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IMPORTANT TERMS

CHAPTER 1 INTRODUCTION

Cost

Accountancy

Cost Accountancy is "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."

Costing Costing is the technique and process of ascertain costs.

Cost

Accounting

[May 2010]

Cost Accounting is the process of accounting for cost which begins with the

incurrence of cost and ends with the control of cost.

Cost Control Cost Control involves the establishment of target performance, measuring actual

performance, comparing actual performance against target performance and taking

corrective action.

Cost

Reduction

[June 2009]

Cost Reduction is the achievement of real and permanent reduction in the unit cost

of products manufactured or services rendered without imparing their suitability for

the use intended or diminution in the quality of the product.

Cost Audit

[May 2008]

Cost Audit is the verification of cost accounts and a check on the adherence to the

Cost Accounting plan. Thus, it involves -.

(i) verification of cost accounting records, and

(ii) Examining these records to ensure that they adhere to the cost accounting

principles, plans, procedures and objectives.

Cost Unit A cost unit is a unit of product, service or time in terms of which costs are

ascertained or expressed. It is basically a unit of measurement like number (per

1000 bricks), weight (per tonne of coal), length (per meter of cloth), volume (per

litre of petrol), time (per kilowatt hours of power), area (per square foot of

construction). Its selection depends on the nature and type of industry.

Cost Centre A Cost Centre is a location, person or item of equipment (or group of these) v for

which costs may be ascertained and used for the purposes of cost control. In other

words, a cost centre is a convenient unit of the organization for which cost may be

ascertained.

Cost Object Cost object may be defined as 'anything for which a separate measurement of cost

is required. It may be a product, service, activity or process etc.

Responsibility

Center

Responsibility Center is unit or function of an organization under the control of a

manager who has direct responsibility for its performance.

Cost Centre Meaning Cost centre is a responsibility centre for which costs are accumulated.

Objective The main objective of cost centre is to minimize the centre's costs.

Revenue Centre Meaning Revenue Centre is a responsibility centre for which only revenues are



accumulated.

Objective The main objective of revenue centre's is to maximize the centre's

revenue.

Profit Centre

[Nov. 2008]

Meaning Profit centre is a responsibility centre for which both costs and revenues

are accumulated.

Objective The main objective of profit centre is to maximize the centre's profit (i.e.,

difference between revenues and expenses).

Contribution

Centre

Meaning Contribution Centre is a responsibility centre for which variable costs

and revenues are accumulated.

Objective The main objective of contribution centre is to maximize the centre's

contribution (i.e., difference between revenues and variable cost of sales).

Investment

Centre

[Nov 2008]

Meaning Investment Centre is a responsibility centre for which costs, revenues

and investment in assets are accumulated.

Objective The main objective of investment centre is to maximize the centre's

Return on investment (ROI) or Return on Capital Employed (ROCE).

METHODS OF COSTING

1.0 Job Costing [Nov

2008]

Job Costing is that form of specific order costing under which each job is treated

as a cost unit and costs are accumulated and ascertained separately for each job.

A job may consist of a job, product, batch of products, contract, a service or any

other specific order.

1.1 Contract

Costing

Contract Costing is that form of specific order costing under which each contract

is treated as cost unit and costs are accumulated and ascertained separately for

each contract.

1.2 Batch Costing

[Nov 2008,

Nov 2009]

Batch Costing is that form of specific order costing under which each batch is

treated as a cost unit and costs are accumulated and ascertained separately for

each batch. Each batch consists of a number of like units.

2.0 Process Costing Process costing is a method of costing under which all costs are accumulated for

each stage of production (also called process of production) and the cost per unit

of product is ascertained at each stage of production by dividing the total cost of

each process by the normal output of that process.

2.0 Process Costing Process costing is a method of costing under which all costs are accumulated for

each stage of production (also called process of production) and the cost per unit

of product is ascertained at each stage of production by dividing the total cost of

each process by the normal output of that process.

2.1 Operation Operation costing is a form of process costing under which costs are



Costing accumulated for each operation and the cost per unit is ascertained at each

stage of production by dividing the total cost of each operation by the normal

output of that operation.

2.2 Unit Costing or

Single/ Output

Costing

Unit costing is a form of process costing under which costs are accumulated and

analysed under various elements of costs and the cost per unit is ascertained by

dividing the total cost by the number of units produced.

2.3 Operating/

Service Costing

[Nov 2009]

It is used to ascertain the cost of providing services in case of those undertakings

which provide services and are not engaged in the manufacture of tangible

products. It is used by Transport Co., Hotels, Hospitals etc.

2.4 Multiple or

Composite Costing

[Nov 2009]

It involves the application of two or more methods of costing in respect of same

product. It is used in industries where a number of components are separately

produced and then assembled into a final product.

ALLOCATION, APPORTIONMENT AND ABSORPTION [MAY 2008]

Cost Allocation Meaning Allocation of cost is the process of charging the full amount of an

individual item of cost directly to a cost centre for which this item of cost was

incurred.

Examples:

(a) Where separate electric meters are installed in each of the

department, the electricity charges on the basis of electricity

bills can be allocated to the respective departments.

(b) Salary and wages paid to indirect workers of each department

can be allocated to the respective departments.

Cost Apportionment Meaning Apportionment of cost is the process of charging the proportion of

common items of cost to two or more cost centres on some equitable basis (say

Actual benefit/Potential Benefit/Ability to pay/Survey)

Examples:

(a) Where only one electric meter is installed in a factory, the

common electricity charges should be apportioned to all the

departments on the basis of no. of light points or floor area.

(b) Factory Rent is incurred for the factory as a whole and benefits

all the departments in the factory. Hence, it should be

apportioned to all the departments on the basis of floor area occupied.

Cost Absorption Absorption of cost is charging cost from cost centres to products or services by

means of absorption rate which is calculated as follows:



CLASSIFICATION OF COSTS BY RELATION TO COST

1. Direct Cost It is the cost which can be conveniently identified with and directly allocated to a

cost center or cost object in an economically feasible way. It represents the

aggregate of:

(a) Direct Material Cost e.g. Cost of cloth in a shirt

(b) Direct Labour Cost e.g. Wages paid to tailor to stitch a shirt

(c) Direct Expenses e.g. Excise duty on production

2. Indirect Cost It is the cost which cannot be conveniently identified with and directly allocated

to a cost centre or cost object in an economically feasible way. It j is apportioned

to various cost centres on some equitable basis. It is also known as overhead. It

represents the aggregate of:

(a) Indirect Material Cost e.g. Lubricating oil for machine

(b) Indirect Labour Cost e.g. Salary of supervisor.

(c) Indirect Expenses e.g. Repairs, Insurance & Depreciation of machines

CLASSIFICATION OF COSTS BY FUNCTIONS

1. Production Cost Production cost is the cost of sequence of operations which begins with

supplying materials, labour and services and ends with the primary packing of

the product.

Production Cost = Aggregate of, Direct Material Cost. Direct Labour

Cost, Direct Expenses, and Production overheads

incurred by the Production Department.

Examples

(a) Wood in making furniture cloth in making a shirt

(b) Wages to carpenter to make furniture. Wages to tailor to stich a shirt

(c) Excise duty on production

(d) Cost of consumable stores, Cost of printing, postage and stationery used

in Production Depatt. Salary of supervisor, worts manager, Repairs,

insurance and depreciation of factory building, machines and furniture

2. Administrative

Cost

Administration cost represents the cost of formulating the poftcy, directing the

organisation and controlling the operations of an undertaking which is not

related directly to production, selling, distribution, research or development

activity or function.

Adm. Cost = Aggregate of Material Cost, Labour Cost and

Expenses incurred by Administration Department

3. Selling Cost Selling cost represents the cost of seeking to create and stir, demand and of



securing order. Thus, this is the cost of promoting sales and retaining customers.

Selling Cost = Aggregate of Materials Cost, Labour Cost and

Expenses incurred by Sales Department

4. Distribution Cost Distribution cost represents the cost of the 'sequence' of operations which

begins with making the packed product available for despatch and ends with

making the reconditioned returned empty package, if any, available for re-use.

These also include expenditure incurred in moving articles to central or local

storage, or in moving articles to and from prospective customers as in the case of

goods on sale or return basis. In the gas, electricity and water industries

'Distribution' means pipes, mains and service which may be regarded as

equivalent to packing and transportation.

Distribution Cost = Aggregate of Materials Cost, Labour Cost and

Expenses incurred by Distribution Department

5. Research Cost The cost of searching for new or improved products, new application of

materials, or new or improved methods.

6. Development

Cost

The cost of the process which begins with the implementation of the decision to

produce a new or improved product or to employ a new or improved method

and ends with commencement of forma! production of that product or by the

method.

7. Pre-production

Cost

It is that part of development cost which is incurred in making a trial production

run preliminary to formal production.

CLASSIFICATION OF COSTS BY VARIABILITY/BEHAVIOUR [MAY 2010]

1. Fixed Costs Fixed costs are those costs which do not vary with the change in the volume of

production upto a given range.

2. Variable Costs Variable costs are those costs which vary in direct proportion to the volume of

production. 3. Semi-Variable

Costs/Semi-Fixed

Costs

Semi-Variable costs are those costs of which one part remains fixed upto a

given range and the other part varies with the change in the volume of

production but not in the same proportion. For example, an expense may not

change if output is upto 50% capacity but may increase by 2% for every 10%

increase in output over 50% capacity but upto 70%.

CLASSIFICATION OF COSTS BY CONTROLLABILITY [MAY 2008]

1. Controllable

Costs

These are the costs which can be influenced by the action of a specified member

of an undertaking at a given level of authority, e.g. Direct costs are generally

controllable by shop level management.



2. Uncontrollable

Costs

These are the costs which cannot be influenced by the action of a specified

member of an undertaking at given level of authority, e.g. Managerial

remuneration; factory rent will be uncontrollable at shop management level.

CLASSIFICATION OF COSTS BY NORMALITY

1. Normal It is the cost which is normally incurred at a given level of output in the

conditions in which that level of output is normally attained. It is treated as a

part of cost of production, e.g. Cost of materials required as per standard, Cost

of labour required as per standard.

2. Abnormal It is the cost which is not normally incurred at given level of output in the

conditions in which that level of output is normally attained. It is not treated as

part of cost of production, it is charged to Costing Profit & Loss Account, e.g.

Cost of abnormal material losses, Cost of abnormal idle time.

CLASSIFICATION OF COSTS BY INVENTORY [JUNE 2009]

1. Product Costs/

Inventoriable costs

There are the costs which are charged to products/services, e.g.Variable

manufacturing costs under marginal costing and total manufacturing cost

(variable & fixed) under absorption costing constitute product costs.

2. Period Costs

[Nov 2008]

There are the costs which are not charged to products/services but are written

off as expenses against the revenue of the period in which these are incurred,

e.g. All fixed costs under marginal costing and total administration, selling &

distribution costs (variable & fixed) under absorption costing constitute period

costs.

CLASSIFICATION OF COSTS BY TIME

1.0 Historical

Costs

These are the actual costs which are ascertained after these have been

incurred, e.g. Cost of Material Consumed, Wages paid to workers.

2.0 Pre-determined

Costs

These are the future costs which are ascertained in advance before production

starts, on the basis of specification of all the factors affecting costs. These may

be either standard costs or estimated costs.



2.1 Standard Cost It is a pre-determined cost which is computed from management's standards

of efficient operation and the relevant necessary expenditure, on the basis of

engineering specifications of all the factors affecting cost, in advance of

production during the period to which the standard cost is intended to relate. In

other words, it is the cost what should have been under a given set of efficient

operating conditions. It is used by a firm having standard costing system, e.g.

Cost of Standard Material to be consumed, Cost of Standard Labour to be

incurred.

2.2 Estimated

Cost

It is a pre-determined cost which is computed in advance before the production

starts, on the basis of past actual costs adjusted for anticipated future changes. In

other words, it is the cost what it will be. It is used by a firm having historical cost

system, e.g. Cost of actual material to be consumed in the year 2011 = Cost of actual

materials consumed in the year 2010 plus 5% (say) for anticipated increase in

material prices in the year 2011.

SPECIAL COSTS USED FOR MANAGERIAL DECISION MAKING

1. Relevant

Costs

These are those future costs which differ under different alternatives. These

can be changed by the decision of the management, e.g. In case of a decision

relating to the replacement of an old machine, dismantle cost of an old

machine is a relevant cost.

2. Irrelevant

Cost

These are those costs which are not relevant. These cannot be changed by the

decisions of the management, e.g. In case of a decision relating to the

replacement of an old machine, written down value of old machine is irrelevant

cost.

3. Sunk Costs These are the historical or past costs incurred by a past decision. Since sunk

costs cannot be changed by later decision, these are not relevant for decision-

making, e.g. In case of a decision relating to the replacement of an old machine,

written down value of old machine is sunk cost.

4. Shut-down

Costs

These are those fixed costs which continue to be incurred even when a plant is

temporarily shut down. e.g. Rent, insurance and depreciation of Building.

5. Out of Pocket

Cost [June 2009]

These are those costs which involve cash outlay. These can be avoided or saved.

These are used in decisions relating to fixation of selling price during

depression, make or buy etc. e.g. Wages of workers, purchase of Materials,

Rent & Insurance of Building.

6. Opportunity

Costs [May 2008,]

[June 2009]

It is the cost of next best alternative. It is the value of sacrifice made in accepting

an alternative course of action, e.g. Likely Rent of owned building proposed to

be used for a new project.



7. imputed Costs

[Nov 2009]

These are the notional costs which do not involve any cash outlay. There costs

are similar to opportunity costs, e.g. Rent of owned building. Interest on owned

capital.

8. Differential Costs

[May 2008,

May 2010]

It is the increase or decrease in total cost (variable & fixed) due to change in

activity level, technology, process or method of production etc. It is termed as

incremental cost when the cost increases and as decremental cost when the

cost decreases, e.g. Total cost under alternative I = Rs 1, 00,000, Total cost under

alternative II = Rs 1, 20,000 Differential cost = Rs 20,000.

9. Marginal Cost It is the amount at any given volume of output by which aggregate costs are

changed if the volume of output is increased or decreased by one unit. In

practice this is measured by the total variable cost attributable to one unit. e.g.

Direct Material Cost Rs 400, Direct Labours Cost Rs 300, Direct Expenses Rs 200,

variable Overhead Rs 100, Marginal Cost is Rs 1,000.

10. Replacement

Cost

It is the cost at which an asset identical to that which is to be replaced, could be

currently purchased. In other words, it is the current purchase price of an

identical asset, e.g. An old machine purchased for Rs 1,00,000 in the year 2,000

is to be replaced in the year 2005 by a new machinery of the same type which

could be purchased for Rs 2,00,000. Here replacement cost of old machine is Rs

2, 00,000.

