MBA - AFM - Cost Accounting

7/26/2019 MBA - AFM - Cost Accounting

1/192

Cost Accounting

Unit -

Four


2/192

Syllabus

Total Hours : 12

Cost Accounts - Classifcation omanuacturing costs - Accounting or

manuacturing costs.Cost Accounting Systems: Job order costing -Process costing- Actiity !ased Costing-Costing and t"e alue c"ain-

Target costing- #arginal costing includingdecision ma$ing- !udgetary Control %&ariance Analysis ' Standard Cost system.


3/192

#eaning

Cost Accounting is t"e classiying( recordingand a))ro)riate allocation o e*)enditure ort"e determination o t"e costs o )roducts or

serices( and or t"e )resentation o suitablyarranged data or )ur)oses o control andguidance o management.

+t includes t"e ascertainment o t"e cost o

eery order( ,ob( contract( )rocess( serice orunit as may be a))ro)riate. +t deals it" t"ecost o )roduction( selling and distribution.


4/192

efnition

According to /"eldon( 0 Cost accounting is t"ea))lication o accounting and costing )rinci)les(met"ods and tec"niues in t"e ascertainment o costsand t"e analysis o saing or e*cess cost incurred as

com)ared it" )reious e*)erience or it" standards.Cost accounting relates to t"e collection( classifcation(ascertainment o cost and its accounting and controlrelating to t"e arious elements o cost.

+t establis"es budgets and standard costs and actualcost o o)erations( )rocesses( de)artments or )roductsand t"e analysis o ariances( )roftability and socialuse o unds.


5/192

3eatures

+t is a )rocess o accounting or costs4

5ecords income and e*)enditure relating to )roductiono goods and serices4

Proides statistical data on t"e basis o "ic" uture

estimates are )re)ared and uotations are submitted4 Concerned it" cost ascertainment( cost control and

cost reduction4

6stablis"es budgets and standards so t"at actual costmay be com)ared to fnd out deiations or ariance4 and

Pre)aration o rig"t inormation to t"e rig"t )erson att"e rig"t time so t"at it "el)s management on )lanning(ealuation o )erormance( control and decision ma$ing.


6/192

3unctions o CostAccounting

Analysis and Ascertainment ocosts

Cost control

Ascertainment o )roftability

etermination o selling )rice

Cost reductionHel)s in ormulating business )olicy


7/192

7b,ecties

To ascertain t"e cost )er unit o di8erent )roductsmanuactured by a business concern4

To )roide a correct analysis o cost bot" by )rocesses oro)erations and by di8erent elements o cost4

To disclose sources o astage "et"er o material( timeor e*)ense or in t"e use o mac"inery( eui)ment andtools and to )re)are suc" re)orts "ic" may benecessary to control suc" astage4

To )roide reuisite data and sere as a guide or f*ing

)rices o )roducts manuactured or serices rendered4To ascertain t"e )roftability o eac" o t"e )roducts and

adise management as to "o t"ese )rofts can bema*imi9ed4


8/192

7b,ecties

To e*ercise e8ectie control o stoc$s o ramaterials( or$-in-)rogress( consumable stores andfnis"ed goods in order to minimi9e t"e ca)ital loc$edu) in t"ese stoc$s4

To install and im)lement a system o cost control ormaterials( labour and oer"eads4

To adice management on uture e*)ansion )oliciesand )ro)osed ca)ital )ro,ects4

To )re)are budgets and im)lementation o budgetarycontrol4

To organi9e internal audit system to ensure e8ectieor$ing o di8erent de)artments.


9/192

Adantages

To Top Management

68ectie ecision ma$ing

#easuring 6ciency

Cost reduction

3i*ation o selling )rice

68ectie cost control

+ncrease in eciency

68ectie inentory control5eduction o astages

68ectie utili9ation o resources

Hel) in e8ectie budgeting


10/192

Adantages

To Employees 3air ages )olicy

5eards

Stability or tenure

To Creditors

;nderstanding t"e )rogress

)roftability o t"e frm

3uture )ros)ects o t"e frm

To Government Planning o resources


11/192

Costing ' an aid to#anagement

Planning

Planning is t"in$ing in adance i.e.( loo$ing a"ead anddeciding in adance "at to do( "o to do it( "en to do itand "o is to do it.

Decision Making#anagement "as to ma$e a c"oice o a course o action outo seeral alternatie courses o action aailable( it inolesdecision-ma$ing.

Controlling

Controlling is t"at )art o management actiity "erebymanagers com)are actual )erormance against t"e )lanned)erormance( fnd out t"e deiations and ta$e remedialste)s to remoe t"e deiations.


12/192


Planning

Planning is t"in$ing in adance i.e.( loo$ing a"eadand deciding in adance "at to do( "o to do it(

"en to do it and "o is to do it.+n )lanning( management is concerned it"laying don ob,ecties and determining t"ecourses o action to be olloed out o seeral

alternaties aailable to ac"iee t"ose ob,ecties.T"us )lanning is concerned it" uture actiityand ormulates budgets to meet t"e ob,ecties ot"e organi9ation.


13/192


Decision Making

Since management "as to ma$e a c"oice o onecourse o action out o seeral alternatie courses oaction aailable( it inoles decision-ma$ing.

All rational decisions are based on accountinginormation.

ecisions may relate to )rice f*ation( c"ange in)roduction sc"edule( introduction o ne )roduct( to

e*)ort t"e )roduct or not( )roftable leels o)roduction( ca)acity utili9ation( e*)loring neermar$ets( discontinuing )roduct to aoid urt"er lossand inestment in a )articular asset etc.(


14/192


Controlling

Controlling is t"at )art o management actiity "erebymanagers com)are actual )erormance against t"e)lanned )erormance( fnd out t"e deiations and ta$e

remedial ste)s to remoe t"e deiations.+mmediate action s"ould be ta$en to remoe t"edeiations to ma$e an im)roement in t"e )erormancebecause )rom)tness is t"e essence o an e8ectiecontrol. T"us control "el)s correction.

Planning and control are interlin$ed it" eac" ot"erbecause a manager cannot control unless "e "as)lanned a course o action.


15/192

#et"ods o Costing

S)ecifc 7rder Costing

7)eration Costing

Job Costing

Contract Costing

!atc" Costing

Process Costing

7ut)ut Costing

Standard Costing#arginal Costing

7)eration Costing

#ulti)le Costing


16/192

Classifcation o

Manuacturing Costs


17/192

Classifcation o #anuacturingCosts

Elements o Cost

Materials !a"our #t$er E%penses

irect +ndirect irect +ndirect irect +ndirect

#ver$eads

Production or /or$s Administration Selling istribution

7er"eads 7er"eads 7er"eads7er"eads


18/192

iisions o Costs

Prime Cost

irect #aterials = irect >abour = irect6*)enses

&orks or Factory CostPrime Cost = /or$s or 3actory 7er"eads

Cost o Production

/or$s Cost = Administration 7er"eads

Total Cost or Cost o 'ales

Cost o Production = Selling and istribution7er"eads


19/192

iisions o Costs

Direct Materials

T"ose materials "ic" can be identifed in t"e )roductand can be coneniently measured and directlyc"arged to t"e )roduct. T"ese materials directly enter

t"e )roduction and orm a )art o t"e fnis"ed )roduct.e.g.( clot" in dress ma$ing( bric$s in building or$.

Direct !a"our

+t is t"at labour "ic" can be coneniently identifed

or attributed "olly to a )articular ,ob( )roduct or)rocess or e*)ended in conerting ra materials intofnis"ed goods.


20/192

iisions o Costs

#ver$eads

T"e aggregate o t"e cost o indirect materials(indirect labour and suc" ot"er e*)enses includingserices as cannot coneniently be c"arged directto s)ecifc cost units. 7er"eads are all e*)ensesot"er t"an direct e*)enses.

E%penses e%cluded rom costs

T"e total cost o a )roduct s"ould include onlyt"ose items o e*)enses "ic" are a c"argeagainst )roft. +tems o e*)enses "ic" arerelating to ca)ital assets( ca)ital losses( )aymentsby ay o distribution o )rofts and matters o)ure fnance s"ould not orm a )art o t"e costs.


21/192

Cost S"eet

Cost s"eet is a statement designed to s"ot"e out)ut o a )articular accounting )eriodalong it" brea$-u) o accounts.

+t is )re)ared to analyse t"e total cost o)roduction and cost o sales in order to f*selling )rice.

+t is )re)ared at regular interals ie.(

ee$ly( mont"ly( uarterly and yearly.Com)aratie fgures o arious )eriods is

also s"on in cost s"eet.


22/192

'pecimen ( Cost '$eet or'tatement o Cost

C#'T ')EET

Total Cost Cost )er ;nit

irect #aterial

irect >abour

irect 6*)enses Prime Cost

Add: Production? /or$s ? 3actory 7er"eads

&orks * Factory Cost

Add: Administration 7er"eads

Cost o Production

Add: Selling and istribution 7er"eads



23/192

Classifcation o Costs

According to +ature o Cost

3i*ed( &ariable( Semi-ariablee*)enses and Ste) Cost

According to relevance to DecisionMaking

ecision ma$ing cost( Accountingcost( releant cost( +rreleant cost(S"utdon cost and Sun$ cost


24/192

Classifcation o Costs

According to Controlla"ility

Aoidable cost( ;naoidable cost( Controllablecost( ;ncontrollable cost( Hy)ot"etical cost(i8erential cost( +ncremental cost( 7ut-o-)oc$etcost( 7))ortunity cost and Traceable cost.

According to +ormality

Common cost( Joint cost( @on-,oint cost(Conersion cost and Production cost

According to Function

Administratie cost( istribution cost and Sellingcost.


