION COST RECORDINGCOST ALLOCATIONCOST DETERMINATION/FINDINGCOST REPORTING
COSTING?
The Terminology published by the Institute
of Cost & Management Accountants (ICMA),
London:
“the technique and process of ascertaining
costs”.
DEFINITION EMPHASISES TWO IMPORTANT
ASPECTS:
THE TECHNIQUE & PROCESS OF COSTING
ASCERTAINMENT OF COST
YOU HAVE TO KNOW:
COSTCONCEPT
COSTOBJECT COST EXPENSE
COSTCENTRE
COSTUNIT
RESPONSIBILITYCENTRE
COST CONTROLVS.
COST REDUCTION
COST ALLOCATIONVS.
COST APPORTIONMENT
CLASSIFICATIONOF COSTS
TYPES/TECHNIQUES OF
COSTING
METHODS OFCOSTING
COSTCONVENTIONS
COST ACCUMULATION&
COST ASSIGNMENT
COST CONCEPT/COST:
(a) The amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity. (here the word cost is used as a noun)
(b) To ascertain the cost of a given thing. (here the word cost is used as a verb)
EXPENSE:
The costs of running the business during the specific accounting period may be termed as expenses. Expenses are always linked with generation of revenue.Expenses may be of two types;1) Revenue Expenses, &2) Capital Expenses.
COST Vs. EXPENSE:AICPA COMMITTEE ON TERMINOLOGY:Cost can be defined as; “ the amount measured in money, of cash
expended or other property transferred, capital stock issued, services performed or a liability incurred in consideration of goods or services received or to be received.”
Expenses can be defined as;“ all expired costs which are deductible
from revenue.”
COST OBJECT:
Anything for which a separatemeasurement of cost is desired.Examples of cost objects include aproduct, a service , a project , acustomer , a brand category , anactivity , a department , a
programme.
COST CENTRE:ICMA, London Terminology:
It is defined as; “A location, person or an item of equipment(or group of these) in respect of which costsmay be ascertained and related to cost units.”and used for the purpose of Cost Control.
Cost Centres are of two types, viz., Personaland Impersonal.
In a manufacturing concern there are two main types of Cost Centres as indicated below :
– Production Cost Centre : It is a Cost Centre where raw material is
handled for conversion into finished product. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops are examples of Production Cost Centres. – Service Cost Centre : It is a Cost Centre which serves as an ancillary unit to a Production Cost Centre. Power house, gas production shop, material service centres, plant maintenance centres are examples of Service Cost Centres.
COST UNIT:
ICMA, London Terminology:
It is;
“ A quantitative unit of product, service or time (or combination of these) in relation to which costs are ascertained.” or expressed.
One may, for instance, determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one or more stages of production may also be consideredas a cost unit. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.
RESPONSIBILITY CENTRE:It is defined as an activity centre of a business organisation entrusted with a special task. Under modern budgeting and control,
financialexecutives tend to develop responsibility centres for the purpose of control. Responsibility centres can broadly be classified into three categories. They are;
– Cost Centres ; – Profit Centres ; & – Investment Centres.
COST CONTROL Vs. COST REDUCTION:COST CONTROL:
“The guidance and regulation, by executiveaction of the cost of operating anundertaking”.
COST REDUCTION:
“The achievement of real and permanentreduction in the unit cost of goodsmanufactured or services rendered withoutimpairing their suitability for the use
intendedor diminution in the quality of the product.”
To exercise cost control, broadly speaking the following steps should be observed:
– Determine clearly the objective, i.e., pre-determine the desired results;
– Measure the actual performance; – Investigate into the causes of failure to perform
according to plan; &– Institute corrective action.
The three-fold assumptions involved in thedefinition of cost reduction may be
summarisedas under :
– There is a saving in unit cost. – Such saving is of permanent nature. – The utility and quality of the goods and services
remain unaffected, if not improved.
COST ALLOCATION Vs. COST APPORTIONMENT:
ICMA, London:Allocation of ‘Expenses’ (or Cost) means:
“ the allotment of whole items of cost to cost centres or cost units.”
In other words, overhead expenses/costs identifiable to a department is charged to that department only, and, this is called ‘allocation’.
ICMA, London:Apportionment of ‘Expenses’ (or Cost) means:
“ the allotment to two or more departments or cost centres of proportions of common items of cost on estimated basis of benefit received.”
In other words, ‘apportionment’ is, therefore, charging to a cost centre or a department a fair share of an overhead expense/cost.