11. Conversion Cost It is the cost of converting a raw-material into a finished product. It is the

aggregate of direct labour cost, direct expenses and production overheads. e.g.

Direct Material Cost Rs 400, Direct Labour Cost Rs 300, Direct Expenses Rs 200,

Production overheads Rs 100, Conversion Cost is Rs 600.

12. Committed

Costs

These are those costs which cannot be avoided in the short run once the

decision to incur them has been taken, e.g. Depreciation of plant & equipment.

13. Discretionary

Costs [Nov 2009]

These are those costs which can be avoided by managerial decisions. e.g.

Advertising costs, Research & Development Costs.

14. Engineered

Costs [May 2010]

Engineered costs are costs that result specifically from a clear cause and effect

relationship between inputs and outputs. The relationship is usually personally

observable. Examples of inputs are direct material cost, direct labour cost.

Examples of output are car, computer etc.

CHAPTER 2 ACCOUNTING FOR MATERIAL COST

Material Control Material Control involves the planning, organizing and controlling the

procurement, storage and usage of materials so as to achieve the objectives of

efficiency and economy.



ABC Analysis

[May 2008]

ABC analysis is a system of inventory control. It exercises discriminating control

over different items of stores classified on the basis of the investment involved.

It is based on the principle of management by exception i.e. concentrate more

on critical areas than others. Re-order Quantity

or Economic order

Quantity (EOQ)

Re-order quantity is the quantity for which order is placed when the stock

reaches re-order level. It is known as economic order quantity when it is the

quantity which is most economical to order. The E OQ refers to the quantity of

inventory, at which total of ordering costs and the carrying costs is minimum. At

EOQ the ordering costs are equal to carrying costs. Maximum Stock

Level

Maximum Stock Level is that level of stock above which the stock in hand should

not normally be allowed to exceed. It is the largest quantity of a particular

material which may be held in the store at any time.

Minimum Stock

Level

Minimum Stock Level is that level of stock below which the stock in hand should

not normally be allowed to fall. It is the lowest quantity of a particular material

which must be held in the store at all times.

Re-order Level Re-order level is that level of stock at which fresh order should be placed for

replenishment of stock. It is fixed somewhere between maximum and minimum

levels in such a way that fresh supplies are received in such a way that fresh

supplies are received just before the minimum level is reached. It is the level at

which purchase requisition should be made out for fresh supplies.

Average Stock

Level

Average Stock Level indicates the average stock held by the organization.

Danger Level Danger level is the level at which normal issues of the raw material inventory

are stopped and emergency issues are only made on special requisition

approved by the competent authority. When stock reaches this level an urgent

action is required for the fresh supplies of materials. It is generally below the

minimum level. However some enterprises treat minimum level as danger level

whereas some others fix the danger level above the minimum level but below the

re-order level. Fixing danger level below the minimum level is meant for taking

urgent corrective action whereas fixing it above the minimum level is for

preventive action.

Inventory Turnover

Ratio

Inventory Turnover Ratio is one of the techniques of inventory control. It

expresses the relationship between the cost of material consumed and the

average stock held.



Just in time (JIT)

Purchasing

Meaning Just in time purchasing means purchase when requires only or

purchase immediately before use. C defines JIT purchasing as "matching receipts

of materials closely with usage so that raw materials inventory is reduced to near

zero level."

Objective The main objective of JIT purchasing is to minimize the carrying costs,

storage costs, material handling costs, spoilage, obsolescence etc.

Purchase

Requisition

Purchase Requisition is a written document prepared by the department

requiring material which is used to make a formal request to the purchase

department to purchase the materials specified therein.

Purchase Order Purchase order is a written document prepared by the purchase department

which authorizes the supplier to supply the specified quantity of materials of

specified quality at specified price on terms specified therein.

Material

Requisition

Material Requisition is a document which is used to authorize and record the

issue of materials from the store.

Bill of Materials

(Material

Specification List)

Bill of Materials is a list of standard quantities of all materials required for a

particular job or work order or a process.

Two Bin System or

Double System

[Nov 2009]

Under Two Bin System each bin is divided into two parts-one smaller part, to

store the quantity equal to the minimum stock or even the re-ordering level, and

the other to store the remaining quantity.

Periodic Inventory

System

Periodic Inventory System is a system of ascertaining the quantity and value of

inventory on the basis of an actual physical count or measure or weight of all the

inventory items on hand at the end of accounting period. It usually requires

closing down of normal functioning for stock- j taking. The cost of materials

issued is calculated as a residual figure (which may include cost of materials lost

also) as under:

Cost of Materials issued

= Opening Inventory + Purchases - Closing Inventory

Perpetual

Inventory System

Perpetual Inventory system is a system of recording stores balances after every

receipt and issue, to facilitate regular checking and to obviate closing down for

stock-taking. It requires use of perpetual inventory records (i.e. Bin Card and

Stores Ledger) and Continuous Stock Taking.



Bin Card or Stock

Card

Bin Card consists of two terms 'Bin and Card'. Bin refers to an almirah, a rack,

box, container or space where materials are kept. A separate bin is maintained

for each item of material and is assigned an identification number. A card is tied

to or placed outside each bin to record the quantity of materials received,

issued, returned and in hand in the bin. This card is called bin card or stock card.

This card also contains particulars regarding maximum level, minimum level,

reorder level, Bin no, name and code of material, location and stores ledger

folio.

The basic objective of Bin Card is to provide a continuous record of the quantity

of materials received, issued, returned and in hand.

Stores Control

Card or Stores

Control Card

Stores Control Card is a quantitative record which is maintained by stores

department for each item of material to record the quantity of materials

received, issued, returned, in hand and on order. These cards are kept at one

place in cabinets or trays or loose binders. This card also contains particulars

regarding maximum level, minimum level, reorder level, Name and Code number

of material, location, Bin No. and Stores Ledger Folio. The basic objective of

Stores Control Card is to provide a record of the quantity of materials received,

issued, returned, in hand and on order at one place.

Stores Ledger Stores Ledger is a subsidiary ledger in which a separate account is opened for

each item of materials in the store to record both the quantity and cost of the

materials received, issued, returned and in hand. The basic objective of stores

ledger is to provide a continuous record of both the quantity and cost of the

materials received, issued, retuned and in hand.

Material Abstract

(Material Issue

Analysis Sheet)

CIMA, London defines Materials Abstract as "a document which is classified

record of material issues to, returns and transfers from various jobs or work

orders.

The basic objective of Material Abstract is to ascertain the material cost of each

job or process.

Purchases Journal Purchases Journal is book which may be maintained by Cost Accounting

Department to record the quantity and cost of various materials purchased in

order to facilitate posting in the Stores Ledger Control Account.



Base Stock

Method

(a) The Base Stock Method proceeds on the assumption that a minimum

quantity of inventory must be held at all times to use in case emergency

arises.

(b) Such minimum quantity of inventory is known as Base Stock-

(c) Base Stock is valued at the cost at which it is acquired and remains

unaffected by subsequent price fluctuations.

(d) Base Stock is carried forward as a fixed asset. The stock in excess of base

stock is valued in accordance with some other method like FIFO, LIFO,

Weighted Average etc.

(e) Its advantages and disadvantages will depend upon the use of the other

method viz. FIFO or LIFO or any other method.

MATERIAL LOSSES

Waste It represents that portion of basic raw materials, which is either lost or which

evaporates or shrinks during a manufacturing process and which has no recoverable

value. It may be visible (e.g. residue of basic raw-materials) or invisible (e.g.

disappearance of basic raw-material through evaporation, smoke etc.

Scrap It is the incidental material residue from certain types of manufacturing processes

usually of small amount and low value, recoverable without further processing. It is

always visible. For example: Scrap of Metals on account of turnings, borings, trimmings

etc.

Spoilage Spoilage is that portion of production which cannot be rectified economically and

which is to be disposed off without further processing. It involves not only the loss of

materials but also of labour and overheads incurred up to the stage where the spoilage

has occurred. It may be normal or abnormal.

Defectives Defectives represents that portion of production which can be rectified by the

application of additional materials, labour and overheads and brought into saleable

condition either as first or second. For example, there may be duplication of some

pages or omission of some pages in book published by a publisher. Defectives may be

normal or abnormal. Defectives are generally treated in two ways : either they are

brought up to the standard by incurring further costs on additional material and labour

where ever possible or they are sold as inferior products (seconds) at lower prices.



CHAPTER 3 ACCOUNTING FOR LABOUR COST

Time Study Time study is a technique which is used to measure the time that may be taken by a

workman of reasonable skills and ability to perform various elements of the tasks

in a job. Motion Study Motion study is a technique which involves close observation of the movements of

body and limbs required to perform a job.

Job Analysis Job analysis is a process, of gathering, analyzing and synthesizing information

regarding the operations, duties and responsibilities of a specific job. There are

two major aspects of job analysis- Job description and Job Specification.

Job Description Job description is a statement of the duties and responsibilities of a specific job. It

contains information —

(a) What is to be done; (b) How is to be done; (c) Why is to be done; Basically, it is a

summary of contents of a job itself without any reference to names of workers to be

associated with the job or the work to be assigned to a particular individual.

Job Specification Job specification is a statement of minimum qualities which a person should

possess to perform the job effectively. The job specification may relate to—

(a) Aptitude and abilities

(b) Personality and related characteristics

(c) Educational qualifications and training

(d) Experience

(e) Physical and mental requirements

(f) Decision making and judgment

Job Evaluation Job Evaluation is the comparative assessment of relative worth of jobs in a job

hierarchy of an organization on the basis of nature and requirement of different

factors required to perform various jobs.

Merit Rating Merit Rating rates the individual merits of a job holder on the job. It is the

quantitative or qualitative assessment of an employee's personality or his

performance on the job made by his supervisor or any other competent person.

Time Keeping Time keeping is a system of recording the arrival and departure time of each

worker.

Time Booking Time Booking is a system of recording the time spent by each worker on various

jobs, orders or processes.

Casual workers

Outworkers

Casual Workers are those who are not on the pay-roll of the factory but are

engaged casually whenever there is extra load in the factory or whenever a regular

worker is absent because of any reason.

Outworkers are those who work outside the factory premises and may be put

under two categories (i.e. on Payroll and Not on Payroll)



Pay-Roll

Accounting

Pay- Roll accounting is that part of financial accounting which is concerned with-

(a) the computation of gross wages and deductions from gross wages with a

view to ascertain net wages payable to each employee during a particular

period, and

(b) the preparation of Pay Roll (or Wage Sheet) and Pay Slip at periodic

intervals (say weekly or monthly)

Pay slip Pay Slip is a periodic statement which is prepared for each worker individually It

shows-

(a) Gross wages earned by him,

(b) Deduction from gross wages, and

(c) Net wages payable to him.

Wages Abstract Wages Abstract is an analysis of wages paid to each worker during a particular

period for different jobs or work orders.

Idle Time Idle Time is that time for which payment made but no direct production/ benefit is

obtained. The question of Idle Time arises only when the payment is made on time

basis. It is calculated as follows:

Idle time = Time Recorded as per Time card - Time Booked on Job as per Job card.

Overtime

Premium or

Overtime

Wages

Overtime is an extra time over and above the normal working hours. According to

the Factories Act, 1949, a worker is entitled to overtime wages when he works for

more than 9 hours on any day or more than 48 hours in a week.

Labour

Turnover

Labour Turnover is the rate of change in the composition of labour force of an

organization due to retirement, resignation or retrenchment etc. during a

particular period. It may be defined as the number of workers left or replaced or

both in relation to the average number of workers employed during the period.

Direct

Expenses/

Chargeable

expenses

Direct expenses are expenses other than direct material or direct labour, which

can readily identify or linked with the cost centre.



CHAPTER 4 ACCOUNTING FOR OVERHEADS

Overhead Overhead is the aggregate of indirect materials cost, indirect labour cost and

indirect expenses which cannot be conveniently identified with and directly

allocated to a particular cost centre or cost object in an economically feasible way. It

is also known as indirect cost, burden or on cost.

Classification of

Overheads

Classification of overheads is the process of grouping the various items of overheads

into distinct class/group on the basis of some common characteristics.

Collection of

Overheads

Collection of overheads means the collection of various items of overheads under

suitable account heading and a unique Standing Order Number (S.O.N.) or Cost

Account Number (C.A.N.).

Standing Order

System

The production overheads are usually collected through a system of standing order

numbers. Standing order system is a system under which a distinct number is

allotted to each item of cost for the purpose of identification.

Cost Account

Number (C.A.N.)

Generally S.O. numbers are used to refer to various items of production overheads

and Cost Account Numbers (C.A.N.) are used to refer to various items of

administration and selling & distribution overheads.

The method of allotment of numbers is the same in both the cases. Departmentalizat

ion of Overheads

Departmentalization of overheads is the process of allocation and apportionment of

overheads to various departments. It is the next step after collecting the overheads

under various standing order numbers.

Secondary

Distribution of

Overheads

Secondary distribution of overheads means the apportionment of overheads of

service departments among the production departments on some suitable basis.

Capacity of Plant Capacity of a plant refers to its ability to produce with the available present

resources and facilities. It may be expressed in terms of

(a) Units of product {for example, 100 cars per day, 1000 tonne coal

per day)

(b) Production Hours (for example, 100 hours per day)

(c) Value in rupee (for example, total direct wages Rs 40,000 per day

hence capacity is Rs 40,000 per day)

Maximum

Installed

Capacity/Rated

Capacity

It refer to the maximum possible production capacity of a plant as indicated by its

manufacturer, which can be achieved only under perfect conditions i.e., when there

is no loss of operating time. Due to normal loss of operation time, it can never be

achieved in practice and it becomes merely a theoretical capacity.

Example A plant can work 8 hours per day.

Here, Maximum capacity = 365 days x 8 = 2,920 hours



Practical

Operating

Capacity

It refers to the maximum possible productive capacity of a plant less capacity to be

lost due to normal reasons such as Normal repairs, Normal maintenance, Normal

delays, Sundays, Holidays, Stock taking etc. Thus,

Practical capacity = Maximum capacity - Normal loss of capacity

Example A plant can work 8 hours per day during a six day week and remains

closed for 18 holidays (exclusive of Sundays) during a year. Average idle hours per

month is 20 for cleaning and maintenance. Here, practical capacity is calculated as

under:

(i) Maximum capacity (365 days x 8 hours) 2,920 hours

(ii) Less: Idle capacity due normal reasons:

Sundays (52 x 8) 416 hours

Holidays (18x8) 144 hours

Maintenance (20 x 12) 240 hours 800 hours

2,120 hours

Normal Capacity It refers to the long-term average of the capacity based on sales expectancy. It is

expected to be utilized over a long period based on sales expectancy. Its

determination considers the average utilization of plant capacity during one full

business cycle which may extend over 3 to 5 years and ignores the abnormal year(s).