25/192

Cost Classifcation

Fi%ed E%penses or Period Costs

6*)enses "ic" are constant or gien )eriod o time 6.g.(5ent( 5ates( +nsurance etc.(

,aria"le E%penses or Product Cost6*)enses "ic" are ary or increase or decrease in t"eolume o out)ut 6.g.( #aterials( /ages( 6*)enses etc.(

'emi-,aria"le E%penses

6*)enses "ic" are critical to identity. +t can also be namedas semi-f*ed cost e.g.( e)reciation( 5e)airs etc.(

'tep Cost

6*)enses "ic" remain constant oer a range o actiity.


26/192

o" #rder Costing


27/192

Job 7rder Costing

Job Costing is t"at orm o s)ecifc order costing "ic"a))lies "ere t"e or$ is underta$en as an identifable unitsuc" as:

a #anuacture o )roducts to customersB s)ecifc

reuirements.b 3abrication o certain materials "ere ra materials are

su))lied by t"e customers.

c 5e)airs are done it"in a actory or at customersB)remises.

d #anuacturing goods are not or stoc$ )ur)oses but orimmediate deliery once t"ese are com)leted in allres)ects.

e +nternal Ca)ital e*)enditure ,obs etc.(


28/192

Job 7rder Costing

Features

;nder t"is met"od( costs are collected and accumulatedor eac" ,ob( or$ order or )ro,ect se)arately.

6ac" ,ob can be se)arately identifed and "ence

it becomes essential to analy9e t"e costsaccording to eac" ,ob.

6ac" ,ob is treated as a cost unit and distinctielyidentifed by a )roduction order t"roug"out t"e)roduction stage and cost o )roduction is ascertainedor eery ,ob ater t"e com)letion o t"e ,ob.

T"e or$-in-)rogress di8ers rom )eriod to )eriodaccording to t"e number o ,obs in "and.


29/192

Job 7rder Costing

#".ectives

Ascertain t"e cost o eac" ,ob order( element byelement( as accurately as easible.

6nabling )re)aration o )roftable uotations andtenders t"roug" reliable estimates.

etermination o suitable oer"eads recoeryrates to absorb t"e oer"eads totally.

Proiding )ro)er aluation o or$-in-)rogress atany gien time.

6stablis"ing )rocedures or controlling andreducing costs oer a )eriod o time.


30/192

Job 7rder Costing

Pre-re/uisites

A sound system o )roduction control.

Com)re"ensie or$s documentation includes or$order and?or o)eration tic$ets( bills o materials

and?or material reuisitions( ,ig and tool reuisitionsetc.(

An a))ro)riate time boo$ing system using eit"ertime s"eets or )iece or$ tic$ets.

A ell organi9ed basis to t"e costing system it"clearly defnes cost centres( good labour analysis(a))ro)riate oer"ead absor)tion rates and a releantissue )ricing system.


31/192

Job 7rder Costing

Advantages

+t )roides a detailed analysis o cost o materials( ages andoer"eads classifed by unctions( de)artments and nature oe*)enses enabling t"e management to determine t"eo)erating eciency o t"e di8erent actors o )roduction(

)roduction centres and t"e unctional units.+t records costs more accurately and acilitates cost control

by com)aring actuals it" estimates.

+t enables t"e management to ascertain "ic" o t"e ,obs aremore )roftable t"an t"e ot"ers( "ic" are less )roftable and

incurring losses.+t )roides a basis or estimating t"e cost o similar ,obs

ta$en u) in uture and t"us "el)s in uture )roduction)lanning.


32/192

Job 7rder Costing

etermination o )redetermined oer"ead rates in ,obcosting necessitates t"e a))lication o a system obudgetary control o oer"eads it" all its adantages.

+dentifcation o s)oilage and deecties it" t"e

res)ectie )roduction orders and de)artments mayenable t"e management to ta$e e8ectie ste)s inreducing t"ese to t"e minimum.

T"e detailed cost records o t"e )ast years can beused or statistical )ur)oses in t"e determination ot"e trends o cost o t"e di8erent ty)es o ,obs andt"eir relatie eciencies.

+t is useul in uoting cost )lus contract.


33/192

Job 7rder Costing

Disadvantages

+t inoles a great deal o clerical or$ in recordingdaily t"e cost o materials issued( ages e*)endedand oer"ead c"argeable to eac" ,ob or or$ order

"ic" adds to t"e cost o cost accounting. T"e sco)e o committing mista$es is enoug" as t"e

cost o one ,ob may be rongly )osted to t"e costo ot"er ,ob.

Cost com)arison among di8erent ,obs becomesdicult es)ecially "en drastic c"anges ta$e)lace.


34/192

Job 7rder Costing

etermination o oer"ead rates may inolebudgeting o oer"ead e*)enses and t"e baseso oer"ead a))ortionment and absor)tion butunless suc" budgeting is com)lete i.e.(e*tended to material( labour and e*)enses( itsadantages are considerably reduced.

Job costing is "istorical costing "ic"ascertains t"e cost o a ,ob or )roduct ater it"as been manuactured. +t does not acilitatecontrol o cost unless it is used it" standard orestimated costing.


35/192

Procedure o Job 7rder Cost System

5eceiing an 6nuiry

6stimation o t"e )rice o t"e Job

5eceiing t"e order confrmationProduction )rocess

5ecording o Costs

Com)letion o Job

Proft or >oss on Job


36/192

Job 7rder Cost System

Steps InvolvedFi%ation o price o eac$ .o"

t$roug$ t$e determination oestimates

Costs are to "e recordedimmediately t$roug$ specifc

order cost s$eet

Comparison "et0een t$eactual costs o t$e .o" and

estimates to study t$evariances o ine1ciencies

Determination o proft or losso t$e .o" t$roug$ an e2ectivecomparison "et0een t$e costincurred and t$e price f%ed


37/192

S)ecimen ' Production7rder

Job Cost S"eet o #s. Customer

Particulars Duantity

ate o commencement ate o com)letion

Cloc$ 7)eration e)t 7)erationDuality

Time @o. @o. @o. etails #ade 5e,ected

7rdered by

7rdered by A))roed by


38/192

'pecimen ( o" #rder Cost '$eet#3 C#'T ')EET o Ms4

escri)tion Job @o.Consumer Duantity

#aterial @o. t. Commenced t. Com)leted

Actual Cost Cost per Unit

irect #aterial

irect >abourirect 6*)enses

Prime Cost

Add: /or$s ? 3actory 7er"eads

&orks * Factory Cost

Add: Administration 7er"eads

Cost o Production

Add: Selling and istribution 7er"eads



39/192

Process Costing


40/192

Process Costing

+t is t"e met"od according to "ic" data relatingto cost o )roduction are collected according tot"e de)artments or )rocesses and t"ereater t"etotal cost is diided by t"e uantity o )roduction(

to arrie at t"e cost )er unit.

+t is suitable or t"ose industries in "ic")roduction Eos rom t"e beginning to t"e endcontinuously and t"roug" arious stages.

6.g.( +n a te*tile mill t"e )roduction )rocess Eosrom carding( ar)ing( s)inning( draing( si9ing(inding( eaing( )ainting( olding etc.(


41/192

Process Costing

Process costing is ado)ted in t"e olloing industries :-

C"emicals

P"armaceutical

7il 5efnery

3lour #ills 6dible 7il

Steel manuacturing

3ood )rocessing

Te*tiles

Pa)er

#il$ iary

Paints


42/192

Princi)les o Process Costing

1.T"e ma,ority o items o cost can ordinarily be identifed it"s)ecifc )rocesses and collected and accumulated se)arately oreac" )eriod.

2.Production records o eac" )rocess are so designed as ould s"ot"e uantum o )roduction or eac" )eriod.

F.T"e total cost o eac" )rocess is diided by t"e total )roduction byt"e )rocess or arriing at t"e unit cost o t"e article )rocessed.

G.T"e cost o any normal s)oilage or astage is included in t"e costo t"e total units )roduced. T"ereby t"e aerage cost )er unit isincreased.

.As t"e )roduct traels rom one )erson to anot"er( t"e cumulatiecost t"ereo in res)ect o t"e )rocesses it "as already undergone istranserred to t"e account o t"e )rocess it "as yet to undergo.


43/192

Process Costing - 6lements

Direct Materials

#aterials ta$en or consum)tion are to )roduce fnis"edgoods at t"e end o fnis"ed stage o t"e )rocess( but notduring t"e frst stage )rocess o manuacturing. T"e

materials )rocessed during t"e frst stage o )rocess aretranserred to subseuent )rocesses as in)uts along it"reuired material or t"e )rocess.

Direct !a"our

irect labour is an amount "ic" normally incurred by

t"e frm on eery )rocess s"ould be a))ro)riately debitedin t"e res)ectie )rocess account to $no t"e amount olabour es)ecially em)loyed or t"e )roduction o goods.


44/192

Process Costing - 6lements

Direct E%penses

T"e e*)enses "ic" are directly connected andattributable to eac" )rocess s"ould be debitedunder eac" )rocess account( more s)ecially incurred

in addition to t"e materials and labour.#ver$ead E%penses

T"e e*)enses "ic" are normally incurred by t"efrm by and large in "eay olume( not only

connected and attributable to one )rocess but alsoit" many )rocesses( s"ould be a))ro)riatelya))ortioned to arious )rocesses o t"e )roduction.


45/192

Process Costing - 3eatures

Production is continuous( in a series ostages called )rocesses.

Product and Process are standardi9ed.

T"ere may be )rocess losses o t"ein)ut. T"ey may be normal andabnormal or bot".

6ac" )rocess is deemed as a cost centre.

T"e out)ut o one )rocess becomes t"era material to t"e ne*t )rocess.


46/192

Process Costing - 3eatures

T"e cost o t"e )reious )rocess istranserred to t"e ne*t )rocess.

3inis"ed and semi-fnis"ed out)uts "ae to

be e*)ressed in common terms or costdetermination.

To or more )roducts may be )roducedunaoidably in t"e same )rocess.

