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Cost Accounting Cost Accounting (2(2ndnd
session)session)Prof. Amit DeProf. Amit De
JOB COSTINGJOB COSTING
Job costing refers to the cost Job costing refers to the cost
procedure or system of cost procedure or system of cost
accumulation that ascertains the accumulation that ascertains the
costs of an individual job or work costs of an individual job or work
order separately. A job represents or order separately. A job represents or
constitutes the unit of costing.constitutes the unit of costing.
TYPES OF PRODUCTION ACTIVITY SUITABLE FOR JOB
COSTING
TYPES OF PRODUCTION ACTIVITY SUITABLE FOR JOB
COSTING1. Production consists of special jobs or projects 1. Production consists of special jobs or projects
based on customer's specifications.based on customer's specifications.
2. Production pattern is not repetitive and 2. Production pattern is not repetitive and
continuous.continuous.
3. Virtually every job produced is somewhat 3. Virtually every job produced is somewhat
different.different.
4. Each job maintains its separate identity 4. Each job maintains its separate identity
throughout the production stage.throughout the production stage.
5. The different jobs are independent of each other.5. The different jobs are independent of each other.
BATCH COSTINGBATCH COSTING
Batch costing is essentially a Batch costing is essentially a
variation of job costing. Instead of a variation of job costing. Instead of a
single job, a number of similar single job, a number of similar
product units are processed or product units are processed or
manufactured in a group as a batch.manufactured in a group as a batch.
ECONOMIC BATCH SIZEECONOMIC BATCH SIZEECONOMIC BATCH SIZEECONOMIC BATCH SIZE
TOTALCOST
HOLDING COST
SET-UP COST
BATCH SIZEqO
Rs.
Economic Production Batch SizeEconomic Production Batch Size
Where Q = total demand in time period TWhere Q = total demand in time period T
CC11 = holding costs per unit = holding costs per unitCC22 = set up cost per batch = set up cost per batch
2C2C22QQ
CC11TT==
CONTRACT COSTINGCONTRACT COSTINGCONTRACT COSTINGCONTRACT COSTING
Contract costing is a type of job
costing in which contract
constitutes a unit of cost.
ESCALATION CLAUSEESCALATION CLAUSEESCALATION CLAUSEESCALATION CLAUSE
Escalation clause is usually provided in
the contract as a safeguard against
likely changes in price and utilization of
material and labour. By adding this
clause, the contractor makes it known to
his customer that price quoted is
dependent on prevailing market prices
of cost elements.
COST-PLUS CONTRACTCOST-PLUS CONTRACTCOST-PLUS CONTRACTCOST-PLUS CONTRACT
It is provided in the contract that
customer/contractee should pay to the
contractor actual cost of manufacture or
rendering services plus a stipulated
profit. The profit to be paid to the
contractor may be a fixed amount or it
may be a particular percentage of capital
employed.
PROFIT OF INCOMPLETE PROFIT OF INCOMPLETE CONTRACTCONTRACT
PROFIT OF INCOMPLETE PROFIT OF INCOMPLETE CONTRACTCONTRACT
1.When work on contract has not reasonably
advanced, no profit is taken into account.
2.When work of a contract has reasonable
advanced, a particular percentage of notional
profit is credited to profit and loss account and
balance is carried forward as provision against
future losses, increase in price and other
contingencies.
When a contract has sufficiently advanced and
it is also not in final stages, following practices
are followed :
(a) If the work certified is more than ¼ but less
than half of the contract price, following
formula is used to determine the figures of
profit to be credited to profit and loss account:
National ProfitCash received
Work certified1
3XX
3. Where the contract is almost complete, an
estimated total profit is determined by
deducting aggregate of cost to date and
estimated additional expenditure from
contract price. A portion of this estimated total
profit is credited to profit and loss account.
Estimated total profitWork certified
Contract PriceX
WORK CERTIFIED AND WORK CERTIFIED AND WORK UNCERTIFIED.WORK UNCERTIFIED.
WORK CERTIFIED AND WORK CERTIFIED AND WORK UNCERTIFIED.WORK UNCERTIFIED.
The work certified represents the
work approved by architect,
engineer or surveyor etc. of the
contractee. It is possible that a part
of the work remains to be
approved at the end of the
accounting period.
MARGINAL COSTINGMARGINAL COSTINGMARGINAL COSTINGMARGINAL COSTING
Sales – Cost = Profit or Sales – (Fixed cost+Variable
Cost)= Profit.
MARGINAL COSTMARGINAL COSTMARGINAL COSTMARGINAL COST
CIMA defines marginal cost as “the
cost of one unit of product or service
which would be avoided if that unit
were not produced or provided.”
VARIABLE COST.VARIABLE COST.VARIABLE COST.VARIABLE COST.
Variable cost is that part of total cost, which changes directly in proportion with volume.
FIXED COST.FIXED COST.FIXED COST.FIXED COST.It represents the cost which is incurred for a period, and which, within certain output tends to be unaffected by fluctuations in output.
BREAK-EVEN POINTBREAK-EVEN POINTBREAK-EVEN POINTBREAK-EVEN POINT
Break even point is the point of sale
at which company makes neither
profit nor loss.
Contribution = sales – variable cost of sales
KEY FACTOR OR LIMITING KEY FACTOR OR LIMITING FACTOR.FACTOR.
KEY FACTOR OR LIMITING KEY FACTOR OR LIMITING FACTOR.FACTOR.
There are always factors that do not lend
themselves to managerial control.
Key factor is the factor whose influence
must be first ascertained to ensure that
there is maximum utilization of resources.
BASIC MARGINAL COST BASIC MARGINAL COST EQUATIONEQUATION
BASIC MARGINAL COST BASIC MARGINAL COST EQUATIONEQUATION
Sales – (Fixed costs + variable costs) = Profit
PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.
When the contribution from sales is
expressed as a percentage of sales value,
it is known as profit/volume ratio (or P/V
ratio).
IMPROVEMENT OF P/V IMPROVEMENT OF P/V RATIO.RATIO.
IMPROVEMENT OF P/V IMPROVEMENT OF P/V RATIO.RATIO.
(i) Increase in sale price,
(ii) Reducing marginal cost by efficient
utilization of men, material and machines.
(iii) Concentrating on the sale of products with relatively better P/V ratio. This
will help to improve overall P/V ratio.
MARGIN OF SAFETY.MARGIN OF SAFETY.MARGIN OF SAFETY.MARGIN OF SAFETY.
Margin of safety represents the difference between sales at a given activity and sales at break-even point.
Sales – Sales at B.E.P = Margin of safety.
Margin of safety X P/V ratio = Profit
ANGLE OF INCIDENCEANGLE OF INCIDENCEANGLE OF INCIDENCEANGLE OF INCIDENCE
The angle which the sales line
makes with the total cost lines, is
known as the angle of incidence.
This angle gives the pictorial
relationship between profit and
sales.