Example 1. Normal sales expected 12,000 pieces, Rate of Production per hour 6,

Here, Normal Capacity = 12,000/6 = 2,000 hours.

Example II. Practical Capacity is 32,400 hours and Actual Capacity during the last 5

years was: I 30,000 II 38,000, III 31,000 IV 30,800, V 26,900. Here year II being two

high and Year V being too low are to be ignored. Hence, Normal Capacity = (30,000 +

31,000 + 30,800) = 30,600 hours.

Capacity based

on Sales

Expectancy

It refers to the capacity to be utilized on the basis of expected sales.

Actual Capacity It refers to the capacity actually achieved during a given period. It may lie between

practical capacity and capacity based on sales expectancy.

Example Actual Production 10,800 pieces, rate of production per hour 6, Here,

Actual capacity = 10,800/6 = 1800 hours.

Idle Capacity Idle capacity refers to that part of practical capacity which can not be utilized due to

abnormal reasons like lack of product demand, shortage of raw-materials, shortage

of labour, shortage of power etc. Idle capacity can be calculated as follows:

Idle Capacity = Practical Capacity - Actual capacity

or = Normal Capacity - Actual capacity

or = Practical Capacity - Capacity based on sales expectancy



CHAPTERS 5 UNIT COSTING

Unit Costing Unit costing is a form of process costing under which costs are accumulated and

analyzed under various elements of costs and the cost per unit is ascertained by

dividing the total cost by the number of units produced.

Production

Statement

Production Statement is a statement which shows:

(a) Different components of total cost (say Prime Cost, Factory Cost,

Cost of Goods produced)

(b) Opening and Closing Stocks of Finished Goods

(c) Sales

(d) Profit

CHAPTER 6 JOB, BATCH AND CONTRACT COSTING

Job Ticket Job ticket is document which contains of several detachable portions each of

which is detached and sent by the foreman to the Production Control Department

on completion of each operation of a job.

Cost plus

Contract

[Nov 008]

Cost plus contract refers to that contract under which the contract price is

ascertained by adding a fixed percentage of profit to the cost of the contract.

Escalation Clause Escalation clause in a contract provides that if during the period of execution of a

contract, the prices of materials, rates of labour etc. rise beyond a specified limit,

the contract price will be increased by specified rate or amount.

How to calculate

Escalation Claim

Escalation claim so far as rates are concerned may be calculated as follows:

For Material = Standard Quantity x (Actual Price - Standard Price)

For Labour = Standard Labour x (Actual Rate - Standard Rate)

Increase in costs

not covered by

Escalation Clause

Escalation clause does not cover that part of increase in costs which is caused due

to inefficiency or wrong estimation.

De-escalation

Clause

Conversely, de-escalation clause may also be provided for the downward

adjustment of the contract price in case the prices of materials, rates of labour

etc. fall beyond a specified limit.



CHAPTER 8 PROCESS COSTING ll-WIP

Production

Units

Represent the notional quantity of completed units substituted for an

actual quantity of incomplete units. In other words, equivalent production

units represent incomplete production units expressed in terms of

equivalent completed units.

Equivalent production units are computed as follows:

= No. of Incomplete Units x Percentage of Completion

Tutorial Note: Equivalent production units should be calculated separately

for each element of cost (viz. Material, Labour and Overheads) because the

percentage of completion with regard to different elements of cost may be

different.

CHAPTER 9 JOINT PRODUCTS AND BY PRODUCTS

Joint Products Joint products represent two or more products of almost equal importance which

are produced in natural proportions simultaneously from the same material in

the same process. These products may be saleable without further processing or

after further processing.

Co-products Co-products represent two or more products which are contemporary but are

not necessarily produced in natural proportions from the same material in the

same process. For example, wheat and grain produced in two separate farms with

separate processing of cultivation. Similarly, timber boards made from different

trees are Co-products.

Split off Point Split off point or Separation point refers to that stage in the manufacturing

process at which the products get separated and become separately identifiable.

By-products By-products are products of relatively small value which emerges incidentally in

the course of manufacturing the main product.

CHAPTER 10 OPERATING COSTING (SERVICE COSTING)

Simple Cost Unit A cost unit is said to be simple cost unit when only one cost unit is used.

For Example:

Undertaking Cost Unit

1. Transport per kilometer

2. Canteen per item, per meal



3. Water per 1000 litres Composite Cost

Unit

A cost unit is said to be composite cost unit when two units are merged into one.

For example:

Undertaking Cost Unit

1. Passenger Transport per passenger - km

2. Goods Transport per tonne - km

3. Hotel per room per day

4. Hospital per bed per day

5. Electricity per kilowatt hour

CHAPTER 11 INTEGRAL AND NON-INTEGRAL SYSTEMS

Integral &

Non-Integral

System

Non-integral system is a system of accounting under which two separate sets of

account books are maintained — one to record cost transactions and the other

to record financial transactions. It is also known as non-integrated system or Inter-

locking system or Cost Ledger Accounting system.

Accounts Control Accounts are the total/summary accounts which are—

(i) maintained for the subsidiary ledgers in the Cost Ledger under non-integral

system,

(ii) Prepared on the basis of periodic total of transactions in the respective

subsidiary ledgers.

Integral

System

Integral System is a system of accounting under which only one set of account

books is maintained to record both the cost and financial transactions. It is also

known as integrated system.

CHAPTER 12 RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

Reconciliation

Statement

Reconciliation Statement is a statement which reconciles the profit/loss as per

Cost Accounts with the profit/loss as per Financial Accounts by showing all causes

of differences between the two. It is needed in case of Non-Integral System of

Accounting.

Memorandum

Reconciliation

Statement

(a) Memorandum Reconciliation Account is basically presentation of

Reconciliation Statement in 'T Account Form.

(b) It is not part of double entry system because all items posted in this

account do not have their corresponding debits/credits in the books of

accounts.



IMPORTANT DISTINCTIONS

1. DISTINCTION BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

Financial Accounting differs from Cost Accounting in the following respects:

Basic of Distinction Financial accounting Cost accounting

1. Objective Its objective is to provide

information about overall financial

performance and financial position

of the business.

Its objective is to ascertain cost, to

control cost and to provide

information for decision-making.

2. Analysis of costs

and profit

It shows the overall profit/loss of

the entire organization.

It shows the detailed cost and profits

for each product, process, job,

contract, etc.

3. Emphasis—

Control/

Repotting

Its emphasis is on reporting and

not on control.

Its emphasis is on control- control on

material cost, labbur cost and

overheads.

4. Decision-Making Financial accounts are of limited

use in decision-making.

Cost accounts are basically designed

to facilitate decision making in the

areas of production, purchase, sales,

etc.

5. Responsibility

fixation

Financial accounts do not offer any

effective help in responsibility

fixation because various expenses

are not identified as controllable

and non-controllable.

Cost accounts effectively help in

responsibility fixation- Responsibility

centres are created on the basis of

controllability of cost. Thus, they also

facilitate delegation of authority.

6. Focus on

present/Future

Its focus is on historical data. Its focus is on present and future

data- It makes use of both the

historical costs and pre-determined

costs.

7. General vs

Special reports

It generates general purpose

reports like Income Statement,

Balance Sheet, and Cash Flow

Statement.

It generates special purpose reports

like Report on Defectives, Report on

Spoilage, Idle Time Report.

8. Legal

requirements

Financial accounts of companies

have to meet requirements of the

Companies Act and the Income Tax

Act.

Preparation of cost records is

voluntary, except in a few cases

where the law makes it

mandatory.



9. Transactions

recorded

It mainly records external

transactions with outsiders, like

purchase of materials.

It records both external and internal

transactions (like issue of material by

store to production department,

transfer of material from one job to

another).

10. Persons

interested

Virtually the whole world is

interested in financial information

the top management, workers, the

shareholders, lenders, prospective

investors, the government.

Usually internal management at

different levels is interested in

costing information.

11. Format of

presenting

information

It usually uses an uniform format

for presenting financial

information.

It uses different formats for

presenting cost information to meet

the needs of management.

12. Access Anybody can have access to

financial statements of companies.

Outsiders generally have no access to

cost records.

13. Monetary/ Non-

monetary

information

Only monetary information is

recorded in financial records.

Both kinds of information

(monetary and physical) are recorded

in cost records.

2. DISTINCTION BETWEEN COST ASCERTAINMENT AND COST ESTIMATION

Basis of Distinction Cost Ascertainment Cost Estimation

1. Cost Estimation Cost ascertainment is the process

of determining actual costs after

there have been incurred.

Cost estimation is the process of

determining future costs in advance

before production starts, on the basis

of actual past costs adjusted for

anticipated future changes.

2. Recording in

Books

Actual costs are recorded in the

books of accounts.

Estimated Costs are not recorded in

the books of accounts.

3. Preparation of

Budget

Actual costs are not used in the

preparation of budgets.

Estimated Costs are used in the

preparation of budgets

4. Price Quotations Actual costs cannot be used in for

making price quotations.

Estimated Costs are used in making

price quotations

5. Cost Control Actual costs are not useful for Cost

Control.

Estimated costs are useful for

cost control.



3. DISTINCTION BETWEEN COST CONTROL AND COST REDUCTION

Basis of Distinction Cost Control Cost Reduction

Meaning Cost Control is defined as the "the

guidance and regulations by

executives action of the cost of

operating and undertaking." Cost

Control implies that cost should not

exceed the budgeted or standard

limits. If it exceeds, investigation is

necessary.

Cost Reduction is 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." Cost reduction

means waste reduction, expenses

reduction and increased production.

Objective Its main objective is to control the Cost

so as not to exceed the budgeted or

standard limits.

Its main objective is to achieve real

and permanent reduction in the unit

cost of goods manufactured or

services rendered without impairing

their suitability for the use intended.

Assumption It assumes the existence of standards. It assumes the existence of concealed

potential savings in the standards.

4. DISTINCTION BETWEEN DIRECT MATERIAL AND INDIRECT MATERIAL

Direct Material differs from Indirect Material in the following respects:

Basis of

Distinction

Direct Material Indirect Material

1. Identification It can be readily identified with a

specific job, contract or work order.

It cannot readily be identified with a


2. Treatment of Cost Direct Material cost is directly

charged to the specific job, contract

or work order and forms part of

prime cost.

Indirect Material cost cannot directly

be charged to the specific job,

contract or work order and is treated

as part of overheads which are

absorbed on some suitable basis. 3. Variability It varies directly with the volume of

output.

It may or may not vary directly with

the volume of output.

Note: Distinction is relative to each particular firm or industry since material which is direct in one unit

may be indirect in another unit due to difference in the nature of work, process or method.

5. BASIC DIFFERENCE BETWEEN MATERIAL REQUISITION AND BILL OF MATERIALS

1. Material Requisition is prepared when a single or a few items of materials are requisitioned

whereas a Bill of Materials is prepared when all the materials required for a particular job are



requisitioned.

2. Material requisition is prepared by foreman whereas Bill of Materials is prepared by Engineering

Department.

6. DISTINCTION BETWEEN PERPETUAL INVENTORY SYSTEM AND CONTINOUS STOCK TAKING

Basis of Distinction Perpetual Inventory

System

Continuous Stock Taking

1. Meaning It is a system of recording stores

balances after every receipt and issue

of materials.

It is a physical verification of a number

of items daily or at frequent intervals.

2. Emphasis Its emphasis is on recording book

balances.

Its emphasis is on the physical

verification of recorded book balances

with the actual physical balances.

7. DISTINCTION BETWEEN PERIODIC INVENTORY SYSTEM AND PERPETUAL INVENTORY SYSTEM

Periodic Inventory System differs from Perpetual Inventory System in the following respects:

Basis of

Distinction

Periodic Inventory

System

Perpetual Inventory

System

1. Basis of

Ascertaining

Inventory

Inventory is ascertained on the basis

of an actual physical count/

measure/weight.

Inventory is ascertained on the basis

of records.

2. Calculation of

Inventory

Inventory is directly calculated by

applying the method of valuation of

inventories like FIFO, LIFO.

Inventory is calculated as a residual

figure as under:

Closing Inventory = Opening

Inventory + Purchases - Cost of Goods

sold 3. Calculation of

cost of goods

sold

Cost of Materials issued is

calculated as a residual figure as

under:

Cost of Materials issued = Opening

Inventory + Purchases - Closing

Inventory

Cost of Materials issued is directly

calculated by applying the method of

valuation of inventories.

4. Lost Goods Cost of Materials issued may include

Cost of Materials lost (if any).

Inventory may include Cost of

Materials lost (if any}.

5. Closing Down of

Work for Stock

taking

It requires closing down of work for

stock taking.

It does not require closing down of

work for Stock taking.

6. Continuous Stock

Checking

It does not facilitate the continuous

stock checking.

It facilitates the continuous

stock checking.

7. Simplicity and It is simple and inexpensive. It is elaborate and expensive.



8. DISTINCTION BETWEEN BIN CARD AND STORES MATERIAL CONTROL CARD

Bin Card differs from Stores Control Card in the following respects:

Basis of

Distinction

Bin Card Stores Control Card

1. Materials on

order

It does not show materials on order. It shows the materials on order.

2. Where kept? It is kept outside each bin. It is kept at one place in cabinets or

trays or loose binders.

3. Who writes? It is written by person handling

materials.

It is written by person solely

engaged in clerical work.

4. Condition of

Record

It is likely to be smeared with dirt

and grease because of proximity to

materials.

It is kept in neat and clean way.

5. Physical

Identification

It facilitates an easy physical

identification of an item of materials

because of proximity to materials.

It does not facilitate an easy physical

identification of an item of materials

because of no proximity to materials.

6. Physical

verification

It facilitates on the spot

comparison of physical stock of an

item with its book balance as shown

by Bin Card because of proximity to

materials.

It does not facilitate on the spot



by ledger because of no proximity to

materials.

7. Chances of

Errors

These would be less chances of error

because entries are made at the

same time as goods are received or

issued by the person handling the

materials.

There may be chances of errors

because entries are made later on by

the person other one who is handling

materials.

9. DISTINCTION BETWEEN BIN CARD AND STORES LEDGER.

Bin Card differs from Stores Ledger in the following respects:

Basis of

Distinction

Bin Card Stores Ledger

1. What it

records?

It records only the quantity of

material received, issued and in

hand.

It records both the quantity and value

of materials received, issued and in

hand.