+t is not )ossible or necessary to trace oridentiy s)ecifc lots o material in)uts it")roduct or out)ut.

P C ti


47/192

Process Costing -Adantages

Cost o eac" )rocess and t"at o t"e fnis"ed )roductcan be com)uted at s"ort interals( ee$ly or daily.

Cost control and control oer )roduction are moree8ectie because o uniorm out)ut and usage o

)redetermined costs as budgeted or standard costs.Cost ascertained is sim)le and less e*)ensie.

Aerage cost )er unit can easily be obtained.

+ndirect e*)enses can be a))ortioned and allocated

more accurate and reliable data can be obtained.&aluation o inentories is easier and accurate.

Duotations become easier due to standard )rocesses.

P C ti


48/192

Process Costing -isadantages

+neciencies in )rocesses can be concealed.

Costs obtained at t"e end o )rocesses are"istorical costs and t"eir utility or cost andmanagerial decision ma$ing is not signifcant.

6aluating t"e eciency o indiidual or$ersor su)erisors is dicult.

A))ortionment o ,oint costs to common

)roducts may lead to irrational )ricing decision.>ater )rocesses may be adersely a8ected due

to t"e ineciency o earlier )rocesses.


49/192

i8erence beteenJob Costing and Process Costing

o" Costing

Production o goodsagainst orders.

Cost o t"e ,ob can beeasily determined.

6ac" ,ob is di8erent(

se)arate andinde)endent rom eac"ot"er.

Process Costing

Production o goods iscontinuous )rocess

Cost o all )rocesses arecom)lied toget"er todetermine t"e cost ofnis"ed )roducts.

6ac" and eery )rocess is

de)endent on eac" ot"eri.e.( fnis"ed )roduct oone )rocess is in)ut oanot"er )rocess.


50/192

i8erence beteenJob Costing and Process Costing

o" Costing

Total cost o a ,ob is diidedby t"e number o units)roduced in t"e ,ob in orderto calculate unit cost o a

,ob.

Costs are com)lied "en is,ob is com)leted.

@o transer in beteen to,obs.

Pro)er control is dicult as)roduction is not continuous.

Process Costing

Total cost o eac" )rocess isdiided by t"e total )roductionor t"e )rocess to calculate

aerage cost )er unit.

Costs are calculated at t"eend o t"e cost )eriod.

Product moes rom one

)rocess to anot"er.Pro)er control is easier as)roduction is standardi9ed andis more stable.


51/192

Process >osses

&astage5 +t is material t"at eit"er is lost(ea)orates or s"rin$s in a manuacturing)rocess or is a residue t"at "as no measurablerecoery alue.

'crap5 +t is discarded material "aing somerecoery alue "ic" is usually dis)osed o8it"out urt"er treatment.

+ormal !oss5 +t is t"e )rocess loss "ic" isunaoidable and uncontrollable.

+ormal &astage5 +t s"ould be absorbed bygoods units )roduced.


52/192

Process >osses

Computation o A"normal !oss

6uantity o +ormal !oss I @ormal out)ut ' Actualout)ut

@ormal 7ut)ut I +n)ut ' @ormal loss

+ t"e actual out)ut is less t"an normal out)ut t"ebalance is )ositie fgure( re)resenting abnormal loss inunit.

,alue o a"normal loss 7

@ormal cost o normal out)ut * ;nit o abnormal loss

@ormal out)ut

+ormal cost o normal output 7

6*)enditure o )rocess ' Scra) alue o normal loss


53/192

Process >osses

Computation o A"normal Gain

6uantity o +ormal !oss I @ormal out)ut ' Actualout)ut

@ormal 7ut)ut I +n)ut ' @ormal loss

+ t"e actual out)ut is more t"an normal out)ut t"ebalance is )ositie fgure( re)resenting abnormal gain inunit.

,alue o a"normal gain 7

@ormal cost o normal out)ut * ;nit o abnormal gain

@ormal out)ut

+ormal cost o normal output 7

6*)enditure o )rocess ' Scra) alue o normal loss


54/192

Activity 3ased Costing


55/192

Actiity !ased Costing

Actiity !ased Costing is defned as( 0it is atec"niue "ic" inoles identifcation o costit" eac" cost-driing actiity and ma$ing itt"e basis or a))ortionment o costs oerdi8erent cost ob,ects and serices.

+n order to meet t"e c"allenges o combatingcom)etition and satisying sta$e"olders( t"e

frm s"ould reduce t"e cost o o)eration onone side and on t"e ot"er side it s"ould)roide alue addition to its customers.

Actiity !ased Costing


56/192

Actiity !ased Costing-7b,ecties

5ig"t )rice or t"e rig"t customers

+ntroduction o ne )roduct

6limination o deectieness

5e)lacing t"e yester met"odology otraditional costing

Cost must )ae t"e needs as sered

6liminating t"e unnecessary actiities

!etter uality( alue added serices

Cost reduction ' a long term )ers)ectie


57/192

Conce)t o A!C

Actiity !ased Costing A!C is a ne termdeelo)ed or fnding out t"e cost.

T"e basic eature o A!C is its ocus on actiities ast"e undamental cost ob,ects.

+t uses actiities as t"e basis or calculating t"e costso )roducts and serice.

A!C is an a))roac" to deelo)ing t"e cost numbersused in ,ob costing or )rocess costing systems.

A!C "as t"e )otential( "oeer to )roide managersit" inormation t"ey fnd more useul or costing)ur)oses.


58/192

Conce)t o A!C

+n A!C a))roac"( t"e frst ste) is to identiy t"e actiitiesor "ic" costs are to be collected and controlled.

T"e arious actiities may be identifed as directactiities and indirect actiities.

irect actiities mat be ta$en as direct material anddirect labour. +ndirect cost may be identifed as order)rocessing( material "andling( mac"ine insertion o )arts(manual insertion o )arts( re)airs and maintenance(uality testing etc.(

T"e ne*t ste) is t"e selection o suitable cost allocationbase or assigning indirect costs to arious actiities sot"at all actiities are suitably burdened.


59/192

7b,ecties o A!C

To establis" t"e lin$age beteen t"e amount ocost and t"e cost driers( "ic" are not"ing butresource and actiity.

To determine t"e cost o eery actiity and

fnally to fnd out t"e cost o )roduct and serice.To a))ortion t"e oer"eads in accordance it"

t"e actiities inoled in t"e )rocess only inorder to ascertain t"e accurate cost.

To eade t"e bottlenec$ o t"e traditional costsystem t"roug" t"e determination o c"argingt"e oer"eads on t"e unctional basis.


60/192

Areas o A!C

Pricing 'trategy

+t deals it" )roft margin out o t"e actiity. To f*reasonable as ell as com)etitie )rice not only toattract t"e buyers but also to earn "andsome sur)lus

out o t"e A!C.Make or 3uy decision

+t is being calculated t"roug" t"e study o nature andnumber o actiities inoled.

#ut sourcing

T"e frm s"ould identiy t"e rig"t mode o su))lying t"egoods to t"e customers eit"er t"roug" )roduction or)urc"ase( "ic" is t"e best alternatie to yield )roft.

!enefts o im)lementing


61/192

!enefts o im)lementingA!C

1. Cost #anagement and onsi9ing

2. etermination o Product ? Sericecosts

F. +m)roements in Perormance

G. Product ? Serice )ricing

. #a$e or !uy decisionK. Transer )ricing

Actiity Cost !ased


62/192

Actiity Cost !ased#anagement

Actiity Cost !ased #anagement dealsit" t"e needs and demands o t"ecustomers( t"eir tastes and

)reerences are to be incor)orated ont"eir )roduct. T"is is ot"erise calledvalue additions on t$e product.

To en"ance t"e )erormance o t"eactiity.

To fnd t"e ays and means to

reduce t"e cost continuously.


63/192

C"aracteristics o AC!#

Cost Driver Analysis

T"is analysis is only on t"e basis o causes "ic"normally ma$e t"e frm to )erorm t"e actiities.T"e eciency and ineciency o t"e actiity isstudied it" reerence to )articular reasons. Tostudy t"e root cause o t"e )roblem orineciency.

Activity Analysis

T"e actiities are to be studied in t"e lig"t o t"ealue addition. T"e im)ortance o t"e actiitiesare to be )robed rom time to time.


64/192


Perormance Analysis

T"e )erormance o t"e actiities are to beanaly9ed only in terms o t"e goals or

ob,ecties o t"e actiity centres in order to"ae continuous im)roement in t"e )rocess.

)ig$er 6uality

T"e serice s"ould be denominated in terms

o good uality "ic" certainly reEectscustomer ? consumer delig"t and it ill leadto brand loyalty.


65/192


!o0er Cost

Cost reduction )ermanently or t"e c"arge oreasonable. )rice

Faster 8esponse Time

T"e customers are to be immediately res)onded toit"out any urt"er delay.

Great 9nnovation

T"e frm s"ould alays fnd its on ays andmeans to attract t"e needs and demand o t"ecustomers t"roug" t"e deelo)ment o uniueeatures.

Actiity Cost !ased


66/192

Actiity Cost !ased#anagement,alue added activities

@ecessary or t"e)erormance o t"e )rocess

&alued eit"er by internal ore*ternal customers

&alue addition is usuallygien out o t"e illingnesso t"e customers

Add to cost o t"e )roductor serice "ic" t"ecustomers are illing to)ay

+on-value addedactivities

@ot necessary or t"e)erormance o t"e)rocess

@ot alued by internal ore*ternal customers

@ot illing or t"erecei)t o t"e actiities

Add to t"e )roduct costbut t"e customers arenot illing to )ay


67/192

Target Costing


68/192

Target Costing

Target costing is a )ricing met"od used byfrms.

+t is defned as 0 a cost management tool orreducing t"e oerall cost o a )roduct oer itsentire lie-cycle it" t"e "el) o )roduction(engineering( researc" and design.