TECHNIQUES OF COSTING:
ABSORPTIONCOSTING
STANDARDCOSTING
MARGINALCOSTING
LIFE CYCLECOSTING
TARGETCOSTING
UNIFORMCOSTING
DIFFERENTIALCOSTING
ACTIVITY-BASED
COSTING
VARIABLECOSTING
METHODS OF COSTING:
JOBCOSTING
PROCESSCOSTING
FARMCOSTING
BATCHCOSTING
TERMINAL/CONTRACTCOSTING
MULTIPLE/COMPOSITE
COSTING
SINGLE/OUTPUTCOSTING
OPERATIONCOSTING
OPERATINGCOSTING
CLASSIFICATION OF COSTS:
CLASSIFICATION ON THE BASIS OF
ELEMENTSOF
COST/NATURE OFEXPENSES
FUNCTIONS/ACTIVITIES
BEHAVIOUR
CONTROLLABILITY
NORMALITY
IDENTIFIABILITY/THE RELATION
TOCOST CENTRE
INVESTMENT
NATURE OF PRODUCTIONPROCESS
TIME
FORMANAGEMENT
DECISIONMAKING
CLASSIFICATION ON THE BASIS OF ELEMENTS OF COST/ NATURE OF EXPENSES:
MATERIALCOST
LABOURCOST
EXPENSES
DIRECTINDIRECT/
OVERHEADS
CLASSIFICATION ON THE BASIS OF FUNCTIONS/ACTIVITIES:
PRODUCTIONCOST
ADMINISTRATIONCOST/OVERHEAD
SELLING COST/OVERHEAD
DISTRIBUTIONCOST/OVERHEAD
RESEARCH &DEVELOPMENT
(R&D) COST
CLASSIFICATION ON THE BASIS OF BEHAVIOUR:
FIXEDCOST
VARIABLECOST
SEMI-FIXED-SEMI-VARIABLE
COST
CLASSIFICATION ON THE BASIS OF CONTROLLABILITY:
CONTROLLABLECOST
UNCONTROLLABLECOST
CLASSIFICATION ON THE BASIS OF NORMALITY:
NORMALCOST
ABNORMALCOST
CLASSIFICATION ON THE BASIS OF IDENTIFIABILITY/ THE
RELATION TO COST CENTRE:
DIRECTCOST
INDIRECTCOST
MATERIAL LABOUR EXPENSESMATERIAL
LABOUR
EXPENSES
CLASSIFICATION ON THE BASIS OF INVESTMENT:
CAPITALCOST
REVENUECOST
CLASSIFICATION ON THE BASIS OF NATURE OF PRODUCTION
PROCESS:
BATCHCOST
PROCESSCOST
OPERATIONCOST
OPERATINGCOST
CONTRACTCOST
JOINTCOST
CLASSIFICATION ON THE BASIS OF TIME:
HISTORICALCOST
PRE-DETERMINEDCOST
STANDARDCOST
ESTIMATEDCOST
CLASSIFICATION ON THE BASIS OF- FOR MANAGEMENT
DECISION MAKING:
MARGINALCOST
DIFFERENTIALCOST
OPPORTUNITYCOST
REPLACEMENTCOST
RELEVANTCOST
IMPUTEDCOST
SUNKCOST
NORMALCOST
ABNORMALCOST
AVOIDABLECOST
UNAVOIDABLECOST
COST ACCUMULATION & COST ASSIGNMENT:
Cost Accumulation:Collection of cost data in some organized way through an Accounting System.Cost Assignment: Tracing (for direct costs) & the allocating (for indirect costs) of accumulated costs to a cost object to help decision making and facilitateproduct or customer profitability analysis.
NEED/OBJECTIVES OF COSTING: TO RECORD & ANALYSE THE EXPENSES WITH A
VIEW TO KNOW THE COST OF A UNIT OF OUTPUT, OF A JOB, OF A PROCESS OR OF AN OPERATION. IT INVOLVES, THEREFORE, ALLOCATION OF EXPENDITURE.
TO EXERCISE CONTROL OVER COST. COSTING EXERTS CONTROL OVER ALL ELEMENTS OF COST IN DETAIL, IN ORDER TO MINIMISE COST & MAXIMISE PROFIT.
TO HELP FORMULATING POLICIES. COSTING HELPS THE MANAGEMENT BY SUPPLYING ACCURATE & RELIABLE COST-RELATED INFORMATION SO THAT THE MANAGEMENT CAN ADOPT A SOUND POLICY ON ANY MATTER.
TO HELP THE MANAGEMENT IN FIXING THE SELLING PRICE. SELLING PRICE IS FIXED BY ADDING THE MARGIN OF PROFIT TO COST OF SALES AS ASCERTAINED BY COSTING.
TO HELP THE MANAGEMENT IN ITS EFFORT TO MAXIMISE OUTPUT AND PROFIT. BY BEP ANALYSIS, COSTING CAN ASCERTAIN THE APPROPRIATE OUTPUT THAT GIVES THE DESIRED AMOUNT OF PROFIT.
TO HELP IN COST NEGOTIATION. TO FORECAST. LONG-TERM FORECAST
REQUIRES THE CONSIDERATION OF FACTORS LIKE, SALES, CAPITAL EXPENDITURE, PROFIT EXPECTED, ETC. THE OVERALL GUIDING FACTOR IS THE RETURN ON CAPITAL EMPLOYED (ROCE).
TO DO THE PLANNING OF CAPITAL EXPENDITURE & CAPITAL STRUCTURE. THE VALUABLE STATISTICS, SUCH AS, OPERATING COSTS, COST BEHAVIOUR AT DIFFERENT LEVELS OF ACTIVITIES, RAPIDITY OF TURNOVER, WORKING CAPITAL REQUIREMENTS, ETC. ARE SUPPLIED BY COSTING.
TO HELP FACING THE DEPRESSION. IN AN ATTEMPT TO FACE THE DEPRESSION, STEPS LIKE, COST CONTROL, COST REDUCTION, SELECTING NEW PRODUCTS OR PRODUCT-MIX, CREATING COST-CONSCIOUSNESS, ETC. ARE TAKEN WITH THE SUPPORT OF COSTING.
TO DO THE PLANNING TO CLOSE DOWN, IF NEEDED.
TO HELP ‘CHOOSING’ BETWEEN ‘MAKING’ & ‘BUYING’.