2. Who maintained? It is maintained by storekeeper. It is maintained by cost department.

3. Periodicity of

posting

Posting in bin card is done

simultaneously with the receipts

and issues of materials.

Position in the stores ledger is usually

done after the transaction at periodic

intervals.



4. Where kept? It is kept outside the bin in store. It is kept outside the store generally in

costing department.

5. Main Advantage It is likely to be smeared with dirt and

grease because of proximity to

materials.

It facilitates the ascertainment of cost

of materials consumed and cost of

materials in hand.

6. Condition of

Record

It is written by person handling

materials

It is kept in neat and clean way.

7. Who writes? It does not enable stock records to be

centralized.

It is written by person solely engaged

in clerical work.

8. Centralization It facilitates an easy physical

identification of an item of material

because of proximity to materials.

It enables stock records to be

centralized.

9. Physical

Identification

It facilitates on the spot



by Bin Card because of proximity to

materials.

It does not facilitate an easy physical

identification of an item of material

because of no proximity to materials.

10. Physical

verification

It does not facilitate on the spot


item with its book balance as shown by

Stores Ledger because of no proximity

to materials.

10. DISTINCTION BETWEEN FIFO AND LIFO METHOD OF VALUATION OF INVENTORY

FIFO Method of Valuation of inventory differs from LIFO Method in the following respects:

Basis of

Distinction

FIFO LIFO

1. Basic

Assumption

Goods received first are issued first. Goods received last are issued first.

2. Cost of Goods

Sold

Cost of goods sold represents cost of

earlier purchases.

Cost of goods sold represents cost of

recent purchases.

3. Ending

Inventory

Ending inventory represents cost of

recent purchases.

Ending inventory represents cost of

earlier purchases.



4. in case of Rising

Prices

Higher income is reported since old

costs (which are lower than current

costs) are matched with current

revenue. As a result, income tax

liability is increased.

Lower income is reported since

current costs (which are higher than

the old costs) are matched with

current revenue. As result, income

tax liability is reduced.

5. Distortion in

Balance Sheet

Balance Sheet shows the ending

inventory at a value nearer the

current market price.

Balance Sheet is distorted because

ending inventory is understated at old

costs.

11. BASIC DIFFERENCE BETWEEN WASTE AND SCRAP

1. Scrap is always visible whereas waste may be visible or invisible (e.g. disappearance of basic raw-

materials through evaporation)

2. Scrap has always recoverable value but waste has no recoverable value.

12. BASIC DIFFERENCES BETWEEN SCRAP AND SPOILAGE

1. Scrap involves loss of materials only while spoilage involves not only the loss of materials but also

of labour and overheads incurred upto the stage where the spoilage has occurred.

2. Scrap has relatively low value but the value of spoilage may vary from low (when it could be sold like

scrap) to high (when it could be sold as seconds)

3. Scrap always arises as a result of the processing of materials while spoilage occurs due to defect in

materials or manufacturing process.

13. BASIC DIFFERENCE BETWEEN SPOILAGE AND DEFECTIVES

The basic difference between spoilage and defectives is that spoilage cannot be rectified and is to be

sold as it is but defectives can be rectified by incurring additional material, labour and overhead costs.

14. DISTINCTION BETWEEN DIRECT LABOUR AND INDIRECT LABOUR

Direct labour differs from indirect labour in the following respects:

Basis of Distinction Direct Labour Indirect Labour

1. Identification It can be readily identified with a


It cannot readily be identified with a


2. Treatment Direct labour cost is directly cost

charged to the specific job, contract

or work order and forms part of

prime cost.

Indirect labour cost cannot directly

be charged to the specific job,

contract or work order and is treated

as part of overheads which are

absorbed on some suitable basis.

3. Variability It varies directly with the volume of

output.

It may or may not vary directly with the

volume of output.

Note: Distinction is relative to each particular firm or industry since labour which is direct in one unit may



be indirect in another unit due to difference in the nature of work, process or method.

15. DISTINCTION BETWEEN TIME STUDY AND MOTION STUDY

Time Study and Motion Study can be distinguished as follows:

Basis of

Distinction

Time Study Motion Study

1. Meaning It is a technique which is used to

measure the time that may be taken

by a workman of reasonable skills

and ability to perform various

elements of the tasks in a job.

It is a technique which involves close

observation of the movements of

the body and limbs required to

perform a job.

2. Purpose Its purpose is to determine time

normally required to perform a

certain job and a fair day's work for

the workman.

Its purpose is to detect and eliminate

wasteful motions and determine the

best way of doing a job.

3. Tools of Study It is conducted with the help of

stopwatch.

It is conducted with the help of a

movie camera connected with micro -

chronometer (i.e., a kind of clock).

16. DISTINCTION BETWEEN JOB EVALUATION AND MERIT RATING.

Job Evaluation differs from Merit Rating in the following respects:

[May 2008]

Distinction Job Evaluation Merit Rating

1. Meaning It is the assessment of relative worth

of jobs in a job hierarchy.

It is the assessment of the relative

worth of a jobholder.

2. Job vs.

Jobholder

It rates the jobs. It rates the jobholders.

3. Objective Its objective is to set up a rational

wage and salary structure.

Its objective is to provide a scientific

basis for determining fair wages for

each worker based on his ability and

performance.

4. Usefulness It helps in establishing a simplified

and rational wage and salary

structure.

It helps in determining fair wages for

each worker.



17. DISTINCTION BETWEEN TIME KEEPING AND TIME BOOKING.

Time keeping differs from Time Booking in the following respects:

Basis of Distinction Time Keeping Time Booking

1. Meaning Time Keeping is a system of

recording the arrival and

departure time of each worker.

Time Booking is a system of recording

the time spent by each worker on

various jobs, orders or processes.

2. Basic Objective Its basic objectives are to maintain

attendance record as per statutory

requirements and to provide

data for the preparation of

payroll.

Its basic objective is to ascertain the

labour Cost of a job, order or process.

3. Methods I- Manual Methods

(i) Attendance Register/

Muster Roll

(ii) Token/Disc Method

II. Mechanical Methods

Time Recording Clocks

1. Daily Time Sheet

2. Weekly Time sheet

3. Job Card (or Job Ticket)

4. Combined Time and Job Card

5. Labour Cost Card or

Circulating Job Card

6. Piece Work Card

18. DISTINCTION BETWEEN CASUAL WORKERS AND OUT WORKERS

Meaning of

Casual

Workers

Casual Workers are those who are not on the pay-roll of the factory but are

engaged casually whenever there is extra load in the factory or whenever a

regular worker is absent because of any reason.

Payment Usually casual workers are paid on daily basis.

Issue of Cards Job card is issued to casual workers falling in the category of direct labour

and Time card is issued to casual workers falling in the category of indirect

labour.

Treatment of Wages (a) Wages paid to casual workers in the nature of direct labour are treated

as direct labour cost forming part of prime cost.

(b) Wages paid to casual workers in the nature of indirect labour are treated

as production overheads.

How to exercise Control (a) Employment of casual workers should be authorised by a competent

authority other than foreman.

(b) Payment to casual workers should be made by a person other than

foreman.

(c) Surprise checks should be made to ensure the physical presence of

such workers at the work.



Outworkers are those who work outside the factory premises and may be put under the following two

categories:

on payroll 1. Workers who are on the pay-roll of the factory

(a) They are on the pay roll of the factory.

(b) They are sent at customer's premises to perform some specific duties

such as Repair work, plumber's work, Sanitary work, Electric work

etc.

(c) Job cards are usually issued to such workers to record the time

spent by them on various jobs.

Not on Payroll 2. Workers who are not on the payroll of the factory

(a) They are not on the payroll of the factory.

(b) They are supplied materials and specific tools.

(c) They use their own premises, lighting, tools etc.

(d) They deliver manufactured products.

(e) They are usually paid on piece wage system basis.

(f) Strict supervision and control is required to ensure-

(i) that all material & tools if any, issued are properly accounted for,

(ii) That tools issued if any, from the factory are returned without

undue wear and tear.

(iii) That quantity and quality of output are as per specifications given.

19. DISTINCTION BETWEEN TIME RATE WAGE SYSTEM AND PIECE RATE WAGE SYSTEM

Time Rate Wage System and Piece Rate Wage System can be distinguished as follows:

Distinction Time Rate Wage System Piece Rate Wage System

1. Basis of

Payment

A worker is paid at a fixed rate per

hour, per day or per month for the

time devoted by him.

A worker is paid at a fixed rate per unit

produced or job completed.

2. Linkage between

Performance and

Reward

There is no linkage between

performance and reward. Both

efficient and inefficient workers get

the same amount of wages so long

as they spend equal time on the

job.

The linkage between performance and

reward motivates the people to

produce more and earn more.

3. Quality Quality of work tends to be high. Quality of work tends to be low.

4. Wastage There is less chance of wastage of

materials and machinery.

There are more chances of wastage of

materials and machinery.



5. Supervision Close supervision is required. Close supervision is not required

6. Maintenance Cost of maintenance is low. Cost of maintenance is high.

7. Attitudes of Trade

Unions

Trade Unions prefer it. Trade Union opposes it.

8. Economic

Security

It provides sense of economic

security to employees.

It does not provide sense of economic

security to employees.

9. Usefulness This method is useful where a

worker has to do a variety of

dissimilar jobs or where tasks

cannot be readily measured,

inspected and counted.

This method is useful where a worker

has to do the jobs of a repetitive nature

or where tasks can be readily

measured, inspected and counted.

10. Adoption This method is adopted for

compensating clerical staff,

managers and operatives

employed in jobs which do not

require much skill.

This method is adapted for compensating

skilled and official workers who can

increase their earning by working to

their full capacity.

11. Assurance A worker is assured of his wages for

work period irrespective of his

output.

No such assurance is given.

20. DISTINCTION BETWEEN ACTUAL AND PRE-DETERMINED OVERHEAD RATE.

Basis of Distinction Actual Overhead Rate Pre-determined

Overhead Rate

1. Meaning Actual overhead rate is calcul-

ated by dividing the actual

overheads by the actual base.

Pre-determined overhead rate is

calculated by dividing the budgeted

overheads by the budgeted base.

2. Formula

3. Use of

=Actual Overheads for the period

Actual Base for the period

Actual overheads are used.

= Budgeted Overheads of the period

Budgeted Base for the period

Budgeted overheads are used.

Overheads 4. Use of base Actual base is used. Budgeted base is used.

5. When computed? It is computed after the expen-

ses have been incurred.

It is computed before the

expenses are incurred.

6. Preparation of cost

sheets

It does not facilitate the prompt

preparation of cost sheet/

It facilitates the prompt preparation

of cost sheets/quotations.

Quotations quotations.



7. Cost control It does not facilitate cost control. It facilitates cost control by

comparison of actual overheads with

predetermined overheads recovered.

21. DISTINCTION BETWEEN BLANKET OVERHEAD RATE AND DEPARTMENTAL OVERHEAD RATES

Distinction Blanket Overhead Rate Departmental Overhead

Rates

1. Meaning It is a single rate of overhead

absorption computed for the

entire factory.

There are the separate rates of

overhead absorption computed for

each individual department/ cost

centre.

2. Single vs

Multiple

Under this practice there is only a

single rate.

Under this practice there are

multiple rates.

3. Factory vs

Departmental

It is computed for the entire

factory.

These are computed for each of

the departments.

4. Suitability It is suitable where one product

is manufactured or where work

performed is more or less

uniform.

These rates are suitable where two or

more products are manufactured and

where work performed in different

departments is different.

5. Formula

Total Overheads for all

= departments/cost centres

Total Base for all

departments/cost centres

Total Overheads of a

= department/cost centre

Base for that

department/cost centre

22. DIFFERENCE BETWEEN COST SHEET AND PRODUCTION STATEMENT

Production Statement includes items of Stock of Finished Goods, Sales and Profit in addition to various

components of Total Cost whereas cost sheet includes only the various components of Total Cost.

However, in practice Production Statement is used interchangeably with cost sheet.

23. DISTINCTION BETWEEN JOB COSTING AND CONTRACT COSTING

Job Costing differs from Contract Costing in the following respects:

Basis of Distinction Job Costing Contract Costing

1. Cost Unit Each job is treated as a cost unit. Each contract is treated as a cost unit.

2. Execution of Work Job work is executed in Factory

Premises.

Contract work is executed at the site of

contract

3. Indirect Costs Indirect costs are higher than those

under contract costing.

Indirect costs are lower than those

under Job costing.



4. Pricing Pricing is influenced by individual

condition and general policy of the

organization.

Pricing is influenced by the specific

clauses of the contract.

5. Size Size of a job is smaller than that of a

contract.

Size of a contract is larger than that of a

job.

6. Number

The numbers of jobs are usually The number of contracts undertaken

are usually small.

24. DISTINCTION BETWEEN JOB COSTING AND PROCESS COSTING

Job Costing differs from Process Costing in the following respects:

Basis of Distinction Job Costing Process Costing

1. Specific orders Job is performed against specific

orders

Production is continuous.

2. Nature Each job may be different. Product is homogeneous and

standardized.

3. Cost centre The cost centre is a job. The cost centre is a process-

4. Cost

Ascertainment

Costs are collected and ascertained

for each job separately.

Cost are collected and ascertained

for each process separately.

5. When cost is

calculated?

Job costs are calculated only when

a job is completed.

Process costs are calculated at the end

of each period-

6. WIP There may or may not be work-in-

process.

There is always some work in process

because of continuous production.

7. Degree of

control

Higher degree of control is required

because of heterogeneous jobs.

Lower degree of control is required

because of homogeneous products

and standardized process.

8. Transfer There are usually no transfers from

one job to another unless there is

some surplus work.

The output of one process is

transferred to another process as

input.

25. DISTINCTION BETWEEN NORMAL PROCESS LOSS AND ABNORMAL PROCESS LOSS.

[June 2009]

Basis of Distinction Normal Process Loss Abnormal Process Loss

1. Meaning it is an unavoidable loss which

occurs due to the inherent nature

of the materials and production

process under normal conditions.

It is an avoidable loss which occurs

due to abnormal reasons like sub-

standard materials, carelessness of

workers, Machinery Breakdown.



2. Advance

Estimation

3. Form of Loss

It can be estimated in advance on

the basis of past experience of the

industry.

It may be in the form of normal

Waste/Scrap/Spoilage/

Defectives.

It cannot be estimated in advance.

It may be in the form of Abnormal

Waste/Scrap/spoilage/ Defective.

4. No. of Units of Loss No of Units of Normal Loss = Input x

Expected % of Normal Loss

No. of Units of Abnormal Loss = Input-

Normal Loss-Actual Output

5. Accounting

Treatment of

Realizable Value

Credited to Process A/c Credited to Abnormal Loss A/c

6. Accounting

Treatment of

Cost of Loss

Its cost is treated as part of cost

of production and is absorbed by

the good units produced by inflating

the cost per unit.