A target cost is t"e ma*imum amount o cost

t"at can be incurred on a )roduct and it" itt"e frm can still earn t"e reuired )roft marginrom t"at )roduct at a )articular selling )rice.


69/192

Target Costing

Price is a crucial )roduct-)ositioning actort"at defnes t"e )roductBs mar$et(com)etition and design.

Target costing inoles setting a target cost

by subtracting a desired )roft margin rom acom)etitie mar$et )rice.

To com)ete e8ectiely( organi9ations mustcontinually redesign t"eir )roducts in orderto s"orten )roduct lie cycles.

T"e )lanning( deelo)ment and designstage o a )roduct is t"ereor critical to an

organi9ationBs cost management )rocess.


70/192

Target Costing

+n traditional costing system it is )resumed t"at a)roduct "as already been deelo)ed( "as beencosted( and is ready to be mar$eted as soon as a)rice is set.

Alternatiely ( t"e com)any already $nos "at)rice s"ould be c"arged( and t"e )roblem is todeelo) a )roduct t"at can be mar$eted )roftablyat t"e desired )rice.

Ja)anese com)anies "ae deelo)ed targetcosting as a res)onse to t"e )roblem o controllingand reducing costs oer t"e )roduct lie cycle.


71/192

Target Costing

T"e target costing or a )roduct is calculatedby starting it" t"e )roducerBs antici)atedselling )rice and t"en deducting t"e desired)roft.

3ormula or Target Costing I

Antici)ated Selling Price - esired Proft

T"e )roduct deelo)ment team is t"en gien

t"e res)onsibility o designing t"e )roduct sot"at it can be made or no more t"an t"etarget cost.


72/192

Target Costing

T"e target costing a))roac" as deelo)ed inrecognition o to im)ortant c"aracteristics omar$ets and costs.

T"e mar$et i.e.( demand and su))ly really

determines )rices( and a com)any t"at attem)ts toignore t"is does so at its )eril. Antici)ated mar$et)rice is ta$en as target cost.

T"e cost o t"e )roduct is determined in t"e design

stage. +nstead o designing t"e )roduct and t"enfnding out "o muc" it costs( t"e target cost is setfrst and t"en t"e )roduct is designed so t"at t"etarget cost is attained.


73/192

Target Costing - Adantages

Proactie a))roac" to cost management7rients organi9ations toards customers

!rea$s don barriers beteen de)artments

+m)lementation en"ances em)loyeeaareness and em)oerment

3oster )artners"i)s it" su))liers

#inimi9e non-alue added actiities

6ncourages selection o loer cost alueadded actiities

5educed time to mar$et

Target Costing -


74/192

Target Costing isadantages

68ectie im)lementation and usereuires t"e deelo)ment o detailedcost data( its im)lementation

reuires illingness to coo)erate.5euires many meetings or co-

ordination.

#ay reduce t"e uality o )roductsdue to t"e use o c"ee) com)onents"ic" may be o inerior uality.


75/192

Target Costing A))roac"

+n t"e automobile industry( t"e target cost or a ne modelis decom)osed into target costs or eac" o t"e elements ot"e car ' don to a target cost or eac" o t"e indiidual)arts.

T"e designers drat a trial blue)rint( and a c"ec$ is madeto see i t"e estimated cost o t"e car is it"in reasonabledistance o t"e target cost. + not( design c"anges aremade( and a ne trial blue)rint is dran u).

T"is )rocess continues until t"ere is sucient confdence in

t"e design to ma$e a )rototy)e car according to t"e trialblue)rint.

+ t"ere is still a ga) beteen t"e target cost and estimatedcost( t"e design o t"e car ill be urt"er modifed.


76/192

Target Costing A))roac"

Ater re)eating t"is )rocess a number o times( t"efnal blue)rint is dran u) and turned oer to t"e)roduction de)artment.

+n t"e frst seeral mont"s o )roduction( t"e target

costs ill ordinarily could not be ac"ieed due to)roblems in getting a ne model into )roduction.

Hoeer ater t"at initial )eriod( target costs arecom)ared to actual costs and discre)ancies

beteen t"e to are inestigated it" t"e aim oeliminating t"e discre)ancies and ac"ieing targetcosts.


77/192

Marginal Costing

i l i


78/192

#arginal Costing

#arginal costing is a tec"niue o costingtotally oriented toards managementdecision-ma$ing and control.

#arginal costing is not a met"od o costascertainment li$e ,ob or o)erating costing. +tcan also be used in combination it" ot"ertec"niues suc" as budgeting and standard

costing.#arginal costing is "el)ul in determining t"e)robability o )roduct( de)artment( )rocessand cost centre.

#arginal costing em)"asis is on be"aiour o

i l C i


79/192

#arginal Costing

T"e c"artered institute o managementaccountants( 6ngland defnes( 0 #arginal cost is t"eamount at any gien olume o out)ut by "ic"aggregate cost are c"anged i t"e olume o out)ut

is increased or decreased by one unit. +n t"isconte*t( a unit may be a single article( a batc" oarticles( an order( a stage o )roduction ca)acity ora de)artment. +t related to t"e c"ange in out)ut int"e )articular circumstances under consideration.

#arginal cost is t"e additional cost o )roducing anadditional unit o a )roduct.

6lements o #arginal


80/192

6lements o #arginalCosting

irect #aterialirect /ages

irect 6*)enses

&ariable 6*)enses

#arginal Costing I

Prime cost = Total ariable oer"eads ' 3i*ed cost

Ascertainment o #arginal


81/192

Ascertainment o #arginalCost

Ascertainment o marginal cost is di8erent romtotal or absor)tion cost.

+n marginal cost it is assumed t"at t"e di8erencebeteen t"e aggregate sales alue and t"e

aggregate marginal cost o t"e out)ut sold)roides a und to meet t"e f*ed cost and )rofto t"e frm.

+n res)ect o eac" )roduct( t"e di8erence

beteen its sales alue and t"e marginal cost is$non as 0contribution made by t"e )roduct tot"is und.

Ascertainment o #arginal


82/192

Ascertainment o #arginalCost

Contribution is t"e di8erence beteen t"e salealue and t"e marginal cost o sales and itcontributes toards f*ed e*)enses and )roft.

+ more t"an one )roduct are )roduced(

contribution o all )roduct are merged into t"eund out o "ic" f*ed e*)enses are deducted toget t"e amount o t"e )roft.

Contribution I Selling Price ' #arginal Cost or

Contribution I 3i*ed 6*)enses = Proft or

Contribution - 3i*ed 6*)enses I Proft

# i l C ti 3 t


83/192

#arginal Costing - 3eatures

#arginal costing is a tec"niue o decisionma$ing

Total cost is classifed as f*ed and ariablecost

3i*ed cost are ascertained se)arately ande*cluded rom cost o )roduct

T"e stoc$ o or$-in-)rogress and fnis"ed

goods stoc$s are alued at ariable cost3i*ed e*)enses not included in t"e stoc$

aluation

# i l C ti 3 t


84/192

#arginal Costing - 3eatures

Contribution is deried rom reducingmarginal cost or ariable cost rom t"eselling )rice

Proftability o t"e )roduct deried romt"e selling )rice

Proft is calculated by ay o reducing

t"e f*ed cost rom t"e contributionCost &olume Proft "el) to ascertain t"e)roftability o arious leels o actiities

#arginal Costing -


85/192

#arginal Costing Assum)tions

All e*)enses are diided into to 'ariable cost and f*ed cost

3i*ed e*)enses remains constant at all

leels o actiities&ariable e*)enses ary in total but

t"ey remain same )er unit

Price o ariable cost suc" as materialcosts( labour rates remain unc"anged

#arginal Costing -


86/192

#arginal Costing Assum)tions

Selling )rice also sometimesariable

>eel o actiity o o)erations isuniorm t"roug"out a costing)eriod

T"e )roduct ris$ is unc"anged@o c"ange in manuacturing

)rocess

T"e number o unit roduced

#arginal Costing -


87/192

#arginal Costing Adantages

Sim)licityStoc$ &aluation

#eaningul re)orting

68ect o f*ed costProft )lanning

Cost control

Cost reduction

Pricing )olicy

Hel)ul to management

#arginal Costing -


88/192

a g a Cos gisadantages

Classifcation o cost@ot suitable or e*ternal re)orting

>ac$ o long term )ers)ectie

;nderaluation o stoc$Automation

Production as)ect is ignored

@ot a))licable in all ty)e o business#isleading fgures

>ac$ o sco)e or long term )olicy decisions

Ab ti C ti


89/192

Absor)tion Costing

Absor)tion costing tec"niue "ereby f*ed asell as ariable costs are considered as cost o)roduction and are used in identiying t"e cost ogoods manuactured and inentories.

6ntire manuacturing costs are ully absorbed intofnis"ed goods.

3inis"ed oer"eads are also treated as a )art oactual )roduction cost. Stoc$ and Cost o goods

are alued at total cost basis.+n Absor)tion costing( f*ed actory e*)enses areincluded in 1 ;nit cost and 2 +nentory alue.

Absor)tion Costing -


90/192

) gAdantages

SuitabilityCorrect )roft calculation

Confrm it" accrual and matc"ing conce)t

5ecogni9ed by arious bodies

Aoid t"e se)aration o costs

iscloses inecient utili9ation o )roductionresources

To ma$e t"e managers more res)onsibleTo calculate t"e gross and net )roft

se)arately

Ab ti C ti i d t


91/192

Absor)tion Costing - isadantages

iculty in com)arison and controlo cost

@ot "el)ul in managerial decisions

Cost itiated because o f*ed costincluded in inentory aluation

3i*ed cost inclusion in cost not

,ustifedA))ortionment o f*ed oer"eads on

arbitrary met"ods

@ot "el ul or re aration o Ee*ible

i8erence beteen Absor)tion and


92/192

)#arginal Costing

A"sorption Costing

All f*ed and ariablecosts are included in

costi8erent unit costs areobtained at di8erentleels o out)ut as f*ede*)enses remaining t"e

same

i8erence beteen salesand total cost is )roft

Marginal Costing

7nly ariable costs areincluded.