ADVANTAGES/ MERITS/ IMPORTANCE OF COSTING:
ELIMINATION OF WASTES, LOSSES & INEFFICIENCIES
COST REDUCTIONDETECTION OF REASONS FOR
PROFIT/LOSSADVICES ON VARIOUS MATTERS TO THE
MANAGEMENT, HELPFUL IN DECISION MAKING*
FIXATION OF THE SELLING PRICECOST CONTROLASSISTING THE GOVERNMENT, TRADE
UNIONS, ETC.
MARGINAL ANALYSIS OF COSTFIXATION OF RESPONSIBILITY FOR
DIFFERENT INDIVIDUALSHELPING PREPARATION OF FINAL
ACCOUNTS UNDER THE FINANCIAL ACCOUNTING SYSTEM
PREVENTION OF FRAUDS, ETC., THEREBY HELPING THE MANAGEMENT, THE GOVERNMENT AND OTHERS CONNECTED WITH THE ORGANISATION
FACILITATES INTER-PERIOD AND INTER-FIRM COMPARISONS
ASSISTS IN INCREASING PROFITABILITYGUIDES FUTURE PRODUCTION POLICY
** Decision Making:
PRICEPROFIT
MAKE ORBUY
CAPACITY
EXPORTPRICE
OPERATEOR
SHUT
SALESVOLUME
NEWMODEL
COST CONVENTIONS:CLASSIFICATION OF EXPENSES
ACCORDING TO NATURE OF COSTCLASSIFICATION OF COSTS INTO FIXED
& VARIABLECLASSIFICATION OF COSTS INTO
NORMAL & ABNORMALPRINCIPLE OF EXCEPTIONESTABLISHMENT OF STANDARDSCLASSIFICATION OF COSTS AS
CONTROLLABLE & UNCONTROLLABLECONSISTENCY
COST CONTROL TO BE EXERCISED THROUGH CLOSE CONTACT WITH THOSE WHO INCUR THE COSTS
COST SHOULD REPRESENT SACRIFICE INVOLVED WHEN A BUSINESS IS OPERATING AT AN EFFICIENT LEVEL OF OPERATION
THE SYSTEM OF COST ACCOUNTING SHOULD BE DESIGNED SO AS TO MEET THE SPECIFIC REQUIREMENTS OF A BUSINESS
Cost Accounting Vs. Financial Accounting:
Need
Purpose
Recording
ProfitAnalysis
Contents
Compulsory Obligatory
Final Financial Results to Stake Holders
Subjective Recording
Total Profit/Loss
External Transactions
Cost Information
Objective Recording
Product Wise
Internal
FA CAFactor
Periodicity
Control
Nature
Valuation
Once/Twice Daily/weekly/monthly
Inadequate
Historical
Cost or Market
System at Place
Historical/Predetermined
Cost Price
FA CAFactor
MANAGEMENT ACCOUNTING CONTRASTED WITH COST ACCOUNTING:
Dimension Management Accounting Cost Accounting Main Emphasis Impact & Effect Aspect of Costs Ascertainment, Allocation, Distribution
& Accounting Aspect of Costs
Collection of Data Derived both from the Cost & Financial Accounts
Derived from the Cost Books & Accounts & Provide to Management Accounting
Scope Broader Narrower
Approach Forward-Looking Historical & Past-Oriented
Purview The Management Accountant has the Responsibility to Suggest Corrective Actions on Weaknesses
The Cost Accountant is only Responsible to Compare the Actual with the Budgeted Performance
More Tools & Techniques The Management Accountant has more tools & techniques, such as, Marginal Costing, Cash Flow Statement, Budgetary Control, etc.
The Cost Accountant does not have so much tools & techniques, only a few, such as, Cost Sheet, etc.
Time Horizon Both Short & Long-Term Short-Term Planning
Concerned With Assisting Management in its Functions & Evaluating the Performance of the Management
Only Concerned with Assisting the Management in its Functions
Installation It cannot be Installed without a Proper Cost Accounting System
It can be Installed without a Management Accounting System
Style & Details Tailored to Requirement & Summarized Standardized
Unit of Account Money/Physical Units Money
Nature of Data For Use by Non-Accountants Somewhat Technical
THE ‘COST SHEET’ OR
‘STATEMENT OF COST’
‘COST SHEET’ IS OF 2 TYPES:
GENERAL COST SHEET
ESTIMATED COST SHEET
THE FORMAT OF A ‘COST SHEET’OR ‘STATEMENT OF
COST’
M/s. XYZ Ltd.Cost Sheet for the year ended 31.03.09 Output:
Particulars Amount(in Rs.)
Amount(in Rs.)
Raw Materials Consumed: Opening Stock of Raw Materials
Add: Purchase of Raw Materials Add: Expenses on Purchase (Carriage Inward, etc.)
Less: Purchase Return/Return Outward
×××××××××
×××(××)
Particulars Amount(in Rs.)
Amount
(in Rs.)
Less: Abnormal Loss of Raw Materials (if any)Less: Closing Stock of Raw MaterialsRAW MATERIALS CONSUMED
Add: Direct Wages (Productive Labour) Add: Direct Expenses/ Chargeable Expenses Add: Royalty (if any)
PRIME COST
(××)
(××)
××××××
×××××××××
Particulars Amount(in Rs.)
Amount
(in Rs.)
* IF IT IS GIVEN THAT WIP IS AT PRIME COST, THEN:
Adjustment for WIP at Prime Cost:
Add: Opening Stock of WIPLess: Closing Stock of WIP
PRIME COSTAdd: Factory Overheads: Factory Rent, Power Indirect Materials
×××(×××)
××××××
××××××
Particulars Amount(in Rs.)