Its cost is not treated as part of cost of

production and is charged to Costing

P&L A/c

26. DISTINCTION BETWEEN ABNORMAL PROCESS LOSS AND ABNORMAL PROCESS GAIN.

[Nov 2009, May 2010]

Basis of Distinction Abnormal Process Loss Abnormal Process Gain/

Abnormal Effectiveness

1. Meaning It arises when Actual Loss is more

than the Expected Normal Loss

It arises when the Actual Loss is less

than the Expected Normal Loss.

2. Calculation of Units No. of units of Abnormal Loss =

Input - Normal Loss- Actual Output

No. of units of Abnormal Gain = Actual

Output - (Input -Normal loss)

3. Accounting Treat-

ment of Realizable-

Value

Credited to Abnormal Loss A/c Debited to Abnormal Gain A/c and

credited to Normal Loss A/c

4. Accounting Treat- Its cost is debited to Costing Profit &

Loss

Its cost is credited to Costing Profit &

Loss A/c

27. DISTINCTION BETWEEN JOINT PRODUCTS AND CO-PRODUCTS

Joint Products can be distinguished from Co-products in the following respects:

Basis of

Distinction

Joint Products Co-products

(a) Proportion These are produced in natural

proportions which cannot be

changed by the management.

These are not produced in natural

proportion. Proportion of such

products can be changed by the

management.



(b) Material These are produced from the same

material.

These need not necessarily be

produced from the same material.

(c) Process These are produced simultaneously

in the same process.

These need not necessarily be

produced in the same process.

(d) Importance These are of almost equal

importance.

These need not necessarily be of

equal importance.

28. DISTINCTION BETWEEN JOINT PRODUCTS AND BY-PRODUCTS

Joint Products differ from By-products in the following respects:

Basis of Distinction Joint Products By-Products

1. These are of almost equal value. These are of relatively small value.

2. Production These are produced

simultaneously.

These emerge incidentally in the

course of manufacturing the main

product.

29. DISTINCTION BETWEEN NON-INTEGRAL SYSTEM AND INTEGRAL SYSTEM

Non-integral System differs from Integral System in the following respects:

Basis of Distinction Non-integral System Integral System

1. No. of Sets of Books Two separate sets of books are

maintained - one to record cost

transactions and the other to

record financial transactions.

Only one set of books is maintained to

record both the cost transactions and

financial transactions.

2. Cost Ledger Cost Ledger is maintained. Cost Ledger is not maintained.

3. Control Accounts Control Accounts are opened in the

Cost Ledger.

Control Accounts are opened in the

General Ledger.

4. Figure of Profit/

Loss

There are two figures of profit/ loss

one as per cost books and another as

per financial books.

There is only one figure of profit/ loss

because only one set of books is

maintained.

5. Need for

Reconciliation

There is need for reconciliation of

cost accounts and financial

accounts because there are two

figures of profit/loss as there are

two sets of books.

There is no need for reconciliation

because there is only one figure of

profit/loss as there is only one set of

books.

6. Balances of

Overheads

Control A/cs

Balances of Overhead Control

Accounts which represent

under/over absorption of

overheads are transferred to

Costing Profit & Loss Account.

Balances of Overhead Central Accounts

which represent under/over

absorption of overheads are

transferred to Profit & Loss Account.



7. Economical It is expensive because of

duplication of recording the

transactions in two sets of books.

It is economical because it avoids the

duplication of recording the

transactions in two sets of books.



IMPORTANT SHORT ANSWER THEORY QUESTIONS

1. State the main Objectives of Cost Accounting. [May 2008, June 2009]

The main objectives of cost accounting are as follows:

1. To Ascertain Cost The basic objective of cost accounting is to ascertain the cost of a cost

centre (i.e., a location, person or item of equipment or group of these). Cost

ascertainment is the process of determining costs after they have been

incurred. Basically there are two methods of cost ascertainment -Job

costing and Process costing. Different industries follow different methods of

costing because of the differences in the nature of their activity.

2. To Control Cost Cost Accounting aims at controlling costs by using various techniques

such as Budgetary Control, Standard Costing, Inventory Control etc.

3. To Provide

Information for

Decision -Making

Cost Accounting aims at providing information for various

managerial decisions like -

(a) Whether to make or buy a component

(b) Whether to retain or replace an existing machine

(c) Whether to process further or not

(d) Whether to shut down or continue operations

4. To Determine

Selling Price

Cost Accounting provides cost information to determine the selling price of

products or services. During the period of depression, it guides the

management to decide 'How much reduction in selling price may be made to

meet the situation?'

5. To Ascertain

Costing Profit

Cost Accounting aims at ascertaining the costing profit or loss of any activity

on an objective basis by matching cost with the revenue of that activity.

2. State the major Limitations of Financial Accounting and how these are overcome by Cost

Accounting.

Major Limitations of Financial

Accounting

How these are overcome by Cost

Accounting

1. Financial Accounting does not provide the

information required by management for forecasting

and planning.

The technique of budgeting enables the

management to perform the function of

forecasting and planning.


information required by management for decision--

making in various areas such as make or buy, shut

down or continue, retain or replace etc.

The technique of marginal costing enables

the management to perform the function of

decision-making.




information required by the management for

control and assessment of the performance of

various costs and responsibility centres.

The techniques of budget and standard

costing enable the management to

perform the function of control and

assessment.

3. State the main Factors to be Considered before installing a costing system [Nov 2009]

1. Nature of business The costing system designer should consider the general nature of

business to determine its suitability.

2. Objective The designer should consider what is the objective of costing system?

Whether to fix selling prices or control cost or both.

3. Organization

structure

Organization structure should be studied to determine the manner in

which costing system could be introduced without altering or extending

the organization appreciably.

4. Technical aspects Technical aspects should be studied thoroughly by the designer.

5. Layout aspects The size and layout of the organization should be studied.

6. Methods and

procedures

7. Methods of Wage

Payment

Existing methods and procedures for the purchases, receipts,

inspection, storage, issue, return or transfer of materials should be

studied.

Existing methods of wage payment should be studied.

8. Standardization of

Forms

Various forms to be used by costing system should be standardized as

far as possible.

9. Accuracy The degree of accuracy desired should be determined.

10. Simplicity The system should be easy to understand and simple to operate.

11. Economical The system should be economical to install and operate.

12. Flexibility The system should be flexible to adopt the changing requirements of

the business.

13. Method of

Maintenance of

Cost Records

The method of maintenance of cost records should be determined. It

should be decided whether to have integral accounting system {i.e., one

set of books for cost and financial transactions) or non-integral

accounting system (i.e., separate sets of books for cost and financial

transactions).

14. Extent of details The extent of details in which cost information is required, should be

determined.

15. Fields of Cost

Control

The various fields where cost control is to be exercised should be

determined.



16. Manner of creating

awareness

The manner in which awareness may be created for the benefits of

costing system, necessity of promptness, frequency and regularity in

collection of costing data should be determined.

4. State the Essentials of a Good Cost Accounting System. [May 2008, June, 2009, May 2010]

The essential features of a good cost accounting system are as follows:

1. Suitability The cost accounting system should be suitable to the nature of business.

2. Tailor made System It should be tailor made to meet the requirements of the business.

3. Simplicity It should be easy to understand and simple to operate.

4. Economical It should be economical to install and operate. Its cost should be justified

by the benefits derived.

5. Flexibility It should be flexible to adopt the changing requirements of the business.

6. Accuracy It should provide the accurate information.

7. Promptness It should provide prompt information at regular intervals.

8. Support of staff It should receive the necessary cooperation and participation of the

staff.

9. Cost Control It should ensure cost control over the various fields.

10. Clearly defined Cost

Centres

There should be clearly defined cost centres and responsibility centres.

11. Detail It should provide the information in detail to the extent it is desired and

should avoid unnecessary detail.

5. State the Items excluded from Cost Accounts. [Nov 2009]

The following items of income and expenditure are normally included in financial accounts and not in

cost accounts. Their inclusion in cost accounts might lead to unwise managerial decisions. These items

are:

1. incomes (a) Profit on sale of Fixed Assets.

(b) Profit on sale of Investments

(c) Interest Income

(d) Dividend Income

(e) Rental Income

(f) Transfer fees.



2. Expenditures (a) Loss on sale of fixed assets

(b) Loss on sale of Investments

(c) Interest on mortgage and loans

(d) Preliminary expenses written off

(e) Goodwill written off.

(f) Underwriting commission and debenture discount

written off

(g) Fines and penalties

3. Appropriations (a) Income tax

(b) Dividend Distribution tax

(c) Transfer to General Reserves

(d) Transfer to Special Reserves like Dividend Equalization Reserve etc.

6. State the Main Objectives of Material Control.

The main objectives of material control are as follows:

1. To avoid the situation of under stocking i.e. to provide continuous supply of required materials so that

the activities of production and service departments may not be held up.

2. To avoid the situation of over-stocking i.e. to maintain optimum investment in inventory

considering the operating requirements and financial resources so as to reduce carrying costs.

3. To ensure the procurement of materials and stores of the required quality at minimum cost from a

reliable source.

4. To minimize the total cost (i.e. ordering costs & carrying costs)

5. To avoid wastages and losses during storage and usage.

6. To maintain proper and up to date records of inventory

7. To provide the required information to the management so as to help the management in taking

inventory decisions.

7. State the Essential Requirements of Material Control.

The essential requirements of material control are as follows:

8.

1. Proper Co-ordination There should be proper co-ordination of all departments involved viz.

Purchasing, Receiving, Inspection, Storage, Production, Cost and

Finance.

2. Proper Purchase

System

There should be proper purchase system to ensure the procurement of

materials and stores of the required quality at minimum cost from a

reliable source.



3. Proper Storage System There should be proper storage system to ensure a place for everything

and everything in its place and avoidance of losses during storage and

minimum storage cost.

4. Proper Issue System There should be proper system for the issue of materials to ensure the

delivery of materials of the required quality in the required quantity at

the required time upon requisition to the department making

requisition.

5. Perpetual

Inventory System

There should be perpetual inventory system so as to determine the

quantity and value of each item of materials in stock at any point of time.

6. Continuous Stock

Taking System

There should be continuous stock taking system so as to ensure

accuracy of perpetual inventory records.

7. Internal Check System There should be internal check system so that all transactions concerning

materials are automatically checked.

8. Proper Budgetary

Control System

There should be proper budgetary control system to ensure economy in

purchasing and usage of materials and stores.

9. Proper Forms There should be use of proper forms with regard to Purchase

Requisition, Purchase Order, Material Received Note, Material

Requisition, Bill of Materials, Material Returned Note, Material Transfer

Note, Bin Card, Stores Card etc.

10. Proper Accounting

System

There should be proper accounting system so as to determine the cost

of materials at time of receipt and consumption.

11. Proper Reporting

System

These should be proper reporting system to ensure regular reporting to

the management regarding-

(a) Materials purchased

(b) Materials issued

(c) Materials in hand

(d) Slow-moving and obsolete stock etc.

8. State any five Advantages of ABC Analysis.

The advantages of ABC analysis are the following:

1. It ensures effective control on costly items (i.e. A category items) which require large investment.

2. It saves time and cost by exercising economic systems of control over low value items (i.e. C

category items).

3. It ensures optimum investment in inventory considering the operational requirements and

financial resources with the use of economic order quantities.

4. It ensures minimum total cost (i.e. ordering costs and carrying costs) of inventory.

5. It helps in the maintenance of high inventory turnover rate.



9. State the Various Methods of Pricing the Issue of Materials.

The various methods used for pricing the issue of materials may be classified as follows:

I. Cost Price Methods (a) Specific Price Method.

(b) First-in First-out Method (FIFO).

(c) Last-in-First-out Method. (LIFO)

(d) Base Stock Method.

II. Average Price Methods (a) Simple Average Price Method.

(b) Weighted Average Price Method.

(c) Periodic Simple Average Price Method.

(d) Periodic Weighted Average Price Method.

(e) Moving Simple Average Price Method.

(f) Moving Weighted Average Price Method.

III. Market Price Methods (a) Replacement Price Method.

(b) Realizable Price Method.

IV. Notional Price Methods (a) Standard Price Method.

(b) Inflated Price Method.

V. Re-use Price Method

10. State the Meaning, Causes and Accounting Treatment of Idle Time.

Meaning Idle Time is that time for which payment made but no direct production/ benefit is

obtained. The question of Idle Time arises only when the payment is made on time

basis. It is calculated as follows:

Idle time = Time Recorded as per Time card - Time Booked on Job as per Job

card.

Causes Idle time may arise due to any one or more of the following causes.

1. Production Causes (a) Machine Break Down

(b) Power failures

(c) Waiting for work

(d) Waiting for Tools

(e) Waiting for Materials

(f) Waiting for Instructions

2. Administration Causes

(which arise due to

administrative decisions)

(a) Decision not to retrench regular trained

workers in the period of depression

(b) Decision not to work up to full capacity

of plant.



3. Economic Causes (which

arise due to economic

conditions & decisions)

Closure of seasonal industry during offseason.

Accounting

Treatment

Idle Time cost may be treated in Cost Accounts as follows:

Idle Time Cost Accounting Treatment

(a) Cost of normal &

controllable Idle Time

(e.g., Machine

Breakdown, waiting for

work, tools, materials or

instructions)

(a) It is treated as part of cost and hence treated

as part of production overheads

(b) Cost of normal but

uncontrollable Idle Time

(e.g. set up time

for machine, interval

between one

job and another, personal

needs)

(c) Cost of abnormal Idle Time

(i.e., due to abnormal

reasons such as power

failure, strikes, lock out,

fire, flood etc.)

(b) It is treated as part of cost and hence charged

directly to job by inflating wage rates (for

example if wage rate is Rs 5 per hour and

workers' effective hours during 8 hour work is

7 hours only, the inflated wage rate will = Rs

5.71

11. State the Causes of Labour Turnover with two examples each.

Type of Causes Examples

1. Personal Causes

These include those causes which

induce or compel workers to leave

their jobs.

(I) Premature retirement due to ill health or old age.

(ii) Domestic problems and family responsibilities,

(III) Discontent over the jobs and working environment.

2. Unavoidable causes

These include those causes which are

not within the control of the

management.

(i) Change of jobs for betterment.

(ii) Seasonal nature of the business;

(iii) Shortage of raw material, power, slack market for

the product etc;

(iv) Change in the plant location;

(v) Disability, making a worker unfit for work;

(vi) Disciplinary measures;

(vii) Marriage (generally in the case of women).