#arginal cost )er unitill remain same atdi8erent leels o

out)ut( ariablee*)enses ary in t"esame )ro)ortion asout)ut aries.

i8erence beteensales and marginal costis contribution andbeteen contribution

and f*ed cost is )roft

i8erence beteen Absor)tion and


93/192

)#arginal Costing

A"sorption CostingT"e a))ortionment of*ed e*)enses on anarbitrary basis gies riseto oer or underabsor)tion o oer"eads"ic" ma$es t"e )roductcost inaccurate andunreliable.

Costs are classifed

according to unctionalbasis i.e.( Production(Administratie( Sellingand istribution.

Marginal Costing7nly ariable costs arec"arged to )roducts(marginal cost tec"niuedoes not lead to oer orunder absor)tion o f*edoer"eads.

Costs are classifedaccording to t"ebe"aiour o costs i.e.(f*ed costs and ariablecosts.


94/192

3reak Even Analysis

Cost &olume Proft Analysis


95/192

yor !rea$ 6en Analysis

!rea$ een analysis is a logical e*tension o marginal costing.+t is based on t"e same o classiying t"e o)erating e*)ensesinto f*ed and ariable. 5ecently it "as become a )oerulinstrument in t"e "ands o )olicy ma$ers to ma*imi9e )rofts.

Cost-olume )roft analysis "el)s t"e management in )roft

)lanning. Proft o t"e frm can be increased by increasing t"eout)ut and sales or reducing cost. Su))ose a frm )roduces tot"e ma*imum ca)acity and sell( contribution is also increasedto t"e ma*imum leel.

T"e most im)ortant actor inEuencing t"e earning o )roft is

t"e leel o )roduction i.e.( olume o out)ut. Cost olume)roft analysis e*amines t"e relations"i) o costs and )roft tot"e olume o business to ma*imi9e )rofts.

7b,ecties o C&P Analysis


96/192


T"e cost or arious ty)es o )roductionT"e desirable olume o )roduction

T"e )roft at arious leels o )roduction

T"e di8erence beteen sales reenueand ariable cost

!6P analysis "el)s to orecast )roft

accurately!6P analysis is useul in setting u)

Ee*ible budgets



97/192


!6P Analysis "el)s in ealuation o)erormance or t"e )ur)ose o control

!6P Analysis useul in ormulating )rice)olicies by s"oing t"e e8ect o di8erent)rice structure on cost and )roft

!6P reEects )re-determined oer"eads rates

!6P s"os t"e mat"ematical relations"i) o

cost( olume and )roft!6P "el)s to )re)aring !rea$ een c"arts

C&P Analysis


98/192

C&P Analysis

T"e study o Cost-olume )roft can be made by

1. #at"ematical relations"i) beteen Cost(

&olume and Proft.

2. Pre)aring !rea$ een c"arts.

#at"ematical relations"i) beteen cost-olume)roft reuires t"e understanding o marginalcost euation.

#arginal Cost 6uation


99/192

#arginal Cost 6uation

Sales ' &ariable cost I 3i*ed cost =Proft

Sales ' &ariable cost I Contribution

Contribution I 3i*ed cost = Proft

+n order to ma$e )roft( contributionmust be more t"an t"e f*ed e*)enses

and to aoid any loss( contributionmust be eual to t"e f*ed e*)enses.

Conce)ts o C&P Analysis


100/192


Contri"ution

Contribution is t"e di8erence beteent"e sales and t"e marginal cost o sales

and it contributes toards f*ed e*)ensesand )roft.

Contribution I Selling Price ' #arginalCost

Contribution I 3i*ed 6*)enses = Proft

Contribution - 3i*ed 6*)enses I Proft



101/192


Proft ,olume 8atio or Contri"ution * 'alesT"e Proft ? &olume ratio is one o t"e mostim)ortant ratios or studying t"e )roftability oo)erations o a business and establis"es t"e

relations"i) beteen contribution and sales.P?& I Contribution L 1MM

Sales

P?& I Sales ' &ariable cost L 1MM

SalesP?& I C"anges in )roft L 1MM

C"anges in Sales



102/192


3reak-even PointA business is said to brea$ een "en its total salesare eual to its total costs. +t is a )oint o @o Proft @o>oss.

!6P I 3i*ed 6*)ensesContribution )er unit

!6P I !rea$ een sales

Selling )rice )er unit

!6P I 3i*ed costP?& 5atio

!6P I !rea$ een olume * Selling )rice )er unit



103/192


Margin o 'aety#argin o Saety is t"e di8erence beteen t"eactual sales and t"e sales at brea$ een )oint.Sales or out)ut beyond brea$ een )oint is

$non as #argin o Saety.

#7S I Actual Sales ' !rea$ een sales

#7S in 5s. I Proft

P?& 5atio#7S in ;nits I Proft

Contribution )er unit

!rea$ een C"art


104/192

!rea$-een C"art

!rea$ een c"art is a gra)"ical re)resentation. +t isconsidered to be most im)ortant gra)"icalre)resentation o accounting data.

!rea$ een c"art s"os t"e inter relations"i)

beteen cost( olume and )roft.T"e gra)" clearly e*)lains t"e brea$ een )oint and)roft or loss at arious olumes o actiities.

+t is a gra)" s"oing t"e amount o f*ed costs and

ariable costs and sales reenue at di8erent olumeo o)erations. +t s"os at "at olume t"e frm frstcoers all costs it" reenue and brea$ een.

Signifcance o !6 C"art


105/192

Signifcance o !6 C"art

T"e brea$ een c"art s"os t"e f*ed costs( ariablecosts and total costs.

T"e c"art s"os t"e sales units and sales alue at"ic" sale reenue is eual to total costs.

+t s"os t"e brea$-een )oint at "ic" t"ere is no)roft or loss.

T"e c"art s"os t"e )roft or loss at arious olumes.

#argin o saety is clearly s"on.

T"e c"art s"os t"e angle o incidence.

+t s"os t"e di8erence beteen total sales and totalcost line on t"e gra)".

Assum)tions o !6 C"art


106/192

Assum)tions o !6 C"art

Costs are classifed into f*ed and ariable.&ariable costs directly c"ange in

)ro)ortion to out)ut.

3i*ed costs remain constant at all leels o

actiity.Selling )rice is same or di8erent leels o

out)ut.

@o c"ange in )roduct mi*.

>eel o eciency and management )olicydo not c"ange.

T"ere is no o)ening and closing stoc$s

Construction o !rea$ 6en


107/192

C"artsCo-ordinates on t"e gra)" are to be dran frst.T"e L a*is re)resents out)ut in units and t"e Na*is re)resents costs and reenue.

Suitable scales are to be selected or bot" units

and amounts.T"e sales olume or sales units are to be

)lotted. /"en )lotted t"e sales reenue or t"eout)ut ill be a straig"t line rom origin to t"e

rig"t. + t"e scales on bot" t"e a*es are t"esame t"e sales line ill be at G degree angleto t"e base.

Construction o !rea$ 6en


108/192

C"artsT"e f*ed cost line is to be dran )arallel to t"e L a*is

to indicate t"at it is inelastic it"in t"e installedca)acity.

T"e total cost line is to be dran or a gien salesolume units.

T"e )oint at "ic" t"e total cost line intersects t"e salesline is t"e brea$ een )oint( a line dran )er)endicularto t"e L a*is rom t"e brea$ een )oint re)resents lossand t"e area aboe t"e )oint re)resents )roft.

T"e angle ormed at t"e )oint o intersection o t"e totalcost and t"e sales lines is called t"e angle o incidence.

Adantages


109/192

Adantages

T"ey re)resent inormation in sim)le orm to analy9e andunderstand t"e relations"i) beteen cost olume and )roft.

T"ey indicate )roftability o )roducts and in )roft )lanning

!rea$ een c"art )roide an insig"t into c"anges in t"earious actor a8ecting )rofts

!rea$ een c"art seres as a tool o cost control as t"estructure o t"e total costs is s"on ery clearly

!rea$ een c"art ill be "el)ul to t"e management toe*ercise decisions regarding control o cost

T"ey "el) in )resentation o Ee*ible budgets as t"e costunder bot" ariable and f*ed categories are analy9eduniormly

>imitations


110/192

>imitations

Assum)tion o brea$ een )oint t"at f*ed costsremain constant and ariable cost ary in )ro)ortionto out)ut ill not "old good in long run.

Assum)tion t"at all units )roduced are sold is rong

Assum)tion regarding constant selling )rice isridicules as t"e )rices are a8ected by demand andsu))ly

#anagement )olicy $ee)s c"anging due to seeralactors

!rea$ een c"art assumes t"at )roduct mi* remainssame

Ty)es o !rea$-een C"art


111/192

Ty)es o !rea$-een C"art

Sim)le brea$ een c"artContribution brea$ een c"art

Proft brea$ een c"artProft c"art or )roduct ise

analysis

Cas" brea$ een c"artControl brea$ een c"art

!rea$ een C"art


112/192

!rea$ een C"art

:

3reak even Point 'ales Angle o

9ncidence Costand

8evenue Total Cost

Fi%ed Cost

; 'ales and #utput abour budget#anuacturing oer"eads

Administratie cost budgets

Plant utili9ation budgets

Ca)ital e*)enditure budgets5esearc" and deelo)ment cost budget

Cas" budget

Ty)es o !udget


125/192

Ty)es o !udget

'ales "udget+s an estimate o antici)ation o sales in t"e near uturein terms o uantity and alue. To orecast t"e cost oselling and distribution cost or budget )eriod.