Amount
(in Rs.)
Indirect Wages Supervisors’ Salary Factory Assets’ Depreciation Consumable Stores, etc.
Less: Sale of Scraps
Adjustment for WIP at Manufacturing Cost:
Add: Opening Stock of WIP Less: Closing Stock of WIP
×××××××××××××××(××)
×××(×××)
×××
×××
Particulars Amount(in Rs.)
Amount
(in Rs.)
FACTORY COST/WORKS COST
Add: Office & Administration Overheads: Office Rent, Electricity Office Assets’ Depreciation Directors’ Fees Auditors’ Fees Bank Charges Office & Admin. Salaries Other Office Expenses, etc.
×××××××××××××××××××××
×××
Particulars Amount(in Rs.)
Amount(in Rs.)
COST OF PRODUCTION
Adjustment for Stock of FinishedGoods: Add: Opening Stock of Finished Goods Less: Closing Stock of Finished Goods ( Note 2)
COST OF GOODS SOLD
×××(×××)
××××××
××××××
Particulars Amount(in Rs.)
Amount(in Rs.)
Add: Selling & Distribution Overheads: Salesmen’s Commission, Salary, etc. Traveling Expenses Carriage Outward Advertisement Delivery-Men Expenses Insurance on Finished Goods Sales Tax, Bad Debts, etc.
TOTAL COST/COST OF SALES
×××××××××××××××××××××
××××××
Particulars Amount(in Rs.)
Amount
(in Rs.)
Add: PROFIT (balancing figure)
SALES/SELLING PRICE
××××××
YOU HAVE TO REMEMBER:
3. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units
Produced.4. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units Sold.
5. Items not to be considered in Cost Sheet: (i) Income Tax Paid, (ii) Cash Discount (Received & Paid), (iii) Donations, Dividends (Received & Paid), (iv) Preliminary Expenses/ Goodwill Written Off, (v) Transfer to Reserves, (vi) Interest (Received & Paid), (vii) Rent Receivables,(viii) Losses on the Sales of Investments, Building
etc., (ix) Profits made on the Sale of Fixed Assets, (x) Transfer Fees Received.
GENERAL ‘COST SHEET’OR
‘STATEMENT OF COST’
COST SHEET- PROBLEM 1:THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FORTHE YEAR ENDED 31.12.08 SHOW THE FOLLOWING;
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)STOCK OF RAWMATERIALS ASON 01.01.08RAW MATERIALSPURCHASEDBAD DEBTS W/OTRAVELLING SALESMEN’SSALARIES &COMMISSIONDEPRECIATION W/O ON OFFICE
67,200
2,59,000
9,100
10,780
FURNITURERENT, RATES,TAXES & INSURANCE (FACTORY)PRODUCTIVE WAGESDIRECTORS’ FEESGENERAL EXPENSESGAS & WATER(FACTORY)
420
11,900
1,76,4008,400
4,760
1,680
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)TRAVELLINGEXPENSESSALESMANAGER’SSALARYDEPRECIATION ONPLANT & MACHINERYCASH DISCOUNTSALLOWEDREPAIRS TO PLANT & MACHINERYCARRIAGE &CARTAGE OUTWARDS
2,940
6,00,00015,000
18,200
4,060
6,230
6,020
DIRECT EXPENSESRENT, RATES &INSURANCE (OFFICE)GAS & WATER (OFFICE)STOCK OF RAW MATERIALS AS ON31.12.08
10,010
2,800
560
87,920
THE MANAGER’S SALARY IS TO BE APPORTIONED IN THE RATIO OF 2:1 IN BETWEEN FACTORY AND OFFICE.
PREPARE A COST SHEET/STATEMENT OF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST OF PRODUCTION,
COSTOF SALES & TOTAL PROFIT.
SOLUTION OF PROBLEM 1:-
P.K. Manufacturers Ltd. Cost Sheet for the year ended 31.12.08 Output:
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
Raw Materials Consumed: Raw Materials as on 01.01.08
Add: Materials Purchased
Less: Raw Materials as on 31.12.08
Add: Productive Wages
67,2002,59,00
03,26,20
0
(87,920)
2,38,280
1,76,400
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
Add: Direct ExpensesPRIME COST
Add: Factory Overheads: Rent, Rates, Taxes & Insurance (Factory) Gas & Water (Factory) Manager’s Salary (2/3 of Rs. 15,000) Depreciation on Plant & Machinery Repairs to Plant & Machinery
11,900
1,68010,000
18,200
6,230
10,0104,24,690
48,010
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
FACTORY COST/WORKS COST
Add: Office & Administration Overheads: Depreciation W/O on Office Furniture Directors’ Fees General Expenses (W.N.1) Manager’s Salary (1/3 of Rs. 15,000) Rent, Rates & Insurance (Office) Gas & Water (Office)
420
8,4004,7605,000
2,800
560
4,72,700
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
COST OF PRODUCTIONAdd: Selling & Distribution Overheads: Travelling Salesmen’s Salaries & Commission Travelling Expenses (W.N.2) Bad Debts W/O Carriage & Cartage Outwards
10,780
2,940
9,100
6,020
21,9404,94,640
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
TOTAL COST/COST OF SALESAdd: PROFIT (balancing figure)
SALES
28,8405,23,480
76,5206,00,000
WORKING NOTES:
1) It has been assumed that ‘General Expenses’ is related to Office & Administration.