3. Avoidable Causes

There include those causes which are

within the control of the management

and which require the attention of

management on a continuous basis so

as to keep the labour turnover ratio as

low as possible.

(i) Dissatisfaction with job, remuneration, hours of work,

working conditions, etc.,

(ii) Strained relationship with management, supervisors

or fellow workers;

(iii) Lack of training facilities and promotional avenues;

(iv) Lack of recreational and medical facilities;

(v) Low wages and allowances.

12. State the Effects of High Labour Turnover.

High Labour Turnover increases the cost of production and decreases the profitability because of-

1. Loss of Output between the time when worker left and new workers recruited

2. Increased Cost of Selection and recruitment

3. Increased Cost of Training

4. Increased Cost of Tools, Equipments and machine breakages

5. Increased Cost of scrap, wastage, spoilage and defective work

7. Increased Cost of industrial accidents

8. Loss of Output due to lower productivity of new worker

9. Fall in Quality of Output by inexperienced or less experienced new worker.

13. State the Various Types of Labour Turnover Costs.

1. Preventive Costs There are the costs which are incurred to keep the labour force contended so

that high labour turnover may be prevented. These costs include the

following;

(i) Cost of Personnel Administration

(ii) Cost of Medical Services

(iii) Cost of Welfare Activities such as canteen services etc.

(iv) Cost of Social Security Schemes such as Pension, Provident Fund

Schemes, Gratuity etc.

(v) Cost of perquisites in excess of the average prevailing in industry



2. Replacement Costs There are the costs which are incurred to meet the consequences of

high labour turnover, There include the following;

(i) Loss of output between the time when worker left and new workers

recruited

(ii) Increased cost of Selection and recruitment

(iii) Increased cost of Training

(iv) Increased cost of Tools, Equipments and machine breakages

(v) Increased cost of scrap, wastage, spoilage and defective work

(vi) Increased cost of industrial accidents

(vii) Loss of output due to lower productivity of new worker

(viii) Fall in quality of output by inexperienced or less experienced new

worker.

14. State the Remedial Steps to Minimize Labour Turnover.

The following steps are suggested to minimize labour turnover.

1. Exit interview An interview should be arranged with each outgoing employee to ascertain the

reasons of his leaving the organization.

2. Job analysis and evaluation Before recruiting workers, job analysis and evaluation may be

carried out to ascertain the requirements of each job.

3. A standardized policy for

(a) Recruitment (b) Selection (c) Induction

(d) Replacement (e) Transfers (f) Promotions

(g) Performance Appraisal (h) Education, Training and Development

of Employees

4. A satisfactory level of Salaries and Wages

5. A satisfactory level of Welfare Schemes like canteen, medical, housing, recreation etc.

6. A satisfactory Social Security Schemes like, gratuity, pension, provident fund, industrial accident

compensation,

7. A standardized Grievance Procedure to settle worker's grievances with management.

8. A satisfactory level of Working Conditions in the organization.

9. A satisfactory policy for Workers' participation in management and Joint Consultation Scheme.

10. Standardized service rules should be framed.

Suggestion Each company must work out the optimum level of labour turnover keeping in view its

personnel policies and the behaviour of replacement cost and preventive costs at various levels of

labour turnover rates.



15. State the main advantages of classification of overheads into fixed and variable.

The advantages of classification of overheads into fixed and variable are as follows:

1. Ascertainment of

Marginal Cost

The classification of overheads into fixed and variable helps in the

ascertainment of marginal cost which is the key requirement of marginal

costing.

2. Control of Cost The classification of overheads into fixed and variable helps in controlling

costs. Fixed costs are generally policy costs, which cannot be easily reduced.

These are incurred irrespective of the output and hence are more or less

non-controllable. Variable expenses vary with the volume of activity and the

responsibility for incurring such expenditure is determined in relation to the

output. The management can control these costs by giving proper J

allowances in accordance with the output achieved.

3. Decision making The classification of overheads between fixed and variable also J helps in

decision making. For example, decisions regarding the price to be charged

during depression or recession or for export market. Likewise, decisions on

make or buy, shut down or continue, etc., are also taken after separating fixed

costs from variable costs. In fact, when any change is contemplated, say,

increase or decrease in production, change in the process of manufacture or

distribution, it is necessary to know the total effect on cost {or l revenue)

and that would be impossible without a correct segregation of fixed and

variable costs. The technique of marginal: costing, cost volume profit

relationship and break-even analysis are all based on such segregation.

4. Preparation of

Budget Estimates


preparation of flexible budget. It enables a firm to estimate costs at

different levels of activity and make comparison with the actual expenses

incurred.

5. Preparation of

Breakeven Charts


preparation of break-even charts and study of cost-volume-profit

relationship.

6. Absorption of

Overheads

The classification of overheads into fixed and variable helps in determining

separate absorption rates for fixed and variable overheads. The fixed

overhead rate also serves as a measure of utilization of facilities and the

under-absorption indicates the extent of idle capacity.

17. State the Meaning, Causes and Accounting Treatment of Under and Over Absorption of

Overheads.



When arise? The situation of under/over absorption of overheads (or Overhead Variance) may

arise where a predetermined overhead rate is used to charge overheads.

Meaning of

Under-

absorption

Under-absorption of overheads means that the amount of overheads absorbed in

the production is less than the amount of actual overheads incurred. For example,

if overheads are recovered on the basis of Rs 10 per hour and 2 hours are required

to produce 1 unit of output and the actual overheads incurred are Rs 1,50,000

and actual output 5,000 units, then

Overheads under-absorbed = Absorbed Overheads - Actual Overheads

= (5,000 units x 2 hours x Rs 10) - Rs 1,50,000

= Rs 50,000

Meaning of Over-

absorption

Over-absorption of overheads means that the amount of overheads absorbed in the

production is more than the amount of actual overheads incurred.

For example, if overheads absorbed are Rs 1, 50,000 and the actual overheads

incurred are Rs 1, 00,000 there is over-absorption to the extent of Rs 50,000.

Causes Under/over absorption of overheads may arise due to any one or more of the

following reasons:

1. Wrong estimation of overhead expenses.

2. Wrong estimation of output

3. Wrong estimation of machine/labour hours to be worked

4. Under/over utilization of production capacity

5. Seasonal fluctuations in the overhead expenses in some particular industries.

6. Unanticipated changes in Methods of production.

Accounting

Treatment

The under/over absorbed overheads may be disposed off by any one of the

following three methods:

1. Use of Supplementary Rate Method

2. Write off to Costing Profit and Loss A/c

3. Carry over to Next Accounting period method

18. State the Treatment of Cost of Idle Facilities.

Meaning Idle facilities refer to that part of total facilities which remain unutilized due to any

reason such as non-availability of raw material, power, lack of demand etc. In

Cost Accounting Idle facilities are treated in the same way as idle capacity. Idle

facilities mean idle plant, machines or services. The costs which are incurred on

facilities during the time when these remain idle are known as Costs of Idle

facilities.



Accounting

Treatment

Costs of Idle facilities are treated as follows:

Reason for Idleness Accounting Treatment

I. Due to unavoidable reasons Such costs are treated as part of Production

overheads.

II. Due to avoidable

reasons like faulty

planning, power

failure.

Such costs are charged to Costing Profit &

Loss Account

19. State the Treatment of Fringe Benefits.

Meaning Fringe Benefits are the indirect benefits such as medical facilities, housing

facilities. These benefits are provided in addition to basic salary and cash

allowances like DA, HRA, CCA. These are provided to improve the morale, loyalty

and stability of employees towards the organization.

Accounting

Treatment

Fringe Benefits may be treated as follows:

Fringe

Benefits

Accounting Treatment

I. If the amount is

substantial

It may be recovered as direct charge by means of a

supplementary wage or labour rate.

II. If the amount is

not substantial

It may be treated as part of Production

Overheads.

20. State the Main Principles to be followed while taking credit for Profit on Incomplete Contract

There are no hard and fast rules as to how much portion of profit on incomplete contract should be

credited to Profit & Loss Account. However, the following principles may be followed:

Principles to be followed while taking credit for profit on incomplete Contract

1. The costs incurred upto date should be clearly identified.

2. The stage of contract performance completed should be reasonably estimated.

3. The costs to complete the contract should be reasonably estimated.

4. The total contract revenues to be received should be reliably estimated.

5. The work certified should be valued in terms of contract price and its value should be treated as

contract revenue for the accounting period.

6. The uncertified work should be valued at cost and should be treated like closing inventory at the

end of accounting period.

7. The notional profit on incomplete contract should be estimated as under:

Notional Profit = Value of Work Certified + Cost of Uncertified Work - Costs incurred to date.

8. The amount of profit to be credited to Profit and Loss Account can be calculated as under

Statement showing the amount of Profit to be credited to Profit & Loss Account



Value of Work Certified.... Amount of Profit to be credited to Profit and Loss

Account

(i) If less than 25% of the Contract Price No Profit is taken into account. The entire amount

is treated as reserve

(ii) If equal to or more than 25% but less than

50% of the Contract Price

(iii) If equal to or more than 50% but less than

90% of the Contract Price

(iv) If equal to or more than 90% of the

Contract Price

The amount of profit to be credited to Profit &

Loss A/c may be ascertained by adopting any of

the following formula:

( )

( )

Notes: (i) Estimated Total Cost = Cost of Contract up to date + Costs to be incurred

(ii) Estimated Total Profit = Total Contract Price - Estimated Total Cost

9. Provision for Foreseeable Losses — When current estimates of total contract costs and revenues

indicate a loss, provision should be made for the entire loss on the contract irrespective of the amount

of work done and the method of accounting followed.



21. State the Advantages and Disadvantages of Cost Plus Contract.

[May 2008, Nov 2008, Nov 2009]

Advantages and Advantages Disadvantages

1. He is assured of a fixed

percentage of profit.

2. He is protected against the rise

in the costs of materials,

labour etc.

1. He is deprived of market advantages

which could have accrued due to

favourable market conditions.

2. Contractee may object to cost

ascertainment.

3. He does not get any benefit by

reducing costs.

Advantages and Advantages Disadvantages

1. He can ensure himself about the

cost of the contract as he is

empowered to examine the

books and documents of the

contractor to ascertain the

accuracy of the cost of

contract.

2. He gets the benefits of a decline

in the prices of materials,

labour etc.

3. He is ensured that the price to

be paid will depend on cost

rather than on arbitrary

commitment.

1. The contractor may not have any

inducement to reduce costs.

2. He cannot ascertain the final price to

be paid.

3. He has to bear the cost of

inefficiencies on part of contractor.

4. He cannot prepare purchase budget.

5. He has to pay not only the resultant

high cost but also the resultant high

profit.

22. State the Main Advantages of Integrated System. [May 2010]

(a) Economical It is economical because it avoids the duplication of recording the

transactions in two separate set of books.

(b) No Need for

Reconciliation

There is no need for reconciliation because there will be only one figure

of profit/loss as there is only one set of books.

(c) No delay in the availa-

bility of information

There is no delay in the availability of information because it is provided

directly from the books of original entry.

(d) Suitable for Mechanized

Accounting

It is suitable for mechanized accounting.

(e) Better Coordination It tends to coordinate the functions of different sections of the

accounting.



23. State the essential Pre-requisites for Integral/Integrated System. [Nov 2008]

The essential pre-requisites for integral/integrated system include the following:

(a) Decision as to

extent of

Integration

The management must decide about the extent of integration of the

two sets of books. Some concerns find it useful to integrate up to the

stage of prime cost or factory cost while other prefer full integration of

the entire accounting records.

(b) Suitable Coding

System

A suitable coding system must be made available so as to serve the

accounting purposes of financial and cost accounts.

(c) Accounting Policy An accounting policy with regard to the treatment of provision for

accruals, prepaid expenses, other adjustment necessary for preparation

of interim accounts, must be laid down in advance.

(d) Co-ordination Perfect coordination should exist between the staff responsible for the

financial and cost aspects of the accounts and an efficient processing of

accounting documents should be ensured.

24. State the reasons for the difference between the results shown by the Cost Accounts and

Financial Accounts.

[May 2007]

1. Under or Overabsorption of Overheads

2. Different Bases for Valuation of Stocks

3. Different Methods of Depreciation

4. Items Included Only in Financial Accounts

5. Items Included Only in Cost Accounts (Notional Expenses)



IMPORTANT ACCOUNTING TREATMENTS

1.0 Explain the Accounting Treatment of Waste, Scrap, Spoilage and Defectives in Cos Accounts.

[May 2007, June 2009].

1.1 Treatment of waste

Case Treatment of waste

(a) Cost of Normal Waste (i.e. arising out of causes

inherent in the process)

It is treated as part of the Cost of production by

inlating the cost per unit. In other words, the cost

of such waste is borne by balance of materials.

(b) Cost of Abnormal Waste (i.e. arising out of

causes not inherent in the process e.g. defective

storage)

It is charged to Costing Profit & Loss Account

1.2 Treatment of Scrap

Case Treatment of Scrap

(a) Where the value of scrap is negligible. Net Sale Proceed of scrap is credited to Costing

Profit & Loss Account.

(b) Where the value of scrap is significant

(i) When scrap is not identifiable with a

particular job or process.

(ii) When scrap is identifiable with a

particular job or process

(i) Net Sale Proceed (i.e. Sale proceeds-Selling &

Distribution Costs) of the scrap is deducted

from the material cost or factory overheads.

(ii) Net Sale Proceed is credited to that

particular job or process.

1.3 Treatment of Spoilage

Case Treatment of Spoilage

(a) Cost of Normal Spoilage (i.e. arising out of

causes inherent in the process).

It is treated as part of the cost of production by

inflating the cost per unit. In other words, the cost

of such spoilage is borne by good production units

Note: Realizable Value (if any) of spoilage is

credited to the account to which cost of spoilage is

charged.

(b) Cost of Abnormal Spoilage (i.e arising out of causes not

inherent in the process e.g. faulty workmanship) It is charged to Costing Profit & Loss

Account

Note: Realizable value (if any) of spoilage is

credited to Costing Profit & Loss Account.



1.4 Treatment of Rectification Cost

Case Treatment of Rectification cost

(a) In case of Normal Defectives (i.e. arising due

to the inherent nature of the process)

(i) When defectives are identifiable with a


(ii) When defectives are not identifiable with


(iii) When defectives are due to the fault of

particular department

(iv) When defectives are due to wrong

instructions of the customer

(i) It is charged to that particular job or process,

(ii) It is charged to production overheads.

(iii) It is charged to that department.

(iv) It is charged to that particular job and is

recovered from that customer.