Production "udget+s mainly de)endent on t"e sales budget as to "omuc" to be )roduced in terms o uantity in monetaryterms

Materials "udget

Ta$es )lace ater identiying t"e uantity o fnis"ed)roducts e*)ected to )roduce in order to meet t"edemands o t"e customers.

Ty)es o !udget


126/192

Ty)es o !udget

Purc$ase "udget+s mainly de)endent on )roduction budget and materialreuirement budget. +t )roides inormation about t"ematerials to be acuired rom t"e mar$et during t"e budget)eriod.

Direct !a"our "udget+t )roides an estimate o t"e reuirements o direct labouressential to meet t"e )roduction target.

Manuacturing over$ead "udget

Ascertains t"e or$ oer"ead e*)enses to be incurred in abudget )eriod to ac"iee t"e )roduction target. +t includest"e cost o indirect material( indirect labour and indirector$s e*)enses.

Ty)es o !udget


127/192

y)es o udge

Administrative e%penses "udget+t coers t"e e*)enses incurred in raming )olicies(directing and conducting t"e business o)erations.

Plant utili>ation "udget

6*)ress t"e reuirement o )lant ca)acity to carryout t"e )roduction as )er )roduction sc"edule.

Capital E%penditure "udget

eals it" t"e estimated amount o ca)ital t"at may

be needed or acuiring t"e f*ed assets reuired orulflling )roduction reuirements.

Ty)es o !udget


128/192

y) g

8esearc$ and Development "udgeteals it" or$ relates to researc" anddeelo)ment actiity

Cas$ "udget


129/192

y) g

Fi%ed "udgetT"is budget is dran or one leel o actiity and one seto conditions. +t "as been defned as a budget "ic" isdesigned to remain unc"anged irres)ectie o t"eolume o out)ut.

Fle%i"le "udget

A Ee*ible budget as a budget "ic"( by recogni9ing t"edi8erence in attitude beteen f*ed and ariable costsin relation to Euctuations in out)ut.

3asic "udgetA basic budget "as been defned as a budget "ic" is)re)ared or use unaltered oer a long )eriod o time.

Ty)es o !udget


130/192

y) g

Current "udgetA current budget can be defned as a budget "ic"is related to t"e current conditions and is )re)aredor use oer a s"ort )eriod o time.

!ong-term "udgetA long term budget can be defned as a budget"ic" is )re)ared or )eriods longer t"an a year.

'$ort-term "udget

T"is budget is defned as a budget "ic" is )re)aredor )eriod less t"an a year and is ery useul toloer leels o management or control )ur)oses.

Perormance !udgeting


131/192

g g

+n conentional system o budgeting( moneyconce)t as gien more )erormance i.e.(estimating or )ro,ecting ru)ee alue or ariousaccounting "eads or classifcation o reenue or

cost.T"ese days( budgets are establis"ed in suc" a ayso t"at eac" item o e*)enditure is related tos)ecifc res)onsibility centre and is closely lin$edit" t"e )erormance o t"at standard.

T"us in )erormance budget classifcation oe*)enditure t"ere are t"ree )attern i.e.( unction()rogramme and actiity. Perormance or )roductiongoals in )"ysical and fnancial terms are establis"ed

in accordance it" t"is ne classifcation and actual

System o Perormance!udgeting


132/192

!udgeting6stablis"ment o ell defned res)onsibility centres

or action )oints "ere o)erations are )erormed andfnancial transactions in terms o money ta$e )lace.

6stablis"ment o eac" res)onsibility center and a)rogramme o e*)ected )erormance in )"ysicalunits o t"at centre.

To orecast t"e amount o e*)enditure under t"earious classifcation "eads to meet t"e )"ysical)lan.

Perormance re)orting indicating t"e result oanalysis o t"e ariance rom t"e budget is done li$et"at o ariance re)orting.


133/192

Oero !ase !udgeting


134/192

g g

T"is tec"niue as introduced by e*-)resident Jimmy carter o ;SA( as a means tocontrolling state e*)enditure.

Since early 1QMBs( it is gaining acce)tancein t"e business orld because it is )roing itsutility as a tool integrating t"e managerialunction o )lanning and control.

O!! is t"e best used as managerial control inactiities "ic" are directly related to t"efnal out)ut o t"ese actiities.

Oero !ase !udgeting


135/192

g g

C+#A defned ( RBas a met"od o budgeting "ereby allactiities are realued eac" time a budget is set.iscrete leels o eac" actiity are alued and acombination c"osen to matc" unds aailable.

A )lanning and budgeting )rocess "ic" reuires eac"manager to ,ustiy "is entire budget reuest in detailrom scratc" and s"it t"e burden o )roo to eac"manager to ,ustiy "y "e s"ould s)end any money atall.

T"e a))roac" reuires t"at all actiities be analy9ed indecision )ac$ages "ic" are ealuated by systematicanalysis and ran$ed in order o im)ortance.

Oero !ase !udgeting


136/192

g g

FeaturesTo "el) t"e management anser t"e

uestion.

To oercome t"e ea$ness oconentional budgeting.

To a))ly successully or goernment

e*)enditure.To deelo)ment o data )rocessing(

uality control( mar$eting and

trans)ortation

Oero !ase !udgeting


137/192

g g

Adantages+t is not based on incremental a))roac" and "ence

assures o)erational eciency( "el)s managers toreie and ,ustiy t"e actiity or t"e unds reuired.

#ost a))ro)riate or t"e sta8 and su))ort areas oan organi9ation because t"e out)uts o t"ese areasare not directly related to t"e fnal out)uts o t"eorgani9ation.

Considers eery alternatie ays o )erorming t"esame ,ob because 9ero is ta$en as a base eerytime at t"e )re)aration o a budget.

Oero !ase !udgeting


138/192

g g

6*)ress t"e management )rocess on analysis anddecision-ma$ing because it reuires managers to reiet"eir actiities eery time "en a budget is deelo)ed.

+t is useul to t"e management in ma$ing o)timumallocation o scarce resources because a uniue as)ect o

O!! is t"e ealuation o bot" current and )ro)osede*)enditure and )lacing it in some order o )riority.

ecision )ac$ages are sel contained modules or )ro)osalssee$ing unds. 6ac" decision )ac$age ill clearly e*)laint"e actiity( t"e need or t"e item( t"e amount inoled(t"e beneft o im)lementing t"e )ro)osal( t"e loss t"at maybe incurred( i it is not done etc.(

Oero !ase !udgeting


139/192

g g

T"e im)ortant ste)s are:-+dentifcation o decision units in order to ,ustiy

eac" item o e*)enditure in t"eir )ro)osed budget.

Pre)aration o decision )ac$ages. 6ac" )ac$age is

a se)arate and identifable actiity. T"ese )ac$agesare lin$ed it" cor)orate ob,ecties.

5an$ing o decision )ac$ages based on cost beneftanalysis.

Allotment o unds based on t"e aboe resulting byolloing )yramid ran$ing system to ensureo)timum results.

Oero !ase !udgeting


140/192

isadantagesT"e )a)er or$ ill increase )eriodically due to large

number o decision )ac$ages.

T"e cost o )re)aring t"e arious )ac$ages may be ery"ig" in large frms inoling more number o decision

)ac$ages.5an$ing o )ac$ages is ery oten sub,ectie and may gie

ris$ to conEicts.

!ad managers may resist ne ideas and c"anges as t"eyeel t"reatened by O!!.

Costs and benefts on eac" )ac$age must be continuallyu)-to-dated to be releant and ne )ac$ages are to bedeelo)ed as soon as ne actiities emerge.

5es)onsibility Accounting


141/192

According to Certifed +nstitute o #anagement

Accounting( >ondon( 05es)onsibility accounting isa system o #anagement Accounting under "ic"accountability is establis"ed according to t"eres)onsibility delegated to arious leels o

management and management inormation andre)orting system instituted to gie adeuate eed-bac$ in terms o t"e delegated res)onsibility.;nder t"is system diisions or units o anorgani9ation under s)ecifed aut"ority in a )ersonare deelo)ed as a res)onsibility centre andealuated indiidually or t"eir )erormance. Agood system o transer )ricing is essential toestablis" t"e )erormance and results o eac"



142/192

5es)onsibility accounting f*es res)onsibility or costcontrol )ur)oses.

+t is met"od o accounting in "ic" costs andreenues are identifed it" )ersons "o areres)onsible or t"eir control rat"er t"an it" )roductsor unctions.

T"is met"od classifes costs and reenues accordingto t"e res)onsibility centres t"at are res)onsible orincurring t"e costs and generating t"e reenues.

5es)onsibility centres can be broadly classifed intot"ree categories i.e.( Cost centres( Proft centres and+nestment centres



143/192

PrinciplesA target is f*ed or eac" res)onsibility centre.

Actual )erormance is com)ared it" t"e target.

T"e ariance rom t"e budgeted )lan are

analy9ed so as to f* t"e res)onsibility o centres.Correctie action is ta$en by t"e "ig"er

management and is communicated to t"eres)onsibility centres.

All a))ortioned costs and )olicy costs aree*cluded in determining t"e res)onsibility orcost.



144/192

Advantages+t establis"es a sound system o control.

+t is tailored according to t"e needs o an organi9ation.

+t encourages budgeting or com)arison o actual

ac"ieement it" t"e budgeted fgures.+t increases interests and aareness among t"esu)erisory sta8 as t"ey are called u)on to e*)lainabout t"e deiation or "ic" t"ey are res)onsible.

+t sim)lifes t"e structure o re)orts and acilities t"e

)rom)t re)orting because o e*clusion o t"ose items"ic" are beyond t"e sco)e o indiidual res)onsibility.



145/192

Demerits!asically t"e )rereuisites or a successul

res)onsibility accounting sc"eme.

+t becomes di8erent to "ae a urt"er analysis o

e*)enses t"an )roided by traditional classifcationo e*)enses.