2) It has also been assumed that ‘Travelling Expenses’ have been incurred in connection with sales.
3) ‘Cash Discounts Allowed’ has been treated as a financial charge and excluded from Cost Accounts.
COST SHEET- PROBLEM 2:THE ACCOUNTS OF M/S. BANI TRADERS FOR THE YEAR ENDED 30.06.08 SHOW THE FOLLOWING;
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)STOCK OF RAWMATERIALS ASON 01.07.07RAW MATERIALSPURCHASEDW-I-P AS ON 01.07.07:AT PRIME COSTAdd: MANUFACTURINGEXPENSES
12,500
1,10,000
15,000
3,00018,000
FINISHED GOODS AT COST AS ON 01.07.07 (8,000 UNITS)FREIGHT ON RAW MATERIALS PURCHASEDLOSS OF MATERIALS BY FIREFACTORY EXPENSES
60,000
5,000
5,000
70,000
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)CHARGEABLEEXPENSESDIRECT LABOURADMINISTRATIVE EXPENSESSELLING EXPENSESDISTRIBUTIONEXPENSESSALE OF FINISHED GOODS (28,000 UNITS)RAW MATERIALS AS ON 30.06.08
25,000
1,35,000RS. 2/UNIT
RS. 1/UNIT
15,000
4,00,000
20,000
W-I-P AS ON 30.06.08:AT PRIME COSTAdd: MANUFACTURINGEXPENSES
STOCK OF FINISHED GOODS AS ON 30.06.08 (10,000 UNITS)
Assume Sales are made on FIFO basis
10,000
8,000
18,000
?
PREPARE A COST SHEET/STATEMENTOF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST
OF PRODUCTION, COST OF SALES,
TOTALPROFIT & PROFIT P.U..
SOLUTION OF PROBLEM 2:-
M/S. BANI TRADERSCost Sheet for the year ended 30.06.08 Output: 30,000 Units Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
RAW MATERIALS CONSUMED:Raw Materials as on 01.07.07 Add: Raw Materials PurchasedAdd: Freight on Raw Materials PurchasedLess: Loss of Materials by FireLess: Raw Materials as on 30.06.08
12,500
1,10,000
5,0001,27,500
(5,000)
(20,000)
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
Add: Direct LabourAdd: Chargeable ExpensesAdd:W-I-P AT PRIME COST:As on 01.07.07Less: As on 30.06.08
PRIME COSTAdd: Factory ExpensesAdd: Manufacturing Expenses
15,000(10,000)
1,02,5001,35,000
25,000
5,0002,67,500
70,000
3.41664.50000.8333
0.16668.91652.3333
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
As on 01.07.07Less: As on 30.06.08
FACTORY/WORKS COSTAdd: Administrative Expenses Rs. (2 × 30,000)COST OF PRODUCTIONAdd: Finished Goods at Cost as on 01.07.07Less: Stock of Finished Goods as on 30.06.08
COST OF GOODS SOLD
3,000(8,000)
60,000
(1,30,832)
(5,000)3,32,500
60,0003,92,500
(70,832)3,21,668
(0.1666)
11.0832
2.000013.083
2
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
Add: Selling Expenses Rs. (1 × 28,000)Add: Distribution Expenses
COST OF SALES/TOTAL COSTAdd: PROFIT
SALES
28,00015,000
3,64,668
35,3324,00,000
1.2619
WORKING NOTES:1) We know that; Opening Stock + Units Produced = Units Sold + Closing
Stock
According to the given information: Opening Stock = 8,000 Units Units Sold = 28,000 Units Closing Stock = 10,000 Units
SO, Units Produced = ?Units Produced = (Units Sold + Closing Stock) – Opening
StockUnits Produced = (28,000 + 10,000)Units – 8,000 UnitsUnits Produced = 30,000 Units
2) Calculation of Value of Finished Goods as on 30.06.08:
= Rs. (13.0832 × 10,000) = Rs. 1,30,832
As we have assumed FIFO Method of Sales:
UNITS SOLD:
28,000
OPENINGSTOCK:8,000
UNITSPRODUCED:
30,00010,000
CLOSINGSTOCK10,000
ESTIMATED ‘COST SHEET’OR
‘STATEMENT OF COST’
COST SHEET- PROBLEM 3:THE FOLLOWING DATA RELATE TO THE MANUFACTURE OF A STANDARD PRODUCTDURING THE MONTH IN JULY, 2008:
RAW MATERIALS CONSUMED – RS. 25,000MANUAL AND MACHINE LABOUR WAGES (DIRECTLY CHARGEABLE) - RS. 15,000CHARGEABLE EXPENSES – RS. 4,500MACHINE HOURS WORKED – 1,000MACHINE HOUR RATE – RS. 2.50ESTABLISHMENT & GENERAL EXPENSES – RS. 4,700
SELLING & DISTRIBUTION OVERHEADS P.U. – RS. 0.08UNITS PRODUCED – 10,000UNITS SOLD – 8,000SELLING PRICE P.U. – RS. 6
(a) YOU ARE REQUIRED TO PREPARE A COST SHEET IN RESPECT OF THE ABOVE SHOWING THEREIN THE COST P.U. UNDER EACH ELEMENT OF COST AND THE PROFIT FOR THE PERIOD. ALSO, SHOW THE PERCENTAGE THAT THE WORKS OVERHEAD COST BEARS TO THE MANUAL
AND MACHINE LABOUR WAGES AND THE PERCENTAGE THAT THE ESTABLISHMENT AND GENERAL EXPENSES BEAR TO THE WORKS COST.(b) WHAT PRICE SHOULD THE COMPANY
QUOTE TO PRODUCE 1,000 UNITS OF ANOTHER PRODUCT WHICH WILL REQUIRE AN EXPENDITURE OF RS. 8,000 FOR RAW MATERIALS AND RS. 6,000 FOR DIRECT WAGES, SO THAT IT WILL YIELD A PROFIT OF 25% ON THE COST OF SALES?