(b) In case of Abnormal Defectives (i.e. arising

due to abnormal factors like poor

workmanship)

It is charged to Costing Profit & Loss Account.

2.0. Explain the Accounting Treatment of Idle Time Cost in Cost Accounts.

[NOV 2009)

Idle Time Cost Accounting Treatment

(a) Cost of normal & controllable Idle Time (e.g.,

Machine Breakdown, waiting for work, tools,

materials or instructions)

(a) It is treated as part of cost and hence treated

as part of production overheads.

(b) Cost of normal but uncontrollable Idle Time

(e.g. set up time for machine, interval between

one job and another, personal needs)

(b) It is treated as part of cost and hence charged

directly to job by inflating wage rates (for example

if wage rate is Rs 5 per hour and workers' effective

hours during 8 hour work is 7 hours only, the

inflated wage rate will = Rs 5.71

(c) Cost of abnormal Idle Time (i.e., due to

abnormal reasons such as power failure, strikes,

lock out,

(c) It is not treated as part of cost and hence

charged to Costing Profit & Loss Account.

4.0 Explain the Accounting Treatment of Overtime Premium in Cost Accounts.

[May 2008]

Circumstances Treatment of Overtime Premium

(a) When it is desired at customer's request to

complete the work within specified time.

It should be charged directly to the job or work

concerned.



(b) When it is required to increase the output as

per general production programme.

It should be treated as production overhead.

(c) When it is required to make up any short fall

in production due to abnormal conditions such as

flood, earthquake, breakdown of machinery etc.

It should be charged to Costing Profit & Loss

Account.

(d) When it is required to meet seasonal

demand.


(e) When it is required to increase the output to

meet the additional market demand.


5.0 Explain the Accounting Treatment of Under/Over Absorption of Overheads in Cost Accounts.

[May 2010]

When arise? The situation of under/over absorption of overheads (or Overhead Variance) may

arise where a predetermined overhead rate is used to charge overheads.

Meaning of

Under-

absorption

Under-absorption of overheads means that the amount of overheads absorbed in

the production is less than the amount of actual overheads incurred. For example,

if overheads are recovered on the basis of Rs 10 per hour and 2 hours are

required to produce 1 unit of output and the actual overheads incurred are Rs

1,50,000 and actual output 5,000 units, then Overheads under-absorbed

= Absorbed Overheads - Actual Overheads

= (5,000 units x 2 hours x Rs 10) - Rs 1,50,000

= Rs 50,000

Meaning of Over-

absorption

Over-absorption of overheads means that the amount of overheads absorbed in

the production is more than the amount of actual overheads incurred. For

example, if overheads absorbed are Rs 1, 50,000 and the actual overheads

incurred are Rs 1,00,000 there is over-absorption to the extent of Rs 50,000.

Causes Under/over absorption of overheads may arise due to any one or more of the

following reasons:

1. Wrong estimation of overhead expenses.

2. Wrong estimation of output

3. Wrong estimation of machine/labour hours to be worked

Accounting

Treatment

The under/over absorbed overheads may be disposed of by any one of the

following methods:

Under absorption of overheads Over Absorption of Overheads

1. Supplementary Rate Method

(Suitable when large amount of

Cost of Sales A/c Dr

Finished Goods Ledger Control

Overheads Control A/c Dr

To Cost of Sales A/c



under/over absorbed overheads

is due to normal reasons like

increase in material

prices/labour rates.)

A/c Dr

Work-in-progress Ledger Control

A/c Dr

To Overheads Control A/c

To Finished Goods Ledger

Control A/c

To Work-in-progress Ledge-

Control A/c

2. Transfer to Costing Profit and

Loss A/c (Suitable when amount

of under/over absored

overheads is small or is due to

abnormal reasons like defective

planning, idle capacity etc.)

Costing Profit and Loss A/c Dr



To Costing Profit and Loss A : 1

3. Carry over to Next Accounting

period Method (Suitable when

normal business cycle is more

than 1 year and Overhead Rates

are determined on a long-term

basis.)

Overheads Reserve/ Suspense

A/c Dr



To Overheads Reserve/ Suspense

A/c

6.0 Explain the Accounting Treatment of Normal Loss, Abnormal Loss and Abnormal Gail in Process

Account. [June 2009, Nov 2009, May 2010]

6.1 Normal Loss in Process

Meaning Normal loss is an unavoidable loss which occurs due to the inherent

nature J of the materials and production process under normal

conditions. It can be estimated in advance on the basis of past

experience of the industry. It may j be in the form of Normal Waste,

Normal Scrap, Normal Spoilage, Normal Defectives. It may occur at

the beginning of a process or during a process.

How to Calculate Units No. of Units of Normal Loss = Input x Expected Percentage of Normal

Accounting Treatment (a) The cost of normal loss is treated as part of the cost of

production.

(b) The cost of normal loss is absorbed by the good units

produced by inflating the cost per unit.

(c) The cost of process is reduced by the realizable value (if any,

significant) of units of normal loss.

6.2 Abnormal Loss in Process

Meaning Abnormal loss is an avoidable loss which occurs due to abnormal

reasons like sub-standard materials, carelessness of workers,



Machinery breakdown, bad plant design, unplanned operations etc.

Such losses are in excess of pre-determined normal losses. Such

losses cannot be estimated in advance. Thus, abnormal losses arise

when actual losses are more than expected losses.

How to Calculate Units Units of Abnormal loss = Expected Output (i.e. Input - Normal Loss) -

Actual Output

How to Calculate the Cost of

Abnormal Loss

Cost of abnormal loss is calculated in the same manner as that of

good units as follows:

Accounting Treatment (a) The cost of abnormal loss is not treated as part of the cost of

production.

(b) The cost of abnormal loss is not absorbed by the good units

produced.

(c) It is charged to Costing Profit and loss Account.

6.3 Abnormal Gain (or Abnormal Effectives) in Process

Meaning Abnormal Gains (or Abnormal Effectives) arise when actual output is more

than the expected output or when actual losses are less than the expected

normal losses.

How to Calculate Units of Abnormal Gain = Actual Output - Expected Output (i.e. Input-

Normal Loss)

How to Calculate Cost

of Abnormal Gain

Cost of Abnormal gains is calculated in the same manner as that of good

units, as follows:

Accounting Treatment (a) Cost of abnormal gains is not treated as recovery of cost of

production.

(b) Cost of good units is not reduced by the cost of abnormal gains.

(c) It is credited to Costing Profit and Loss Account.

7.0 Explain the Accounting Treatment of Labour Turnover Costs in Cost Accounts.

(a) Preventive Costs There costs should be charged a part of production overheads and

should be apportioned to different departments on the basis of number

of workers engaged in each department.

(b) Replacement Costs These costs should be charged directly to that department.



(i) arising on account of

fault of any particular

department

(ii) arising due to

general reasons

These costs should be charged as part of a production overheads and

should be apportioned to different departments on the basis of number

of workers engaged in each department.

8.0 Explain the Accounting Treatment of Interest on Capital in Cost Accounts.

There is a controversy whether interest on capita! should be included in the costs or not. The arguments

in favour of inclusion and against inclusion are given below:

8.1 Arguments in favour of inclusion:

(a) Like wages, interest should also be part of production cost since wages are reward for

labour and interest is reward for capital.

(b) True carrying cost of maintaining stocks can not be ascertained unless interest is

considered.

(c) True comparison of different jobs requiring different amounts of capital or different

periods of completion can not be made unless interest is considered.

(d) True comparison of the cost under old method and new method (e.g. replacement of

manual labour by machine or replacement of less expensive machine by more expenses

machine) can not be made unless interest is considered.

(e) True profits can not be ascertained unless interest is considered.

(f) To submit tenders for cost plus contracts etc. interest should be taken into account.

(g) In business where raw materials in different stages can be used, computation of total cost:

is impossible unless interest is taken into account. Thus, a timber merchant, if he buys

standing trees and seasons the timber himself, would incur a large amount of costs as

interest. Another merchant who buys his timber already seasoned would automatically

have to pay a higher price; obviously, this price includes interest.

8.2 Arguments against inclusion:

(a) Interest is the reward of capital holds good in economics and not in costing.

(b) Interest is an internal matter of pure finance and is not connected with the cost of

manufacture and hence should be excluded from cost.

(c) It is difficult to determine the amount of capital on which interest is to calculate.

(d) It is difficult to determine the fair rate of interest to be charged.

(e) Comparison can be made by including interest on capital but without introducing it into

cost accounts.

(f) Inclusion of interest inflates the value of stocks in hand which means recognition of

unrealized profit.

Conclusion: After considering the above arguments it can be concluded:



(a) That interest should be excluded from cost accounts, and

(b) That interest should be considered while making cost comparisons for managerial decision

making.

9.0 Explain the Accounting Treatment of Depreciation in Cost Accounts.

9.1 Meaning Depreciation is the diminution in the value of a fixed asset due to use or passage of

time.

9.2 How to calculate The amount of depreciation may be calculated according to various methods

of providing depreciation. For example

Method Amount of depreciation

I. Straight Line

Method (SLM)

= Original cost + Installation costs - Estimated Scrap value

Expected useful life in (years)

II. Machine Hour Rate

Method

= Original cost + Installation costs - Estimated Scrap value

Estimated working hours

9.3 Accounting Treatment Depreciation is treated as follows:

Depreciation Treatment

I. Depreciation on fixed assets of factory (like

factory building, plant & machines,

furniture)

It is treated as part of Production overheads.

II. Depreciation on fixed assets of

administration office (like office building,

equipment, furniture)

It is treated as part of Administration overheads.

III. Depreciation on fixed assets of selling

office (like show room building,

equipment, furniture)

It is treated as part of Selling overheads.

IV. Depreciation on fixed assets of

distribution office (like warehouse,

delivery van)

It is treated as part of Distribution overheads.

10.0 Explain the Accounting Treatment of Research and Development Costs in Cost Accounts.

10.1 Meaning of Research Costs CIMA, London defines Research Cost as "the cost of searching for new

or improved products, new applications of materials or new or improved methods."

10.2 Treatment of Research costs Research Costs are treated as follows:

Research Cost Treatment

I. Cost of research relating to It should be treated as part of Production overheads.



manufacturing activities

II. Cost of research relating General

Management administration

It should be treated as part of Administration overheads.

III. Cost of research relating to marketing

activities

It should be treated as part of Selling & Distribution

overheads.

IV. Cost of research relating to a

particular product

It should directly be charged to that particular product.

V Cost of unsuccessful research. It should be treated as deferred revenue loss and should

be charged to Costing Profit & Loss Account over a

period generally not exceeding 3 years.

10.3. Meaning of Development Cost CIMA London, defines Developments Cost as "the cost of the

process which begins with the implementation of the decision to produce a new or improved product or

to employ a new or improved method and ends with the commencement of formal production of that

product or by that method"

10.4. Treatment of Development Costs Development Costs are treated as follow:

Development Costs Treatment

I. Development Costs relating to a

particular product.

It should directly be charged to that product.

II. Substantial amount of development

cost.

It should be treated as a deferred revenue expenditure

and should be charged to Costing Profit & Loss Account

over a period generally not exceeding 3 years.

11.0 Explain the Accounting Treatment of Idle Capacity in Cost Accounts.

[June 2009]

1- Meaning Idle capacity refers to that part of practical capacity which can not be

utilized due to abnormal reasons like lack of product demand, shortage of

raw-materials, shortage of labour, shortage of power etc.

2. Calculation Idle capacity can be calculated as follows:

Idle Capacity = Practical capacity - Actual capacity

or = Normal capacity - Actual capacity

or = Practical capacity-Capacity based on sales expectancy

3. How to calculate Idle

Capacity Cost

Idle capacity cost refers to costs associated with idle capacity which could

not be recovered due to under-utilization of plant. It can be calculated

follows:



4. Treatment of Idle

Capacity Costs

Reason for Idle Capacity Treatment

I. If idle capacity is due to

unavoidable reasons like

repairs, maintenance etc.

Such costs are charged to capacity utilized by using a Supplementary

Overhead Rate.

II. If idle capacity is due

to abnormal reasons like

faulty planning, power

failure etc.

Such costs are charged to Costing Profit & Loss Account

III. If idle capacity is due

to seasonal factors

Such costs are charged to the cost of production by inflating overhead

rates

12.0 Explain the Accounting Treatment of By-Products in Cost Accounts.

Case Accounting treatment

I. Where by-products

are of small total value

(a) Joint Costs

(b) Sale proceeds

(a) No portion of joint cost is apportioned to by-products.

(b) Sale proceeds of by-products may be treated in any one of the

following two ways:

(I) It may be treated as Miscellaneous Income and credited to

Costing Profit & Loss Account

(ii) It may be credited to the Process Account in which the by-

product has arisen.

II. Where by-products

are of considerable

total value

(a) Joint Costs

(b) Sale Proceeds

(c) Profit/Loss

(a) Joint Costs are apportioned to by-products by any of the methods of

accounting for joint products discussed earlier

(b) Sale proceeds of by - products are credited to the By-product Account.

(c) Profit/loss arising in By-product Account is transferred to Costing

Profit & Loss Account.

III. Where by- products

Require further

processing

(a) Total sales value is of

Treat as discussed under I



small amount

(b) Total sales value is of

considerable amount

Treat as discussed under II

Note: Joint Cost may be apportioned in the ratio of net realizable value at

split off point.

IV. Where by-products are

used by the

undertaking itself

Replacement Price of by-product used should be debited to the

Process Account in which the by-product has been used and should be

credited to By-product Account. The replacement price is the price at

which the same by-product can be purchased in the market.

13.0 Explain the accounting Treatment of opening WIP of process under FIFO method and under

Weighted Average method in Cost Accounts.

Under FIFO method, Equivalent Units of opening WIP as to Material, Labor & Overheads are calculated

separately upon the degree of completion whereas under weighted average method, Units of opening

WIP are merged with units introduced and completed and hence Equivalent units of units Transferred to

next process are calculated.



IMPORTANT FORMULAE

21.