/"ile introducing t"e system su)erisory sta8 mayreuire additional classifcation es)ecially in t"eres)onsibility re)orts.

5es)onsibility accounting must be e*)lained )ro)erlyt"e )ur)ose and benefts o t"e ne system.


146/192

'tandard Costing

Standard Costing and &arianceAnalysis


147/192

Analysis

Standard cost is a )redetermined cost. +t is adetermination in adance o )roduction( o "at s"ouldbe t"e cost. /"en standard costs are used or t"e)ur)oses o cost-control( t"e tec"niue is $non asstandard costing.

6ric > o"ler defnes ( 0Standard cost is a orecast or)redetermination o "at actual cost s"ould be under)ro,ected conditions( sering as a cost control and as ameasure o )roduction eciency or standard ocom)arison "en ultimately aligned against actual cost.

+t urnis"ed a medium by "ic" t"e e8ectieness ocurrent results can be measured and t"e res)onsibilityor deotion can be )laced.

Standard Costing


148/192

+t is )re-determined calculation o "at costoug"t to be under s)ecifc or$ing conditions.

+t is built by correlating standard uantity andorecast o uture mar$et trend or )rice

standards.+t )roides bases or control t"roug" ariance

accounting.

+t )roides bases or aluation o stoc$ andor$-in-)rogress and some cases or f*ing

selling )rice.

Standard Costing


149/192

Standard Costing is t"e )re)aration o standard costs anda))lying t"em to measure t"e ariations rom actual costsand analy9ing t"e causes o ariations it" a ie tomaintain ma*imum eciency in )roduction.

+t is a tec"niue "ic" uses standards or costs and reenue

or t"e )ur)ose o control t"roug" ariance analysis.T"e system o standard costing can be useul in all ty)es oindustries. !ut it is more commonly used in industries)roducing standardi9ed )roducts "ic" are re)etitie innature and not suitable or ,ob order industries.

Com)arison o t"e actual cost and t"e standard cost o t"eo)erations ill be "el)ul in controlling t"e cost o t"eo)erations.

Standard Costing &s !udgetaryControl


150/192

Control

Standard costing and budgetary control ac"iee t"e sameob,ecties o ma*imum eciency and cost reduction byestablis"ing )redetermined standards( com)aring actual)erormance it" t"e )redetermined standards and ta$ingcorrectie measures( "ereer necessary.

Standards are based on tec"nical assessments "ereasbudgets are based on )ast actual ad,usted to uture trends.

!udgetary control deals it" t"e o)eration o a de)artmento business. /"ile standard costing is a))lied tomanuacturing o a )roduct( )rocess or )roiding serices.

!udgetary control is e*tensie "ereas standard costing isintensie. !udgets are )ro,ection o fnancial accounts. !utstandard costs are )ro,ection o cost accounts.

Standard Costs and 6stimated Costs


151/192

Standard costs and estimated costs are)redetermined costs( but t"eir ob,ecties aredi8erent. 7b,ect o estimated cost is to "ae areasonable assessment o "at a cost ill be

"ereas standard cost aims "at a cost s"ouldbe.

6stimated costs are calculated on t"e basis o)erormance ad,usted in t"e lig"t o antici)ated

c"anges in t"e uture. !ut standard costs aredetermined on a scientifc basis $ee)ing in iecertain actors and conditions o eciency.

Standard Costing &s #arginalCosting


152/192

g

Standard costing is a system o accounting in"ic" all e*)enses are considered or t"edetermination o standard cost or a)rescribed set o or$ing conditions.

7n t"e ot"er "and( marginal costing is atec"niue in "ic" only ariable e*)ensesare ta$en to ascertain t"e marginal cost.

!ot" standard costing and marginal costingare com)letely inde)endent o eac" ot"erand may be installed ,ointly.

Standard Costing -Preliminaries


153/192

Preliminaries

Esta"lis$ment o cost centresA cost centre is a location( )erson or item oeui)ment or "ic" costs may be ascertained andused or t"e )ur)ose o cost control. 6stablis"ment

o cost centres is necessary or f*ing res)onsibilityor unaourable conditions.

Types o 'tandards

T"ere are t"ree ty)es o standards:-

a Current standardsb !asic standards

c @ormal standards



154/192

Preliminaries

Current standardsA standard "ic" is related to current conditions and isestablis"ed or use oer a s"ort )eriod o time. T"isstandard may be f*ed on t"e basis o ideal standardand e*)ected standard.

9deal standard

A standard "ic" can be attained under t"e mostaourable conditions )ossibly is related to currentconditions.

E%pected or attaina"le standardT"is is t"e standard "ic" is antici)ated during a utures)ecifed budget )eriod.



155/192

Preliminaries

3asic standards+t is a standard "ic" is establis"ed or use unaltered oer along )eriod o time. T"is standard is f*ed or long )eriod soas to "el) orard )lanning. !asic standard is establis"ed orsome base year and is not c"anges or a long )eriod o time

as material )rices( labour rate and ot"er e*)enses c"ange.+ormal standards

T"is standard is defned as t"e aerage standards "ic" it isantici)ated can be attained oer a uture )eriod o time()reerably long enoug" to coer one trade cycle.

Suc" standards are establis"ed on t"e basis o aerageestimated )erormance oer a uture )eriod o time coeringone trade cycle.



156/192

Preliminaries'etting t$e standard oresta"lis$ment o standard cost

Standard committee "ic" s"ould beentrusted it" t"e or$ o settingstandard costs.

Direct material cost

etermination o standard uantity omaterials needed or t"e )roduction.

etermination o standard )rice unit omaterial.



157/192

Preliminaries

Direct !a"our costStandard time establis"ed according to time andmotions study are inde)endent o )reious)erormance.

Standard rate o )ay s"ould be establis"ed oreery category o labour.

Direct #ver$ead cost

Standard f*ed oer"eads rate and standard

ariable oer"ead rate s"ould be determinedaccording to t"e unction-ise classifcation ooer"eads.

Analysis o &ariances


158/192

Analysis o ariance is "el)ul in controlling t"e

)erormance and ac"ieing t"e )rofts t"at "aebeen )lanned.

T"e deiation o t"e actual cost or )roft or salerom t"e standard cost or )roft or sales is $non

as ariance./"en actual cost is less t"an standard cost oractual )roft is better t"an standard )roft( it is$non as aourable ariance and suc" ariance

is usually a sign o eciency o t"e organi9ation./"en actual cost is more t"an standard cost oractual )roft or turnoer is less t"an standard)roft or turnoer( it is called unaourable

Standard Costing -Adantages


159/192

Adantages

Standards )roide yardstic$s against "ic" actual costsare com)ared to ascertain eciency or ineciency oactual )erormance.

Standard costing "el)s in e*ercising cost control and)roides inormation "ic" is "el)ul in cost control and

cost reduction.Analysis o ariance ill assist to single out ineciency

and locate )ersons "o are res)onsible or unaourableariances.

Standard costs( being )re-determined costs( are useul in

)lanning and budgeting.Standard costing ma$es all t"e e*ecuties cost conscious

"ic" increases eciency and )roductiity all round.

Standard Costing ->imitations


160/192

>imitations

6stablis"ment o standards reuires "ig" degree o s$illin case o small concerns

3or f*ing res)onsibilities( ariance s"ould besegregated into controllable and uncontrollableariances because e*ecutie can be made res)onsible

or controllable ariances "ic" arise rom t"eir action.T"e tec"niues o standard costing may not be ery

e8ectie in t"e industries "ic" deal it"non-standard )roducts and t"e ,obs "ic" c"angeaccording to customersB reuirements.

+t is ery dicult to establis" standard cost o material(labour and oer"eads.


161/192

,ariance Analysis



162/192

Analysis o ariance may be donein res)ect o eac" elements o costand sales i9.(

irect #aterial &arianceirect >abour &ariance

7er"eads &ariance

Sales &ariance



163/192

Direct Material ,ariance#aterial cost ariance

#aterial Price ariance

#aterial usage or uantityariance

#aterial mi* ariance#aterial yield ariance



164/192

Direct Material Cost ,ariance ?DMC,@+t is t"e di8erence beteen t"e standard cost omaterials alloed or t"e out)ut ac"ieed and t"eactual cost o material used.

#C& I Standard cost o materials or actual out)ut- Actual cost o materials used

#C& I irect material )rice ariance =

irect material usage ariance

#C& I irect material )rice ariance =

#aterial mi* ariance = #aterial yieldariance



165/192

Direct Material Price ,ariance ?DMP,@+t is t"at )ortion o t"e material cost ariance"ic" is due to t"e di8erence beteen t"estandard cost o materials used or t"e out)ut

ac"ieed and t"e actual cost o material used.#P& I Actual usage standard unit )rice ' Actualunit )rice

Actual usage I Actual uantity o materials used

Standard unit )rice I Standard )rice o materials )erunit

Actual unit )rice I Actual )rice o materials )er unit



166/192

Direct Material Usage or /uantityvariance ?DMU,@

+t is t"at )ortion o material cost ariance"ic" is due to t"e di8erence beteen t"e

standard uantity o materials s)ecifed ort"e actual out)ut and t"e actual uantity omaterials used.

#aterial usage ariance IStandard )rice )er unit *

Standard uantity - Actual uantity



167/192

Direct Material Mi% ,ariance?DMM,@

#aterial mi* ariance is t"e di8erence

beteen standard and t"e actualcom)osition o a mi*ture. T"isariance arises because t"e ratio o

materials being c"anged rom t"estandard ratio set. +t is calculated asdi8erence beteen t"e standard )riceo standard mi* and standard )rice o



168/192

Actual 0eig$t o mi% and t$e standard 0eig$t omi% do not di2er

Standard unit cost * standard uantity '

actual uantity

Standard cost o standard mi* 'Standard cost o actual mi*

9 t$e standard is revised due to s$ortage o aparticular type o material t$e material mi%variance is calculated as ollo0s5

Standard unit cost * 5eised standard uantity '

Actual uantity

Standard cost o reised standard mi* '

Standard cost o actual mi*



169/192

Direct Material :ield ,ariance?DM:,@

+t is t"at )ortion o t"e material usage

ariance "ic" is due to t"e di8erencebeteen t"e standard yield s)ecifedand t"e actual yield obtained. T"is

ariance measures t"e abnormal lossor saing o materials.