SOLUTION OF PROBLEM 3:-
(a) Cost Sheet for the month ended July, 2008
Output: 10,000 Units
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
RAW MATERIALS CONSUMEDMANUAL & MACHINELABOUR WAGESCHARGEABLE EXPENSES
PRIME COSTFACTORY OVERHEADRS. (2.50 × 1,000)
FACTORY COST
25,000
15,000
4,500
44,5002,500
47,000
2.50
1.50
0.45
4.450.25
4.70
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
ESTABLISHMENT &GENERAL EXPENSESCOST OF PRODUCTIONLess: CLOSING STOCK OF FINISHED GOODSRS. (51,700 × 2/10)COST OF GOODS SOLDSELLING & DISTRIBUTION OVERHEADSRS. (0.08 × 8,000)
COST OF SALESAdd: PROFIT
SALESRS. (6 × 8,000)
4,700
51,700
10,340
41,360640
42,0006,000
48,000
0.47
5.17
0.08
5.250.75
6.00
CALCULATION OF WORKS OVERHEAD COST TO MANUAL & MACHINE LABOUR WAGES:
RS. 2,500 = × 100
RS. 15,000
= 16.67% Ans.
CALCULATION OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST:
RS. 4,700
= × 100
RS. 47,000
= 10%
(b) Cost Sheet (Estimated) for the year ended 2009 Output: 1,000
Units Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
RAW MATERIALS CONSUMEDMANUAL & MACHINELABOUR WAGESCHARGEABLE EX.
PRIME COSTFACTORY OVERHEAD
FACTORY COSTESTABLISHMENT & GENERAL EXPENSESCOST OF PRODUCTION
8,000
6,000
45014,4501,000
15,450
1,54516,995
8.00
6.00
0.4514.451.00
15.45
1.54516.995
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
SELLING & DISTRIBUTION OVERHEADSRS. (0.08 × 1,000)
COST OF SALES
Add: PROFITRS. (25/100 × 17,075)
SALES
80
17,075
4,268.75
21,343.75
0.08
17.075
4.26875
21.34375
WORKING NOTES:1) CALCULATION OF NO. OF MACHINE HOURS WORKED:
1,000= 1,000
10,000
= 100 HOURS Ans.
1,000= × 1,000 10,000
= RS. 100
COST SHEET- PROBLEM 4:IN 2008, THE ACCOUNTS OF A COMPANY MANUFACTURING MINI GENERATORSDISCLOSED THE FOLLOWING PARTICULARS:
MATERIALS USED – RS. 16,00,000DIRECT WAGES – RS. 17,40,000FACTORY OVERHEAD EXPENSES – RS. 2,82,000ESTABLISHMENT & GENERAL EXPENSES – RS. 2,78,000
YOU ARE ASKED TO PREPARE A STATEMENT SHOWING THE PRICE AT WHICH THE COMPANY SHOULD SELL GENERATORS DURING 2009 ASSUMING;
(a) THAT IT IS ESTIMATED THAT EACH GENERATOR WILL REQUIRE MATERIALS WORTH RS. 2,900 AND AN EXPENDITURE IN DIRECT WAGES RS. 1,200.
(b) THAT DURING 2009, THE FACTORY OVERHEAD EXPENSES WILL BEAR THE SAME RATIO TO DIRECT WAGES AS IN 2008.
(c) THAT THE PERCENTAGE OF ESTABLISHMENT & GENERAL EXPENSES ON FACTORY COST WILL BE THE SAME IN 2009 AS IN 2008.
(d) THAT THE COMPANY HAS DECIDED TO EARN A PROFIT OF 10% ON SELLING PRICE.
SOLUTION OF PROBLEM 4:-
A Company Cost Sheet for the year ended 2008
Output:
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
MATERIALS USEDDIRECT WAGES
PRIME COSTFACTORY OVERHEAD EXPENSES
WORKS COSTESTABLISHMENT & GENERAL EXPENSES
TOTAL COST
16,00,000
17,40,000
33,40,000
2,82,00036,22,00
0
2,78,00039,00,00
0
A Company Estimated Cost Sheet for the year ended
2009 Output:
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
MATERIALS USEDDIRECT WAGES
PRIME COSTFACTORY OVERHEAD EXPENSES RS. (16.2069% OF RS. 1,200)
WORKS COSTESTABLISHMENT & GENERAL EXPENSESRS. (7.6753% OF RS. 4,294.48)
2,900.001,200.004,100.00
194.48
4,294.48
329.61
Particulars/Elements of Cost
Amount(in Rs.)
Amount(in Rs.)