AOEOQ

C

2. No. of Orders per year = Total Annual Consumption (in Units)/EOQ

3. Economic Order Frequency = 365 days/No. of orders per year.

4. Total Annual Ordering and Carrying Cost at EOQ = 2AOC

5. Re-order Level = Maximum Consumption x Maximum Re-order Period

Or, = Minimum Level+ (Normal Consumption x Normal Re- order Period)

6. Maximum Level = Re-order Level + Re-order Quantity-(Minimum Consumption x Minimum Re-

order Period)

7. Minimum Level = Re-order Level-(Normal Consumption x Normal Re-order Period)

8. Average Inventory Level = Minimum level + 1/2 Re-order quantity

Or, = (Maximum Level + Minimum Level) / 2

9. Danger Level = Normal Rate of Consumption x Maximum Re-order Period for emergency

purchases

10. Safety Stock = Normal Rate of Consumption x (Maximum Re-order Period – Normal Re-order

Period)

11. cos t of consumed during the period

Inventory turnover ratio = .....timescost of average stock hed during the period

12. Average No. of days for which an average inventory is held = 365 days

Inventory Turnover

13. Labour Turnover Rate under Separation Method = . of Separations

Average no. of workers

No

14. Labour Turnover Rate under Replacement Method =. of Replacements


No

15. Labour Turnover Rate under Flux Method = No. of Separations No. of Replacements


Or = No. of Separations No. of Accessions


Where, No. of Accessions = No. of workers recruited in the vacancies of those leaving and those

recruited on account of its expansion

16. Total Earnings under Halsey Plan = Time Rate Wages + Bonus

Or, = (AH x R) + [50% (SH - AH) x R]

17. Total Earnings under Halsey - Weir. Plan = Time Rate Wages + Bonus

Or, = (AH x R) + [30% (SH - AH) x R]



18. Total Earnings under Rowan Plan = Time Rate Wages + Bonus

( ) [( ) )]AH

or AH R SH AH RSH

19. Total earnings under Barth Sharing system Hourly rate SH AH

20. Total Earnings under Taylor's Differential Piece Rate

WORKER TOTAL EARNING

(a) For worker who produces less than the

Standard Output

(b) For worker who produces Standard

Output or more than the Standard Output

Actual Output x Normal Piece Rat* x 80%.

Actual Output x Normal Piece Rate x 120%.

21. Total Earnings under Merrick's Differential Piece Rate


(a) For worker who produces up to 83 1/3%

of standard output

(b) For worker who produces above 83 1/3%

and up to 100% of standard output

(c) For worker who produces above 100% of

standard output

= Actual Output x Normal Piece Rate

= Actual Output x Normal Piece Rate x 110%

= Actual Output x Normal piece Rate x 120%

22. Total Earnings under Gant Task and Bonus System


(a) For worker who produces less than

Standard Output

(b) For worker who produces Standard Output

only

(c) For worker who produces more than

Standard Output

= AH x Time Rate per hour

= (AH x Time Rate per hour) x 120%

= (Actual Output x Piece Rate) x 120%

23. Total Earnings under Emerson's Efficiency System

Level of efficiency Total earning

Up to 66 -2/3 Only Guaranteed Time Wages

Above 66 -2/3 % and 100 % (AH x R) + Bonus up to 20 % on the basis of Step Bonus Rates.

Above 100% AH x R) + Bonus @ 20% of Basic Wages + Additional Bonus @

1% for each 1% increase in efficiency.



24. Variable portion of Semi Variable Overheads

25. Effective Machine Hours

A. No. of Working Days (365 - Holidays like Festivals, Sundays)

B. No. of Working Hours available per day

C. Total No. of Working Hours (A x B)

D. Less: Hours required for maintenance

E. Productive Machine Hours (if set up time is assumed to be productive)

F. Less: Unproductive Set up time (if assumed to be unproductive)

G. Productive Machine Hours (E - F)

XXX

XXX

XXX

(XXX)

XXX

(XXX)

XXX

26. Computation of Production Overhead Absorption / Recovery Rate

1. Direct Material Cost %

2. Direct Labour Cost %

3. Prime Cost %

4. Labour Hour Rate = Production Overheads/Labour Hours

5. Machine Hour Rate = Production Overheads/Machine Hours

6. Rate per unit of Production = Production Overheads/No of Units of Output

27. Computation of Administrative Overhead Absorption/Recovery Rate

1. As a Percentage to Works Cost = (Adm. Overheads / Total Works Cost) x 100

2. As a Percentage to Conversion

Cost

3. As a Percentage of Sales Value = (Adm. Overheads / Total Sales Value) x 100

4. As a percentage of gross profit = (Adm. Overheads / Gross Profit) x 100

5. As rate per unit produced = Adm. Overheads / No of Units of Output

28. Computation of Selling & Distribution Overhead Absorption / Recovery Rate

(a) For Variable Overheads

1. A Rate per Unit Sold

2. As a % of Sales Value

= Selling & Distribution Overheads / No of Units Sold

(b) For Fixed Overheads

1. As a percentage to Works Cost



29. actual overheads for the period

Actual overhead Rate = Actual Base for the period

30. Budgeted Overheads for the period

Pre- determined overhead Rae= Budgeted Base for the period

31. Blanket Over lead Rate Total Overheads for all Departments

= Total Base for all Departments

32. Departmental Overhead RateTotal Overheads of a Department

= Base of a Department

33. Overhead Absorbed / Recovered = Rate x Quantity of Base

34. Under/Over absorbed/Recovered Overhead = Overhead Absorbed - Overhead actually incurred

(excluding, overheads of previous or year next year or of non recurring nature)

35. Supplementary overhead Rate = Under / Over Absorbed Overhead

= Actual Base

36. Maximum/installed Rated Capacity = As indicated by manufacturer

37. Practical Capacity = Maximum Capacity - Normal Loss of Capacity (due to normal repair &

maintenance, holidays)

38. Normal Capacity = Long Term Average of Capacity based on Sales Expectancy

39. Actual Capacity = Capacity actually utilized

40. Idle Capacity = Practical Capacity - Actual Capacity

Or, = Normal Capacity - Actual Capacity

41. Idle capacity cost= (Total Fixed Cost of Plant / Practical Capacity) x Idle Capacity

42. Value of Work Certified = Contract Price x Work Certified as % of Contract Price

Or, = Cash Received / Cash Received as % of work Certified

43. Cost of Work Uncertified = Total Cost incurred till date - Cost of Work Certified

44. Notional Profit = Value of Work Certified - Cost of Work Certified = Value of Work Certified -

(Total Cost incurred till date - Cost of Work Uncertified)

45. Profit on Incomplete Contracts to be Credited to the Contractor's P/L Account

Value of work certified ………….. Amount of profit to be credited to P/L A/c

(i) Less than 25% of the contract

price

Nil

(ii) More than 25% by less than

50% of the contract price

(iii) More than 50% but less than

90% of the contract price



(iv) Equal to or more than 90% ( )

( )

46. Estimated Total Cost = Cost of Contract up to date + Costs to be incurred

47. Estimated Total Profit = Total Contract Price - Estimated Total Cost

48. Provision for Foreseeable Losses = Estimated Total Cost - Total Contract Price

49. Value of WIP to be shown in Contractor's Balance Sheet

When the amount of Work

Certified is debited to Work-in-progress Account

When the amount of Work Certified is debited to

contractee’s Account

Rs. Rs.

A Value of Work Certified

B Cost of Work Uncertified

C Less: Credit balance on

the Contractee's Account

D Less : Amount transferred

to Reserve

…………

………..

………..

………..

A Cost of Work Uncertified

B Add: Debit balance on the

Contractee's Account

C Less: Amount transferred to

Reserve

………..

………..

…………

E Value of Work-in-progress

(A + B - C - D)

………

D Value of Work-in-progress (A + B

- C)

…………

50. Effective Average Cost per good unit =

55. Effective kilometers = Distance covered one way x No. of Trips per Day x No. of Days operated in a

Month x No. of Months operated in a Year

56. Effective Passenger kilometers (in case of passenger transport) = Effective Kilometer x Seating

Capacity x Seating Capacity Occupancy Rate

Note.: If seating capacity occupied in outward journey is different from inward journey, effective

passenger kilometers would be calculated separately for outward and inward journey.

57. Absolute tonnes km = various distances x respective load quantities carried

58. Commercial tonnes km = Total Distance x Average load quantity carried

Note: It rnay be noted that while calculating the Absolute tonnes-kms, the travel betwee" any

two stations is considered individually, while in the case of commercial tonne-kms, tne trip is

considered as a whole.

59. Takings of a Passenger Transport = Total Operating Cost + Profit



60. Time Taken per trip from one mine to another mine = Running time going + Running time

returning + Loading Time + Unloading Time

61. Effective Hotel Room Days = Number of Rooms x Occupancy Rate x No. of Days in a month x No.

of Working Months in a Year

62. Effective Patient Room Days = Number of Beds x Occupancy Rate x. No. of Days in a month x No.

of Working Months in a Year



IMPORTANT METHODS 1. Enumerate the Methods of Time Keeping and Time Booking.

[ May 2007]

Time Keeping Method Time Booking Methods

I. Manual Methods

(i) Attendance Register /

Muster Roll

(ii) Token/Disc Method

II. Mechanical Methods

Time Recording Clocks

1. Daily Time Sheet

2. Weekly Time sheet

3. Job Card (or Job Ticket)

4. Combined Time and Job Card

5. Labour Cost Card

or Circulating Job Card

6. Piece Work Card

2. Enumerate the Methods of Measurement of Labour Turnover.

[ Nov 2010]

Method Formula to measure labour Turnover

1. Separation rate

method

Where,

No. of separations = No. of workers left

No. of workers in the be+

2. Replacement

Rate Method

Where,

No. of replacements= no. of workers recruited in the vacancies of those

leaving excluding those recruited on account of expansion scheme.

3. Flux Method

Where,

No. of accessions = no. of workers recruited in the vacancies of those leaving

and those recruited on account of its expansion

Equivalent Annual Labour Turnover Rate

In case Labour Turnover Rate is based on a period other than a year, An Equivalent Annual Labour

Turnover Rate may be calculated as follows:



3. Enumerate the Methods of Segregating Semi-Variable Overheads.

1. Comparison by

Level of Activity

Method

Under this method, the variable element of overhead per unit and total fixed

element are ascertained as follows:

Variable Element of Overhead per unit

Total Fixed Element = Total Semi-variable Overheads - Total Variable

Element

2. High and Low

Method or Range

Method

Under this method the variable element of overhead per unit and

total fixed element are ascertained as follows:

Variable Element of Overhead per unit

Total Fixed Element = Total Semi-Variable Overheads - Total Variable

Element

3. Least Square

Method

This is a statistical technique of finding out a line of best fit for a number of

observations. This method uses the linear equation y = a + bx; where b

represents the variable element of overheads per unit 'a' represents the

total fixed overheads, y represents the total semi-variable overheads, y(

represents the volume of output. The total semi-variable overheads is thus

split into fixed and variable elements by solving this equation.

4. Analytical Method Under this method an attempt is made to judge empirically the proportion

of variable overheads and fixed overheads. The degree of variability is

determined for each item of semi-variable overheads. Once this has been

done, the method is easy to apply.

5. Graphical Method Under this method, variable and fixed element of semi-variable overheads

are ascertained with the help of a graph.



4. Enumerate the Methods of Secondary Distribution of Overheads.

5. Enumerate the Methods of Absorption of Production Overheads

Method Production overhead absorption rate

1. Percentage of direct material cost

2. Percentage of direct labour cost

3. Percentage of prime cost

4. Direct labour hour rate = production overheads/labour hours

5. Machine hour rate = production overheads/machine hours

6. Rate per unit of production = production overheads/No of Units of Output

6. Enumerate the Methods of Absorption of Administration Overheads.

When administration is considered as a separate function like Production and Sales

Method Administration overhead absorption Rate

1. As a percentage to works cost

Methods of Secondary Distribution of Overheads

Apportionment to Production

Departments only

Apportionment to both

production and service

departments

On non-reciprocal basis On reciprocal basis

1. Simultaneous

equation method

2. Repeated distribution

method

3. Trial and error

method



2. As a percentage to conversion cost

3. As a percentage of Sales Value

( )

4. As a percentage of Gross profit

5. A rate per unit produced

7. Enumerate the Methods of Absorption of Selling & Distribution Overheads.

Method S & D Overhead Absorption Rate

1. For variable Overheads

(a) A rate per unit sold

(b) As % sales value

( )

2. For fixed overheads only

As % of Works cost

8. Enumerate the Methods of Apportioning Joint Costs over Joint Products and explain in brief any

four methods.

[June 2009]

Physical Unit Method Joint costs are apportioned on the basis of physical volume of the joint

products at the split off point. Any processing loss is also apportioned over

the products on the same basis.

Average Unit Cost

Method

Joint costs are apportioned on the basis of Average Cost Per Unit which is

obtained by dividing total joint costs by total number of units of joints

products produced. Thus

Survey Method/ Point

Values Method

Joint costs are apportioned on the basis of point values/percentages

assigned to the products according to their relative importance. The point

values / percentages are based on the technical survey of all the factors

affecting the production and distribution of joint products.

Contribution Margin

Method

(i) The variable portion of total joint cost is apportioned on the basis of

physical volume of products produced ratio.

(ii) The fixed portion of total joint cost is apportioned on the basis of

Contribution Margin Ratio.

Market Value at

Separation Point

Method

Joint costs are apportioned in the ratio of market value of the joint products

at the separation point.



Market Value After

Further Processing

Method

Joint costs are apportioned in the ratio of Market value of the joint products

after further processing.

NRV Method Joint costs are apportioned in the ratio of Net Realizable Values of the joint

products at the separation point. Net realizable value is computed as

follows.

Particulars Rs.

A. Sales Value after Further Processing

B. Less: Further Processing Costs

C. Net Realizable Value [ A - B]

………

………

………

Reverse cost method Joint Costs are apportioned in the ratio of Joint Cost Values of the joint

products at the separation point. Joint Cost Value is computed as follows:

Particulars Product p Rs. Product P Rs.

A Sales Value of Output after Further

Processing

B Less: Estimated Profit

……..

(………)

……..

(……..)

C Total Cost of Output [A - B]

D Less: Selling & Distribution Expenses

Less: Further Processing Costs

………..

(………)

(………)

………..

(………)

(………)

E Joint Cost Value [C - D] ………. ………..

Tutorial Note: If Estimated Profit percentages on Sales Value (after further

processing) are given, use Reverse Cost Method.

Constant Margin

Method

Joint Costs are apportioned in the ratio of Joint Cost Value at the Separation

Point. Joint Cost Value is computed as follows:

Particulars Product p

Rs.

Product P

Rs.

A. Sales Value of Output after Further

Processing

B. Less: Gross Margin @ Constant Gross

Margin %

……..

(………)

……..

(……..)

C. Total Cost of Output (A - B)

D. Less: Further Processing Costs

Selling and Distribution Costs

………..

(………)

(………)

………..

(………)

(………)

E. Joint Cost Value (C - D) ………. ……….

Note: Constant Gross Margin Percentage is calculated as follows:



( )

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IMPORTANT TERMS - JMA Consultantjmaconsultant.com/Cost-Accounting.pdfdifference between revenues and expenses). ... 1.0 Job Costing ... Batch Costing is that form of specific order