170/192

&$en standard and actual mi% do not di2erNield ariance I Standard rate *

Actual yield ' Standard yield

Standard rate I Standard cost o standard mi*

@et standard out)ut ' Standard loss&$en actual mi% di2ers rom standard mi%

Nield ariance I Standard rate *

Actual yield ' 5eised Standard yield

Standard rate I Standard cost o reised standardmi*

@et standard out)ut



171/192

!a"our ,ariances>abour cost ariance

>abour rate ariance

Total labour eciency ariance>abour eciency ariance

>abour idle time ariance

>abour mi* ariance>abour yield ariance



172/192

!a"our cost variance+t is t"e di8erence beteen t"e standard cost o labouralloed or t"e actual out)ut ac"ieed and t"e actual costo labour em)loyed. +t is also $non as ages ariance.

>abour ariance I

Standard cost o labour ' Actual cost o labour

!a"our rate variance

+t is t"at )ortion o t"e labour cost ariance "ic" arisesdue to t"e di8erence beteen t"e standard rate s)ecifed

and t"e actual rate )aid.>abour rate ariance I

Actual time ta$en ' Standard rate ' Actual rate

Analysis o &ariancesTotal la"our e1ciency variance


173/192

Total la"our e1ciency variance

+t is t"at )art o labour cost ariance "ic" arisesdue to t"e di8erence beteen standard labourcost o standard time or actual out)ut andstandard cost o actual time )aid or.

Total labour eciency ariance IStandard time or actual out)ut ' Actual time)aid or

!a"our e1ciency variance

+t is t"at )ortion o labour cost ariance "ic"arises due to t"e di8erence beteen t"e standardlabour "ours s)ecifed or t"e out)ut ac"ieedand t"e actual labour "our s)end.



174/192

!a"our idle time variance+t is suitable to calculate only "en t"ere is abnormalidle time. +t is t"at )ortion o labour cost ariance"ic" is due to t"e abnormal idle time o or$ers.

+dle time ariance I Abnormal idle time * standardrate

!a"our mi% variance

>i$e materials mi* ariance and is a )art o laboureciency ariance. T"e ariance s"os to t"e

management as to "o muc" o labour cost arianceis due to t"e c"ange in t"e com)osition o labour orce.



175/192

>abour mi* ariance IStandard cost o standard com)osition '

Actual time ta$en

Standard cost actual com)osition

Actual time or$ed

!a"our yield variance

>i$e material yield ariance and arises due to t"e di8erencebeteen yield t"at s"ould "ae been obtained by actualtime utili9ed on )roduction and actual yield obtained.

Standard labour cost )er unit IActual yield in units ' Standard yield in units e*)ected rom

t"e actual time or$ed on )roduction



176/192

#ver$ead ,ariance7er"ead cost can be defned as t"edi8erence beteen t"e standard cost ooer"ead alloed or t"e actual out)ut

ac"ieed and t"e actual oer"eads costincurred. 7er"ead cost ariance is under oroer absor)tion o oer"eads.

7er"ead cost ariance IActual out)ut * Standard oer"ead rate )erunit ' Actual oer"ead cost



177/192

7er"ead cost ariance can be classifed as :&ariable oer"ead ariance&ariable oer"ead e*)enditure ariance

&ariable oer"ead eciency ariance

3i*ed oer"ead ariance6*)enditure ariance

&olume ariance

Ca)acity ariance

Calendar ariance

6ciency ariance



178/192

,aria"le over$ead variance+t is t"e di8erence beteen t"e standard ariableoer"ead cost alloed or t"e actual out)utac"ieed and t"e actual ariable oer"ead cost.

T"is ariance is re)resented by e*)enditureariance only because ariable oer"ead cost illary in )ro)ortion to )roduction so t"at only ac"ange in e*)enditure can cause suc" ariance.

Actual out)ut * Standard ariance oer"ead rate-

Actual ariable oer"eads



179/192

,aria"le over$ead e%penditure variance&76& I Actual "ours or$ed *

Standard ariable oer"ead rate )er "our -Actual ariable oer"ead

,aria"le over$ead e1ciency variance

&76& I Standard time or actual )roduction*

Standard ariable rate )er "our '

Actual "our or$ed * Standard ariable

oer"ead rate )er "our



180/192

Fi%ed over$ead variance

+t is t"at )ortion o total oer"eads cost ariance "ic" isdue to t"e di8erence beteen t"e standard cost o f*edoer"eads alloed or t"e actual out)ut ac"ieed and t"eactual f*ed oer"ead cost incurred.

37& I Actual out)ut * Standard f*ed oer"eadrate )er unit ' Actual f*ed oer"eads

E%penditure variance

+t is t"at )ortion o t"e f*ed oer"ead ariance "ic" is dueto t"e di8erence beteen t"e budgeted f*ed oer"eads and

t"e actual f*ed oer"eads incurred during a )articular)eriod.

6& I !udgeted f*ed oer"eads ' Actual f*ed oer"eads



181/192

,olume variance

+t is t"at )ortion o t"e f*ed oer"ead ariance"ic" arises due to t"e di8erence beteen t"estandard cost o f*ed oer"ead alloed or t"eactual out)ut and t"e budgeted f*ed oer"ead or a

)eriod during "ic" t"e actual out)ut "as beenac"ieed.

T"is ariance s"os t"e oer or under absor)tion of*ed oer"eads during a )articular )eriod. + t"e

actual out)ut is more t"an t"e budgeted out)ut(t"ere is oer-recoery o f*ed oer"eads andolume ariance is aourable and ice ersa it"e actual out)ut is less t"an t"e budgeted out)ut.

T"is is so because f*ed oer"eads are not e*)ected



182/192

Capacity variance+t is t"at )ortion o olume ariance "ic" is due toor$ing at "ig"er or loer ca)acity t"an t"e budgetedca)acity. Ca)acity ariance is related to t"e under andoer utili9ation o )lant and eui)ment and arises due

to idle time( stri$es and loc$-out( brea$don o t"emac"inery( )oer ailure( s"ortage o materials andlabour( absenteeism( oertime( c"anges in number os"its. T"e ariance arises due to more or less or$ing

"ours t"an t"e budgeted or$ing "ours.C& I Standard rate 5eised budgeted unit ' !udgetedunits



183/192

Calendar variance+t is t"at )ortion o t"e olume ariance "ic" is due tot"e di8erence beteen t"e number o or$ing days int"e budget )eriod and t"e number o actual or$ingdays in t"e )eriod to "ic" t"e budget is a))licable.

+ t"e actual or$ing days are more t"an t"e standardor$ing days( t"e ariable ill be aourable and iceersa i t"e actual or$ing days are less t"an t"estandard days.

C& I +ncrease or decrease in )roduction due tomore or less or$ing days at t"e rate o

budgeted ca)acity * Standard rate )er unit



184/192

E1ciency variance+t is t"at )ortion o t"e olumeariance "ic" is due to t"e di8erence

beteen t"e budgeted eciency o)roduction and t"e actual eciencyac"ieed. T"is ariance is related tot"e eciency o or$ers and )lan.

6& I Standard rate )er unit *

Actual )roduction ' Standard)roduction



185/192

'ales ,ariancesSales ariances "ae com)lete analysis o )roftariance because )roft is t"e di8erence beteen salesand cost.

Sales ariance may be calculated in to di8erent ays.

T"e frst met"od o calculating sales ariances is )roftmet"od o calculating sales ariances and t"e second is$non as alue met"od o calculating sales ariance.

T"ese may be com)uted so as to s"o t"e e8ort on

)roft or to s"o t"e e8ect on sales alue.Sales ariance s"oing t"e e8ect on )roft are moremeaningul( so t"ese ould be considered frst.



186/192

Proft met$od o calculatingsales variances

Total sales margin ariance

Sales margin ariance due toselling )rice

Sales margin ariance due to

olumeSales margin ariance due to sales

mi*ture



187/192

,alue met$od o calculatingsales volume

Sales alue ariance

Sales )rice ariance

Sales olume ariance

Sales mi* ariance

Sales uantity ariance



188/192

Proft met$od o calculating sales volumeTotal sales margin variance

TS#& I Actual )roft ' !udgeted )roft

'ales margin variance due to selling price

+t is t"at )osition o total sales margin ariance"ic" is due to t"e di8erence beteen t"e actual)rice o uantity o sale e8ected and t"e standard)rice o t"ose sales.

TS#& I Actual uantity o sales *Actual selling )rice )er unit ' Standard )rice )erunit



189/192

'ales margin variance due to volume+t is t"at )ortion o total sales margin ariance "ic"arises due to t"e number o articles sold being more orless t"an t"e budgeted uantity o sales.

S#& I Standard )roft )er unit *

Actual uality o sales ' !udgeted uality o sales

'ales margin variance due to sales mi%

/"ic" arises because o di8erent )ortion o actual salesmi*. +t is ta$en as di8erent beteen t"e actual and

budgeted uantities o eac" )roduct o "ic" t"e salesmi*ture is com)osed( aluing t"e di8erence ouantities at standard )roft.



190/192

S#&S# I Standard )roft )er unit *Standard )ro)ortion or actual sales ' !udgeted

uantity o sales

'ales margin variance due to sales /uantities

+t is t"at )ortion o sales margin ariance due toolume "ic" arises due to t"e di8

Documents

MBA - AFM - Cost Accounting