TOTAL COST/COST OF SALES
Add: PROFITRS. (4,624.09 × 10/90)
SELLING PRICE
4,624.09
513.79
5,137.88
WORKING NOTES:1) CALCULATION OF THE RATIO OF FACTORY OVERHEAD EXPENSES TO DIRECT WAGES:
FACTORY OVERHEAD EXPENSES
= ×100
DIRECT WAGES RS. 2,82,000= × 100 = 16.2069% RS. 17,40,000
WORKING NOTES:2) CALCULATION OF THE RATIO OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST: ESTABLISHMENT & GENERAL EX.=
×100 WORKS COST RS. 2,78,000= × 100 = 7.6753% RS. 36,22,000
COST SHEET- PROBLEM 5:THE JAY ENGINEERING CO. LTD. MANUFACTURED AND SOLD 1,000 SEWINGMACHINES IN 2008. FOLLOWING ARE THE PARTICULARS OBTAINED FROM THE RECORDS OF THE COMPANY:
MATERIALS CONSUMED – RS. 80,000WAGES PAID – RS. 1,20,000MANUFACTURING EXPENSES – RS. 50,000SALARIES – RS. 60,000RENT, RATES & INSURANCE – RS. 10,000
SELLING EXPENSES – RS. 30,000GENERAL EXPENSES – RS. 20,000SALES – RS. 4,00,000
THE COMPANY PLANS TO MANUFACTURE 1,200 SEWING MACHINES IN 2009. YOU ARE REQUIRED TO SUBMIT A STATEMENT SHOWING THE PRICE AT WHICH THESE MACHINES WOULD BE
SOLD AS TO SHOW A PROFIT OF 10% ON
SELLINGPRICE.
THE FOLLOWING ADDITIONAL INFORMATION IS PROVIDED TO YOU:(a) PRICE OF MATERIALS WILL RISE BY
20% ON THE PREVIOUS YEAR’S LEVELS.(b) WAGE RATES WILL GO UP BY 5%.(c) MANUFACTURING EXPENSES WILL
RISE IN PROPORTION TO THE COMBINED COST OF MATERIALS AND WAGES.
(d) SELLING EXPENSES P.U. WILL REMAIN UNCHANGED.
(e) OTHER EXPENSES WILL REMAIN UNAFFECTED BY THE RISE IN OUTPUT.
SOLUTION OF PROBLEM 5:-
Jay Engineering Co. Ltd.Cost Sheet for the year ended 2008 Output: 1,000 Sewing
Machines Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
MATERIALS CONSUMEDWAGES PAID
PRIME COSTMANUFACTURINGEXPENSES
FACTORY COSTOFFICE & ADMIN.
OVERHEADS:SALARIESRENT, RATES & INS.GENERAL EXPENSES
60,00010,00020,000
80,0001,20,0002,00,000
50,000
2,50,000
60.0010.0020.00
80.00120.00200.0050.00
250.00
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
COST OF PRODUCTIONSELLING EXPENSES
COST OF SALESAdd: PROFIT
SALES
90,0003,40,000
30,0003,70,000
30,0004,00,000
90.00340.0030.00
370.0030.00
400.00
Jay Engineering Co. Ltd.Cost Sheet for the year ended 2009 Output: 1,200 Sewing
Machines Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
MATERIALS CONSUMED(W.N. 1)WAGES PAID (W.N. 2)
PRIME COSTMANUFACTURINGEXPENSES (W.N. 3)
FACTORY COSTOFFICE & ADMIN.
OVERHEADS:SALARIES
60,000
1,15,200
1,51,2002,66,400
66,6003,33,000
50.00
96.00
126.00222.00
55.50277.50
Particulars/Elements of
Cost
TotalAmount(in Rs.)
TotalAmoun
t(in Rs.)
Per Unit
Amount
(in Rs.)
Per Unit
Amount
(in Rs.)
RENT, RATES & INS.GENERAL EXPENSES
COST OF PRODUCTIONSELLING EXPENSES
COST OF SALESAdd: PROFIT (W.N. 4)
SALES
10,00020,000
90,0004,23,000
36,0004,59,000
51,0005,10,000
8.3316.67
75.00352.5030.00
382.5042.50
425.00
WORKING NOTES:1) CALCULATION OF MATERIALS CONSUMED COST (TOTAL) IN 2009:
MATERIALS PRICE P.U. IN 2008 – RS. 80MATERIALS PRICE P.U. IN 2009 – RS. (80 + 20% OF RS. 80) = RS. 96MATERIALS CONSUMED COST (TOTAL) IN2009: RS. (96 × 1,200) = 1,15,200
WORKING NOTES:2) CALCULATION OF WAGES PAID IN 2009:
WAGES PAID P.U. IN 2008 – RS. 120WAGES PAID P.U. IN 2009 – RS. (120 + 5% OF RS. 120) = RS. 126WAGES PAID (TOTAL) IN 2009:RS. (126 × 1,200) = 1,51,200
WORKING NOTES:3) CALCULATION OF MANUFACTURING EXPENSES IN 2009:
TOTAL MANUFACTURING EXPENSES IN 2008 – RS. 50,000MANUFACTURING EXPENSES × 100 IN
2008 PRIME COST RS. 50,000= × 100 = 25% RS. 2,00,000
SO, IN 2009, MANUFACTURING EXPENSES
WILL BE:
RS. (1,15,200 + 1,51,200) × 25%= RS. (25% OF RS. 2,66,400)= RS. 66,600
WORKING NOTES:4) CALCULATION OF PROFIT IN 2009:
LET US ASSUME THAT SELLING PRICE WILLBE RS. 100.PROFIT IS 10% OF SELLING PRICE (GIVEN),I.E., RS. 10.SO, COST WILL BE:RS. (100 – 10) = RS. 90RATIO OF PROFIT TO COST IS:RS. (10/90) = 1/9. SO,RS. (4,59,000 × 1/9) = RS. 51,000 WILL BETHE PROFIT IN 2009.
ASSIGNMENT NO. 1:
COST SHEET- PROBLEM 6:THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FORTHE YEAR ENDED 31.12.08 SHOW THE FOLLOWING;
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)STOCK OF RAWMATERIALS ASON 01.01.08RAW MATERIALSPURCHASEDBAD DEBTS W/OSALARIES TO ADMINISTRATIVE STAFF
REPAIRS TO PLANT & MACHINERY
1,88,000
8,32,000
18,800
40,000
42,400
INDIRECT WAGESRENT, RATES &TAXES (FACTORY)DIRECT WAGES PAIDRENT, RATES &TAXES (OFFICE)GENERAL CHARGES
FREIGHT INWARD
16,000
12,0002,38,400
6,400
24,800
32,000
PARTICULARS AMOUNT
(IN RS.)
PARTICULARS AMOUNT
(IN RS.)FREIGHT OUTWARDDIRECTORS’ FEESMANAGER’SSALARYDEPRECIATION ONPLANT & MACHINERYSALESMEN’S SALARIES & COM.
TRAVELLING EXPENSES
DEPRECIATION ON FURNITURE
20,000
24,00048,000
28,400
33,600
12,400
2,400
CASH DISCOUNTS ALLOWEDELECTRICITY CHARGES (FACTORY)FUEL (FOR BOILER)STOCK OF RAW MATERIALS AS ON31.12.08
14,000
48,000
64,000
2,00,000
THE MANAGER’S TIME IS SHARED BETWEEN THE FACTORY AND THE OFFICE IN THE RATIO OF 20:80.
FROM THE ABOVE DETAILS YOU ARE REQUIRED TO PREPARE A STATEMENTSHOWING; (a) PRIME COST, (b) WORKSCOST, (c) COST OF PRODUCTION, (d)
COSTOF SALES/TOTAL COST.
ANSWERS:
(a) RS. 10,90,400(b) RS. 13,10,800(d) RS. 15,12,800
ASSIGNMENT NO. 2:
COST SHEET- PROBLEM 7:
FROM THE FOLLOWING PARTICULARS RELATING TO PRODUCTION AND SALES FORTHE YEAR ENDED 31.12.2007, PREPARE ASTATEMENT OF COST SHOWING THE PRIMECOST, FACTORY/WORKS COST, COST OFPRODUCTION, COST OF GOODS SOLD
(COGS), COST OF SALES, SALES, PROFIT AND ALSOP.U. COST OF SALES AND P.U. PROFIT.
PARTICULARS AS ON 01.01.07
(AMT. RS.)
AS ON 31.12.07
(AMT. RS.)
RAW MATERIALSWORK-IN-PROGRESSFINISHED GOODS(AT COST)3,000 UNITS2,500 UNITS
16,00012,600
16,400
19,6004,600
?
Other Information for the Year: Purchase of Raw Materials – Rs. 1,11,600Sales of Finished Goods – Rs. 2,83,500 (40,500 Units)Productive Wages – Rs. 67,200Office & Administrative Expenses – Rs. 20,800Selling & Distribution Expenses – Rs. 0.50 Per Unit SoldMachine Hours Worked – Rs. 8,000 HoursMachine Hour Rate (MHR) – Rs. 2.50Assume that sales are made on the basis
of‘First-in-First-out’ (FIFO) principle.
ANSWERS:PRIME COST = RS. 1,75,200WORKS COST = RS. 2,03,200COST OF PRODUCTION = RS. 2,24,000CLOSING STOCK OF FINISHED GOODS = RS. 14,000COST OF GOODS SOLD = RS. 2,26,400COST OF SALES = RS. 2,46,650 (P.U. = RS. 6.09)PROFIT = RS. 36,850(P.U. = RS. 0.91)
ASSIGNMENT NO. 3:
COST SHEET- PROBLEM 8:IN RESPECT OF A FACTORY, THE FOLLOWING FIGURES HAVE BEEN OBTAINED FOR THE YEAR ENDED 31.12.2008.
COST OF MATERIALS – RS. 1,50,000DIRECT WAGES – RS. 1,25,000FACTORY OVERHEAD – RS. 75,000ADMINISTRATION OVERHEAD – RS. 84,000SELLING OVERHEAD – RS. 56,000DISTRIBUTION OVERHEAD – RS. 35,000PROFIT – RS. 1,05,000
A WORK ORDER HAS BEEN ISSUED IN 2009AND THE FOLLOWING EXPENSES HAVE BEEN ESTIMATED:COST OF MATERIALS – RS. 3,000DIRECT WAGES – RS. 2,000ASSUMING THAT, IN 2009, FACTORY OVERHEAD WILL GO UP BY 20%, DISTRIBUTION OVERHEAD WILL GO DOWNBY 10% AND SELLING AND ADMINISTRATION OVERHEADS WILL EACHGO UP BY 12½%.
STATE AT WHAT PRICE SHOULD THE
PRODUCT BE SOLD, SO AS TO EARN
THE SAME RATE OF PROFIT ON THE
SELLING PRICE AS IN 2008.
NOTE: Administration, Selling and Distribution Overheads are based on Works Cost.
ANSWERS:SELLING PRICE = RS. 11,729RELATIONS IN 2008: i) Factory Overhead/Direct Wages = 72% ii) Administration Overhead/Works Cost= 25.89%iii) Selling Overhead/Works Cost= 17.26%iv) Distribution Overhead/Works Cost = 8.63%v) Rate of Profit in 2008 = 20% of Cost
Recommended